10-K 1 fcf-20131231x10k.htm 10-K FCF-2013.12.31-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file Number 001-11138
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
25-1428528
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
601 PHILADELPHIA STREET    INDIANA, PA
15701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
COMMON STOCK, $1 PAR VALUE
 
NEW YORK STOCK EXCHANGE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨    No x
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x        Accelerated filer ¨      Non-accelerated filer ¨        Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x
The aggregate market value of the voting and non-voting common stock, par value $1 per share, held by non-affiliates of the registrant (based upon the closing sale price on June 30, 2013) was approximately $700,502,967.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of February 28, 2014, was 94,206,690.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the annual meeting of shareholders to be held April 22, 2014 are incorporated by reference into Part III.



FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
 
PART I
 
PAGE
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 1B.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
 
 
PART II
 
 
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
ITEM 7.
 
 
 
ITEM 7A.
 
 
 
ITEM 8.
 
 
 
ITEM 9.
 
 
 
ITEM 9A.
 
 
 
ITEM 9B.
 
 
 
PART III
 
 
 
 
 
ITEM 10.
 
 
 
ITEM 11.
 
 
 
ITEM 12.
 
 
 
ITEM 13.
 
 
 
ITEM 14.
 
 
 
PART IV
 
 
 
 
 
ITEM 15.
 
 
 
 



FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements regarding our strategy, evaluations of our asset quality, future interest rate trends and liquidity, prospects for growth in assets and prospects for future operating results. Forward-looking statements can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Forward-looking statements are based on assumptions of management and are only expectations of future results. You should not place undue reliance on our forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements as a result of, among others, the risk factors described in Item 1A of this report. Forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

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ITEM 1.    Business
Overview
First Commonwealth Financial Corporation (“First Commonwealth” or “we”) is a financial holding company that is headquartered in Indiana, Pennsylvania. We provide a diversified array of consumer and commercial banking services through our bank subsidiary, First Commonwealth Bank (“FCB” or the “Bank”). We also provide trust and wealth management services and offer insurance products through FCB and our other operating subsidiaries. At December 31, 2013, we had total assets of $6.2 billion, total loans of $4.3 billion, total deposits of $4.6 billion and shareholders’ equity of $711.7 million. Our principal executive office is located at 601 Philadelphia Street, Indiana, Pennsylvania 15701, and our telephone number is (724) 349-7220.
FCB is a Pennsylvania bank and trust company. At December 31, 2013, the Bank operated 110 community banking offices throughout western and central Pennsylvania and a loan production office in downtown Pittsburgh, Pennsylvania. During the fourth quarter of 2014, an additional loan production office is scheduled to open in Cleveland, Ohio. The largest concentration of our branch offices is located within the greater Pittsburgh metropolitan area in Allegheny, Butler, Washington and Westmoreland counties, while our remaining offices are located in smaller cities, such as Altoona, Johnstown, and Indiana, Pennsylvania, and in towns and villages throughout predominantly rural counties. The Bank also operates a network of 115 automated teller machines, or ATMs, at various branch offices and offsite locations. All of our ATMs are part of the NYCE and MasterCard/Cirrus networks, both of which operate nationwide. The Bank is a member of the Allpoint ATM network which allows surcharge-free access to over 55,000 ATMs. The Bank is also a member of the “Freedom ATM Alliance,” which affords cardholders surcharge-free access to a network of over 670 ATMs in over 50 counties in Pennsylvania, Maryland, New York, West Virginia and Ohio.
Historical and Recent Developments
FCB began in 1934 as First National Bank of Indiana with initial capitalization of $255 thousand. First National Bank of Indiana changed its name to National Bank of the Commonwealth in 1971 and became a subsidiary of First Commonwealth in 1983.

Since the formation of the holding company in 1983, we have grown steadily through the acquisition of smaller banks and thrifts in our market area, including Deposit Bank in 1984, Dale National Bank and First National Bank of Leechburg in 1985, Citizens National Bank of Windber in 1986, Peoples Bank and Trust Company in 1990, Central Bank in 1992, Peoples Bank of Western Pennsylvania in 1993, Unitas National Bank and Reliable Savings Bank in 1994. In 1995, we merged all of our banking subsidiaries (other than Reliable Savings Bank) into Deposit Bank and renamed the resulting institution “First Commonwealth Bank.” We then merged Reliable Savings Bank into FCB in 1997. We acquired Southwest Bank in 1998 and merged it into FCB in 2002.

