AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FIRST COMMONWEALTH FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
PENNSYLVANIA 25-1428528
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6712
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
OLD COURTHOUSE SQUARE, 22 NORTH SIXTH STREET,
INDIANA, PENNSYLVANIA 15701-0400
412-349-7220
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DAVID R. TOMB, JR.
VICE PRESIDENT, SECRETARY AND TREASURER
FIRST COMMONWEALTH FINANCIAL CORPORATION
OLD COURTHOUSE SQUARE
22 NORTH SIXTH STREET
INDIANA, PA 15701-0400
412-349-7220
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
DAVID L. DENINNO
REED SMITH SHAW & MCCLAY
435 SIXTH AVENUE
PITTSBURGH, PA 15219
412-288-3214
----------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: The date of mailing the Proxy Statement/Prospectus contained
herein.
----------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- -------------------------------------------------------------------------------
Common Stock, $1.00 par
value..................... 1,637,580 $8.14 $13,329,901 $4,596.52
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(1) Estimated solely for the purpose of calculating the registration fee and
calculated in accordance with Rule 457(f)(2) on the basis of the book value
per share of the Common Stock, $2.50 par value, of United National
Bancorporation as of March 31, 1994 and the maximum of 818,790 shares of
such stock to be converted in the merger described herein into Common Stock
of the registrant.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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FIRST COMMONWEALTH FINANCIAL CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS OF
SECURITIES AND EXCHANGE COMMISSION FORM S-4 AND CAPTIONS IN THE PROXY
STATEMENT/PROSPECTUS
SECURITIES AND EXCHANGE CAPTION(S) OR LOCATION
COMMISSION FORM S-4 ITEM IN PROXY STATEMENT/PROSPECTUS
------------------------ -----------------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Outside Front Cover Page of
Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.......... Summary; Outside Front Cover Page of Proxy
Statement/Prospectus
4. Terms of the Transaction................ Plan of Reorganization; Comparison of FCFC
Common Stock and United Common Stock
5. Pro Forma Financial Information......... Comparative and Pro Forma Combined
Financial Information
6. Material Contacts with the Company Being
Acquired............................... Plan of Reorganization
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.............. Not applicable
8. Interests of Named Experts and Counsel.. Management of FCFC--Board of Directors,
Interests of Directors and Officers in
Certain
Transactions; Legal Opinions; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not applicable
10. Information with Respect to S-3
Registrants............................ Not applicable
11. Incorporation of Certain Information by
Reference.............................. Not applicable
12. Information with Respect to S-2 or S-3
Registrants............................ Not applicable
13. Incorporation of Certain Information by
Reference.............................. Not applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants ..... Information Concerning FCFC--Business and
Properties of FCFC, FCFC and Subsidiaries
Selected Financial Data, FCFC Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Comparative and Pro Forma Combined
Financial Information-- Comparative Stock
Prices and Dividends; Relationships with
Independent Public Accounts--FCFC; Index to
Financial Statements
SECURITIES AND EXCHANGE CAPTION(S) OR LOCATION
COMMISSION FORM S-4 ITEM IN PROXY STATEMENT/PROSPECTUS
------------------------ -----------------------------
15. Information with Respect to S-3
Companies.............................. Not applicable
16. Information with Respect to S-2 or S-3
Companies.............................. Not applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies........ Information Concerning United--Business and
Properties of United, United and Subsidiaries
Selected Financial Data, United Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Comparative and
Pro Forma Combined Financial Information--
Comparative Stock Prices and Dividends;
Relationships with Independent Public
Accountants--United; Index to Financial
Statements
18. Information if Proxies, Consents or
Authorizations are to be Solicited..... Introduction; Introduction--Voting and
Revocation of Proxies, Solicitation of Proxies;
Plan of Reorganization--Dissenters' Rights of
United Shareholders, Required Vote;
Management Recommendation, Management
Following the Merger; Management of FCFC--
Board of Directors, Compensation of Directors,
Executive Officers, Compensation of Executive
Officers, Interests of Directors and Officers in
Certain Transactions; Management of United--
Board Directors, Compensation of Directors,
Executive Officers, Compensation of Executive
Officers, Interests of Directors and Officers in
Certain Transactions; Certain Beneficial Owners
of FCFC Common Stock; Certain Beneficial
Owners of United Common Stock
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................ Not applicable
[LETTERHEAD OF UNITED NATIONAL BANCORPORATION]
July , 1994
Dear Shareholder:
A Special Meeting of the Shareholders of United National Bancorporation
("United") will be held on July 27, 1994 at 10:30 A.M., local time, at the
Holiday Inn, 1095 Wayne Avenue, Chambersburg, Pennsylvania.
The purpose of the Special Meeting is to consider and vote upon the Agreement
and Plan of Reorganization and the related Plan of Merger (collectively, the
"Plan of Reorganization") providing for the merger of United into First
Commonwealth Financial Corporation ("FCFC"). FCFC is a bank holding company
with its principal office in Indiana, Pennsylvania. Through its subsidiary
banks, FCFC currently maintains 70 community banking offices in 14 Pennsylvania
counties.
If the merger is approved, United shareholders will receive 2 shares of FCFC
Common Stock for each share of United Common Stock owned by them. Your
attention is directed to the attached Proxy Statement/Prospectus which contains
a more complete description of the terms of the proposed merger and provides
detailed financial, business and other information concerning United and FCFC.
The Board of Directors of United has carefully considered the Plan of
Reorganization and believes that the proposed merger is in the best interests
of United and its shareholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE PLAN OF
REORGANIZATION.
The affirmative vote of the holders of a majority of the votes cast by all
shareholders of United entitled to vote at the Special Meeting is necessary for
approval of the Plan of Reorganization. Your vote is important regardless of
the number of shares you own. We urge you to participate in this significant
development by marking, signing, dating and returning promptly the enclosed
proxy card in the accompanying postage paid, pre-addressed envelope, whether or
not you plan to attend the Special Meeting. You will retain the right to vote
your shares in person at the Special Meeting if you so desire.
Sincerely yours,
Robert C. Williams
Vice Chairman, President & CEO
[LETTERHEAD OF UNITED NATIONAL BANCORPORATION]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 27, 1994
To the Shareholders of United National Bancorporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of United
National Bancorporation ("United") will be held at the Holiday Inn, 1095 Wayne
Avenue, Chambersburg, Pennsylvania, on July 27, 1994 at 10:30 A.M., local time,
to:
1. Consider and act upon the Agreement and Plan of Reorganization between
United and First Commonwealth Financial Corporation ("FCFC") and the
related Plan of Merger, each of which is attached to and described in the
accompanying Proxy Statement/Prospectus; and
2. Transact such other business as may properly come before the Special
Meeting or any adjournment or adjournments thereof.
The Plan of Reorganization provides for the merger of United into FCFC (the
"Merger"). As a result of the Merger, the shareholders of United will receive 2
shares of FCFC Common Stock for each share of United Common Stock owned by
them.
The Board of Directors of United has established June 30, 1994 as the record
date for the Special Meeting, and only holders of record of United Common Stock
at the close of business on that date will be entitled to notice of and to vote
at the Special Meeting.
Approval of the first proposal described above requires the affirmative vote
of the holders of a majority of the votes cast by all shareholders of United
entitled to vote at the Special Meeting.
By Order of the Board of Directors,
Dorothy J. Jamison
Vice President & Secretary
Chambersburg, Pennsylvania July , 1994
SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
YOUR ATTENTION IS DIRECTED TO THE PROXY STATEMENT/PROSPECTUS ACCOMPANYING THIS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.
PROXY STATEMENT/PROSPECTUS
UNITED NATIONAL BANCORPORATION FIRST COMMONWEALTH FINANCIAL
15 South Main Street CORPORATION
Chambersburg, Pennsylvania 17201 Old Courthouse Square
(717) 267-1776 22 North Sixth Street
Indiana, Pennsylvania 15701-0400
(412) 349-7220
This Proxy Statement/Prospectus serves as a Proxy Statement of United
National Bancorporation ("United") and as a Prospectus of First Commonwealth
Financial Corporation ("FCFC"). It is being furnished to the shareholders of
United in connection with the solicitation of proxies by the Board of Directors
of United for use at a Special Meeting of Shareholders to be held on July 27,
1994. The purpose of the Special Meeting is to consider and take action on the
proposed merger (the "Merger") of United into FCFC. In the Merger, each
outstanding share of United Common Stock will be converted into 2 shares of
FCFC Common Stock. FCFC has filed this Proxy Statement/Prospectus with the
Securities and Exchange Commission as part of a Registration Statement under
the Securities Act of 1933 with respect to a maximum of 1,637,580 shares of
FCFC Common Stock which may be issued to the shareholders of United upon
consummation of the Merger.
THE SHARES OF FCFC COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR
HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF FCFC COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus, and, if given
or made, any such information or representation should not be relied upon as
having been authorized by FCFC or United. This Proxy Statement/Prospectus does
not constitute an offer or solicitation by any person in any State in which
such offer or solicitation is not authorized by the laws thereof or in which
the person making such offer or solicitation is not qualified to make the same.
Neither the delivery of this Proxy Statement/Prospectus at any time nor the
distribution of FCFC Common Stock hereunder shall imply that the information
contained herein is correct as of any time subsequent to its date.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY , 1994
AVAILABLE INFORMATION
FCFC and United are subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information filed
by FCFC and United can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Commission, Public Reference Section, Washington, D.C. 20549. In addition,
material filed by FCFC can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein or previously filed with the Commission shall
be deemed to be modified or superseded by this Proxy Statement/Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to exist or constitute a part of this
Proxy Statement/Prospectus.
S U M M A R Y
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This Summary is provided for convenience
and should not be considered complete. It is qualified in its entirety by the
more detailed information contained elsewhere in this Proxy
Statement/Prospectus and in the Annexes hereto.
THE PARTIES
First Commonwealth Financial Corporation ("FCFC") is a registered bank
holding company. It conducts business principally through seven subsidiary
banks (the "Subsidiary Banks") and a subsidiary trust company, all of which
have principal offices located in central western Pennsylvania: Central Bank
("Central"), a Pennsylvania-chartered bank and trust company, has its principal
office in Hollidaysburg; Cenwest National Bank ("Cenwest"), a national banking
association in Johnstown; Deposit Bank ("Deposit"), a Pennsylvania-chartered
bank and trust company in DuBois; First National Bank of Leechburg
("Leechburg"), a national banking association in Leechburg; National Bank of
the Commonwealth ("NBOC"), a national banking association in Indiana; Peoples
Bank and Trust Company ("PBTC"), a Pennsylvania-chartered bank and trust
company in Jennerstown; Peoples Bank of Western Pennsylvania, a Pennsylvania
bank in New Castle; and First Commonwealth Trust Company ("FCTC"), a
Pennsylvania-chartered trust company in Indiana. The Subsidiary Banks conduct
their business through 70 community banking offices (including one that is
approved and under construction) in 52 communities in the counties of Armstrong
(3 offices), Beaver (1), Bedford (3), Blair (8), Cambria (11), Centre (2),
Clearfield (6), Elk (3), Huntingdon (1), Indiana (9), Jefferson (4), Lawrence
(7), Somerset (7) and Westmoreland (5). See "Information Concerning FCFC--
Business and Properties of FCFC." At March 31, 1994, FCFC reported total
consolidated assets of approximately $1,972,633,000.
United National Bancorporation ("United") is a registered bank holding
company. It conducts business principally through two subsidiaries: Unitas
National Bank ("Unitas Bank"), a national banking association in Chambersburg,
Pennsylvania; and Unitas Mortgage Corporation ("Unitas Mortgage", and together
with Unitas Bank, the "United Subsidiaries"), a Pennsylvania business
corporation engaged in the origination of mortgages for resale in the secondary
mortgage market, with its principal office in Carlisle, Pennsylvania. See
"Information Concerning United--Business and Properties of United." Following
the Merger described herein, United's separate corporate existence will cease
and each of the United Subsidiaries will continue its business as a wholly-
owned subsidiary of FCFC. Each will retain its current name and have the same
assets, liabilities, directors, officers and employees as it had immediately
prior to the Merger, except that the Unitas Bank Board of Directors will be
increased by two members upon effectiveness of the Merger, with one current
Director and one current officer of FCFC joining the Unitas Bank Board. See
"Plan of Reorganization--The Merger." At March 31, 1994, United reported total
consolidated assets of approximately $145,522,000.
THE SPECIAL MEETING
A Special Meeting of Shareholders of United will be held at 10:30 A.M., local
time, on July 27, 1994, at the Holiday Inn, 1095 Wayne Avenue, Chambersburg,
Pennsylvania. Only holders of record of the Common Stock of United, par value
$2.50 per share ("United Common Stock"), at the close of business on June 30,
1994 will be entitled to notice of and to vote at the meeting. On that date,
769,147 shares of United Common Stock were outstanding and held of record by
approximately 488 persons, each share entitling the holder thereof to one vote
on each matter submitted for action at the Special Meeting. See "Introduction."
PROPOSED MERGER
At the Special Meeting, the shareholders of United will be asked to approve
an Agreement and Plan of Reorganization between United and FCFC and a related
Plan of Merger (collectively, the "Plan of
i
Reorganization"). The Plan of Reorganization provides for the merger of United
into FCFC (the "Merger"). As a result of the Merger, each of the United
Subsidiaries will be a wholly-owned subsidiary of FCFC, and the shareholders of
United will receive 2 shares of FCFC Common Stock for each share of United
Common Stock owned by them. See "Plan of Reorganization--The Merger; Conversion
of United Shares." The currently outstanding shares of FCFC Common Stock will
remain outstanding without change by reason of the Merger. Approval of the Plan
of Reorganization requires the affirmative vote of the holders of a majority of
the votes cast by all shareholders of United entitled to vote at the Special
Meeting. See "Plan of Reorganization--Required Vote; Management
Recommendation."
REASONS FOR THE MERGER
The managements of both United and FCFC believe that the combined entity
resulting from the Merger, by virtue of its increased financial, managerial,
technological and other resources, will be better able to meet increased
competition, to profit from the opportunities resulting from the changed legal
and regulatory environment facing banks and bank holding companies, to offer
new services or expand into additional markets and to offer existing services
with increased efficiency. See "Plan of Reorganization--Reasons for the
Merger."
MARKET PRICE TABLE
The following sets forth the last reported sales prices per share of the FCFC
Common Stock and the United Common Stock on the New York Stock Exchange
Composite Transactions Tape and in the over-the-counter market, respectively,
on March 24, 1994, the last trading day before announcement of the Merger, and
on June 10, 1994, the last practicable trading day before printing this Proxy
Statement/Prospectus; and the equivalent per share prices for the United Common
Stock based on the FCFC Common Stock prices:
MARKET PRICE FCFC UNITED UNITED
PER SHARE AT COMMON STOCK COMMON STOCK EQUIVALENTS (A)
------------ ------------ ------------ ---------------
March 24, 1994........................ $16.750 $27.260 $33.500
June 10, 1994......................... 17.625 30.250 35.250
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(a) Represents the equivalent of one share of United Common Stock calculated by
multiplying the sales price per share of FCFC Common Stock by 2.
MANAGEMENT RECOMMENDATION AND VOTE
The Board of Directors of United unanimously recommends that the United
shareholders vote "FOR" approval of the Plan of Reorganization. Executive
officers and directors of United hold, in the aggregate, approximately 147,117
shares of United Common Stock, constituting approximately 19% of all such
shares outstanding. Such officers and directors have advised United of their
intention to vote such shares "FOR" the proposal to approve the Plan of
Reorganization. See "Plan of Reorganization--Required Vote; Management
Recommendation."
MANAGEMENT FOLLOWING THE MERGER
Following the Merger, the Board of Directors of FCFC will consist of 20
directors, which number shall include the 19 current directors of FCFC and 1
current director of United. See "Plan of Reorganization--Management Following
the Merger."
ii
CERTAIN TAX ASPECTS OF THE MERGER
The Merger will qualify as a nontaxable reorganization for federal and
Pennsylvania income tax purposes, and no gain or loss will be recognized to the
United shareholders upon the exchange of their United Common Stock for FCFC
Common Stock. For a more complete description of the federal and Pennsylvania
income tax consequences of the exchange, see "Plan of Reorganization--Certain
Tax Aspects of the Merger."
DISSENTERS' RIGHTS
Holders of shares of United Common Stock who object to the Merger and who
comply with prescribed statutory procedures are entitled to have the fair value
of their shares determined in accordance with Subchapter D of Chapter 15 of the
Pennsylvania Business Corporation Law of 1988, as amended, and paid to them in
cash in lieu of the FCFC Common Stock a United shareholder would otherwise be
entitled to receive in the Merger. A copy of the pertinent statutory provisions
is attached to this Proxy Statement/Prospectus as Annex II. See "Plan of
Reorganization--Dissenters' Rights."
CONDITIONS; AMENDMENT; TERMINATION
In addition to shareholder approval of the Plan of Reorganization,
consummation of the Merger is contingent upon the approval of the Merger by the
Pennsylvania Department of Banking and the Board of Governors of the Federal
Reserve System, as well as the satisfaction of a number of other conditions.
See "Plan of Reorganization--Conditions to the Merger."
Notwithstanding prior shareholder approval, the Plan of Reorganization may be
amended, by a written agreement between the parties, in any respect other than
the rate of conversion of United Common Stock into FCFC Common Stock. The Plan
of Reorganization may also be terminated and the Merger abandoned,
notwithstanding prior shareholder approval, by written and mutual agreement of
FCFC and United or by either of them in the event of failure by the other to
satisfy certain conditions to the Merger. See "Plan of Reorganization--
Amendment, Waiver and Termination."
EFFECTIVE DATE OF THE MERGER
It is presently anticipated that if the Plan of Reorganization is approved,
the Merger will become effective at the close of business on September 26,
1994. However, there can be no assurance that all conditions necessary to the
consummation of the Merger will be satisfied or that, if satisfied, such
conditions will be satisfied in time to permit the Merger to become effective
by that date. See "Plan of Reorganization--Effective Date of the Merger."
EXCHANGE OF UNITED CERTIFICATES
Instructions on how to effect the exchange of United Common Stock
certificates for FCFC Common Stock certificates will be sent as promptly as
practicable after the effective date of the Merger to each United shareholder
of record immediately prior to the Merger. See "Plan of Reorganization--
Conversion of United Shares." United shareholders should not send in stock
certificates until they receive written instructions to do so.
RELIABLE FINANCIAL CORPORATION MERGER
FCFC has signed an Agreement and Plan of Reorganization, and a related Plan
of Merger (collectively, the "Reliable Plan of Reorganization"), dated as of
April 21, 1994 with Reliable Financial Corporation ("Reliable"), a Delaware
business corporation and a savings and loan holding company for Reliable
Savings Bank, PaSA ("Reliable Savings Bank"), a Pennsylvania-chartered savings
association with its principal place
iii
of business in Bridgeville, Pennsylvania. The Reliable Plan of Reorganization
provides for the merger of Reliable into a wholly-owned subsidiary of FCFC to
be created expressly for the purposes of the merger (the "Reliable Merger"). On
the effective date of the Reliable Merger, each share of Reliable Common Stock
will be converted into 1.6 shares of FCFC Common Stock for an aggregate of
2,256,310 shares of FCFC Common Stock to be issued in the Reliable Merger. In
connection with the Merger, FCFC will assume the outstanding stock options
covering 11,336 shares of Reliable Common Stock. After the effective date of
the Reliable Merger these options will be exercisable for FCFC Common Stock at
the rate of 1.6 shares of FCFC Common Stock for each share of Reliable Common
Stock covered by the option, for an aggregate of 18,137 shares of FCFC Common
Stock to be issued by FCFC if all the options are exercised. See the Reliable
Consolidated Financial Statements and the notes thereto appearing elsewhere in
this Proxy Statement/Prospectus.
Reliable's only subsidiary, Reliable Savings Bank, conducts its business
through three community banking offices in three communities in the counties of
Allegheny (2 offices) and Washington (1). See "Information Concerning
Reliable." At March 31, 1994, Reliable reported total consolidated assets of
approximately $150,401,000.
It is contemplated that the United Merger and the Reliable Merger will be
consummated at the same time if all required regulatory approvals have been
received and all conditions precedent have been satisfied; however, the United
Merger and the Reliable Merger are separate and independent transactions. The
information presented in this Proxy Statement/Prospectus concerning Reliable is
intended only to provide the holders of United Common Stock an understanding of
Reliable and the Reliable Merger. The holders of United Common Stock have no
rights to approve or reject the consummation of the Reliable Merger. The
consummation of the Reliable Merger is not a condition precedent to the United
Merger, and the consummation of the United Merger is not a condition precedent
to the Reliable Merger. It is contemplated that each Merger will be consummated
as soon as its conditions precedent have been satisfied.
SELECTED FINANCIAL DATA (UNAUDITED)
The following table sets forth certain historical and pro forma combined
financial information for the three month periods ended March 31, 1994 and for
the year ended December 31, 1993 for FCFC and United and for the three month
period ended March 31, 1994 and the year ended September 30, 1993 for Reliable.
This table should be read in conjunction with the separate historical balance
sheets and statements of income of FCFC, United and Reliable and the pro forma
combined financial statements appearing elsewhere in this Proxy
Statement/Prospectus.
PRO FORMA (2)(4)
FCFC (1) UNITED RELIABLE COMBINED
---------------- ---------------- --------------- ----------------
3/31/94 12/31/93 3/31/94 12/31/93 3/31/94 9/30/93 3/31/94 12/31/93
------- -------- ------- -------- ------- ------- ------- --------
Net income (in thou-
sands) (3)............. $5,130 $22,690 $ 418 $1,820 $ 651 $3,155 $6,199 $27,665
Net income per share
(3).................... 0.28 1.22 0.54 2.37 0.46 2.21 0.29 1.23
Net income per 2 FCFC
shares................. 0.56 2.44 -- -- -- -- 0.58 2.46
Cash dividends declared. 0.14 0.13 0.13 0.47 0.80 1.15 -- --
Cash dividends declared
per 2 FCFC shares...... 0.28 0.26 -- -- -- -- -- --
Book value per share.... 9.82 10.00 16.28 15.97 21.54 21.31 10.07 10.21
Book value per 2 FCFC
shares................. 19.64 20.00 -- -- -- -- 20.14 20.42
- --------
(1) FCFC per share data reflects the two-for-one stock split on January 18,
1994.
(2) The pro forma amounts assume that none of the holders of outstanding shares
of United Common Stock exercises his or her dissenters' rights with respect
to the Merger. It is a condition to the Merger that the total number of
shares of United Common Stock, if any, as to which such holders exercise
their rights as dissenting shareholders shall not be greater than 9% of the
United Common Stock outstanding. The pro forma information would not be
materially affected if the 9% threshold were reached. The Reliable
shareholders do not have dissenters' rights.
(3) For purposes of this pro forma data, net income and net income per share
exclude the cumulative effects of accounting changes.
(4) For the pro forma data combining only FCFC and United, see "Comparative Per
Share Data."
iv
TABLE OF CONTENTS
PAGE
----
INTRODUCTION.............................................................. 1
Record Date; Voting Rights............................................... 1
Purpose of the Special Meeting........................................... 1
Voting and Revocation of Proxies......................................... 2
Solicitation of Proxies.................................................. 2
PLAN OF REORGANIZATION.................................................... 2
The Merger............................................................... 2
Reasons for the Merger................................................... 3
Opinion of Financial Advisor............................................. 4
Required Vote; Management Recommendation................................. 5
Conversion of United Shares.............................................. 5
Conversion of United State Options....................................... 8
Management Following the Merger.......................................... 8
Conditions to the Merger................................................. 8
Representations and Warranties........................................... 9
Amendment, Waiver and Termination........................................ 9
Dissenters' Rights of United Shareholders................................ 10
Certain Tax Aspects of the Merger........................................ 12
Restrictions on Resales of FCFC Common Stock by United Affiliates........ 13
Expenses................................................................. 13
Effective Date of the Merger............................................. 13
RELIABLE FINANCIAL CORPORATION MERGER..................................... 14
COMPARATIVE AND PRO FORMA COMBINED FINANCIAL INFORMATION.................. 15
Comparative Stock Prices and Dividends................................... 15
Certain Information About the Pro Forma Combined Financial Data.......... 16
Comparative Per Share Data............................................... 17
Pro Forma Combined Financial Statements.................................. 18
INFORMATION CONCERNING FCFC............................................... 21
Business and Properties of FCFC.......................................... 21
FCFC Selected Financial Data............................................. 24
FCFC Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations..................................................... 25
MANAGEMENT OF FCFC........................................................ 40
Board of Directors....................................................... 40
The Board and Its Committees............................................. 43
Compensation of Directors................................................ 44
Executive Officers....................................................... 44
Compensation of Executive Officers....................................... 45
Executive Compensation Committee Interlocks and Insider Participation.... 45
Interests of Directors and Officers in Certain Transactions.............. 45
CERTAIN BENEFICIAL OWNERS OF FCFC COMMON STOCK............................ 47
INFORMATION CONCERNING UNITED............................................. 48
Business and Properties of United........................................ 48
United Selected Financial Data........................................... 50
United Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 51
PAGE
----
MANAGEMENT OF UNITED.................................................. 63
Board of Directors................................................... 63
Executive Officers................................................... 64
Compensation of Executive Officers................................... 64
Executive Compensation Committee Interlocks and Insider Participa-
tion................................................................ 66
Interests of Directors and Officers in Certain Transactions.......... 66
CERTAIN BENEFICIAL OWNERS OF UNITED COMMON STOCK...................... 67
INFORMATION CONCERNING RELIABLE....................................... 68
The Reliable Merger.................................................. 68
Business and Properties of Reliable.................................. 68
Reliable Selected Financial Data..................................... 70
Reliable Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 71
REGULATION AND SUPERVISION............................................ 78
FCFC and United...................................................... 78
Subsidiary Banks and Unitas Bank..................................... 79
Reciprocal Interstate Banking........................................ 79
EFFECTS OF GOVERNMENTAL POLICIES...................................... 80
COMPARISON OF FCFC COMMON STOCK AND UNITED COMMON STOCK............... 80
General.............................................................. 80
Voting Rights........................................................ 80
Qualifications for Directors......................................... 82
"Anti-Takeover" Provisions........................................... 82
Dissenters' Rights................................................... 83
Dividend Reinvestment Plan........................................... 83
Miscellaneous........................................................ 83
FCFC Preferred Stock................................................. 83
RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS..................... 84
FCFC................................................................. 84
United............................................................... 84
LEGAL OPINIONS........................................................ 84
EXPERTS............................................................... 84
SHAREHOLDER PROPOSALS................................................. 85
INDEX TO FINANCIAL STATEMENTS......................................... F-1
ANNEXES
I Agreement and Plan of Reorganization............................. A-I-1
Appendix A--Plan of Merger........................................ App. A-1
II Statutory Provisions Concerning Dissenters' Rights of United
Shareholders........................................................ A-II-1
III Fairness Opinion................................................. A-III-1
PROXY STATEMENT/PROSPECTUS
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF UNITED NATIONAL BANCORPORATION
TO BE HELD ON
JULY 27, 1994
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of United National Bancorporation
("United") of proxies to be voted at a Special Meeting of Shareholders of
United to be held at the Holiday Inn, 1095 Wayne Avenue, Chambersburg,
Pennsylvania on July 27, 1994 at 10:30 A.M., local time (the "Special
Meeting"), and at any adjournment or adjournments thereof. The approximate date
on which this Proxy Statement/Prospectus shall first be mailed to the
shareholders of United is July , 1994.
RECORD DATE; VOTING RIGHTS
The Board of Directors of United has fixed the close of business on June 30,
1994 as the record date for determining which shareholders of United shall be
entitled to notice of and to vote at the Special Meeting. On that date, 769,147
shares of Common Stock of United, par value $2.50 per share ("United Common
Stock"), were outstanding. Each such share entitles its holder of record at the
close of business on the record date to one vote on each matter properly
submitted for action to the shareholders at the Special Meeting. United has no
other outstanding class of capital stock.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, shareholders of United will be asked to consider and
vote upon a proposal to approve the Agreement and Plan of Reorganization dated
as of March 25, 1994 between United and First Commonwealth Financial
Corporation ("FCFC"), a bank holding company, and the related Plan of Merger of
even date therewith. Complete copies of the Plan of Reorganization and the Plan
of Merger (collectively, the "Plan of Reorganization") are attached hereto as
Annex I and Appendix A to Annex I, respectively.
As more fully described below under "Plan of Reorganization", the Plan of
Reorganization provides for the merger of United into FCFC (the "Merger").
Following the Merger, each of United's subsidiaries, including Unitas National
Bank ("Unitas Bank") and Unitas Mortgage Corporation ("Unitas Mortgage") will
continue its business as a wholly-owned subsidiary of FCFC.
In the Merger, each issued and outstanding share of United Common Stock
(other than shares as to which the holders thereof properly exercise their
dissenters' rights) will be converted into 2 shares of Common Stock of FCFC,
par value $1 per share ("FCFC Common Stock"). See "Plan of Reorganization--
Conversion of United Shares."
On the effective date of the Merger (the "Effective Date"), the Board of
Directors of FCFC will consist of 20 members, which number shall include the 19
persons who are currently directors of FCFC plus Robert C. Williams, who is
currently Vice Chairman of the Board, President and Chief Executive Officer of
United. See "Plan of Reorganization--Management Following the Merger."
Following the Merger, the Board of Directors of Unitas Bank will consist of
all of the current directors thereof plus E. James Trimarchi, who is currently
Chairman of the Board, President and Chief Executive Officer of FCFC, and
Joseph E. O'Dell, who is currently Senior Executive Vice President and Chief
Operating Officer of FCFC. The Board of Directors of Unitas Mortgage will
remain unchanged. See "Plan of Reorganization--Management Following the
Merger."
1
THE BOARD OF DIRECTORS OF UNITED BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF UNITED AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF UNITED VOTE TO APPROVE THE PLAN OF REORGANIZATION.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies not theretofore revoked will be voted at the
Special Meeting in accordance with the instructions thereon. Proxies containing
no voting instructions regarding the proposal to approve the Plan of
Reorganization will be voted in favor thereof. As to any other matter brought
before the Special Meeting and submitted to a shareholder vote, proxies will be
voted in accordance with the judgment of the proxyholders named thereon.
Approval of the Plan of Reorganization requires the affirmative vote of a
majority of the votes cast by all United shareholders entitled to vote at the
Special Meeting.
A shareholder who has executed and returned a proxy may revoke it at any time
before it is voted by giving written notice to the Secretary of United, by
submitting a later-dated proxy or by attending the Special Meeting and voting
in person.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
United may, for no additional compensation, solicit proxies from the
shareholders of United in person or by telephone or otherwise. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
proxy soliciting materials to the beneficial owners of shares held of record by
them and will be reimbursed for their expenses. It is anticipated that all
expenses in connection with the solicitation of proxies for the Special Meeting
will be borne by United.
PLAN OF REORGANIZATION
This section of the Proxy Statement/Prospectus describes certain of the more
important aspects of the Plan of Reorganization. The following description does
not purport to be complete and is qualified in its entirety by reference to the
Plan of Reorganization and the Plan of Merger, which are set forth as Annex I
and Appendix A to Annex I, respectively, in the back of this Proxy
Statement/Prospectus. All shareholders are urged to read the Plan of
Reorganization and the Plan of Merger in their entirety.
THE MERGER
The Plan of Reorganization provides for the merger of United into FCFC. FCFC
is a bank holding company, the principal business of which is the ownership of
all the outstanding stock of seven banks (the "Subsidiary Banks"), a trust
company, and a data processing company and 50% of the outstanding stock of an
insurance company. See "Information Concerning FCFC--Business and Properties of
FCFC." United is a bank holding company, the principal business of which is the
ownership of all the outstanding stock of Unitas Bank and Unitas Mortgage
(collectively, the "United Subsidiaries"). See "Information Concerning United--
Business and Properties of United."
On the Effective Date, United will be merged into FCFC, and United's separate
corporate existence will cease. The Articles of Incorporation and By-Laws of
FCFC will remain in effect. Upon the effectiveness of the Merger, each
outstanding share of United Common Stock will be converted into 2 shares of
FCFC Common Stock. Following the Merger, each of the United Subsidiaries will
continue its present business as a wholly-owned subsidiary of FCFC. At that
time, the Unitas Bank Board of Directors will consist of all current Unitas
Bank Directors plus one current Director of FCFC and one current officer of
FCFC. The Board of Directors of Unitas Mortgage will remain unchanged.
2
It is presently contemplated that following the Merger, each of the United
Subsidiaries will continue to operate the same offices it currently operates
and will continue to provide the same services to its customers as those
currently provided. See "Information Concerning United--Business and Properties
of United."
Each outstanding share of United Common Stock held of record on the Effective
Date will, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into 2 shares of FCFC Common Stock. Each holder of
United Common Stock who does not exercise dissenters' rights will therefore
receive 2 shares of FCFC Common Stock for each share of United Common Stock
held of record on the Effective Date. The Plan of Reorganization provides that,
as a condition to the consummation of the Merger, the number of shares of
United Common Stock as to which the holders may exercise their rights as
dissenting shareholders must not be greater than 9% of the United Common Stock
outstanding as of the Effective Date. See "Dissenters' Rights of United
Shareholders."
NO REPRESENTATION IS MADE HEREBY AS TO THE VALUE OF THE 2 SHARES OF FCFC
COMMON STOCK OFFERED FOR EACH SHARE OF UNITED COMMON STOCK.
There are currently 769,147 shares of United Common Stock outstanding. If no
holders of United Common Stock exercise their dissenters' rights with respect
to their shares and all of the outstanding shares of United Common Stock are
converted into shares of FCFC Common Stock in the Merger, 1,538,294 shares of
FCFC Common Stock would be issued in the Merger to the shareholders of United.
REASONS FOR THE MERGER
In 1982, the Pennsylvania Banking Code of 1965, as amended (the "Pennsylvania
Banking Code") was amended to permit Pennsylvania banks to expand into counties
bicontiguous to the counties of their principal offices and to permit bank
holding companies to own more than one Pennsylvania bank. All legislative
restrictions on statewide banking in Pennsylvania were eliminated as of March
4, 1990. See "Regulation and Supervision." The 1982 legislation resulted in an
increased volume of merger activity among Pennsylvania banks and bank holding
companies as the larger metropolitan banking organizations sought to position
themselves to enter into statewide banking, and smaller nonmetropolitan banking
organizations sought to increase their size in order to be able to remain
competitive on a regional basis. Since adoption of the legislation, both FCFC
and United have seen acquisitions of bank competitors by large Philadelphia-
based and Pittsburgh-based bank holding companies and mergers of other bank
competitors with banks outside their market areas. At the same time,
deregulation of the banking industry has both increased the opportunities
available to banks and bank holding companies to offer new types of financial
services and increased the potential for competition in the area of traditional
banking services from nonbank financial institutions.
The managements of FCFC and United believe that combining the resources of
Unitas Bank with those of the Subsidiary Banks under common holding company
ownership and control will enable Unitas Bank and the Subsidiary Banks to more
effectively meet the increased competition and to profit from the opportunities
made available by the elimination of legislative restrictions on statewide
banking in Pennsylvania. The increased financial, managerial, technological and
other resources available to the parties will place each bank in a better
position to offer the expanding variety of financial services that will be
necessary to meet the competition from larger bank and nonbank financial
institutions. FCFC's holding company structure will provide additional
opportunities for the expansion of services. Under federal law, a bank holding
company is permitted to engage, either directly or through subsidiaries, in the
provision of certain types of mortgage, consumer finance, factoring, leasing,
loan servicing, credit insurance, investment and other financial services, some
of which either cannot be provided by banks or can be provided more efficiently
by a holding company or nonbank subsidiary.
The increased resources of the combined entity following the Merger and the
flexibility afforded by FCFC's holding company structure will also place FCFC
in a better position to take advantage of the
3
opportunities for expansion into new markets, either through expansion of the
service areas of the Subsidiary Banks or through the acquisition of additional
banks. FCFC remains receptive to and continues to evaluate potential
opportunities for such expansion and acquisitions. See "Reliable Financial
Corporation Merger."
The Merger will also enable the Subsidiary Banks and Unitas Bank to increase
their efficiency and competitiveness in providing existing banking services.
For example, each bank will be better able to profit from the lending
opportunities in the combined area served by them by drawing upon the other
banks' knowledge of their market areas and by combining lending limits through
loan participations to make loans that none of the banks could make
individually or in which they might otherwise have to involve their
competitors. Each bank will also be able to draw upon the combined skills and
experience of the holding company and all of the Subsidiary Banks following the
Merger in other areas such as marketing, investments, asset/liability
management and deposit and trust services. In addition, economies of scale may
be achieved by combining purchases of supplies and services, eliminating
duplication of contract services and combining certain internal management,
accounting and other functions under one holding company.
While the combined holding company and its shareholders will benefit from the
increased size and strength and the diversification of assets, liabilities and
revenue sources resulting from the ownership of several banks having different
geographical markets, the separate corporate identities of the Subsidiary Banks
will be maintained so long as it is advantageous to do so. As a result, each
bank will be able to maintain its regional market identification and its
inherent advantage, in competing with larger financial institutions, of greater
flexibility in tailoring its services to respond to the particular needs of the
communities it serves.
Berwind Financial Group, Inc. ("Berwind") was retained by the United Board of
Directors on August 26, 1993 to advise the Board of Directors on its strategic
alternatives going forward, which included, but were not limited to, a possible
sale of control of United. Berwind advised the United Board of Directors on
various market factors in the banking industry, including the present climate
for acquisitions. On February 8, 1994, the Executive Committee of the United
Board of Directors commenced discussions with FCFC with a view toward a
possible combination of the entities.
After review and deliberation, the United Board of Directors concluded that
it would be in the best interests of the shareholders of United to undertake
the merger. This conclusion was based upon a consideration of the various
reasons and factors described above including: (1) the fact that Unitas Bank
will be able to maintain its separate identity, (2) other possible alternatives
to the transaction such as continuing to remain independent, (3) the proposed
financial terms of the transaction which allows shareholders of United to
receive shares of FCFC in a tax-free transaction, (4) the fact that the
financial terms were negotiated between United and FCFC at arms-length, and (5)
the assessment by United's independent financial advisor, Berwind, that the
terms of the transaction were fair to the shareholders of United from a
financial point of view.
OPINION OF FINANCIAL ADVISOR
United has retained Berwind to act as its financial advisor and to render a
fairness opinion in connection with the Merger. Berwind has rendered opinions
that, based upon and subject to the various considerations set forth therein,
as of March 25, 1994, and as of the date of this Proxy Statement/Prospectus,
the Merger is fair, from a financial point of view, to the holders of United
Common Stock.
The full text of Berwind's opinion as of the date thereof, which sets forth
the assumptions made, matters considered and limitations of the review
undertaken, is attached as Annex III to this Proxy Statement/Prospectus, is
incorporated herein by reference, and should be read in its entirety in
connection with this Proxy Statement/Prospectus. The summary of the opinion of
Berwind set forth herein is qualified in its entirety by reference to the full
text of such opinion attached as Annex III to this Proxy Statement/Prospectus.
4
United retained Berwind to act at United's financial advisor in connection
with several matters including the Merger. Berwind was selected to act as
United's financial advisor based upon its qualifications, expertise and
experience. Berwind has knowledge of, and experience with, Pennsylvania banking
markets and banking organizations operating in those markets and was selected
by United because of its knowledge of, experience with, and reputation in the
financial services industry.
On March 25, 1994, United's Board of Directors approved and executed the Plan
of Reorganization. Berwind delivered an opinion (the "March Opinion") to
United's Board stating that, as of such date, the Merger was fair to the
shareholders of United from a financial point of view. Berwind reached the same
opinion as of the date of this Proxy Statement/Prospectus. The full text of the
opinion of Berwind dated as of the date of this Proxy Statement/Prospectus,
which sets forth assumptions made, matters considered and limits on the review
undertaken (the "Proxy Opinion"), is attached as Annex III to this Proxy
Statement/Prospectus. No limitations were imposed by United's Board of
Directors upon Berwind with respect to the investigations made or procedures
followed by Berwind in rendering the March Opinion or the Proxy Opinion.
In rendering its Proxy Opinion, Berwind: (i) reviewed the historical
financial performances, current financial positions and general prospects of
United and FCFC, (ii) reviewed the Plan of Reorganization, (iii) reviewed the
Registration Statement on Form S-4, (iv) reviewed and analyzed stock market
performance of FCFC, (v) studied and analyzed the consolidated financial and
operating data of United and FCFC, (vi) considered the terms and conditions of
the proposed Merger between United and FCFC as compared with the terms and
conditions of comparable bank mergers and acquisitions, (vii) met and/or
communicated with certain members of United and FCFC's senior management to
discuss their respective operations, historical financial statements, and
future prospects, and (viii) conducted such other financial analyses, studies
and investigations as were deemed appropriate.
Berwind relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to United's
financial forecasts reviewed by Berwind in rendering its opinion, Berwind
assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of United as to the future financial performance of United. Berwind
did not make an independent evaluation or appraisal of the assets (including
loans) or liabilities of United or FCFC nor was it furnished with any such
appraisal. Berwind also did not independently verify and has relied on and
assumed that all allowances for loan and lease losses set forth in the balance
sheets of United and FCFC were adequate and complied fully with applicable law,
regulatory policy and sound banking practice as of the date of such financial
statements.
The following is a summary of selected analyses prepared by Berwind and
presented to United's Board of Directors in connection with the March Opinion
and analyzed by Berwind in connection with the March and Proxy Opinions.
Comparable Companies and Comparable Acquisition Transaction Analyses. Berwind
compared selected financial and operating data for United with those of a peer
group of selected banks and bank holding companies with assets between $100
million and $210 million, as of the most recent financial period publicly
available, located in southern central Pennsylvania. Financial data and
operating ratios compared in the analysis of the united peer group included but
were not limited to: return on average assets, return on average equity,
shareholder's equity to assets ratios and certain asset quality ratios. Berwind
also compared selected financial, operating and stock market data for FCFC with
those of a peer group of selected commercial banks with assets between $1
billion and $4 billion, as of the most recent period publicly available located
in Pennsylvania, Maryland, Ohio and West Virginia. Financial, operating and
stock market data, ratios and multiples compared in the analysis of the FCFC
peer group included but were not limited to: return on average assets, return
on average equity, shareholders equity to asset ratios, certain asset quality
ratios, price to book value, price to tangible book value, price to earnings
(latest twelve months) and dividend yield.
5
Berwind also compared the multiples of book value, tangible book value and
latest twelve months' earnings inherent to the Merger with the multiples paid
in recent acquisitions of banks and bank holding companies that Berwind deemed
comparable. The transactions deemed comparable by Berwind included both
interstate and intrastate acquisitions announced since January 1, 1993, in
which the selling institution's assets were between $100 million and $200
million. Berwind compared selected transactions located throughout the country.
However, no company or transaction used in this analysis is identical to
United, FCFC or the Merger. Accordingly, an analysis of the result of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that would affect the public trading values of
the companies or company to which they are being compared.
Discounted Dividend Analyses. Using discounted dividend analyses, Berwind
estimated the present value of the future dividend streams that United could
produce over a five year period under different assumptions as to dividend pay
out levels, if United performed in accordance with various earnings growth
forecasts. Berwind also estimated the terminal value for United Common Stock
after the five year period by applying a range of earnings multiples from 9 to
12 to United's terminal year earnings. The range of multiples used reflected a
variety of scenarios regarding the growth and profitability prospects of
United. The dividend streams and terminal values were then discounted to
present value using discount rates ranging from 10% to 20%, reflecting
different assumptions regarding the rates of return required by holders or
prospective buyers of United Common Stock.
Pro Forma Contribution Analysis. Berwind analyzed the changes in the amount
of earnings, book value, and dividends represented by 1.0 shares of United
Common Stock prior to the Merger and 2.0 shares of FCFC Common Stock after the
Merger. The analysis considered, among other things, the changes that the
Merger would cause to United's earnings per share, book value per share, and
indicated dividends. In reviewing the pro forma combined earnings, equity and
assets of FCFC based on the Merger with United, Berwind analyzed the
contribution that United would have made to the combined company's earnings,
equity and assets for 1993. Berwind also reviewed the percentage ownership that
United's shareholders would hold in the combined company.
In connection with rendering its March Opinion and Proxy Opinion, Berwind
performed a variety of financial analyses. Although the evaluation of the
fairness, from a financial point of view, of the consideration to be paid in
the Merger was to some extent a subjective one based on the experience and
judgment of Berwind and not merely the result of mathematical analysis of
financial data, Berwind principally relied on the previously discussed
financial valuation methodologies in its determinations. Berwind believes its
analyses must be considered as a whole and that selecting portions of such
analyses and factors considered by Berwind without considering all such
analyses and factors could create an incomplete view of the process underlying
Berwind's opinion. In its analysis, Berwind made numerous assumptions with
respect to business, market, monetary and economic conditions, industry
performance and other matters, many of which are beyond United's and FCFC's
control. Any estimates contained in Berwind's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. None of the analyses performed by Berwind was
assigned a greater significance by Berwind than any other.
In connection with delivering its Proxy Opinion, Berwind updated certain
analyses described above to reflect current market conditions and events
occurring since the date of the Plan of Reorganization. Such reviews and
updates led Berwind to conclude that it was not necessary to change the
conclusions it had reached in connection with rendering the March Opinion.
Berwind, as part of its investment banking business, is regularly engaged in
the valuation of assets, securities and companies in connection with various
types of asset and security transactions, including mergers, acquisitions,
private placements, and valuation for various other purposes and in the
determination of adequate consideration in such transactions.
6
Berwind's Proxy Opinion was based solely upon the information available to it
and the economic, market and other circumstances as they existed as of the date
its Proxy Opinion was delivered; events occurring after the date of its Proxy
Opinion could materially affect the assumptions used in preparing its Proxy
Opinion. Berwind has not undertaken to reaffirm and revise its Proxy Opinion or
otherwise comment upon any events occurring after the date thereof.
In delivering its March Opinion and Proxy Opinion, Berwind assumed that in
the course of obtaining the necessary regulatory and governmental approvals for
the Merger, no restriction will be imposed on FCFC that would have a material
adverse effect on the contemplated benefits of the Merger. Berwind also assumed
that there would not occur any change in applicable law or regulation that
would cause a material adverse change in the prospects or operations of FCFC
after the Merger.
Pursuant to the terms of the engagement letter dated August 26, 1993 United
paid Berwind $12,500 upon its engagement and $131,716 for acting as financial
advisor in connection with the Merger including delivering its March and Proxy
Opinions. In addition, United has also agreed to pay Berwind $131,716 upon the
consummation of the Merger and to reimburse Berwind for its reasonable out-of-
pocket expenses. Whether or not the Merger is consummated, United has also
agreed to indemnify Berwind and certain related persons against certain
liabilities relating to or arising out of its engagement.
The full text of the Proxy Opinion of Berwind dated as of the date of this
Proxy Statement/Prospectus, which sets forth assumptions made and matters
considered, is attached hereto as Annex III to this Proxy Statement/Prospectus.
United's shareholders are urged to read the Proxy Opinion in its entirety.
Berwind's Proxy Opinion is directed only to the consideration to be received by
United shareholders in the Merger and does not constitute a recommendation to
any holder of United Common Stock as to how such holder should vote at the
Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF BERWIND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION, WHICH
IS SET FORTH AS ANNEX III TO THIS PROXY STATEMENT/PROSPECTUS.
REQUIRED VOTE; MANAGEMENT RECOMMENDATION
Approval of the Plan of Reorganization by the shareholders of United requires
the affirmative vote of a majority of the votes cast by all United shareholders
entitled to vote at the Special Meeting. The Board of Directors of United has
carefully considered the Plan of Reorganization and believes that the proposed
Merger is in the best interests of United and its shareholders. Executive
officers and directors of United hold, in the aggregate, approximately 147,117
shares of United Common Stock, constituting approximately 19% of all such
shares outstanding. ACCORDINGLY, THE BOARD OF DIRECTORS OF UNITED UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS OF UNITED VOTE TO APPROVE THE PLAN OF
REORGANIZATION.
CONVERSION OF UNITED SHARES
On the Effective Date, each outstanding share of United Common Stock will, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into 2 shares of FCFC Common Stock.
Surrender and Exchange of United Stock Certificates. As promptly as
practicable after the Effective Date, FCFC will send or cause to be sent to
each United shareholder of record as of the close of business on the Effective
Date transmittal materials containing instructions on how to effect the
exchange of United Common Stock certificates for certificates representing
shares of FCFC Common Stock. HOLDERS OF UNITED COMMON STOCK CERTIFICATES SHOULD
NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE SUCH TRANSMITTAL MATERIALS
AND INSTRUCTIONS. However, certificates should be surrendered promptly after
instructions to do so are received.
7
Any dividends declared on FCFC Common Stock after the Effective Date will
apply to all whole shares of FCFC Common Stock into which shares of United
Common Stock have been converted by virtue of the Merger. HOWEVER, NO FORMER
UNITED SHAREHOLDER WILL BE ENTITLED TO RECEIVE ANY SUCH DIVIDEND UNTIL SUCH
SHAREHOLDER'S UNITED COMMON STOCK CERTIFICATES HAVE BEEN SURRENDERED FOR
EXCHANGE AS PROVIDED IN THE LETTER OF TRANSMITTAL. Upon such surrender, the
former United shareholder will be entitled to receive all such dividends
payable on the whole shares of FCFC Common Stock issuable in exchange for the
surrendered certificate or certificates (without interest thereon and less the
amount of taxes, if any, which may have been imposed or paid thereon).
Unexchanged Certificates. On the Effective Date, the stock transfer books for
United Common Stock will be closed, and no further transfers of United Common
Stock will be made or recognized. Certificates for United Common Stock which
are surrendered for exchange after the Effective Date will entitle the holder
only to receive, upon surrender as provided in the letter of transmittal, a
certificate for the number of shares of FCFC Common Stock into which the shares
represented by such United Common Stock certificates were converted by virtue
of the Merger.
CONVERSION OF UNITED STOCK OPTIONS
On the Effective Date, all rights with respect to United Common Stock
pursuant to stock options or stock appreciation rights ("United Options")
granted under United's 1986 Stock Option Plan outstanding on the Effective
Date, whether or not then exercisable, will be converted into and become rights
with respect to FCFC Common Stock, and FCFC will assume each United Option in
accordance with the terms of the stock option plan under which it was issued.
From and after the Effective Date, (i) each United Option assumed by FCFC will
be exercisable solely for shares of FCFC Common Stock or cash in the case of
stock appreciation rights, (ii) the number of shares of FCFC Common Stock
subject to each United Option will be equal to the number of shares of United
Common Stock subject to such United Option immediately prior to the Effective
Date multiplied by two, and (iii) the per share exercise price under such
United Option will be adjusted by dividing by two and rounding down to the
nearest cent.
MANAGEMENT FOLLOWING THE MERGER
On the Effective Date, the Board of Directors of Unitas Bank will consist of
all those persons who are currently Directors of Unitas Bank, plus E. James
Trimarchi, Chairman of the Board, President and Chief Executive Officer of
FCFC, and Joseph E. O'Dell, Senior Executive Vice President and Chief Operating
Officer of FCFC. At that time, all officers and employees of Unitas Bank will
continue to hold the positions they held with Unitas Bank prior to the
Effective Date. The Board of Directors, officers and employees of Unitas
Mortgage will remain unchanged.
Following the Merger, the Board of Directors of FCFC will consist of 20
directors, which number shall include the 19 current directors of FCFC and
Robert C. Williams, Vice Chairman of the Board, President and Chief Executive
Officer of United.
CONDITIONS TO THE MERGER
In addition to approval by the shareholders of United, the Merger is
contingent upon the satisfaction of a number of other conditions, including:
(i) approval of the Merger by the Pennsylvania Department of Banking; (ii)
approval of the Merger by the Board of Governors of The Federal Reserve System
(the "Federal Reserve Board") and the absence of any action or suit to enjoin
or prohibit the Merger under the antitrust laws filed by the United States
within the 30-day period following Federal Reserve Board approval; (iii) the
continued effectiveness of FCFC's registration statement filed with the
Securities and Exchange Commission (the "Commission") with respect to the
shares of FCFC Common Stock issuable in connection with the Merger; (iv)
receipt of a favorable tax opinion described below from the law firm of Reed
Smith Shaw &
8
McClay, special counsel to United and FCFC; (v) fulfillment of the requirement
that the number of shares of United Common Stock as to which the holders
exercise dissenters' rights do not exceed 9% of the outstanding shares of such
stock; (vi) authorization of the shares of FCFC Common Stock issuable to United
shareholders pursuant to the Merger for listing on the New York Stock Exchange
upon official notice of issuance; (vii) receipt by FCFC from each of the
affiliates of United of an executed agreement referred to below under
"Restrictions on Resales of FCFC Common Stock by United Affiliates"; (viii)
receipt by FCFC of a favorable opinion from Jarrett * Stokes & Co., certified
public accountants, that the Merger meets the requirements for pooling of
interests accounting treatment; (ix) receipt by United of a favorable opinion
from Berwind Financial Group, Inc., that the terms of the Merger are fair, from
a financial point of view, to United and its shareholders; and (x) there shall
be no action taken, statute, rule, regulation, order or other legal restraint
enacted, entered, enforced or deemed applicable to the Merger which delays the
Merger or makes the consummation thereof illegal. In addition, unless waived,
each party's obligation to consummate the Merger is subject to the performance
by the other party of its obligations under the Plan of Reorganization, the
accuracy of the representations and warranties of the other party contained
therein and the receipt of certain certificates and opinions from the other
party and its counsel.
REPRESENTATIONS AND WARRANTIES
The representations and warranties of FCFC and United are set forth in
Sections 3 and 4, respectively, of the Agreement and Plan of Reorganization.
The representations and warranties relate to, among other things, the
organization and good standing of FCFC and United; the capitalization of FCFC
and United and ownership of their subsidiaries; the authorization by FCFC and
United of the Plan of Reorganization and the absence of conflict with other
agreements; the accuracy of financial statements furnished to the other party;
the absence of undisclosed liabilities and the absence of material adverse
changes subsequent to December 31, 1993; payment of taxes and title to
properties; compliance with laws and the absence of undisclosed material
litigation; compliance by employee benefit plans with the terms thereof and
laws applicable thereto; and the accuracy of the information furnished by FCFC
and United for inclusion in this Proxy Statement/Prospectus. Except for the
representations and warranties relating to the accuracy of the information
furnished by the parties for inclusion herein, none of the representations and
warranties contained in the Plan of Reorganization will survive the
consummation of the Merger.
AMENDMENT, WAIVER AND TERMINATION
Subject to applicable law, at any time before the Effective Date, the Plan of
Reorganization may, by written instrument signed by an authorized officer of
FCFC and United, be amended in any respect, except that after shareholder
approval no amendment may change the rates of exchange of FCFC Common Stock for
United Common Stock in connection with the Merger. FCFC or United may also (i)
extend the time for performance of any of the obligations of the other; (ii)
waive any inaccuracies in the representations and warranties of the other;
(iii) waive compliance by the other with any of its covenants or agreements
under the Plan of Reorganization and the performance of any obligations
contained therein; and (iv) waive any condition precedent to its obligations
under the Plan of Reorganization other than shareholder approval of the Plan of
Reorganization, governmental regulatory approvals required to consummate the
Merger, registration requirements incident to the issuance of FCFC Common Stock
and authorization of the FCFC Common Stock for listing on the New York Stock
Exchange.
The Plan of Reorganization may be terminated by the mutual written consent of
the Boards of Directors of FCFC and United at any time prior to the Effective
Date without liability of any party, notwithstanding prior approval by the
shareholders of United.
Notwithstanding prior shareholder approval, either FCFC or United, by written
notice to the other, may terminate the Plan of Reorganization without liability
of any party in the event of failure to satisfy prior to June 30, 1995 any
condition precedent to its obligation to consummate the Merger, if such failure
occurs despite the good faith effort of the terminating party to perform all
agreements and covenants and satisfy all conditions required of such party.
9
DISSENTERS' RIGHTS OF UNITED SHAREHOLDERS
A holder of shares of United Common Stock is entitled to exercise the rights
of a dissenting shareholder under Subchapter D of Chapter 15 of the
Pennsylvania Business Corporation Law of 1988 ("Subchapter D") to object to the
Plan of Reorganization and make written demand that United or FCFC pay in cash
the fair value of the shares held as determined in accordance with such
statutory provisions. The following summary does not purport to be a complete
statement of the provisions of Subchapter D and is qualified in its entirety by
reference to such statutory provisions, which are set forth in full as Annex II
to this Proxy Statement/Prospectus.
A record holder of shares of United Common Stock may assert dissenters'
rights as to fewer than all of such shares registered in his name only if he
dissents with respect to all the shares beneficially owned by any one person
and discloses the name and address of the person or persons on whose behalf he
dissents.
A beneficial owner of shares of United Common Stock who is not the record
holder of such shares is entitled to assert dissenters' rights with respect to
shares held on his behalf only if he submits to United no later than the time
of the assertion of dissenters' rights a written consent of the record holder
of such shares. A beneficial owner may not dissent with respect to less than
all shares of United Common Stock owned by him, whether or not the shares so
owned by him are registered in his name.
In the event that a holder of shares of United Common Stock wishes to dissent
to the Plan of Reorganization and obtain payment of the fair value of his
shares, he must satisfy all of the following conditions to acquire any right to
payment of the fair value of his shares under Subchapter D:
(1) He must file with United, prior to the vote on the Plan of
Reorganization, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed Plan of Reorganization is
effectuated. Neither a proxy nor a vote against the proposed Plan of
Reorganization shall constitute the written notice required.
(2) He must effect no change in the beneficial ownership of his shares
from the date of filing such written notice continuously through the
Effective Date.
(3) He must not vote his shares in favor of the Plan of Reorganization.
Neither an abstention from voting with respect to, nor failure to vote in
person or by proxy against approval of, the Plan of Reorganization
constitutes a waiver of the rights of a dissenting shareholder. A signed
proxy that is presented at the Special Meeting but which does not contain
any instruction as to how the proxy should be voted will be voted in favor
of approval of the Plan of Reorganization and will be deemed a waiver of
the rights of a dissenting shareholder.
A dissenter who fails in any of these respects shall not acquire any right to
payment of the fair value of his shares under Subchapter D. Each written notice
of intention to demand payment should be sent to United National
Bancorporation, 15 South Main Street, Chambersburg, PA 17201, Attention:
Dorothy J. Jamison, Secretary. A dissenting shareholder shall retain all other
rights of a United shareholder until those rights are modified by effectuation
of the Plan of Reorganization.
If the Plan of Reorganization is approved by the required vote at the Special
Meeting, United shall mail a notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who did not
vote in favor of the Plan of Reorganization. Such notice shall:
(1) State where and when a demand for payment must be sent and
certificates representing United shares must be deposited in order to
obtain payment. The time set for receipt of the demand and deposit of
shares shall be not less than 30 days from the mailing of the notice.
(2) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(3) Be accompanied by a copy of Subchapter D.
10
The dissenting shareholder must make written demand on United for payment of
the fair value of the shares with respect to which dissent is made and must
deposit certificates representing such shares, in accordance with the terms of
the notice to demand payment sent by United. A shareholder who fails to demand
payment, or fails to deposit certificates, as required by the notice to demand
payment, shall not have any right under Subchapter D to receive payment of the
fair value of his shares.
Within 60 days after the date set for demanding payment and depositing
certificates, if the Plan of Reorganization has not been effectuated, United
shall return any certificates that have been deposited. When deposited
certificates have been returned, United may at any later time send a new notice
to demand payment, which will have a like effect as the original notice.
Promptly after effectuation of the Plan of Reorganization, or upon timely
receipt of demand for payment if the Plan of Reorganization has already been
effectuated, United shall either remit to dissenters who have made demand and
have deposited their certificates the amount that United estimates to be the
fair value of the shares, or shall give written notice that no remittance will
be made. The remittance or notice shall be accompanied by: (1) the closing
balance sheet and statement of income of United for the fiscal year ended
December 31, 1993, together with the latest available interim financial
statements; (2) a statement of United's estimate of the fair value of the
shares; and (3) a notice of the right of the dissenter to demand supplemental
payment, accompanied by a copy of Subchapter D. If United does not remit the
amount of its estimate of the fair value of the shares, it shall return any
certificates that have been deposited.
If United gives notice of its estimate of the fair value of the shares,
without remitting such amount, or remits payment of its estimate of the fair
value of a dissenter's shares and the dissenter believes that the amount stated
or remitted is less than the fair value of his shares, the dissenter may send
to United his own estimate of the fair value of the shares, which shall be
deemed a demand for payment of such amount or the deficiency.
Where United has remitted payment of its estimated value of a dissenter's
shares, and the dissenter does not file his own estimate within 30 days after
the mailing by United of its remittance, the dissenter shall be entitled to no
more than the amount remitted to him by United.
Within 60 days after the latest of (1) effectuation of the Plan of
Reorganization, (2) timely receipt of any demands for payment and (3) timely
receipt of any estimates by dissenters of the fair value of their shares, if
any demands for payment remain unsettled, United may file in court an
application for relief requesting that the fair value of the shares be
determined by the court. All dissenting shareholders, wherever residing, whose
demands have not been settled shall be made parties to the proceeding. A copy
of the application for relief shall be served on each such dissenter.