We expanded our presence in the Pittsburgh market through the acquisitions of Pittsburgh Savings Bank (dba BankPittsburgh) in 2003, Great American Federal in 2004 and Laurel Savings Bank in 2006. These acquisitions added 27 branches in Allegheny and Butler Counties.
In recent years, we have primarily focused on organic growth, improving the reach of our franchise and the breadth of our product offering. As part of this strategy, we have opened fourteen de novo branches since 2005, all of which are in the greater Pittsburgh area. As a result of our acquisition and de novo strategy, FCB operates 61 branches in the Pittsburgh metropolitan statistical area and currently ranks ninth in deposit market share.
Competition
The banking and financial services industry is extremely competitive in our market area. We face vigorous competition for customers, loans and deposits from many companies, including commercial banks, savings and loan associations, finance companies, credit unions, trust companies, mortgage companies, money market mutual funds, insurance companies, and brokerage and investment firms. Many of these competitors are significantly larger than us, have greater resources, lending limits and larger branch systems and offer a wider array of financial services than us. In addition, some of these competitors, such as credit unions, are subject to a lesser degree of regulation than that imposed on us.
Employees
At December 31, 2013, First Commonwealth and its subsidiaries employed 1,256 full-time employees and 181 part-time employees.

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Supervision and Regulation
The following discussion sets forth the material elements of the regulatory framework applicable to financial holding companies and their subsidiaries and provides certain specific information relevant to First Commonwealth and its subsidiaries. The regulatory framework is intended primarily for the protection of depositors, other customers and the federal deposit insurance fund and not for the protection of security holders. The rules governing the regulation of financial institutions and their holding companies are very detailed and technical. Accordingly, the following discussion is general in nature and is not intended to be complete or to describe all the laws and regulations that apply to First Commonwealth and its subsidiaries. A change in applicable statutes, regulations or regulatory policy may have a material adverse effect on our business, financial condition or results of operations.
Regulatory Reforms
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions such as bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect all bank holding companies and banks, including First Commonwealth and FCB, some of which are described in more detail below.
Many of the Dodd-Frank Act’s provisions are subject to final rulemaking by the U.S. financial regulatory agencies, and the implications of the Dodd-Frank Act for First Commonwealth’s businesses will depend to a large extent on how such rules are adopted and implemented by the primary U.S. financial regulatory agencies. First Commonwealth continues to analyze the impact of rules adopted under Dodd-Frank, on its businesses. However, the full impact will not be known until the rules, and other regulatory initiatives that overlap with the rules, are finalized and their combined impacts can be understood.
Bank Holding Company Regulation
First Commonwealth is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (“FRB”).
Acquisitions. Under the BHC Act, First Commonwealth is required to obtain the prior approval of the FRB before it can merge or consolidate with any other bank holding company or acquire all or substantially all of the assets of any bank that is not already majority owned by it or acquire direct or indirect ownership, or control of, any voting shares of any bank that is not already majority owned by it, if after such acquisition it would directly or indirectly own or control more than 5% of the voting shares of such bank. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act (“CRA”) ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions and open branch offices.
Non-Banking Activities. First Commonwealth is generally prohibited under the BHC Act from engaging in, or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the FRB considers whether the performance of these activities by a bank holding company can reasonably be expected to produce benefits to the public that outweigh the possible adverse effects.
Reporting. Under the BHC Act, First Commonwealth is subject to examination by the FRB and is required to file periodic reports and other information of its operations with the FRB. In addition, under the Pennsylvania Banking Code of 1965, the Pennsylvania Department of Banking has the authority to examine the books, records and affairs of any Pennsylvania bank holding company or to require any documentation deemed necessary to ensure compliance with the Pennsylvania Banking Code.
Source of Strength Doctrine. FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codifies this policy as a statutory requirement. Under this requirement, First Commonwealth is expected to commit resources to support FCB, including at times when First Commonwealth may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Affiliate Transactions. Transactions between FCB, on the one hand, and First Commonwealth and its other subsidiaries, on the other hand, are regulated by the Federal Reserve Board. These regulations limit the types and amounts of covered transactions