The court may appoint an appraiser to receive evidence and recommend a
decision on the issue of fair value, which appraiser shall have such power and
authority as may be specified by the court.
Each dissenter who is made a party to the proceeding shall be entitled to
recover the amount by which the fair value of his shares exceeds the amount, if
any, previously remitted by United, plus interest.
If United fails to file an application for relief, any dissenter who made a
demand and who has not already settled his claim against United may do so in
the name of United at any time within 30 days after the expiration of the 60-
day period. If a dissenter does not file an application within such 30-day
period, each dissenter entitled to file an application shall be paid United's
estimate of the fair value of the shares and no more and may bring an action to
recover any amount not previously remitted.
In general, the costs and expenses of any valuation proceeding, including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against United. However, any part
of the costs and expenses may be apportioned and assessed as the court deems
11
appropriate against all or some of the dissenting shareholders who are parties
to the proceeding and whose action in demanding supplemental payment the court
finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith.
Fees and expenses of counsel and of experts for the respective parties may be
assessed as the court deems appropriate against United and in favor of any or
all dissenters if United failed to comply substantially with the requirements
of Subchapter D. Such fees and expenses may be assessed against either United
or a dissenter, or in favor of any other party, if the court finds that the
party against whom the fees and expenses are assessed acted in bad faith or in
a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by Subchapter D. If the court finds that the services of counsel for
any dissenter were of substantial benefit to other dissenters similarly
situated and should not be assessed against United, it may award to those
counsel reasonable fees to be paid out of the amounts awarded to the dissenters
who were benefited.
SHAREHOLDERS OF UNITED WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS SHOULD
CONSULT THEIR OWN COUNSEL.
CERTAIN TAX ASPECTS OF THE MERGER
Federal Income Tax. FCFC and United have been advised by their special
counsel, Reed Smith Shaw & McClay, that for federal income tax purposes, it is
their opinion that:
(1) The Merger will constitute a reorganization under the provisions of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986 (the "Code");
United and FCFC will each be a party to the reorganization within the
meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized to United or FCFC as a result of
the Merger;
(3) No gain or loss will be recognized to the United shareholders upon
the exchange of their United Common Stock for FCFC Common Stock;
(4) The basis of the FCFC Common Stock to be received by the United
shareholders will be the same as the basis of the United Common Stock
surrendered in exchange therefor;
(5) The holding period of the FCFC Common Stock to be received by the
United shareholders will include the holding period of the United Common
Stock surrendered in exchange therefor, provided that the United Common
Stock was held as a capital asset in the hands of the United shareholders
on the date of the exchange;
(6) Where a United shareholder dissents to the proposed transaction and
receives cash in exchange for his United Common stock, the cash will be
treated as received by the shareholder as a distribution in redemption of
his United Common Stock subject to the provisions and limitations of
Section 302 of the Code; and
(7) Cash received by a dissenting United shareholder as described in
paragraph (6) will be treated as if the shares had been sold to United for
the cash received and will generally be entitled to capital gain or loss
treatment under Section 302 of the Code, provided the shares are a capital
asset in the hands of the shareholder. However, because the ownership of
shares by certain individuals related to the shareholder and by certain
partnerships, estates, trusts and corporations in which the shareholder has
an interest may have an adverse impact upon the tax treatment of the cash
received by the shareholder and result in its being taxed as a dividend,
the shareholder should consult with his personal tax advisor as to the
federal, state and local tax consequences of receiving cash as a dissenting
shareholder.
Pennsylvania Personal Income Tax. United and FCFC have been advised by their
special counsel, Reed Smith Shaw & McClay, that for Pennsylvania Personal
Income Tax purposes, it is their opinion that no gain or loss will be
recognized to the United shareholders who are subject to the Pennsylvania
Personal Income Tax upon the receipt by them of FCFC Common Stock in exchange
for their United Common Stock, and
12
that the state tax basis for the FCFC Common Stock to be received by the United
shareholders will be the same as the state tax basis of the United Common Stock
surrendered in exchange therefor. Cash received by a dissenting United
shareholder who is subject to the Pennsylvania Personal Income Tax will be
treated as if he had sold his shares to United for the cash received and taxed
accordingly.
Pennsylvania Personal Property Tax. United and FCFC have been advised by
their special counsel, Reed Smith Shaw & McClay, that it is their opinion that
the shares of FCFC Common Stock to be received by the United shareholders are
exempt from the Pennsylvania county personal property tax.
The foregoing opinions cover only certain federal, Pennsylvania and local
Pennsylvania tax aspects and are based upon existing law and regulations, as
presently interpreted by judicial decisions and administrative rulings, all of
which are subject to change without notice and any such change might be applied
retroactively to the transactions contemplated by the Merger. Among other
things, the foregoing opinions do not address the federal or state income tax
considerations that may affect the treatment of a shareholder who acquired his
United Common Stock pursuant to an employee stock option. Accordingly, each
United shareholder should consult his personal tax advisor with specific
reference to his own tax situation and potential changes in the applicable law
as to all federal, state and local tax matters in connection with the Merger.
RESTRICTIONS ON RESALES OF FCFC COMMON STOCK BY UNITED AFFILIATES
The shares of FCFC Common Stock issuable in the Merger have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), but this
registration does not cover resales by shareholders of United who may be deemed
to control or be under common control with United and who therefore may be
deemed "affiliates" of United as that term is used in Rule 145 promulgated
under the Securities Act. Such affiliates may not sell their shares of FCFC
Common Stock acquired in the Merger except pursuant to: (i) an effective
registration statement under the Securities Act covering the shares to be sold;
(ii) the conditions contemplated by Rules 144 and 145 promulgated under the
Securities Act; or (iii) another applicable exemption from the registration
requirements of the Securities Act. The management of United will notify those
persons whom it believes may be such affiliates.
The Plan of Reorganization requires as a condition to the obligation of FCFC
to consummate the Merger that each such United affiliate enter into an
agreement with FCFC not to sell, assign, pledge, transfer or otherwise dispose
of any of his United Common Stock or any of the shares of FCFC Common Stock
acquired by such affiliate in the Merger except (i) in accordance with the
requirements of the Securities Act and the regulations promulgated thereunder
and (ii) in order to permit the Merger to be accounted for as a pooling of
interests, during the period 30 days prior to the Effective Date and thereafter
until FCFC has published the financial results of at least 30 days of combined
operations of FCFC and United, at such times and in such quantities as are
prescribed in Section 201.01 of the Commission's Codification of Financial
Reporting Policies and Staff Accounting Bulletin Nos. 65 and 76. See
"Conditions to the Merger."
EXPENSES
Each of FCFC and United shall bear its own expenses incurred in connection
with the Plan of Reorganization and all related transactions, including the
fees of its accountants, regular attorneys and investment advisors. The fees
and expenses of Reed Smith Shaw & McClay, special counsel to FCFC and United,
will be borne equally by FCFC and United, except that such fees and expenses
related to the regulatory approvals referred to above under "Conditions to the
Merger" will be borne by FCFC.
EFFECTIVE DATE OF THE MERGER
It is presently anticipated that if the Plan of Reorganization is approved by
the shareholders of United, the Merger will become effective on or before
September 30, 1994. However, consummation of the Merger is subject to the
receipt of certain required regulatory approvals and to the expiration of the
required 30-day waiting period following the date of the approval by the
Federal Reserve Board, during which period no action to prohibit the Merger
shall have been initiated by the United States. There can be no assurance that
13
all required regulatory approvals will be received or that, if received, such
approvals will be received in time to permit the Merger to become effective on
the anticipated Effective Date. In addition, as also noted above, the Merger is
subject to the satisfaction of certain other conditions, some of which may not
be waived, and FCFC and United retain the power to abandon the Merger or to
extend the time for performance of conditions or obligations necessary to its
consummation, notwithstanding prior shareholder approval of the Plan of
Reorganization.
RELIABLE FINANCIAL CORPORATION MERGER
FCFC has signed an Agreement and Plan of Reorganization, and a related Plan
of Merger (collectively, the "Reliable Plan of Reorganization"), dated as of
April 21, 1994 with Reliable Financial Corporation ("Reliable"), a Delaware
business corporation and a savings and loan holding company for Reliable
Savings Bank, PaSA ("Reliable Savings Bank"), a Pennsylvania-chartered savings
association with its principal place of business in Bridgeville, Pennsylvania.
The Reliable Plan of Reorganization provides for the merger of Reliable into a
wholly-owned subsidiary of FCFC to be created expressly for the purposes of the
merger (the "Reliable Merger"). On the effective date of the Reliable Merger,
each share of Reliable Common Stock will be converted into 1.6 shares of FCFC
Common Stock for an aggregate of 2,256,310 shares of FCFC Common Stock to be
issued in the Reliable Merger. In connection with the Merger, FCFC will assume
the outstanding stock options covering 11,336 shares of Reliable Common Stock.
After the effective date of the Reliable Merger these options will be
exercisable for FCFC Common Stock at the rate of 1.6 shares of FCFC Common
Stock for each share of Reliable Common Stock covered by the option, for an
aggregate of 18,137 shares of FCFC Common Stock to be issued by FCFC if all the
options are exercised. See the Reliable Consolidated Financial Statements and
the notes thereto appearing elsewhere in this Proxy Statement/Prospectus.
Reliable's only subsidiary, Reliable Savings Bank, conducts its business
through three community banking offices in three communities in the counties of
Allegheny (2 offices) and Washington (1). See "Information Concerning
Reliable--Business and Properties of Reliable." At March 31, 1994, Reliable
reported total consolidated assets of approximately $150,401,000. It is
contemplated that the United Merger and the Reliable Merger will be consummated
at the same time if all required regulatory approvals have been received and
all conditions precedent have been satisfied; however, the United Merger and
the Reliable Merger are separate and independent transactions. The information
presented in this Proxy Statement/Prospectus concerning Reliable is intended
only to provide the holders of United Common Stock an understanding of Reliable
and the Reliable Merger. The holders of United Common Stock have no rights to
approve or reject the consummation of the Reliable Merger. The consummation of
the Reliable Merger is not a condition precedent to the United Merger, and the
consummation of the United Merger is not a condition precedent to the Reliable
Merger. It is contemplated that each Merger will be consummated as soon as its
conditions precedent have been satisfied. FCFC will file a registration
statement with the SEC, containing a Proxy Statement/Prospectus for the
shareholders meeting to be held by Reliable to consider and act upon the FCFC
Merger and for the shares of FCFC Common Stock to be issued in the Reliable
Merger.
14
COMPARATIVE AND PRO FORMA COMBINED FINANCIAL INFORMATION
COMPARATIVE STOCK PRICES AND DIVIDENDS
STOCK PRICES
FCFC Common Stock has been listed on the New York Stock Exchange ("NYSE")
since June 10, 1992 under the symbol "FCF". FCFC Common Stock before that time
and United Common Stock were not listed on any national securities exchange but
were traded to a limited extent in private trades and in the over-the-counter
market. The following table sets forth, for the periods indicated, the high and
low sales prices per share of the FCFC Common Stock on the NYSE Composite
Transactions Tape, the high and low sales prices per share of transactions
known to FCFC management for FCFC Common Stock before June 10, 1992 and the
high and low sales prices per share of transactions known to United management
for United Common Stock. Prices per share for FCFC Common Stock have been
adjusted to reflect the two-for-one stock split effected in the form of a 100%
stock distribution on the FCFC Common Stock declared on January 18, 1994.
Prices per share for United Common Stock have been adjusted to reflect the 10%
stock dividends declared on the United Common Stock on November 18, 1992 and
November 17, 1993.
FCFC UNITED
COMMON STOCK COMMON STOCK
--------------- ---------------
1992 HIGH LOW HIGH LOW
---- ------- ------- ------- -------
First Quarter.................................. $10.500 $10.000 $11.160 $ 9.900
Second Quarter................................. 12.250 10.250 12.810 10.330
Third Quarter.................................. 14.875 12.000 16.530 12.290
Fourth Quarter................................. 15.688 13.688 17.730 15.000
1993
----
First Quarter.................................. 14.625 12.375 20.000 15.450
Second Quarter................................. 14.875 13.250 24.320 17.500
Third Quarter.................................. 16.000 13.313 27.270 23.640
Fourth Quarter................................. 17.625 14.875 28.500 26.000
1994
----
First Quarter.................................. 20.250 16.750 29.000 23.000
Second Quarter (through June 10)............... 18.250 15.500 33.500 29.500
The prices contained in the table for FCFC Common Stock for the periods
before June 10, 1992 and the prices contained in the table for United Common
Stock are limited to transactions known to their respective managements,
including inquiries made of local brokers, and are not necessarily indicative
of the actual range of prices at which such stock was traded during the periods
indicated. In the case of United, management of United believes that most of
the trading in the United Common Stock takes place through local brokers.
United's Common Stock and FCFC's Common Stock (before June 10, 1992) were
traded from time to time by securities brokers, but management is not aware
that bid and asked quotations were reported nationally or in newspapers of
local circulation.
The last reported sale price of FCFC Common Stock on the NYSE Composite
Transactions Tape on March 24, 1994, the last trading day before announcement
of the Merger, was $16.75, and the last known sale price of United Common Stock
on the same date was $27.26. As of June 10, 1994, the last reported sale price
of FCFC Common Stock was $17.625 and the last known sale price of United Common
Stock was $30.25.
DIVIDENDS
The following table sets forth, for the periods indicated, the quarterly cash
dividends per share declared on FCFC Common Stock and United Common Stock.
During the second quarter of 1992, the Board of Directors of FCFC began the
practice of declaring dividends at the end of the quarter instead of at the
15
beginning of the quarter. The payable dates continued to be in the period
following the end of the quarter. This resulted in FCFC dividends being
declared twice in the second quarter of 1992, but only one dividend was paid
per quarter. Dividends per share of FCFC Common Stock have been adjusted to
reflect the two-for-one stock split on January 18, 1994. Dividends per share of
United Common Stock have been adjusted to reflect the 10% stock dividends
declared on November 18, 1992 and November 17, 1993.
FCFC UNITED
COMMON STOCK COMMON STOCK
------------ ------------
1992
----
First Quarter......................................... $.105 $.108
Second Quarter........................................ .210 .108
Third Quarter......................................... .105 .108
Fourth Quarter........................................ .125 .108
1993
----
First Quarter......................................... .125 .118
Second Quarter........................................ .125 .118
Third Quarter......................................... .125 .118
Fourth Quarter........................................ .135 .118
1994
----
First Quarter......................................... .140 .130
Second Quarter (through June 10)...................... -- .130
FCFC and United have agreed in the Plan of Reorganization that, pending
consummation of the Merger, United will not declare, pay or set aside a
dividend or other distribution in respect to its capital stock other than cash
dividends declared prior to the date of the Agreement and regular quarterly
cash dividends declared, each in an amount no greater than $.13 per share and
each having both a record date and payment date the same as the regular
quarterly cash dividend of FCFC.
CERTAIN INFORMATION ABOUT THE PRO FORMA COMBINED FINANCIAL DATA
On March 25, 1994, FCFC announced the proposed merger with United. Under the
terms of the Agreement and Plan of Reorganization with United, the holders of
769,147 shares of United Common Stock will receive 2 shares of FCFC Common
Stock for each share of United Common Stock. On April 21, 1994 the Corporation
entered into a definitive agreement to merge with Reliable. Under the terms of
the Agreement and Plan of Reorganization with Reliable, the holders of
1,410,194 shares of Reliable Common Stock will receive 1.6 shares of FCFC
Common Stock for each share of Reliable Common Stock. The Plan of
Reorganization with United also requires that the number of shares of United,
if any, as to which the holders may exercise their rights as dissenting
shareholders shall not be greater than 9% of the United Common Stock
outstanding. The Reliable shareholders do not have dissenters' rights.
The proposed United Merger is a separate and independent transaction from the
proposed Reliable Merger. The consummation of either Merger is not a condition
precedent to the consummation of the other Merger.
The following pro forma combined financial statements and data assume that
none of the holders of the outstanding Common Stock of United exercise
dissenters' rights. The United Merger and the Reliable Merger will be accounted
for as poolings of interests and, accordingly, all financial statements will be
restated as though the companies had been combined as of the beginning of each
period presented. Per share data for FCFC in the following pro forma combined
financial statements and data has been adjusted to reflect the two-for-one
stock split effected in the form of a 100% stock distribution on the FCFC
Common Stock declared on January 18, 1994. Per share data for United in the
following pro forma combined financial statements and data has been adjusted to
reflect 10% stock dividends declared on November 13, 1991, November 18, 1992
and November 17, 1993.
16
These pro forma statements are presented for informational purposes only and
should not be construed to be indicative of actual financial position and
results of operations after the Mergers.
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth certain historical per share financial
information for FCFC Common Stock, United Common Stock and Reliable Common
Stock and pro forma per share financial information for FCFC, United and
Reliable combined and for FCFC and United combined. The calculations are based
on the average number of shares outstanding. Net income per common share and
pro forma net income per common share were calculated before the cumulative
effect of accounting changes. The pro forma information is presented for
informational purposes only and should not be construed as being indicative of
the actual financial position, results of operations and dividends subsequent
to the Mergers. See "Certain Information About the Pro Forma Combined Financial
Data."
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------- ------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- ------- ------ ----- ----- ----- -----
Earnings Per Share:
Historical:
Net income per FCFC share.. $ 0.28 $0.32 $ 1.22 $1.14 $0.94 $0.85 $0.76
Net income per 2 FCFC
shares.................... 0.56 0.64 2.44 2.28 1.88 1.70 1.52
Net income per United
share..................... 0.54 0.80 2.37 1.84 1.17 1.18 0.68
Pro Forma Combined FCFC and
United per FCFC share (a)... 0.27 0.32 1.21 1.12 0.91 0.83 0.72
Pro Forma Combined FCFC and
United per 2 FCFC shares
(a)......................... 0.54 0.64 2.42 2.24 1.82 1.66 1.44
Pro Forma Combined FCFC,
United and Reliable per FCFC
share (a)................... 0.29 0.32 1.23 1.11 0.89 0.79 0.70
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------- ------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- ------- ------ ----- ----- ----- -----
Pro Forma Combined FCFC,
United and Reliable per 2
FCFC shares (a)............. 0.58 0.64 2.46 2.22 1.78 1.58 1.40
Dividends Per Share:
Historical:
Dividends per FCFC share... $ 0.14 $0.13 $ 0.51 $0.55 $0.38 $0.33 $0.30
Dividends per 2 FCFC
shares.................... 0.28 0.26 1.02 1.10 0.76 0.66 0.60
Dividends per United share. 0.13 0.12 0.47 0.43 0.39 0.39 0.39
Book Value Per Share:
Historical:
Book value per FCFC share.. $ 9.82 $10.00
Book value per 2 FCFC
shares.................... 19.64 20.00
Book value per United
share..................... 16.28 15.97
Pro Forma Combined FCFC and
United (a).................. 9.69 9.85
Pro Forma Combined FCFC and
United per 2 FCFC shares
(a)......................... 19.38 19.70
Pro Forma Combined FCFC,
United and Reliable per FCFC
share (a)................... 10.07 10.21
Pro Forma Combined FCFC,
United and Reliable per 2
FCFC shares (a)............. 20.14 20.42
- --------
(a) Pro Forma data is derived from the Pro Forma combined financial statements
which follow. Pro Forma data include the historical financial information
for FCFC, United and Reliable.
17
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(FCFC, UNITED AND RELIABLE)
MARCH 31, 1994
(UNAUDITED)
The following unaudited Pro Forma Combined Balance Sheet combines the
historical balance sheets of FCFC, United and Reliable as if the Mergers had
become effective on March 31, 1994. This balance sheet should be read in
conjunction with the First Commonwealth Financial Corporation Consolidated
Financial Statements, the United National Bancorporation Consolidated Financial
Statements and the Reliable Financial Corporation Consolidated Financial
Statements and the notes thereto appearing elsewhere in this Proxy
Statement/Prospectus. See "Certain Information About the Pro Forma Combined
Financial Data."
The proposed Merger between FCFC and United is a separate and independent
transaction from the proposed Merger between FCFC and Reliable. The
consummation of the Reliable Merger is not a condition precedent to the United
Merger, and the consummation of the United Merger is not a condition to the
Reliable Merger.
HISTORICAL
-----------------------------
PRO FORMA
FCFC UNITED RELIABLE ADJUSTMENTS COMBINED
---------- -------- -------- ----------- ----------
ASSETS
Cash and due from
banks................ $ 50,976 $ 4,089 $ 820 $ 55,885
Investment securities. 835,762 21,302 59,720 916,784
Money market invest-
ments................ 2,025 236 -0- 2,261
Loans, net............ 1,016,842 114,759 86,365 1,217,966
Premises and equip-
ment................. 22,189 2,597 2,484 27,270
Other assets.......... 44,839 2,539 1,012 48,390
---------- -------- -------- ---------- ----------
Total assets........ $1,972,633 $145,522 $150,401 $ -0- $2,268,556
========== ======== ======== ========== ==========
LIABILITIES
Deposits.............. $1,590,715 $128,003 $116,817 $1,835,535
Short-term borrowings. 174,471 3,347 -0- 177,818
Other liabilities..... 16,448 1,651 3,208 21,307
Long-term debt........ 7,911 -0- -0- 7,911
---------- -------- -------- ----------
Total liabilities... 1,789,545 133,001 120,025 2,042,571
SHAREHOLDERS' EQUITY
Common stock.......... 93,210 1,923 15 (a) (1,938) 112,183
(a) 18,973
Additional paid-in
capital.............. -0- 4,115 13,657 (a)(17,772) 737
(a) 737
Retained earnings..... 98,579 6,483 17,702 (a) (998) 121,766
Treasury stock........ -0- -0- (998) (a) 998 -0-
Unrealized gain (loss)
on securities
available for sale... (3,701) -0- -0- (3,701)
Deferred compensation. (5,000) -0- -0- (5,000)
---------- -------- -------- ----------
Total shareholders'
equity............. 183,088 12,521 30,376 225,985
---------- -------- -------- ---------- ----------
Total liabilities
and shareholders'
equity............. $1,972,633 $145,522 $150,401 $ -0- $2,268,556
========== ======== ======== ========== ==========
Book value per common
share.................. $ 9.82 $ 16.28 $ 21.54 $ 10.07
- --------
(a) Reflects issuance of 1,538,294 shares of FCFC Common Stock for 769,147
shares of United Common Stock, and 2,256,310 shares of FCFC Common Stock
for 1,410,194 shares of Reliable Common Stock.
18
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(FCFC, UNITED AND RELIABLE)
(UNAUDITED)
The following unaudited Pro Forma Combined Condensed Statements of Income for
the three months ended March 31, 1994, and the years ended December 31, 1993,
1992 and 1991 for FCFC and United, and the three months ended March 31, 1994
and the years ended September 30, 1993, 1992 and 1991 for Reliable combine the
historical statements of income of FCFC, United and Reliable as if the Mergers
had become effective on January 1, 1991 as described in "Certain Information
About the Pro Forma Combined Financial Data." These income statements should be
read in conjunction with the First Commonwealth Financial Corporation
Consolidated Financial Statements, the United National Bancorporation
Consolidated Financial Statements, the Reliable Financial Corporation
Consolidated Financial Statements and the related notes thereto appearing
elsewhere in this Proxy Statement/Prospectus.
The proposed Merger between FCFC and United is a separate and independent
transaction from the proposed Merger between FCFC and Reliable. The
consummation of the Reliable Merger is not a condition precedent to the United
Merger, and the consummation of the United Merger is not a condition to the
Reliable Merger.
THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED --------------------------------
MARCH 31, 1994 1993 1992 1991
-------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income
Interest and fees on loans... $ 25,551 $ 106,079 $ 105,971 $ 103,232
Interest and dividends on
investment securities....... 12,233 48,360 47,164 41,337
Interest on money market se-
curities.................... 41 761 2,710 5,942
---------- ---------- ---------- ----------
Total interest income...... 37,825 155,200 155,845 150,511
---------- ---------- ---------- ----------
Interest expense
Interest on deposits......... 14,789 63,192 71,706 80,400
Interest on short-term
borrowings.................. 1,522 3,639 1,753 1,570
Interest on long-term debt... 106 456 454 456
---------- ---------- ---------- ----------
Total interest expense..... 16,417 67,287 73,913 82,426
---------- ---------- ---------- ----------
Net interest income........ 21,408 87,913 81,932 68,085
Provision for possible loan
losses...................... 688 2,920 3,744 5,401
---------- ---------- ---------- ----------
Net interest income after
provision for possible
loan losses............... 20,720 84,993 78,188 62,684
Net security gains........... 466 3,528 955 711
Other income................. 2,867 10,972 9,410 7,497
Other expenses............... 14,991 59,367 54,958 46,050
---------- ---------- ---------- ----------
Income before taxes........ 9,062 40,126 33,595 24,842
Applicable income taxes...... 2,863 12,461 9,246 6,243
---------- ---------- ---------- ----------
Net income................. $ 6,199 $ 27,665 $ 24,349 $ 18,599
========== ========== ========== ==========
Average common shares outstand-
ing........................... 21,410,953 22,461,272 21,978,270 20,899,175
Net income per share........... $0.29 $1.23 $1.11 $0.89
19
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(FCFC AND UNITED)
(UNAUDITED)
The following unaudited Pro Forma Combined Condensed Statements of Income for
the three months ended March 31, 1994, and the years ended December 31, 1993,
1992 and 1991 for FCFC and United combine the historical statements of income
of FCFC and United as if the Mergers had become effective on January 1, 1991 as
described in "Certain Information About the Pro Forma Combined Financial Data."
These income statements should be read in conjunction with the First
Commonwealth Financial Corporation Consolidated Financial Statements, the
United National Bancorporation Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this Proxy Statement/Prospectus.
The proposed Merger between FCFC and United is a separate and independent
transaction from the proposed Merger between FCFC and Reliable. The
consummation of the Reliable Merger is not a condition precedent to the United
Merger, and the consummation of the United Merger is not a condition to the
Reliable Merger.
THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED --------------------------------
MARCH 31, 1994 1993 1992 1991
-------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income
Interest and fees on loans... $ 23,661 $ 97,067 $ 95,434 $ 91,982
Interest and dividends on
investment securities....... 11,592 46,507 45,725 40,174
Interest on money market
securities.................. 41 761 2,710 5,942
---------- ---------- ---------- ----------
Total interest income...... 35,294 144,335 143,869 138,098
---------- ---------- ---------- ----------
Interest expense
Interest on deposits......... 13,750 58,692 65,559 72,488
Interest on short-term
borrowings.................. 1,522 3,639 1,753 1,570
Interest on long-term debt... 106 456 454 456
---------- ---------- ---------- ----------
Total interest expense..... 15,378 62,787 67,766 74,514
---------- ---------- ---------- ----------
Net interest income........ 19,916 81,548 76,103 63,584
Provision for possible loan
losses...................... 638 2,670 3,544 5,246
---------- ---------- ---------- ----------
Net interest income after
provision for possible
loan losses............... 19,278 78,878 72,559 58,338
Net security gains........... 232 2,395 694 711
Other income................. 2,765 10,606 9,208 7,335
Other expenses............... 14,338 56,792 52,738 44,126
---------- ---------- ---------- ----------
Income before taxes........ 7,937 35,087 29,723 22,258
Applicable income taxes...... 2,389 10,577 7,717 5,371
---------- ---------- ---------- ----------
Net income................. $ 5,548 $ 24,510 $ 22,006 $ 16,887
========== ========== ========== ==========
Average common shares
outstanding................... 20,180,318 20,180,318 19,645,560 18,562,788
Net income per share........... $ 0.27 $ 1.21 $ 1.12 $ 0.91
20
INFORMATION CONCERNING FCFC
BUSINESS AND PROPERTIES OF FCFC
FCFC was incorporated as a Pennsylvania business corporation on November 15,
1982 and is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended. After its incorporation it became affiliated as a
result of statutory mergers with the following banks, all of which are now
wholly-owned subsidiaries of FCFC with their principal places of business in
central western Pennsylvania (the "Subsidiary Banks"). On April 29, 1983, FCFC
became affiliated with National Bank of the Commonwealth ("NBOC"), a national
bank in Indiana, Indiana County; on March 19, 1984, with Deposit Bank
("Deposit"), a Pennsylvania-chartered bank and trust company in DuBois,
Clearfield County; on August 16, 1985, with Dale National Bank, now called
Cenwest National Bank ("Cenwest"), a national bank in Johnstown, Cambria
County; on December 14, 1985 with First National Bank of Leechburg
("Leechburg"), a national bank in Leechburg, Armstrong County; on May 31, 1990
with Peoples Bank and Trust Company ("PBTC"), a Pennsylvania-chartered bank and
trust company in Jennerstown, Somerset County; on April 30, 1992 with Central
Bank ("Central") a Pennsylvania-chartered bank and trust company in
Hollidaysburg, Cambria County; and on December 31, 1993 with Peoples Bank of
Western Pennsylvania ("Peoples"), a Pennsylvania-chartered bank in New Castle,
Lawrence County. On December 31, 1986, FCFC merged with CNB CORP, INC. ("CNB"),
a bank holding company with its principal office in Windber, Somerset County.
CNB had one subsidiary, Citizens National Bank ("Citizens"), which was also
located in Windber. On December 31, 1986, FCFC affiliated with Citizens by
merging it directly into Cenwest. Commonwealth Systems Corporation ("CSC") was
incorporated as a Pennsylvania business corporation in 1984 by FCFC to function
as its data processing subsidiary and has its principal place of business in
Indiana, Pennsylvania. Before August 1984, CSC had operated as the data
processing department of NBOC. First Commonwealth Trust Company ("FCTC") was
incorporated as a Pennsylvania trust company on January 18, 1991 to render
general trust services and has its principal place of business in Indiana,
Pennsylvania. Commonwealth Trust Credit Life Insurance Company ("Commonwealth
Trust") was incorporated as an Arizona insurance corporation on March 27, 1989
to function as a credit life and credit accident and health reinsurer. FCFC and
its subsidiaries currently employ approximately 906 persons (full-time
equivalents).
Through its Subsidiary Banks, FCFC traces its banking origins to 1880. The
Subsidiary Banks conduct their business through 70 banking offices (including
one that is approved and under construction) in 52 Pennsylvania communities in
the counties of Armstrong (3 offices), Beaver (1), Bedford (3), Blair (8),
Cambria (11), Centre (2), Clearfield (6), Elk (3), Huntingdon (1), Indiana (9),
Jefferson (4), Lawrence (7), Somerset (7) and Westmoreland (5).
The Subsidiary Banks engage in a general banking business and offer a full
range of financial services. They offer such general retail banking services as
demand, savings and time deposits; commercial, mortgage and consumer
installment loans; and credit card operations through MasterCard and VISA.
The Subsidiary Banks operate a network of 49 automated teller machines
("ATMs") which permit their customers to conduct routine banking transactions
24 hours a day. Of these ATMs, 29 are located on the premises of the main or
branch offices of the Subsidiary Banks and 20 are in remote locations. All of
the ATMs are part of the MAC network, which consists of over 14,000 ATMs owned
by numerous banks, savings and loan associations and credit unions located in
16 states, of which 14 are east of the Mississippi River. The Subsidiary Banks'
MAC customers may use the HONOR Network, which has 9,800 ATMs located primarily
in the southeastern quadrant of the United States. The ATMs operated by the
Subsidiary Banks are also part of the global MasterCard/Cirrus ATM Network
which is comprised of more than 168,900 ATMs located in the United States,
Canada and 58 other countries and territories, and which services over 365
million cards. Such networks allow the Subsidiary Banks' customers to withdraw
cash and, in certain cases, conduct other banking transactions using ATMs of
all participating financial institutions.
21
Each of the Subsidiary Banks faces intense competition, both from within and
without its service area, in all aspects of its business. The Subsidiary Banks
compete with numerous other commercial banks and savings banks doing business
within their service areas for deposits, in such forms as checking, savings and
NOW (negotiable order of withdrawal) accounts and certificates of deposit, and
in making consumer loans and loans to smaller businesses. With respect to loans
to larger businesses, the Subsidiary Banks also compete with much larger banks
located outside of their service areas. They also compete, primarily in making
consumer loans and for deposits, with state and federally chartered savings and
loan associations and with credit unions. In recent years the Subsidiary Banks
have encountered significant competition for deposits from money market funds
located throughout the United States. Such funds pay dividends (which are the
equivalent of the interest paid by banks on deposits) to their shareholders and
are able to offer services and conveniences similar to those offered by the
Subsidiary Banks. The effect of such competition has been to increase the cost
to the Subsidiary Banks of deposits which provide the funds with which loans
are made. In addition to savings and loan associations and credit unions, the
Subsidiary Banks also compete for consumer loans with local offices of national
finance companies and finance subsidiaries of automobile manufacturers, as well
as with national credit card companies such as MasterCard and VISA, whose
cards, issued through financial institutions, are held by consumers throughout
their service areas. The Subsidiary Banks believe that the principal means by
which they compete for deposits and consumer and smaller commercial loans are
the number and desirability of the locations of their offices and ATMs, the
sophistication and quality of their services and the prices (primarily interest
rates) of their services.
CSC is the data processing subsidiary of FCFC. It provides on-line general
ledger accounting services and bookkeeping services for deposit and loan
accounts to FCFC, the Subsidiary Banks and two other bank customers located in
Pennsylvania. CSC is able to compete, principally with data processing
subsidiaries of other, mostly larger, banks, on the basis of the price and
quality of its services and the speed with which such services are delivered.
First Commonwealth Trust Company was incorporated on January 18, 1991 to
acquire the trust business formerly conducted by the Subsidiary Banks. It is
headquartered in Indiana, Pennsylvania and has six branch offices in the
service areas of the Subsidiary Banks. It commenced operations on January 28,
1991 and has operated profitably since its formation. First Commonwealth Trust
Company offers personal and corporate trust services, including administration
of estates and trusts, individual and corporate investment management and
custody services and employee benefit trust services.
Commonwealth Trust is 50% owned by FCFC, with the remaining 50% owned by
another bank holding company based in Indiana, Pennsylvania. Commonwealth Trust
provides reinsurance for credit life and credit accident and health insurance
sold by the subsidiary banks of the two holding companies under a joint venture
arrangement whereby the net income derived from such reinsurance inures
proportionally to the benefit of the holding company selling the underlying
insurance to its banks' customers. Commonwealth Trust has been profitable since
its formation.
FCFC does not engage in any significant business activities other than
holding the stock of its subsidiaries. FCFC does not at present have any plans
to expand or modify its business or that of its subsidiaries, other than as
described herein. Nevertheless, it will be receptive to and will consider other
mergers and acquisitions and may actively seek out such mergers and
acquisitions in the event opportunities which management considers advantageous
to the development of FCFC's business arise, and may otherwise expand or modify
its business as management deems necessary to respond to changing market
conditions or the laws and regulations affecting the business of banking.
FCFC's principal office is located in the old Indiana County Courthouse
complex. This certified Pennsylvania and national historic landmark was built
in 1870 and restored by NBOC in the early 1970s. FCFC, NBOC and CSC occupy this
grand structure, which provides 32,000 square feet of floor space, under a 25-
year restoration lease agreement with Indiana County, which NBOC entered into
in 1973 and which
22
contains a 25-year renewal option. Under the lease, NBOC is obligated to pay
all taxes, maintenance and insurance on the building and to restore it in
conformity with historic guidelines. The building is now in excellent condition
and provides space for the operations of FCFC, NBOC and CSC. The Subsidiary
Banks have 70 banking facilities (including one under construction), of which
23 are leased and 47 are owned in fee, free of all liens and encumbrances. All
of the facilities utilized by FCFC and its subsidiaries are used primarily for
banking activities. Management believes all such facilities to be in good
repair and well suited to their uses. Management presently expects that such
facilities will be adequate to meet the anticipated needs of FCFC and its
subsidiaries for the immediate future.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data is not covered by the auditor's report
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations, which follows, and with the
consolidated financial statements and related notes appearing elsewhere in this
Proxy Statement/Prospectus. All amounts have been restated to reflect the
pooling of interests.
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Income
Interest and fees on
loans................. $ 21,021 $ 21,695 $ 86,121 $ 84,612 $ 81,357 $ 83,993 $ 79,422
Interest and dividends
on investment
securities............ 11,311 11,018 44,906 44,311 38,844 32,865 30,322
Interest on money
market investments.... 28 302 691 2,494 5,600 7,906 8,014
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest income.. 32,360 33,015 131,718 131,417 125,801 124,764 117,758
---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Expense
Interest on deposits... 12,759 13,794 54,041 59,906 65,484 66,060 64,059
Interest on short-term
borrowings............ 1,522 663 3,496 1,723 1,569 3,001 3,291
Interest on long-term
debt.................. 106 115 456 454 456 535 621
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest expense. 14,387 14,572 57,993 62,083 67,509 69,596 67,971
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 17,973 18,443 73,725 69,334 58,292 55,168 49,787
Provision for possible
loan losses........... 539 593 2,197 3,219 4,946 3,933 2,310
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
possible loan losses.. 17,434 17,850 71,528 66,115 53,346 51,235 47,477
Net securities gains
(losses).............. 213 657 2,333 679 677 (269) (998)
Other operating income. 2,606 2,329 9,792 8,695 6,852 6,650 5,622
Other operating
expenses.............. 12,932 12,637 51,244 47,825 39,866 38,655 36,478
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
cumulative effect of
change of accounting
method................ 7,321 8,199 32,409 27,664 21,009 18,961 15,623
Applicable income
taxes................. 2,191 2,360 9,719 7,076 5,025 4,475 2,749
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before
cumulative effect of
change in accounting
method................ 5,130 5,839 22,690 20,588 15,984 14,486 12,874
Cumulative effect of
change in accounting
method................ -0- 500 500 -0- -0- -0- -0-
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 5,130 $ 6,339 $ 23,190 $ 20,588 $ 15,984 $ 14,486 $ 12,874
========== ========== ========== ========== ========== ========== ==========
PER SHARE DATA(A)
Net income before
cumulative effect of
change in accounting
method................ $ 0.28 $ 0.32 $ 1.22 $ 1.14 $ 0.94 $ 0.85 $ 0.76
Cumulative effect of
change in accounting
method................ $ 0.00 $ 0.02 $ 0.02 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income............. $ 0.28 $ 0.34 $ 1.24 $ 1.14 $ 0.94 $ 0.85 $ 0.76
Dividends declared..... $ 0.14 $ 0.13 $ 0.51 $ 0.55 $ 0.38 $ 0.33 $ 0.30
Average shares
outstanding........... 18,642,024 18,642,024 18,642,024 18,107,266 17,024,494 17,024,494 17,024,494
AT END OF PERIOD
Total assets........... $1,972,633 $1,830,619 $1,955,269 $1,787,548 $1,479,592 $1,346,028 $1,267,444
Securities............. 835,762 731,800 847,035 664,046 537,894 419,948 354,564
Loans and leases, net
of unearned income.... 1,031,728 989,102 1,006,176 964,527 801,533 763,250 727,023
Reserve for possible
loan losses........... 14,886 14,402 14,544 14,267 9,426 8,323 7,721
Deposits............... 1,590,715 1,536,705 1,575,624 1,544,823 1,279,988 1,149,863 1,088,910
Long-term debt......... 7,911 7,951 7,363 8,130 6,524 5,718 5,979
Shareholders' equity... 183,088 174,682 186,453 170,403 140,992 130,762 122,957
KEY RATIOS
Return on average
assets................ 1.06% 1.44% 1.25% 1.24% 1.14% 1.12% 1.10%
Return on average
equity................ 10.99% 14.76% 12.91% 12.91% 11.75% 11.59% 10.82%
Net loans to deposit
ratio................. 63.92% 63.43% 62.94% 61.51% 61.88% 65.65% 66.06%
Dividend payout ratio.. 50.88% 34.69% 39.30% 45.11% 38.55% 36.88% 38.70%
Average shareholders'
equity as percentage
of average assets..... 9.66% 9.72% 9.65% 9.60% 9.69% 9.66% 10.17%
- --------
(a) Average number of shares outstanding has been restated to reflect pooling
of interests. Restatements also reflect two-for-one stock split on January
18, 1994.
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
This discussion and the related financial data are presented to assist in the
understanding and evaluation of the consolidated financial condition and the
results of operations of First Commonwealth Financial Corporation (the
"Corporation") including its subsidiaries for the years ended December 31,
1993, 1992 and 1991 and are intended to supplement, and should be read in
conjunction with, the consolidated financial statements and related footnotes.
Effective December 31, 1993, the Corporation acquired all of the outstanding
common stock of Peoples Bank of Western Pennsylvania, a state-chartered bank,
headquartered in New Castle, Pennsylvania. The merger was accounted for as a
pooling of interests and accordingly, all financial statements have been
restated as though the merger had occurred at the beginning of the earliest
period presented.
Effective April 30, 1992, the Corporation acquired all of the outstanding
common stock of Central Bank ("Central"), a state-chartered bank headquartered
in Hollidaysburg, Pennsylvania. The merger was accounted for as a purchase
transaction, whereby the results of operations of Central from the date of
acquisition were included in the financial statements.
RESULTS OF OPERATIONS
Net income in 1993 was $23.2 million, an increase of $2.6 million over the
1992 level of $20.6 million and compared to $16.0 million which was reported in
1991. Earnings per share before the cumulative effect of the change in
accounting method increased $0.08 per share in 1993 to $1.22. This compared to
$1.14 in 1992 and $0.94 in 1991. The cumulative effect of change in the method
of accounting for income taxes added $0.02 per share to result in $1.24
earnings per share for 1993. Per share data has been restated to reflect the
two-for-one stock split effected in the form of a 100% stock dividend declared
on January 18, 1994. Return on average assets was 1.25% during the 1993 period
compared to 1.24% for 1992. Return on average equity was 12.91% for both the
1993 and 1992 periods. During 1991 return on average assets was 1.14% and
return on average equity was 11.75%.
The following is an analysis of the impact of changes in net income on
earnings per share:
1993 VS. 1992 1992 VS. 1991
------------- -------------
Net income per share, prior year.................... $ 1.14 $ 0.94
Increase (decrease) from changes in:
Net interest income............................... 0.07 0.30
Provision for possible loan losses................ 0.06 0.10
Security transactions............................. 0.09 0.00
Other income...................................... 0.04 0.05
Salaries and employee benefits.................... (0.08) (0.06)
Occupancy and equipment costs..................... (0.03) (0.01)
Settlement of lender liability claim.............. 0.08 (0.08)
Other expenses.................................... (0.03) (0.06)
Provision for Federal income taxes................ (0.13) (0.08)
------ ------
Subtotal............................................ 1.21 1.10
Inclusion of acquisition during year................ 0.01 0.04
Cumulative effect of change in accounting method.... 0.02 0.00
------ ------
Net income per share................................ $ 1.24 $ 1.14
====== ======
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest expense
on liabilities. Net interest income was $73.7 million in 1993 compared to $69.3
million in 1992 and $58.3 million in 1991. The following is an analysis of the
average balance sheets and net interest income for each of the three years in
the period ended December 31, 1993.
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
-----------------------------------------------------------------------------------------
1993 1992 1991
----------------------------- ----------------------------- -----------------------------
AVERAGE INCOME/ YIELD OR AVERAGE INCOME/ YIELD OR AVERAGE INCOME/ YIELD OR
BALANCE EXPENSE RATE(A) BALANCE EXPENSE RATE(A) BALANCE EXPENSE RATE(A)
------- -------- -------- ---------- -------- -------- ---------- -------- --------
ASSETS (DOLLAR AMOUNTS IN THOUSANDS)
Interest-earning assets:
Time deposits with banks....... $ 10,294 $ 483 4.69% $ 29,902 $ 1,844 6.17% $ 50,100 $ 3,990 7.96%
Investment securities.......... 762,562 44,906 6.10 622,869 44,311 7.45 477,168 38,844 8.59
Federal funds sold............. 6,832 208 3.04 18,265 650 3.56 28,151 1,610 5.72
Loans (b) (c), net of unearned
income........................ 986,596 86,121 8.88 902,486 84,612 9.59 770,795 81,357 10.78
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest-earning assets.. 1,766,284 131,718 7.63 1,573,522 131,417 8.61 1,326,214 125,801 9.78
---------- ======== ==== ---------- ======== ==== ---------- ======== =====
Noninterest-earning assets:
Cash........................... 45,496 41,104 36,083
Reserve for loan losses........ (14,683) (13,113) (8,723)
Other assets................... 64,766 59,726 49,554
---------- ---------- ----------
Total noninterest-earning
assets........................ 95,579 87,717 76,914
---------- ---------- ----------
Total Assets.................. $1,861,863 $1,661,239 $1,403,128
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... $ 169,423 3,050 1.80% $ 143,478 3,799 2.65% $ 104,632 4,006 3.83%
Savings deposits............... 421,626 9,681 2.30 396,733 12,150 3.06 317,904 13,312 4.19
Time deposits.................. 816,920 41,310 5.06 763,264 43,957 5.76 681,662 48,166 7.07
Short-term borrowings.......... 95,925 3,496 3.64 38,459 1,723 4.48 25,610 1,569 6.13
Long-term debt................. 7,985 456 5.71 7,803 454 5.82 6,338 456 7.19
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest-bearing
liabilities................... 1,511,879 57,993 3.84 1,349,737 62,083 4.60 1,136,146 67,509 5.94
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Noninterest-bearing liabilities
and capital:
Noninterest-bearing demand
deposits...................... 157,653 139,831 119,143
Other liabilities.............. 12,660 12,196 11,832
Shareholders' equity........... 179,671 159,475 136,007
---------- ---------- ----------
Total noninterest-bearing
funding sources............... 349,984 311,502 266,982
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity......... $1,861,863 $1,661,239 $1,403,128
========== ========== ==========
Net Interest Income and Net
Yield On Interest-earning
Assets......................... $ 73,725 4.35% $ 69,334 4.66% $ 58,292 4.69%
======== ==== ======== ==== ======== =====
- --------
(a) Yields on interest-earning assets have been computed on a tax equivalent
basis using the 35% Federal income tax statutory rate in 1993, and 34% in
1992 and 1991.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan
balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
26
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Both interest income and interest expense increased as volumes increased.
Average interest earning assets increased $192.8 million in 1993 to $1,766,284
which is 94.9% of average total assets. Included in the 1993 growth was $41.8
million in investments, primarily mortgage-backed securities, and these
purchases were funded with borrowings from the Federal Home Loan Bank and other
banks. This leveraging strategy added approximately $1.0 million to net
interest income during 1993. Excluding the earning assets resulting from the
Central acquisition, average earning assets grew $111.2 million in 1992.
Average earning assets were 94.7% of average total assets during 1992, compared
to 94.5% during 1991. Average interest-bearing liabilities increased $162.1
million during 1993, which included $41.8 million related to the previously
mentioned leveraging strategy. The remainder of the increase occurred primarily
through deposit growth. Average interest-bearing liabilities grew $213.6
million during 1992 which included $90.7 million in addition to the Central
acquisition.
Both asset yields and the cost of funds declined in 1993 and 1992 as the
interest rates were generally lower during those periods when compared to
previous years. Asset yields, on a tax-equivalent basis, decreased 98 basis
points (0.98%) during 1993 and 117 basis points (1.17%) during 1992. The cost
of funds declined 76 basis points (0.76%) during 1993 and 134 basis points
(1.34%) during 1992. Earning asset yields declined in 1993 faster than
liability costs primarily because of lower mortgage rates. Mortgage borrowers
have been refinancing loans during the low interest rate environment reducing
loan yields. Additionally, mortgage loan refinancing on a national scale had
accelerated the repayments of mortgage backed securities in excess of
projections. Reinvestment of the proceeds at the then current rates lowered the
investment portfolio yields. This trend should stabilize if interest rates
remain constant or rise. Deposit customers tended to extend maturities which
locked in rates as deposit rates fell, thereby preventing the cost of funds to
decline as fast as asset yields. Net interest margin, on a tax-equivalent
basis, was 4.35% during 1993 compared to 4.66% in 1992 and 4.69% during 1991.
The Corporation's use of computer modeling to manage interest rate risk is
further described in the "Interest Sensitivity" section of this discussion
herein. The following table shows the effect of changes in volumes and rates on
interest income and interest expense.
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
-------------------------------------------------------------
1993 CHANGE FROM 1992 1992 CHANGE FROM 1991
------------------------------ ------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
------- ---------- ---------- ------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Interest-earning assets:
Time deposits with
banks................ $(1,361) $(1,209) $ (152) $(2,146) $(1,608) $ (538)
Securities............ 595 10,407 (9,812) 5,467 12,516 (7,049)
Federal funds sold.... (442) (407) (35) (960) (565) (395)
Loans................. 1,509 8,066 (6,557) 3,255 14,196 (10,941)
------- ------- -------- ------- ------- --------
Total interest income. 301 16,857 (16,556) 5,616 24,539 (18,923)
------- ------- -------- ------- ------- --------
Interest-bearing
liabilities:
Deposits.............. (5,865) 4,807 (10,672) (5,578) 11,817 (17,395)
Short-term borrowings. 1,773 2,575 (802) 154 787 (633)
Long-term debt........ 2 11 (9) (2) 105 (107)
------- ------- -------- ------- ------- --------
Total interest ex-
pense................ (4,090) 7,393 (11,483) (5,426) 12,709 (18,135)
------- ------- -------- ------- ------- --------
Net interest income... $ 4,391 $ 9,464 $ (5,073) $11,042 $11,830 $ (788)
======= ======= ======== ======= ======= ========
The provision for possible loan losses is an amount added to the reserve
against which loan losses are charged. The amount of the provision is
determined by management based upon its assessment of the size and quality of
the loan portfolio and the adequacy of the reserve in relation to the risks
inherent within the loan portfolio. The provision for possible loan losses was
$2.2 million in 1993 and $3.2 million and $4.9 million in 1992 and 1991,
respectively. Net charge-offs against the reserve for possible loan losses were
$1.9 million, or 0.19% of average total loans in 1993. This is compared to $2.9
million in 1992. Charge-offs were
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
$510 thousand less during 1993 while recoveries of previously charged off loans
increased $449 thousand. Net charge-offs were $3.8 million in 1991. Net charge-
offs were 0.32% and 0.50% of average total loans during 1992 and 1991,
respectively. For an analysis of credit quality, see the "Credit Review"
section of this discussion.
The following table presents an analysis of the consolidated reserve for
possible loan losses for the five years ended December 31, 1993:
SUMMARY OF LOAN LOSS EXPERIENCE
--------------------------------------------------
1993 1992 1991 1990 1989
---------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Loans outstanding at end of
year...................... $1,006,176 $964,527 $801,533 $763,250 $727,023
========== ======== ======== ======== ========
Average loans outstanding.. $ 986,596 $902,486 $770,795 $746,898 $706,858
========== ======== ======== ======== ========
Reserve for possible loan
losses:
Balance, beginning of year. $ 14,267 $ 9,426 $ 8,323 $ 7,721 $ 7,294
Addition as result of ac-
quisition................. 0 4,501 0 0 0
Loans charged off:
Commercial, financial and
agricultural............ 731 816 1,981 1,883 1,226
Loans to individuals..... 1,662 1,840 1,849 2,055 1,006
Real estate.............. 1,011 1,281 803 367 358
Lease financing receiv-
ables................... 80 57 35 205 9
---------- -------- -------- -------- --------
Total loans charged
off................... 3,484 3,994 4,668 4,510 2,599
Recoveries of loans previ-
ously charged off:
Commercial, financial and
agricultural............ 559 360 153 447 369
Loans to individuals..... 552 388 595 506 124
Real estate.............. 453 364 74 148 222
Lease financing receiv-
ables................... 0 3 3 78 1
---------- -------- -------- -------- --------
Total recoveries....... 1,564 1,115 825 1,179 716
---------- -------- -------- -------- --------
Net loans charged off.. 1,920 2,879 3,843 3,331 1,883
---------- -------- -------- -------- --------
Provision charged to ex-
pense..................... 2,197 3,219 4,946 3,933 2,310
---------- -------- -------- -------- --------
Balance, end of year....... $ 14,544 $ 14,267 $ 9,426 $ 8,323 $ 7,721
========== ======== ======== ======== ========
Ratios:
Net charge-offs as a
percentage of average
loans outstanding....... 0.19% 0.32% 0.50% 0.45% 0.27%
Reserve for possible loan
losses as a percentage
of average loans out-
standing................ 1.47% 1.58% 1.22% 1.11% 1.09%
Total other operating income increased $2.7 million in 1993 to $12.1 million.
Net security gains increased $1.7 million to $2.3 million during 1993 compared
to $679 thousand during 1992 and $677 thousand in 1991. Security transactions
during 1993 and 1992 were primarily the sale of U.S. Treasury securities
maturing within a year. Proceeds were reinvested in U.S. Treasury securities
and U.S. Government agency securities with maturities of 2-3 years to continue
to lock in yields while interest rates were falling. Additionally, during 1993
marketable equity securities with a book value of $1.6 million were sold for a
$1.0 million gain. During 1991 the Corporation also sold low and marginal
quality securities which improved the marketability and liquidity of the
portfolio. Gross gains of $2.3 million and gross losses of $17 thousand were
recognized during 1993. Gross gains of $803 thousand and $1.5 million were
recognized during 1992 and 1991, respectively, while gross losses of $124
thousand and $779 thousand were recognized in the corresponding periods.
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Trust income increased $227 thousand during 1993 to $2.2 million as estate
fees decreased $67 thousand, and core revenues increased. Trust income
increased $664 thousand during 1992 as the 1991 restructuring of the subsidiary
banks' trust departments into a single trust company began to produce benefits.
Management of the trust company allows an opportunity to focus on growth, since
the specialized areas and back-office operations were centralized. Service
charges on deposits increased $320 thousand in 1993 and $1.0 million in 1992
primarily as a result of average total deposits increasing. Additionally, new
fee schedules established during the fourth quarter of 1991 provided higher
revenues during 1992.
Total other operating expenses increased $3.4 million to $51.2 million in
1993 and compared to $47.8 million and $39.9 million in 1992 and 1991,
respectively. Results for the 1992 period did not reflect any of Central's
results until the merger date of April 30, 1992. Operating expenses related to
Central in the first four months of 1993 were $2.2 million.
Employee costs experienced an increase of $2.4 million to $25.4 million. Of
this increase $946 thousand was a result of including Central for the full year
of 1993. Total employee costs were $23.0 million and $20.2 million in 1992 and
1991, respectively. Salary levels are generally maintained through attrition
management programs. Employee costs as a percentage of average assets was 1.36%
in 1993, reduced from 1.38% in 1992 and 1.44% in 1991.
Net occupancy expense and furniture and equipment increased over the three
year period primarily as the costs of maintaining branch operations, including
utilities, repairs and depreciation continued to increase. Additionally,
equipment depreciation increased as computer equipment that was previously
being leased was purchased and is being depreciated over a shorter life than
the original lease. Additionally, the process of automating loan documentation
and the branch network increased depreciation costs but is expected to improve
platform productivity and reduce loan documentation risks. The deposit
insurance assessment from the Federal Deposit Insurance Corporation ("FDIC")
increased as a result of deposit increases. This assessment is not scheduled to
increase again in 1994, but the possibility of future increases cannot be
eliminated. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") has established a risk-based assessment system which went into
effect January 1, 1993. This system designates an assessment rate for each
insured institution based on a combination of its capital and supervisory
condition. Because of the Corporation's strong capital position and supervisory
condition, only future rate changes will cause a significant change in the
related expense. A lender liability claim for which a subsidiary of the
Corporation was a defendant, was settled out of court in October 1992 in the
amount of $1.4 million. Other operating expenses increased $1.3 million in 1993
over the 1992 related period to $15.0 million. The inclusion of Central for the
entire period of 1993 increased this category $829 thousand. An increase in the
amortization of core deposit intangibles as a result of the implementation of
FAS No. 109 was $715 thousand. One of the subsidiary banks agreed to a
settlement of a PA shares tax claim resulting in a refund of $298 thousand. The
1992 increase was primarily a result of including Central for eight months.
Cost increases occurred in the process of the collection of loans or the
disposition of real estate acquired in lieu of loan repayment but was partially
responsible for the increased recovery of previously charged off loans.
Federal income tax expense was $9.7 million during 1993 representing an
increase of $2.6 million over the 1992 total of $7.1 million. Taxable income
increased nearly $7.0 million during 1993. On August 10, 1993 President Clinton
signed into law the Omnibus Budget Reconciliation Act of 1993 ("the Act"). The
Act made several changes that will affect financial institutions such as the
Corporation and its subsidiaries. While it is difficult to determine the short
and long-range effects of the Act on the Corporation and whether it will be
able to change its operations and make adaptations to maintain net income
levels that would otherwise have prevailed if the Act had not passed, it should
be noted that the primary focus of the Act was to raise taxes. One provision of
the Act increased the tax rate for corporate taxable income in excess of $10
million to 35 percent from 34 percent. This provision was retroactively applied
to taxable income earned after January 1, 1993. The tax rate change increased
the Corporation's Federal income tax expense by $259 thousand.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY
Liquidity is a measure of the Corporation's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the ordinary
course of business, funds are generated from deposits (primary source) and the
maturity or repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be provided through
the use of overnight Federal funds purchased and borrowings from the Federal
Reserve Bank. Additionally, six of the seven banking subsidiaries are members
of the Federal Home Loan Bank and may borrow up to ten percent of their total
assets at any one time. The sale of earning assets may also provide an
additional source of liquidity.
The Corporation's long-term liquidity source is a large core deposit base and
a strong capital position. Core deposits are the most stable source of
liquidity a bank can have due to the long-term relationship with a deposit
customer. Deposits increased $30.8 million in 1993 primarily in core customer
deposit relationships. Non-core deposits, which are time deposits in
denominations of $100 thousand or more represented only 6.1% of total deposits
at December 31, 1993. Time deposits of $100 thousand or more at December 31,
1993, 1992 and 1991 had remaining maturities as follows:
MATURITY DISTRIBUTION OF LARGE CERTIFICATES OF
DEPOSIT
-------------------------------------------------
1993 1992 1991
--------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- ------- -------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
Remaining Maturity:
3 months or less............. $19,734 21% $ 25,289 25% $ 53,945 51%
Over 3 months through 6
months...................... 12,543 13 15,906 15 24,726 23
Over 6 months through 12
months...................... 16,542 17 11,140 11 13,196 12
Over 12 months............... 47,006 49 49,731 49 14,784 14
------- --- -------- --- -------- ---
Total...................... $95,825 100% $102,066 100% $106,651 100%
======= === ======== === ======== ===
Net loans increased $41.4 million during 1993 as consumer loans and real
estate secured loans were the primary categories of increased volume reflecting
a strengthening of loan demand.
An additional source of liquidity are certain marketable securities that the
Corporation holds in its investment portfolio. These securities are classified
as "securities available for sale". While the Corporation does not have
specific intentions to sell these securities, they have been designated as
"available for sale" because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part of the
implementation of tax management strategies. As of December 31, 1993,
securities available for sale had an amortized cost of $462.8 million and a
market value of $465.2 million. Gross unrealized gains were $3.7 million and
gross unrealized losses were $1.3 million.
Below is a schedule of loans by classification for the five years ended
December 31, 1993 and a schedule of the maturity distribution of investment
securities at December 31, 1993.
LOANS BY CLASSIFICATION
-------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
Commercial, financial,
agricultural and other. $ 153,039 15% $196,979 20% $255,525 31% $221,575 28% $204,933 27%
Real estate............. 643,321 62 573,076 58 394,002 47 384,347 48 358,000 48
Loans to individuals.... 239,904 23 220,085 22 177,390 21 179,610 23 184,152 24
Net leases.............. 1,411 -0- 4,628 -0- 3,802 1 5,622 1 6,285 1
---------- --- -------- --- -------- --- -------- --- -------- ---
Gross loans and leases. 1,037,675 100% 994,768 100% 830,719 100% 791,154 100% 753,370 100%
=== === === === ===
Unearned income........ (31,499) (30,241) (29,186) (27,904) (26,347)
---------- -------- -------- -------- --------
Total loans, and leases
net of unearned
income................ $1,006,176 $964,527 $801,533 $763,250 $727,023
========== ======== ======== ======== ========
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
---------------------------------------------------------
U.S. TREASURY
AND OTHER
U.S. GOVERNMENT STATES AND TOTAL WEIGHTED
AGENCIES AND POLITICAL OTHER BOOK AVERAGE
CORPORATIONS SUBDIVISIONS SECURITIES VALUE YIELD*
--------------- ------------ ---------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Within 1 year........... $ -0- $14,322 $ 3,289 $ 17,611 7.58%
After 1 but within 5
years.................. 94,612 22,105 9,953 126,670 5.73
After 5 but within 10
years.................. 81,550 27,058 1,566 110,174 5.93
After 10 years.......... 116,758 9,880 718 127,356 5.95
-------- ------- ------- -------- ----
Total................. $292,920 $73,365 $15,526 $381,811 5.95%
======== ======= ======= ======== ====
- --------
* Yields are calculated on a tax-equivalent basis
INTEREST SENSITIVITY
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances.
While no single number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity positions, or
"gaps" when measured over a variety of time periods may be helpful.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities
("ISL") during a prescribed time period, a positive gap results. Conversely,
when ISL exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates fall
during the period. A negative gap tends to indicate that earnings will be
affected inversely to interest rate changes. In other words, as interest rates
fall, a negative gap should tend to produce a positive effect on earnings and
when interest rates rise, a negative gap should tend to affect earnings
negatively.