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engaged in by FCB and generally require those transactions to be on an arm’s-length basis. “Covered transactions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these regulations require that any such transaction by FCB (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.
SEC Regulations. First Commonwealth is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and various state securities commissions for matters relating to the offer and sale of its securities and is subject to the SEC rules and regulations relating to periodic reporting, proxy solicitation and insider trading.
Bank Regulations
FCB is a state bank chartered under the Pennsylvania Banking Code and is not a member of the FRB. As such, FCB is subject to the supervision of, and is regularly examined by, both the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and is required to furnish quarterly reports to both agencies. The approval of the Pennsylvania Department of Banking and FDIC is also required for FCB to establish additional branch offices or merge with or acquire another banking institution.
Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus is at least equal to capital. Dividends may not reduce surplus without the prior consent of the Pennsylvania Department of Banking. FCB has not reduced its surplus through the payment of dividends.
The FDIC also prohibits the declaration or payout of dividends at a time when FCB is in default in payment of any assessment due the FDIC. In addition, supervisory guidance issued by the FRB requires, among other things, that a company must consult with the FRB in advance of paying a dividend that exceeds earnings for the quarter for which the dividend is paid or that could result in a material adverse change to the company’s capital structure. The guidance also states that a company should, as a general matter, eliminate, defer or severely limit its dividend if (1) the company’s net income for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividend; (2) the company’s prospective rate of earnings retention is not consistent with the company’s capital needs and current and prospective financial condition; or (3) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Community Reinvestment. Under the Community Reinvestment Act, or CRA, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the applicable regulatory agency to assess an institution’s record of meeting the credit needs of its community. The CRA requires public disclosure of an institution’s CRA rating and requires that the applicable regulatory agency provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the basis for denying an application. For its most recent examination, FCB received a “satisfactory” rating.
Consumer Protection Laws. The operations of FCB are also subject to numerous federal, state and local consumer protection laws and regulations including the Truth in Lending Act, Truth in Savings Act, Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other things, these acts:
require banks to disclose credit terms in meaningful and consistent ways;
prohibit discrimination against an applicant in any consumer or business credit transaction;
prohibit discrimination in housing-related lending activities;
require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and
prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
Deposit Insurance. Deposits of FCB are insured up to applicable limits by the FDIC and are subject to deposit insurance assessments to maintain the Deposit Insurance Fund (“DIF”). Deposit insurance assessments are based upon average total assets minus average total equity. The insurance assessments are based upon a matrix that takes into account a bank’s capital level and supervisory rating. The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and

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unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessment was refunded during the second quarter of 2013 and no longer has a balance in the accompanying Statements of Financial Condition.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.
Capital Requirements
As a bank holding company, we are subject to consolidated regulatory capital requirements administered by the FRB. FCB is subject to similar capital requirements administered by the FDIC and the Pennsylvania Department of Banking. The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories.
A depository institution’s or holding company’s capital, in turn, is classified in one of two tiers, depending on type:
Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, and qualifying trust preferred securities, less goodwill, most intangible assets and certain other assets.
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for possible loan and lease losses, subject to limitations.
First Commonwealth, like other bank holding companies, currently is required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance sheet items, such as letters of credit). FCB, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The minimum leverage ratio is 3.0% for bank holding companies and depository institutions that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other bank holding companies and depository institutions are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%.

As of December 31, 2013, FCB was a “well-capitalized” bank as defined by the FDIC. See Note 26 “Regulatory Restrictions and Capital Adequacy” of Notes to the Consolidated Financial Statements, contained in Item 8, for a table that provides a comparison of First Commonwealth’s and FCB’s risk-based capital ratios and the leverage ratio to minimum regulatory requirements.

In July 2013, the FRB, the FDIC and other bank regulatory agencies published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding

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companies and depository institutions compared to the current U.S. risk-based capital rules. The Basel III Capital Rules, among other things:
introduce a new capital measure called “Common Equity Tier 1” (“CET1”);
define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;
specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements; and
expand the scope of the deductions/adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require First Commonwealth and FCB to maintain:
a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation);
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);
a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, smaller banking organizations, including First Commonwealth and FCB, may make a one-time permanent election to continue to exclude these items.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The Basel III Capital Rules also revise the “prompt corrective action” capital requirements described above. The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

Management believes that, as of December 31, 2013, First Commonwealth and FCB would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Liquidity Requirements
Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. In October 2013, the federal banking agencies proposed rules that would implement the LCR for banking organizations that follow the “advanced approach” to calculating capital and a separate version for banking organizations with consolidated assets

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of greater than $50 billion, neither of which would apply to First Commonwealth or FCB. The federal banking agencies have not yet proposed rules to implement the NSFR.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as FCB. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Availability of Financial Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Our SEC filings are also available to the public on the SEC website at www.sec.gov and on our website at www.fcbanking.com.
We also make available on our website, www.fcbanking.com, and in print to any shareholder who requests them, our Corporate Governance Guidelines, the charters for our Audit, Risk, Compensation and Human Resources, and Governance Committees, and the Code of Conduct and Ethics that applies to all of our directors, officers and employees.
Our Chief Executive Officer has certified to the New York Stock Exchange (“NYSE”) that, as of the date of the certification, he was not aware of any violation by First Commonwealth of NYSE’s corporate governance listing standards. In addition, our Chief Executive Officer and Chief Financial Officer have made certain certifications concerning the information contained in this report pursuant to Section 302 of the Sarbanes-Oxley Act. The Section 302 certifications appear as Exhibits 31.1 and 31.2 to this annual report on Form 10-K.

ITEM 1A.    Risk Factors
As a financial services company, we are subject to a number of risks, many of which are outside of our control. These risks include, but are not limited to:
Changes in interest rates could negatively impact our financial condition and results of operations.
Our results of operations depend substantially on net interest income, which is the difference between interest earned on interest-earning assets (such as investments and loans) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. If our interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a declining interest rate environment, net interest income could be adversely impacted. Likewise, if interest-bearing liabilities mature or reprice more quickly than interest-earnings assets in a rising interest rate environment, net interest income could be adversely impacted.
Changes in interest rates also can affect the value of loans and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows.
We are subject to extensive government regulation and supervision.
Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or

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implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. See “Supervision and Regulation” included in Item 1. Business for a more detailed description of the Dodd-Frank Act and other regulatory requirements applicable to First Commonwealth.

We will be completing a transition to a new core processing system. If we are not able to complete the transition as planned, or unanticipated events occur during the transition, our operations, net income, or reputation could be adversely affected.

We will be transitioning to a new core processing system during 2014. The core processing system is used to maintain customer and account records, reflect account transactions and activity, and support our customer relationship management systems for substantially all of our deposit and loan customers. First Commonwealth has assembled a team of officers and employees representing key business units and functional areas throughout the Company to plan and oversee the transition process. This team, working with the vendor for the core processing system and outside project management consultants, has developed a comprehensive work plan for completing the transition. Extensive pre-conversion testing of, and employee training in, processing routines and new core processing system operation will be conducted before FCB is transitioned to the new core processing system.

If we are not able to complete the transition to the new core processing system as expected in accordance with the work plan, or if unanticipated events occur during or following the transition, FCB may not be able to timely process transactions for its customers, those customers may not be able to complete transactions in or affecting their accounts that are maintained on the core processing system, or FCB may not be able to perform contractual and other obligations to its customers or other parties. Should any of these consequences occur, First Commonwealth may incur additional expense in its financial and regulatory reporting, in processing or re-processing transactions, and FCB may not be able to meet customer expectations for transaction processing and customer service, customers may close their accounts with us, and we may incur liability under contractual or other arrangements with customers or other parties. Any of these events, should they occur, could have a material and adverse impact on the Company’s operations, net income, reputation or the trading price of First Commonwealth’s shares, as well as expose the Company to civil liability or regulatory sanctions.
Declines in real estate values could adversely affect our earnings and financial condition.
As of December 31, 2013, approximately 62% of our loans were secured by real estate. These loans consist of residential real estate loans (approximately 30% of total loans), commercial real estate loans (approximately 30% of total loans) and real estate construction loans (approximately 2% of total loans). During the economic recession in 2008, declines in real estate values and weak demand for new construction, particularly outside of our core Pennsylvania market, caused deterioration in our loan portfolio and adversely impacted our financial condition and results of operations. Additional declines in real estate values, both within and outside of Pennsylvania, could adversely affect the value of the collateral for these loans, the ability of borrowers to make timely repayment of these loans and our ability to recoup the value of the collateral upon foreclosure, further impacting our earnings and financial condition.
Our earnings are significantly affected by general business and economic conditions.
Our operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance and the strength of the United States economy, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values and a decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our financial condition and results of operations.
Our allowance for credit losses may be insufficient.
All borrowers carry the potential to default and our remedies to recover may not fully satisfy money previously loaned. We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is adequate to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for credit losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic conditions; and