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of
December 31, 1993 and 1992:
1993 1992
-------------------------------- --------------------------------
0- 0-
0-90 DAYS 180 DAYS 0-365 DAYS 0-90 DAYS 180 DAYS 0-365 DAYS
--------- --------- ---------- --------- --------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Loans................... $ 384,639 $ 458,967 $ 593,225 $ 395,097 $ 463,995 $ 615,796
Investments............. 162,510 210,823 276,518 72,879 114,000 185,784
Other interest-earning
assets................. 1,974 2,172 2,469 34,403 37,692 46,859
--------- --------- ---------- --------- --------- ----------
Total interest-
sensitive assets..... 549,123 671,962 872,212 502,379 615,687 848,439
--------- --------- ---------- --------- --------- ----------
Certificates of deposit. 160,487 278,868 404,764 156,655 288,295 389,704
Other deposits.......... 503,288 503,288 503,288 583,307 583,807 584,648
Short-term borrowings... 155,518 165,096 168,803 44,801 50,135 51,492
--------- --------- ---------- --------- --------- ----------
Total interest-
sensitive
liabilities.......... 819,293 947,252 1,076,855 784,763 922,237 1,025,844
--------- --------- ---------- --------- --------- ----------
Gap................... $(270,170) $(275,290) $ (204,643) $(282,384) $(306,550) $ (177,405)
========= ========= ========== ========= ========= ==========
ISA/ISL................. 0.67 0.71 0.81 0.64 0.67 0.83
Gap/Total assets........ 13.82% 14.08% 10.47% 15.80% 17.15% 9.92%
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at December
31, 1993 are as follows:
WITHIN ONE ONE TO AFTER
YEAR 5 YEARS 5 YEARS TOTAL
---------- ------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Commercial and industrial................. $ 92,566 $19,544 $ 14,403 $126,513
Financial institutions.................... -0- 162 -0- 162
Real estate-construction.................. 7,199 1,147 1,372 9,718
Real estate-commercial.................... 99,684 40,003 81,119 220,806
Other..................................... 9,276 6,050 11,219 26,545
-------- ------- -------- --------
Totals.................................. $208,725 $66,906 $108,113 $383,744
======== ======= ======== ========
Loans at fixed interest rates............. 43,902 49,367
Loans at variable interest rates.......... 23,004 58,746
------- --------
Totals.................................. $66,906 $108,113
======= ========
The Corporation has not experienced the kind of earnings volatility indicated
from the gap analysis. This is because assets and liabilities with similar
contractual repricing characteristics may not reprice at the same time or to
the same degree.
Therefore, to more precisely measure the impact of interest rate changes on
the Corporation's net interest margin, management simulates the potential
effects of changing interest rates through computer modeling. The Corporation
is then better able to implement strategies which would include an acceleration
of a deposit rate reduction or a lag in a deposit rate increase. The repricing
strategies for loans would be inversely related.
The analysis at December 31, 1993, indicated that a 200 basis point movement
in interest rates in either direction would not have a significant impact on
the Corporation's anticipated net interest income over the next twelve months.
CREDIT REVIEW
Maintaining a high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of the loan
portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by external auditors,
internal auditors, regulatory authorities and our loan review staff. These
reviews include the analysis of credit quality, diversification of industry,
compliance to policies and procedures, and an analysis of current economic
conditions.
In the management of its credit portfolio, the Corporation emphasizes the
importance of the collectibility of loans and leases as well as asset and
earnings diversification. The Corporation immediately recognizes as a loss, all
credits judged to be uncollectible and has established a reserve for possible
credit losses that may exist in the portfolio at a point in time, but have not
been specifically identified.
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Since all identified losses are immediately charged off, no portion of the
reserve is restricted to any individual credit or groups of credits, and the
entire reserve is available to absorb any and all credit losses. However, for
analytical purposes, the following table sets forth an allocation of the
reserve for possible loan losses at December 31 according to the categories
indicated:
ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
----------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Commercial, industrial,
financial, agricultural
and other.............. $ 2,177 $ 5,109 $ 4,226 $ 2,074 $ 2,536
Real estate............. 7,176 4,627 2,597 2,725 2,285
Loans to individuals.... 1,879 1,806 1,182 1,765 1,672
Lease financing receiv-
ables.................. 32 39 21 28 25
Unallocated............. 3,277 2,686 1,400 1,731 1,203
---------- ---------- ---------- ---------- ----------
Total................. $ 14,541 $ 14,267 $ 9,426 $ 8,323 $ 7,721
========== ========== ========== ========== ==========
Reserve as percentage of
average total loans.... 1.47% 1.58% 1.22% 1.11% 1.09%
========== ========== ========== ========== ==========
Other than those described below, there are no material credits that
management has serious doubts as to the borrower's ability to comply with the
present loan repayment terms. The following table identifies nonperforming
loans at December 31. A loan is placed in a nonaccrual status at the time when
ultimate collectibility of principal or interest, wholly or partially, is in
doubt. Past due loans are those which were contractually past due 90 days or
more as to interest or principal payments. Renegotiated loans are those which
terms have been renegotiated to provide a reduction or deferral of principal or
interest as a result of the deteriorating financial position of the borrower.
NONPERFORMING LOANS AND EFFECT ON INTEREST INCOME DUE TO NONACCRUAL
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------- ------------- ------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
Loans on nonaccrual ba-
sis.................... $ 8,166 $ 8,223 $ 5,458 $ 5,392 $ 6,281
Past due loans.......... 6,011 4,881 4,561 3,065 4,536
Renegotiated loans...... 1,186 1,002 1,086 3,185 221
------------- ------------- ------------- ------------- -------------
Total nonperforming
loans................ $ 15,363 $ 14,106 $ 11,105 $ 11,642 $ 11,038
============= ============= ============= ============= =============
Nonperforming loans as a
percentage of total
loans.................. 1.53% 1.46% 1.38% 1.53% 1.52%
============= ============= ============= ============= =============
Gross income that would
have been recorded at
original rates......... $ 706 $ 936 $ 521 $ 687 $ 425
Interest that was re-
flected in income...... 76 106 41 166 57
------------- ------------- ------------- ------------- -------------
Net reduction to
interest income due to
nonaccrual............. $ 630 $ 830 $ 480 $ 521 $ 368
============= ============= ============= ============= =============
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The level of nonperforming loans has increased in recent years, principally
as nonaccrual loans increased. These loans are primarily secured by residential
and commercial real estate and no significant loss is expected. Management
believes that the reserve for possible loan losses and nonperforming loans
remained safely within acceptable levels during 1993.
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAPITAL RESOURCES
Equity capital increased $16.0 million in 1993. Dividends declared decreased
equity by $8.9 million. The retained net income remains in permanent capital to
fund future growth and expansion. Payments by the Corporation's Employee Stock
Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's
common stock for future distribution as employee compensation, net of
additional advances, increased equity capital by $464 thousand. The market
value adjustment to securities available for sale added $1.6 million to capital
while the tax benefit of dividends paid to the ESOP increased equity by $84
thousand and amounts paid to fund the discount on reinvested dividends and
optional cash payments reduced equity by $159 thousand.
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services while protecting
against future uncertainties. The evaluation of capital adequacy depends on a
variety of factors, including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In consideration of these
factors, management's primary emphasis with respect to the Corporation's
capital position is to maintain an adequate and stable ratio of equity to
assets.
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which went into effect in stages through 1992. The risk-based capital standard
is designed principally as a measure of credit risk. These guidelines require:
(1) at least 50% of a banking organization's total capital be common and
certain other "core" equity capital ("Tier I Capital"); (2) assets and off-
balance sheet items must be weighted according to risk; (3) the total capital
to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio
of Tier I capital to total assets. The minimum leverage ratio is not
specifically defined, but is generally expected to be 4-5 percent for all but
the most highly rated banks, as determined by a regulatory rating system.
The table below presents the Corporation's capital position at December 31,
1993:
PERCENT
AMOUNT OF ADJUSTED
(IN THOUSANDS) ASSETS
-------------- -----------
Tier I Capital.................................. $169,546 16.29
Risk-Based Requirement.......................... 41,642 4.00
Total Capital................................... 182,989 17.58
Risk-Based Requirement.......................... 83,285 8.00
Minimum Leverage Capital........................ 169,546 8.88
Minimum Leverage Requirement.................... 76,384 4.00
INFLATION AND CHANGING PRICES
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by analysis
and monitoring of its asset and liability structure. The Corporation monitors
its asset and liability position with particular emphasis on the mix of
interest-sensitive assets and liabilities in order to reduce the effect of
inflation upon its performance. However, it must be remembered that the asset
and liability structure of a financial institution is substantially different
from an industrial corporation in that virtually all assets and liabilities are
monetary in nature, meaning that they have been or will be converted into a
fixed number of dollars regardless of changes in general price levels. Examples
of monetary items include cash, loans and deposits. Nonmonetary items are those
assets and liabilities which do not gain or lose purchasing power solely as a
result of general price level changes. Examples of nonmonetary items are
premises and equipment.
Inflation can have a more direct impact on categories of noninterest expenses
such as salaries and wages, supplies and employee benefit costs. These expenses
are very closely monitored by management for both the effects of inflation and
increases relating to such items as staffing levels, usage of supplies and
occupancy costs.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY OF FINANCIAL DATA--UNAUDITED
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited quarterly results of operations for the years ended December
31, 1993 and 1992 are as follows:
1993
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest income................................ $33,014 $33,098 $32,623 $32,983
Interest expense............................... 14,572 14,562 14,351 14,508
------- ------- ------- -------
Net interest income.......................... 18,442 18,536 18,272 18,475
Provision for possible loan losses............. 593 519 484 601
------- ------- ------- -------
Net interest income after provision for possi-
ble loan losses............................... 17,849 18,017 17,788 17,874
Other operating income......................... 2,999 2,914 2,578 3,633
Other operating expenses....................... 12,649 12,967 12,676 12,952
------- ------- ------- -------
Income before taxes and cumulative effect of
change in accounting method................. 8,199 7,964 7,690 8,555
Applicable income taxes........................ 2,360 2,292 2,474 2,592
------- ------- ------- -------
Net income................................... $ 5,839 $ 5,672 $ 5,216 $ 5,963
======= ======= ======= =======
Earnings per share(a).......................... $ 0.31 $ 0.30 $ 0.28 $ 0.32
1992
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest income................................ $30,733 $33,188 $33,937 $33,559
Interest expense............................... 15,275 16,042 15,741 15,030
------- ------- ------- -------
Net interest income.......................... 15,458 17,146 18,196 18,529
Provision for possible loan losses............. 977 847 601 794
------- ------- ------- -------
Net interest income after provision for possi-
ble loan losses............................... 14,481 16,299 17,595 17,735
Other operating income......................... 2,267 2,684 2,213 2,213
Other operating expenses....................... 10,701 11,578 13,106 12,438
------- ------- ------- -------
Income before taxes and cumulative effect of
change in accounting method................. 6,047 7,405 6,702 7,510
Applicable income taxes........................ 1,458 1,837 1,801 1,980
------- ------- ------- -------
Net income................................... $ 4,589 $ 5,568 $ 4,901 $ 5,530
======= ======= ======= =======
Earnings per share(a).......................... $ 0.27 $ 0.31 $ 0.26 $ 0.30
- --------
(a) Average number of shares outstanding have been restated to reflect two-for-
one stock split effected in the form of a 200% stock dividend declared
January 18, 1994.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Three Months of 1994 as Compared to the First Three Months of 1993
Net income in the first three months of 1994 was $5.1 million, a decrease of
$709 thousand from the 1993 period before the change in the method of
accounting for income taxes which added $500 to the 1993 amount. Earnings per
share were $0.28 during the first three months of 1994 compared to $0.34 during
the 1993 period. Earnings per share during the 1993 period were $0.32 before
the effect of change in the method of accounting for income taxes. Return on
average assets was 1.06% and return on average equity was 10.99% during the
1994 period, compared to 1.44% and 14.76%, respectively during the same period
of 1993. Included in the 1993 period results was the change in accounting
method which added 11 basis points (0.11%) to the return on average assets and
116 basis points (1.16%) to the return on average equity for 1993.
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest expense
on liabilities. Net interest income for the 1994 period was $18.0 million
compared to $18.4 million during the same time period in 1993. Interest income,
on a tax-equivalent basis, decreased 90 basis points (0.90%) as a percentage of
average earning assets to 7.19% in 1994, from 8.09% in the 1993 period. This
represented a decline in all categories of interest earning assets, reflecting
lower rates in general. Mortgage borrowers had been refinancing loans during
the lower rate environment existing in 1993, resulting in a decline in yields
that carried forward into 1994. Mortgage loan refinancings on a national scale
had accelerated the repayments of mortgage backed securities. As proceeds were
reinvested in securities yielding lower rates, portfolio yields declined. The
recent rise in interest rates should stabilize prepayments of the portfolio.
The cost of funds was 3.65% and 4.06% in the first three months of 1994 and
1993, respectively as deposit costs, the predominant category of interest-
bearing liabilities, decreased only 37 basis points (0.37%) to 3.28%. This was
expected as deposit customers tended to extend maturities over the previous 18
months as interest rates declined, thereby preventing the cost of funds to
decline as fast as asset yields. Although interest yields and costs of funds
have continued to decline during the first quarter of 1994, the decline has
slowed. Net interest income on a tax-equivalent basis was 4.06% of earning
assets during 1994, compared to 4.61% in the 1993 related period.
Average earning assets were 95.1% of average total assets in the 1994 period
and 94.9% during the 1993 time frame. Average interest-bearing liabilities
increased as a percentage of average total assets to 81.5% in the first three
months of 1994 and 81.3% during the 1993 period.
Provision for possible loan losses was $539 thousand in 1994, compared to
$593 thousand in the same period of 1993. Net charge-offs against the reserve
for possible loan losses were $197 thousand in the 1994 period and can be
compared to $458 thousand during the 1993 period. Nonperforming loans were
1.50% of loans at March 31, 1994 compared to 1.52% of loans at March 31, 1993.
Nonperforming loans include loans past due 90 days or more, loans on a
nonaccrual basis and renegotiated loans.
Other operating income decreased $167 thousand in 1994 to $2.8 million. Net
security gains decreased $444 thousand. During the 1994 period, U.S. Treasury
securities and U.S. Government agency securities totaling $43.1 million with
remaining maturities of one year or less were sold and reinvested in similar
securities with maturities of 3-5 years. These securities were classified as
"securities available for sale" in accordance with Financial Accounting
Standards Board Statement No. 115. Other income increased $288 thousand in the
1994 period primarily as the gain on the sale of loans and other assets
increased. Income from the credit life reinsurance joint venture increased as
did service charges on club accounts. Increased
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
consumer loan volumes will tend to improve the income from credit life
reinsurance. Fees related to club accounts should tend to level out since
customer promotions occurred during the previous two quarters.
Noninterest expense was $12.9 million in the first three months of 1994 which
reflected an increase of $295 thousand over the 1993 period. Employee costs
were $6.6 million in 1994, an increase of $327 thousand over the 1993 related
period. Employee costs (annualized) as a percentage of average assets was 1.38%
in the 1994 period, reduced from 1.43% (annualized) in the 1993 period.
Furniture and equipment expense increased primarily as a result of increased
depreciation on computer equipment acquired to automate new customer loan and
deposit processes. Other operating expenses decreased $153 thousand to $3.6
million in the first three months of 1994 when compared to the 1993 related
period as loan collection costs and professional fees decreased. Loan
collection costs should continue to be favorable throughout the remainder of
the year. Professional fees are expected to increase as pending acquisitions
progress.
Federal income tax expense was $2.2 million during the first three months of
1994 compared to $2.4 million during the 1993 related period. Income before
taxes decreased $878 thousand in the 1994 period as compared to the same time
period of 1993. Taxable income decreased only $519 thousand as tax-free income
reduced $359 thousand.
LIQUIDITY
Liquidity is a measure of the Corporation's ability to meet normal cash flow
requirements of both borrowers and depositors efficiently. In the ordinary
course of business, funds are generated from deposits (primary source), and
maturity or repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be provided through
the use of overnight federal funds purchased and borrowings from the Federal
Reserve Bank. Additionally, each of the subsidiary banks are members of the
Federal Home Loan Bank and may borrow up to ten percent of their total assets
at any one time.
Net loans increased $25.2 million in the first three months of 1994 as all
major categories of loans increased. Total deposits increased $15.1 million,
mostly as time deposits increased. Time deposits in denominations of $100
thousand or more remained stable, indicating that the growth is primarily from
core customer relationships. Investment securities held to maturity declined
$8.2 million through maturities and repayments. Federal funds sold increased
$1.4 million and interest-bearing bank deposits declined $2.0 million while
short-term borrowings increased $3.0 million.
An additional source of liquidity are certain marketable securities that the
Corporation holds in its investment portfolio. These securities are classified
as "securities available for sale". While the Corporation does not have
specific intentions to sell these securities, they may be sold for the purpose
of obtaining future liquidity, for management of interest rate risk or as part
of the implementation of tax management strategies. As of March 31, 1994
securities available for sale had an amortized cost of $467.9 million and an
approximate market value of $462.2 million. Securities available for sale
decreased $3.0 million in 1994, primarily as the market values declined with
rising interest rates.
INTEREST SENSITIVITY
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances.
While no single number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity positions, or
"gaps", when measured over a variety of time periods, may be helpful.
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets ("ISA") exceed interest-sensitive liabilities ("ISL")
during a prescribed time period, a positive gap results. Conversely, when ISL
exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates fall
during the time period. A negative gap tends to indicate that earnings will be
affected inversely to interest rates changes. In other words, as interest rates
fall, a negative gap should tend to produce a positive effect on earnings and
when interest rates rise, a negative gap should tend to affect earnings
negatively.
The primary components of ISA include adjustable rate loans and investments,
loan repayments, investment maturities and money market investments. The
primary components of ISL include maturing certificates of deposit, money
market deposits, savings deposits, NOW accounts and short-term borrowings.
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of March
31, 1994 and December 31, 1993.
MARCH 31, 1994 DECEMBER 31, 1993
-------------------------------- --------------------------------
0-90 0-180 0-365 0-90 0-180 0-365
DAYS DAYS DAYS DAYS DAYS DAYS
--------- --------- ---------- --------- --------- ----------
Interest-sensitive as-
sets................... $ 542,219 $ 649,561 $ 865,416 $ 549,123 $ 671,962 $ 872,212
Interest-sensitive lia-
bilities............... 819,396 918,560 1,040,865 819,293 947,252 1,076,855
--------- --------- ---------- --------- --------- ----------
Gap..................... $(277,177) $(268,999) $ (175,449) $(270,170) $(275,290) $ (204,643)
========= ========= ========== ========= ========= ==========
ISA/ISL................. 0.66 0.71 0.83 0.67 0.71 0.81
Gap/Total assets........ 14.05% 13.64% 8.89% 13.82% 14.08% 10.47%
The Corporation has not experienced the kind of earnings volatility indicated
from the gap analysis. This is because assets and liabilities with similar
contractual repricing characteristics may not reprice at the same time or to
the same degree.
Therefore, to more precisely measure the impact of interest rate changes on
the Corporation's net interest income, management simulates the potential
effects of changing interest rates through computer modeling. The Corporation
is then better able to implement strategies which would include an acceleration
of a deposit rate reduction or a lag in a deposit rate increase. The repricing
strategies for loans would be inversely related.
The analysis at March 31, 1994, indicated that a 200 basis point movement in
interest rates in either direction over the next twelve months would not have a
significant impact on the Corporation's anticipated net interest income over
that time frame. Rising interest rates should tend to have a favorable impact,
while declining rates will tend to affect net interest income negatively.
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT QUALITY RISK
The following table identifies amounts of loan losses and nonperforming
loans. Past due loans are those which were contractually past due 90 days or
more as to interest or principal payments. Renegotiated loans are those which
terms had been renegotiated to provide a reduction or deferral of principal or
interest as a result of the deteriorating financial position of the borrower
and are in compliance with the restructured terms.
AT MARCH 31,
--------------------
1994 1993
---------- --------
(AMOUNTS IN
THOUSANDS)
Nonperforming Loans:
Loans in nonaccural status............................. $ 8,689 $ 7,294
Past due loans......................................... 6,176 3,537
Renegotiated loans..................................... 604 4,206
---------- --------
Total nonperforming loans............................ $ 15,469 $ 15,037
========== ========
Other real estate owned (including in-substance foreclo-
sures).................................................. $ 2,758 $ 4,929
Loans outstanding at end of period....................... $1,031,728 $989,102
Average loans outstanding (year-to-date)................. $1,016,546 $975,764
Nonperforming loans as percent of total loans............ 1.50% 1.52%
Provision for possible loan losses....................... $ 539 $ 593
Net charge-offs.......................................... $ 197 $ 458
Net charge-offs as percent of average loans.............. 0.02% 0.05%
Provision for possible loan losses as percent of net
charge-offs............................................. 273.6% 129.5%
Reserve for possible loan losses as percent of average
loans outstanding....................................... 1.46% 1.48%
CAPITAL RESOURCES
Equity capital decreased $3.4 million in 1994. Earnings retention was $2.5
million, representing an earnings retention rate of 49.1%. The retained net
income remains in permanent capital to fund future growth and expansion. Stock
purchased by the Employee Stock Ownership Plan (the "ESOP"), subject to the
debt of the Corporation, reduced equity by $730 thousand while the loan
repayment by the ESOP of debt guaranteed by the Corporation increased equity by
$179 thousand. Amounts paid to fund the discount on reinvested dividends
reduced equity by $49 thousand. The market value adjustment to securities
available for sale reduced equity by $5.3 million resulting from market values
declining as interest rates increased.
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services, while protecting
against future uncertainties. The evaluation of capital adequacy depends on a
variety of factors, including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In consideration of these
factors, management's primary emphasis with respect to the Corporation's
capital position is to maintain an adequate and stable ratio of equity to
assets.
The Federal Reserve Board issued risk-based capital adequacy guidelines which
are designed principally as a measure of credit risk. These guidelines require:
(1) at least 50% of a banking organization's total capital be common and other
"core" equity capital ("Tier I Capital"); (2) assets and off-balance-sheet
items be weighted according to risk; (3) the total capital to risk-weighted
assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital
to average total assets. The minimum leverage ratio has not been specifically
defined, but is generally expected to be 4-5 percent for all but the most
highly rated banks, as determined by a regulatory rating system. As of March
31, 1994, the Corporation had a Tier I Capital to risk-weighted assets ratio
and total capital to risk-weighted assets ratio of 15.96% and 17.25%,
respectively, and a minimum leverage ratio of 8.77%.
39
MANAGEMENT OF FCFC
BOARD OF DIRECTORS
The table below provides information concerning the present Board of
Directors of FCFC and named executive officers who are not directors. The By-
Laws of FCFC provide that the Board of Directors may fix the number of
directors, and such number is currently fixed at 20. The Board of Directors of
FCFC is divided into three classes, with one class elected at each Annual
Meeting of Shareholders and each class serving a term of three years. Each of
the directors of FCFC named below will serve until the Annual Meeting of FCFC
held in the year indicated in the table or until his successor is elected and
has been qualified. Following the Effective Date and as a result of the Merger,
the number of directors of FCFC shall be increased by one and Robert C.
Williams, who is currently Vice Chairman of the Board, President and Chief
Executive Officer of United, will fill such vacancy, becoming a director of
FCFC until the annual meeting of FCFC shareholders in 1997. Information
concerning Mr. Williams comparable to that appearing below is set forth
elsewhere herein. See "Management of United". Share ownership information
contained in the table reflects beneficial ownership (see note (1) to the
table) of FCFC Common Stock as of June 10, 1994, and is based upon information
furnished by or on behalf of the persons named in the table.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DIRECTOR OWNERSHIP OF OUTSTANDING
DURING THE PAST FIVE OF FCFC FCFC COMMON FCFC COMMON
YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
-------------------------- --- -------- ------------ -------------
Term Ending in 1997:
E. H. Brubaker........................ 64 1984 10,078(2) *
Chairman of the Board and Director of
Deposit
A. B. Hallstrom....................... 65 1986 10,811(3) *
Chairman, Hallstrom Construction Inc.
(real estate development); Director
of Deposit
Thomas J. Hanford..................... 55 1984 48,258 *
Investor; formerly President, Coca-
Cola Bottling Co. of DuBois, Inc.;
Director of 1st United BANCORP, Boca
Raton, FL ("BANCORP") (bank holding
company)
H. H. Heilman, Jr..................... 77 1985 21,500 *
Partner, Heilman & McClister
(attorneys-at-law); Chairman of the
Board and Director of Leechburg;
previously President and Chief
Executive Officer of Leechburg
Charles J. Szewczyk................... 66 1990 269,755 1.45%
(pronounced and sometimes known as
Charles J. Sheftic) Chairman of the
Board of PBTC; Managing Partner of
County Amusement Co. (motion picture
theatres and real estate holdings);
Director of Westview, Inc. (motion
picture theatre service company)
John I. Whalley, Jr................... 48 1986 52,360(4) *
President, Whalley Group, Inc.
(various business enterprises)
Term Ending in 1996:
Sumner E. Brumbaugh................... 65 1992 145,990(2)(3) *
Chairman of the Board and Chief
Executive Officer of Central;
President, Brumbaugh Insurance Group;
Board Member, Pennsylvania National
Mutual Casualty Insurance Co.,
Central Pennsylvania Health Systems
("CPHS"); Advisory Board, Penn State
University (Altoona Campus):
President, Lexington One and
Lexington Two (subsidiaries of CPHS)
40
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DIRECTOR OWNERSHIP OF OUTSTANDING
DURING THE PAST FIVE OF FCFC FCFC COMMON FCFC COMMON
YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
-------------------------- --- -------- ------------------ -------------
Edward T. Cote.................. 57 1984 100,400(5) *
Associate, The Wakefield Group
(Investment Banking);
previously President, Benefits
and Services Company (insurance
holding company); Director of
NBOC and New Mexico Banquest
Investors Corp. ("NMB") (bank
holding Company)
Clayton C. Dovey, Jr............ 69 1985 23,134 *
Chairman of the Board of
Cenwest
Johnston A. Glass............... 44 1986 19,587(3) *
President and Director of NBOC
Dale P. Latimer................. 63 1984 615,431(3)(5)(8) 3.30%
President, R & L Development
Co. (heavy construction);
Director of FCTC, NMB and NBOC
David R. Tomb, Jr............... 62 1983 295,420(2)(3)(5)(6) 1.58%
Partner, Tomb and Tomb
(attorneys-at-law); Vice
President, Secretary and
Treasurer of FCFC; Director of
NBOC, Peoples, FCTC, CSC and
Commonwealth Trust
Term Ending in 1995:
Thomas L. Delaney............... 63 1984 41,604(2) *
Private Investor; formerly
Chairman, Petrolec, Inc.
(petroleum wholesaler);
Director of Deposit and BANCORP
Ronald C. Geiser................ 65 1985 18,544(3) *
Retired; formerly President of
Cenwest; Director of Cenwest
David F. Irvin.................. 76 1984 63,204 *
Sole Owner, The Irvin-McKelvy
Company (sales and engineering
for mining and industrial
services); Director of NBOC
David L. Johnson................ 64 1984 7,193(2) *
Retired; formerly Vice
President and Corporate
Secretary, Pennsylvania
Manufacturers' Corporation
(insurance holding company);
Director of NBOC
Robert F. Koslow................ 58 1993 15,420(3)(9) *
Chairman of the Board,
President and Chief Executive
Officer of Peoples; Director,
Pennsylvania Bankers
Association, Pennsylvania
Independent Bank and Wheeling
Jesuit College; Member of the
Advisory Board to the President
of the Federal Reserve Bank of
Cleveland
Joseph W. Proske................ 57 1984 10,787(2) *
Vice President-Engineering,
Stackpole Magnet Division
(manufacturer of magnetic
components); Director of
Deposit and CSC
41
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DIRECTOR OWNERSHIP OF OUTSTANDING
DURING THE PAST FIVE OF FCFC FCFC COMMON FCFC COMMON
YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
-------------------------- --- -------- --------------------- -------------
E. James Trimarchi........... 71 1982 325,612(2)(3)(5)(6)(7) 1.75%
Chairman of the Board,
President and Chief
Executive Officer of FCFC;
Director of NBOC, Peoples,
FCTC, NMB, CSC and
Commonwealth Trust
Executive Officers Who Are
Not Directors:
William Miksich.............. 58 -- 21,755 *
President, Chief Executive
Officer and Director of
Deposit
Joseph E. O'Dell............. 48 -- 9,415(2) *
Senior Executive Vice
President and Chief
Operating Officer of FCFC;
Director of Cenwest, FCTC,
CSC and Delaware National
Bancshares, Inc.
Gerard M. Thomchick.......... 37 -- 6,293(2)(3) *
Executive Vice President of
FCFC; President, Chief
Executive Officer and
Director of Commonwealth
Trust; Director of Central,
Deposit and FCTC
John J. Dolan................ 37 -- 4,666(3) *
Senior Vice President,
Comptroller and Chief
Financial Officer of FCFC;
Chief Financial
Officer/Comptroller of
Commonwealth Trust;
Treasurer and Assistant
Secretary, FCTC; Director of
PBTC
George E. Dash............... 44 -- 3,451 *
Senior Vice President/ Sales
and Marketing of FCFC;
Director of Central
All directors and executive
officers of FCFC as a group
(24 persons)................ -- -- 1,681,350(2-10) 9.02%
- --------
* Less than one percent.
(1) Under regulations of the Securities and Exchange Commission, a person who
has or shares voting or investment power with respect to a security is
considered a beneficial owner of the security. Voting power is the power
to vote or direct the voting of shares, and investment power is the power
to dispose of or direct the disposition of shares. Unless otherwise
indicated in the other footnotes below, each director has sole voting
power and sole investment power with respect to the shares indicated
opposite his name in the table, and each member of a group has sole voting
power and sole investment power with respect to the number of the shares
indicated for the group.
(2) Does not include the following shares held by spouses, either individually
or jointly with other persons, as to which voting and investment power is
disclaimed by the director or officer: Mr. Brubaker, 24,498; Mr.
Brumbaugh, 132; Mr. Delaney, 8,616; Mr. Johnson, 816; Mr. O'Dell, 1,658;
Mr. Proske, 31,530; Mr. Thomchick, 1,733; Mr. Tomb, 264; Mr. Trimarchi,
20,000; and all Directors and officers as a group, 94,247.
(3) Includes the following shares held jointly with spouses, as to which
voting and investment power is shared with the spouse: Mr. Brumbaugh,
15,400; Mr. Geiser, 14,364; Mr. Glass, 11,466; Mr. Hallstrom, 9,468; Mr.
Koslow, 9,400; Mr. Latimer, 12,165; Mr. Proske, 1,600; Mr. Thomchick,
2,547; Mr. Tomb, 31,846; Mr. Trimarchi, 8,482; and all directors and
officers as a group, 115,138.
42
(4) Includes 51,860 shares held by the J. Irving Whalley Testamentary Trust, of
which John I. Whalley, Jr. is co-trustee.
(5) Includes 100,000 shares owned by Berkshire Securities Corporation.
Berkshire is a Pennsylvania corporation organized in 1976 for the purpose
of acquiring and holding the securities of Pennsylvania banks. The
officers, directors or shareholders of Berkshire include Messrs. Cote,
Latimer, Tomb and Trimarchi, each of whom is an officer or director of
FCFC, among others. The shares were acquired by Berkshire when its shares
of Dale National Bank (now Cenwest) were converted into shares of FCFC
Common Stock as a result of the Dale merger in 1985. Each of the foregoing
persons may be deemed to share voting and investment power with respect to
these shares.
(6) Includes 159,338 shares held by County Wide Real Estate, Inc., of which
Messrs. Tomb and Trimarchi are each 50% owners and as to which shares they
share voting and investment power.
(7) Includes 29,652 shares held by family interests with respect to which
shares Mr. Trimarchi exercises sole voting and investment power.
(8) Includes 91,958 shares held by the R&L Development Company Pension & Profit
Sharing Plan of which Mr. Latimer is Trustee.
(9) Mr. Koslow became a member of the Board of Directors on the occasion of the
merger of Peoples into FCFC on December 31, 1993.
Each of the persons listed above has held the position described above or
other executive positions with the same entity (or a subsidiary thereof) for at
least the past five years.
THE BOARD AND ITS COMMITTEES
During 1993 there were four meetings of the Board of Directors of FCFC. All
directors attended at least 75% of the total number of meetings of the Board of
Directors of FCFC and all committees of such Board of which they were members.
The Board of Directors of FCFC has established four standing committees:
Executive, Audit, Personnel and Compensation, and Executive Compensation. The
Board has no standing Nominating Committee.
When the Board of Directors is not in session, the Executive Committee, which
is comprised of Messrs. Trimarchi (Chairman), Tomb (Secretary), Brubaker,
Brumbaugh, Delaney, Geiser, Glass, Heilman, Latimer and Szewczyk, possesses and
exercises all the powers of the Board, except for matters which are required by
law to be acted upon by the full Board. The Executive Committee considers major
policy matters and makes reports and recommendations to the Board. The
Executive Committee met four times in 1993.
The Audit Committee is comprised of Messrs. Latimer (Chairman), Hallstrom,
Irvin, Cote and Proske and reviews the internal auditing procedures and
controls of FCFC and its subsidiaries. The Audit Committee also reviews reports
of examinations of the Subsidiary Banks received from state and federal
regulators, as well as reports from internal and external auditors. The Audit
Committee formally reports to the full Board of Directors its evaluations,
conclusions and recommendations with respect to the condition of FCFC and its
subsidiaries and the effectiveness of their policies, practices and controls.
The Audit Committee met four times in 1993.
The Personnel and Compensation Committee is comprised of Messrs. Cote, Dovey
and Glass. Roy R. Fairman, deceased director, was chairman of this committee. A
new chairman has not been appointed at this time. The Personnel and
Compensation Committee reviews the general salary administration and employee
benefit programs of FCFC and its subsidiaries and makes recommendations
relating thereto to the Board of Directors. The Personnel and Compensation
Committee met one time in 1993.
43
The Executive Compensation Committee is comprised of Messrs. Johnson
(Chairman), Cote, Irvin and Latimer. The Executive Compensation Committee
maintains on an on-going basis a comprehensive executive compensation program
which seeks to maintain a position of "equity" with respect to balancing the
interests of the shareholders with those of the executive officers. The minutes
of Executive Compensation Committee meetings are submitted to the FCFC Board of
Directors on a timely basis, and a report of the committee is included in the
proxy statement delivered to all FCFC shareholders prior to the annual meeting.
The Executive Compensation Committee met four times in 1993.
The By-Laws of FCFC require that any shareholder who intends to nominate or
cause to have nominated any candidate for election to the Board of Directors of
FCFC (other than a candidate proposed by FCFC's then-existing Board of
Directors) must notify the Secretary of FCFC in writing not less than 120 days
prior to the date of FCFC's proxy statement released to its shareholders in
connection with the previous year's annual shareholders' meeting called for the
election of Directors. Such notification must contain (to the extent known by
the notifying shareholder) the name, address, age, principal occupation and
number of shares of FCFC Common Stock owned by each proposed nominee; the name,
residence address and number of shares of FCFC Common Stock owned by the
notifying shareholder; the total number of shares of FCFC Common Stock that, to
the knowledge of the notifying shareholder, will be voted for each proposed
nominee; a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons pursuant to which
the nomination or nominations are to be made by the shareholder; such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy roles
of the Securities and Exchange Commission had the nominee been nominated by the
Board of Directors; and the written consent of each nominee, signed by such
nominee, to serve as a director of FCFC if so elected. The Board of Directors
of FCFC as a whole considers nominations submitted by shareholders only if
submitted in accordance with the By-Laws and otherwise in time for such
consideration.
COMPENSATION OF DIRECTORS
Directors are compensated at the rate of $1,000 for each quarterly Board
meeting attended for Board members presently serving in a management or Board
capacity at any FCFC affiliate and $1,500 for each quarterly Board meeting
attended for all other Board Members. Committee members receive $200 for
attendance at each committee meeting. A Committee Chairman or Secretary is
compensated $250 per meeting attended.
EXECUTIVE OFFICERS
The table below provides information concerning the present executive
officers of FCFC.
NAME AGE POSITIONS HELD DURING THE PAST FIVE YEARS
---- --- -----------------------------------------
E. James Trimarchi...... 71 Chairman of the Board, President and Chief Executive Officer of FCFC
Joseph E. O'Dell........ 48 Senior Executive Vice President and Chief Operating Officer of FCFC
Gerard M. Thomchick..... 38 Executive Vice President of FCFC
David R. Tomb, Jr....... 62 Vice President, Secretary and Treasurer of FCFC
John J. Dolan........... 37 Senior Vice President, Comptroller and Chief Financial Officer of FCFC
George E. Dash.......... 44 Senior Vice President/Sales and Marketing of FCFC
Each of the officers identified above has held the position indicated above
or other executive positions with the same entity (or a subsidiary thereof) for
at least the past five years.
Executive officers of FCFC serve at the pleasure of the Board of Directors of
FCFC and for a term of office extending through the election and qualification
of their successors.
44
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding compensation
received by the Chief Executive Officer and the remaining executive officers of
FCFC whose annual compensation, including bonus, exceeded $100,000 for the
period indicated.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND ALL OTHER/3/
PRINCIPAL POSITION YEAR SALARY BONUS OTHER/1/,/2/ COMPENSATION
------------------ ---- -------- ------- ------------ ------------
E. James Trimarchi............ 1993 $305,000 $ 0 $21,006 $ 6,800
Chairman of the Board, 1992 270,000 32,500 28,122 12,000
President and Chief Executive
Officer 1991 262,750
Joseph E. O'Dell.............. 1993 180,000 0 21,190 5,400
Senior Executive Vice Presi-
dent 1992 145,000 30,000 19,737 5,700
and Chief Operating Officer 1991 135,000
Johnston A. Glass............. 1993 156,000 0 19,120 6,500
President and Chief Executive 1992 143,100 0 18,693 6,050
Officer of NBOC 1991 135,000
Gerard M. Thomchick........... 1993 145,000 0 17,800 16,200
Executive Vice President 1992 110,000 25,000 18,800 15,200
1991 100,000
William Miksich............... 1993 132,800 0 16,339 2,400
President and Chief Executive 1992 124,720 0 16,253 3,600
Officer of Deposit 1991 105,600
- --------
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by
the Securities and Exchange Commission (the "Commission"), as informally
interpreted by the Commission's Staff, amounts of Other Annual Compensation
and All Other Compensation are excluded for FCFC's 1991 year.
(2) Includes the matching and automatic contribution by FCFC to the
individual's account in FCFC's 401(k) Plan as well as the allocation of
shares to the individual's account in the Employee Stock Ownership Plan
("ESOP").
(3) Includes compensation for services on boards and committees of FCFC and
various subsidiaries.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Executive Compensation Committee was an officer or employee
of FCFC during 1993, has ever been a former officer of FCFC or a subsidiary or
has a transaction or relationship required to be disclosed under Item 404 of
Regulation S-K of the Commission. During 1993, no executive officer served on a
compensation committee (or other board committee performing equivalent
functions) or Board of Directors of any entity related to the above named
Committee members.
INTERESTS OF NOMINEES, DIRECTORS AND OFFICERS IN CERTAIN TRANSACTIONS
Mr. Geiser served as President of Cenwest pursuant to an employment agreement
providing that he shall continue to serve in that position until December 31,
1994. Mr. Geiser retired on May 31, 1994 as President of Cenwest but continues
as a director of Cenwest and FCFC. The agreement provided that his salary shall
not be less than $69,363 and was reviewed annually in accordance with Cenwest's
past practices. Mr. Geiser has agreed that during the term of his employment
and for a period of 10 years thereafter, he will not engage in any competing
business within 10 miles of any of the banking facilities of FCFC or its
subsidiaries or solicit any of their then existing customers.
45
Mr. Brumbaugh serves as Chairman of the Board and Chief Executive Officer of
Central pursuant to an employment agreement for a period of 7 years, commencing
May 1, 1992 and ending April 30, 1999. The agreement provides that Mr.
Brumbaugh shall serve in an executive capacity and shall be the Chairman of the
Board of Directors and Chief Executive Officer of Central and shall also
perform such services for FCFC as from time to time are requested. As
compensation to Mr. Brumbaugh for all services rendered to Central and FCFC as
an officer, director or member of any committee of Central or any of FCFC's
subsidiaries or affiliates, FCFC has agreed, in addition to director's fees and
committee meeting fees, to pay or cause Central to pay to Mr. Brumbaugh a
salary at an annual rate of $100,000, which sum shall be adjusted upward at the
annual rate of 5%. Should Mr. Brumbaugh retire after at least one year of
continuous service under the agreement, thereafter he shall be paid his
retirement compensation for the remaining term of the agreement at an annual
rate of $50,000, adjusted upwards annually for cost of living at the rate of
5%. Should Mr. Brumbaugh die at any time during the agreement, in lieu of the
foregoing payments, FCFC shall pay his wife the sum of $25,000 per year if she
is living at the time each payment is made. As a part of the agreement and for
a period of 10 years thereafter, Mr. Brumbaugh will not engage in any competing
business within 10 miles of any of the banking facilities of Central or its
subsidiaries or solicit any of its then existing customers.
Mr. Koslow serves as Chairman of the Board, President and Chief Executive
Officer of Peoples under an employment agreement extending to July 19, 1998.
The agreement provides that Mr. Koslow will serve in such executive capacity as
may be designated from time to time by the Board of Directors. As compensation
to Mr. Koslow, Peoples agrees to pay him a minimum annual salary equal to the
annual salary in effect on July 20, 1988, such annual salary to be subject to
annual review for possible increase. If Mr. Koslow's employment is terminated
other than for cause, he is entitled to be paid annually in equal monthly
amounts, for the greater of two years or the remaining term of the agreement,
the annual salary and bonus paid to him for the full calendar year immediately
preceding the year in which such termination occurs, plus the insurance
premiums provided in a split dollar life insurance agreement between Peoples
and Mr. Koslow. If there is a change in control of Peoples, such minimum annual
salary shall be increased on January 1 of each year thereafter by an amount
equal to the percentage increase in the Consumer Price Index for the preceding
calendar year. If there is a change of control of Peoples and thereafter Mr.
Koslow's responsibilities are changed without his consent, Mr. Koslow is
entitled to resign within twelve months of such change of control, in which
case he is entitled to receive annually in equal monthly amounts, for the
greater of three years or the remaining term of the agreement, but not beyond
his reaching age 65, the annual salary and bonus paid to him for the full
calendar year immediately preceding such resignation, plus the split dollar
life insurance premiums. As part of the agreement, Mr. Koslow has agreed that
during the term of his employment and for a period of 10 years thereafter, he
will not engage in any business in competition with Peoples or any of its
subsidiaries within 20 miles of any of their banking facilities or solicit any
of their then existing customers.
During 1993, David R. Tomb, Jr., attorney-at-law, and the law firm of Tomb
and Tomb of which Mr. Tomb is a partner performed legal services for FCFC, NBOC
and CSC. Mr. Tomb is a Director and executive officer of FCFC. The fees paid
for services during 1993 were $65,000. See "Legal Opinions."
One or more of the Subsidiary Banks (the "Lending Bank" or "Lending Banks")
have extended credit to several directors and executive officers of FCFC, to
members of their families and to corporations or organizations in which such
persons have a beneficial interest or with which such persons are associated as
officers, partners, directors or trustees. In all cases, except as described in
the following paragraphs, these transactions were made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present other unfavorable features. As of December 31, 1993, total loans to
FCFC's and its subsidiaries' directors, executive officers, principal
shareholders and their related interests whose loan balances exceeded $60,000
during 1993 were $25,245,000.
Mr. John I. Whalley, Jr. became an FCFC director in December 1986 and was
reelected a director in 1990 and 1994. Since January 1, 1993 there has been
outstanding from the Lending Banks to Mr. Whalley
46
and his related interests four loans having an aggregate original principal
balance of $2,223,631, which bear interest rates from the prime rate (currently
7%) to 11.5% and are partially collateralized with marketable securities and
motor vehicles. These loans were incurred principally to consolidate
outstanding loans from the Lending Banks and other financial institutions and
to strengthen the Lending Banks' collateral position.
In his examination of the Lending Bank on September 30, 1992, the Comptroller
of the Currency classified $621,092 of these loans as Substandard and $209,147
as Doubtful, leaving an aggregate unclassified balance of $554,164 secured by
the marketable securities. At the Comptroller's instruction $1,138,291 of these
loans were placed in nonaccrual status by the Lending Bank. Subsequent
reexamination by the Comptroller of the Currency in 1993 resulted in $1,101,182
being classified substandard and with the balance remaining in nonaccrual. It
is the opinion of the Lending Bank's management that the Comptroller has
classified this indebtedness as Substandard and Doubtful due to the cessation
of operations of Mr. Whalley's related business and the fact that loan
collateral is being sold by the borrower to repay the indebtedness. The largest
aggregate amount of indebtedness outstanding at any time from Mr. Whalley and
his related interests since January 1, 1993 was $1,469,895, and the aggregate
amount outstanding was $1,328,927 as of June 10, 1994.
In June 1986 the Lending Bank granted credit of $600,000 to the purchasers of
commercial real estate, the proceeds of which were paid to David F. Irvin, a
Director of FCFC. To facilitate the granting of this credit, Mr. Irvin gave a
mortgage to the Lending Bank on a property and building adjacent to the subject
real estate. In his September 30, 1992 examination, the Comptroller classified
as Substandard $486,279 of the $518,279 balance of this loan. This loan was
rewritten on August 31, 1993 at an interest rate of 8%. The loan balance was
$490,117 as of June 10, 1994. It is the opinion of the Lending Bank's
management that the Comptroller has classified this credit as Substandard as a
result of difficulties experienced in the business operations of the purchaser.
CERTAIN BENEFICIAL OWNERS OF FCFC COMMON STOCK
As of June 10, 1994, FCTC, acting in a fiduciary capacity for various trusts
and estates, including the FCFC ESOP and the FCFC 401(k) Plan, held an
aggregate of 1,868,861 shares of FCFC Common Stock (10.3% of the outstanding
shares). Of these shares, FCTC had sole voting power with respect to 594,462
shares, shared voting power with respect to 1,274,391 shares, had sole
investment power with respect to 755,876 shares and shared investment power
with respect to 1,112,985 shares. FCTC votes the shares over which it, acting
in its fiduciary capacity, has voting power and, where voting power is shared,
shares are voted by FCTC in consultation with the other persons having voting
power. As of June 10, 1994, the FCFC ESOP held 879,337 shares (4.72%) of FCFC's
Common Stock of which 461,984 shares were allocated to the accounts of
participants and 417,353 shares were unallocated. Allocated shares are voted by
the participants; unallocated shares, by the ESOP trustee in its discretion.
47
INFORMATION CONCERNING UNITED
BUSINESS AND PROPERTIES OF UNITED
United was organized as a Pennsylvania business corporation on July 24, 1981
at the direction of the Board of Directors of Unitas Bank for the purpose of
acquiring Unitas Bank and creating a bank holding company. On January 4, 1982,
Unitas Bank became a wholly-owned subsidiary of United and the shareholders of
Unitas Bank became the shareholders of United. Unitas Bank and Unitas Mortgage
are United's only active subsidiaries and United functions primarily as the
holder of all of the outstanding stock of these two subsidiaries. As used
herein, "United" refers collectively to United and its two subsidiaries. United
is registered as a bank holding company under the Bank Holding Company Act of
1956, as amended, and United currently employs 110 employees (full-time
equivalents).
Through Unitas Bank, United traces its origins to John Bare & Co., a private
bank established in Huntingdon, Pennsylvania on October 17, 1866. On May 15,
1894 the bank was organized as a national banking association under the name
The Union National Bank of Huntingdon. Unitas Bank adopted its present name on
October 1, 1983. Since January 1, 1989, Unitas Bank has established three new
branches--one inside a supermarket in Gettysburg, Pennsylvania on April 1,
1991; another inside a supermarket in State College, Pennsylvania on March 23,
1992; and a free-standing branch in Guilford Township (just outside
Chambersburg), Pennsylvania on March 20, 1993. Unitas Bank presently conducts
its business through 12 community banking offices in 11 communities in the
counties of Adams (1 office), Bedford (1), Centre (2), Franklin (2) and
Huntingdon (6).
Unitas Bank engages in a full-service commercial banking business within the
vicinity of its service area. It offers various loan services, including
secured and unsecured commercial and consumer loans, construction and mortgage
loans, lease financing, all types of deposit services, including checking
services and interest bearing demand, savings and other time deposit accounts,
and trust and personal financial services. Trust services include investment
custodianship, investment management, estate administration, executorships,
trusteeships, guardian of property, employee benefits and corporate trusts.
Unitas Mortgage engages in the origination of mortgages for resale in the
secondary mortgage market from three community offices located in Adams, Centre
and Cumberland Counties. United's business is not seasonal in nature.
United operates six ATMs which permit its customers to conduct routine
banking transactions 24 hours a day, and these ATMs are located on the premises
of its banking offices. All of the ATMs are part of the MAC Network, which
consists of over 14,000 ATMs owned by numerous banks, savings and loan
associations and credit unions located in 16 states, of which 14 are east of
the Mississippi River. United's MAC customers may use the HONOR Network, which
has 9,800 ATMs located primarily in the southeastern quadrant of the United
States. The ATMs operated by United are also part of the national Plus Network
which is comprised of more than 170,000 ATMs located in the United States,
Canada and 45 other countries and territories, and which services over 161
million cards. Such networks allow United's customers to withdraw cash and, in
certain cases, conduct other banking transactions using ATMs of all
participating financial institutions.
As a nationally chartered, federally insured commercial bank that is a member
of the Federal Reserve System, United is subject to supervision and regular
examination by the Office of the Comptroller of the Currency ("OCC"). Various
federal and state laws and regulations govern many aspects of its banking
business. See "Regulation and Supervision--Subsidiary Banks and United."
United competes actively with other commercial banks and savings and loan
associations in its area, many of which are larger than United, as well as with
major regional banking and financial institutions headquartered in Harrisburg,
Altoona, State College, Johnstown and Pittsburgh. The management of United
believes that it is generally competitive with all competing financial
institutions in its service area with respect to interest rates paid on savings
and other time deposits, service charges on deposit accounts and interest rates
charged on loans.
48
The headquarters of United is located at 15 South Main Street, Chambersburg,
Franklin County, Pennsylvania. The two-story brick veneer headquarters building
has approximately 9,200 square feet of floor space and contains a full-service
banking facility and the central administrative offices of United. Of United's
banking offices, the headquarters and three branches are leased and the
remaining facilities are owned in fee, free of all liens and encumbrances.
Management believes all such facilities to be in good repair and well suited to
their current uses.
49
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data is not covered by the auditor's report
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations, which follows, and with the
consolidated financial statements and related notes appearing elsewhere in the
Proxy Statement/Prospectus. The results for the three month periods ended March
31, 1994 and 1993 are not necessarily indicative of the results to be expected
for the entire year.
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------ ------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
Interest Income
Interest and fees on
loans................. $ 2,640 $ 2,704 $ 10,946 $ 10,822 $ 10,625 $ 10,485 $ 9,971
Interest and dividends
on investment
securities............ 281 429 1,601 1,414 1,330 1,224 1,248
Interest on money mar-
ket investments....... 13 38 70 216 342 735 1,053
-------- -------- -------- -------- -------- -------- --------
Total interest income.. 2,934 3,171 12,617 12,452 12,297 12,444 12,272
-------- -------- -------- -------- -------- -------- --------
Interest Expense
Interest on deposits... 955 1,257 4,651 5,653 7,004 7,601 7,808
Interest on short-term
borrowings............ 36 36 143 30 1 7 21
Interest on long-term
debt.................. 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total interest expense. 991 1,293 4,794 5,683 7,005 7,608 7,829
-------- -------- -------- -------- -------- -------- --------
Net interest income.... 1,943 1,878 7,823 6,769 5,292 4,836 4,443
Provision for possible
loan losses........... 99 75 473 325 300 300 420
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
possible loan losses.. 1,844 1,803 7,350 6,444 4,992 4,536 4,023
Other operating income. 178 361 876 528 517 439 402
Other operating ex-
penses................ 1,406 1,266 5,548 4,913 4,260 3,716 3,794
-------- -------- -------- -------- -------- -------- --------
Income before taxes.... 616 898 2,678 2,059 1,249 1,259 631
Applicable income tax-
es.................... 198 286 858 641 346 350 110
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 418 $ 612 $ 1,820 $ 1,418 $ 903 $ 909 $ 521
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA
Net income............. $ .54 $ .80 $ 2.37 $ 1.84 $ 1.17 $ 1.18 $ .68
Cash dividends de-
clared................ $ .13 $ .12 $ .47 $ .43 $ .39 $ .39 $ .39
Average shares out-
standing (a).......... 769,147 769,147 769,147 769,147 769,147 769,147 769,147
AT END OF PERIOD
Total assets........... $145,522 $145,177 $147,603 $143,261 $128,644 $124,974 $121,098
Investment Securities.. 21,302 29,082 20,041 25,426 18,567 20,270 23,532
Loans and leases, net
of unearned income.... 114,759 107,035 117,287 101,719 97,385 96,632 90,292
Reserve for possible
loan losses........... 1,257 1,129 1,189 1,061 910 802 652
Deposits............... 128,003 128,864 129,319 127,862 117,437 114,344 110,372
Long-term debt......... 0 0 0 0 0 0 0
Shareholders' equity... 12,521 11,352 12,282 10,831 9,748 9,149 8,541
KEY RATIOS
Return on average as-
sets.................. 1.14% 1.41% 1.22% 1.05% 0.72% 0.75% 0.42%
Return on average equi-
ty.................... 13.48% 18.37% 15.36% 13.62% 9.60% 10.26% 6.22%
Net loans to deposit
ratio................. 89.65% 83.06% 90.70% 79.55% 82.93% 84.51% 81.81%
Dividend payout ratio.. 23.92% 14.86% 20.00% 23.34% 33.33% 33.11% 57.58%
Average shareholders'
equity as percentage
of average assets..... 9.32% 8.87% 9.05% 8.75% 8.49% 8.05% 7.55%
- --------
(a) Average number of shares outstanding has been adjusted to reflect 10% stock
dividends declared on November 13, 1991, November 18, 1992 and November 17,
1993.
50
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
PROFITABILITY--Interest rates continued to fall during 1993, affording the
banking industry another window of opportunity to enhance net interest margins
and, likewise, profitability. UNB's net income for fiscal year ended December
31, 1993 reached a record $1.8 million, comparing vigorously with net income of
$1.4 million in 1992 and $903 thousand in 1991. Return on assets for the three
years ended December 31, 1993 equalled 1.22 percent, 1.05 percent, and .72
percent, respectively. Return on shareholders' equity equalled 15.4 percent, a
healthy increase over 13.6 percent in 1992 and 9.6 percent in 1991.
Net interest income grew $1 million in 1993, representing the underlying
strength of the earning power of the Corporation. The following analysis of
average balances and interest rates illustrates the components of net interest
margin. While interest rates continued to fall, UNB managed the net interest
margin conservatively and achieved a net increase of 23 basis points. The three
year trend in declining interest rates and achievable yields is evident in each
category of funding sources and earning assets. The overall decline of 78 basis
points on earning assets from 1992 to 1993 was more than offset by a 101 basis
point decline in break even cost of carrying earning assets. The resultant net
interest margin equalled 5.67 percent in 1993, as compared with 5.44 percent in
1992 and 4.62 percent in 1991.
AVERAGE BALANCES AND INTEREST RATES--Tax Equivalent Basis (In Thousands)
1993 1992 1991
------------------------- ------------------------- -------------------------
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE REV/EXP RATE BALANCE REV/EXP RATE BALANCE REV/EXP RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
EARNING ASSETS
Investment Securities... $ 25,545 $ 1,619 6.34% $ 19,233 $ 1,580 8.22% $ 16,355 $ 1,519 9.29%
Loans, Net of Reserve... 111,451 11,016 9.88 103,115 10,822 10.50 96,570 10,625 11.00
Funds Sold.............. 2,033 60 2.95 3,923 145 3.70 3,111 163 5.24
Short-Term Investments.. 459 10 2.18 1,344 71 5.28 2,653 179 6.75
-------- ------- -------- ------- -------- -------
Total Earning Assets.... $139,488 $12,705 9.11% $127,615 $12,618 9.89% $118,689 $12,486 10.52%
======== ======== ========
SOURCE OF FUNDS
Interest-Bearing Demand. $ 38,653 $ 1,199 3.10% $ 36,583 $ 1,462 4.00% $ 24,770 $ 1,400 5.65%
Savings Deposits........ 31,495 1,173 3.72 17,329 790 4.56 10,269 616 6.00
Time Deposits........... 52,256 2,279 4.36 60,408 8,401 5.63 70,609 4,988 7.06
Short-Term Borrowings... 3,928 143 3.64 647 30 4.64 13 1 7.69
-------- ------- -------- ------- -------- -------
Total Interest-Bearing
Sources................ $126,332 $ 4,794 3.79% $114,967 $ 5,683 4.94% $105,661 $ 7,005 6.63%
Demand Deposits......... 8,465 8,166 8,055
Cash and Due from Banks. (3,731) (3,720) (3,614)
Other Sources, Net...... 8,422 8,202 8,587
-------- ------- -------- ------- -------- -------
Total Sources of Funds.. $139,488 $ 4,794 3.44% $127,615 $ 5,683 4.45% $118,689 $ 7,005 5.90%
======== ------- ======== ------- -------- -------
Net Interest Revenue.... $ 7,911 $ 6,935 $ 5,481
======= ======= =======
Net Interest Revenue to
Earning Assets......... 5.67% 5.44% 4.62%
For the purposes of this presentation, nonaccrual loans are accounted for in
Loans, Net of Reserve.
Interest revenue on Investment Securities and Loans is calculated
on a tax equivalency basis at a rate of 34 percent.
51
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
During 1993, the banking industry felt the pressure on net interest income as
more assets repriced at the low interest rate levels. Influenced by declining
earning asset yields, the industry continued to lower interest rates paid on
deposits. UNB's competitive market was not immune to these pressures and
responded accordingly by lowering depository rates. Attraction of new deposits
became highly competitive as investors sought out higher yielding instruments
such as mutual funds, stocks, and bonds.
Fortunately, UNB was negatively gapped at December 31, 1992, whereby $106
million in liabilities were scheduled to mature or reprice during fiscal 1993,
and only $46 million in assets were scheduled to mature or reprice. Repricing
of more liabilities than assets was the greatest contributor to the increase in
net interest income in 1993. Growth in earning assets also contributed
significantly to the change in net interest income, as can be analyzed by
review of the following summary of the changes in interest earned and resulting
from changes in volume and rates.
1993 COMPARED TO 1992(1) 1992 COMPARED TO 1991(1)
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
------------------------------ ------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------- --------- ------------------- ---------
(In Thousands of Dollars)
Interest earned on:
Investment Securities. $ 400 $ (361) $ 39 $ 237 $ (176) $ 61
Loans, Net of Reserve. 824 (630) 194 687 (490) 197
Funds Sold............ (56) (29) (85) 30 (48) (18)
Short-Term Invest-
ments................ (19) (42) (61) (192) 84 (108)
-------- --------- --------- ------- --------- ---------
Total interest-earning
assets............... $1,149 $(1,062) $ 87 $ 762 $ (630) $ 132
======== ========= ========= ======= ========= =========
Interest paid on:
Demand deposits....... $ 64 $ (327) $ (263) $473 $ (411) $ 62
Savings deposits...... 528 (145) 383 322 (149) 173
Time deposits......... (356) (766) (1,122) (472) (1,115) (1,587)
Short-Term borrowings. 119 (6) 113 30 -- 30
-------- --------- --------- ------- --------- ---------
Total interest-bearing
liabilities.......... $ 356 $(1,245) $ (889) $ 353 $(1,675) $(1,322)
======== ========= ========= ======= ========= =========
Net interest income..... $ 793 $ 183 $ 976 $ 409 $ 1,045 $ 1,454
======== ========= ========= ======= ========= =========
- --------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
Noninterest income equalled $876 thousand in 1993 as computed with $528
thousand in 1992 and $517 thousand in 1991. The large increase in noninterest
income was accomplished through sales of mortgage loans and investment
securities. During the first quarter of 1993, Management elected to sell $4.7
million in fixed-rate, long-term real estate loans in strategy to reduce the
volume of long-term assets funded by short-term liabilities. The sale of this
block of mortgages produced $238 thousand in gross income, or $157 thousand net
of federal income taxes. During the fourth quarter of 1993, Management elected
to sell $2.2 million in investment securities as UNB repositioned the portfolio
for mark-to-market accounting to be adopted during the first quarter of 1994
pursuant to FASB Statement No. 115, as discussed in Note 1 of the financial
statements. The gain on sale of investment securities totalled $62 thousand
gross income, or $41 thousand net of federal income tax.