10


unidentified losses in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments different than those of management. An increase in the allowance for credit losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.
Acts of cyber-crime may compromise client and company information, disrupt access to our systems or result in loss of client or company assets.
Our business is dependent upon the availability of technology, the Internet and telecommunication systems to enable financial transactions by clients, record and monitor transactions and transmit and receive data to and from clients and third parties. Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our technologies, systems, networks and our clients’ devices have been subject to, and are likely to continue to be the target of, cyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’ business operations.
We have a significant deferred tax asset and cannot assure it will be fully realized.
We had net deferred tax assets of $63.2 million as of December 31, 2013. We did not establish a valuation allowance against our federal net deferred tax assets as of December 31, 2013 as we believe that it is more likely than not that all of these assets will be realized. In evaluating the need for a valuation allowance, we estimated future taxable income based on management approved forecasts. This process required significant judgment by management about matters that are by nature uncertain. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material adverse effect on our results of operations and financial condition.
We must evaluate whether any portion of our recorded goodwill is impaired. Impairment testing may result in a material, non-cash write-down of our goodwill assets and could have a material adverse impact on our results of operations.
At December 31, 2013, goodwill represented approximately 3% of our total assets. We have recorded goodwill because we paid more for some of our businesses than the fair market value of the tangible and separately measurable intangible net assets of those businesses. We test our goodwill and other intangible assets with indefinite lives for impairment at least annually (or whenever events occur which may indicate possible impairment). Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is not considered impaired. If the fair value of the reporting unit is less than the carrying amount, goodwill is considered impaired. Determining the fair value of our company requires a high degree of subjective management assumptions. Any changes in key assumptions about our business and its prospects, changes in market conditions or other externalities, for impairment testing purposes could result in a non-cash impairment charge and such a charge could have a material adverse effect on our consolidated results of operations. The challenges of the current economic environment may adversely affect our earnings, the fair value of our assets and liabilities and our stock price, all of which may increase the risk of goodwill impairment.
We have significant exposure to a downturn in the financial services industry due to our investments in trust preferred securities.
As of December 31, 2013, we had single issuer trust preferred securities and trust preferred collateralized debt obligations with an aggregate book value of $48.7 million and an unrealized loss of approximately $18.2 million. These securities were issued by banks, bank holding companies and other financial services providers. Depending on the severe economic recession and its impact on the financial services industry, we may be required to record additional impairment charges on other investment securities if they suffer a decline in value that is considered other-than-temporary. If the credit quality of the securities in our investment portfolio deteriorates, we may also experience a loss in interest income from the suspension of either interest or dividend payments. Numerous factors, including lack of liquidity for resales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate or adverse actions by regulators could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough it could affect the