Noninterest expenses equalled $5.5 million in 1993, as compared with $4.9
million in 1992 and $4.3 million in 1991. Increased noninterest expenditures
represent the cost of new branch offices and an increase in salaries and
employee benefits, primarily the rising cost of health care. During 1993, UNB
expanded the
52
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
supermarket retail segment of the bank by relocation of the existing Huntingdon
Plaza Office into a new Bi-Lo Superstore within the same plaza center. This
location offers full-service banking as well as drive-up facilities. In the
first quarter of 1993, UNB opened a traditional branch on Lincoln Way East in
Chambersburg. This location complements the downtown headquarters location. As
with many businesses nationwide, UNB has felt the increasing burden of the cost
to provide adequate health care coverage for its employees. Health care costs
totalled $333 thousand in 1993 as compared with $170 thousand in 1992 and $144
thousand in 1991. UNB is continually seeking avenues to manage this cost over
the long run. FDIC insurance costs escalated significantly from 1990 to 1991,
when the banking industry was experiencing significant losses and the FDIC
assessment fund needed to be replenished. In subsequent years, FDIC insurance
costs have grown commensurate with depository growth. Costs of FDIC insurance
are now determined by the capitalization level of the institution and deposit
base. At present, the capitalization level of the bank commands the least
costly premium charge.
Management evaluates the adequacy of the loan loss reserve on a quarterly
basis. As part of this analysis, Management determines the appropriate loan
loss provisional level. In 1993, UNB provided $473 thousand for loan losses, an
increase over $325 thousand in 1992 and $300 thousand in 1991. In consideration
of the exceptional loan growth that UNB has experienced over the past two
years, and a fourth quarter increase in nonaccrual loans, Management elected to
make an additional $173 thousand provision to the reserve account and allocate
$27 thousand for possible other real estate deficiencies. These additional
provisions place UNB in a strengthened position to absorb potential future
losses.
FEDERAL INCOME TAXES--The federal income tax provision for book purposes was
$858 thousand in 1993, $641 thousand in 1992, and $346 thousand in 1991.
Federal tax provisions absorbed 32 percent of pretax profits in 1993, 31
percent in 1992, and 28 percent in 1991. UNB incurred Alternative Minimum Tax
(AMT) of $485 thousand in 1993, deferring $373 thousand to future tax
liability; this AMT position resulted primarily from timing differences
incurred by leasing activities.
The Corporation adopted FASB Statement No. 109, "Accounting for Income
Taxes," in the first quarter of 1993. UNB adopted the Statement of a
prospective basis, without restating any prior years and has determined that
the effect of its implementation on financial position and profitability was
not material for 1993 or 1992.
IMPACT OF INFLATION AND CHANGING PRICES--The majority of assets and
liabilities of a financial institution are monetary in nature and therefore
differ greatly from most commercial and industrial companies that have
significant investments if fixed assets or inventories. However, inflation does
have an important impact on the growth of total assets in the banking industry
and the resulting need to increase equity capital at a faster pace than asset
growth in order to maintain an appropriate equity-to-assets ratio. An important
effect of this has been the reduction of the proportion of earnings paid out as
dividends. Another significant effect of inflation is on other expenses, which
tend to rise during periods of general inflation.
Management of UNB believes that the most significant impact on financial
performance is the ability to react to interest rate swings in a timely and
prudent manner and to monitor noninterest expenditures. The Asset/Liability
function closely monitors economic indicators and anticipated interest rate
swings. Through such monitoring, Management is able to react on a timely basis
in adjusting strategy to minimize exposure to earnings and asset quality.
Management's strategy in this regard is to maintain an essentially neutral
position between interest-sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.
53
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION--UNB functions as a financial intermediary and, as such,
trends in its sources and uses of funds should be examined when reviewing
financial condition. The table below depicts the major funding sources and
funding uses:
SOURCES AND USES OF FUNDS TRENDS
1993 1992 1991
-------------------------- ---------------------------- --------
INCREASE/ INCREASE/
AVERAGE (DECREASE) % AVERAGE (DECREASE) % AVERAGE
BALANCE AMOUNT CHANGE BALANCE AMOUNT CHANGE BALANCE
-------- ---------- ------ -------- ---------- -------- --------
(IN THOUSANDS)
FUNDING SOURCES
Demand deposits:
Noninterest-bearing... $ 8,465 $ 299 3.66% $ 8,166 $ 111 1.38% $ 8,055
Interest-bearing...... 38,653 2,070 5.66 36,583 11,813 47.69 24,770
Savings deposits....... 31,495 14,166 81.75 17,329 7,060 68.75 10,269
Time deposits.......... 52,256 (8,152) (13.49) 60,408 (10,201) (14.45) 70,609
Federal funds purchased
& other short-term
borrowings............ 3,928 3,281 507.11 647 634 4,876.92 13
Other.................. 13,614 1,895 16.17 11,719 757 6.91 10,962
-------- ------- -------- -------- --------
Total Sources....... $148,411 $13,559 10.05% $134,852 $ 10,174 8.16% $124,678
======== ======= ======== ======== ========
FUNDING USES
Loans.................. $111,451 $ 8,336 8.08% $103,115 $ 6,545 6.78% $ 96,570
Taxable investment
securities............ 25,047 6,264 33.35 18,783 2,884 18.14 15,899
Tax exempt investment
securities............ 498 48 10.67 450 (6) (1.32) 456
Federal funds sold &
securities purchased
u/a resell............ 2,033 (1,890) (48.18) 3,923 812 26.10 3,111
Deposits with banks at
interest.............. 375 3 0.81 372 (1,321) (78.03) 1,693
Money market
investments........... 84 (888) (91.36) 972 12 1.25 960
Other.................. 8,923 1,686 23.30 7,237 1,248 20.84 5,989
-------- ------- -------- -------- --------
Total Uses.......... $148,411 $13,559 10.05% $134,852 $ 10,174 8.16% $124,678
======== ======= ======== ======== ========
DEPOSITS--UNB's primary funding source is the deposit base. Total deposits
equalled $129 million at December 31, 1993, reflecting a slight gain over $128
million in total deposits at year end 1992. Depository growth in the prior year
totalled $10 million, and was achieved through special promotions of core-type
depository products. Growth in deposits leveled off in 1993, when investors
sought other avenues of investment in an effort to obtain higher returns. UNB
experienced growth in investors savings and checking accounts; however,
maturing certificates of deposit were difficult to retain in the highly
competitive interest rate environment. Certificates of deposit under $100
thousand declined $1.7 million, with the primary reason from investors
repeatedly being to achieve higher rates in the nonbanking sector of the
financial industry.
54
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1993, are summarized as follows:
TIME CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS TOTAL
----------------- ---------- ------
(In Thousands)
3 months or less....................... $1,115 $ 0 $1,115
Over 3 through 6 months................ 3,400 0 3,400
Over 6 through 12 months............... 1,454 107 1,561
Over 12 months......................... 765 338 1,103
------ ---- ------
Total Deposits $100,000 or more...... $6,734 $445 $7,179
====== ==== ======
Future growth in deposits is dependent upon UNB's ability to attract and
retain funding in an environment where the investor is seeking higher rates and
willing to venture out of the insured comfort of the banking system. UNB
anticipates several promotional deposit products will be offered during 1994 to
assist in retaining maturing certificates as well as attracting new depositors.
SHORT-TERM BORROWINGS--UNB's deposit base is complemented by another source
of funds--repurchase agreements. Such instruments are simply business cash
management accounts for which securities are pledged. UNB offers this type of
account to business clients at their request, but does not actively seek new
accounts due to the uninsured nature and required pledging. At December 31,
1993, cash management (repo) accounts totalled $4.7 million, reflecting a gain
of $1.5 million over prior year. Outstanding volumes in these accounts can
fluctuate significantly from day to day. The following table shows the
distribution of UNB's short-term borrowings and the weighted average interest
rates thereon. Also, provided pertaining to borrowings, are the maximum
amounts, average amounts, and weighted average interest rates for the last
three years.
SECURITIES SOLD UNDER OTHER SHORT-TERM
AGREEMENTS TO PURCHASE BORROWINGS
---------------------- ----------------
(In Thousands)
Balance at December 31
1993............................. $4,687 $ 0
1992............................. 3,198 0
1991............................. 0 0
Weighted average interest rate at
year-end:
1993............................. 3.50% N/A
1992............................. 3.75 N/A
1991............................. N/A N/A
Maximum amount outstanding at any
month's end:
1993............................. $6,481 $3,000
1992............................. 5,772 0
1991............................. 1,175 0
Average amount outstanding during
the year:
1993............................. $3,714 $ 302
1992............................. 647 0
1991............................. 9 4
Weighted average interest rate dur-
ing the year:
1993............................. 3.59% 3.17%
1992............................. 4.64 0.00
1991............................. 7.29 5.58
LOANS--UNB's primary use of funds has historically been meeting the credit
needs of our communities through retail lending. The year 1993 proved to be a
challenging one, as loan demand was very strong in our
55
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
markets during a time period when investors were looking to other financial
intermediaries to invest their funds. Funded by growth in savings accounts,
retained earnings, and cash management accounts, the loan portfolio grew $10.2
million in 1993. During the first quarter of the year, $4.7 million in mortgage
loans were sold to a secondary market investor. UNB replaced these long-term
assets with short-term, more liquid and diversified loans. In addition, normal
runoff of approximately $4 million per month was rewritten, bringing total
lending volume to approximately $63 million for the year. UNB's growth in 1993
was spread among consumer, leasing, and commercial categories. Retail consumer
loans and lease financing, combined, grew $8.3 million, or 17.4 percent in
1993, comparing similarly to $7.3 million, or 18.1 percent in 1992. The tables
below illustrate the mix of the loan portfolio and the maturity and repricing
frequency:
LOAN PORTFOLIO
1993 1992 1991 1990 1989
-------- -------- ------- ------- -------
Commercial........................... $ 24,881 $ 18,854 $18,998 $18,998 $17,718
Real Estate
Comm'l & Other..................... 15,675 14,872 12,476 10,234 10,845
Residential........................ 21,518 20,493 25,313 27,094 26,444
Construction....................... 357 816 1,095 585 282
Held for Resale.................... 0 5,507 0 0 0
Consumer............................. 32,119 28,852 27,720 27,513 24,909
Leases............................... 23,926 18,893 12,693 11,709 10,746
-------- -------- ------- ------- -------
Total Loans & Mortgage Loans Held for
Resale.............................. $118,476 $108,287 $98,295 $96,083 $90,944
======== ======== ======= ======= =======
LOAN MATURITY AND LESS THAN AFTER ONE BUT WITHIN AFTER FIVE
REPRICING FREQUENCY ONE YEAR FIVE YEARS YEARS TOTAL
- ------------------- --------- -------------------- ---------- --------
Fixed Interest Rate.......... $ 3,768 $53,365 $21,508 $ 78,641
Variable Interest Rate....... 34,888 9,223 536 44,647
------- ------- ------- --------
Total...................... $38,656 $62,588 $22,044 $123,288
======= ======= ======= ========
Growth in the loan portfolio in 1994 will be dependent upon the bank's
ability to attract and retain deposit accounts. Our communities continue to
generate strong loan demand into the first quarter of 1994, and Management
anticipates this to continue throughout the year. The disparity between deposit
growth and loan demand resulted in a loan to deposit ratio of 90 percent at
year-end 1993.
On a quarterly basis, Management evaluates the adequacy of the allowance for
loan losses with respect to past loan loss experience, current economic
conditions, growth and composition of the loan portfolio, credit analyses, and
the status of problem and potential problem loans. Included in this quarterly
review, is determination of specific allocations for identified loans, as well
as general allocations for each category type.
56
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
The following table shows the allocation by category of the allowance for
loan losses for each of the past five years:
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991 DECEMBER 31, 1990
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH
BALANCE AT END CATEGORY CATEGORY CATEGORY CATEGORY
OF PERIOD TO GROSS TO GROSS TO GROSS TO GROSS
APPLICABLE TO AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- -------------- ---------- --------- ---------- --------- --------- --------- --------- ---------
Domestic Loans:
Real Estate Loans......... $ 51 32% $ 100 39% $ 75 40% $ 50 39%
Commercial, financial and
agricultural............. 331 21 375 17 350 19 350 21
Installment (including
lease receivables)....... 583 47 325 44 275 41 225 40
Not allocated.............. 224 N/A 261 N/A 210 N/A 177 N/A
---------- ---------- --------- ---------
Total................... $1,189 100% $1,061 100% $910 100% $802 100%
========== ========== ========= =========
DECEMBER 31, 1989
-----------------------
PERCENT
OF LOANS
IN EACH
BALANCE AT END CATEGORY
OF PERIOD TO GROSS
APPLICABLE TO AMOUNT LOANS
- -------------- ---------- ------------
Domestic Loans:
Real Estate Loans......... $ 50 42%
Commercial, financial and
agricultural............. 325 19
Installment (including
lease receivables)....... 175 39
Not allocated.............. 102 N/A
----------
Total................... $652 100%
==========
The relationship of the allowance and net charge-offs to loan volume is
depicted historically in the table below:
1993 1992 1991 1990 1989
------ ------ ----- ----- -----
Allowance for Loan Losses as percent of
Average Loans............................ 1.06% 0.98% 0.92% 0.81% 0.74%
Net Loan Charge-Offs as percent of Average
Loans.................................... 0.31% 0.17% 0.20% 0.16% 0.45%
Provision for Loan Losses as percent of
Average Loans............................ 0.43% 0.32% 0.31% 0.31% 0.45%
Nonaccrual Loans (000's).................. $1,515 $1,092 $ 392 $ 299 $ 575
Restructured Loans........................ 227 0 0 0 0
Accruing Loans past due 90 days or more... 345 242 418 93 103
------ ------ ----- ----- -----
Total................................... $2,087 $1,334 $ 810 $ 392 $ 678
====== ====== ===== ===== =====
Nonaccrual Loans as a percent of Average
Loans.................................... 1.36% 1.05% 0.41% 0.31% 0.63%
The allowance for loan losses increased as a percent of average loans from
.98 percent in 1992 to 1.06 percent in 1993. Included in the analysis for the
adequacy of the allowance was the increase in nonaccrual loans from $1.1
million at December 31, 1992 to $1.5 million at December 31, 1993. No interest
income was recorded on such loans during 1993 or 1992; however, interest income
which would have been recorded under original terms equalled $74 thousand in
1993 and $44 thousand in 1992. At December 31, 1993, all nonaccrual loans were
secured. The increase in nonaccruals, coupled with the loan growth over the
past two years, was a determining factor for Management to increase the
provision for loan losses to .43 percent of average loans as compared with .32
percent provisioned in 1992. At December 31, 1993, UNB had $3.3 million in
loans for which payments presently are current, but the borrowers are
experiencing financial difficulties. Those loans are subject to ongoing
management attention, and their classification is reviewed on a quarterly
basis.
The allowance for loan losses is charged when Management determines that the
prospects of recovery of the principal of a loan or lease have significantly
diminished. Subsequent recoveries, if any, are credited to the allowance.
During 1993, $369 thousand in gross charge-offs were made, and $24 thousand in
recoveries occurred. Net loan charge-offs equalled .31 percent of average
loans, comparing higher than .17 percent in 1992. The following table shows the
charge-offs and recoveries by loan category for the past five years:
57
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY OF LOAN LOSS EXPERIENCE
1993 1992 1991 1990 1989
------ ------ ---- ---- ----
Allowance for Loan Losses Balance January 1........ $1,061 $ 910 $802 $652 $643
Charge-Offs:
Commercial....................................... 43 44 26 70 275
Real Estate...................................... 137 30 56 0 17
Installment...................................... 163 66 40 53 90
Lease Financing.................................. 26 70 82 58 62
------ ------ ---- ---- ----
Total Charge-Offs.............................. $ 369 $ 210 $204 $181 $444
Recoveries:
Commercial....................................... 4 11 0 2 0
Real Estate...................................... 0 0 0 4 0
Installment...................................... 13 9 5 10 14
Lease Financing.................................. 7 16 7 15 19
------ ------ ---- ---- ----
Total Recoveries............................... $ 24 $ 36 $ 12 $ 31 $ 33
------ ------ ---- ---- ----
Net Charge-Offs.................................... $ 345 $ 174 $192 $150 $411
------ ------ ---- ---- ----
Provision for Loan Losses.......................... $ 473 $ 325 $300 $300 $420
------ ------ ---- ---- ----
Allowance for Loan Losses Balance December 31...... $1,189 $1,061 $910 $802 $652
====== ====== ==== ==== ====
The Corporation will be required to adopt FASB Statement No. 114, "Accounting
by Creditors for Impairment of a Loan," in the first quarter of fiscal year
ending December 31, 1995. UNB has determined that the effect of such
implementation will not be material to the financial position and results of
operations.
INVESTMENTS--As of December 31, 1993, the book values of investment
securities was $20 million, reflecting a decrease of $3.7 million for the prior
year. This decrease was a result of UNB's aggressive loan growth, which
absorbed all new depository funds as well as some of the funds generated by
investment sales, calls, and maturities. The mix within the portfolio remains
consistent with last year's mix, reinforcing Management's commitment to keep
the portfolio in high quality and liquid, with the majority of investments made
in Treasuries or Government Agencies. The following table sets forth the
carrying amount of the investment portfolio in each of the past five years:
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
U.S. Treasury Securities............... $ 3,150 $ 2,124 $ 1,259 $ 755 $ 105
Other U.S. Gov't Securities*........... 15,052 18,895 9,168 5,959 5,080
State and Municipal.................... 200 550 550 450 620
All Other Securities................... 1,606 2,171 5,490 8,608 7,731
------- ------- ------- ------- -------
Total Investments.................... $20,008 $23,740 $16,467 $15,772 $13,536
======= ======= ======= ======= =======
- --------
* Other U.S. Gov't Securities includes all holdings of mortgage-backed
securities issued by FNMA and FHLMC.
In preparing for implementation of FASB STATEMENT No. 115 in the first
quarter of 1994, Management updated Investment and Asset/Liability Policies to
incorporate mark-to-market accounting issues. Concurrently, Management reviewed
the investment portfolio and made the decision to sell $2.2 million in
securities in order to reposition the portfolio for future needs. Management's
continuous review of the Corporation's ability to hold securities to maturity
will insure compliance with financial accounting standards as well as liquidity
to fund the Bank's needs. Future changes in Held to Maturity and Available for
Sale mix will be achieved through the classification of new securities at the
time of purchase; transfers out of Held to Maturity would be rare.
58
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
However, the Revenue Reconciliation Act of 1993 (S)475 requires
classification of securities for tax purposes; Management has deemed all
securities to be Not Held for Sale. This necessitates that some securities have
a dual classification: 1) Available for Sale under the definition of FASB 115
and 2) Not Held for Sale under the definition of (S)475.
The following table sets forth the contractual maturities of investment
securities at December 31, 1993 and their respective weighted average tax
equivalent yields.
AFTER 1 YEAR, AFTER 5 YEARS, AFTER
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS TEN YEARS
-------------- --------------- ---------------- ------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ------ -------- ------ -------- ------- ------ -----
U.S. Treasury........... $ 500 5.45% $ 1,100 4.39% $ 1,550 4.81% -- --
Gov't Agency............ -- -- 11,096 5.50 3,920 6.71 $ 36 9.50%
State & Municipal....... 100 9.55 100 10.98 -- -- -- --
Other Securities........ 250 8.62 550 7.32 -- -- 806 7.58
------ ------ -------- ------ -------- ------ ---- ----
Total Investments....... $850 6.86% $12,846 5.55% $5,470 6.17% $842 7.66%
====== ====== ======== ====== ======== ====== ==== ====
LIQUIDITY AND INTEREST RATE SENSITIVITY--As with any business, the need to
insure financial stability is foremost in management's decisions. This includes
contingency financing to satisfy any foreseen or unforeseen demand, as well as,
counteracting any adverse effect interest rate movements may cause. With this
directive, UNB's Management strives to maintain the most cost-effective funding
while preserving the earning power of its asset base.
Core deposits for 1993 averaged $126 million, giving UNB a strong springboard
for loan growth. This growth was further funded by the runoff of called and
matured securities. Additional growth or an unexpected reduction in deposits
can be financed by various other means including federal fund lines, repurchase
agreements, Federal Home Loan Bank, and Federal Reserve Bank borrowings. These
instruments created a borrowing potential of approximately $21 million at
December 31, 1993. UNB can attract, but does not actively seek, brokered
deposits. As of December 31, 1993, UNB had seven brokered certificates of
deposit totalling $693 thousand, which were issued in 1991 during an advertised
promotion of normal bank certificates of deposit. Each brokered certificate was
less than $100 thousand, and no such deposits were issued in 1992 or 1993.
Liquidity analyses are presented every month to the Asset and Liability
Management Committee (ALCO) with a 30 and 90 day measurability. As of December
31, 1993, UNB's 30 day ratio of available funds to net needs was 1.31 percent
and the 90 day ratio was 1.19 percent. These compared with 2.01 percent and
1.80 percent, respectively, at December 31, 1992. With the strong loan demand
and the downward trend of the ratios, Management has elected to modify
reporting criteria and monitor liquidity on a weekly basis to provide prudent
guidance for future liquidity needs.
Earning power for the bank is mainly attained through the net interest margin
or the difference between the cost of funds and earning asset yields. This can
be controlled by volume, rate, and repricing frequency; usually a blend is used
to obtain maximum earnings with minimal risk. Though risk is inherent in a
volatile rate environment, assumptions can be made and forecasts run to assist
management in making prudent decisions to reduce risk. UNB's ALCO has the
responsibility of monitoring and adjusting volume and rate mix to ensure the
Corporation's continued profitability and adequate capitalization. The ALCO has
many tools which it can utilize to track, predict, and simulate trends and
changes to volumes and rates. At its monthly meetings, the ALCO reviews the
gaps, or the spread between asset and liability pricing at 30 days, 90 days,
and one year. Management has maintained a negative gap (more liabilities
repricing than assets in a given period of time) thus taking full advantage of
the downward rate movement. Exemplifying this strategy is the one year gap
which was $(33,393) as of December 31, 1992 and $(60,535) at year-end 1993.
59
UNITED NATIONAL BANCORPORATION AND SUBSIDIARY
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Balance sheet gaps (volume) cannot solely be used to control interest rate
sensitivity. Interest rates themselves must be monitored and adjusted to
maintain an acceptable return on assets. Management's ability to forecast and
simulate rate movements allows changes to be made quickly and advantageously.
With the economists predicting a slight upward movement in rates for 1994,
Management is prepared to monitor these effects on earnings and to implement
changes in the balance sheet and rates to insure UNB's continued success.
INTEREST SENSITIVITY GAP ANALYSIS
DECEMBER 31, 1993
AFTER 1 AFTER 5
0-3 3-12 BUT WITHIN BUT WITHIN AFTER
ASSETS: MONTHS MONTHS 5 YEARS 10 YEARS 10 YEARS
- ------- -------- -------- ---------- ---------- --------
Investment Securities....... $ 4,864 $ 5,263 $ 9,085 $ 204 $ 592
Loans:
Real Estate............... 1,862 2,673 7,215 9,785 16,015
Commercial................ 18,204 3,624 950 44 2,059
Installment............... 3,762 8,010 13,213 6,032 1,102
Leases.................... 129 785 23,012 0 0
Other Interest-Bearing...... 1,633
-------- -------- -------- ------- -------
Total Earning Assets.... $ 30,454 $ 20,355 $ 53,475 $16,065 $19,768
======== ======== ======== ======= =======
LIABILITIES:
DEPOSITS:
NOW & MMDA................ $ 39,551
Savings................... 33,763
Time + 100M............... 1,115 4,960 1,103
All Other Time............ 10,050 17,218 12,606 150 27
Repurchase Agreements..... 4,687 0 0 0 0
Other Noninterest-Bearing. 0 0 0 0 0
-------- -------- -------- ------- -------
Total Interest-Bearing
Liabilities............ $ 89,166 $ 22,178 $ 13,709 $ 150 $ 27
======== ======== ======== ======= =======
Sensitivity Gap........... (58,712) (1,823) 39,766 15,915 19,741
Cumulative Gap............ (58,712) (60,535) (20,769) (4,854) 14,887
Gap Ratio................. 0.34 0.92 3.90 107.10 732.15
Cumulative Gap Ratio...... 0.34 0.46 0.83 0.96 1.12
Table conservatively based upon calls in Investment Portfolio.
CAPITAL RESOURCES--UNB's equity capital grew $1.5 million in 1993,
representing internal capital generation of 13.4 percent.Over the past five
years, equity capital grew at an average rate of 8.2 percent, with all growth
funded internally. Regulation of UNB falls under the joint responsibility of
the Federal Reserve Bank of Philadelphia for the Corporation, the Office of
the Comptroller of the Currency and Federal Deposit Insurance Corporation for
the bank, and the Pennsylvania Department of Banking for both.Such regulatory
authorities monitor capital growth, sufficiency, and leverage position. UNB's
regulatory capital ratios for the past three years are as follows:
1993 1992 1991
----- ----- -----
Capital Leverage........................................ 8.26% 7.52% 7.58%
Tier I Capital/Risk Weighted Assets..................... 10.72 10.42 10.10
Tier 1 and Tier 2 Capital/Risk Weighted Assets.......... 11.76 11.45 11.04
At December 31, 1993, all UNB capital ratios exceeded minimum required
levels. Regulatory agencies are currently in the process of revising equity
capital guidelines to include recognition of unrealized gains and losses on
investment securities to be included in equity capital on the Corporation's
statement of condition beginning in the first quarter of 1994. It is
anticipated that initial adoption of mark-to-market accounting will not
materially affect the Corporation's capital adequacy ratios. However,
Management does concur with banking industry concerns regarding the volatility
of the capital base of the banking industry as a whole, exposed by major
swings in interest rates and/or stock price fluctuations. UNB closely monitors
the quality of the investment portfolio and will act prudently to protect the
capital adequacy of the Corporation.
60
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations for the three month period ended March 31, 1994
compared to March 31, 1993: Net income for the three month period ended March
31, 1994 totalled $418 thousand, representing a 1.14 percent annualized return
on average assets. Net profits for the comparable period last year equalled
$612 thousand, or 1.41 percent return on assets; however, prior year
profitability included $157 thousand net gain on the sale of mortgage loans.
Excluding this prior period gain, profitability levels have declined from 1.23
percent return on assets to 1.14 percent. This differential is directly related
to increased noninterest expenditures related to expanded branch facilities and
overall increased salary and benefit costs.
Reduction in interest rates paid on deposits afforded UNB a 3.4 percent
increase in net interest income over the prior year period. The average rate
paid on deposits during the first quarter of 1994 equalled 2.99 percent, as
compared with 3.88 percent paid in the first quarter of 1993. The gross earning
asset base declined $2.6 million, or 1.9 percent as compared with prior year.
These two factors combined to result in an increase in the annualized net
interest margin from 5.50 percent in 1993 to 5.66 percent in 1994; thus, an
indication of continued strength in UNB's basic earning power.
Noninterest expenditures increased $140 thousand, or 11 percent over the
comparable period last year. During 1993, UNB opened a new branch facility in
the Chambersburg area to complement the downtown Headquarters Office, and
relocated the Huntingdon Plaza Office into a supermarket branch location.
Staffing and facilities costs to accommodate such expansion is included in the
current quarter expenditures; however, growth potential and related
profitability to be gained by these strategic locations are yet to be fully
realized.
Financial Condition: The banking industry continues to be stagnant in deposit
growth due to unattractive interest rates for the investor. UNB's deposit base
declined $1.3 million during the three month period ended March 31, 1994, and
business cash management accounts (repurchase agreements) also declined $1.3
million. During the first quarter of 1994, UNB curtailed lending volume by $2.5
million due to the lack of growth in the deposit base. UNB experienced strong
loan growth of 9.4 percent in 1993 and 10.2 percent in 1992. Deposit growth
kept pace with loan growth in 1992 and through the first nine months of 1993;
however, during the fourth quarter of 1993, public funds deposits declined and
investors sought other avenues of investment in an effort to obtain higher
returns. This trend has continued into 1994, as UNB offered two special
promotion certificates of deposit to retain existing deposits and attract new
accounts, but deposits continued to move out to nonbanking entities offering
higher rates of return to investors.
Equity capital increased $239 thousand during the first quarter of 1994,
affording UNB enhanced capital protection on a smaller volume of assets. The
primary capital to average assets ratio increased from 8.87 percent one year
ago to 9.32 percent currently. All three measures of regulatory capital
adequacy reflect improvement over December 31, 1993 ratios, as follows:
MARCH 31, 1994 DECEMBER 31, 1993
-------------- -----------------
Capital Leverage........................... 8.46% 8.26%
Tier 1 Capital to Risk Weighted Assets..... 11.12 10.72
Tier 1 and Tier 2 Capital to Risk Weighted
Assets.................................... 12.24 11.76
Equity capital at March 31, 1994 included a charge of $80 thousand for net
unrealized losses in investment securities categorized as available-for-sale in
the adoption of FASB No. 115, "Accounting for Certain Investments in Debt and
Equity Securities".
Asset quality remains good, as evidenced by a low net loan charge off level
of .03 percent of average loans. The allowance for loan losses has been
augmented through provisions from earnings to increase the reserve level from
1.05 percent of total loans last year to 1.06 percent at March 31, 1994.
Nonaccrual loans as a percent of average loans have declined from 1.36 percent
at December 31, 1993 to 1.23 percent at March 31, 1994. UNB aggressively works
the delinquent accounts to maintain past due loans below 2 percent of total
loans. At March 31, 1994, past due accounts equalled 1.24 percent of average
total loans.
61
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cash flows from operations were $771 thousand for the three month period
ended March 31, 1994 as compared with cash generation of $850 thousand in the
comparable period of 1993. Net cash provided by investing activities equalled
$914 thousand in 1994, as compared with cash used in investing activities of
$3.6 million in 1993. Proceeds from sales and maturities of investment
securities and reduction in loan volume created cash generation in 1994,
contrasting strong loan growth and less than half the proceeds collected by
maturing securities in 1993. Decreases in deposits and short term borrowings
resulted in cash being used in financing activities of $2.8 million in 1994,
also contrasting cash provided by such activities of $1.0 million in 1993.
UNB is optimistic that as interest rates inch upward, investors will return
to insured deposits for investment. On March 25, 1994, UNB signed a definitive
agreement to merge the Corporation into First Commonwealth Financial
Corporation of Indiana, PA ("PCFC"). Total assets of the combined entity will
exceed $2.0 billion, affording our bank subsidiary, Unitas National Bank, and
active nonbank subsidiary, Unitas Mortgage Corporation, excellent long term
growth and profitability potential. We are confident that this partnership will
open significant opportunities for these subsidiaries as they become
independent affiliates of FCFC. Management of UNB anticipates acquisition costs
to UNB in excess of $200 thousand during 1994; however, Management is not aware
of forseeable future events which would otherwise materially alter the
profitability or safety and soundness of UNB. We expect certain cost savings in
noninterest expenditures subsequent to the merger.
62
MANAGEMENT OF UNITED
BOARD OF DIRECTORS
The table below provides information concerning the Board of Directors of
United. Robert C. Williams, who is Vice Chairman of the Board, President and
Chief Executive Officer of United, will become a Director of FCFC following the
Merger. See "Plan of Reorganization--Management Following the Merger." Share
ownership information contained in the table reflects beneficial ownership (see
note (1) to the table) of United Common Stock as of June 10, 1994, and is based
upon information furnished by or on behalf of the persons referred to in the
table.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DURING DIRECTOR OWNERSHIP OF OUTSTANDING
THE PAST FIVE YEARS, OTHER OF UNITED UNITED COMMON UNITED COMMON
DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
--------------------------------- --- --------- ------------- -------------
Term Ending in 1997:
Stanley E. Cipar..................... 60 1989 2,943(2) *
Owner/Secretary, Jack M. Shuck
Agency, Inc. and The Kline Agency
(independent insurance agencies);
Director, Unitas Bank and Juniata
Valley Loan Company
Ramsey G. Dilibero................... 65 1990 1,699 *
Executive Vice President, Chief
Operating Officer and Director,
Western Waste Industries, Inc.; Co-
Owner and Vice President, Eagle
Equipment Corp.; Director, Unitas
Bank; previously Vice Chairman, BFI
International, Inc.
Robert E. Fleck...................... 46 1989 1,342(3) *
President and Director Robert E.
Fleck and Associates, Ltd.
(financial planning and advisory
firm); Director, Unitas Bank
Dorothy J. Jamison................... 65 1989 5,021(5) *
Vice President and Secretary,
United; Corporate Secretary and
Director, Unitas Bank; Director,
Vice President and Secretary, Unitas
Mortgage
Term Ending in 1996:
John E. Byler........................ 47 1990 2,401 *
President, C&G Realty Co.; Director,
Executive Vice President and
Secretary, Carlos R. Leffler, Inc.;
Director, Unitas Bank; Vice
President, C.R. Friendly Markets;
Executive Vice President and
Secretary, ABE Oil Co. and All
American Truck Plaza, Inc.
Lewis R. Frame....................... 62 1992 124,775(4) 16.2%
President, Frame Group, Ltd.
(industrial and commercial real
estate ventures); Director, Unitas
Bank
Stephen C. Huston.................... 46 1992 630(2) *
President and Director, Huston Motor
Co., Inc. (retail auto and truck
sales and leasing); Director, Unitas
Bank
Charles Q. Smith..................... 54 1989 1,086 *
Managing Partner, Adia Personnel
Services (temporary employee
services and professional and
management permanent placement);
Director, Unitas Bank; previously
President and Sales Representative,
Smith & Bell Insurance Associates,
Inc.
63
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DURING DIRECTOR OWNERSHIP OF OUTSTANDING
THE PAST FIVE YEARS, OTHER OF UNITED UNITED COMMON UNITED COMMON
DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
--------------------------------- --- --------- -------------- -------------
Term Ending in 1995:
Gerald K. Morrison.................. 50 1989 6,353 *
Attorney-at-Law; Shareholder,
Buchanan Ingersoll Professional
Corporation; Director, Harrisburg
Symphony and The Pennsylvania State
University- Harrisburg; previously
partner in Rhoads & Sinon (law
firm); Director, Unitas Bank
Robert C. Williams.................. 50 1989 21,168(2)(5) 2.7%
Vice Chairman President and Chief
Executive Officer, United; Director
and President, Unitas Bank;
Director and President, Unitas
Mortgage; Director, Chambersburg
Area Development Corporation
previously Executive Vice
President, United and Unitas Bank
All directors and executive officers
of United as a group
(16 persons)....................... -- -- 193,784.5(1)(5) 25.2%
- --------
*Less than one percent.
(1) Under regulations of the Securities and Exchange Commission, a person who
has or shares voting or investment power with respect to a security is
considered a beneficial owner of the security. Voting power is the power to
vote or direct the voting of shares, and investment power is the power to
dispose of or direct the disposition of shares. Unless otherwise indicated
in the other footnotes below, each director has sole voting power and sole
investment power with respect to the shares indicated opposite his name in
the table, and each member of a group has sole voting power and sole
investment power with respect to the number of the shares indicated for the
group.
(2) Includes the following shares held jointly with spouses and children: Mr.
Cipar, 1,038 shares; Mr. Huston, 630; Mr. Williams, 111; and all directors
and executive officers as a group, 2,906.
(3) Includes 266 shares held by Mr. Fleck's spouse in custody for a minor
child.
(4) Includes 6,655 shares owned by Mr. Frame's spouse, Ruth A. Frame.
(5) Includes the following shares which may be acquired pursuant to stock
options: Ms. Jamison, 3,641 shares; Mr. Williams, 18,205; and all directors
and executive officers as a group, 46,667.5.
Each of the persons listed above has held the position described above or
other executive positions with the same entity (or a subsidiary thereof) for at
least the past five years.
EXECUTIVE OFFICER
The table below provides information concerning Robert C. Williams, the only
present executive officer of United who will become a member of the FCFC Board
of Directors following the Merger. Mr. Williams has held the positions
indicated below for at least the past five years.
NAME AGE POSITIONS HELD DURING THE PAST FIVE YEARS
---- --- -----------------------------------------
Robert C. Williams....... 50 Vice Chairman, President and Chief Executive
Officer, United; President, Unitas Bank and Unitas
Mortgage; previously Executive Vice President,
United and Unitas Bank
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding compensation
received by the Chief Executive Officer. No other executive officer of United
received annual compensation, including bonus, in excess of $100,000 for the
period indicated.
64
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM
COMPENSATION
-----------------
ANNUAL NO. OF SECURITIES
COMPENSATION UNDERLYING
---------------- OPTIONS/SARS ALL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED OTHER(1,2)
--------------------------- ---- -------- ------- ----------------- ----------
Robert C. Williams.......... 1993 $135,000 $30,000 5,500 $6,170
Vice Chairman and President
of United; President 1992 129,615 15,000 6,050 5,676
of Unitas Bank; President
of Unitas Mortgage 1991 115,000 10,000 0 707
- --------
(1) For 1993 includes $389 premium for split dollar life insurance program;
$576 premium for additional group life insurance; and $5,205 premium for
long-term disability insurance policy. For 1992 includes $375 premium for
split dollar life insurance program; $348 premium for additional group life
insurance; and $4,953 premium for long-term disability insurance policy.
For 1991 includes $359 for split dollar life insurance program; and $348
premium for additional group life insurance.
(2) Includes compensation for services on Boards and committees of United and
Unitas Bank.
The following table sets forth certain information regarding stock options
granted to Robert C. Williams during the fiscal year ending December 31, 1993.
INDIVIDUAL STOCK OPTION/SARS GRANTS
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR $/SHARE DATE
---- ------------ ------------ -------- ----------
Robert C. Williams................ 5,500(1) 35% $16.14 1/20/2003
- --------
(1) These are options with tandem SARs.
The following table provides certain information regarding the value attached
to the aggregate stock options held by Robert C. Williams as of December 31,
1993.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED DOLLAR YEAR END EXERCISABLE/ YEAR END EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- --------------------- ---------------------
Robert C. Williams...... N/A N/A 12,705/5,500 $137,468/$88,770
PENSION PLAN
The following table presents estimated annual retirement benefits under
United's Pension Plan for the average annual base salary and years of credited
service on the assumptions that full retirement benefits are payable and that
the benefits will be paid in the form of a straight life annuity. The estimated
annual retirement benefits shown in the table are not subject to a deduction
for Social Security or other offset amounts.
65
PENSION PLAN TABLE
YEARS OF CREDITED SERVICE
AVERAGE ANNUAL --------------------------------
COMPENSATION 10 20 30 40
-------------- ------- ------- ------- --------
$ 80,000.............................. $10,460 $20,921 $31,381 $ 41,842
100,000.............................. 13,400 26,801 40,201 53,602
120,000.............................. 16,340 32,681 49,021 65,362
140,000.............................. 19,280 38,561 57,841 77,122
160,000.............................. 22,220 44,441 66,661 88,882
180,000.............................. 25,160 50,321 75,481 100,642
The Pension Plan is a defined benefit plan providing for pensions based upon
years of credited service (not to exceed 40) and the average monthly base
salary of the employee for the five consecutive years of highest earnings in
the last ten years of service prior to retirement. As of December 31, 1993 Mr.
Williams had 29 years of credited service.
Participants in the Pension Plan may make voluntary contributions (not to
exceed 10% of such participant's annual compensation) to a separate participant
contribution account in tandem with the Pension Plan. Such contributions are
immediately fully vested and provide benefits in addition to the benefits
provided through United's contributions to the Pension Plan.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Williams' compensation is fixed by the Personnel Committee of the United
Board of Directors. No member of the Personnel Committee, which fulfills the
functions of an executive compensation committee, was an officer or employee of
United during 1993, has ever been a former officer of United or a subsidiary or
has a transaction or relationship required to be disclosed under Item 404 of
Regulation S-K of the Commission. During 1993, no executive officer served on a
compensation committee (or other board committee performing equivalent
functions) or Board of Directors of any entity related to the above named
Committee members.
INTERESTS OF NOMINEES, DIRECTORS AND OFFICERS IN CERTAIN TRANSACTIONS
In November 1986, United and Unitas Bank entered into a Supplemental
Executive Benefit Agreement with Robert C. Williams, President of each, which
provides Mr. Williams with certain benefits in the event of a change in
control. Should Mr. Williams' employment with Unitas Bank be terminated
pursuant to a change in control, Unitas Bank shall make payment to him for
services in an amount equal to his last full regular monthly compensation prior
to the change in control for a period of 36 months following the change in
control. A termination pursuant to a change in control may occur with a merger,
consolidation, acquisition, reorganization, sale of assets or significant stock
acquisition of United or Unitas Bank. The compensation payable upon a change in
control is unfunded and would be paid out of general assets of Unitas Bank or
its successor if they became payable.
Unitas Bank has extended credit to directors and officers of Unitas Bank and
United, to members of their families and to corporations or organizations in
which such persons have a beneficial interest or with which such persons are
associated as officers, partners, directors or trustees. In all cases these
transactions were made in the ordinary course of business and on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and do not involve more
than the normal risk of collectibility or present other unfavorable features.
As of December 31, 1993 total loans to such directors, executive officers,
principal shareholders and their related interests whose loan balances exceeded
$60,000 during 1993 were $1,567,489.82.
66
CERTAIN BENEFICIAL OWNERS OF UNITED COMMON STOCK
The following table sets forth, as of June 10, 1994 and as to each person who
owns of record, or who is known by the Board of Directors of United to be the
beneficial owner of, more than 5% of the outstanding shares of United Common
Stock, the name and address of such person, the number of shares beneficially
owned and the percentage of the outstanding shares of United Common Stock so
owned:
PERCENTAGE OF
OUTSTANDING
AMOUNT AND NATURE OF UNITED
NAME AND ADDRESS BENEFICIAL OWNERSHIP COMMON STOCK
---------------- -------------------- -------------
Lewis R. Frame, P.O. Box 490, Honey Brook,
PA 19344................................... 124,775(1) 16.2%
Carlos R. Leffler, P.O. Box 278, Richland,
PA 17087................................... 131,084 17.0
- --------
(1) Includes 6,655 shares registered to Ruth A. Frame, wife of Lewis R. Frame.
As of June 10, 1994, Unitas Bank, acting in a fiduciary capacity for various
trusts and estates, held an aggregate of 36,561 shares of United Common Stock
(4.8% of the outstanding shares). Pursuant to applicable principles of
fiduciary law, Unitas Bank cannot vote proxies in trust where it is sole
trustee. However, proxies in other trusts may be voted by the co-fiduciary or
beneficiaries alone.
67
INFORMATION CONCERNING RELIABLE
THE RELIABLE MERGER
FCFC and Reliable have entered into the Reliable Plan of Reorganization,
which provides for the Reliable Merger. Although it is contemplated that the
United Merger and the Reliable Merger will be consummated at the same time if
all required regulatory approvals have been received and all conditions
precedent have been satisfied, the United Merger and the Reliable Merger are
separate and independent transactions. The information presented in this Proxy
Statement/Prospectus concerning Reliable is intended only to provide the
holders of United Common Stock an understanding of Reliable and the Reliable
Merger. The holders of United Common Stock have no rights to approve or reject
the consummation of the Reliable Merger. The consummation of the Reliable
Merger is not a condition precedent to the United Merger, and the consummation
of the United Merger is not a condition precedent to the Reliable Merger.
BUSINESS AND PROPERTIES OF RELIABLE
Reliable was organized as a Delaware business corporation on November 7, 1991
at the direction of the Board of Directors of Reliable Savings Bank for the
purpose of acquiring the Savings Bank and creating a savings and loan holding
company. On March 30, 1992, the Savings Bank converted from the mutual to the
stock form and became a wholly-owned subsidiary of Reliable. Reliable functions
primarily as the holder of all of the outstanding stock of the Savings Bank. As
used herein, "Reliable" refers collectively to Reliable and the Savings Bank.
Reliable is registered as a savings and loan holding company under the Savings
and Loan Holding Company Act, as amended, and it currently employs 31 employees
(full-time equivalents).
Through Reliable Savings Bank, Reliable traces its origins to a building and
loan association incorporated on July 16, 1925 under the laws of Pennsylvania
with the name Reliable Building and Loan Association of Bridgeville, Pa. The
Saving Bank adopted its present name on July 21, 1989. Reliable presently
conducts its business through three community banking offices in three
communities, of which two are in Allegheny County and one is in Washington
County, which is adjacent to Allegheny County.
Reliable engages in a full-service savings association business within the
vicinity of its service area. It offers various loan services, including
secured and unsecured commercial and consumer loans, construction and mortgage
loans, lease financing, all types of deposit services, including passbook,
interest bearing demand or NOW accounts and savings and time deposit accounts.
As of September 30, 1993, approximately 94% of its loan portfolio consisted of
loans secured by mortgages on 1-to-4 family residences. Reliable invests in
U.S. Government and agency obligations, state and municipal obligations,
Federal Home Loan Mortgage Corporation common stock and Federal Home Loan Bank
of Pittsburgh capital stock. Reliable's principal sources of income are
mortgage loans, investment securities and interest bearing deposits. Reliable
does not have a trust department, and its business is not seasonal in nature.
Reliable operates two ATMs which permit its customers to conduct routine
banking transactions 24 hours a day, and these ATMs are located on the premises
of its banking offices. All of the ATMs are part of the MAC Network, which
consists of over 14,000 ATMs owned by numerous banks, savings and loan
associations and credit unions located in 16 states, of which 14 are east of
the Mississippi River. Reliable's MAC customers may use the HONOR Network,
which has 9,800 ATMs located primarily in the southeastern quadrant of the
United States.
As a state chartered, federally insured savings association that is a member
of the Federal Home Loan Bank System, Reliable is subject to supervision and
regular examination by the Pennsylvania Department of Banking and the Office of
Thrift Supervision. Various federal and state laws and regulations govern many
aspects of its savings association business. See "Regulation and Supervision--
Subsidiary Banks and Reliable."
Reliable competes actively with commercial banks, savings banks and savings
and loan associations in its area, many of which are larger than Reliable, as
well as with major regional banking and financial institutions headquartered in
Pittsburgh. The management of Reliable believes that it is generally
competitive with all competing financial institutions in its service area with
respect to interest rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
68
The headquarters of Reliable is located at 428 Station Street, Bridgeville,
Allegheny County, Pennsylvania. The one-story granite headquarters building
has approximately 4,200 square feet of floor space and contains a full-service
banking facility and the central administrative offices of Reliable. Of
Reliable's banking offices, two branches are leased and the headquarters is
owned in fee, free of all liens and encumbrances. Management believes all such
facilities to be in good repair and well suited to their current uses.
69
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data is not covered by the auditor's report
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations, which follows, and with the
consolidated financial statements and related notes appearing elsewhere in this
Proxy Statement/Prospectus. The results for the six month periods ended March
31, 1994 and 1993 are not necessarily indicative of the results to be expected
for the entire year.
SIX MONTHS
ENDED MARCH 31, YEARS ENDED SEPTEMBER 30,
---------------------- ---------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- --------- --------- ---------
Interest income......... $ 5,108 $ 5,467 $ 10,865 $ 11,976 $ 12,413 $ 11,453 $ 10,639
Interest expense........ 2,092 2,310 4,500 6,147 7,912 7,817 7,112
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income.... 3,016 3,157 6,365 5,829 4,501 3,636 3,527
Provision for possible
loan losses........... 100 100 250 200 155 67 0
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income
after provision for
possible loan losses.. 2,916 3,057 6,115 5,629 4,346 3,569 3,527
Gain (loss) on sales of
investment securities. 234 483 1,133 261 0 (54) 0
Gain (loss) on sales of
real estate owned..... 0 (5) 49 11 0 67 0
Non-interest income.... 189 145 317 191 162 141 106
Non-interest expense... 1,304 1,252 2,575 2,220 1,924 1,682 1,377
---------- ---------- ---------- ---------- --------- --------- ---------
Income before taxes and
cumulative effect of
change in tax
accounting method..... 2,035 2,428 5,039 3,872 2,584 2,041 2,256
Applicable income
taxes................. 818 952 1,884 1,529 872 995 953
---------- ---------- ---------- ---------- --------- --------- ---------
Net income before
cumulative effect of
change in tax
accounting method..... 1,217 1,476 3,155 2,343 1,712 1,046 1,303
Cumulative effect of
change in tax
accounting method..... 365 0 0 0 0 0 0
---------- ---------- ---------- ---------- --------- --------- ---------
Net income............. $ 1,582 $ 1,476 $ 3,155 $ 2,343 $ 1,712 $ 1,046 $ 1,303
========== ========== ========== ========== ========= ========= =========
PER SHARE DATA
Net income before
cumulative effect of
change in tax
accounting method..... $ 0.86 $ 1.03 $ 2.21 $ 1.61 N/A N/A N/A
Cumulative effect of
change in tax
accounting method..... 0.26 0 0 0 N/A N/A N/A
---------- ---------- ---------- ---------- --------- --------- ---------
Net income............. $ 1.12 $ 1.03 $ 2.21 $ 1.61 N/A N/A N/A
========== ========== ========== ========== ========= ========= =========
Cash dividends
declared.............. $ 0.80 $ 0.50 $ 1.15 $ 0.35 N/A N/A N/A
Average shares
outstanding........... 1,409,938 1,437,277 1,425,596 1,457,944 N/A N/A N/A
AT END OF PERIOD
Total assets........... $ 150,401 $ 149,964 $ 146,783 $ 145,803 $ 135,505 $ 126,148 $ 115,026
Investment securities.. 37,474 36,391 31,640 8,913 3,165 4,025 5,353
Interest-bearing
deposits.............. 16,910 17,932 20,587 33,763 18,201 6,993 10,736
Loans and leases, net
of unearned income(1). 92,501 91,989 91,185 99,683 110,967 111,451 95,587
Allowance for possible
loan losses........... 800 550 700 495 295 155 90
Deposits............... 116,817 117,142 114,619 114,099 119,431 111,649 101,666
Long-term debt......... 0 0 0 0 0 0 0
Total liabilities...... 120,025 119,789 116,979 116,226 121,432 113,787 103,711
Stockholders'
equity(2)............. 30,376 30,175 29,804 29,577 14,073 12,361 11,315
KEY RATIOS
Return on average
assets................ 2.13% 2.00% 2.14% 1.61% 1.31% 0.87% 1.17%
Return on average
equity................ 10.63 10.09 10.70 9.16 12.95 8.83 12.22
Net loans to deposit
ratio................. 78.49 78.05 78.94 86.93 92.66 99.68 93.93
Dividend payout ratio.. 71.42 48.54 52.03 43.47(3) N/A N/A N/A
Average stockholders'
equity as percentage
of average assets..... 20.02 19.83 20.02 17.61 10.10 9.82 9.56
- --------
(1) Includes mortgage-backed securities.
(2) Stockholders' equity consists of common stock, additional paid-in capital,
treasury stock and retained earnings effective for periods ending subsequent
to completion of the Conversion on March 30, 1992.
(3) Dividend payout ratio annualized for comparative purposes.
70
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Liquidity and Sources of Capital
During the fiscal year ended September 30, 1993, the total consolidated
assets of Reliable Financial Corporation increased by only 0.67% to
$146,783,000 from $145,803,000 for the fiscal year ended September 30, 1992.
Changes in the composition of the balance sheet resulted primarily from loan
repayments continuing to exceed new loans granted throughout the year which
represents an additional source of liquidity for the Corporation. With net
loans repaid by borrowers during fiscal 1993 totaling $14,631,000, these monies
were reinvested among a variety of intermediate term investment securities
including U.S. Government Treasury notes and agency obligations, tax-qualified
municipal general obligation bonds and mortgage-backed securities. Together
with cash and cash equivalents of approximately $21,616,000, mostly held in
readily-liquid interest-bearing deposits in the FHLB of Pittsburgh, the
Corporation maintains a liquidity ratio, as defined by federal regulations, of
over 41% as of September 30, 1993.
What this has achieved for Reliable over the course of the last twelve months
and for the past two years in general is to significantly change the interest-
rate sensitivity position, or "gap" of the Corporation. As of September 30,
1993, the Savings Bank's cumulative one-year maturity gap as a percentage of
total assets was a positive 3.9% as compared to a positive 4.5% gap position at
September 30, 1992. Translated a positive gap means that total interest-bearing
assets maturing or repricing within one year exceed total interest-bearing
liabilities maturing or repricing within the same period. For fiscal 1993, the
overall ratio of average interest-earnings assets to average interest-costing
liabilities for 1.29-to-1, which in management's opinion, is a safe and sound
position and serves as a protective measure in a low-rate environment against
when rates eventually turn less favorable and begin to trend upward.
The overall strength and quality of the asset side of Reliable's balance
sheet is evident through a review of the three major components. Cash and
interest-bearing deposits in other institutions has provided the liquidity
necessary to remain efficient and flexible in an everchanging economic
environment. Investment securities, in addition to providing currently higher
level yields; have, without sacrificing marketability, positioned the portfolio
for growth in capital appreciation as the market value exceeds the carrying
amount of the investment portfolio by over $5.1 million as of September 30,
1993. And finally, loans, making up over 61% of the assets composition,
continue to represent the mainstay of Reliable's business. Broken down even
further, 94% of the loans included in portfolio at fiscal year end 1993 were
collateralized by one-to-four family residences. In the area of non-performing
assets, Reliable has not been immune to the effects of the sluggish economy. As
of September 30, 1993, the ratio of non-performing assets to total consolidated
assets was 1.80% as compared to a ratio of 1.79% as of a year earlier. This
increase is a direct result of management attempting to identify potential
problem loans by taking a scrutinizing look at its loan portfolio. These
regular evaluations are supported by the continued aggressive position taken
with respect to providing for possible loan losses monthly, even if the actual
loan loss experience would not alone indicate an addition. In view of the
uncertain economic environment and growing regulatory pressure for higher
allowance levels, the Corporation's established business plan for the Savings
Bank includes the intention to add to the general valuation allowance at an
annual rate of $200,000 through fiscal year end 1994.
At September 30, 1993, Reliable had a total of $2,638,000 in loans that were
past due 90 days or more considered non-performing loans that have been
determined by management to be placed on non-accrual status. As of fiscal year
end 1993, the Savings Bank's general allowance for loan losses was $700,000
which represented 0.78% of total loans and 26.54% of total non-performing
loans, compared to the coverage as of September 30, 1992 of 0.48% and 18.91%,
respectively.
71
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Despite the recent trend of increased delinquencies affecting the Savings
Bank's loan portfolio, management does not expect to experience a material loss
on any of the currently non-performing loans as, in the opinion of management,
adequate allowances have been established as of September 30, 1993 and will
continue to be evaluated for adequacy on at least a quarterly basis. However,
the Savings Bank is prepared, if required, to take the necessary foreclosure
steps in order to protect its interest and to minimize any unforeseen future
losses.
On the liability side of the balance sheet, overall deposits accounts showed
a slight increase of 0.46% during fiscal year 1993. The majority of this
movement was out of the area of long-term certificates of deposit as interest
rates declined throughout the year. Offsetting balance increases were noticed
in passbook savings accounts and NOW and money market checking accounts as
funds liquidity appeared to be a customer concern in light of the falling rate
environment. Although the Savings Bank has the ability to borrow over $18
million in advances from the FHLB of Pittsburgh to meet its current liquidity
requirements if necessary, there continues to be no outstanding debt or
borrowings as of September 30, 1993 and as of that date the amount of
outstanding loan commitments and loans in process totaled $6,964,000.
Consolidated stockholders' equity of the Corporation remained relatively
constant between the fiscal years ended September 30, 1993 and 1992, increasing
only by 0.77% to a level of $29,804,000. The level amount of equity resulted
primarily from the declaration of over $1.6 million in quarterly cash dividends
and the repurchase of approximately $1.4 million in treasury stock during the
fiscal year. The ratio of average equity to average assets during fiscal year
1993 was 20.02% compared to 17.61% for fiscal 1992. Current net earnings
represents a return on average equity for fiscal 1993 of 10.7% compared to
prior year's return on average equity of 9.16%. The Savings Bank continues to
be well capitalized as of September 30, 1993, with tangible and core capital
levels of 18.19% and an adjusted risk-based capital level of 42.71%, each of
which continues to be well in excess of the current regulatory capital
requirements.
RESULTS OF OPERATIONS
Net Income
Net income for the fiscal year ended September 30, 1993 was $3,155,000
compared to net income for fiscal years 1992 and 1991 of $2,343,000 and
$1,712,000, respectively. This represents annual net earnings growth at a rate
of 35% during fiscal 1993 and 37% for fiscal 1992. The operating results of
Reliable are largely dependent upon the net interest income generated by the
Savings Bank. The most significant factor contributing to this steady growth
pattern has been the impact of the continued declining interest rate
environment throughout the financial services industry. The effect can be noted
in the Savings Bank's interest rate spread or the difference between the yield
earned on interest-earning assets and the rate paid on interest-bearing
liabilities. The average interest rate spread for fiscal 1993 was 3.54% versus
3.05% and 2.75% for fiscal years 1992 and 1991, respectively.
The Savings Bank has also benefited from its interest-rate sensitivity
position during these years. Interest-rate sensitivity provides a measure as to
the effect changes in rates will have on net interest income. During the fiscal
years 1993, 1992 and 1991, the Savings Bank's cumulative one-year interest rate
repricing "gap" was a positive 3.9%, 4.5% and a negative 11.6% of total assets,
respectively. The favorable impact of the changing rate environment during
these periods can be seen in Reliable's bottom line as the return on average
assets has increased from 1.31% for fiscal 1991, to 1.61% during fiscal 1992,
and to 2.14% for fiscal year end 1993.
72
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
It has, however, been Reliable's strategy to attempt to balance its interest-
rate sensitivity position by achieving a more favorable match between the
maturity and repricing of its interest-earning assets and its interest-bearing
liabilities. It is apparent from the related discussion of Reliable's financial
condition that continued success has been reached towards this goal. In the
face of reduced loan demand, Reliable has increased its short and intermediate
term liquidity positions; thereby, improving the interest rate sensitivity of
its earning assets. At fiscal year end 1993, the Savings Bank had a positive
gap of (9.8%) which has well positioned the Corporation for a period when
interest rates may again be on the rise.
Interest Income
Interest income experienced an overall decrease of 9.3% for the fiscal year
ended 1993 as compared to a decrease of 3.5% between the fiscal years ended
1992 and 1991. The current year decline is a result in large due to a 14.6%
decrease in the amount of total loans outstanding caused primarily by an
increased number of prepayments and the overall reduced loan demand experienced
attributable to general economic uncertainty. An offsetting increase occurred
as interest on investments increased by $438,000 or 36% as an additional $23
million was used to purchase investment securities during the fiscal year 1993.
The net interest margin, a measure which reflects the net yield on interest-
earning assets, has continued to reflect Reliable's overall strength and
earnings capacity. The net interest margin for fiscal year 1993 was 4.45%
compared to 4.12% and 3.54% for the respective fiscal years ended 1992 and
1991.
Interest Expense
Interest expense during fiscal 1993 declined by 27% or $1,647,000 from a
total of just over $6.15 million in fiscal 1992 to the current year end level
of $4.5 million. The major impact on the Savings Bank's interest expense paid
on deposits resulted from the general decrease in market interest rates. The
average cost of funds for the fiscal year 1993 was 4.05% compared to 5.41% for
fiscal 1992, representing a 136 basis point decline for the current year. A
comparison of interest expense between fiscal 1992 and fiscal 1991 reflected a
22% decrease resulting from a 4.5% decrease in outstanding deposit balances
coupled with a significant decline in the average cost of funds.
Provision for Loan Losses
The provision for loan losses is based upon management's assessment of the
inherent risk of loss in the loan portfolio. This evaluation process takes into
consideration the growth and composition of the portfolio, historical loan loss
experience and delinquency trends, overall credit risk exposure related to
general economic conditions and the identification of problem loans based on
the current ability of borrowers to repay and the adequacy of the underlying
collateral securitizing the loans. The provision for loan losses during fiscal
year 1993 increased $50,000 or 25% to $250,000 compared to $200,000 for fiscal
1992. For fiscal year ended September 30, 1991 the provision for loan losses
was $155,000. Reliable will continually monitor its loan portfolio in an effort
to maintain an adequate allowance for loan losses to absorb unforeseen future
losses and in view of this effort management's plans include, at a minimum, an
addition of $200,000 to the provision for loan losses during the upcoming
fiscal year ending September 30, 1994.
Non-Interest Income
During the fiscal years ended September 30, 1993 and 1992, the Corporation
recognized gains of $1,182,000 and $272,000, respectively, on the sales of
marketable equity securities and real estate owned. The
73
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
gains on such sales were primarily attributable to the sale of 25,000 shares in
1993 and 10,000 shares in 1992 of Federal Home Loan Mortgage Corporation
(FHLMC) common stock. Due to the increased operating overhead and tax cost
burdens of being a publicly-traded company, it is management's intention to
utilize the current benefit of the unrealized gain available within its equity
investments to the extent determined appropriate in order to maintain the
projected level of earnings and expected rate of return to our stockholders.
Other non-interest income increased $126,000 or 66% during fiscal year 1993
and increased by $29,000 or 18% in fiscal 1992 when compared to respective
prior fiscal years. Included in other non-interest income are fees generated
out of normal operating activities, such as transaction account service fees
and late payment charges.
Non-Interest Expense
For fiscal 1993, total non-interest expenses increased by $355,000 or 16% to
$2.6 million up from the prior year's total $2.2 million. Fiscal 1992 reflected
a 15.4% or $296,000 increase over fiscal year end 1991. In addition to the
normal recurring increases in the general cost of operations: including
compensation and employee benefits, occupancy expense, deposit insurance and
data processing, the primary increase in overhead costs occurred in the area of
outside service and professional fees. A further review of this area explains
the increase as a result of the costs incurred by the Corporation to retain
professional services and advice as Reliable continues to expand and is faced
with the costs of keeping pace with the demands of the complex and regulated
financial services industry.
For the fiscal years ended September 30, 1993, 1992 and 1991, the Corporation
continues to maintain relatively low operating expenses with ratios of net
interest income to non-interest expenses of 2.47x, 2.63x and 2.34-to-1,
respectively; and, respective percentages of non-interest expenses to average
assets of 1.75%, 1.53% and 1.47% for the same periods.
Provision for Income Taxes
The Corporation incurred provisions for income taxes of $1,884,000,
$1,529,000 and $872,000 during the fiscal years ended 1993, 1992 and 1991,
respectively. The provision for Federal income taxes varied between the fiscal
years due to the tax effects of changes in the Corporation's operating results
and resultant levels of taxable income generated. Effective Federal tax rates
for fiscal years 1993, 1992 and 1991 were 31.5%, 31.3% and 26.6%, respectively.
In addition to the higher level of taxable income generated during fiscal years
ended September 30, 1993 and 1992, the increase in the effective tax rate over
fiscal 1991 was most significantly impacted by the limitations imposed on the
deductibility of the tax bad debt calculation. Changes in the state statutory
tax rates during the comparative fiscal years provides an additional
explanation regarding the difference in effective tax rates between those
years. The provision for the state income taxes assessed on the net earning of
the Savings Bank was determined based on the statutory rates of 11.5%, 12.5%
and 20% for the fiscal years ended 1993, 1992 and 1991, respectively.
Additional state tax liabilities are incurred by the Corporation as a separate
entity in both Delaware as the state of incorporation and Pennsylvania where
business operations are conducted.
74
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Liquidity and Sources of Capital
For the six months ended March 31, 1994, the total consolidated assets of
Reliable Financial Corporation increased by $3.6 million from $146,783,000 to
$150,401,000 or 2.46%. The Corporation maintains a strategy of balance sheet
diversification and continues to hold a favorable mix of interest-earning
assets consisting of interest-bearing deposits and investments representing 36%
of assets and loans and mortgage-backed securities representing 61% of assets.
During the six-month period ended March 31, 1994, net cash flows were negative
$3.9 million versus negative cash flows of $2.2 million for the comparable
period of fiscal 1993. The use of these funds during the six months ended March
31, 1994 was seen primarily in the area of investing activities as evidenced by
a 16.2% increase in investment securities since the end of the preceding fiscal
year. Total loans outstanding grew slightly during the same period showing
growth of $1.9 million compared to a net reduction of $7.3 million for the six
months ended March 31, 1993.
The diversity and strength of the asset side of Reliable's balance sheet
provides a solid basis for earnings potential as the ratio of average interest-
earning assets to average interest-bearing liabilities has been maintained at a
level of 1.29-to-1, the same ratio existing at the end of the fiscal year ended
September 30, 1993. The Corporation retains as a source of liquidity cash and
cash equivalents of $17.7 million which contributes to an overall liquidity
ratio, as defined by federal regulations, of 41.5% as of March 31, 1994.
As of March 31, 1994, the ratio of non-performing assets to total
consolidated assets was 1.86% as compared to a ratio of 1.80% as of the end of
the preceding fiscal year. Despite this slight increase, the Corporation
considers this a relatively low level of non-performing assets and continues to
monitor these assets on a regular basis. At March 31, 1994, Reliable had a
total of $2,795,000 in non-performing loans that were past due 90 days or more
and have been placed on non-accrual status. For the quarter ended March 31,
1994, a provision for possible loan losses of $50,000 was recorded which
increased the allowance for possible loan losses to $800,000 at March 31, 1994.
This level of allowance for possible loan losses represents 0.86% of total
loans and 28.62% of total non-performing loans, compared to the coverage as of
September 30, 1993 of 0.78% and 26.54%, respectively.
On the liability side of the balance sheet, growth in the overall deposit
account balances kept pace with asset growth by showing an increase of $2.2
million or 2% since the fiscal year ended September 30, 1993. The other
significant increase in liabilities as of March 31, 1994 was the collection of
$1.5 million in advances from borrowers for taxes and insurance. The
Corporation continues to maintain no outstanding debt or borrowings as of March
31, 1994 and as of that date the total amount of outstanding investment and
loan commitments and loans in process was $8,762,000.
Consolidated stockholders' equity of the Corporation was $30,376,000 which
represents a stated book value of $21.54 per share at March 31, 1994.
Annualized return on average equity for the three- and six-month periods ended
March 31, 1994 was 8.74% and 10.63%, respectively, compared to the return on
average equity for the 1993 fiscal year of 10.70%. Reliable Savings Bank
remains well capitalized at March 31, 1994 as tangible, core and risk-based
capital levels continue to be well in excess of the current regulatory capital
requirements.
RESULTS OF OPERATIONS
Net Income
Net income for the three months ended March 31, 1994 was $651,000 or $0.46
per share, a decrease of 18% from the $791,000 and $0.56 per share earned
during the second quarter of fiscal 1993. Six month year-to-date income for
fiscal 1994 was $1,582,000 or $1.12 per share, including the cumulative effect
of a change in an accounting principle totaling $365,000 or $0.26 per share.
Six-month income before the cumulative effect adjustment was $1,217,000 or
$0.86 per share, a decrease of 17.5% over the comparative six-month
75
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
results of operations of $1,476,000 and $1.03 per share for fiscal 1993. For
the comparative three- and six-month periods ended March 31, 1994 and March 31,
1993 the annualized return on average assets was 1.75% and 2.13%, respectively,
for fiscal 1994 compared to 2.14% and 2.00%, respectively, for fiscal 1993.
The operating results of Reliable are largely dependent upon the net interest
income generated by the Savings Bank. Net interest income represents the amount
by which interest income on earning assets, including FHLMC stock available for
sale, investment securities and loans, exceeds interest paid on interest-
bearing liabilities, mainly deposits. Interest rate fluctuations, as well as
changes in the amount and type of earning assets and interest-bearing
liabilities combine to affect net interest income. In addition to contributing
to growth in earnings for the Corporation in fiscal 1993, the low interest rate
environment has also had its effect on the more recent decrease in interest
earning yields. The narrowing of the rates can be seen in the Savings Bank's
interest rate spread or the difference between the yield earned on interest-
earning assets and the rate paid on interest-bearing liabilities. The average
interest rate spread during the comparative three- and six-month periods ended
March 31, 1994 and 1993 was 3.28% compared to 3.26% and 3.32% versus 3.48%,
respectively.
Net Interest Income
Net interest income reflected a decrease of $141,000 or 4.5% for the six-
month period ended March 31, 1994 over the six-month period ended March 31,
1993. Respective quarter to quarter figures did not vary. The net interest
margin, a measure which reflects the net yield on interest-earning assets,
however, continued to reflect Reliable's earnings ability. The net interest
margin for the second quarter of fiscal year 1994 was 4.13% compared to 4.16%
for the same quarter in the prior fiscal year. Six-month comparative periods
reflect a net interest margin of 4.18% for fiscal 1994 versus 4.40% for fiscal
1993.
During the six months ended March 31, 1994, interest income declined by
$359,000 or 6.57% when compared to the same period ended one year earlier. This
decrease can be attributed to continued repricing of the loan portfolio in a
lower interest rate environment along with the origination of new loans and the
purchase of investment securities at yields lower than the previously existing
portfolio. The low interest rate environment also accelerated prepayments on
loans and mortgage-backed securities, as residential mortgage borrowers
refinanced their loans. The cost of funds also declined due to the maturing and
repricing downward of deposits reflected by an offsetting 9.44% or $218,000
decrease in interest expense incurred between the comparative six-month
periods.
Provision for Possible Loan Losses
The provision for possible loan losses is based upon management's assessment
of the inherent risk of loss in the loan portfolio. This evaluation process
takes into consideration the growth and composition of the portfolio,
historical loan loss experience and delinquency trends, overall credit risk
exposure related to general economic conditions and the identification of
problem loans based on the current ability of borrowers to repay and the
adequacy of the underlying collateral securing the loans. The provision for
possible loan losses for the six months ended March 31, 1994 and 1993 was
$100,000, respectively. As Reliable's management continues to monitor the loan
portfolio the necessary measures will be taken in order to maintain an adequate
allowance for possible loan losses and current plans include recording at least
$200,000 in provision for possible loan losses during the fiscal year ending
September 30, 1994.
Non-Interest Income
Non-interest income decreased $200,000 or 32% during the six-month period
ended March 31, 1994 versus the same six-month period ended a year ago. For the
six months ended March 31, 1994 compared to the six months ended March 31,
1993, the Corporation recognized net gains of $234,000 and $478,000,
76
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
respectively, on the sales of investment securities and real estate owned. The
gains on such sales were primarily attributable to the sale of shares of
Federal Home Loan Mortgage Corporation (FHLMC) stock. Offsetting the investment
gains during fiscal 1993 were the non-operating costs incurred to hold and
maintain the REO properties which were recognized and netted against any gains
realized upon ultimate disposition.
Other non-interest income increased by $44,000 or 30% during the six-month
period ended March 31, 1994 versus the same six-month period one year ago and
showed an increase of $26,000 or 34% for the comparative fiscal three-month
periods. Included in non-interest income are fees generated out of normal
operating activities, such as transaction account service fees and late payment
charges. Service fee income based on the levels of customer activity is one
area in which revenues may be generated by the Savings Bank that are largely
unaffected by the prevailing economic conditions and interest rate environment.
Non-Interest Expense
Total non-interest expense increased by $12,000 or 1.87% for the quarter
ended March 31, 1994 when compared to the prior fiscal year's second quarter.
During the comparative six months ended March 31, 1994 and 1993, non-interest
expense was $1,304,000 and $1,252,000, respectively, an increase of 4.15%. The
major components of non-interest expense represent the normal recurring costs
of operations including compensation and employee benefits, occupancy expense,
deposit insurance, data processing and outside service and professional fees.
The Corporation continues to focus on overall cost maintenance which
translates into a relatively low overhead burden with ratios of net interest
income to non-interest expense of 2.28 and 2.31-to-1 and percentages of non-
interest expense to average assets of 1.76% and 1.75% for the fiscal quarters
ended March 31, 1994 and 1993, respectively. The same ratios for the respective
six-month periods ended on the same dates were 2.31 and 2.51-to-1 for net
interest income to non-interest expense and percentages of 1.75% and 1.70% for
non-interest expense to average assets.
Provision for Income Taxes
The Corporation incurred provisions for income taxes of $474,000 and $818,000
for the three- and six-month periods ended March 31, 1994, respectively. These
figures compare to provisions for income taxes of $564,000 and $952,000 for the
same respective periods ended March 31, 1993. The decreased level of provision
for income taxes varied between the comparative fiscal periods primarily due to
the tax effects of changes in the Corporation's operating results and the
resultant levels of taxable income generated. Income before income taxes for
the Corporation decreased by 17% and 16%, respectively, between the comparative
three- and six-month fiscal periods ended March 31, 1994 and 1993. The
provision for state income taxes assessed on the net earnings of the Savings
Bank is determined based on a current statutory rate of 11.5%. Additional state
tax liabilities are incurred by the Corporation as a separate entity in both
Delaware as the state of incorporation and Pennsylvania where business
operations are conducted.
77
REGULATION AND SUPERVISION
FCFC AND UNITED
FCFC and United are bank holding companies registered as such with the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended
(the "Bank Holding Company Act"). As bank holding companies, FCFC and United
are each required to file with the Federal Reserve Board an annual report and
other information. The Federal Reserve Board is also empowered to make
examinations and inspections of FCFC and United and their respective
subsidiaries.
The Bank Holding Company Act and Regulation Y of the Federal Reserve Board
require every bank holding company to obtain the prior approval of the Federal
Reserve Board before it may acquire direct or indirect ownership or control of
more than 5% of the outstanding voting shares or substantially all of the
assets of a bank or merge or consolidate with another bank holding company. The
Federal Reserve Board may not approve acquisitions by FCFC or United of such
percentage of voting shares or substantially all the assets of any bank located
in any state other than Pennsylvania unless the laws of such state specifically
authorize such an acquisition.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in a nonbanking business or acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any nonbanking
corporation, subject to certain exceptions, the principal one of which
exceptions is applicable where the business activity in question is determined
by the Federal Reserve Board to be so closely related to banking or to managing
or controlling banks as to be a proper incident thereto. The Bank Holding
Company Act does not place territorial restrictions on the activities of such
banking related subsidiaries of bank holding companies.
Under the Federal Reserve Act, subsidiary banks of a bank holding company are
subject to certain restrictions on extensions of credit to the bank holding
company or any of its subsidiaries, investments in the stock or other
securities thereof or acceptance of such stock or securities as collateral for
loans to any one borrower. A bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with the
extension of credit or the furnishing of property or services.
Under the Pennsylvania Banking Code, there is no limit on the number of
Pennsylvania banks that may be owned or controlled by a Pennsylvania bank
holding company such as FCFC and United.
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which provide for a standard designed principally as a measure of credit risk.
These guidelines require that: (1) at least 50% of a banking organization's
total capital ("Total Capital") be common and certain other "core" equity
capital ("Tier 1 Capital"); (2) assets and off-balance sheet items be weighted
according to risk; (3) the Total Capital to risk-weighted assets ratio be at
least 8%; and (4) the minimum leverage capital ratio, Tier 1 Capital to total
assets, be 3% for banking organizations that do not anticipate significant
growth and have well-diversified risk (including no undue interest rate risk
exposure), excellent asset quality, high liquidity and good earnings. The
minimum leverage capital ratio for other banking organizations is generally
expected to be 4-5%, depending on their particular condition and growth plans.
The table below presents FCFC's historical and pro forma capital position
relative to its minimum capital requirements:
HISTORICAL PRO FORMA(1)
AT MARCH 31, 1994 AT MARCH 31, 1994
------------------- -------------------
PERCENTAGE PERCENTAGE
AMOUNT OF ASSETS AMOUNT OF ASSETS
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Tier 1 Capital.......................... $170,426 15.96% $213,304 16.98%
Risk-Based Requirement.................. 42,723 4.00 50,242 4.00
Total Capital........................... 184,207 17.25 229,142 18.24
Risk-Based Requirement.................. 85,445 8.00 18,331 8.00
Leverage Capital........................ 170,426 8.77 213,304 9.50
Minimum Leverage Requirement............ 58,360 3.00 67,333 3.00
78
- --------
(1) Assuming that FCFC, United and Reliable had been combined as of March 31,
1994, and that pooling of interests accounting had been used to record the
business combinations. If FCFC and United only were combined, the pro forma
Tier I Capital ratio would be 15.40%, the pro forma Total Capital ratio
would be 16.66% and the pro forma Leverage ratio would be 8.74%.
Upon consummation of the Reliable Merger, FCFC will be not only a bank
holding company subject to regulation and supervision by the Federal Reserve
Board under the Bank Holding Company Act as described above, but also a savings
and loan holding company subject to regulation and supervision by the Office of
Thrift Supervision under the Savings and Loan Holding Company Act, as amended,
and by the Pennsylvania Department of Banking under the Pennsylvania Savings
Association Code of 1967, as amended. While this dual regulation and
supervision will increase FCFC's cost of compliance with federal and state
banking laws and regulations, it is not expected to have a significant adverse
effect on its operations or financial condition.
SUBSIDIARY BANKS AND UNITAS BANK
Unitas Bank and the Subsidiary Banks, other than Deposit, PBTC and Central
are subject to the supervision of and are regularly examined by the Comptroller
of the Currency. In addition, because such banks are members of the Federal
Reserve System, they are also subject to examination by that System. Deposit
and PBTC are Pennsylvania-chartered banks and are not members of the Federal
Reserve System. They are subject to the supervision of and regularly examined
by the Pennsylvania Department of Banking and the FDIC and are subject to
certain regulations of the Federal Reserve Board. Because Central is a
Pennsylvania-chartered bank and a member of the Federal Reserve System, it is
subject to the supervision of and is regularly examined by the Pennsylvania
Department of Banking and the Federal Reserve System. All the Subsidiary Banks
and Unitas Bank are members of the FDIC and, as such, are subject to
examination by the FDIC.
The areas of operation of the Subsidiary Banks and Unitas Bank which are
subject to regulation by federal and Pennsylvania laws, regulations and
regulatory agencies include reserves against deposits, maximum interest rates
for specific classes of loans, truth-in-lending and truth-in-savings
disclosure, permissible types of loans and investments, trust operations,
mergers and acquisitions, issuance of securities, payment of dividends,
Community Reinvestment Act evaluations, mandatory external audits,
establishment of branches and other aspects of operations. Under the
Pennsylvania Banking Code, a state or national bank located in Pennsylvania may
establish branches anywhere in the state. In addition, the Comptroller, the
FDIC and the Federal Reserve Board have issued to national banks, state
nonmember banks and state member banks, respectively, capital adequacy and
risk-based capital guidelines similar to those adopted by the Federal Reserve
Board for bank holding companies as described above. The Subsidiary Banks and
Unitas Bank are in compliance with all such guidelines.
RECIPROCAL INTERSTATE BANKING
As stated above, under the Bank Holding Company Act a bank holding company
located in one state cannot acquire a bank or a bank holding company located in
another state unless the law of such other state specifically permits such
acquisition. On June 25, 1986, Pennsylvania passed a law (Act No. 1986-69)
(referred to herein as the "Reciprocal Interstate Banking Law") which provides
that a bank holding company located in any state or the District of Columbia
can acquire a Pennsylvania bank or bank holding company if the jurisdiction
where the acquiring bank holding company is located has passed an enabling law
that permits a Pennsylvania bank holding company to acquire a bank or a bank
holding company in such jurisdiction. As of May 31, 1994 enabling laws have
been passed so that the required reciprocity presently exists with
approximately 34 states, of which the following 18 are east of the Mississippi
River: Connecticut, Delaware, Illinois, Indiana, Kentucky, Louisiana, Maine,
Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Rhode Island, Tennessee, Vermont and West Virginia.
It is difficult to determine the precise effects that reciprocal interstate
banking will have on FCFC, United and the Subsidiary Banks, but it is likely
that the number of potential buyers for Pennsylvania banks and
79
bank holding companies will increase. The Reciprocal Interstate Banking Law
also permits Pennsylvania bank holding companies that desire to expand outside
Pennsylvania to acquire banks and bank holding companies located in
jurisdictions with which Pennsylvania has reciprocity.
EFFECTS OF GOVERNMENTAL POLICIES
The business and earnings of FCFC and United are affected not only by general
economic conditions, but also by the monetary and fiscal policies of the United
States government and its agencies, including the Federal Reserve Board. An
important function of the Federal Reserve Board is to regulate the national
supply of bank credit. Among the instruments of monetary policy used by the
Federal Reserve Board to implement these objectives are open market operations
in United States government securities, changes in the discount rate on
borrowings by banks and savings institutions from the Federal Reserve System
and changes in reserve requirements on bank and savings institution deposits.
These instruments, together with fiscal and economic policies of various
governmental entities, influence overall growth of bank loans, investments and
deposits and may also affect interest rates charged on loans, received on
investments or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of bank holding companies and their subsidiary
banks in the past and are expected to continue to do so in the future. In view
of changing conditions in the national and Pennsylvania economies and in the
money markets, as well as the effect of actions by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels and loan demand or
the effect of such changes on the business and earnings of FCFC, United or the
Subsidiary Banks.
COMPARISON OF FCFC COMMON STOCK AND UNITED COMMON STOCK
GENERAL
Both FCFC and United are Pennsylvania bank holding companies governed by and
subject to the Pennsylvania Business Corporation Law of 1988 ("BCL"). If the
proposed Merger is consummated, United shareholders who do not exercise their
dissenters' rights will become FCFC shareholders and, as such, their rights as
shareholders will continue to be governed by the BCL. Described below are
differences between the rights of United shareholders and the rights of FCFC
shareholders which arise from differences between the Articles of Incorporation
and By-Laws of United and the Articles of Incorporation and By-Laws of FCFC.
VOTING RIGHTS
General. Holders of United Common Stock and holders of FCFC Common Stock are
each entitled to one vote for each share held on all matters submitted to a
shareholder vote. Except where a greater vote is required by law or by the
Articles of Incorporation or By-Laws (see "Voting Rights--Mergers,
Consolidations, Etc." and "Voting Rights--Amendment of Articles and By-Laws"
below), any matter submitted to a vote of the shareholders at a duly organized
meeting of the shareholders may be passed, in the case of FCFC, by the
affirmative vote of a majority of the votes cast by all shareholders entitled
to vote thereon and, in the case of United, by the affirmative vote of a
majority of the votes which all shareholders present are entitled to cast at
the meeting.
Election of Directors. Holders of United Common Stock and holders of FCFC
Common Stock are not entitled to exercise cumulative voting rights in the
election of directors. The absence of cumulative voting means that a nominee
for director must receive the votes of a majority of the shares voted in order
to be elected.
As permitted by the BCL, the By-Laws of FCFC and United provide that their
respective Boards of Directors shall be divided into three classes, with one
class to be elected at each annual meeting of shareholders and each class to
serve for a term of three years. The By-Laws of FCFC and United provide that
vacancies on their respective Boards of Directors, including vacancies
resulting from an increase in the
80
number of directors, shall be filled by a majority vote of the remaining
members of the Board, even if less than a quorum, and that each person so
appointed will be a director until the expiration of the term of office of the
class of directors to which he was appointed, in the case of FCFC, and until
the shareholders elect a successor, in the case of United.
Mergers, Consolidations, Etc. The Articles of Incorporation of FCFC provide
that no merger, consolidation or liquidation or dissolution of FCFC nor any
action that would result in the sale or other disposition of all or
substantially all of the assets of FCFC shall be valid unless first approved by
the affirmative vote of the holders of at least 75% of the outstanding shares
of United Common Stock; provided, however, that in a merger or consolidation,
no vote of the shareholders is required if the number of outstanding shares of
FCFC Common Stock is increased by less than 100% as a result of the merger or
consolidation. The supermajority voting requirement contained in the FCFC
Articles of Incorporation may result in a transaction favored by the holders of
a majority of the shares in effect being vetoed by a minority.
The Articles of Incorporation of United provide that certain business
combinations (including mergers, sales of assets, and sales or issuances of
securities) with any Interested Stockholder or Affiliate thereof (both as
defined below), plans of liquidation or dissolution proposed by any Interested
Stockholder or Affiliate thereof, and any recapitalization or securities
reclassification which would increase the proportionate interest in United of
any Interested Stockholder or Affiliate thereof, must be approved by the
affirmative vote of the holders of at least two-thirds of the voting power of
the then outstanding shares of United Common Stock. The term "Interested
Stockholder" is defined as any (i) beneficial owner, directly or indirectly, of
more than 15% of the voting power of the United Common Stock, (ii) any entity
controlling, controlled by, or under common control with, United who was a
beneficial owner of 5% or more of the voting power of the United Common Stock
within the last two years or (iii) the assignee or other successor to the
beneficial ownership of such shares owned within the last two years by any
person described in (i) or (ii) above, provided that such assignment or
succession was not the result of a public offering within the meaning of the
Securities Act of 1933. FCFC is not an Affiliate of United; therefore, this
"supermajority" approval requirement will not be triggered by the consummation
of the Merger.
Amendment of Articles and By-Laws. Except with respect to mergers and similar
transactions as described above, the Articles of Incorporation of FCFC may
generally be amended by a resolution of a majority of the Board of Directors
which is adopted by the affirmative vote of a majority of the votes cast by all
shareholders of FCFC entitled to vote thereon. However, approval of a
resolution or petition amending the provision of FCFC's Articles of
Incorporation pertaining to approval of mergers or similar transactions would
require the affirmative vote of the holders of at least 75% of the outstanding
shares of FCFC Common Stock. The Articles of Incorporation of United may
generally be amended by a resolution of a majority of the Board of Directors
which is adopted by the affirmative vote of the shareholders entitled to cast
at least a majority of the votes which all shareholders of United are entitled
to cast thereon. However, approval of a resolution or petition amending the
provisions of United's Articles of Incorporation pertaining to (i) the lack of
cumulative voting in elections for members of the Board of Directors, (ii)
certain business combinations, (iii) directors' business judgment or (iv) the
amendment of the Articles or By-Laws, would require the affirmative vote of the
holders of at least two-thirds of the outstanding shares of United Common
Stock.
The By-Laws of United may be amended by the affirmative vote of the holders
of two-thirds of the outstanding United Common Stock. The By-Laws of United may
also be amended by a majority vote of the Board of Directors, subject to the
power of the United shareholders to change such action by the affirmative vote
of the holders of two-thirds of the outstanding United Common Stock. In
contrast, an amendment of the By-Laws of FCFC by the shareholders requires the
affirmative vote of the holders of at least 80% of the outstanding shares of
FCFC Common Stock. The By-Laws of FCFC may also be amended by a majority vote
of the FCFC Board of Directors, subject to the power of the FCFC shareholders
to change such action by the affirmative vote of the holders of 80% of the
outstanding FCFC Common Stock.
81
QUALIFICATIONS FOR DIRECTORS.
The By-Laws of FCFC require that directors who have never served as such
before December 31, 1988 and who are elected after such date must maintain
direct, indirect or beneficial ownership of at least 2,500 shares of FCFC
Common Stock. In addition, directors of FCFC elected after December 31, 1988
who have never served as directors before such date are not eligible for
reelection when age 72 or over. The By-Laws of United require directors to
retire upon reaching age 66.
"ANTI-TAKEOVER" PROVISIONS
The Articles of Incorporation and By-Laws of FCFC contain a number of
provisions that may be considered to be "anti-takeover" in nature. Among these
are those relating to the previously described three-year staggered terms of
office for directors, the absence of cumulative voting and the 75% shareholder
vote requirement for mergers and similar transactions and the 80% shareholder
vote requirement for amendments to the By-Laws not approved by the Board of
Directors. Another such provision is the authorization contained in FCFC's
Articles of Incorporation for the Board of Directors to oppose a tender offer
or other offer for securities of FCFC on the basis of factors other than
economic benefit to the shareholders, including the impact of an acquisition of
FCFC on the employees, depositors and customers of FCFC and its subsidiaries as
well as the communities which FCFC and its subsidiaries serve and the
reputation and business practices of the offeror. The FCFC Board of Directors
is also authorized to issue preferred stock, with or without voting rights and
convertible or not convertible into FCFC Common Stock, which could potentially
be used to discourage attempts by others to obtain control of FCFC through
merger, tender offer, proxy or consent solicitation or otherwise by making such
attempts more difficult to achieve or more costly. The Articles of
Incorporation and By-Laws of United contain certain similar provisions with
respect to staggered terms of office for the directors, supermajority approval
of certain business combinations, and authorization of the United Board of
Directors to oppose a tender offer or other offer for United's securities on
the basis of factors other than economic benefit to the shareholders.
The classification of the Board of Directors of FCFC helps to assure
continuity and stability of corporate leadership and policy, while the absence
of cumulative voting, by making it more difficult for a minority to gain
representation on the Board of Directors, helps to assure that directors will
represent and act in the best interests of all shareholders and not any special
group. The 75% shareholder vote requirement prevents the entry by FCFC into
certain types of extraordinary corporate transactions in the absence of a clear
mandate from its shareholders. The authorization to consider the interests of
employees, depositors, customers and the communities served by FCFC and its
subsidiaries in evaluating an offer for FCFC's securities is a recognition of
the responsibilities of FCFC's Board of Directors to these constituent groups.
However, the overall effect of these provisions might be to discourage the
making of, or to enable management to defeat, a future tender offer for FCFC
Common Stock, which offer might include a substantial premium over the market
price of FCFC Common Stock at that time or which the majority of FCFC's
shareholders might for other reasons consider to be in their best interests. In
addition, not only might these provisions assist the incumbent management of
FCFC in retaining their positions in the face of an outside attempt to gain
control of FCFC, but such provisions might also place incumbent management in a
better position to resist changes that FCFC's shareholders may wish to make if
dissatisfied with incumbent management's conduct of FCFC's business.
The management of FCFC is not aware of any specific effort to accumulate
securities of FCFC or United or to obtain control of FCFC by means of a tender
offer or otherwise. However, the provisions of the Articles of Incorporation
and By-Laws of FCFC discussed above were adopted in light of the Reciprocal
Interstate Banking Law, which might make such an attempt more likely. See
"Regulation and Supervision." The management of FCFC has no present intention
to propose the adoption of other "anti-takeover" provisions in future proxy
solicitations. The BCL also contains "anti-takeover" provisions applicable to
FCFC which make a takeover of a Pennsylvania corporation more difficult in
certain circumstances.
82
DISSENTERS' RIGHTS
Subject to certain exceptions, the BCL provides for dissenters' rights in a
variety of transactions, including certain mergers or consolidations to which a
Pennsylvania business corporation is a party and certain share exchanges
involving a Pennsylvania business corporation. However, dissenters' rights are
not available to shareholders of a Pennsylvania business corporation if their
stock is either listed on a national securities exchange or held of record by
2,000 or more shareholders, except in cases involving (i) shares converted by a
plan under which a shareholder's shares would be converted into something other
than shares of the acquiring, surviving, new or other corporation (or such
shares and money in lieu of fractional shares), (ii) shares of any preferred or
special class unless the plan or the terms of the transaction provide that all
shareholders of such class are entitled to vote thereon and require the
affirmative vote of a majority of the votes cast by all shareholders of such
class to adopt the plan or effect the transaction or (iii) shares entitled to
dissenters' rights in the case of special treatment of shareholders under
Section 1906(c) of the BCL.
Because United has less than 2,000 shareholders, holders of United Common
Stock are entitled to exercise dissenters' rights in connection with the
proposed merger or in the other situations described above. See "Plan of
Reorganization--Dissenters' Rights of United Shareholders." FCFC Common Stock
is listed on the New York Stock Exchange, which is a national securities
exchange. Therefore, FCFC shareholders following the Merger, including former
United shareholders who receive FCFC Common Stock pursuant to the Plan of
Reorganization, will not be entitled to exercise dissenters' rights in future
transactions to which FCFC is a party, except as stated above.
DIVIDEND REINVESTMENT PLAN
FCFC currently maintains a dividend reinvestment plan in order to provide its
shareholders with a simple and convenient method of investing cash dividends
and voluntary contributions of up to $10,000 per quarter in additional shares
of FCFC Common Stock. The price per share is equal to 95% of the then current
fair market value of FCFC Common Stock. The dividend reinvestment plan relates
only to dividends paid on (and further investment in) FCFC Common Stock.
Following the sale of any dividend reinvestment plan shares by an FCFC
shareholder, such shareholder is not eligible to purchase additional shares
pursuant to the plan for a period of six months. United has a Dividend
Reinvestment and Stock Purchase Plan that permits a United shareholder to
invest cash dividends and voluntary contributions of up to $5,000 per quarter
in additional shares of United Common Stock. The purchase price per share is
not discounted as in the FCFC plan. United shareholders who are participating
in the United Dividend Reinvestment and Stock Purchase Plan on the Effective
Date of the Merger and who receive shares of FCFC Common Stock in exchange for
their shares of United Common Stock will automatically become participants in
the FCFC dividend reinvestment plan on the Effective Date of the Merger.
MISCELLANEOUS
There are no sinking fund provisions, conversion rights or redemption
provisions applicable to United Common Stock or FCFC Common Stock, and holders
of fully paid shares of United Common Stock or FCFC Common Stock are under no
liability for further calls or assessments. Holders of United Common Stock and
FCFC Common Stock are entitled to dividends when, as and if declared by their
respective Boards of Directors out of funds legally available therefor. Neither
the holders of United Common Stock nor the holders of FCFC Common Stock have
preemptive rights to subscribe for additional shares of United Common Stock or
FCFC Common Stock, as the case may be, which may be issued from time to time.
On liquidation, dissolution or winding up, whether voluntary or involuntary,
the holders of United Common Stock and FCFC Common Stock are entitled to share
ratably in the assets of United or FCFC, as the case may be, after all
liabilities of such corporation have been satisfied.
FCFC PREFERRED STOCK
FCFC's authorized capital includes a class of 3,000,000 shares of preferred
stock, par value $1 per share ("FCFC Preferred Stock"). As yet, no shares of
FCFC Preferred Stock have been issued. Such FCFC
83
Preferred Stock may be issued in one or more series by resolution of the Board
of Directors from time to time without further authorization by shareholders.
Each series will have such dividend rate and date from which dividends
accumulate, and such general voting, dividend, redemption, liquidation,
conversion and sinking fund rights, if any, as the Board of Directors of FCFC
may determine. All shares of any one series of FCFC Preferred Stock will have
identical rights.
Each series of FCFC Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors of FCFC, and before any dividends (other
than dividends payable in stock of junior shares) are paid on any series or
class ranking junior to the shares of such series, dividends at the rate fixed
by the FCFC Board of Directors for such series. Under Pennsylvania law, no
dividend may be paid on FCFC Common Stock which would reduce the remaining net
assets of FCFC below the amount to which holders of any series of FCFC
Preferred Stock, if issued, would be entitled in a voluntary liquidation.
RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS
FCFC
The independent auditors for FCFC and its subsidiaries are selected annually
by the FCFC Board of Directors. The independent auditors to audit the financial
statements of FCFC for 1994 has not yet been appointed. Jarrett * Stokes & Co.
has served as the independent auditor for FCFC or NBOC for each year since
1978. Representatives of Jarrett * Stokes & Co. are expected to be present at
the Special Meeting.
UNITED
At present, the financial statements of United are audited annually by Ernst
& Young, independent certified public accountants. It is anticipated that if
the Merger is consummated, the financial statements of United will, in the
future, be audited by FCFC's independent auditors.
Representatives of Ernst & Young, are expected to be present at the Special
Meeting and to be available to respond to appropriate questions.
LEGAL OPINIONS
The validity of the shares of FCFC Common Stock to be issued in the Merger
will be passed upon for FCFC by Tomb and Tomb, Attorneys-at-Law, Indiana,
Pennsylvania. David R. Tomb, Jr., a partner of the firm of Tomb and Tomb, is
Vice President, Secretary and Treasurer and a Director of FCFC. Information
concerning the beneficial ownership of FCFC Common Stock by Mr. Tomb is set
forth under "Management of FCFC--Board of Directors." During 1993, Tomb and
Tomb performed legal services for FCFC and its subsidiaries and the fees paid
for such services in 1993 were $65,000. Reed Smith Shaw & McClay, special
counsel to FCFC and United in connection with the proposed Merger, will be
rendering an opinion with respect to certain tax matters in connection with the
proposed Merger. See "Plan of Reorganization--Conditions to the Merger."
EXPERTS
The audited consolidated financial statements of FCFC appearing on pages F-2
through F-14 of this Proxy Statement/ Prospectus have been examined by Jarrett
* Stokes & Co., independent certified public accountants, whose report thereon
is included herein on page F-3. Such financial statements have been included
herein in reliance upon such report, given upon the authority of such firm as
experts in auditing and accounting.
The consolidated financial statements of United at December 31, 1993 and
1992, and for each of the three years ended December 31, 1993 appearing on
pages F-22 through F-34 of this Proxy Statement/Prospectus have been audited by
Ernst & Young, independent auditors, as set forth in their report appearing on
page F-22, and are included herein in reliance upon such report, given upon the
authority of such firm as experts in accounting and auditing.
84
The audited financial statements of Reliable appearing on pages F-41 through
F-58 of this Proxy Statement/Prospectus have been examined by Edwards Leap &
Sauer, independent certified public accountants, whose report thereon is
included herein on page F-41. Such financial statements have been included
herein in reliance upon such report, given upon the authority of such firm as
experts in auditing and accounting.
SHAREHOLDER PROPOSALS
Proposals of FCFC shareholders intended to be presented at FCFC's 1995 Annual
Meeting of Shareholders must be received by the Secretary of FCFC not later
than November 29, 1994 in order to be considered for inclusion in FCFC's proxy
statement for such meeting.
If the Plan of Reorganization is approved and the Merger becomes effective
before the date for United's 1995 Annual Meeting, United will have been merged
into FCFC, and no 1995 Annual Meeting of Shareholders of United will be held.
In that event, holders of FCFC Common Stock issued in the Merger will be
entitled to vote at FCFC's 1995 Annual Meeting of Shareholders.
85
INDEX TO FINANCIAL STATEMENTS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES:
Audited Financial Statements:
Auditor's Report......................................................... F-2
Balance Sheets........................................................... F-3
Statements of Income..................................................... F-4
Statements of Cash Flows................................................. F-5
Statements of Changes in Shareholders' Equity............................ F-6
Notes to Financial Statements............................................ F-7
Unaudited Interim Financial Statements:
Balance Sheets........................................................... F-15
Statements of Income..................................................... F-16
Statements of Changes in Shareholders' Equity............................ F-17
Statements of Cash Flows................................................. F-18
Notes to Financial Statements............................................ F-19
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES:
Audited Financial Statements:
Report of Independent Auditors........................................... F-22
Balance Sheet............................................................ F-23
Statement of Income...................................................... F-24
Statement of Changes in Shareholders' Equity............................. F-25
Statement of Cash Flows.................................................. F-26
Notes to Financial Statements............................................ F-27
Unaudited Interim Financial Statements:
Balance Sheet............................................................ F-35
Statement of Income...................................................... F-36
Statement of Changes in Shareholders' Equity............................. F-37
Statement of Cash Flows.................................................. F-38
Notes to Financial Statements............................................ F-39
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY:
Audited Financial Statements:
Independent Auditors' Report............................................. F-41
Balance Sheets........................................................... F-42
Statements of Income..................................................... F-43
Statements of Changes in Stockholders' Equity............................ F-44
Statements of Cash Flows................................................. F-45
Notes to Financial Statements............................................ F-46
Unaudited Interim Financial Statements:
Balance Sheets........................................................... F-59
Statements of Income..................................................... F-60
Statements of Changes in Shareholders' Equity............................ F-61
Statements of Cash Flows................................................. F-62
Notes to Financial Statements............................................ F-63
F-1
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
AUDITOR'S REPORT
Report of Jarrett . Stokes & Co.
Independent Certified Public Accountants
Board of Directors and Shareholders of
First Commonwealth Financial Corporation
Indiana, Pennsylvania
We have audited the accompanying consolidated balance sheets of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1993
and 1992, and the results of their operations and cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, the
Corporation changed its method of accounting for income taxes and investments.
JARRETT . STOKES & CO.
Indiana, Pennsylvania
March 2, 1994
- --------------------------------------------------------------------------------
F-2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
December 31,
------------------------------
1993 1992
------------------------------
Assets
Cash and due from banks on demand $ 51,044 $ 63,337
Interest-bearing deposits with banks 2,569 18,196
Federal funds sold -0- 30,555
Securities available for sale 465,224 -0-
Investment securities, market value
$383,943 in 1993 and $674,066 in 1992 381,811 664,046
Loans 1,037,675 994,768
Unearned income (31,499) (30,241)
Reserve for possible loan losses (14,544) (14,267)
------------------------------
Net loans 991,632 950,260
------------------------------
Property and equipment 21,911 21,107
Other real estate owned 4,929 4,044
Other assets 36,149 36,003
------------------------------
Total assets $1,955,269 $1,787,548
==============================
Liabilities
Deposits (All Domestic):
Noninterest-bearing $ 167,306 $ 167,486
Interest-bearing 1,408,318 1,377,337
------------------------------
Total deposits 1,575,624 1,544,823
------------------------------
Short-term borrowings 171,497 52,676
Other liabilities 14,332 11,516
Long-term debt 7,363 8,130
------------------------------
Total liabilities 1,768,816 1,617,145
------------------------------
Shareholders' Equity
Preferred stock, $1 par value per share, 3,000,000
shares authorized and unissued -0- -0-
Common stock, $5 par value per share, 25,000,000
shares authorized, 9,321,012 issued and outstanding 46,605 46,605
Additional paid-in capital 35,296 35,455
Retained earnings 107,417 93,256
Unrealized gain on securities available for sale 1,584 -0-
------------------------------
190,902 175,316
Deferred compensation (4,449) (4,913)
------------------------------
Total shareholders' equity 186,453 170,403
------------------------------
Total liabilities and shareholders' equity $1,955,269 $1,787,548
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-3
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31,
-------------------------------------------
1993 1992 1991
-------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 86,121 $ 84,612 $ 81,357
Interest and dividends on investments:
Taxable interest 41,323 39,922 34,494
Interest exempt from Federal income taxes 2,955 4,118 4,184
Dividends 628 271 166
Interest on Federal funds sold 208 650 1,610
Interest on bank deposits 483 1,844 3,990
-------------------------------------------
Total interest income 131,718 131,417 125,801
-------------------------------------------
INTEREST EXPENSE
Interest on deposits 54,041 59,906 65,484
Interest on short-term borrowings 3,496 1,723 1,569
Interest on long-term debt 456 454 456
-------------------------------------------
Total interest expense 57,993 62,083 67,509
-------------------------------------------
NET INTEREST INCOME 73,725 69,334 58,292
Provision for possible loan losses 2,197 3,219 4,946
-------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 71,528 66,115 53,346
-------------------------------------------
OTHER INCOME
Net securities gains 2,333 679 677
Trust income 2,194 1,967 1,303
Service charges on deposit accounts 4,720 4,400 3,397
Other income 2,878 2,328 2,152
-------------------------------------------
Total other income 12,125 9,374 7,529
-------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 25,397 22,968 20,154
Net occupancy expense 3,595 3,235 2,796
Furniture and equipment expense 3,710 3,246 2,762
FDIC expense 3,521 3,222 2,474
Settlement of lender liability claim -0- 1,400 -0-
Other operating expenses 15,021 13,754 11,680
-------------------------------------------
Total other expenses 51,244 47,825 39,866
-------------------------------------------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 32,409 27,664 21,009
Applicable income taxes 9,719 7,076 5,025
-------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 22,690 20,588 15,984
Cumulative effect of change in accounting method 500 -0- -0-
-------------------------------------------
NET INCOME $ 23,190 $ 20,588 $ 15,984
===========================================
Average Shares Outstanding 18,642,024 18,107,266 17,024,494
PER SHARE DATA:
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD $ 1.22 $ 1.14 $ 0.94
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD $ 0.02 $ 0.00 $ 0.00
NET INCOME $ 1.24 $ 1.14 $ 0.94
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-4
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
Operating Activities
Net income $ 23,190 $ 20,588 $ 15,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 2,197 3,219 4,946
Depreciation and amortization 4,701 3,547 2,954
Net gains on sales of assets (2,617) (273) (904)
Changes net of acquisition:
Decrease (increase) in interest receivable 145 2,712 (209)
Increase in interest payable (896) (2,336) (3)
Increase (decrease) in income taxes payable 308 (567) 354
Provision for deferred taxes (1,189) (406) (478)
Other - net (719) (2,363) (663)
---------------------------------------
Net cash provided by operating activities 25,120 24,121 21,981
---------------------------------------
Investing Activities
Proceeds from investment securities transactions:
Sales 95,658 16,840 65,362
Maturities and redemptions 329,606 170,301 119,994
Proceeds from sales of loans and other assets 14,661 17,866 245
Acquisition of affiliate -0- (3,950) -0-
Changes net of acquisition:
Net decrease in time deposits with banks 15,627 39,945 3,583
Purchases of investment securities (603,637) (263,036) (301,778)
Net increase in loans (57,044) (22,614) (42,239)
Purchases of premises and equipment (3,425) (3,728) (1,936)
---------------------------------------
Net cash used by investing activities (208,554) (48,376) (156,769)
---------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 202 2,500 -0-
Repayments of long-term debt (505) (179) -0-
Tax benefit of ESOP dividend 84 119 97
Discount on dividend reinvestment plan purchases (159) (124) (80)
Dividends paid (8,571) (6,860) (5,899)
Dividends paid by subsidiary prior to merger (169) (285) (263)
Changes net of acquisition:
Net increase in deposits 30,883 65,441 130,020
Net increase (decrease) in Federal funds purchased 45,955 (10,550) 3,150
Net increase (decrease) in other short-term borrowings 72,866 15,482 (11,112)
---------------------------------------
Net cash provided by financing activities 140,586 65,544 115,913
---------------------------------------
Net increase (decrease) in cash and cash equivalents (42,848) 41,289 (18,875)
Cash and cash equivalents acquired with acquisition -0- 6,300 -0-
Cash and cash equivalents at January 1 93,892 46,303 65,178
---------------------------------------
Cash and cash equivalents at December 31 $ 51,044 $ 93,892 $ 46,303
=======================================
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar Amounts in Thousands)
Unrealized
Gain (Loss)
Additional on Securities Total
Common Paid-in Retained Available Deferred Shareholders'
Stock Capital Earnings For Sale Compensation Equity
-------------------------------------------------------------------------------------
Balance at December 31, 1990 $ 42,561 $ 22,719 $ 71,918 $ (1,615) $ (4,821) $ 130,762
Net income -0- -0- 15,984 -0- -0- 15,984
Cash dividends declared -0- -0- (5,899) -0- -0- (5,899)
Cash dividends declared by
subsidiary prior to merger -0- -0- (263) -0- -0- (263)
Decrease in unrealized loss on
marketable equity securities -0- -0- -0- 1,197 -0- 1,197
Tax benefit on ESOP dividends -0- -0- 97 -0- -0- 97
Increase in deferred compensation -0- -0- -0- -0- (806) (806)
Discount on dividend reinvestment
plan purchases -0- (80) -0- -0- -0- (80)
---------------------------------------------------------------------------------------
Balance at December 31, 1991 42,561 22,639 81,837 (418) (5,627) 140,992
Net income -0- -0- 20,588 -0- -0- 20,588
Cash dividends declared -0- -0- (9,003) -0- -0- (9,003)
Cash dividends declared by
subsidiary prior to merger -0- -0- (285) -0- -0- (285)
Decrease in unrealized loss on
marketable equity securities -0- -0- -0- 418 -0- 418
Tax benefit on ESOP dividends -0- -0- 119 -0- -0- 119
Decrease in deferred compensation -0- -0- -0- -0- 714 714
Discount on dividend reinvestment
plan purchases -0- (124) -0- -0- -0- (124)
Acquisition of subsidiary 4,044 12,940 -0- -0- -0- 16,984
-------------------------------------------------------------------------------------
Balance at December 31, 1992 46,605 35,455 93,256 -0- (4,913) 170,403
Net income -0- -0- 23,190 -0- -0- 23,190
Cash dividends declared -0- -0- (8,944) -0- -0- (8,944)
Cash dividends declared by
subsidiary prior to merger -0- -0- (169) -0- -0- (169)
Increase in unrealized gain on
securities available for sale, net
of tax effect -0- -0- -0- 1,584 -0- 1,584
Tax benefit on ESOP dividends -0- -0- 84 -0- -0- 84
Decrease in deferred compensation -0- -0- -0- -0- 464 464
Discount on dividend reinvestment
plan purchases -0- (159) -0- -0- -0- (159)
-------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 46,605 $ 35,296 $107,417 $ 1,584 $ (4,449) $ 186,453
=====================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE 1--Statement of Accounting Policies
General
The following summary of accounting and reporting policies is presented to aid
the reader in obtaining a better understanding of the financial statements and
related financial data of First Commonwealth Financial Corporation (the
"Corporation") and its subsidiaries contained in this report. Such policies
conform to generally accepted accounting principles and to general practice
within the banking industry.
The Corporation and its subsidiaries are on the accrual basis of accounting
except for certain trust related revenues which are recorded on a cash basis.
Recording income from such activities on a cash basis does not materially affect
net income.
Certain items of the consolidated statements for the years ended December 31,
1992 and 1991 have been reclassified to conform with the December 31, 1993
presentation.
- --------------------------------------------------------------------------------
F-6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Statement of Accounting Policies (Continued)
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation.
Investments of 20 to 50 percent of the outstanding common stock of investees are
accounted for using the equity method of accounting.
Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS No. 115"), Accounting for Certain
Investments in Debt and Equity Securities. This statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are to be classified in three categories and accounted for as
follows: (a) securities held-to-maturity, (b) trading securities and (c)
securities available-for-sale.
Debt securities that the Corporation has the positive intent and ability to hold
to maturity are classified as securities held-to-maturity and are reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as either held-to-
maturity securities or trading securities are classified as securities
available-for-sale and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity.
The Corporation adopted FAS No. 115 effective December 31, 1993 and classified
securities as either held-to-maturity or available-for-sale. The Corporation
does not engage in trading activities (see NOTES 4 and 5).
Prior to the implementation of FAS No. 115, investment securities consisted of
debt and equity securities. Debt securities were stated at cost adjusted for
amortization of premium and accretion of discount. These securities were
principally purchased with the intent of holding them until maturity.
Marketable equity securities were carried at the lower of aggregate cost or
market value. Net gain or loss on the sale of investment securities was
determined by using the specific identification method.
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans is taken into income on a declining basis which results in an
approximately level rate of return over the life of the loan. Interest is
accrued as earned on nondiscounted loans. When a loan becomes past due and
doubt exists as to the ultimate collection of principal and interest, the
accrual of income is discontinued and is only recognized at the time payment is
received.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related loan
yield on the interest method, generally over the contractual life of the related
loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
market at the time of acquisition. Expenses related to holding the property,
net of rental income, are generally charged against earnings in the current
period. Other real estate also includes properties that have in substance been
foreclosed. In-substance foreclosed properties are those properties where the
borrower has little or no remaining equity in the property considering its fair
market value; where repayment can only be expected to come from the operation or
sale of the property; and where the borrower has effectively abandoned control
of the property or it is doubtful that the borrower will be able to rebuild
equity in the property. In-substance foreclosed properties included in other
real estate owned were $111 and $1,514 at December 31, 1993 and 1992,
respectively.
Reserve for Possible Loan Losses
The reserve for possible loan losses represents management's estimate of an
amount adequate to provide for losses which may be incurred on loans currently
held. Management determines the adequacy of the reserve based on historical
patterns of loan charge-offs and recoveries, the relationship of the reserve to
outstanding loans, industry experience, current economic trends and other
factors relevant to the collectibility of loans currently in the portfolio.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line and accelerated
methods over the estimated useful life of the asset. Charges for maintenance
and repairs are expensed as incurred. Where a lease is involved, amortization
is charged over the term of the lease or the estimated useful life of the
improvement, whichever is shorter.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 ("FAS No. 109"), Accounting for Income
Taxes (see NOTE 14). Under the asset and liability method utilized by FAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases given the provisions of the enacted tax laws. Deferred tax assets are
reduced, if necessary, by the amount of such benefits that are not expected to
be realized based upon available evidence.
Effective January 1, 1993, the Corporation adopted FAS No. 109 and has reported
the cumulative effect of that change in method of accounting for income taxes in
the 1993 consolidated statement of income.
Cash Flow Statement
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and Federal funds sold. Generally, Federal funds
are sold for one-day periods.
- --------------------------------------------------------------------------------
F-7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1--Statement of Accounting Policies (Continued)
Supplemental Disclosures
Cash paid during the year for:
1993 1992 1991
------- ------- -------
Interest $59,119 $64,546 $67,518
Income taxes $ 9,245 $ 8,175 $ 5,187
Noncash Investing and Financing Activities
The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently loaned
these amounts to the First Commonwealth Financial Corporation Employee Stock
Ownership Plan Trust ("ESOP") on identical terms. The loan has been recorded as
long-term debt on the Corporation's books and the offset was recorded as a
reduction in common shareholders' equity. Loan payments in the amount of $714
were made by the ESOP in each of the three years ending in 1993, thereby
reducing the outstanding amount related to deferred compensation to $4,449 at
December 31, 1993.
Earnings Per Common Share
Earnings per share have been calculated on the weighted average number of common
shares outstanding during each year, restated to reflect pooling of interests.
Additionally, average number of shares has been restated to reflect the two-for-
one stock split effected in the form of a 100% stock dividend declared on
January 18, 1994 (see NOTE 22).
Fair Values of Financial Instruments
The financial statements include various estimated fair values at December 31,
1993, as required by Statement of Financial Accounting Standards No. 107 ("FAS
No. 107"). Such information, which pertains to the Corporation's financial
instruments, is based on the requirements set forth in FAS No. 107 and does
not purport to represent the aggregate net fair value of the Corporation. It
is the Corporation's general practice and intent to hold its financial
instruments to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading activities. Many
of the financial instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Corporation had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and the methodologies in absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
The following methods and assumptions were used by the Corporation in estimating
financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying amounts for cash
and short-term instruments approximate the estimated fair values of such assets.
Securities: Fair values for investment securities and securities available for
sale are based on quoted market prices, if available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable
instruments. The carrying value of nonmarketable equity securities, such as
Federal Reserve Bank stock and Federal Home Loan Bank stock, is considered a
reasonable estimate of fair value.
Loans receivable: Fair values of variable rate loans subject to frequent
repricing and which entail no significant credit risk are based on the carrying
values. The estimated fair values of other loans are estimated by discounting
the future cash flows using interest rates currently offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest is considered a reasonable estimate of fair value.
Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore the commitment amounts do
not necessarily represent future cash requirements. Management has determined
that due to the uncertainties of cash flows and difficulty in predicting the
timing of such cash flows, fair values were not estimated for these instruments.
Deposit liabilities: For deposits which are payable on demand at the reporting
date, representing all deposits other than time deposits, management estimates
that the carrying value of such deposits is a reasonable estimate of fair value.
The carrying amounts of variable rate time deposit accounts and certificates of
deposit approximate their fair values at the report date. Fair values of fixed
rate time deposits are estimated by discounting the future cash flows using
interest rates currently being offered and a schedule of aggregated expected
maturities. The carrying amount of accrued interest approximates its fair
value.
Short-term borrowings: The carrying amounts of short-term borrowings such as
Federal funds purchased, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate their
fair values at the report date. Fair values of fixed rate debt are estimated by
discounting the future cash flows using the Corporation's estimated incremental
borrowing rate for similar types of borrowing arrangements.
NOTE 2--Business Combination
Effective December 31, 1993 the Corporation acquired all of the outstanding
common shares of Peoples Bank of Western Pennsylvania, a state-chartered bank
headquartered in New Castle, Pennsylvania. Each of the 375,000 outstanding
shares of common stock were exchanged for two shares of the Corporation's common
stock. The merger was accounted for as a pooling of interests, and accordingly,
all financial statements were restated as though the merger had occurred at the
beginning of the earliest period presented.
Effective April 30, 1992, the Corporation acquired all of the outstanding common
shares of Central Bank ("Central"), a state-chartered bank headquartered in
Hollidaysburg, Pennsylvania, for 808,765 shares of the Corporation's common
stock and $3,950 in cash. The acquisition was accounted for as a purchase
transaction, whereby the identifiable tangible and intangible assets and
liabilities of Central have been recorded at their fair values at the
acquisition date. Goodwill of $4,858 and core deposit
- --------------------------------------------------------------------------------
F-8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 2--Business Combination (continued)
intangibles of $2,873 acquired in the transaction are being amortized on a
straight-line basis over respective periods of fifteen and ten years. Under
the purchase method of accounting, the results of operations of Central from
the date of acquisition were included in the financial statements.
NOTE 3--Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with transaction
accounts (checking accounts, NOW accounts, etc.). Reserves are maintained in
the form of vault cash or a noninterest-bearing balance held with the Federal
Reserve Bank. The subsidiary banks maintained with the Federal Reserve Bank
average balances of $3,355 during 1993 and $3,971 during 1992.
NOTE 4--Investment Securities
Below is an analysis of the book values and approximate fair values of debt
securities at December 31:
1993 1992
-------------------------------------------------------------------------------------------------
Gross Gross Approximate Gross Gross Approximate
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ -0- $ -0- $ -0- $ -0- $ 62,958 $ 1,562 $ (16) $ 64,504
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 207,349 923 (805) 207,467 380,749 6,143 (612) 386,280
Other 85,570 425 (121) 85,874 89,362 1,170 (126) 90,406
Obligations of States and
Political Subdivisions 73,366 1,646 (349) 74,663 72,642 1,639 (209) 74,072
Debt Securities Issued By
Foreign Governments 745 4 -0- 749 350 -0- (2) 348
Corporate Securities 10,722 442 (73) 11,091 21,768 285 (152) 21,901
Other Mortgage Backed
Securities 4,059 40 -0- 4,099 22,522 221 (92) 22,651
------------------------------------------------------------------------------------------------
Total Debt Securities $381,811 $3,480 $(1,348) $383,943 $650,351 $11,020 $(1,209) $660,162
================================================================================================
Mortgage backed securities include mortgage backed obligations of the U.S.
Government agencies and corporations, mortgage backed securities issued by other
organizations and other asset backed securities. These obligations have
contractual maturities ranging from 5 to 34 years and have an anticipated
average life to maturity ranging from less than one year to 10 years.
The amortized cost and estimated market value of debt securities at December 31,
1993, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
--------------------
Due within 1 year $ 20,174 $ 20,326
Due after 1 but within 5 years 111,271 112,482
Due after 5 but within 10 years 30,439 30,662
Due after 10 years 8,519 8,907
-------------------
170,403 172,377
Mortgage backed securities 211,408 211,566
-------------------
Total debt securities $381,811 $383,943
===================
Proceeds from the sales of investment securities were $16,840 and $65,362 in
1992 and 1991, respectively. Gross gains of $803 and $1,456 were recognized
during 1992 and 1991, respectively, while gross losses of $124 and $779 were
recognized in the corresponding periods.
Marketable equity securities included in investment securities at December 31,
1992 with a cost basis of $6,219 had gross unrealized gains of $331 and gross
unrealized losses of $122. The Corporation also held nonmarketable equity
securities in the amount of $7,476 at December 31, 1992, primarily Federal Home
Loan Bank stock and Federal Reserve Bank stock. At December 31, 1993 equity
securities have been classified as securities available for sale.
Investment securities with a book value of $249,160 and $181,787 were pledged at
December 31, 1993 and 1992, respectively, to secure public deposits and for
other purposes required or permitted by law.
- --------------------------------------------------------------------------------
F-9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 5--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 1993:
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
U.S. Treasury Securities $103,253 $ 862 $ (125) $103,990
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed
Securities 285,854 2,507 (978) 287,383
Other 49,726 323 (133) 49,916
Obligations of States and
Political Subdivisions 97 -0- -0- 97
Corporate Securities 4,688 50 -0- 4,738
Other Mortgage Backed
Securities 6,327 25 (9) 6,343
-------------------------------------------
Total Debt Securities 449,945 3,767 (1,245) 452,467
Equity Securities 12,841 -0- (84) 12,757
-------------------------------------------
Total Securities
Available for Sale $462,786 $3,767 $(1,329) $465,224
===========================================
Mortgage backed securities include mortgage backed obligations of the U.S.
Government agencies and corporations, mortgage backed securities issued by other
organizations and other asset backed securities. These obligations have
contractual maturities ranging from 5 to 34 years and have an anticipated
average life to maturity ranging from less than one year to 10 years.
The amortized cost and estimated market value of debt securities at
December 31, 1993, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
Estimated
Amortized Fair
Cost Value
--------------------
Due within 1 year $ 4,960 $ 5,083
Due after 1 but within 5 years 141,804 142,652
Due after 5 but within 10 years 8,815 8,804
Due after 10 years 2,185 2,202
-------------------
157,764 158,741
Mortgage backed securities 292,181 293,726
-------------------
Total debt securities $449,945 $452,467
===================
Proceeds from the sales of investment securities during 1993 were $95,658.
Gross gains of $2,350 and gross losses of $17 were realized on those sales.
NOTE 6--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31,
----------------------
1993 1992
----------------------
Commercial, financial,
agricultural and other $ 153,039 $196,979
Real estate loans:
Construction and land
development 9,718 11,676
1-4 Family dwellings 412,799 373,174
Other real estate loans 220,804 188,226
Loans to individuals for household,
family and other personal
expenditures 239,904 220,085
Leases, net of unearned income 1,411 4,628
---------------------
Subtotal 1,037,675 994,768
Unearned income (31,499) (30,241)
---------------------
Total loans and leases $1,006,176 $964,527
=====================
Management's estimate of the fair value of loans was $1,035,850 and $991,491 at
December 31, 1993 and 1992, respectively.
Most of the Corporation's business activity was with customers located within
Pennsylvania. The portfolio is well diversified, and as of December 31, 1993,
there were no significant concentrations of credit.
NOTE 7--Reserve for Possible Loan Losses
Description of changes:
1993 1992 1991
------------------------
Reserve balance at January 1 $14,267 $ 9,426 $8,323
Additions:
Recoveries of previously
charged off loans 1,564 1,115 825
Provision charged to operating
expense 2,197 3,219 4,946
From acquisition -0- 4,501 -0-
Deductions:
Loans charged off 3,484 3,994 4,668
------------------------
Reserve balance at December 31 $14,544 $14,267 $9,426
========================
For Federal tax purposes, the reserve for possible loan losses was $1,911 in
1993 and $2,222 in 1992.
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and commercial letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract or notional amount of
those instruments reflects the extent of involvement the Corporation has in
particular classes of financial instruments. The Corporation does not issue any
other instruments with significant off-balance-sheet risk.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party of the financial instrument for commitments to extend credit,
standby letters of credit and commercial letters of credit written is
- --------------------------------------------------------------------------------
F-10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (continued)
represented by the contract or notional amount of those instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The following table
identifies the notional amount of those instruments at December 31, 1993 and
1992.
1993 1992
------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $182,013 $153,319
Standby letters of credit $ 17,900 $ 11,858
Commercial letters of credit $ 65 $ 10
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and commercial letters of credit written are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
NOTE 9--Premises and Equipment
Premises and equipment are described as follows:
1993 1992
----------------
Land $ 3,615 $ 2,977
Buildings and improvements 22,200 21,084
Leasehold improvements 3,312 3,254
Furniture and equipment 20,377 19,221
----------------
Subtotal 49,504 46,536
Less accumulated depreciation and
amortization 27,593 25,429
----------------
Total premises and
equipment $21,911 $21,107
================
Depreciation and amortization related to premises and equipment was $3,008 in
1993, $2,637 and $1,901, in 1992 and 1991, respectively.
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1993 1992
----------------------
N.O.W. and Super N.O.W. accounts $ 169,897 $ 168,130
Savings and MMDA accounts 426,640 411,380
Time deposits 811,781 797,827
----------------------
Total interest-bearing deposits $1,408,318 $1,377,337
======================
Included in time deposits at December 31 were certificates of deposit in
denominations of $100 or more maturing as follows:
1993 1992
-----------------
3 months or less $19,734 $ 25,289
3 to 6 months 12,543 15,906
6 to 12 months 16,542 11,140
Over 12 months 47,006 49,731
-----------------
Total $95,825 $102,066
=================
Interest expense related to $100 or greater certificates of deposit amounted to
$5,426 in 1993, $7,389 in 1992, and $7,566 in 1991.
Management's estimated fair value of deposits was $1,590,502 and $1,565,065 at
December 31, 1993 and 1992, respectively.
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1993 1992
------------------------------------------------------
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
------------------------------------------------------
Federal funds
purchased $ 46,155 $22,782 3.10% $ -0- $ 2,505 6.75%
Borrowings from
FHLB 62,276 22,673 3.32 -0- -0- -0-
Securities sold
under agreements
to repurchase 43,498 41,714 4.28 34,272 25,595 4.69
Treasury, tax and
loan note option 19,568 8,756 2.91 18,404 10,359 3.41
------------------------------------------------------
Total $171,497 $95,925 3.64 $52,676 $38,459 4.48
======================================================
Maximum total at
any month-end $171,497 $67,056
======================================================
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
1993 1992 1991
-----------------------
Federal funds purchased $ 705 $ 169 $ 58
Borrowings from FHLB 753 -0- -0-
Securities sold under agreements to
repurchase 1,783 1,201 1,089
Treasury, tax and loan note option 255 353 422
----------------------
Total interest on
short-term borrowings $3,496 $1,723 $1,569
======================
- --------------------------------------------------------------------------------
F-11
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 12--Long-Term Debt
Long-term debt at December 31, 1993 follows:
Amount Rate
------ ------
Bank subordinated notes due September, 1997 $ 716 8.38%
ESOP loan due September, 1997 2,678 80% of Prime
Bank loan due December, 1997 2,000 Prime
ESOP loan due March, 2001 1,770 Prime
Mortgage note due October, 2003 199 6.26%
------
Total long-term debt $7,363
======
All subordinated notes are unsecured and equally subordinated in right of
payment to depositors and other creditors. The notes are redeemable at 102% of
principal until maturity, at the bank's option. The subordinated notes do not
provide for sinking fund obligations. Scheduled loan payments and subordinated
note maturities are summarized below:
1994 1995 1996 1997 1998 Thereafter
-------------------------------------------------
Loan payments $1,419 $1,483 $1,484 $1,307 $272 $682
Note maturities -0- -0- -0- 716 -0- -0-
-------------------------------------------------
Total $1,419 $1,483 $1,484 $2,023 $272 $682
=================================================
Management estimated the fair value of long-term debt at December 31, 1993 to be
$7,433 and $8,207 at December 31, 1992.
NOTE 13--Common Share Commitments
At December 31, 1993 the Corporation had 25,000,000 common shares authorized and
18,642,024 shares outstanding after reflecting the two-for-one stock split
effected in the form of a 100% stock dividend (see NOTE 22). The Corporation
may be required to issue additional shares to satisfy common share purchases
related to the employee stock ownership plan described in NOTE 15.
NOTE 14--Federal Income Taxes
As discussed in Note 1, effective January 1, 1993 the Corporation adopted FAS
No. 109. As permitted under FAS No. 109, prior years' financial statements have
not been restated. The adoption of this statement resulted in a cumulative
benefit of $500 in 1993. This benefit was primarily due to lower tax rates in
the year that FAS No. 109 was adopted than tax rates were in the years of
purchase business combinations.
The income tax provision consists of:
1993 1992 1991
-------------------------
Current tax provision for income
before securities transactions $ 9,591 $7,229 $5,273
Securities transactions 817 231 230
-------------------------
Total current tax
provision 10,408 7,460 5,503
-------------------------
Deferred tax provision (credit) on:
Loan loss provision (327) (72) (404)
Bond discount (53) (130) (62)
Leasing income (432) (236) (44)
Purchase accounting valuations (209) -0- -0-
Depreciation (15) 110 31
Loan origination fees and costs 185 47 172
Other 162 (103) (171)
-------------------------
Total deferred tax benefit (689) (384) (478)
-------------------------
Total tax provision $ 9,719 $7,076 $5,025
=========================
Temporary differences between financial statement carrying amounts and tax bases
of assets and liabilities that represent significant portions of the deferred
tax assets (liabilities) at January 1, 1993 and December 31, 1993 were as
follows:
December 31 January 1
------------------------
Reserve for possible loan losses $ 4,422 $ 4,095
Accumulated accretion of bond discount (278) (331)
Lease financing deduction (149) (581)
Purchase accounting valuations, other
than excess purchase price (2,191) (2,400)
Accumulated depreciation (348) (363)
Unrealized gain on securities
available for sale (851) -0-
Loan origination fees and costs (192) (7)
Other - net 325 487
------------------------
Deferred tax asset balance $ 738 $ 900
========================
Management does not feel a need to establish a valuation allowance against the
deferred tax asset because of the Corporation's ability to recover previously
paid taxes through carrybacks.
The total tax provision for financial reporting purposes differs from the amount
computed by applying the statutory income tax rate to income before income
taxes. The differences are as follows:
1993 1992 1991
-----------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-----------------------------------------------
Tax at statutory rate $11,343 35.0 $9,406 34.0 $7,143 34.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (1,979) (6.1) (2,406) (8.7) (2,346) (11.2)
Other 355 1.1 76 0.3 228 1.1
-----------------------------------------------
Total tax
provision $ 9,719 30.0 $7,076 25.6 $5,025 23.9
===============================================
NOTE 15--Retirement Plans
All employees with at least one year of service are eligible to participate in
the employee stock ownership plan. Contributions to the plan are determined by
the board of directors, and are based upon a prescribed percentage of the annual
compensation of all participants. These contributions are used to purchase the
Corporation's common shares. Contributions to the plan were $622 in 1993, $680
in 1992 and $518 in 1991.
The Corporation also has a savings plan pursuant to the provisions of section
401(k) of the Internal Revenue Code. Under the terms of the plan, each
participant will receive an automatic employer contribution to the plan in an
amount equal to 3% of compensation. Each participating employee may contribute
up to 5% of compensation to the plan which is matched by the employer's
contribution equal to 60% of the employee's contribution. The 401(k) plan
expense was $1,158 in 1993, $984 in 1992, $875 in 1991.
Statement of Financial Accounting Standards No. 106 ("FAS No. 106"), Employers'
Accounting for Postretirement Benefits Other than Pensions established standards
for accounting for postretirement benefits, primarily health care benefits. FAS
No. 106 was effective for all fiscal years
- --------------------------------------------------------------------------------
F-12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans (continued)
beginning after December 15, 1992. Since the Corporation generally does not
offer these benefits, the impact on net income is not considered material.
Employees of Central were covered by a noncontributory defined benefit plan,
which covered substantially all of its employees. The plan was fully funded,
and no contributions were made during the past three years. The net periodic
cost was $16 during 1992. The plan was terminated during 1993 and Central
employees were included in the Corporation's employee stock ownership plan and
401(k) plan. The plan termination resulted in a gain of $186 thousand recorded
during 1993.
NOTE 16--Deferred Compensation
The Corporation had borrowed amounts which were concurrently loaned to the First
Commonwealth Financial Corporation Employee Stock Ownership Plan Trust ("ESOP")
on the same terms. The combined balances of the ESOP related loans were $4,449
at December 31, 1993.
The loans have been recorded as long-term debt on the Corporation's consolidated
balance sheets. A like amount of deferred compensation was recorded as a
reduction of common shareholders' equity. Deferred compensation, included as a
component of shareholders' equity, represents the Corporation's prepayment of
future compensation expense. As the Corporation makes annual contributions to
the ESOP, these contributions, plus dividends accumulated on the Corporation's
common stock held by the ESOP, will be used to repay the loan to the
Corporation. As the loan is repaid, common stock is allocated to the ESOP
participants and deferred compensation is reduced by the amount of the principal
payment on the loan. Interest on this loan was $245 in 1993 and $286 in 1992
and $382 in 1991. Dividends on common shares held in the ESOP used for debt
service were $417 in 1993, $351 in 1992 and $289 in 1991.
NOTE 17--Commitments and Contingent Liabilities
During 1990, a subsidiary bank was named as a defendant in a forgery claim where
the bank allegedly allowed checks bearing forged endorsements to be negotiated.
Management feels that its maximum exposure is not significant and that it has
adequate defenses for the claim. This action is being vigorously defended and,
in the opinion of management, should be resolved in the bank's favor.
There are no material legal proceedings to which the Corporation or its
subsidiaries are a party, or of which any of their property is the subject,
except proceedings which arise in the normal course of business and, in the
opinion of management, will not have any material adverse effect on the
consolidated financial position of the Corporation and its subsidiaries.
The Corporation leases various premises and assorted equipment under
noncancelable agreements. Total future minimum rental commitments at December
31, 1993 were as follows:
1994 1995 1996 1997 1998 Thereafter Total
-----------------------------------------------
Premises $451 $352 $255 $212 $148 $805 $2,223
Equipment 171 36 17 1 -0- -0- 225
-----------------------------------------------
Total $622 $388 $272 $213 $148 $805 $2,448
===============================================
Under the terms of various lease agreements, increases in utilities and taxes
may be passed on to the lessee. Such adjustments are not reflected in the above
table. Additionally, various lease renewal options are available and are not
included in the minimum lease commitments until such options are exercised.
Total lease expense amounted to $1,034 in 1993, $1,326 in 1992 and $1,248 in
1991.
NOTE 18--Related Party Transactions
Some of the Corporation's or its subsidiaries' directors, executive officers,
principal shareholders and their related interests, had transactions with the
subsidiary banks in the ordinary course of business during 1993. All loans and
commitments to loans in such transactions were made on substantially the same
terms, including collateral and interest rates, as those prevailing at the time
for comparable transactions. In the opinion of management, these transactions
do not involve more than the normal risk of collectibility nor do they present
other unfavorable features. It is anticipated that further such extensions of
credit will be made in the future.
The following is an analysis of loans to those parties whose aggregate loan
balances exceeded $60 during 1993.
Balances December 31, 1992 $34,840
Advances 7,599
Repayments (17,307)
Other 102
-------
Balances December 31, 1993 $25,234
=======
Three loans to two directors, or their related interests were placed on a
nonaccrual status during 1992 due to cash flow deficiencies. The original loans
were made on substantially the same terms as those prevailing at the time for
comparable transactions. One loan to a director has been in compliance with the
terms of the loan and has been removed from a nonaccrual status. The original
amount of this loan was $616 and the balance at December 31, 1993 was $500. The
remaining two loans to one director remained on a nonaccrual status during 1993.
The original balances of these loans were $1,969 and the recorded balance of
these loans at December 31, 1993 was reduced to $987. In the opinion of
management, adequate amounts have been provided in the reserve for possible loan
losses for these loans.
NOTE 19--Dividend Restrictions
The amount of funds available to the parent from its subsidiary banks is limited
by restrictions imposed on all national banks by the Comptroller of the Currency
and on all state chartered banks by the Pennsylvania Department of Banking.
During 1993, dividends from subsidiary banks were restricted not to exceed
$44,908. These restrictions have not had, and are not expected to have, a
significant impact on the Corporation's ability to meet its cash obligations.
NOTE 20--Jointly-Owned Company
Investment in Commonwealth Trust Credit Life Insurance Company ("Commonwealth
Trust"), a jointly-owned credit life reinsurance company in which the
Corporation has a 50% interest in the voting common stock, is carried at cost,
adjusted for the Corporation's proportionate share of the
- --------------------------------------------------------------------------------
F-13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
earnings. Dividends, if any, reduce the basis of the investment.
Commonwealth Trust has been in operation since June of 1989. The Corporation's
net investment in Commonwealth Trust at December 31, 1993 was $1,162 and income
from its investment was $221 during 1993.
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
- --------------
December 31,
---------------------
1993 1992
---------------------
Assets
Cash $ 2,571 $ 2,625
Investment in subsidiaries 187,054 171,568
Investment in jointly-owned company 1,162 941
Premises and equipment 1,181 890
Dividends receivable from subsidiaries 3,679 3,095
Receivable from subsidiaries 440 842
Other assets 279 397
-------------------
Total assets $196,366 $180,358
===================
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 947 $ 399
Dividends payable 2,517 2,143
Loans payable 6,449 7,413
Shareholders' equity, exclusive of
deferred compensation 190,902 175,316
Deferred compensation (4,449) (4,913)
-------------------
Total liabilities and
shareholders' equity $196,366 $180,358
===================
Statements of Income
Years Ended December 31,
---------------------------
1993 1992 1991
---------------------------
Dividends from subsidiaries $13,490 $11,082 $11,085
Operating expenses (5,598) (4,893) (4,378)
---------------------------
Income before taxes and equity
in undistributed earnings of
subsidiaries 7,892 6,189 6,707
Applicable income tax benefits 1,782 1,433 1,250
---------------------------
Income before equity in
undistributed earnings of
subsidiaries 9,674 7,622 7,957
Equity in undistributed
earnings of subsidiaries 13,516 12,966 8,027
---------------------------
Net income $23,190 $20,588 $15,984
===========================
Statements of Cash Flows
Years Ended December 31,
------------------------------
1993 1992 1991
------------------------------
Operating Activities
Net income $ 23,190 $ 20,588 $15,984
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,190 865 723
Decrease (increase) in
prepaid income taxes (262) (298) 911
Undistributed equity in
subsidiaries (13,516) (12,966) (8,027)
Other - net (11) (165) (618)
------------------------------
Net cash provided by
operating activities 10,591 8,024 8,973
------------------------------
Investing Activities
Purchases of premises and
equipment (499) (106) (300)
Acquisition and additional
investment in subsidiary (1,000) (3,950) -0-
------------------------------
Net cash used by
investing activities (1,499) (4,056) (300)
------------------------------
Financing Activities
Proceeds from issuance of
long-term debt -0- 2,500 -0-
Repayment of long-term
debt (500) -0- -0-
Tax benefit of ESOP dividend 84 119 97
Discount on dividend reinvestment
plan purchases (159) (124) (80)
Cash dividends paid (8,571) (6,860) (5,899)
------------------------------
Net cash used by
financing activities (9,146) (4,365) (5,882)
------------------------------
Net increase (decrease) in cash (54) (397) 2,791
Cash at beginning of year 2,625 3,022 231
------------------------------
Cash at end of year $ 2,571 $ 2,625 $ 3,022
==============================
Supplemental schedule of noncash investing and financing activities
The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently loaned
these amounts to the ESOP on identical terms. The loans were recorded as long-
term debt and the offset was recorded as a reduction of the common shareholders'
equity. Loan payments in the amount of $714 were made during each of the three
years ended 1993 thereby reducing the outstanding amount related to deferred
compensation to $4,449 at December 31, 1993.
NOTE 22--Subsequent Event
On January 18, 1994, the Board of Directors declared a two-for-one stock split
effected in the form of a 100% stock dividend in the amount of 9,321,012 shares
payable on February 10, 1994. Accordingly, the average number of shares and all
per share amounts have been restated to reflect the stock split on a retroactive
basis.
F-14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
March 31, December 31,
1994 1993
----------- ------------
ASSETS
Cash and due from banks.................. $ 50,976 $ 51,044
Interest-bearing bank deposits........... 595 2,569
Federal funds sold....................... 1,430 0
Securities available for sale............ 462,195 465,224
Investment securities (Market Value
$367,603 in 1994 and
$383,943 in 1993)...................... 373,567 381,811
Loans (all domestic)..................... 1,062,440 1,037,675
Less unearned income................... 30,712 31,499
Less reserve for possible loan losses 14,886 14,544
---------- ----------
Net loans........................... 1,016,842 991,632
Property and equipment................... 22,189 21,911
Other real estate owned.................. 2,758 4,929
Other assets............................. 42,081 36,149
---------- ----------
TOTAL ASSETS........................ $1,972,633 $1,955,269
========== ==========
LIABILITIES
Deposits (all domestic):
Noninterest-bearing.................... $ 167,170 $ 167,306
Interest-bearing....................... 1,423,545 1,408,318
---------- ----------
Total deposits...................... 1,590,715 1,575,624
Short-term borrowings.................... 174,471 171,497
Other liabilities........................ 16,448 14,332
Long-term debt........................... 7,911 7,363
---------- ----------
Total liabilities................... 1,789,545 1,768,816
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value per
share, 3,000,000 shares authorized
and unissued........................... -0- -0-
Common stock $5 par value per share,
25,000,000 shares authorized and
18,642,024 and 9,321,012 shares
issued and outstanding in 1994 and
1993, respectively..................... 93,210 46,605
Additional paid-in capital............... -0- 35,296
Retained earnings........................ 98,579 107,417
Unrealized gain (loss) on securities
available for sale..................... (3,701) 1,584
---------- ----------
188,088 190,902
Deferred compensation.................... (5,000) (4,449)
---------- ----------
Total shareholders' equity............. 183,088 186,453
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.............. $1,972,633 $1,955,269
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except per share data)
For the 3 Months
Ended March 31,
----------------
1994 1993
---- ----
Interest Income
Interest and fees on loans............... $21,021 $21,695
Interest and dividends on investments:
Taxable interest....................... 10,214 10,057
Interest exempt from federal
income taxes.......................... 871 810
Dividends.............................. 226 151
Interest on federal funds sold........... 8 103
Interest on bank deposits................ 20 199
------- -------
Total Interest Income................. 32,360 33,015
Interest Expense
Interest on deposits..................... 12,759 13,794
Interest on short-term borrowings........ 1,522 663
Interest on long-term debt............... 106 115
------- -------
Total Interest Expense................ 14,387 14,572
------- -------
Net interest income........................ 17,973 18,443
Provision for possible loan losses....... 539 593
------- -------
Net interest income after provision
for possible loan losses................. 17,434 17,850
Other Income
Securities gains......................... 213 657
Trust income............................. 630 603
Service charges on deposits.............. 1,146 1,184
Other income............................. 830 542
------- -------
Total Other Income.................... 2,819 2,986
Other Expenses
Salaries and employee benefits........... 6,649 6,322
Net occupancy expense.................... 971 936
Furniture and equipment expense.......... 865 784
FDIC expense............................. 889 884
Other operating expenses................. 3,558 3,711
------- -------
Total Other Expenses.................. 12,932 12,637
------- -------
Income before taxes and cumulative
effect of change in accounting
method................................... 7,321 8,199
Applicable income taxes.................. 2,191 2,360
------- -------
Income before cumulative effect of
change in accounting method.............. 5,130 5,839
Cumulative effect of change in method
of accounting for income taxes........... -0- 500
------- -------
Net Income................................. $ 5,130 $ 6,339
======= =======
Average Shares Outstanding................. 18,642,024 18,642,024
Per Share Data:
Net income before effect of change
in accounting method..................... $0.28 $0.32
Cumulative effect of change in
method of accounting for income
taxes.................................... $0.00 $0.02
Net income................................. $0.28 $0.34
Cash dividends per share................... $0.14 $0.125
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
Unrealized
Gain (loss)
Additional on Securities Total
Common Paid-in Retained Available Deferred Shareholders'
Stock Capital Earnings For Sale Compensation Equity
------- ----------- --------- -------------- ------------- --------------
Balance at December 31, 1992......... $46,605 $35,455 $93,256 $ -0- $(4,913) $170,403
Net income......................... -0- -0- 6,339 -0- -0- 6,339
Cash dividends declared............ -0- -0- (2,143) -0- -0- (2,143)
Cash dividends declared by
subsidiary prior to merger....... -0- -0- (56) -0- -0- (56)
Decrease in deferred compensation -0- -0- -0- -0- 179 179
Discount on dividend reinvestment
plan purchases................... -0- (40) -0- -0- -0- (40)
------- ------- -------- ---- -------- ---------
Balance at March 31, 1993............ $46,605 $35,415 $97,396 $ -0- $(4,734) $174,682
======= ======= ======== ====== ======== =========
Balance at December 31, 1993......... $46,605 $35,296 $107,417 $ 1,584 $(4,449) $186,453
Net income......................... -0- -0- 5,130 -0- -0- 5,130
Cash dividends declared............ -0- -0- (2,610) -0- -0- (2,610)
Transfer to reflect 2-for-1
stock split effected in
the form of a 100% stock
dividend......................... 46,605 (35,258) (11,347) -0- -0- -0-
Change in unrealized gain
(loss) on securities
available for sale, net
of tax effect.................... -0- -0- -0- (5,285) -0- (5,285)
Increase in deferred compensation -0- -0- -0- -0- (551) (551)
Discount on dividend reinvestment
plan purchases................... -0- (38) (11) -0- -0- (49)
------- -------- ------- ------- ------- --------
Balance at March 31, 1994............ $93,210 $ -0- $98,579 $(3,701) $(5,000) $183,088
======= ======== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 3 Months
Ended March 31,
-----------------
1994 1993
---- ----
Operating Activities
Net income......................................... $ 5,130 $ 6,339
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses.............. 539 593
Depreciation and amortization................... 1,239 1,081
Net gains on sales of assets.................... (277) (670)
Increase in interest receivable................. (1,125) (913)
Decrease in interest payable.................... (126) (169)
Increase in income taxes payable................ 1,907 2,473
Provision for deferred taxes.................... 478 (594)
Other(net)...................................... (442) (2,281)
-------- -------
Net cash provided by operating activities..... 7,323 5,859
-------- -------
Investing Activities
Proceeds from investment securities transactions:
Sales........................................... 43,329 39,402
Maturities and redemptions...................... 57,181 70,151
Proceeds from sales of loans and other assets...... 3,306 3,089
Net decrease in time deposits with banks........... 1,974 2,378
Purchases of investment securities................. (97,368) (176,707)
Net increase in loans.............................. (28,286) (28,039)
Purchase of premises and equipment................. (1,624) (806)
------- -------
Net cash used by investing activities............ (21,488) (90,532)
------- -------
Financing Activities
Repayments of long-term debt....................... (3) (2)
Discount on dividend reinvestment plan purchases... (49) (40)
Dividends paid..................................... (2,516) (2,143)
Dividends paid by subsidiary prior to merger....... -0- (56)
Net increase (decrease) in deposits................ 15,121 (8,068)
Net increase in federal funds purchased............ 7,837 21,410
Net increase (decrease) in other short-term
borrowings....................................... (4,863) 20,491
------- -------
Net cash provided by financing activities..... 15,527 31,592
------- -------
Net increase (decrease) in cash and
cash equivalents............................ 1,362 (53,081)
Cash and cash equivalents at January 1............... 51,044 93,892
------- -------
Cash and cash equivalents at March 31................ $52,406 $40,811
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
(Unaudited)
NOTE 1 Management Representation
- ------ -------------------------
In the opinion of management, the unaudited interim consolidated financial
statements include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair statement of financial position as of March
31, 1994 and the results of operations for the three month periods ended March
31, 1994 and 1993, and statements of cash flows and changes in shareholders'
equity for the three month periods ended March 31, 1994 and 1993. The results
of the three months ended March 31, 1994 and 1993 are not necessarily indicative
of the results to be expected for the entire year. The interim consolidated
financial statements should be read in conjunction with the annual consolidated
financial statements of First Commonwealth Financial Corporation and
Subsidiaries, including the notes thereto.
NOTE 2 Reserve For Possible Loan Losses (in thousands)
- ------ --------------------------------
1994 1993
---- ----
Reserve balance January 1.. $14,544 $14,267
Additions:
Provision charged to
operating expenses.... 539 593
Recoveries of
previously charged off
loans................. 405 454
Deductions:
Loans charged off...... 602 912
------- -------
Reserve balance March 31... $14,886 $14,402
======= =======
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands)
- ------ ---------------------
Cash paid during the first three months of the year for interest and income
taxes were as follows:
1994 1993
---- -----
Interest $14,513 $14,811
Income Taxes $ -0- $ -0-
During 1994 the Corporation borrowed $730 and concurrently loaned this amount to
the ESOP Trust on identical terms. ESOP loan payments of $179 were made by the
ESOP Trust during the respective 1994 and 1993 periods, thereby resulting in
outstanding amounts related to deferred compensation of $5,000 at March 31, 1994
and $4,734 at March 31, 1993.
F-19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1994
(Unaudited)
NOTE 4 Change of Accounting Method
- ------ ---------------------------
The Corporation adopted Statement of Financial Accounting Standards No. 109
("FAS No. 109"), "Accounting for Income Taxes", effective January 1, 1993. FAS
No. 109 is an asset and liability approach for financial accounting and
reporting for income taxes. The effect of adopting FAS No. 109 resulted in a
cumulative benefit of $500 thousand in the first quarter of 1993.
NOTE 5 Proposed Business Combination
- ------ -----------------------------
On March 25, 1994, the Corporation entered into a definitive agreement to merge
United National Bancorporation and its subsidiaries ("United") into the
Corporation. Under the terms of the Agreement and Plan of Reorganization, the
holders of shares of United common stock will receive two shares of the
Corporation's common stock for each share of United common stock. The
transaction is expected to be accounted for as a pooling of interests.
United was organized as a Pennsylvania business corporation established in 1982
for the purposes of operating as a bank holding company. United is
headquartered in Chambersburg, Pennsylvania with two active Subsidiaries.
Unitas National Bank, a national banking association, headquartered in
Chambersburg, Pennsylvania and Unitas Mortgage Corporation, having its principal
place of business in Carlisle, Pennsylvania, and is engaged in the origination
of mortgages for the secondary market. Total assets of United were $146 million
serviced through twelve community offices. The proposed transaction requires
the approval of the shareholders of United and approval of the appropriate
regulatory agencies.
On April 21, 1994 the Corporation entered into a definitive agreement to merge
Reliable Financial Corporation ("Reliable") into the Corporation. Under the
terms of the Agreement and Plan of Reorganization, the holders of shares of
Reliable common stock will receive 1.6 shares of the Corporation's common stock
for each share of Reliable common stock. The transaction is expected to be
accounted for as a pooling of interests.
Reliable is a holding company which was established in 1991 for the purpose of
owning 100% of the outstanding common stock of Reliable Savings Bank, PaSA.
Reliable Savings Bank, PaSA is a Pennsylvania-chartered savings association,
headquartered in Bridgeville, Pennsylvania with total assets of $150 million
serviced through three community offices. Reliable shares are traded on the
NASDQ National Market System under the symbol "RESB". The proposed transaction
requires the approval of the shareholders of Reliable and approval of the
appropriate regulatory agencies.
F-20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1994
(Unaudited)
NOTE 6 Earnings per Common Share
- ------ -------------------------
Earnings per share have been calculated on the weighted average number of common
shares outstanding during each period, restated to reflect pooling of interests.
Additionally, average number of shares has been restated to reflect the two-for-
one stock split effected in the form of a 100% stock distribution on the
Corporation's common stock declared on January 18, 1994.
F-21
[LETTERHEAD OF ERNST & YOUNG APPEARS HERE]
Report of Independent Auditors
The Board of Directors and Shareholders
United National Bancorporation
We have audited the accompanying consolidated balance sheets of United
National Bancorporation and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United National
Bancorporation and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the Corporation
changed its method of accounting for income taxes.
/s/ Ernst & Young
January 14, 1994
F-22
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31
1993 1992
-------- --------
(In Thousands)
Assets
Cash and due from banks $ 3,758 $ 6,030
Federal funds sold 1,600 --
-------- --------
Cash and Cash Equivalents 5,358 6,030
Interest-bearing deposits in banks 33 1,686
Investment securities (Market value 1993 -- $20,363; 1992 -- $24,161) 20,008 23,740
Mortgage loans held for sale (Market value 1992 -- $5,809) -- 5,507
Loans:
Real estate 37,550 36,181
Installment and consumer 38,446 38,318
Commercial, financial, and agricultural 24,881 18,854
Lease financing 28,113 18,893
-------- --------
128,990 112,246
Less: Allowance for loan losses (1,189) (1,061)
Unearned income (10,514) (9,466)
-------- --------
Net Loans 117,287 101,719
Premises and equipment, net of accumulated
depreciation (1993 -- $2,566; 1992 -- $2,317) 2,570 2,201
Accrued interest receivable 630 729
Other assets 1,717 1,649
-------- --------
TOTAL ASSETS $147,603 $143,261
======== ========
Liabilities
Deposits:
Noninterest-bearing $ 8,776 $ 9,188
Interest-bearing 120,543 118,674
-------- --------
Total Deposits 129,319 127,862
Securities sold under agreements to repurchase 4,687 3,198
Net deferred tax liabilities 934 561
Other liabilities 381 809
-------- --------
Total Liabilities 135,321 132,430
Shareholders' Equity
Preferred Stock -- $10.00 par value:
Authorized and unissued 5,000,000 shares -- --
Common Stock -- $2.50 par value:
Authorized 10,000,000 shares; issued and
outstanding shares -- 769,147 in 1993 and 699,407 in 1992 1,923 1,748
Surplus 4,115 2,476
Retained earnings 6,244 6,607
-------- --------
Total Shareholders' Equity 12,282 10,831
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $147,603 $143,261
======== ========
See accompanying notes.
4
F-23
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Year Ended December 31
1993 1992 1991
------- ------- -------
(In Thousands, except per share data)
Interest income:
Loans, including fees $10,946 $10,822 $10,625
Investment securities:
Taxable 1,573 1,382 1,297
Tax-exempt 28 32 33
Other 70 216 342
------- ------- -------
Total Interest Income 12,617 12,452 12,297
Interest expense:
Deposits 4,651 5,653 7,004
Short-term borrowings 143 30 1
------- ------- -------
Total Interest Expense 4,794 5,683 7,005
------- ------- -------
Net Interest Income 7,823 6,769 5,292
Provision for loan losses 473 325 300
------- ------- -------
Net Interest Income After
Provision for Loan Losses 7,350 6,444 4,992
Other income:
Gain on sale of mortgages 238 -- --
Trust department 138 138 157
Investment securities gains 62 15 34
Service fees and other 438 375 326
------- ------- -------
876 528 517
------- ------- -------
Other expenses:
Salaries and employee benefits 2,854 2,377 2,108
Occupancy expense 718 637 567
Special services 293 259 271
Taxes, other than income 57 107 98
FDIC insurance 293 268 238
Other 1,333 1,265 978
------- ------- -------
5,548 4,913 4,260
------- ------- -------
Income Before Income Taxes 2,678 2,059 1,249
Income Taxes 858 641 346
------- ------- -------
NET INCOME $ 1,820 $ 1,418 $ 903
======= ======= =======
Per share data:
Net income $2.37 $1.84 $1.17
Cash dividends .47 .43 .39
See accompanying notes.
5
F-24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Common Retained
Stock Surplus Earnings Total
------- ------- -------- -------
(In Thousands)
Balance at January 1, 1991 $1,446 $ 846 $ 6,857 $ 9,149
Net income 903 903
Cash dividends (301) (301)
10% common stock dividend --
57,637 shares at fair market value 144 664 (811) (3)
------ ------ ------- -------
Balance at December 31, 1991 1,590 1,510 6,648 9,748
Net income 1,418 1,418
Cash dividends (331) (331)
10% common stock dividend --
63,375 shares at fair market value 158 966 (1,128) (4)
------ ------ ------- -------
Balance at December 31, 1992 1,748 2,476 6,607 10,831
Net income 1,820 1,820
Cash dividends (364) (364)
10% common stock dividend --
69,740 shares at fair market value 175 1,639 (1,819) (5)
------ ------ ------- -------
Balance at December 31, 1993 $1,923 $4,115 $ 6,244 $12,282
====== ====== ======= =======
See accompanying notes.
6
F-25
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended December 31
1993 1992 1991
-------- -------- -------
(In Thousands)
Operating Activities
Net income $ 1,820 $ 1,418 $ 903
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 473 325 300
Provision for depreciation and amortization 249 221 198
Amortization of investment security premiums
and accretion of discounts, net 94 16 4
Deferred income taxes 373 180 19
Realized investment security gains (62) (15) (34)
Gain on sale of mortgages (238) -- --
(Increase) decrease in other assets 31 (1,006) 238
Decrease in other liabilities (433) (273) (42)
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,307 866 1,586
Investing Activities
Net increase in loans (16,041) (10,166) (1,068)
Proceeds from sale of mortgages 5,745 -- --
Purchase of premises and equipment, net (618) (837) (494)
Proceeds from sales of investment securities 2,555 2,016 2,183
Proceeds from maturities of investment securities 11,471 5,556 4,375
Purchase of investment securities (10,326) (14,846) (7,210)
Net decrease in short-term investments 1,653 414 2,398
-------- -------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (5,561) (17,863) 184
Financing Activities
Net increase in deposits 1,457 10,425 3,093
Net increase in short-term borrowings 1,489 3,198 --
Cash dividends (364) (331) (301)
-------- -------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,582 13,292 2,792
-------- -------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (672) (3,705) 4,562
Cash and cash equivalents at beginning of year 6,030 9,735 5,173
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,358 $ 6,030 $ 9,735
======== ======== =======
See accompanying notes.
7
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
1. Significant Accounting Policies
Principles of Consolidation
United National Bancorporation (the Corporation) and its subsidiaries (Unitas
National Bank [the Bank], Unitas Real Estate Corp., Unitas Commercial Leasing
Corp., Unitas Financial Corp., Unitas Life Insurance Co., Unitas Mortgage
Corp., and Unitas Services Corp.) provide financial services. The
consolidated financial statements include the accounts of the Corporation and
its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated. Investments in subsidiaries are carried at the
parent company's equity in the underlying net assets.
Mortgage Loans Held for Sale
The Bank identified a pool of conventional fixed-rate mortgages at December
31, 1992 which it was holding for sale. Mortgage loans held for sale are
carried at the aggregate of lower of cost or market value. No loans were held
for sale at December 31, 1993.
Investment and Mortgage-Backed Securities
Investment securities are stated at cost adjusted for amortization of
premiums and accretion of discounts. Security gains and losses are determined
using the specific identification method. In classifying debt securities
acquired and held in the investment portfolio, management continually
evaluates the Corporation's ability to hold the securities to maturity as
well as its intent to hold the securities for the foreseeable future.
Management's evaluation of the Corporation's ability to hold securities to
maturity is based on an evaluation of its ability to satisfy liabilities in
the normal course of business and meet regulatory and legal requirements such
as minimum capital requirements. Additionally, management continually
evaluates the probability of events that might occur which may cause the
Corporation to sell debt securities. Currently, management is not aware of
such probable events; thus all debt securities are classified as investment
securities at December 31, 1993.
Revenue Recognition
Interest on loans is recognized based upon the principal amount outstanding.
The accrual of interest income is discontinued when circumstances indicate
that collection is questionable. When interest accruals are discontinued,
interest credited to income in the current year is reversed. Management may
elect to continue the accrual of interest when the estimated net realizable
value of collateral is sufficient to cover the principal balance and accrued
interest.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on the risk
characteristics of the portfolio, past loan loss experience, local economic
conditions, and such other relevant factors which, in management's judgment,
deserve recognition. The allowance is increased by provisions for loan losses
charged to operations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are charged to operations over
the estimated useful lives of the assets, computed by the straight-line
method.
Lease Financing
The Corporation provides equipment (principally automobiles) financing
through lease arrangements. Direct financing leases are stated at the
aggregate of lease payments receivable plus estimated residual values
(1993 -- $10,340,000; 1992 -- $5,891,000). Unearned income on direct
financing leases is amortized over the lease term resulting in an approximate
level rate of return.
8
F-27
- --------------------------------------------------------------------------------
1. Significant Accounting Policies (continued)
Per Share Data
Net income and dividends per share have been restated to reflect a 10 percent
stock dividend to shareholders of record December 9, 1993, payable January
18, 1994. The effect of common stock equivalents is not significant for any
period presented.
Cash Flow Information
For purposes of the statements of cash flows, the Corporation considers cash
and due from banks and federal funds sold as cash and cash equivalents.
Generally, federal funds are purchased and sold for one-day periods. Cash
paid during the years ended December 31, 1993, 1992, and 1991 for interest
was $4,883,000, $5,961,000, and $5,314,000, respectively. Cash paid for
income taxes was $585,000 in 1993, $544,000 in 1992, and $288,000 in 1991.
Accounting Change -- Income Taxes
The Corporation adopted FASB Statement No. 109, "Accounting for Income
Taxes," in the first quarter of its fiscal year ended December 31, 1993.
The Corporation adopted the Statement on a prospective basis without
restating any prior years and has determined that the effect of its
implementation on the Corporation's financial position and results of
operations was not material for 1993 or 1992. In accordance with FASB
Statement No. 109, the liability method is used in accounting for income
taxes. Deferred income taxes are provided for differences between the tax
basis of an asset or liability and its reported amount in the financial
statements at the statutory tax rates that will be in effect when the
differences are expected to reverse.
Recently Issued FASB Statement
The Corporation is required to adopt FASB Statement No. 115, "Accounting
for Certain Investment in Debt and Equity Securities," in the first quarter
of its fiscal year ending December 31, 1994 and will be required to adopt
FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
in the first quarter of its fiscal year ending December 31, 1995. The
Corporation has determined that the effect of its implementation of these
FASB Statements on the Corporation's financial position and results of
operations will not be material.
2. Restrictions on Cash and Due from Banks
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1993 was approximately $1,130,000.
3. Investment Securities
The amortized cost and estimated market value of investment securities were
as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
December 31, 1993:
U.S.Treasury securities and obligations
of U.S. government corporations
and agencies $ 17,006 $ 281 $ (17) $ 17,270
Obligations of states and
political subdivisions 200 3 -- 203
Corporate securities 800 29 -- 829
Foreign securities 250 19 -- 269
Mortgage-backed securities 1,195 40 -- 1,235
--------- ---------- ---------- ---------
Total debt securities 19,451 372 (17) 19,806
Equity securities 557 -- -- 557
--------- ---------- ---------- ---------
Total $ 20,008 $ 372 $ (17) $ 20,363
========= ========== ========== =========
9
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
3. Investment Securities (continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
December 31, 1992:
U.S.Treasury securities and obligations
of U.S. government corporations
and agencies $ 18,822 $ 329 $ (80) $ 19,071
Obligations of states and
political subdivisions 550 22 -- 572
Corporate securities 1,316 48 (4) 1,360
Foreign securities 249 22 -- 271
Mortgage-backed securities 2,244 84 -- 2,328
--------- ---------- ---------- ---------
Total debt securities 23,181 505 (84) 23,602
Equity securities 559 -- -- 559
--------- ---------- ---------- ---------
Total $ 23,740 $ 505 $ (84) $ 24,161
========= ========== ========== =========
At December 31, 1993 and 1992, investment securities with a carrying value of
$14,649,000 and $9,830,000, respectively, were pledged as collateral to
secure public deposits and for other purposes.
The amortized cost and estimated market value of debt securities at December
31, 1993, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
--------- ---------
(In Thousands)
Due in one year or less $ 850 $ 863
Due after one year through five years 12,068 12,249
Due after five years through ten years 5,338 5,459
Due after ten years -- --
------- -------
18,256 18,571
Mortgage-backed securities 1,195 1,235
------- -------
$19,451 $19,806
======= =======
Proceeds from sales of investments in debt securities during 1993 were
$2,555,000. Gross gains of $62,000 and gross losses of $-0- were realized
on those sales. Proceeds from sales of investments in debt securities
during 1992 were $2,016,000. Gains of $35,000 and gross losses of $20,000
were realized on those sales. Proceeds from such sales were $2,183,000 in
1991. Gains of $41,000 were realized on those sales and a loss of $7,000
was realized on the sale of an interest-bearing time deposit.
4. Related Party Loans
Certain directors and executive officers of the Corporation and the Bank,
including their associates and companies, have loans with the Bank. Such
loans were made in the ordinary course of business at the Bank's normal
credit terms including interest rate and collateralization and do not
represent more than a normal risk of collection. Total loans to these
persons amounted to approximately $1,893,000 and $1,958,000 at December 31,
1993 and 1992, respectively. During 1993, $257,000 of new loans were made
and repayments totalled $322,000.
10
F-29
- --------------------------------------------------------------------------------
5. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years ended
December 31, 1993 were as follows:
1993 1992 1991
------ ------ ------
(In Thousands)
(In Thousands)
Balance beginning of year $1,061 $ 910 $ 802
Provision charged to operations 473 325 300
Recoveries on loans 24 36 12
Loans charged off (369) (210) (204)
------ ------ -----
Balance end of year $1,189 $1,061 $ 910
====== ====== =====
6. Regulatory Matters
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain regulatory
restrictions exist regarding the ability of the Bank to transfer funds to
the Corporation in the form of cash dividends, loans, or advances. As of
December 31, 1993, the Bank had retained earnings of $7,982,000 of which
$3,070,000 was available for distribution to the Corporation as dividends
without prior regulatory approval.
Under Federal Reserve regulation, the Bank also is limited as to the amount
it may loan to its affiliates, including the Corporation, unless such loans
are collateralized by specified obligations. At December 31, 1993, the
maximum amount available for transfer from the Bank to the Corporation in
the form of loans approximated 20 percent of consolidated net assets.
The Bank is also required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At December
31, 1993, the Bank was required to have minimum Tier I and total capital
ratios of 4.00 percent and 8.00 percent, respectively. The Bank's actual
ratios at that date were 10.72 percent and 11.76 percent, respectively. The
Bank's leverage ratio at December 31, 1993 was 8.26 percent.
7. Income Taxes
Effective January 1, 1993, the Corporation changed its method of accounting
for income taxes from the deferred method to the liability method required
by FASB Statement No. 109, "Accounting for Income Taxes" (see Note 1,
"Accounting Changes"). As permitted under the new rules, prior years'
financial statements have not been restated. There was no cumulative effect
of adopting Statement No. 109 as of January 1, 1993. There was no effect on
the pre-tax income from continuing operations as a result of the adoption
of Statement No. 109.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1993 are as follows (In Thousands):
Deferred tax liabilities:
Leasing activity $2,205
Other 99
------
Total Deferred tax liabilities 2,304
Deferred tax assets:
Allowance for loan loss 188
Alternative minimum tax carryforward 1,182
------
Total deferred tax assets 1,370
------
Net deferred tax liabilities $ 934
======
11
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. Income Taxes (continued)
The provision for income taxes is summarized as follows:
Liability Method Deferred Method
-------------------------------------
1993 1992 1991
------ ------ ------
(In Thousands)
Current $ 485 $ 461 $ 327
Deferred 373 180 19
------ ------ ------
Income taxes $ 858 $ 641 $ 346
====== ====== ======
Deferred taxes resulted from the following timing differences for the years
ended December 31, 1992 and 1991:
1992 1991
------ ------
(In Thousands)
Leasing activities $ 199 $ (42)
Allowance for loan losses (69) (66)
Alternative minimum tax 58 178
Other (8) (51)
----- -----
$ 180 $ 19
===== =====
Income taxes applicable to investment securities gains included in the
provision for income taxes totaled $21,000 in 1993, $5,000 in 1992, and
$12,000 in 1991.
A reconciliation of the provision for income taxes and the amount which would
have been provided at statutory rates is as follows:
Liability Method Deferred Method
-----------------------------------
1993 1992 1991
------ ------ ------
Tax at statutory rate on pre-tax income $ 911 $ 700 $ 425
Effect of tax-exempt income (53) (59) (68)
Other -- -- (11)
----- ----- -----
Income taxes $ 858 $ 641 $ 346
===== ===== =====
8. Pension Plan
The Corporation has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. No contributions were made in 1993, 1992, or 1991. Contributions
are intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future.
The following table sets forth the Plan's funded status and amounts
recognized in the Corporation's financial statements at December 31:
1993 1992
------ ------
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $751 in 1993 and $574 in 1992 $ (764) $ (588)
======= ======
Projected benefit obligation for service rendered to date $(1,100) $ (890)
Plan assets at fair value, primarily listed stocks and bonds 1,126 1,064
------- ------
Plan assets in excess of projected benefit obligation 26 174
Unrecognized net loss from past experience different
from that assumed 188 78
Unrecognized net transition asset (195) (215)
------- ------
Prepaid pension cost included in other assets $ 19 $ 37
======= ======
12
F-31
- --------------------------------------------------------------------------------
8. Pension Plan (continued)
Net pension expense (income) included the following components:
1993 1992 1991
------ ------ ------
(In Thousands)
Service cost-benefits earned during the period $ 60 $ 48 $ 40
Interest cost on projected benefit obligation 77 63 53
Actual return on plan assets (83) (79) (74)
Net amortization and deferral (14) (20) (20)
----- ----- ----
Net periodic pension expense (income) $ 40 $ 12 $ (1)
===== ===== ====
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8 percent and 7 percent, respectively, at
December 31, 1993 and 1992. The expected long-term rate of return on plan
assets was 8 percent in 1993 and 7 percent in 1992 and 8.5 percent in 1991.
9. Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of the Bank's
customers. Standby letters of credit commit the Bank to make payments on
behalf of customers when certain specified future events occur. They
primarily are issued to facilitate customers' trade transactions.
Historically, more than 90 percent of standby letters of credit expire
unfunded.
Both arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Bank's normal credit
policies. Collateral (e.g., securities, receivables, inventory, equipment) is
obtained based on management's credit assessment of the customer.
The Bank's maximum exposure to credit loss for loan commitments (unfunded
loans and unused lines of credit, including home equity lines of credit) and
standby letters of credit outstanding at December 31, 1993 was as follows (In
Thousands):
Loan commitments:
Home equity loans $ 828
Lines of credit 793
Real estate construction 907
Standby letters of credit 498
------
Total $3,026
======
Loan commitments and standby letters of credit were $1,828,000 and $651,000,
respectively, at December 31, 1992.
10. Concentration of Credit Risk
Most of the Bank's business is with customers in the five county area of
Central Pennsylvania where it has full-service branch locations. The Bank's
consumer and real estate loan portfolios are principally to borrowers
throughout this market area. The Bank requires collateral on all real estate
exposures and generally requires loan-to-value ratios of no greater than 80
percent. The Bank's lease portfolio includes customers in this area as well
as other parts of South Central Pennsylvania. The commercial, financial, and
agricultural portfolio is diversified with no industry comprising greater
than 10 percent of total loans outstanding.
Collateral requirements on such loans are determined on a case-by-case basis
based on management's credit evaluations of the respective borrower.
13
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
11. Shareholders' Equity
In 1987, the Corporation established a dividend reinvestment and stock
purchase plan. Shareholders of common stock may participate in the plan which
provides that additional shares of common stock may be purchased with
reinvested dividends at prevailing market prices. To the extent that shares
are not available on the open market, the Corporation has reserved 266,200
shares of common stock to be issued under the dividend reinvestment plan.
The Corporation has reserved 133,100 shares covered by the 1986 Stock Option
Plan which expires January 1997.
The Plan permits the granting of stock options, including incentive stock
options (ISOs) and nonqualified stock options (NQSOs) to key employees.
Options may be accompanied by stock appreciation rights (SARs). The
exercise of a SAR requires the surrender of an unexercised related option.
The purchase price of the common stock covered by each ISO will not be less
than 100 percent (85 percent for NQSOs) of the fair market value of the
stock on the date of the grant of such option. The duration of each option
granted under the Plan will not exceed 10 years from the date of grant. No
option will be exercisable during the year ending on the first anniversary
date of the granting of such option. The Plan provides that SARs will be
automatically exercised on the last business day prior to the expiration of
the related option if, on that date, the fair market value of a share of
common stock exceeds the per share price of the related option. In the
event of termination of employment, options will generally remain
exercisable until the earlier of the expiration of the option term or three
months from the date of termination of employment.
At December 31, 1993, all option holders have expressed their intention to
exercise the fixed award portion of their plan. Accordingly, no compensation
expense has been recorded. Had the holders intended to exercise the SAR
portion of their plan, compensation expense of approximately $528,000, based
on the market value of the Corporation's shares at December 31, 1993, would
have been recorded.
The changes in option shares outstanding are as follows:
Year Ended December 31
1993 1992 1991
------ ------ ------
Options outstanding at beginning of year 34,243 17,303 17,303
Options granted at $10.52-$16.14 per share 15,400 16,940 --
------ ------ ------
Options outstanding at end of year 49,643 34,243 17,303
====== ====== ======
Options available for grant at December 31 83,457
======
Options exercisable at December 31 34,243
======
12. United National Bancorporation (Parent Company Only) Financial Information
December 31
1993 1992
------ ------
(In Thousands)
Balance Sheet
Assets
Cash $ 37 $ 43
Investment in:
Bank subsidiary 12,209 10,770
Nonbank subsidiaries 36 18
------- -------
Total Assets $12,282 $10,831
======= =======
Shareholders' Equity $12,282 $10,831
======= =======
14
F-33
- --------------------------------------------------------------------------------
12. United National Bancorporation (Parent Company Only) Financial Information
(continued)
Year Ended December 31
1993 1992 1991
------ ------ ------
Statements of Income (In Thousands)
Income:
Dividends from Bank subsidiary $ 404 $ 370 $ 351
Other 12 40 --
------- ------- -------
416 410 351
Expenses 53 41 35
------- ------- -------
Income before equity in undistributed
net income of subsidiaries 363 369 316
Equity in undistributed net income of:
Bank subsidiary 1,439 1,049 583
Nonbank subsidiaries 18 -- 4
------- ------- -------
Net income $ 1,820 $ 1,418 $ 903
======= ======= =======
Year Ended December 31
1993 1992 1991
------ ------ ------
Statements of Cash Flows (In Thousands)
Operating activities
Net income $ 1,820 $ 1,418 $ 903
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of subsidiaries (1,457) (1,049) (587)
Other (5) (8) (3)
------- ------- -----
Net cash provided by operating activities 358 361 313
Financing activities
Cash dividends (364) (331) (301)
------- ------- -----
Net cash used by financing activities (364) (331) (301)
------- ------- -----
Increase (decrease in cash) (6) 30 12
Cash at beginning of year 43 13 1
------- ------- -----
Cash at end of year $ 37 $ 43 $ 13
======= ======= =====
15
F-34
United National Bancorporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
1994 1993
---------- -------------
(In thousands)
Assets
Cash and due from banks $ 4,089 $ 3,758
Federal funds sold 200 1,600
-------- --------
Cash and cash equivalents 4,289 5,358
Interest-bearing deposits in banks 36 33
Investment Securities:
Held to Maturity (fair value 1994 - 6,718 20,008
$6,821; 1993 - $20,363)
Available for Sale at fair value 14,584 --
Loans:
Real estate 36,591 37,550
Installment and Consumer 38,025 38,446
Commercial, financial, and
agricultural 23,284 24,881
Lease financing 28,252 28,113
-------- --------
Total Loans 126,152 128,990
Less: Allowance for loan losses (1,257) (1,189)
Unearned income (10,136) (10,514)
-------- --------
Net Loans 114,759 117,287
Premises and equipment, net of
accumulated depreciation
(1994-$2,644; 1993-$2,378) 2,597 2,570
Other assets 2,539 2,347
-------- --------
Total Assets $145,522 $147,603
======== ========
Liabilities
Deposits:
Noninterest-bearing $ 8,192 $ 8,776
Interest-bearing 119,811 120,543
-------- --------
Total Deposits 128,003 129,319
Securities sold under
agreements to repurchase 3,347 4,687
Other liabilities 1,651 1,315
-------- --------
Total Liabilities 133,001 135,321
Shareholders' Equity
Preferred Stock-$10.00 par value:
Authorized and unissued 5,000,000 shares -- --
Common Stock-$2.50 par value:
Authorized 10,000,000 shares: issued
and outstanding - 769,147 shares 1,923 1,923
Surplus 4,115 4,115
Retained earnings 6,483 6,244
-------- --------
Total Shareholders' Equity 12,521 12,282
-------- --------
Total Liabilities and Shareholders'
Equity $145,522 $147,603
======== ========
See accompanying notes.
F-35
United National Bancorporation and Subsidiaries
Consolidated Statements of Income (unaudited)
Three Months
Ended March 31,
-----------------
1994 1993
---- ----
(In thousands except per share data)
Interest Income
Loans Including Fees $ 2,640 $ 2,704
Investments 281 429
Other 13 38
-------- --------
Total Interest Income 2,934 3,171
Total Interest Expense 991 1,293
-------- --------
Net Interest Income 1,943 1,878
Provision for Loan Losses 99 75
-------- --------
Net Interest Income
After Provision for Loan Losses 1,844 1,803
Gain on Sale of Mortgage Loans 9 239
Other Income 169 122
Other Expense 1,406 1,266
-------- --------
Income Before Income Taxes 616 898
Income Taxes 198 286
-------- --------
Net Income $ 418 $ 612
======== ========
Per share data:
Net income $0.54 $0.80
Cash dividends $0.13 $0.12
Average number of shares outstanding 769,147 769,147
See accompanying notes.
F-36
United National Bancorporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Unrealized
Common Retained Gain (Loss)
Stock Surplus Earnings AFS Securities Total
------- -------- -------- -------------- -----------
(in thousands)
Balance at 12/31/92 $1,748 $2,476 $6,607 $ 0 $10,831
Net income 612 612
Cash Dividends (92) (92)
------ ------ ------ ---- -------
Balance at 3/31/93 $1,748 $2,476 $7,127 $ 0 $11,351
====== ====== ====== ==== =======
Balance at 12/31/93 $1,923 $4,115 $6,244 $ 0 $12,282
Net Income 418 418
Cash Dividends (100) (100)
Changes in unrealized
gain (loss) on
securities available
for sale, net of
tax effect (79) (79)
------ ------ ------ ---- -------
Balance at 3/31/94 $1,923 $4,115 $6,562 $(79) $12,521
====== ====== ====== ==== =======
See accompanying notes.
F-37
United National Bancorporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months
Ended March 31,
-------------------------
1994 1993
------- --------
(In Thousands)
Operating Activities:
Net Income $ 418 $ 612
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for Loan Losses 99 75
Provision for Other Real Estate Owned 0 0
Provision for Depreciation & Amortization 78 61
Amortization of Investment Security Premiums
and Accretion of Discounts, net 18 (16)
Deferred Income Taxes 198 166
Gain on Sale of Loans (8) (239)
Realized Investment Security Gains (19) (2)
(Increase) Decrease in Other Assets (192) 132
Increase (Decrease) in Other Liabilities 180 61
------- -------
Net Cash Provided By (Used In) Operating
Activities 772 850
Investing Activities:
Net (Increase) Decrease in Loans 2,286 (4,652)
Proceeds from sale of Mortgage Loans 153 5,009
Purchase of premises and equipment, net (105) (183)
Proceeds from sales of investment securities 545 0
Proceeds from maturities of investment securities 3,627 1,468
Purchase of investment securities (5,588) (6,794)
Net (increase) decrease in short term investments (3) 1,566
------- -------
Net Cash Provided By (Used In) Investing
Activities 915 (3,586)
Financing Activities:
Net Increase (Decrease) in Deposits (1,316) 1,002
Net increase (decrease) in short-term borrowings (1,340) 106
Cash Dividends (100) (91)
------- -------
Net Cash Provided By (Used In) Financing
Activities (2,756) 1,017
Decrease in Cash and Cash Equivalents (1,069) (1,719)
Cash and Cash Equivalents, Beginning of Period 5,358 6,030
------- -------
Cash and Cash Equivalents, End of Period $ 4,289 $ 4,311
======= =======
See accompanying notes.
F-38
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1994
BASIS OF PRESENTATION
- ---------------------
Note 1 Management Representation: The accompanying unaudited consolidated
- ------ --------------------------
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 1994 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1994. For further
information, refer to the consolidated financial statements and footnotes
thereto included in United National Bancorporation's annual report on Form 10-K
for the year ended December 31, 1993.
Note 2 Reserve For Possible Loan Losses: (In thousands)
- ------ ---------------------------------
1994 1993
------ ------
Reserve balance January 1 $1,189 $1,061
Additions:
Provision charged to operating expenses 99 75
Recoveries of previously charged
off loans 17 12
Deductions:
Loans charged off 48 19
------ ------
Reserve balance March 31 $1,257 $1,129
Note 3 Cash Flow Disclosures: (In thousands)
- ------ ----------------------
Cash paid during the first three months of the year for interest and income
taxes were as follows:
1994 1993
------ ------
Interest $977 $1,210
Income Taxes 0 53
Note 4 Change in Accounting Method: The Corporation adopted Statement of
- ------ ----------------------------
Financial Accounting Standards No. 109 ("FAS No. 109"), "Accounting for Income
Taxes" effective January 1, 1993. FAS No. 109 is an asset and liability
approach for financial accounting and reporting for income taxes. As permitted
by Statement 109, UNB has elected not to restate the financial statements of any
prior year and the cumulative effect of the change had no material impact on the
balance sheet or income statement in the first quarter of 1993.
F-39
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1994
Note 5 Proposed Business Combination: On March 25, 1994, UNB signed a
- ------ ------------------------------
definitive agreement to merge the Corporation into First Commonwealth Financial
Corporation of Indiana, PA ("FCFC"). Total assets of the combined entity will
exceed $2.0 billion, affording our bank subsidiary, Unitas National Bank, and
active nonbank subsidiary, Unitas Mortgage Corporation, excellent long term
growth and profitability potential. We are confident that this partnership will
open significant opportunities for these subsidiaries as they become independent
affiliates of FCFC. Management of UNB anticipates acquisition costs to UNB in
excess of $200 thousand during 1994; however, Management is not aware of
forseeable future events which would otherwise materially alter the
profitability or safety and soundness of UNB. We expect certain cost savings in
noninterest expenditures subsequent to the merger.
F-40
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Independent Auditors' Report
[LETTERHEAD OF EDWARDS LEAP & SAUER APPEARS HERE]
To the Board of Directors and Stockholders
Reliable Financial Corporation
Reliable Savings Bank, PaSA
Bridgeville, Pennsylvania
We have audited the accompanying consolidated balance sheets of Reliable
Financial Corporation (the "Corporation") and subsidiary as of September 30,
1993 and 1992 and the related consolidated statements of income, changes in
retained earnings and stockholders' equity and cash flows for the years ended
September 30, 1993 and 1992 and the statements of income, changes in retained
earnings and stockholders' equity and cash flows of Reliable Savings Bank, PaSA
(the "Savings Bank") for the year ended September 30, 1991. These financial
statements are the responsibility of the Corporation's and the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Reliable
Financial Corporation and subsidiary as of September 30, 1993 and 1992 and the
results of their operations and cash flows for the years then ended and the
results of operations and cash flows of Reliable Savings Bank, PaSA for the year
ended September 30, 1991, in conformity with generally accepted accounting
principles.
Edwards Leap & Sauer
Pittsburgh, Pennsylvania
November 5, 1993
F-41
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
================================================================================
September 30,
1993 1992
-------------------------
(in thousands)
ASSETS
Cash $ 1,029 $ 955
Interest-bearing deposits in other institutions 20,587 33,763
Investment securities, at cost (approximate market value of
$35,856 and $12,796, respectively) 30,718 7,813
Federal Home Loan Bank stock, at cost 922 1,101
Loans 85,255 99,459
Allowance for loan losses (700) (495)
Mortgage-backed securities, at cost (approximate market value of
$6,117 and $226, respectively) 5,930 224
Accrued interest receivable 348 91
Premises and equipment, net 2,553 2,627
Other assets 141 265
-------- --------
$146,783 $145,803
======== ========
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $114,619 $114,099
Accrued interest payable 829 924
Advances from borrowers for taxes and insurance 707 650
Other liabilities 824 553
-------- --------
116,979 116,226
RETAINED EARNINGS AND STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share,
4,000,000 shares authorized, 1,460,242 shares issued of which
1,398,862 are outstanding 15 15
Additional paid-in capital 13,657 13,657
Retained earnings--substantially restricted 17,348 15,905
-------- --------
31,020 29,577
Less: Treasury stock; 61,380 shares at cost (1,216) -0-
-------- --------
$146,783 $145,803
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statements of Income
================================================================================
Years Ended September 30,
1993 1992 1991
------------------------------------------
(in thousands, except per share data)
INTEREST INCOME
Loans $ 9,012 $ 10,537 $ 11,250
Investment securities 1,662 1,224 941
Dividends 191 215 222
--------- --------- -------
10,865 11,976 12,413
================================================================================================================
INTEREST EXPENSE
Deposit accounts 4,500 6,147 7,912
--------- --------- -------
NET INTEREST INCOME 6,365 5,829 4,501
- ----------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 250 200 155
--------- --------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,115 5,629 4,346
================================================================================================================
NON-INTEREST INCOME
Net gain on sales of investment securities 1,133 261 -0-
Net gain on sales of real estate owned 49 11 -0-
Other 317 191 162
--------- --------- -------
7,614 6,092 4,508
=================================================================================================================
NON-INTEREST EXPENSES
Compensation 859 766 660
Employee benefits 183 114 124
Occupancy expense 308 295 287
Deposit insurance 236 267 221
Data processing 343 332 296
Other 646 446 336
--------- --------- -------
2,575 2,220 1,924
--------- --------- -------
INCOME BEFORE INCOME TAXES 5,039 3,872 2,584
================================================================================================================
PROVISION FOR INCOME TAXES 1,884 1,529 872
--------- --------- -------
NET INCOME $ 3,155 $ 2,343 $ 1,712
========= ========= =======
================================================================================================================
NET INCOME PER COMMON SHARE $ 2.21 $ 1.61 N/A*
========= ========= =======
Weighted average shares used in computing net
income per common share 1,425,596 1,457,944 N/A*
========= ========= =======
* Not Applicable
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Changes in Stockholders' Equity
================================================================================
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
-------------------------------------------------------------------
(in thousands)
Balance at September 30, 1990
(Reliable Savings Bank) $-0- $ -0- $12,361 $ -0- $12,361
Net Income -0- -0- 1,712 -0- 1,712
=======================================================================================================================
Balance at September 30, 1991
(Reliable Savings Bank) -0- -0- 14,073 -0- 14,073
Proceeds from issuance of
common stock 15 13,657 -0- -0- 13,672
Net Income -0- -0- 2,343 -0- 2,343
Dividends declared -0- -0- (511) -0- (511)
=======================================================================================================================
Balance at September 30, 1992 15 13,657 15,905 -0- 29,577
Net Income -0- -0- 3,155 -0- 3,155
Treasury stock (purchased 72,712
shares) -0- -0- -0- (1,420) (1,420)
Treasury stock (reissued 11,332
shares) -0- -0- (91) 204 113
Dividends declared -0- -0- (1,621) -0- (1,621)
=======================================================================================================================
Balance at September 30, 1993 $ 15 $13,657 $17,348 $(1,216) $29,804
==== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
================================================================================
Years Ended September 30,
1993 1992 1991
----------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,155 $ 2,343 $ 1,712
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 137 138 134
Net accretion/amortization of premiums and discounts 13 (1) (1)
Net gain on sales of investment securities (1,133) (261) -0-
Net gain on sales of real estate owned (49) (11) -0-
Unamortized loan fees (427) (73) (51)
Provision for loan losses 250 200 155
Increase (decrease) in cash due to changes in assets and liabilities:
Accrued interest receivable (257) (13) 160
Other assets 124 (118) (15)
Accrued interest payable (95) (200) 16
Other liabilities 73 137 (29)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,791 2,141 2,081
====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities -0- 800 1,000
Proceeds from sales of and redemption of investment securities 1,766 424 -0-
Purchase of investment securities (23,550) (6,709) -0-
Redemption (purchase) of FHLB stock 179 -0- (140)
Net loans repaid by customers 13,742 11,357 519
Purchase of mortgage-backed securities (5,977) -0- -0-
Proceeds from sales of real estate owned 1,163 39 13
Premises and equipment expenditures (63) (45) (94)
Net change in long-term interest-bearing deposits in other institutions -0- -0- 790
------- ------- -------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (12,740) 5,866 2,088
====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 520 (5,332) 7,782
Net increase (decrease) in advances from borrowers for taxes and insurance 57 (103) (123)
Proceeds from issuance of common stock, net of issuance costs of $930 -0- 13,672 -0-
Purchase of treasury stock (1,420) -0- -0-
Proceeds from reissuance of treasury stock 113 -0- -0-
Dividends paid (1,423) (219) -0-
------- ------- -------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,153) 8,018 7,659
====================================================================================================================
NET CHANGE IN CASH AND CASH EQUIVALENTS (13,102) 16,025 11,828
Cash and cash equivalents at beginning of year 34,718 18,693 6,865
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $21,616 $34,718 $18,693
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements
Years ended September 30, 1993, 1992 and 1991
================================================================================
Note A--Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements as of and for the years ended
September 30, 1993 and 1992 include Reliable Financial Corporation and its
wholly-owned subsidiary, Reliable Savings Bank, PaSA. The consolidated financial
statements for the year ended September 30, 1991 include Reliable Savings Bank,
PaSA and its wholly-owned subsidiary, Reliable Savings Service Corporation. All
significant intercompany balances and transactions have been eliminated.
Investment Securities:
Investment securities are carried at cost, adjusted for amortization of
premium and accretion of discount over the term of the security using the
interest method or methods which approximate the interest method. Gains or
losses on the sale of securities are recognized upon realization using both the
weighted average and the specific-identification methods. All securities
currently owned are classified as held for investment as management has the
ability to hold such investments until maturity and the intent to hold them for
the foreseeable future.
Mortgage-Backed Securities:
Mortgage-backed securities are stated at cost, adjusted for amortization of
premium and accretion of discount using the interest method or methods which
approximate the interest method. The Corporation has the ability and
management's intention is to hold such assets to maturity. Should any be sold,
gains and losses will be recognized based on the specific identification method.
Loans and Allowance for Loan Losses:
Loans are stated at the amount of unpaid principal less the undisbursed
portion of loans and unamortized loan fees. The allowance for loan losses is
established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible.
Real Estate Owned (REO):
Real estate acquired in satisfaction of a loan and in-substance
foreclosures are reported in other assets. In-substance foreclosures are
properties in which a borrower with little or no equity in the collateral,
effectively abandons control of the property or has no economic interest to
continue involvement in the property. The borrower's ability to rebuild equity
based on current financial conditions is also considered doubtful. Properties
acquired by foreclosure or deed in lieu of foreclosure and properties classified
as in-substance foreclosures are transferred to REO and recorded at the lower of
cost or fair value at the date actually or constructively received. Fair value
is measured by market transactions. If there are no active markets for similar
items, fair value is determined by discounting a forecast of expected cash flows
at a rate commensurate with the risk involved.
F-46
- --------------------------------------------------------------------------------
Interest Income:
Interest on loans is recorded when earned. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection is questionable. Loan origination fees are
deferred and recognized over the life of the loan as an adjustment of yield
(interest income).
Depreciation:
The Savings Bank generally computes depreciation on the straight-line
method for financial reporting purposes over the assets' estimated useful lives
which range from 7 to 50 years for buildings and leasehold improvements and from
5 to 10 years for furniture and fixtures. Depreciation for tax purposes is
computed under the straight-line method for assets placed in service prior to
January 1, 1981. Assets placed in service after December 31, 1980 are
depreciated under the provisions of Accelerated Cost Recovery System (ACRS) or
the Modified Accelerated Cost Recovery System (MACRS), which stipulates that the
cost of assets be recovered over recovery lives as determined by the Internal
Revenue Code. As a result, there may be timing differences between book
depreciation and tax depreciation.
Income Taxes:
Deferred income taxes are reported for timing differences between items of
income or expense reported in the financial statements and those reported for
income tax purposes. The differences relate principally to depreciation of
premises and equipment, recognition of interest income and the provision for
loan losses.
Earnings per Share:
Earnings per share are calculated on the basis of the weighted average
number of shares outstanding. As a result of the stock conversion, as described
in Note P, the newly issued stock was outstanding for 184 days during the fiscal
year ended September 30, 1992. Options to purchase an additional 34,000 shares
at $10/share, as described in Note L, were available for the year ended
September 30, 1993, with 11,332 shares actually purchased during the quarter
ended March 31, 1993. Therefore, the weighted average number for shares
outstanding was 1,425,596 and 1,457,944 at September 30, 1993 and 1992,
respectively.
Cash Equivalents:
For the purposes of the Statements of Cash Flows, the Corporation and the
Savings Bank consider all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
totaled $20,586,837, $33,762,891 and $18,201,160 at September 30, 1993, 1992 and
1991, respectively. Net loans transferred to real estate owned, a non-cash
operating activity, totaled $1,138,140, $0 and $32,943 in the years ended
September 30, 1993, 1992 and 1991, respectively.
Reclassification of Prior Years' Statements:
Certain items previously reported in the prior years' financial statements
have been reclassified to conform with the current year's classifications. These
reclassifications have no effect on net income.
F-47
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note B--Investment Securities
Investment securities at September 30 are summarized as follows:
September 30, 1993
---------------------------------------------------------
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
----------- ---------- ----------- -----------
U.S. Treasury notes $ 8,983,966 $ 69,784 $-0- $ 9,053,750
U.S. agency obligations 17,000,000 129,662 -0- 17,129,662
State and municipal
obligations 3,264,441 81,893 -0- 3,346,334
Corporate debt 499,044 5,656 -0- 504,700
Federal Home Loan Mortgage
Corporation common stock 970,103 4,851,772 -0- 5,821,875
----------- ---------- ---------- -----------
$30,717,554 $5,138,767 $-0- $35,856,321
=========== ========== ========== ===========
September 30, 1993
---------------------------------------------------------
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
----------- ---------- ----------- -----------
U.S. Treasury notes $ 1,997,485 $ 33,765 -0- $ 2,031,250
U.S. agency obligations 2,500,000 85,781 -0- 2,585,781
State and municipal obligations 1,715,000 14,580 -0- 1,729,580
Corporate debt 497,666 1,709 -0- 499,375
Federal Home Loan Mortgage Corporation
common stock 1,102,353 4,847,647 -0- 5,950,000
----------- ---------- --------- -----------
$ 7,812,504 $4,983,482 $-0- $12,795,986
=========== ========== ========= ===========
Years Ended
September 30,
---------------------------
1993 1992
----------- ----------
Gross realized gains:
Federal Home Loan Mortgage
Corporation common stock $ 1,133,333 $ 261,061
=========== ===========
The maturities of investment securities at September 30, 1993
were as follows:
Carrying Market
Amount Value
----------- -----------
Due in one year or less $ 2,143,883 $ 2,165,600
Due from one to five years 25,693,568 25,879,269
Due from five to ten years 1,910,000 1,989,577
Due after ten years -0- -0-
Marketable equity security 970,103 5,821,875
----------- -----------
$30,717,554 $35,856,321
=========== ===========
F-48
- ---------------------------------------------------------------------------
Note C--Loans
Loans at September 30 consisted of the following:
1993 1992
----------- ------------
Residential mortgage $78,782,333 $ 93,049,040
Real estate construction 5,765,420 5,450,472
Commercial real estate 1,837,585 456,171
Non-residential and land 1,941,955 2,391,215
Loans on deposit accounts 1,047,040 1,020,583
Home improvement loans 53,662 64,077
Consumer 570,623 391,259
----------- ------------
89,998,618 102,822,817
Less: Undisbursed portion of loans 3,555,533 1,749,066
Unamortized loan fees 1,188,441 1,615,346
----------- ------------
$85,254,644 $ 99,458,405
=========== ============
As of September 30, loans secured by one-to-four family residences
represented 93.94% and 95.80% of the total loan portfolio for 1993 and 1992,
respectively. Total loans on non-accrual status at September 30, 1993 and 1992
totaled approximately $2,600,000 and $1,200,000, respectively.
Changes in the allowance for loan losses were as follows:
Years Ended September 30,
------------------------------------
1993 1992 1991
-------- -------- --------
Balance, beginning of year $495,000 $295,000 $155,000
Provision charged to operations 250,000 200,000 154,619
Loans charged off (44,768) -0- (14,619)
-------- -------- --------
$700,232 $495,000 $295,000
======== ======== ========
The Savings Bank primarily grants residential mortgage loans to customers
in Allegheny and Washington counties, Pennsylvania. The Savings Bank maintains a
diversified loan portfolio and the ability of its debtors to honor their
contracts is not substantially dependent on any particular economic business
sector.
- --------------------------------------------------------------------------------
Note D--Accrued Interest Receivable
Accrued interest receivable at September 30 consisted of the following:
1993 1992
--------- ---------
Loans $ 1,449 $ 5,254
Investments 346,343 86,126
-------- -------
$347,792 $91,380
======== =======
F-49
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note E--Premises and Equipment
Premises and equipment at September 30 consisted of the following:
1993 1992
---------- ----------
Land $ 120,253 $ 120,253
Building 2,305,845 2,301,456
Leasehold improvements 258,024 242,691
Furniture and fixtures 862,535 819,555
---------- ----------
3,546,657 3,483,955
Less: Accumulated depreciation 993,171 856,769
---------- ----------
$2,553,486 $2,627,186
========== ==========
Depreciation expense totaled $136,402, $138,110 and $133,844 for the years
ended September 30, 1993, 1992 and 1991, respectively.
- --------------------------------------------------------------------------------
Note F--Federal Home Loan Bank Stock
The Savings Bank is required to own stock of the Federal Home Loan Bank
based on a percentage of net residential mortgages outstanding. During the year
ended September 30, 1993, the Savings Bank was required to redeem stock to the
Federal Home Loan Bank at its cost basis. The amount of common stock owned was
$922,100 and $1,100,800 at September 30, 1993 and 1992, respectively.
- --------------------------------------------------------------------------------
Note G--Deposit Accounts
Deposit accounts at September 30 consisted of the following:
Weighted
Average Rate At 1993 1992
September 30, ---------------------- -----------------------
1993 Amount % Amount %
--------------- ------------ ---- ------------ ----
Regular Passbook Savings 2.75% $ 29,843,096 26% $ 28,599,688 25%
Other Passbook Savings 2.75% 774,857 1% 1,229,640 1%
Christmas Club Savings 2.75% 630,625 1% 670,033 1%
Money Market Accounts 2.80% 14,771,856 13% 14,035,181 12%
NOW Checking Accounts 2.25% 6,296,495 5% 5,633,579 5%
Certificate Accounts
Maturities:
6 months or less 3.07% 15,680,504 14% 17,098,033 15%
6 months to 1 year 3.34% 10,430,759 9% 12,458,547 11%
1 year to 3 years 4.79% 12,272,065 11% 13,576,041 12%
More than 3 years 7.00% 19,762,189 17% 17,334,740 15%
------------ ---- ------------ ----
58,145,517 51% 60,467,361 53%
Non-Interest Bearing Accounts 4,156,062 3% 3,463,672 3%
------------ ---- ------------ ----
$114,618,508 100% $114,099,154 100%
============ ==== ============ ====
Certificates of deposit with balances exceeding $100,000 totaled $1,234,650
and $1,026,810 at September 30, 1993 and 1992, respectively.
The Savings Bank paid cash of approximately $4,600,000, $6,300,000, and
$7,900,000 in interest on deposits during the years ended September 30, 1993,
1992 and 1991, respectively.
F-50
- --------------------------------------------------------------------------------
Interest expense for the years ended September 30 is summarized as follows:
1993 1992 1991
-------------- -------------- --------------
Savings and NOW accounts $ 1,494,143 $ 1,890,983 $ 1,976,217
Time deposits 3,005,806 4,256,044 5,936,262
-------------- -------------- --------------
$ 4,499,949 $ 6,147,027 $ 7,912,479
============== ============== ==============
- --------------------------------------------------------------------------------
Note H--Stockholders' Equity
Retained earnings at September 30, 1992, the most recent date for which tax
returns were filed, included approximately $4,917,000 for which no provision for
federal income tax has been made. These amounts represent allocations of income
to bad debt deductions for tax purposes only. Reduction of amounts so allocated
for purposes other than tax bad debt losses will create income for tax purposes
only, which will be subject to the then current corporate income tax rate.
Treasury stock is shown at cost and consists of 61,380 shares of the
Corporation's stock at September 30, 1993. The Corporation purchased 72,712
shares of Treasury stock at an average price per share of approximately $19.50
and reissued 11,332 shares which cost approximately $18.00 per share, at $10.00
per share during the year ended September 30, 1993. The reissuance was in
conjunction with the Benefit Plans as described in Note L.
- --------------------------------------------------------------------------------
Note I--Income Taxes
In addition to charging income for taxes actually paid or payable, the
provision for income taxes can reflect deferred income tax credits which result
from timing differences in computing income for financial and income tax
reporting. There were no deferred tax credits included in the income tax
provisions for the years ended September 30, 1993, 1992 and 1991. The principal
timing differences are a result of recognition of bad debt deductions, interest
income, loan fees and accelerated depreciation methods.
For Federal income tax purposes the Savings Bank is permitted a tax bad
debt deduction unrelated to any loan loss provision for book purposes. This
deduction is computed by one of two methods, the experience method taking into
account the six year moving average of net charge-offs to loans, and the
percentage of taxable income method, subject to certain limitations. The amount
of the tax bad debt deduction for the year ended September 30, 1992 was $-0-and
approximately $145,000 for the short tax year ended September 30, 1991. Due to
the limitations referenced above, no tax bad debt deduction is anticipated for
the tax year ended September 30, 1993.
The Corporation made income tax payments of $1,847,644 and $1,442,703
during the years ended September 30, 1993 and 1992, respectively. The Savings
Bank made income tax payments of $866,270 during the year ended September 30,
1991.
The income tax provision at September 30 consisted of the following:
1993 1992 1991
-------------- -------------- ------------
Federal income taxes $ 1,587,873 $ 1,209,935 $ 687,308
State income taxes 296,037 318,782 184,705
-------------- -------------- ------------
$ 1,883,910 $ 1,528,717 $ 872,013
============== ============== ============
F-51
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate primarily due to the following:
1993 1992 1991
-------------- -------------- ------------
Statutory tax rate 34.0% 34.0% 34.0%
Decrease in deferred loan fees (2.9) (.6) (1.4)
Exempt interest, dividends, net (.9) (.6) (.7)
Change in accounting method -0- -0- .2
Bad debt deduction 1.7 1.8 .1
Capital loss carryover -0- (.5) -0-
Other, net (.4) (2.8) (5.6)
-------------- -------------- ------------
Effective tax rate 31.5% 31.3% 26.6%
============== ============== ============
State income taxes are paid on income determined in accordance with
generally accepted accounting principles.
In February of 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes", that supersedes SFAS No. 96 and APB 11. The primary changes
incorporated in SFAS 109 include, among other things, relaxation of the criteria
for recognizing deferred tax assets and reduction in the complexity of
calculating deferred taxes by reducing the need to schedule the reversal of
temporary differences year-by-year. The statement is effective for fiscal years
beginning after December 15, 1992. The Corporation plans to adopt SFAS 109 in
the first quarter of fiscal 1994. The adoption of SFAS 109 will require the
Corporation to change to the liability method for financial accounting and
reporting for income taxes. The Corporation currently estimates that its
deferred tax liability would be decreased by approximately $370,000. The
resulting benefit will be recorded through the income statement and reported as
a cumulative effect of a change in an accounting principle.
- --------------------------------------------------------------------------------
Note J--Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") of 1989
FIRREA was signed into law on August 9, 1989 and regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the federal regulatory structure for institutions including a new deposit
insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment-grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings institution.
The regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5 percent of total assets and, a minimum 3 percent core
capital ratio. The risk-based capital ratio requirement is 8.0 percent of total
risk adjusted assets as of December 31, 1992. Prior to December 31, 1992 it was
7.2% of total risk adjusted assets.
The Savings Bank, at September 30, 1993, meets all regulatory tangible
capital, core capital and risk-based capital requirements of 8.0 percent, as
defined by FIRREA. Failure to meet these capital requirements would expose the
Savings Bank to regulatory sanctions, including limitations on asset growth. The
following table shows that the Savings Bank is in compliance with regulatory
capital standards:
F-52
- --------------------------------------------------------------------------------
Percent of
Adjusted
Amount Total Assets
---------- --------------
(dollars in thousands)
GAAP capital $ 25,903 18.19%
========== ==============
Tangible capital $ 25,903 18.19%
Tangible capital requirement 2,135 1.50%
---------- --------------
Excess $ 23,768 16.69%
========== ==============
Core capital $ 25,903 18.19%
Core capital requirement 4,271 3.00%
---------- --------------
Excess $ 21,632 15.19%
========== ==============
Risk-based capital $ 26,603 42.71%
Minimum risk-based capital requirement 4,984 8.00%
---------- --------------
Excess $ 21,619 34.71%
========== ==============
Risk-based capital includes supplementary capital of $700,232, representing
the general allowance for loan losses.
The following is a reconciliation of net income and retained earnings (as
shown in these audited financial statements) to net income and retained earnings
as presented in the Office of Thrift Supervision quarterly reports:
September 30, 1993 September 30, 1992
------------------------- -------------------------
Twelve Twelve
Months Ended Balance Months Ended Balance
------------ ------- ------------ -------
Retained Retained
Net Income Earnings Net Income Earnings
------------ -------- ------------ --------
(in thousands)
Balances on regulatory reports $3,203 $19,067 $2,208 $15,864
Add (deduct) audit adjustments for:
Income (loss) of parent (48) (7) 41 41
Other activity -0- (1,712) 94 -0-
------ ------- ------ -------
Balances on accompanying consolidated
financial statements $3,155 $17,348 $2,343 $15,905
====== ======= ====== =======
Other activity for the year ended September 30, 1993 consists of dividends
declared of approximately $1,621,000 and the effect of treasury stock reissued
at approximately $91,000 less than the purchase price.
- --------------------------------------------------------------------------------
Note K--Commitments
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit. These
commitments involve, to varying degrees, elements of credit risk in excess of
amounts recognized in the balance sheets.
Loan commitments are made to accommodate the financial needs of the Savings
Bank's customers.
These arrangements have credit risk essentially the same as that involved
in extending loans to customers and are subject to the Savings Bank's normal
credit policies and loan underwriting standards. Collateral is obtained based on
management's credit assessment of the customer. Management currently expects no
loss from these activities.
F-53
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
The Savings Bank's maximum exposure to credit loss for loan commitments
(unfunded loans) outstanding at September 30, 1993 and 1992, was $3,330,720 and
$1,272,000, respectively. Commitments for fixed rate loans totaled $2,741,720
and $773,000 at September 30, 1993 and 1992, respectively, with rates ranging
from 6.5% to 12%. The Savings Bank had outstanding commitments at September 30,
1993 and 1992 of $-0- and $324,000, respectively to purchase investment
securities.
Lease commitments: Annual rentals under long-term monthly operating leases
for property amounted to $22,800 in 1993, 1992 and 1991. At September 30, 1993,
the minimum rental commitment, including any current renewal options under
existing leases with initial or remaining terms of more than one year was as
follows:
Years Ending Gross Rental
September 30 Expense
------------ -----------
1994 $ 23,900
1995 24,000
1996 24,000
1997 13,900
1998 10,800
Remaining term 1,800
--------
TOTAL COMMITMENT $ 98,400
========
- --------------------------------------------------------------------------------
Note L--Pension, Retirement and Benefit Plans
On August 9, 1991, the Savings Bank elected to terminate its previously
existing defined benefit pension plan. Under Statement of Financial Accounting
Standards No. 88 (SFAS 88), "Employer's Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", a
termination of a defined benefit plan is considered both a settlement (an
irrevocable transaction relieving an employer of the responsibility for a
pension benefit obligation) and a curtailment (elimination for employees of the
accrual of defined benefits for future service). All balances in the plan as of
September 30, 1991, which were determined by actuaries to equal $845,627 vested
in the plan participants in relation to their respective present values
determined at a weighted average discount rate and long-term rate of return on
plan assets of 7.5% in the plan as of the termination date. Therefore, there was
no settlement or curtailment gain or loss associated with the termination. The
plan trust continued to hold the plan assets until distribution of $861,351 on
January 20, 1992. By definition, the accumulated benefit obligation is the value
of the assets. Pension expense for 1991 totaled $31,377.
On June 25, 1991, the Savings Bank adopted a 401(k) retirement plan,
whereby the employees may elect to make pre-tax contributions through a salary
reduction of up to 10% of their monthly salary. The Savings Bank may match
dollar for dollar up to 5% of employees' monthly salary reduction or make
elective contributions to the Plan. The Savings Bank's contributions to the Plan
were $29,047, $22,786 and $1,770 for the years ended September 30, 1993, 1992
and 1991, respectively.
On January 23, 1992, the Board of Directors of the Savings Bank adopted the
Reliable Savings Bank, PaSA Recognition and Retention Plan ("RRP") as a method
of providing officers and key employees with a proprietary interest in Reliable
Financial Corporation. All employees of the Savings Bank and its affiliates are
eligible to receive awards from the plan. The standard vesting rate of an award
is 20% per year commencing one year from the date of the award.
In August, 1992 an award under the RRP was granted to President Stephen
Grippi, representing 6,000 shares which were purchased at $17.50 per share.
Vesting under this award is 33 1/3% over three years. Amortization, on a
straight line basis over three (3) years, of this award for the years
F-54
ended September 30, 1993 and 1992 totaled $49,500 and $3,500, respectively.
During the year ended September 30, 1993, 2,000 shares had vested.
On January 14, 1992, the Board of Directors of Reliable Financial adopted
Reliable Financial Corporation 1992 Incentive Stock Option Plan (the "Option
Plan") and the Reliable Financial Corporation 1992 Stock Option Plan for
Nonemployee Directors (the "Directors' Plan"). Under the Option Plan, options
may only be granted to officers and other key employees. The Option Plan is
designed to encourage the continued employment of these employees and to attract
new employees by facilitating their purchase of a stock interest in Reliable
Financial. Options granted under the Option Plan may include both incentive
stock options ("ISOs") within the meaning of Section 422A of the Internal
Revenue Code and nonstatutory stock options ("Nonstatutory Options").
The Pension Committee will, from time to time, select employees to whom
Options are to be granted and the number of Options to be granted based upon the
employee's performance, compensation and the nature of his responsibilities,
duties and functions.
Pursuant to the Option Plan, up to 109,518 shares of Reliable Financial
common stock may be issued or transferred for the exercise of options to
purchase shares of common stock.
The Committee will determine the dates on which each Option will become
exercisable. Each ISO will continue to be exercisable over a maximum period of
ten years from the date granted, and each Nonstatutory Option will be
exercisable over a period of ten years and one day from the date granted.
Under circumstances set forth in the Option Plan, all or a portion of the
Options may be exercised for specified periods following termination of
employment. An Option may not be transferred by an optionee during his or her
lifetime. The exercise price per share of Common Stock covered by an Option
shall be the fair market value of Common Stock on the date of grant. The
shares purchased upon exercise of an Option are to be paid for in cash or
through the delivery of previously-acquired shares of Common Stock or in a
combination of cash and such shares.
The Pension Committee, with shareholder ratification, has granted to
President Grippi options under the Option Plan to purchase 12,000 shares of
stock. One-third of these options were exercised on the first anniversary date
of the conversion.
The Directors' Plan is designed to promote the growth and profitability of
Reliable Financial and the Savings Bank and to provide non-employee directors
with an incentive to assume the significant duties and responsibilities entailed
therewith. Benefits under the Directors' Plan are granted to non-employee
directors, a group currently consisting of 4 people. Pursuant to the Directors'
Plan, up to 36,506 shares of the common stock of Reliable may be issued or
transferred pursuant to the exercise of options to purchase shares of common
stock ("Directors' Options"). Directors' Options may only be granted to members
of Reliable's Board of Directors who are not employees of Reliable, the Savings
Bank or any other subsidiary or affiliate thereof on the date the Directors'
Options are granted. Directors' Options granted under the Directors' Plan are
nonstatutory stock options.
The Directors' Plan provides that each of the 4 non-employee directors
serving at the consummation of the conversion of the Savings Bank from mutual to
stock form receive options to purchase 5,500 shares of Reliable common stock.
New directors, subsequently elected, also receive the option to purchase 5,500
shares, to the extent shares remain available under the Directors' Plan. The
exercise price of the outstanding Directors' Options is $10.00 per share, which
was the fair market value of Reliable's common stock on the date of grant. No
Directors' Option may be exercised after the expiration of ten years and one day
from the date of grant of such option. One-third of these Directors' Options
were exercised on the first anniversary of the date of grant.
F-55
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note M--Reliable Financial Corporation
Reliable Financial Corporation was formed on November 7, 1991 to acquire
100% of the common stock of Reliable Savings Bank, PaSA as a result of the
Savings Bank's conversion from mutual to stock form. Prior to March 30, 1992,
Reliable Financial Corporation had no significant assets. Reliable Financial
Corporation currently has no independent business operations. Certain items
previously reported in the prior years' financial statements have been
reclassified to conform with the current year's classifications. These
reclassifications have no effect on the consolidated net income.
The condensed financial information for Reliable Financial Corporation as
of and for the years ended September 30, 1993 and 1992 is as follows:
BALANCE SHEETS
1993 1992
------------ -----------
ASSETS
Interest-bearing deposits $ 4,416,208 $ 7,134,702
Investment in Reliable Savings Bank 11,830,791 8,627,252
Prepaid taxes 839 42,572
----------- -----------
$16,247,838 $15,804,526
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends Payable $ 489,602 $ 292,048
Accrued expenses 27,212 8,148
----------- -----------
516,814 300,196
Stockholders' Equity
Common stock, par value $0.01 per share, 4,000,000 shares authorized,
1,460,242 shares issued and outstanding 14,602 14,602
Additional paid-in capital 13,657,743 13,657,743
Retained earnings 3,275,153 1,831,985
Treasury stock, at cost (1,216,474) -0-
----------- -----------
15,731,024 15,504,330
----------- -----------
$16,247,838 $15,804,526
=========== ===========
STATEMENTS OF INCOME
Interest and other operating income $ 159,708 $ 108,733
Dividends from Reliable Savings Bank -0- 511,086
----------- ------------
159,708 619,819
EXPENSES
Operating expenses 208,344 16,586
----------- ------------
INCOME (LOSS) BEFORE TAXES (48,636) 603,233
PROVISION FOR INCOME TAXES -0- 51,243
----------- ------------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (48,636) 551,990
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 3,203,539 1,791,080
----------- -----------
NET INCOME $ 3,154,903 $ 2,343,070
=========== ===========
F-56
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES 1993 1992
--------------- ---------------
Net income $ 3,154,903 $ 2,343,070
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase (decrease) in cash due to changes in assets and liabilities:
Equity in undistributed earnings of subsidiary (3,203,539) (1,791,080)
Prepaid taxes 41,732 (42,572)
Accrued expenses 19,064 8,148
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,160 517,566
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Reliable Savings Bank stock -0- (6,836,171)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES -0- (6,836,171)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net -0- 13,672,345
Purchase of treasury stock (1,420,240) -0-
Proceeds from reissuance of treasury stock 113,320 -0-
Dividends paid (1,423,734) (219,038)
--------------- ---------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,730,654) 13,453,307
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,718,494) 7,134,702
Cash and cash equivalents at beginning of year 7,134,702 -0-
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,416,208 $ 7,134,702
=============== ===============
- --------------------------------------------------------------------------------
Note N--Supplemental Information
The following condensed statement summarizes the financial position of the
Savings Bank's wholly-owned subsidiary, Reliable Savings Service Corporation,
which has been consolidated with the financial statements of Reliable Savings
Bank, PaSA at September 30, 1992 (immediately prior to liquidation). Under the
authority of the Board of Directors of the Savings Bank, liquidation of the
service corporation was approved as of September 30, 1992.
The statement is presented as supplemental information only and is not
necessary for the fair presentation of the consolidated financial statements.
RELIABLE SAVINGS SERVICE CORPORATION
CONDENSED BALANCE SHEET
September 30, 1992 (immediately prior to liquidation)
ASSETS
Cash in bank $ -0-
Receivable--Parent 5,764
-----------
$ 5,764
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Common stock $ 21,000
Additional paid-in capital 40,000
Retained earnings (deficit) (55,236)
-----------
$ 5,764
===========
F-57
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note O--Related-Party Transactions
Certain officers and directors and their affiliates of Reliable Savings
Bank, PaSA were indebted to the Savings Bank at September 30, 1993 and 1992.
Related party loans are made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons and generally do
not involve more than normal risk of collectibility. The aggregate dollar amount
of these loans (exclusive of loans to any such person which in the aggregate do
not exceed $60,000 at September 30, 1993) was $706,387 and $726,979 at September
30, 1993 and 1992, respectively. During the year ended September 30, 1993 and
1992, $67,000 and $87,900 of new loans were made to related parties and
repayments by any such person(s) totaled $87,592 and $90,336, respectively.
- --------------------------------------------------------------------------------
Note P--Conversion
On March 16, 1992, the members of the Savings Bank formally approved the
Plan of Conversion under which the Savings Bank converted from a
Pennsylvania-chartered mutual savings and loan association to a
Pennsylvania-chartered permanent reserve fund capital stock savings and loan
association. Included in the Plan of Conversion was the formation of a holding
company, Reliable Financial Corporation, which owns all of the common stock of
Reliable Savings Bank, PaSA, as its wholly-owned subsidiary. The conversion was
consummated on March 30, 1992.
- --------------------------------------------------------------------------------
Note Q--Accounting Standards
In addition to SFAS 109, as previously discussed in Note I, certain other
recent accounting standards relating to the Corporation have been promulgated by
the Financial Accounting Standards Board. Statement of Financial Accounting
Standards No. 107 requires entities to disclose the fair value of "Financial
Instruments" for which it is practicable to estimate fair value, with certain
exceptions. Statement of Financial Accounting Standards No. 114 addresses the
accounting by creditors for impairment of certain loans. Statement of Financial
Accounting Standards No. 115 relates to accounting for certain investments in
debt and equity securities.
The Corporation is not currently required to and has elected not to adopt
early implementation of any of these standards. The impact of such adoption was
not determined at this time.
F-58
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
- --------------------------------------------------------------------------------
March 31, September 30,
1994 1993
---------- -------------
ASSETS
Cash $ 820 $ 1,029
Interest-bearing deposits in other institutions 16,910 20,587
FHLMC stock available for sale (market value 928 -
of $5,583 at March 31, 1994)
Investment securities, at cost (market value 35,698 30,718
of $37,133 and $35,586)
Mortgage-backed securities, at cost (market value 5,336 5,930
of $5,426 and $6,117)
Federal Home Loan Bank stock, at cost 848 922
Loans 87,165 85,255
Allowance for possible loan losses (800) (700)
Accrued interest receivable 423 348
Premises and equipment, net 2,484 2,553
Other assets 589 141
-------- --------
$150,401 $146,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $116,817 $114,619
Accrued interest payable 307 829
Advances from borrowers for taxes and insurance 2,238 707
Other liabilities 663 824
120,025 116,979
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 4,000,000 shares 15 15
authorized; 1,460,242 shares issued;
1,410,194 and 1,398,862 shares outstanding
Additional paid-in capital 13,657 13,657
Retained earnings - substantially restricted 17,702 17,348
-------- --------
31,374 31,020
Less: Treasury stock, at cost 998 1,216
-------- --------
30,376 29,804
-------- --------
$150,401 $146,783
======== ========
See notes to consolidated financial statements.
F-59
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share data)
- --------------------------------------------------------------------------------
Three Months Six Months
Ended March 31, Ended March 31,
--------------------- ---------------------
1994 1993 1994 1993
---- ---- ---- ----
INTEREST INCOME
Loans $ 1,890 $ 2,148 $ 3,846 $ 4,572
Investment securities 522 366 1,023 726
Mortgage-backed securities 80 61 159 70
Dividends 39 50 80 99
---------- ---------- ---------- ----------
2,531 2,625 5,108 5,467
INTEREST EXPENSE
Deposit accounts 1,039 1,133 2,092 2,310
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,492 1,492 3,016 3,157
PROVISION FOR POSSIBLE LOAN
LOSSES 50 50 100 100
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE
LOAN LOSSES 1,442 1,442 2,916 3,057
NON-INTEREST INCOME
Net gain on sales of FHLMC stock 234 483 234 483
Net (loss) on real estate owned - (5) - (5)
Other 102 76 189 145
---------- ---------- ---------- ----------
1,778 1,996 3,339 3,680
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Compensation 230 223 443 420
Employee benefits 47 59 91 91
Occupancy expense 79 71 156 148
Deposit insurance 66 51 133 117
Data processing 79 83 161 171
Other 152 154 320 305
---------- ---------- ---------- ----------
653 641 1,304 1,252
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT ON PRIOR
YEARS OF CHANGE IN TAX
ACCOUNTING METHOD 1,125 1,355 2,035 2,428
PROVISION FOR INCOME TAXES 474 564 818 952
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
ON PRIOR YEARS OF CHANGE IN
TAX ACCOUNTING METHOD 651 791 1,217 1,476
CUMULATIVE EFFECT ON PRIOR YEARS
OF CHANGE IN TAX ACCOUNTING
METHOD - - 365 -
---------- ---------- ---------- ----------
NET INCOME $ 651 $ 791 $ 1,582 $ 1,476
========== ========== ========== ==========
PER SHARE DATA (BASED ON AVERAGE
SHARES OUTSTANDING)
Income before cumulative effect
of change in tax accounting
method
$0.46 $0.56 $0.86 $1.03
---------- ---------- ---------- ----------
Cumulative effect of change in
tax accounting method - - 0.26 -
---------- ---------- ---------- ----------
Net income $0.46 $0.56 $1.12 $1.03
========== ========== ========== ==========
Cash dividends declared $0.40 $0.25 $0.80 $0.50
========== ========== ========== ==========
Weighted average shares
outstanding 1,406,299 1,405,038 1,409,938 1,437,277
========== ========== ========== ==========
See notes to consolidated financial statements.
F-60
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
(In thousands)
- --------------------------------------------------------------------------------
Common Additional Retained Treasury Total
stock Paid-In Capital Earnings Stock
-----------------------------------------------------------
Balance at September 30, 1992 $15 $13,657 $15,905 $-0- $29,577
Net Income -0- -0- 1,476 -0- 1,476
Treasury stock (purchased -0- -0- -0- (1,420) (1,420)
72,712 shares)
Treasury stock (reissued -0- -0- (91) 204 113
11,332 shares)
Dividends declared -0- 0- (712) -0- (712)
--- ------- ------- ------- -------
Balance at March 31, 1993 $15 $13,657 $16,578 $(1,216) $29,034
=== ======= ======= ======= =======
- ---------------------------
Balance at September 30, 1993 $15 $13,657 $17,348 $(1,216) $29,804
Net Income -0- -0- 1,582 -0- 1,582
Treasury stock (reissued -0- -0- (105) 218 113
11,332
shares)
Dividends declared -0- -0- (1,123) -0- (1,123)
--- ------- ------- ----- -------
Balance at March 31, 1994 $15 $13,657 $17,702 $(998) $30,376
=== ======= ======= ===== =======
See notes to consolidated financial statements.
F-61
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
(In thousands)
- --------------------------------------------------------------------------------
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,582 $ 1,476
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 69 68
Net accretion of discounts on
investment securities (7) (3)
Gain on sales of FHLMC stock (234) (483)
Unamortized loan fees (121) (144)
Deferred income taxes (355) -
Provision for possible loan losses 100 100
Increase (decrease) in cash due to
changes in assets and liabilities:
Accrued interest receivable (75) (52)
Other assets (93) 10
Accrued interest payable (522) (593)
Other liabilities (161) 39
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 183 418
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed
securities - (4,997)
Purchases of investment securities (8,943) (6,570)
Proceeds from sales of FHLMC stock 276 489
Proceeds from redemptions and
maturities of investment securities 3,000 -
Proceeds from redemption of FHLB stock 74 179
Net (increase) decrease in loans (1,862) 7,342
Principal payments on mortgage-backed
securities 594 -
Premises and equipment expenditures - (42)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,861) (3,599)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 2,198 1,761
Net increase in advances from
borrowers for taxes and insurance 1,530 1,148
Purchase of treasury stock - (1,420)
Proceeds from sale of treasury stock 113 113
Dividends paid (1,049) (654)
------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,792 948
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,886) (2,233)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 21,616 34,718
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $17,730 $32,485
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid on deposits $ 2,614 $ 2,903
Income taxes paid $ 978 $ 863
Loans transferred to real estate owned $ - $ 983
Investment securities transferred to
FHLMC stock available for sale $ 928 $ -
See notes to consolidated financial statements.
F-62
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
- -------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three- and six-month periods ended
March 31, 1994, are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30,
1994. The interim consolidated financial statements and the
following discussion should be read in conjunction with the
consolidated financial statements and footnotes thereto included
in the Corporation's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993.
NOTE 2. EARNINGS PER SHARE
Earnings per common share are based on the weighted average
number of common shares outstanding and common share equivalents
in each period. Weighted average shares outstanding include
common share equivalents under the available stock option plans.
NOTE 3. FHLMC STOCK AVAILABLE FOR SALE
Investment securities to be held for indefinite periods of time
including investment securities that management intends to use
as part of its asset/liability strategy, and that may be sold in
response to changes in interest rates, changes in prepayment
risk, or other similar factors are classified as available for
sale and are recorded at the lower of aggregate cost or market.
Specifically, management has classified only the FHLMC stock as
available for sale.
NOTE 4. INVESTMENT SECURITIES
Investments in debt securities which management has the ability
and intent to hold to maturity or on a long-term basis are
carried at cost. Premiums and discounts are amortized to expense
and accreted to income over the life of the securities using a
method which approximates the level yield method. Gain or loss
on the sale of investment securities, if any, are based on the
specific identification method.
F-63
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
- -------------------------------------------------------------------------------
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB")
issued Statement No. 114 "Accounting by Creditors for the
Impairment of a Loan" which is effective for fiscal years
beginning after December 15, 1994. Statement No. 114 addresses
the methods to be used by a creditor to measure the impairment
of a loan and the proper recognition of a change in the value of
an impaired loan. Management believes that the effect of
adopting this statement on Reliable's consolidated financial
statements would not be material.
Also in May 1993, the FASB issued Statement No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" which is
effective for fiscal years beginning after December 15, 1993.
Statement No. 115 addresses the definition of, accounting for
and disclosure of debt and equity securities. In accordance with
this statement, securities will be classified into and accounted
for based on three distinct categories: securities held to
maturity, securities available for sale and trading securities.
Management is currently evaluating the impact of this statement
on Reliable's consolidated financial statements.
NOTE 6. RECLASSIFICATIONS
Certain items previously reported in the September 30, 1993
consolidated financial statements have been reclassified to
conform with the current quarter's classifications. These
reclassifications have no effect on net income.
NOTE 7. SUBSEQUENT EVENT
On April 21, 1994, the registrant entered into a definitive
agreement to be acquired by First Commonwealth Financial
Corporation ("FCFC") of Indiana, Pennsylvania. FCFC was
incorporated in Pennsylvania in 1982 and is registered as a bank
holding company which is currently affiliated with 7 wholly
owned bank subsidiaries. In addition, FCFC owns a data
processing subsidiary and a trust company subsidiary both
headquartered in Indiana, Pennsylvania and FCFC also has a joint
venture interest in a credit life insurance company. Through its
subsidiary banking network, FCFC traces it banking origins to
1880 and conducts its business through 69 community banking
offices in 51 communities throughout 14 counties of central and
western Pennsylvania. FCFC has total assets of approximately $2
billion and employs over 900 persons. The shares of FCFC are
traded on the New York Stock Exchange under the symbol "FCF".
The agreement provides for the issuance of 1.6 shares of FCFC's
common stock for each share of the registrant's common stock. It
is anticipated that the acquisition will be accounted for as a
pooling of interests.
F-64
ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION made as of March 25, 1994 (the
"Agreement") by FIRST COMMONWEALTH FINANCIAL CORPORATION, a Pennsylvania
business corporation having its principal place of business at Old Courthouse
Square, 22 North Sixth Street, Indiana, Pennsylvania ("FCFC"), and UNITED
NATIONAL BANCORPORATION, a Pennsylvania business corporation having its
principal place of business at 15 South Main Street, Chambersburg, Pennsylvania
("United").
W I T N E S S E T H:
FCFC and United are bank holding companies registered under the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"); and
the Boards of Directors of FCFC and United have determined that it is in the
best interests of FCFC and United to become affiliated by means of a merger of
United into FCFC in which FCFC will be the surviving corporation and the
shareholders of United will become shareholders of FCFC.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements herein contained and each intending to be legally bound
hereby, covenant and agree as follows:
1. The Reorganization. The reorganization contemplated by this
------------------
Agreement is the merger of United into FCFC (the "Merger") pursuant to a Plan of
Merger substantially in the form attached hereto as Appendix A (the "Plan of
Merger"). As provided in the Plan of Merger, on the Effective Date (as defined
in Section 8(g) hereof) United will be merged into FCFC, which will be the
surviving corporation; each share of Common Stock, par value $2.50 per share, of
United (the "United Stock") outstanding immediately before the Merger becomes
effective (other than those shares, if any, as to which the holders shall
perfect their dissenters' rights) will be converted into two shares of Common
Stock, par value $1 per share, of FCFC (the "FCFC Stock").
2. Conditions. This Agreement and the consummation of the Merger are
----------
subject to the fulfillment at or before the Closing (as defined in Section 8(a)
hereof) of the following conditions:
(a) Shareholder Approvals. This Agreement and the Plan of Merger
---------------------
shall have been approved by the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote at the United Shareholders'
Meeting referred to in Section 6(a) hereof.
A-I-1
(b) Regulatory Approvals. The Merger shall have been approved by the
--------------------
Pennsylvania Department of Banking under the Pennsylvania Banking Code of
1965, as amended (the "Pennsylvania Banking Code"); the Merger shall have
been approved by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act; and any other
regulatory approvals necessary to the consummation of the Merger shall have
been obtained. No action or suit to enjoin or prohibit the Merger shall
have been filed by the United States under the antitrust laws in the period
of 30 days following the date of the approval by the Federal Reserve Board.
(c) Federal Tax Opinion. FCFC and United shall have received from
-------------------
Reed Smith Shaw & McClay, special counsel for FCFC and United, an opinion
in form and substance satisfactory to the parties and their respective
counsel to the effect that:
(i) The Merger will constitute a reorganization under the
provisions of Sections 368(a)(1)(A) of the Internal Revenue Code of
1986 (the "Code");
(ii) No gain or loss will be recognized to United or FCFC as a
result of the Merger;
(iii) No gain or loss will be recognized to the United
shareholders upon the exchange of United Stock for FCFC Stock;
(iv) The basis of the FCFC Stock to be received by the United
shareholders will be the same as the basis of the United Stock
surrendered in exchange therefor;
(v) The holding period of the FCFC Stock to be received by the
United shareholders will include the holding period of the United
Stock surrendered in exchange therefor, provided that the United Stock
was held as a capital asset in the hands of the United shareholders on
the date of the exchange;
(vi) Where a United shareholder dissents to the proposed
transaction and receives cash in exchange for his United Stock, the
cash will be treated as received by the shareholder as a distribution
in redemption of his United Stock subject to the provisions and
limitations of Section 302 of the Code; and
(vii) Cash received by a dissenting United shareholder as
described in paragraph (vi) will be treated as if the shares had been
sold to United for the cash received and will generally be entitled to
capital gain or loss treatment under Section 302 of the Code,
A-I-2
provided the shares are a capital asset in the hands of the
shareholder. However, because the ownership of shares by certain
individuals related to the shareholder and by certain partnerships,
estates, trusts and corporations in which the shareholder has an
interest may have an adverse impact upon the tax treatment of the
cash received by the shareholder and result in its being taxed as a
dividend, the shareholder should consult with his personal tax
advisor as to the federal, state and local tax consequences of
receiving cash as a dissenting shareholder.
(d) Securities Act Registration. The Registration Statement
---------------------------
contemplated by Section 5(c) hereof shall have been filed by FCFC with
the Securities and Exchange Commission (the "SEC") under the Securities
Act of 1933, as amended (the "Securities Act"), and shall have been
declared effective before the proxy statement/prospectus contained
therein (the "Proxy Statement/Prospectus") is first mailed to the United
shareholders, and no stop order with respect to the effectiveness of the
Registration Statement shall have been issued or any proceeding therefor
initiated or threatened under the Securities Act. The Registration
Statement, when and as declared effective by the SEC and on the date of
the United Shareholders' Meeting referred to in Section 6(a) hereof,
shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under
which they are made, not misleading. In addition, the FCFC Stock to be
issued pursuant to the Plan of Merger shall have been duly registered or
qualified under the securities or "blue sky" laws of all states in which
such action is required for purposes of the initial issuance of such
stock and its distribution to the United shareholders entitled to receive
it.
(e) Investment Banking Opinion. United shall have received the
--------------------------
fairness opinion of Berwind Financial Group, Inc., dated as of the date
hereof and as of a date no earlier than five days before the Proxy
Statement/Prospectus is first mailed to the United shareholders, to the
effect that, as of that date, the terms of the Merger are fair, from a
financial point of view, to United and its shareholders.
(f) Dissenting United Shareholders. As of the Closing Date, the
------------------------------
number of shares of United Stock, if any, as to which the holders have
taken all steps necessary or required to be taken prior to the Closing Date
pursuant to Subchapter D of Chapter 15 of the Pennsylvania Business
Corporation Law of 1988, as amended (the "Pennsylvania Business Corporation
Law"), to perfect their rights as
A-I-3
dissenting shareholders, shall not be greater than 9% of the United Stock
outstanding.
(g) Representations and Warranties; Performance of Covenants. Except
--------------------------------------------------------
for changes approved by the other party or contemplated by this Agreement,
the representations and warranties of the parties contained herein shall be
true and correct in all material respects on the Closing Date (as defined
in Section 8(a) hereof) as though made on such date, and the parties shall
have performed and complied with their respective agreements, covenants and
conditions contained herein to be performed or complied with on or before
the Closing Date.
(h) NYSE Listing. The shares of FCFC Stock issuable to the United
------------
shareholders pursuant to this Agreement shall have been authorized for
listing on the New York Stock Exchange (the "NYSE") upon official notice of
issuance.
(i) Closing Requirements. All documents required to be exchanged at
--------------------
the Closing pursuant to Section 8(b) and (c) hereof shall have been
delivered.
(j) Affiliates' Agreements. FCFC shall have received from each of
----------------------
the persons identified by United pursuant to Section 6(f) hereof an
executed counterpart of an affiliate's agreement in the form contemplated
by such Section which will be in full force and effect.
(k) Accountant's Opinion. FCFC shall have received from Jarrett *
--------------------
Stokes & Co., certified public accountants, an opinion in form and
substance satisfactory to FCFC and its counsel to the effect that, as of
the Closing, the Merger meets the requirements for pooling of interests
accounting treatment under generally accepted accounting principles and the
accounting rules of the SEC.
(l) No Injunctions. No temporary restraining order, preliminary or
--------------
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding by any person or governmental entity seeking any of the
foregoing be pending. There shall not be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable
to the Merger which makes the consummation of the Merger illegal;
provided, however, that the requirements of paragraphs (f), (j) and (k) shall be
conditions to the consummation of the Merger only if asserted by FCFC.
A-I-4
3. Representations and Warranties of FCFC. FCFC represents and
--------------------------------------
warrants to United that:
(a) Organization. FCFC is a business corporation duly organized,
------------
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania and is duly registered under the Bank Holding Company Act.
FCFC has full corporate power and legal authority (including all licenses,
franchises, permits and other governmental authorizations that are legally
required) to own its assets and to transact the business in which it is
engaged and proposes to engage.
(b) Capitalization. The authorized capital stock of FCFC consists of
--------------
3,000,000 shares of Preferred Stock, par value $1 per share, none of which
has been issued, and 25,000,000 shares of Common Stock, par value $5 per
share, of which 18,642,024 shares are presently issued and outstanding.
The Board of Directors of FCFC has submitted to a vote of its shareholders
at their annual meeting to be held on April 23, 1994 a proposal to amend
its articles of incorporation to increase its authorized Common Stock to
100,000,000 shares and reduce the par value from $5 to $1 per share. If
approved by the shareholders, the amendments are expected to become
effective on or about April 26, 1994. All of such issued shares are, and
upon consummation of the Merger and issuance thereof the shares of FCFC
Stock to be issued pursuant to the Plan of Merger will be, duly and validly
authorized and issued, fully paid and nonassessable. Other than the
provisions of this Agreement calling for the issuance of FCFC Stock, shares
of FCFC Common Stock that may be issued from time to time under FCFC's
employee stock ownership plan and except as previously disclosed in writing
to United, FCFC is not a party to or bound by any option, call, warrant or
other commitment or agreement obligating FCFC at present or upon the
occurrence of any event to issue or sell any FCFC Stock or other capital
stock of FCFC.
(c) Subsidiaries. FCFC has the following subsidiaries (the
------------
"Subsidiaries"): Central Bank, a Pennsylvania-chartered bank and trust
company having its principal place of business in Hollidaysburg,
Pennsylvania; Cenwest National Bank, a national banking association having
its principal place of business in Johnstown, Pennsylvania; Deposit Bank, a
Pennsylvania-chartered bank and trust company having its principal place of
business in DuBois, Pennsylvania; First National Bank of Leechburg, a
national banking association having its principal place of business in
Leechburg, Pennsylvania; National Bank of the Commonwealth, a national
banking association having its principal place of business in Indiana,
Pennsylvania; Peoples Bank and Trust Company, a Pennsylvania-chartered bank
and trust company having its principal place of business in Jennerstown,
Pennsylvania; Peoples Bank of Western Pennsylvania, a
A-I-5
Pennsylvania-chartered bank having its principal place of business in New
Castle, Pennsylvania; First Commonwealth Trust Company, a Pennsylvania-
chartered trust company having its principal place of business in Indiana,
Pennsylvania and engaged in rendering general trust services; Commonwealth
Systems Corporation, a Pennsylvania business corporation having its
principal place of business in Indiana, Pennsylvania and engaged in
rendering data processing services; and Commonwealth Trust Credit Life
Insurance Company, an Arizona insurance corporation having its principal
place of business in Phoenix, Arizona ("Commonwealth Trust") and engaged as
a reinsurer of credit life and credit accident and health insurance. Each
Subsidiary has full corporate power and legal authority (including all
licenses, franchises, permits and other governmental authorizations that
are legally required) to own its assets and to transact the business in
which it is engaged and proposes to engage. FCFC owns all the issued and
outstanding shares of capital stock of its Subsidiaries free and clear of
any liens, security interests or other encumbrances, except for
Commonwealth Trust which is 50% owned. FCFC has no other direct or
indirect subsidiaries.
(d) Corporate Authority; Absence of Violation. The Board of
-----------------------------------------
Directors of FCFC has authorized the execution, delivery and performance of
this Agreement and the Plan of Merger and no approval of the FCFC
shareholders is required therefor, FCFC has the full power, authority and
legal right to enter into this Agreement and the Plan of Merger, this
Agreement has been duly and validly executed and delivered by FCFC and this
Agreement constitutes and the Plan of Merger when executed and delivered by
United as herein provided will constitute, a valid and binding obligation
of FCFC enforceable in accordance with its terms except to the extent
enforcement is limited by bankruptcy, insolvency or other similar laws of
general application affecting creditors' rights or by the application by a
court of equitable principles. Neither the execution or delivery hereof or
the Plan of Merger, the consummation of the Merger nor compliance by FCFC
with any of the provisions of this Agreement or the Plan of Merger will
violate any provision of the Articles of Incorporation or By-Laws of FCFC
or any of its Subsidiaries or conflict with or result in a material breach
of or material default under any material agreement, obligation or
instrument to which FCFC or any of its Subsidiaries is a party or by which
any is bound, or violate any order or decree of any court or any statute,
rule or regulation applicable to FCFC or any of its Subsidiaries or the
properties or assets of any of them.
(e) Financial Statements. FCFC has delivered to United FCFC's Annual
--------------------
Reports on Form 10-K for 1989, 1990, 1991, 1992 and 1993 and Annual Reports
to Shareholders for 1989, 1990,
A-I-6
1991, 1992 and 1993, containing consolidated balance sheets of FCFC at
December 31, 1989, 1990, 1991, 1992 and 1993 and consolidated statements
of income, changes in shareholders' equity and cash flows of FCFC for
each of the five years in the period ended December 31, 1993, all audited
by Jarrett * Stokes & Co. (or its predecessor Jarrett & Co.), certified
public accountants. All such financial statements (including the related
notes and schedules) have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis and present
fairly, in all material respects, the consolidated financial position of
FCFC and its wholly-owned Subsidiaries and the consolidated results of
their operations and cash flows at their respective dates and for the
respective periods then ended.
(f) Absence of Undisclosed Liabilities. Except as reflected or
----------------------------------
reserved against in FCFC's December 31, 1993 consolidated balance sheet and
except as previously disclosed in writing to United, as of December 31,
1993 there was no liability or obligation of FCFC or any of its
Subsidiaries of any nature, due or to become due, absolute, contingent or
otherwise, including liability for or in respect of taxes, required to be
reflected or reserved against therein by generally accepted accounting
principles.
(g) Absence of Certain Changes. Except as previously disclosed in
--------------------------
writing to United, since December 31, 1993 there has not been:
(i) any material change in the condition, financial or
otherwise, or in the assets, liabilities or business of FCFC or any of
its Subsidiaries, other than changes in the ordinary course of
business which do not in the aggregate materially and adversely affect
the business of FCFC and its Subsidiaries;
(ii) any damage to or destruction or loss of property of FCFC or
any of its Subsidiaries (whether or not insured) which has had or may
be reasonably expected to have a material adverse effect on the
business of FCFC and its Subsidiaries; or
(iii) any sale or transfer of any assets or any cancellation of
any debts or claims of FCFC or any of its Subsidiaries except in the
ordinary course of business or any mortgage, pledge or subjection to
lien, charge or encumbrance of any kind of any material assets of any
of them other than statutory liens for obligations not yet delinquent.
(h) Taxes. The Federal income tax returns of FCFC and its
-----
Subsidiaries have either been audited by the IRS or
A-I-7
closed by statute for all periods ending on or before December 31, 1990.
All taxes, deficiencies, interest and penalties which are reflected as
due under such returns or which have been assessed as a result of such
audits have been paid in full, and there are no outstanding agreements to
extend periods during which additional assessments may be made. Federal
income tax returns required for all periods beginning after December 31,
1990 and all returns in respect of all other Federal, state and local
taxes of any kind required to be filed by FCFC and its Subsidiaries have
been timely filed, and all taxes, interest and penalties due in respect
of such periods have been paid. To the best of FCFC's knowledge there is
no proposed deficiency, assessment, penalty or delinquency with respect
to any of such returns or any of the taxes reflected as due and payable
thereby.
(i) Properties. Except as previously disclosed in writing to United,
----------
FCFC and its Subsidiaries have good and marketable title to all of their
real estate and assets (including those reflected in FCFC's December 31,
1993 consolidated balance sheet except such as have been disposed of in the
ordinary course of business) free of any mortgage, encumbrance, lien or
security interest, except pledges of assets to secure public deposits and
minor imperfections in title and encumbrances which do not materially
detract from the value or impair the use of the properties affected
thereby. All material leases under which FCFC or any of its Subsidiaries
leases real or personal property, as lessee, are valid and effective in
accordance with their terms, and there is no material existing default by
FCFC or any of its Subsidiaries under such leases or any event which with
notice or the lapse of time or both would constitute such a material
default.
(j) Compliance with Laws. To the best of FCFC's knowledge, FCFC and
--------------------
its Subsidiaries are in substantial compliance with all laws, rules,
regulations and other legal requirements applicable to them.
(k) Litigation and Administrative Proceedings. Except as previously
-----------------------------------------
disclosed in writing to United, there is no action, suit, arbitration or
administrative proceeding or investigation to which FCFC or any of its
Subsidiaries is or may be a party or subject which is pending, or to FCFC's
knowledge threatened, in which there could be a judgment, order, decree,
liability, fine, penalty, injunction or cease-and-desist order which would
have a material adverse effect on its condition, financial or otherwise, or
the conduct of its business.
(l) Employee Benefit Plans. All retirement and employee benefit or
----------------------
welfare plans of FCFC or its Subsidiaries have been maintained and operated
in accordance with their
A-I-8
terms, and all such plans which are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), have been maintained
and operated in material compliance with all applicable provisions of
ERISA and the regulations thereunder and are not subject to any
accumulated funding deficiency within the meaning of ERISA and the
regulations thereunder or to any outstanding liability to the Pension
Benefit Guaranty Corporation. No "prohibited transaction" has occurred
and is continuing with respect to any such plan, nor has any "reportable
event" occurred with respect thereof, as such terms are defined in ERISA
and the regulations thereunder, and no such plan is a "Multiemployer
Plan" or a "Multiple Employer Plan", as such terms are defined in ERISA
and the regulations thereunder.
(m) Registration Statement. The Registration Statement will not
----------------------
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading at the time the Registration Statement is declared
effective by the SEC, at the time the Proxy Statement/Prospectus is
distributed to the United shareholders or at the time of the United
Shareholders' Meeting, except that no representation is made with respect
to the information furnished by United specifically for inclusion therein.
(n) Agreements with Bank Regulators. Neither FCFC nor any of its
-------------------------------
Subsidiaries has received any notice from, or is a party to any written
agreement or memorandum of understanding to, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or is a recipient of any extraordinary supervisory letter
from, any bank regulator or other governmental entity or any staff thereof
(i) asserting that FCFC or any of its Subsidiaries is not in substantial
compliance with any statute, regulation or ordinance which such regulator
or governmental entity enforces, or with the internal policies and
procedures of such entity, or (ii) directing, restricting or limiting in
any manner the operations of FCFC or any of its Subsidiaries, including
matters with respect to their capital adequacy, credit policies, management
or the payment of dividends.
4. Representations and Warranties of United. United represents and
----------------------------------------
warrants to FCFC that:
(a) Organization. United is a business corporation duly organized,
------------
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania and is duly registered under the Bank Holding Company Act.
United has full corporate power and legal authority (including all
licenses, franchises, permits and other governmental
A-I-9
authorizations that are legally required) to own its assets and to
transact the business in which it is engaged and proposes to engage.
(b) Capitalization. The authorized capital stock of United consists
--------------
of 5,000,000 shares of Preferred Stock, par value $10 per share, none of
which has been issued, and 10,000,000 shares of Common Stock, par value
$2.50 per share, of which 769,147 shares are presently issued and
outstanding and 49,643 shares are covered by outstanding employee stock
options. All of such issued shares have been duly authorized and are duly
and validly issued, fully paid and nonassessable. Except for shares of
United Common Stock that may be issued upon exercise of the foregoing stock
options, United is not a party to or bound by any option, call, warrant or
other commitment or agreement obligating United at present or upon the
occurrence of any event to issue or sell any United Stock or other capital
stock of United.
(c) Subsidiaries. United has the following subsidiaries (the
------------
"Subsidiaries"), each of which is a Pennsylvania business corporation
having its principal place of business in Chambersburg, Pennsylvania,
except where otherwise noted: Unitas National Bank, a national banking
association; Unitas Mortgage Corporation, having its principal place of
business in Carlisle, Pennsylvania and engaged in the origination of
mortgages in the secondary mortgage market; Unitas Commercial Leasing
Corporation, originally formed for the purpose of leasing real and personal
property; Unitas Real Estate Corporation, originally formed for the purpose
of holding real property for United and its Subsidiaries; Unitas Financial
Corporation, originally formed for the purpose of consumer financing;
Unitas Services Corporation, originally formed for the purpose of
providing data processing services to United and its Subsidiaries, and
Unitas Life Insurance Company, an Arizona corporation that has not been
capitalized or activated. All the Subsidiaries are presently inactive,
except for Unitas National Bank and Unitas Mortgage Corporation. Each
Subsidiary has full corporate power and legal authority (including all
licenses, franchises, permits and other governmental authorizations that
are legally required) to own its assets and to transact the business in
which it is engaged and proposes to engage. United owns all the issued
and outstanding shares of capital stock of its Subsidiaries free and
clear of any liens, security interests or other encumbrances. United has
no other direct or indirect subsidiaries.
(d) Corporate Authority; Absence of Violation. The Board of
-----------------------------------------
Directors of United has authorized the execution and delivery of this
Agreement and the Plan of Merger, has directed or will direct that this
Agreement and the Plan of Merger be submitted to the United shareholders
for their approval and, subject to such approval, has authorized the
performance of this Agreement and the Plan of
A-I-10
Merger and the consummation of the Merger. United has the full power,
authority and legal right to enter into this Agreement and the Plan of
Merger, this Agreement has been duly and validly executed and delivered
by United and this Agreement constitutes and the Plan of Merger when
executed and delivered by United as herein provided will constitute, a
valid and binding obligation of United enforceable in accordance with its
terms except to the extent enforcement is limited by bankruptcy,
insolvency or other similar laws of general application affecting
creditors' rights or by the application by a court of equitable
principles. Neither the execution or delivery hereof or of the Plan of
Merger, the consummation of the Merger nor compliance by United with any
of the provisions of this Agreement or the Plan of Merger will violate
any provision of the Articles of Incorporation or By-Laws of United or
any of its Subsidiaries or conflict with or result in a material breach
of or material default under any material agreement, obligation or
instrument to which United or any of its Subsidiaries is a party or by
which any is bound, or violate any order or decree of any court or any
statute, rule or regulation applicable to United or any of its
Subsidiaries or the properties or assets of any of them.
(e) Financial Statements. United has delivered to FCFC United's
--------------------
Annual Reports on Form 10-K for 1989, 1990, 1991, 1992 and 1993 and Annual
Reports to Shareholders for 1989, 1990, 1991, 1992 and 1993, containing
consolidated balance sheets of United at December 31, 1989, 1990, 1991,
1992 and 1993 and consolidated statements of income, changes in
shareholders' equity and cash flows of United for each of the five years in
the period ended December 31, 1993, all audited by Ernst & Young, certified
public accountants. All such financial statements (including the related
notes and schedules) have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis and present
fairly, in all material respects, the consolidated financial position of
United and its Subsidiaries and the consolidated results of their
operations and cash flows at their respective dates and for the respective
periods then ended.
(f) Absence of Undisclosed Liabilities. Except as reflected or
----------------------------------
reserved against in United's December 31, 1993 consolidated balance sheet
and except as previously disclosed in writing to FCFC, as of December 31,
1993 there was no liability or obligation of United or any of its
Subsidiaries of any nature, due or to become due, absolute, contingent or
otherwise, including liability for or in respect of taxes,
A-I-11
required to be reflected or reserved against therein by generally accepted
accounting principles.
(g) Absence of Certain Changes. Except as previously disclosed in
--------------------------
writing to FCFC, since December 31, 1993 there has not been:
(i) any material change in the condition, financial or
otherwise, or in the assets, liabilities or business of United or any
of its Subsidiaries, other than changes in the ordinary course of
business which do not in the aggregate materially and adversely affect
the business of United and any of its Subsidiaries;
(ii) any damage to or destruction or loss of property of United
or any of its Subsidiaries (whether or not insured) which has had or
may be reasonably expected to have a material adverse effect on the
business of United and any of its Subsidiaries;
(iii) any sale or transfer of any assets or any cancellation of
any debts or claims of United or any of its Subsidiaries except in the
ordinary course of business or any mortgage, pledge or subjection to
lien, charge or encumbrance of any kind of any material assets of any
of them other than statutory liens for obligations not yet delinquent;
(iv) any increase in the compensation payable or to become
payable to any of the officers, agents or employees of United or any
of its Subsidiaries or any bonus arrangement with any of them other
than merit increases in accordance with past practices, normal cost-
of-living increases, regular bonuses and normal increases related to
promotions or increased job responsibilities; or any adoption or
modification of any pension, profit sharing or other compensation plan
or arrangement; or
(v) any declaration, payment or setting aside of a dividend or
distribution in respect of United Stock other than as would be
permissible under Section 7(b) hereof or any direct or indirect
purchase of any United Stock.
(h) Taxes. The Federal income tax returns of United and its
-----
Subsidiaries have either been audited by the IRS or closed by statute for
all periods ending on or before December 31, 1989. All taxes,
deficiencies, interest and penalties which are reflected as due under such
returns or which have been assessed as a result of such audits have been
paid in full, and there are no outstanding agreements to extend periods
during which additional assessments may be
A-I-12
made. Federal income tax returns required for all periods beginning after
December 31, 1989 and all returns in respect of all other Federal, state
and local taxes of any kind required to be filed by United and its
Subsidiaries have been timely filed, and all taxes, interest and
penalties due in respect of such periods have been paid. To the best of
United's knowledge there is no proposed deficiency, assessment, penalty
or delinquency with respect to any of such returns or any of the taxes
reflected as due and payable thereby.
(i) Properties. Except as previously disclosed in writing to FCFC,
----------
United and its Subsidiaries have good and marketable title to all of their
real estate and assets (including those reflected in United's December 31,
1993 consolidated balance sheet except such as have been disposed of in the
ordinary course of business) free of any mortgage, encumbrance, lien or
security interest, except pledges of assets to secure public deposits and
minor imperfections in title and encumbrances which do not materially
detract from the value or impair the use of the properties affected
thereby. All material leases under which United or any of its Subsidiaries
leases real or personal property, as lessee, are valid and effective in
accordance with their terms, and there is no material existing default by
United or any of its Subsidiaries under such leases or any event which with
notice or the lapse of time or both would constitute such a material
default.
(j) Employment Contracts. Except as previously disclosed in writing
--------------------
to FCFC, neither United nor any of its Subsidiaries is a party or subject
to any contract of employment not terminable at will or any profit sharing,
incentive compensation, bonus, thrift, savings or other employee benefit or
welfare plan providing for employer contributions other than the pension
plan referred to in Section 4(m) hereof or group insurance or medical
plans.
(k) Compliance with Laws. To the best of United's knowledge, United
--------------------
and its Subsidiaries are in substantial compliance with all laws, rules,
regulations and other legal requirements applicable to them.
(l) Litigation and Administrative Proceedings. Except as previously
-----------------------------------------
disclosed in writing to FCFC, there is no action, suit, arbitration or
administrative proceeding or investigation to which United or any of its
Subsidiaries is or may be a party or subject which is pending, or to
United's knowledge threatened, in which there could be a judgment, order,
decree, liability, fine, penalty, injunction or cease-and-desist order
which would have a material adverse effect on its condition, financial or
otherwise, or the conduct of its business.
A-I-13
(m) Employee Benefit Plans. Except as previously disclosed in
----------------------
writing to FCFC, neither United nor any of its Subsidiaries has any
contract or plan providing for retirement benefits. All retirement and
employee benefit or welfare plans of United or any of its Subsidiaries have
been maintained and operated in accordance with their terms, and all such
plans which are subject to ERISA have been maintained and operated in
material compliance with all applicable provisions of ERISA and the
regulations thereunder and are not subject to any accumulated funding
deficiency within the meaning of ERISA and the regulations thereunder or to
any outstanding liability to the Pension Benefit Guaranty Corporation. No
"prohibited transaction" has occurred and is continuing with respect to any
such plan, nor has any "reportable event" occurred in respect thereof, as
such terms are defined in ERISA and the regulations thereunder, and no such
plan is a "Multiemployer Plan" or a "Multiple Employer Plan", as such terms
are defined in ERISA and the regulations thereunder.
(n) Proxy Statement/Prospectus. None of the information relating to
--------------------------
United to be included in the Proxy Statement/Prospectus will contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading at
the time the Proxy Statement/Prospectus is distributed to the United
shareholders or at the time of the United Shareholders' Meeting, except
that no representation is made with respect to the information furnished by
FCFC specifically for inclusion therein.
5. Covenants and Actions of FCFC Pending the Closing. Between the
-------------------------------------------------
date hereof and the Closing Date:
(a) Proxy Statement/Prospectus. FCFC will cooperate with United in
--------------------------
the preparation and filing of the Proxy Statement/Prospectus in accordance
with the requirements of the proxy rules of the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(b) Regulatory Approvals. FCFC will file an application with the
--------------------
Pennsylvania Department of Banking for its approval of the Merger under the
Pennsylvania Banking Code, an application with the Federal Reserve Board
for its approval of the Merger under the Bank Holding Company Act and any
other applications with any other regulatory agencies having jurisdiction
that may be necessary for the consummation of the Merger. FCFC will take
all actions necessary for such applications to be approved and will provide
United with copies of all correspondence and notices to or from such
agencies concerning such applications.
A-I-14
(c) Registration Statement. As soon as practicable after the date
----------------------
hereof, FCFC will prepare and file with the SEC under the Securities Act a
registration statement on Form S-4, or other appropriate form, for the
registration of the shares of FCFC Stock to be issued pursuant to the Plan
of Merger (the "Registration Statement"), which will include a preliminary
form of the Proxy Statement/Prospectus. FCFC will not be liable for any
untrue statement of a material fact or omission to state a material fact in
the Registration Statement made in reliance upon, and in conformity with,
information furnished to FCFC by United for use therein. FCFC will provide
United with copies of all correspondence, comment letters or notices to or
from the SEC concerning or relating to the Registration Statement and will
advise United promptly after it receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or
amendment thereto has been filed, of the issuance of any stop order with
respect to the effectiveness thereof, of the suspension of the
qualification of the FCFC Stock issuable in connection with the Merger for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the
amendment or supplement of the Registration Statement or the filing or
submission of additional information.
(d) Stock Exchange Listing. FCFC will use all reasonable efforts to
----------------------
cause the shares of FCFC Stock to be issued in the Merger to be approved
for listing on the NYSE, subject to official notice of issuance, prior to
the Closing Date.
(e) Access to Properties and Records. Between the
--------------------------------
date of this Agreement and the Effective Date, FCFC will give United and
its authorized representatives reasonable access during normal business
hours to the properties, books and records of FCFC and its Subsidiaries and
will cause their officers to furnish such additional financial and
operating data and other information as United may reasonably request,
subject to the obligation of United and its authorized representatives to
maintain the confidentiality of all information concerning FCFC and its
Subsidiaries furnished to United or obtained by United by reason of such
access, whether before or after the date of this Agreement.
(f) Notice of Actions and Proceedings. FCFC will promptly notify
---------------------------------
United of any event or fact which, if existing on the date hereof, would
have been required to be disclosed to United to assure the accuracy of the
representations of FCFC contained in Section 3 hereof or which otherwise
relate to, or affect, the business or assets of FCFC or its Subsidiaries in
any material respect or the consummation of the Merger and the transactions
contemplated hereby.
A-I-15
6. Covenants and Actions of United Pending the Closing. Between the
---------------------------------------------------
date hereof and the Closing Date:
(a) Shareholders' Meeting. United will take appropriate action to
---------------------
call a meeting of its shareholders (the "United Shareholders' Meeting"), to
be held not more than 45 days following the effective date of the
Registration Statement, to consider approval of this Agreement and the Plan
of Merger. Subject to its continuing fiduciary duties to United's
shareholders, United's Board of Directors will use its best efforts to
secure such approval. In connection with the United Shareholders' Meeting,
United will duly solicit, in compliance with Section 14(a) of the Exchange
Act, the vote of the United shareholders by mailing or delivering to each
such shareholder on the date such Registration Statement is declared
effective by the SEC or as soon thereafter as practicable the Proxy
Statement/Prospectus in the form filed by FCFC with the SEC pursuant to
Rule 424(b) under the Securities Act in connection with the Registration
Statement.
(b) Proxy Statement/Prospectus. United will cooperate with FCFC in
--------------------------
the preparation and filing of the Proxy Statement/Prospectus in accordance
with the requirements of the proxy rules of the SEC under the Exchange Act
and the filing thereof as part of the Registration Statement. United will
not be liable for any untrue statement of a material fact or omission to
state a material fact in the Proxy Statement/Prospectus made in reliance
upon, and in conformity with, information furnished to United by FCFC for
use therein.
(c) Regulatory Approvals. United will cooperate with FCFC in the
--------------------
preparation and filing of an application with the Federal Reserve Board for
its approval of the Merger under the Bank Holding Company Act and any other
applications with any other regulatory agencies having jurisdiction that
may be necessary for the consummation of the Merger. United will publish
all notices in connection with such applications, supply all information
reasonably requested by FCFC or any such regulatory agency in connection
with such applications and take any other actions required on the part of
United for such applications to be approved.
(d) Access to Properties and Records. Between the date of this
--------------------------------
Agreement and the Effective Date, United will give FCFC and its authorized
representatives reasonable access during normal business hours to the
properties, books and records of United and its Subsidiaries and will cause
their officers to furnish such additional financial and operating data and
other information as FCFC may reasonably request, subject to the obligation
of FCFC and its authorized representatives to maintain the confidentiality
of all
A-I-16
information concerning United and its Subsidiaries furnished to FCFC or
obtained by FCFC by reason of such access, whether before or after the
date of this Agreement.
(e) Notice of Actions and Proceedings. United will promptly notify
---------------------------------
FCFC of any event or fact which, if existing on the date hereof, would have
been required to be disclosed to FCFC to assure the accuracy of the
representations of United contained in Section 4 hereof or which otherwise
relate to, or affect, the business or assets of United or any of its
Subsidiaries in any material respect or the consummation of the Merger and
the transactions contemplated hereby.
(f) United Affiliates. United will furnish FCFC with a schedule of
-----------------
all holders of United Stock and other persons who on the date of the United
Shareholders' Meeting may be deemed to be affiliates of United within the
meaning of Rule 145 under the Securities Act and will use its best efforts
to assist FCFC in obtaining from each of such persons an executed
affiliate's agreement in a form reasonably satisfactory to counsel for FCFC
and counsel for United. To permit the Merger to be accounted for as a
pooling of interests, each affiliate's agreement will include an
undertaking that the affiliate will not sell, assign, pledge, transfer or
otherwise dispose of any of his United Stock or any of the FCFC Stock to be
received by the affiliate in the Merger, except at such time and in such
quantities as are permitted in Section 201.01 of the SEC's Codification of
Financial Reporting Policies and Staff Accounting Bulletin Nos. 65 and 76.
7. Covenants and Actions of FCFC and United Pending the Closing.
------------------------------------------------------------
Between the date hereof and the Closing Date:
(a) Conduct of Business in Ordinary Course. Pending the Merger, the
--------------------------------------
business and operations of each of FCFC and United and their Subsidiaries
will be conducted only in the ordinary course, and each will use its best
efforts, and will cause each of its Subsidiaries to use its best efforts,
to preserve its business organization intact and to preserve its goodwill
with its customers and others having business relations with it, and
neither FCFC nor United will, without the prior written consent of the
other or except as expressly contemplated herein or previously disclosed in
writing to the other:
(i) amend its Articles of Incorporation or its By-Laws;
(ii) issue, sell, purchase, acquire or redeem, or grant options
or rights to purchase, any shares of its capital stock or other
securities other than, in the
A-I-17
case of FCFC, transactions in connection with its employee stock
ownership plan and, in the case of United, shares issued upon proper
exercise of any of the options described in Section 4(b); or
(iii) take any action which if taken prior to the date hereof
would have constituted a breach of any representation or warranty
contained herein or permit any of its Subsidiaries to do so.
(b) United Dividends. United will not declare, pay or set aside a
----------------
dividend or other distribution in respect of its capital stock other than
cash dividends declared prior to the date hereof and regular quarterly cash
dividends each in an amount no greater than $.13 per share and each having
both a record date and a payment date the same as the regular quarterly
cash dividend of FCFC.
(c) Satisfaction of Conditions. Each party will exercise its best
--------------------------
efforts to assure that all conditions to the obligations of the other party
under this Agreement are fulfilled.
8. Closing and Effective Date.
--------------------------
(a) Closing Date. The transactions contemplated hereby will be
------------
consummated at a closing (the "Closing") to be held at the offices of
United, 15 South Main Street, Chambersburg, Pennsylvania, at 10:00 A.M.,
local time, on September 26, 1994, on such earlier date as the parties may
agree or, in the event all conditions to the consummation of the Merger
other than the Closing shall not have been satisfied prior to September 26,
1994, on the earliest practicable date following satisfaction of such
conditions (the "Closing Date"). At the Closing the parties will exchange
the certificates and other documents provided for in this Section.
(b) Closing Certificate of FCFC. At the Closing, FCFC will deliver
---------------------------
to United a certificate dated the Closing Date of its chief executive
officer, its chief financial officer and its Secretary to the effects that:
(i) except for changes approved by United or contemplated
hereby, the representations and warranties of FCFC contained herein
are true and correct in all material respects on the Closing Date as
if made on such date;
(ii) FCFC has performed and complied with all agreements,
covenants and conditions to be performed or complied with by FCFC
hereunder on or before the Closing Date;
A-I-18
(iii) the Merger has been approved by the Pennsylvania
Department of Banking under the Pennsylvania Banking Code;
(iv) the Merger has been approved by the Federal Reserve Board
under the Bank Holding Company Act;
(v) 30 days have expired since the date of the approval by the
Federal Reserve Board referred to in (iv) above without a stay of
effectiveness of such approval by reason of the filing of an action by
the United States under the antitrust laws during that period; and
(vi) the Registration Statement has been declared effective by
the SEC by an order, and that, to the best knowledge of such officers
after due inquiry, no stop order with respect to the effectiveness of
the Registration Statement has been issued nor any proceeding therefor
initiated or threatened under the Securities Act.
(c) Closing Certificate of United. At the Closing, United will
-----------------------------
deliver to FCFC a certificate dated the Closing Date of its chief executive
officer, its chief financial officer and its Secretary to the effects that:
(i) except for changes approved by FCFC or contemplated hereby,
the representations and warranties of United contained herein are true
and correct in all material respects on the Closing Date as if made on
such date;
(ii) United has performed and complied with all agreements,
covenants and conditions to be performed or complied with by United
hereunder on or before the Closing Date;
(iii) the holders of the requisite number of shares of United
Stock have approved this Agreement and the Plan of Merger; and
(iv) lists submitted to FCFC contain the names of all holders of
United Stock who gave written notice of their intention to dissent as
contemplated by Section 1574 of the Pennsylvania Business Corporation
Law and the number of shares of United Stock held by each, the names
of any such shareholders who voted in favor of the Merger and the
names of all holders of United Stock who have made written demand on
United for payment as contemplated by Section 1575 of the Pennsylvania
Business Corporation Law and the number of
A-I-19
shares owned by each such shareholder as to which such payment has
been demanded.
(d) Opinion of Counsel for FCFC. United will receive from counsel
---------------------------
for FCFC an opinion or opinions, dated the Effective Date and in form and
substance satisfactory to United and its counsel, with respect to the
validity of the Merger, the due authorization and issuance of the FCFC
Stock to be issued in connection with the Merger and such other matters
related thereto as may be agreed upon by FCFC and United.
In rendering such opinions, such counsel may rely as to matters of
fact, to the extent such counsel deems such reliance necessary or
appropriate, upon certificates of public officials and of responsible
officers of FCFC, provided that the extent of such reliance is specified in
the opinion and executed counterparts of such certificates have been
furnished to United.
(e) Opinion of Counsel for United. FCFC will receive from counsel
-----------------------------
for United an opinion or opinions, dated the Effective Date and in form and
substance satisfactory to FCFC and its counsel, with respect to the
validity of the Merger and such other matters related thereto as may be
agreed upon by FCFC and United.
In rendering such opinions, such counsel may rely as to matters of
fact, to the extent such counsel deems such reliance necessary or
appropriate, upon certificates of public officials and responsible
officers of United, provided that the extent of such reliance is
specified in the opinion and executed counterparts of such certificates
have been furnished to FCFC.
(f) Additional Documents. At or before the Closing, each party shall
--------------------
have received from the other such certified or other copies of such
documents and proceedings in connection with the transactions contemplated
hereby as such party or its counsel may reasonably request.
(g) Effective Date of Merger. Upon the delivery of all documents to
------------------------
be delivered at the Closing, FCFC and United will cause Articles of Merger
provided for in the Plan of Merger to be filed with the Pennsylvania
Department of State, specifying that the Merger will be effective as of the
close of business on the last day of the month in which the Closing occurs
or such other date and time as the parties may agree (the "Effective
Date").
9. Board of Directors of FCFC Following Effective Date. Upon the
---------------------------------------------------
Merger becoming effective and without the necessity of any further corporate
action by FCFC, (a) the number
A-I-20
of Directors of FCFC shall be increased by one and Robert C. Williams is
hereby appointed to fill such vacancy, to hold office until the annual meeting
of the FCFC shareholders in 1997 and until his successor has been duly elected
and qualified and (b) the number of directors of Unitas National Bank shall be
increased by two and such vacancies shall be filed by E. James Trimarchi and
Joseph E. O'Dell, who shall hold office until the next annual meeting of the
Unitas National Bank shareholders and until their respective successors have
been duly elected and qualified.
10. Termination.
-----------
(a) Mutual Consent. FCFC and United may terminate this Agreement and
--------------
the Plan of Merger by written mutual consent of their respective Boards of
Directors at any time before the Effective Date, without liability of any
party, notwithstanding prior approval by the United shareholders, and such
consent shall not be unreasonably withheld by FCFC or United.
(b) Failure of Conditions. Notwithstanding prior approval by the
---------------------
United shareholders, either FCFC or United may, without liability of any
party, terminate this Agreement and the Plan of Merger by written notice to
the other in the event of a failure to satisfy before June 30, 1995 any of
the conditions to its obligations under this Agreement, if such failure
occurred despite the good faith effort of the party electing to terminate
to perform all agreements and covenants and to satisfy all conditions
required to be performed or satisfied by it.
11. Miscellaneous.
-------------
(a) Brokers. FCFC and United each represents and warrants that
-------
except as previously disclosed in writing to the other party, it is not
obligated to pay any brokerage commissions, finder's fees or other like
payments in connection with the transactions contemplated hereby. Each
party agrees to pay or discharge and to indemnify and hold the other
harmless from and against any and all claims or liabilities for brokerage
commissions, finder's fees and other like payments incurred by such party
in connection with the transactions contemplated hereby.
(b) Expenses. The fees and expenses of Reed Smith Shaw & McClay
--------
related to this Agreement and the Plan of Merger, the federal tax opinion
referred to in Section 2(c) hereof, the Proxy Statement/Prospectus and the
consummation of the Merger shall be borne equally by the parties hereto.
The fees and expenses of Reed Smith Shaw & McClay related to the regulatory
approvals referred to in Section 2(b) hereof shall be borne by FCFC. Each
party shall bear its own other
A-I-21
expenses incurred in connection with this Agreement, the Merger and all
related transactions, including fees of accountants, attorneys and
investment advisors. The obligations of the parties under this Section
11(b) shall survive any termination of this Agreement.
(c) Further Assurances. Each party shall execute and deliver such
------------------
instruments and take such other actions as the other party hereto may
reasonably request in order to carry out the intent and purposes hereof and
the Plan of Merger.
(d) Survival. Except for those contained in Sections 3(m) and 4(n)
--------
hereof, the representations and warranties of the parties contained herein
or in any schedule or certificate delivered in connection herewith shall
not survive the Effective Date but expire with and be terminated and
extinguished by the consummation of the Merger contemplated hereby.
(e) Amendment and Waiver. Subject to applicable law, this Agreement
--------------------
may be amended in any respect by an instrument in writing signed by an
authorized officer of each of FCFC and United, whether before or after the
United Shareholders' Meeting, at any time before the Effective Date, except
that no such amendment after such Shareholders' Meeting shall affect the
rates of exchange of FCFC Stock for United Stock provided in the Plan of
Merger. FCFC or United may (i) extend the time for the performance of any
of the obligations of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party, (iii) waive compliance
by the other party with any of the covenants or agreements contained herein
and the performance of any obligations of the other party and (iv) waive
the fulfillment of any condition (other than Sections 2(a), (b), (d) and
(h) hereof) that is precedent to the performance by it of any of its
obligations under this Agreement, all of the above to the fullest extent
permitted by law.
(f) Communications. All notices and other communications hereunder
--------------
shall be in writing and shall be deemed to have been given if delivered by
hand or mailed, first-class, registered or certified mail, postage prepaid,
addressed as follows:
If to FCFC:
First Commonwealth Financial Corporation
Old Courthouse Square
P.O. Box 400
Indiana, Pennsylvania 15701-0400
Attention: E. James Trimarchi, Chairman
A-I-22
With a copy to:
Tomb and Tomb
402 Indiana Theatre Building
Indiana, Pennsylvania 15701
Attention: David R. Tomb, Jr., Esquire
If to United:
United National Bancorporation
15 South Main Street
Chambersburg, Pennsylvania 17201
Attention: Robert C. Williams, Vice Chairman
With a copy to:
Gerald K. Morrison, Esquire
Buchanan Ingersoll Professional Corporation
30 North Third Street
Harrisburg, Pennsylvania 17101
or at such other address or addresses as may hereafter be furnished by the
addressee party.
(g) Publicity. Except as otherwise required by law or the rules of
---------
the NYSE or the NASD, so long as this Agreement is in effect neither FCFC
nor United shall, or shall permit any of their respective Subsidiaries to,
issue or cause the publication of any press release or other public
announcement with respect to the transactions contemplated by this
Agreement without the consent of the other party, which consent shall not
be unreasonably withheld.
(h) Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder shall be assigned by either party hereto
(whether by operation of law or otherwise) without the prior written
consent of the other party. Subject to the preceding sentence, this
Agreement is binding upon and shall inure to the benefit of and be
enforceable by each party and its respective successors and assigns.
(i) Counterparts; Headings. This Agreement may be executed in
----------------------
several counterparts, each of which will constitute an original. The
headings and captions contained herein are for reference purposes only and
do not constitute a part hereof.
(j) Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the law of the
A-I-23
Commonwealth of Pennsylvania and, to the extent applicable, the law of the
United States.
(k) Entire Agreement. This Agreement, together with the Plan of
----------------
Merger, sets forth the entire understanding of the parties with respect to
the subject matter hereof and supersedes all previous agreements or
understandings among the parties with respect thereto.
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Agreement as of the date first above
written.
Attest: FIRST COMMONWEALTH FINANCIAL
CORPORATION
/s/ David R. Tomb, Jr. By /s/ Joseph E. O'Dell
- ------------------------------ -----------------------------
David R. Tomb, Jr., Secretary Joseph E. O'Dell, Senior
Executive Vice President
and Chief Operating Officer
[Corporate Seal]
Attest: UNITED NATIONAL BANCORPORATION
/s/ Dorothy J. Jamison By /s/ Robert C. Williams
- ------------------------------ -----------------------------
Dorothy J. Jamison, Vice Robert C. Williams, Vice
President and Secretary Chairman, President and
Chief Executive Officer
[Corporate Seal]
A-I-24
APPENDIX A TO ANNEX I
PLAN OF MERGER
PLAN OF MERGER (the "Plan") made by UNITED NATIONAL BANCORPORATION, a
Pennsylvania business corporation having its principal place of business at 15
South Main Street, Chambersburg, Pennsylvania ("United"), and FIRST COMMONWEALTH
FINANCIAL CORPORATION, a Pennsylvania business corporation having its principal
place of business at Old Courthouse Square, 22 North Sixth Street, Indiana,
Pennsylvania ("FCFC"). United and FCFC are hereinafter sometimes referred to as
the "Constituent Corporations."
W I T N E S S E T H:
WHEREAS, FCFC and United have entered into an Agreement and Plan of
Reorganization dated as of March 25, 1994 (the "Reorganization Agreement"),
which provides, among other things, for the execution of this Plan and the
acquisition of United by FCFC by means of the merger (the "Merger") of United
into FCFC;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for the purpose of stating the
method, terms and conditions of the Merger, including the rights of the
shareholders of United, and such other details and provisions as are deemed
desirable, the parties hereto, each intending to be legally bound hereby, agree
as follows:
1. The Merger. Subject to the terms and conditions of this Plan and
----------
the Reorganization Agreement, and in accordance with the Pennsylvania Business
Corporation Law of 1988, as amended (the "Pennsylvania Business Corporation
Law"), on the Effective Date (as defined in Section 8(g) of the Reorganization
Agreement) United shall be merged into FCFC, which shall be the surviving
corporation.
2. Articles of Incorporation and By-Laws. Upon the Merger becoming
-------------------------------------
effective, the Articles of Incorporation and By-Laws of FCFC as in effect on the
Effective Date shall continue in effect without change therein by reason of the
Merger.
3. Conversion of United Shares.
---------------------------
(a) Subject to the provisions of Section 5 hereof with respect to
dissenting shares, each share of Common Stock, par value $2.50 per share, of
United ("United Common Stock") issued and outstanding immediately before the
Merger becomes effective shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into two shares of Common Stock,
par value $1 per share, of FCFC ("FCFC Common Stock").
App. A-1
(b) Conversion of Stock Options. At the Effective Date, all rights
---------------------------
with respect to United Common Stock pursuant to stock options or stock
appreciation rights ("United Options") granted by United under United's 1986
Stock Option Plan, which are outstanding at the Effective Date whether or not
then exercisable, shall be converted into and become rights with respect to FCFC
Common Stock, and FCFC shall assume each United Option in accordance with the
terms of the stock option plan under which it was issued and the stock option
agreement by which it is evidenced. From and after the Effective Date, (i) each
United Option assumed by FCFC may be exercised solely for shares of FCFC Common
Stock or cash in the case of stock appreciation rights, (ii) the number of
shares of FCFC Common Stock subject to each United Option shall be equal to the
number of shares of United Common Stock subject to such United Option
immediately prior to the Effective Date multiplied by two and (iii) the per
share exercise price under such United Option shall be adjusted by dividing the
per share exercise price under each such option by two and rounding down to the
nearest cent; provided, however, that the terms of each United Option shall, in
accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction subsequent to the Effective Date. It is intended that the foregoing
assumption shall be undertaken in a manner that will not constitute a
"modification" as defined in Section 424(h) of the Code as to any stock option
which is an "incentive stock option." As promptly as practicable after the
Effective Date, FCFC shall take all actions necessary to permit the issuance of
FCFC Common Stock upon the exercise of any United Stock Option in compliance
with all applicable securities laws, including the filing of any required
registration statement under the Securities Act of 1933, as amended, and the
listing of such shares on the New York Stock Exchange.
(c) Antidilution. If after the date hereof and prior to the Effective
------------
Date, FCFC or United shall declare a stock dividend or make distributions upon
or subdivide, split-up, reclassify, or combine its common stock or preferred
stock or declare a dividend or make a distribution of its common stock or
preferred stock in any security convertible into or exchangeable for its common
stock or preferred stock, then the conversion ratio shall be appropriately
adjusted. Nothing contained in this Section 3(c) shall be deemed to permit any
action which is otherwise prohibited by the Reorganization Agreement.
4. Surrender and Exchange of United Stock Certificates. Upon the
---------------------------------------------------
Merger becoming effective, holders of certificates that represent shares of
United Common Stock outstanding immediately before the Merger becomes effective
(hereinafter called "Old Certificates") shall cease to be, and shall have no
rights as, shareholders of United, except the right to receive certificates for
the shares of FCFC Common Stock into which such shares are converted in the
Merger as provided herein. Old Certificates shall
App. A-2
be exchangeable by the holders thereof (upon surrender of such Old
Certificates in the manner provided in the transmittal materials described
below) for a certificate or certificates for that number of shares of FCFC
Common Stock equal to the product of two times the number of shares of United
Common Stock represented by the Old Certificates so surrendered. Each Old
Certificate shall after the Merger only represent the shares of FCFC Common
Stock into which the shares of United Common Stock previously represented has
been converted in the Merger.
As promptly as practicable after the Effective Date, FCFC shall send
or cause to be sent to each holder of record of United Common Stock as of the
close of business on the Effective Date transmittal materials for use in
surrendering Old Certificates in exchange for certificates representing FCFC
Common Stock. The letter of transmittal will contain instructions with respect
to the surrender of Old Certificates.
If any dividend on FCFC Common Stock is declared by FCFC after the
Effective Date, the declaration shall include dividends on all whole shares of
FCFC Common Stock into which shares of United Common Stock have been converted
under this Plan, but no former holder of record of United Common Stock will be
entitled to receive a distribution of any such dividend until surrender of the
shareholder's Old Certificates shall have been effected in accordance with the
instructions furnished by FCFC. Upon surrender for exchange of a shareholder's
Old Certificates, such shareholder shall be entitled to receive from FCFC an
amount equal to all such dividends declared (without interest thereon and less
the amount of taxes, if any, which may have been imposed or paid thereon), and
for which the payment date has occurred, on the whole shares of FCFC Common
Stock into which the shares of United Common Stock represented by such Old
Certificates have been converted.
After the Merger becomes effective, there shall be no transfers on the
stock transfer books of United or FCFC of shares of United Common Stock. If,
after the Effective Date, Old Certificates are presented for transfer, they
shall be cancelled and certificates representing whole shares of FCFC Common
Stock shall be issued or paid in exchange therefor as provided herein.
5. Dissenters' Rights. The rights and remedies of a dissenting
------------------
shareholder under Section 1930 and Subchapter D of Chapter 15 of the
Pennsylvania Business Corporation Law shall be afforded to any holder of United
Common Stock who objects to this Plan and who takes the necessary steps to
perfect the rights of a dissenting shareholder. FCFC, as the surviving
corporation, will make whatever payments are to be made to any dissenting
shareholders in the exercise of such rights.
6. Articles of Merger. Upon fulfillment of all conditions in Section
------------------
2 of the Reorganization Agreement and
App. A-3
completion of the Closing (as defined in Section 8(a) of the Reorganization
Agreement), United and FCFC will execute Articles of Merger in compliance with
the requirements of the Pennsylvania Business Corporation Law and will deliver
them for filing with the Pennsylvania Department of State, specifying that the
Merger shall be effective as of the close of business on the last day of the
month in which the Closing occurs or such other date and time as the parties
may agree.
7. Termination and Amendment. Notwithstanding approval by the
-------------------------
shareholders of United, this Plan shall be terminated and the Merger shall be
abandoned in the event of termination of the Reorganization Agreement as
provided therein. If there is such termination after delivery of Articles of
Merger to the Pennsylvania Department of State, such Articles of Merger shall be
withdrawn, terminated and cancelled. Subject to applicable law, this Plan may
be amended in any respect by an instrument in writing signed by an authorized
officer of each of FCFC and United before or after the shareholders' meeting
referred to in Section 6(a) of the Reorganization Agreement at any time before
the Merger becomes effective, except that no such amendment after such
shareholders' meeting shall affect the rates of exchange provided in Sections 3
and 4 of this Plan.
8. Effect of Merger. On the Effective Date, the separate existence
----------------
of United shall cease, and all of the property (real, personal and mixed),
rights, powers, duties and obligations of United and FCFC shall be taken and
deemed to be transferred to and vested in FCFC, as the surviving corporation,
without further act or deed, all as provided in the Pennsylvania Business
Corporation Law.
9. Further Assurances. If at any time FCFC shall consider or be
------------------
advised that any further assignments, conveyances or assurances in law are
necessary or desirable to vest, perfect or confirm of record in FCFC the title
to any property or rights of the Constituent Corporations, or otherwise to carry
out the provisions hereof, the proper officers and directors of the Constituent
Corporations immediately before the Effective Date shall, on behalf of the
Constituent Corporations, execute and deliver any and all proper deeds,
assignments and assurances in law, and do all things necessary or proper to
vest, perfect or confirm title to such property or rights in FCFC and otherwise
to carry out the provisions hereof.
10. Counterparts; Headings. This Plan may be executed in several
----------------------
counterparts, each of which will constitute an original. The headings and
captions contained herein are for reference purposes only and do not constitute
a part hereof.
11. Governing Law. This Plan is governed by and shall be construed
-------------
and enforced in accordance with the law of the Commonwealth of Pennsylvania.
App. A-4
IN WITNESS WHEREOF, the parties have executed this Plan this 25th day
of March, 1994.
Attest: UNITED NATIONAL BANCORPORATION
/s/ Dorothy J. Jamison By /s/ Robert C. Williams
- ----------------------------- -----------------------------
Dorothy J. Jamison, Vice Robert C. Williams, Vice
President and Secretary Chairman, President and
Chief Executive Officer
[Corporate Seal]
Attest: FIRST COMMONWEALTH FINANCIAL
CORPORATION
/s/ David R. Tomb, Jr. By /s/ Joseph E. O'Dell
- ----------------------------- -----------------------------
David R. Tomb, Jr., Secretary Joseph E. O'Dell, Senior
Executive Vice President
and Chief Operating Officer
[Corporate Seal]
App. A-5
ANNEX II
STATUTORY PROVISIONS CONCERNING DISSENTERS' RIGHTS
OF UNITED SHAREHOLDERS
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988
SUBCHAPTER D.--DISSENTERS RIGHTS
(S) 1571. Application and effect of subchapter.
(a) General rule.--Except as otherwise provided in subsection
(b), any shareholder of a business corporation shall have the right to dissent
from, and to obtain payment of the fair value of his shares in the event of, any
corporate action, or to otherwise obtain fair value for his shares, where this
part expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special
treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
A-II-1
(b) Exceptions.--
(1) Except as otherwise provided in paragraph (2), the holders
of the shares of any class or series of shares that, at the record
date fixed to determine the shareholders entitled to notice of and
to vote at the meeting at which a plan specified in any of section
1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any
such shares under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall
be available without regard to the exception provided in that
paragraph in the case of:
(i) Shares converted by a plan if the shares are not
converted solely into shares of the acquiring, surviving, new or
other corporation or solely into such shares and money in lieu of
fractional shares.
(ii) Shares of any preferred or special class unless the
articles, the plan or the terms of the transaction entitle all
shareholders of the class to vote thereon and require for the
adoption of the plan or the effectuation of the transaction the
affirmative vote of a majority of the votes cast by all
shareholders of the class.
(iii) Shares entitled to dissenters rights under Section
1906(c) (relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase,
lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of
shares, obligations or otherwise, with or without assuming the
liabilities of the other corporation and with or without the
intervention of another corporation or other person, shall not be
entitled to the rights and remedies of dissenting shareholders
provided in this subchapter regardless of the fact, if it be the
case, that the acquisition was accomplished by the issuance of
voting shares of the corporation to be outstanding
A-II-2
immediately after the acquisition sufficient to elect a majority or
more of the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution
of the board of directors may direct that all or a part of the shareholders
shall have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
(d) Notice of dissenters rights.--Unless otherwise provided by
statute, if a proposed corporate action that would give rise to dissenters
rights under this subpart is submitted to a vote at a meeting of shareholders,
there shall be included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair
value of their shares by complying with the terms of this subchapter;
and
(2) a copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter
may not be relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
(S) 1572. Definitions.
The following words and phrases when used in this subchapter shall
have the meanings given to them in this section unless the context clearly
indicates otherwise:
"Corporation." The issuer of the shares held or owned by the
dissenter before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation for
purpose of this subchapter. The successor corporation in a division shall have
sole responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
A-II-3
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed every
act required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter object taking into
account all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all of the
circumstances, taking into account all relevant factors including the average
rate currently paid by the corporation on its principal bank loans.
(S) 1573. Record and beneficial holders and owners.
(a) Record holders of shares.--A record holder of shares of a
business corporation may assert dissenters rights as to fewer than all of the
shares registered in his name only if he dissents with respect to all the shares
of the same class or series beneficially owned by any one person and discloses
the name and address of the person or persons on whose behalf he dissents. In
that event, his rights shall be determined as if the shares as to which he has
dissented and his other shares were registered in the names of different
shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
(S) 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting
of shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in
A-II-4
approval of such action. A dissenter who fails in any respect shall not acquire
any right to payment of the fair value of his shares under this subchapter.
Neither a proxy nor a vote against the proposed corporate action shall
constitute the written notice required by this section.
(S) 1575. Notice to demand payment.
(a) General rule.--If the proposed corporate action is approved by
the required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action
is to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to
obtain payment.
(2) Inform holders of uncertificated shares to what extent
transfer of shares will be restricted from the time that demand for
payment is received.
(3) Supply a form for demanding payment that includes a request
for certification of the date on which the shareholder, or the person
on whose behalf the shareholder dissents, acquired beneficial
ownership of the shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for
receipt of the demand and deposit of certificated shares shall be not less than
30 days from the mailing of the notice.
(S) 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act.--A shareholder who
fails to timely demand payment, or fails (in the case of certificated shares) to
timely deposit certificates, as required by a notice pursuant to section 1575
(relating to notice to demand payment) shall not have any right under this
subchapter to receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not
represented by certificates, the business
A-II-5
corporation may restrict their transfer from the time of receipt of demand for
payment until effectuation of the proposed corporate action or the release of
restrictions under the terms of section 1577(a) (relating to failure to
effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain
all other rights of a shareholder until those rights are modified by
effectuation of the proposed corporate action.
(S) 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action.--Within 60 days after
the date set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment.--When uncertificated shares
have been released from transfer restrictions and deposited certificates have
been returned, the corporation may at any later time send a new notice
conforming to the requirements of section 1575 (relating to notice to demand
payment), with like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of
the proposed corporate action, or upon timely receipt of demand for payment if
the corporate action has already been effectuated, the corporation shall
either remit to dissenters who have made demand and (if their shares are
certificated) have deposited their certificates the amount that the
corporation estimates to be the fair value of the shares, or give written
notice that no remittance under this section will be made. The remittance or
notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the
issuer of the shares held or owned by the dissenter for a fiscal year
ending not more than 16 months before the date of remittance or notice
together with the latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value
of the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of
this subchapter.
(d) Failure to make payment.--If the corporation does not remit the
amount of its estimate of the fair value of the shares as provided by
subsection (c), it shall return any certificates that have been deposited and
release uncertificated
A-II-6
shares from any transfer restrictions imposed by reason of the demand for
payment. The corporation may make a notation on any such certificate or on the
records of the corporation relating to any such uncertificated shares that
such demand has been made. If shares with respect to which notation has been
so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer
any rights in the corporation other than those which the original dissenter
had after making demand for payment of their fair value.
(S) 1578. Estimate by dissenter of fair value of shares.
(a) General rule.--If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does
not file his own estimate under subsection (a) within 30 days after the mailing
by the corporation of its remittance or notice, the dissenter shall be entitled
to no more than the amount stated in the notice or remitted to him by the
corporation.
(S) 1579. Valuation proceedings general.
(a) General rule.--Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
A-II-7
(b) Mandatory joinder of dissenters.--All dissenters, wherever
residing, whose demands have not been settled shall be made parties to the
proceeding as in an action against their shares. A copy of the application
shall be served on each such dissenter. If a dissenter is a nonresident, the
copy may be served on him in the manner provided or prescribed by or pursuant
to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction and interstate and
international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall
be plenary and exclusive. The court may appoint an appraiser to receive
evidence and recommend a decision on the issue of fair value. The appraiser
shall have such power and authority as may be specified in the order of
appointment or in any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall
be entitled to recover the amount by which the fair value of his shares is
found to exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
(S) 1580. Costs and expenses of valuation proceedings.
(a) General rule.--The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
as the court deems appropriate against all or some of the dissenters who are
parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good
faith appears.--Fees and expenses of counsel and of experts for the respective
parties may be assessed as the court deems appropriate against the corporation
and in favor of any or all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
A-II-8
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in
respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court
finds that the services of counsel for any dissenter were of substantial
benefit to other dissenters similarly situated and should not be assessed
against the corporation, it may award to those counsel reasonable fees to be
paid out of the amounts awarded to the dissenters who were benefited.
A-II-9
ANNEX III
[Letterhead of Berwind Financial Group, Inc.]
June 17, 1994
Board of Directors
United National Bancorporation
15 South Main Street
Chambersburg, PA 17201
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of United National Bancorporation ("United") of
the financial terms of the proposed merger whereby United will be merged into
First Commonwealth Financial Corporation ("First Commonwealth"). The terms of
the proposed merger (the "Proposed Merger") between United and First
Commonwealth are set forth in the Agreement and Plan of Reorganization and the
Plan of Merger (collectively the "Merger Agreement") dated March 25, 1994, and
provide that each outstanding share of United common stock will be converted
into 2.0 shares of First Commonwealth common stock subject to certain terms
and conditions as detailed in the Merger Agreement.
Berwind Financial Group, Inc., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements and valuations for various other
purposes, and in the determination of adequate consideration in such
transactions.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performances, current financial positions and general
prospects of United and First Commonwealth, (ii) reviewed the Merger
Agreement, (iii) reviewed the Registration Statement on Form S-4, (iv)
reviewed and analyzed stock market performance of First Commonwealth, (v)
studied and analyzed the consolidated financial and operating data of United
and First Commonwealth, (vi) considered the terms and conditions of the
Proposed Merger between United and First Commonwealth as compared with the
terms and conditions of comparable bank mergers and acquisitions, (vii) met
and/or communicated with certain members of United and First Commonwealth's
senior management to discuss their respective operations, historical financial
A-III-1
statements, and future prospects, and (viii) conducted such other financial
analyses, studies and investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by United and First Commonwealth, and their respective officers,
directors, auditors, counsel and other agents, and on filings, releases and
other information issued by United and First Commonwealth including financial
statements, financial projections, and stock price data as well as certain
information from recognized independent sources. We have not independently
verified the information concerning United and First Commonwealth nor other
data which we have considered in our review and, for purposes of the opinion
set forth below, we have assumed and relied upon the accuracy and completeness
of all such information and data. Additionally, we assume that the Proposed
Merger is, in all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospectus of United and First Commonwealth, we have assumed that such
information has been reasonably prepared and reflects the best currently
available estimates and judgments of the managements of United and First
Commonwealth as to United's and First Commonwealth's most likely future
performance. In rendering our opinion, we have assumed that in the course of
obtaining the necessary regulatory approvals for the Proposed Merger, and in
preparation of the final proxy statement, no conditions will be imposed that
will have a material adverse effect on the contemplated benefits of the
Proposed Merger to United.
Our opinion is based upon information provided to us by the managements of
United and First Commonwealth, as well as market, economic, financial, and
other conditions as they exist and can be evaluated only as of the date hereof
and speaks to no other period. Our opinion pertains only to the financial
consideration of the Proposed Merger and does not constitute a recommendation
to the Board of United.
Based on the foregoing, it is our opinion that, as of the date hereof, the
Proposed Merger between United and First Commonwealth is fair, from a
financial point of view, to the shareholders of United.
Sincerely,
BERWIND FINANCIAL GROUP, INC.
A-III-2
UNITED NATIONAL BANCORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE
HELD ON JULY 27, 1994
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder of
United National Bancorporation ("United") does hereby nominate, constitute and
appoint C. Kenneth Crotsley, Richard M. Langdon and Christine W. Schucker, or
each of them acting individually, the true and lawful attorney(s) and proxy
(proxies) of the undersigned with full power of substitution, for the
undersigned and in the name, place and stead of the undersigned to vote all the
shares of United Common Stock standing in the name of the undersigned on
United's books at the close of business on June 30, 1994, at the Special Meeting
of United's Shareholders to be held at the Holiday Inn, 1095 Wayne Avenue,
Chambersburg, Pennsylvania, at 10:30 A.M., local time, or at any adjournment or
adjournments thereof, with all the powers the undersigned would possess if
personally present as follows:
(1) FOR [__] AGAINST [__] ABSTAIN [__]
the proposal to approve the (i) Agreement and Plan of Reorganization and
(ii) the Plan of Merger which are attached as Annex I and as Appendix A
to said Annex I, respectively, to, and are described in, the Proxy
Statement/Prospectus dated July 6, 1994.
(2) Upon such other matters as may properly come before the Special Meeting
or any adjournment or adjournments thereof in their discretion.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" NO. 1.
UNLESS OTHERWISE SPECIFIED BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED
FOR NO. 1.
Any other proxy heretofore given by the undersigned to vote shares of
United Common Stock which the undersigned would be entitled to vote if
personally present at said Special Meeting or any adjournment or adjournments
thereof is hereby expressly revoked. This proxy may be revoked at any time
prior to the voting hereof. The undersigned hereby acknowledges receipt of the
Notice of Special Meeting of Shareholders of United and the Proxy
Statement/Prospectus dated July 6, 1994.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
his seal this _____ day of ____________, 1994.
(SEAL)
-------------------------------
(SEAL)
-------------------------------
Please date and sign exactly as
name appears hereon. When
signing as attorney, executor,
administrator, trustee,
guardian, etc., full title as
such should be shown. For joint
accounts, each joint owner must
sign. If more than one trustee,
all should sign.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pennsylvania Business Corporation Law of 1988. Section 1741 of the
Pennsylvania Business Corporation Law of 1988 (the "BCL") provides that unless
otherwise restricted in its bylaws, a business corporation shall (subject to the
limitations described below) have the power to indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action or proceeding, if such person acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. The termination of any
action or proceeding by judgment, order, settlement or conviction or upon a plea
of nolo contendere or its equivalent shall not, of itself, create a presumption
that such person did not act in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had reasonable cause to believe that
his conduct was unlawful.
Section 1742 of the BCL provides that unless otherwise restricted in its
bylaws, a corporation shall (subject to the limitations described below) have
the power to indemnify any person who was or is a party, or is threatened to be
made a party, to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another domestic or foreign corporation for profit or not-
for-profit, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action if such
person acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the corporation. Indemnification shall
not be made under Section 1742 in respect of any claim, issue or matter as to
which such person shall have been
II-1
adjudged to be liable to the corporation unless, and only to the extent that,
the court of common pleas of the judicial district embracing the county in
which the registered office of the corporation is located or the court in
which such action was brought determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court of common pleas or such other court shall deem proper.
Section 1744 of the BCL provides that unless ordered by a court, any
indemnification under Section 1741 or 1742 shall be made by the business
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because the indemnitee has met the applicable standard of conduct
set forth in the relevant section. Such determination shall be made:
(1) By the board of directors of the corporation by a majority vote of a
quorum consisting of directors who were not parties to the action or proceeding;
or
(2) If such a quorum is not obtainable, or, if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) By the shareholders.
Notwithstanding the above, Section 1743 of the BCL provides that, to the
extent that a director, officer, employee or agent of a business corporation has
been successful on the merits or otherwise in defense of any action or
proceeding referred to above, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Section 1745 of the BCL provides that expenses (including attorneys' fees)
incurred in defending any action or proceeding may be paid by a business
corporation in advance of the final disposition of the action or proceeding upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount if it is ultimately determined that such person is
not entitled to be indemnified by the corporation.
Section 1746 of the BCL provides that the indemnification and advancement
of expenses provided by or granted pursuant to the subchapter on indemnification
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested
II-2
directors or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office. Section 1746
also provides that indemnification may not be made in any case where the act
or failure to act giving rise to the claim for indemnification is determined
by a court to have constituted willful misconduct or recklessness. The
articles of incorporation may not provide for indemnification in the case of
willful misconduct or recklessness.
Section 1747 of the BCL provides that, unless otherwise restricted in its
bylaws, a business corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against any liability asserted against such person and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify the
director, officer, employee or agent against such liability under the provisions
of the subchapter governing indemnification. Section 1747 declares such
insurance to be consistent with the public policy of the Commonwealth of
Pennsylvania.
Section 1750 of the BCL provides that the indemnification and advancement
of expenses provided by, or granted pursuant to, the subchapter governing
indemnification shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent of the corporation and shall inure to the benefit of the heirs and
personal representatives of such director, officer, employee or agent.
FCFC By-Laws. Article 23 of the By-Laws of the FCFC provides that FCFC
shall indemnify any director, officer and/or employee or any former director,
officer and/or employee who was or is a party to, or is threatened to be made a
party to, or is called as a witness in connection with, any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was a director,
officer and/or employee of FCFC, or is or was serving at the request of FCFC as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. In the case of an action or suit by
or in the right of the registrant, no indemnification shall be made in respect
of a claim, issue or matter as to which such person shall have been adjudged to
be liable for misconduct in the performance of his duty to the registrant.
Article 23 further provides that, except as may be otherwise ordered by a court,
there shall be a presumption that any officer, director and/or employee is
entitled to indemnification in the foregoing circumstances unless either a
majority of the directors not
II-3
involved in the proceedings or, if there are less than three such directors,
then the holders of one-third of the outstanding shares of FCFC, determine
that the person is not entitled to such presumption. In the event of any such
determination, a written opinion as to whether or not the parties involved are
entitled to indemnification shall be requested from independent counsel.
Section 12.3 of the By-Laws of FCFC further provides that except as
specifically provided by law, a director of FCFC will not be personally liable
for monetary damages with respect to any action taken, or any failure to act,
unless such director has breached or failed to perform the duties of his office
under Pennsylvania law relating to standard of care and justifiable reliance and
the breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness. Any amendment or repeal of Section 12.3 which has the effect of
increasing director liability shall operate prospectively only and shall not
affect any action taken, or any failure to act, prior to the adoption of such
amendment.
FCFC maintains directors' and officers' liability insurance covering its
directors and officers with respect to liabilities, including liabilities under
the Securities Act of 1933, which they may incur in connection with their
serving in such capacity. Under the provisions of this insurance policy, FCFC
received reimbursement for amounts as to which the directors and officers are
indemnified by FCFC under the indemnification provisions of Article 23 of the
By-Laws of FCFC. Such insurance also provides certain additional coverage for
the directors and officers against certain liabilities even though such
liabilities may not be covered by the indemnification provisions described
above.
II-4
ITEM 21. EXHIBITS.
EXHIBIT INDEX
(PURSUANT TO ITEM 601 OF REGULATION S-K)
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Reorganization dated as of March 25, 1994
between First Commonwealth Financial Corporation and United
National Bancorporation and Plan of Merger dated as of March 25,
1994 between First Commonwealth Financial Corporation and United
National Bancorporation (filed herewith as Annex I and Appendix A
to Annex I, respectively, to the Proxy Statement/Prospectus
constituting part of this Registration Statement).
3.1* Articles of Incorporation of First Commonwealth Financial
Corporation, as amended (filed as Exhibit 3(i) to the Registrant's
quarterly report on Form 10-Q for the quarter ended March 31, 1994
and incorporated herein by reference thereto).
3.2* By-Laws of First Commonwealth Financial Corporation, as amended
(filed as Exhibit 3.2 to the Registrant's Registration Statement on
Form S-4 (Reg. No. 33-50611), filed with the Securities and
Exchange Commission on October 15, 1993 and incorporated herein by
reference thereto).
5.1 Opinion of Tomb and Tomb regarding the legality of the shares of
Common Stock of First Commonwealth Financial Corporation being
registered.
8.1 Opinion of Reed Smith Shaw & McClay as to certain tax matters.
10.1* Employment Agreement between Cenwest and Ronald C. Geiser (filed as
Exhibit 10.2 to the Registrant's Form SE filed November 28, 1983
and incorporated herein by reference thereto).
10.2* Employment Agreement between Central and Sumner E. Brumbaugh (filed
as Exhibit 10.2 to the Registrant's Registration Statement on Form
S-4 (Reg. No. 33-50611), filed with the Securities and Exchange
Commission on October 15, 1993 and incorporated herein by reference
thereto).
10.3* Employment Agreement between Peoples and Robert F. Koslow,
including Amendment No. 1 thereto (filed as Exhibit 10.3 to the
Registrant's Registration Statement
II-5
on Form S-4 (Reg. No. 33-50611), filed with the Securities and
Exchange Commission on October 15, 1993 and incorporated herein by
reference thereto).
10.4 Supplemental Executive Benefit Agreement between United and Robert
C. Williams.
10.5* United National Bancorporation 1986 Stock Option Plan (filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8
(Reg. No. 33-56014), filed with the Securities and Exchange
Commission on December 21, 1992 and incorporated herein by
reference thereto).
10.6* Agreement and Plan of Reorganization dated as of April 21, 1994
between First Commonwealth Financial Corporation and Reliable
Financial Corporation and Plan of Merger dated as of April 21, 1994
between First Commonwealth Financial Corporation and Reliable
Financial Corporation (filed as Exhibit 2.1 to the Registrant's
Report on Form 8-K (event date April 21, 1994), filed with the
Securities and Exchange Commission on May 4, 1994 and incorporated
herein by reference thereto).
21.1* List of subsidiaries of the Registrant (filed as Exhibit 21.1 to
the Registrant's annual report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference thereto).
23.1 Consent of Jarrett * Stokes & Co., independent certified public
accountants.
23.2 Consent of Ernst & Young, independent certified public accountants.
23.3 Consent of Edwards Leap & Sauer, independent certified public
accountants.
23.4* Consent of Tomb and Tomb (contained in their opinion filed as
Exhibit 5.1 hereto).
23.5* Consent of Reed Smith Shaw & McClay (contained in their opinion
filed as Exhibit 8.1 hereto).
24.1 Powers of Attorney.
99.1 Preliminary copy of letter to shareholders of United National
Bancorporation appears as a part of the Proxy Statement/Prospectus
constituting part of this Registration Statement.
99.2 Preliminary copy of Notice of Special Meeting of Shareholders of
United National Bancorporation appears
II-6
as a part of the Proxy Statement/Prospectus constituting part of
this Registration Statement.
99.3 Preliminary copy of form of proxy for use by shareholders of United
National Bancorporation appears as a part of the Proxy
Statement/Prospectus constituting part of this Registration
Statement.
99.4 Consent of Robert C. Williams.
- ----------------
* Incorporated herein by reference.
II-7
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (4) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 ((S) 230.415 of this chapter),
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(4) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of
II-8
the registration statement through the date of responding to the request.
(5) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania,
on the 17th day of June, 1994.
FIRST COMMONWEALTH FINANCIAL
CORPORATION
By /s/ E. James Trimarchi
--------------------------------------
E. James Trimarchi
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 17th day of June, 1994.
SIGNATURE AND CAPACITY
----------------------
/s/ E. James Trimarchi
- ----------------------------------
E. James Trimarchi, President
and Principal Executive Officer
and Director
*
- ----------------------------------
Sumner E. Brumbaugh, Director
*
- ----------------------------------
E.H. Brubaker, Director
*
- ----------------------------------
Edward T. Cote, Director
*
- ----------------------------------
Thomas L. Delaney, Director
*
- ----------------------------------
Clayton C. Dovey, Jr., Director
II-10
*
- -----------------------------------
Ronald C. Geiser, Director
*
- ----------------------------------
Johnston A. Glass, Director
*
- ----------------------------------
A.B. Hallstrom, Director
*
- ----------------------------------
Thomas J. Hanford, Director
*
- ----------------------------------
H.H. Heilman, Jr., Director
*
- ----------------------------------
David F. Irvin, Director
*
- ----------------------------------
David L. Johnson, Director
*
- ----------------------------------
Robert F. Koslow, Director
*
- ----------------------------------
Dale P. Latimer, Director
*
- ----------------------------------
Joseph W. Proske, Director
*
- ----------------------------------
Charles J. Szewczyk, Director
*
- ----------------------------------
David R. Tomb, Jr., Director
*
- ----------------------------------
John I. Whalley, Jr., Director
II-11
*
- -----------------------------------
John J. Dolan, Senior Vice
President, Principal Financial
Officer and Principal Accounting
Officer
*By /s/ E. James Trimarchi
------------------------------
E. James Trimarchi
Attorney-in-Fact
II-12