11


ability of FCB to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for regulatory purposes.
First Commonwealth relies on dividends from its subsidiaries for most of its revenues.
First Commonwealth is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on First Commonwealth’s common stock and interest and principal on First Commonwealth’s debt. Various federal and/or state laws and regulations limit the amount of dividends that FCB and certain non-bank subsidiaries may pay to First Commonwealth. In the event FCB is unable to pay dividends to First Commonwealth, First Commonwealth may not be able to service debt, pay obligations or pay dividends on its common stock. The inability to receive dividends from FCB could have a material adverse effect on First Commonwealth’s business, financial condition and results of operations.
Competition from other financial institutions in originating loans, attracting deposits and providing various financial services may adversely affect our profitability.
We face substantial competition in originating loans and attracting deposits. This competition comes principally from other banks, savings institutions, mortgage banking companies and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, better brand recognition, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. These competitors may offer more favorable pricing through lower interest rates on loans or higher interest rates on deposits, which could force us to match competitive rates and thereby reduce our net interest income.
Negative publicity could damage our reputation.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Because we conduct all of our business under the “First Commonwealth” brand, negative public opinion about one business could affect our other businesses.
An interruption to our information systems could adversely impact our operations.
We rely upon our information systems for operating and monitoring all major aspects of our business, including deposit and loan operations, as well as internal management functions. These systems and our operations could be damaged or interrupted by natural disasters, power loss, network failure, improper operation by our employees, security breaches, computer viruses, intentional attacks by third parties or other unexpected events. Any disruption in the operation of our information systems could adversely impact our operations, which may affect our financial condition, results of operations and cash flows.
Provisions of our articles of incorporation, bylaws and Pennsylvania law, as well as state and federal banking regulations, could delay or prevent a takeover of us by a third party.
Provisions in our articles of incorporation and bylaws, the corporate law of the Commonwealth of Pennsylvania, and state and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock. These provisions include, among other things, advance notice requirements for proposing matters that shareholders may act on at shareholder meetings. In addition, under Pennsylvania law, we are prohibited from engaging in a business combination with any interested shareholder for a period of five years from the date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock.

ITEM 1B.    Unresolved Staff Comments
None.
 

12


ITEM 2.    Properties
Our principal office is located in the old Indiana County courthouse complex, consisting of the former courthouse building and the former sheriff’s residence and jail building for Indiana County. This certified Pennsylvania and national historic landmark was built in 1870 and restored by us in the early 1970s. We lease the complex from Indiana County pursuant to a lease agreement that was originally signed in 1973 and has a current term that expires in 2048.
The majority of our administrative personnel are also located in two owned buildings and one leased premise in Indiana, Pennsylvania, each of which is in close proximity to our principal office.
First Commonwealth Bank has 110 banking offices of which 23 are leased and 87 are owned. We also lease two loan production office.
While these facilities are adequate to meet our current needs, available space is limited and additional facilities may be required to support future expansion. However, we have no current plans to lease, purchase or construct additional administrative facilities.
 
ITEM 3.    Legal Proceedings
The information required by this Item is set forth in Part II, Item 8, Note 24, “Contingent Liabilities,” which is incorporated herein by reference in response to this item.
 
ITEM 4.    Mine Safety Disclosures
Not applicable

13


Executive Officers of First Commonwealth Financial Corporation
The name, age and principal occupation for each of the executive officers of First Commonwealth Financial Corporation as of December 31, 2013 is set forth below:
I. Robert Emmerich, age 63, has served as Executive Vice President and Chief Credit Officer of First Commonwealth Bank since 2009. Prior to joining First Commonwealth, Mr. Emmerich was retired from a 31-year career at National City Corporation, where he most recently served as Executive Vice President & Chief Credit Officer for Consumer Lending.
Jane Grebenc, age 55, has served as Executive Vice President and Chief Revenue Officer of First Commonwealth Financial Corporation and President of First Commonwealth Bank since May 31, 2013. Ms. Grebenc's financial services career includes executive leadership roles at a variety of institutions, including Park View Federal Savings Bank, Key Bank, and National City Bank. She was formerly the Executive Vice President in charge of the retail, marketing, IT and operations and the mortgage segments at Park View Federal Savings Bank from 2009 until 2012, the Executive Vice President in charge of the Wealth Segment at Key Bank from 2007 until 2009 and the Executive Vice President / Branch Network at National City Bank prior to 2007.
Leonard V. Lombardi, age 54, has served as Executive Vice President and Chief Audit Executive of First Commonwealth Financial Corporation since January 1, 2009. He was formerly Senior Vice President / Loan Review and Audit Manager.

Norman J. Montgomery, age 46, has served as the Executive Vice President of Business Integration of First Commonwealth Bank since May 2011. He oversees First Commonwealth’s product development and business analysis functions and assumed oversight of First Commonwealth’s technology and operations functions in July 2012. He served as Senior Vice President/Business Integration of First Commonwealth Bank from September 2007 until May 2011 and previously held positions in the technology, operations, audit and marketing areas.
T. Michael Price, age 51, has served as President of First Commonwealth Bank since November 2007. On March 7, 2012, he began serving as President and Chief Executive Officer of First Commonwealth Financial Corporation. From January 1, 2012 to March 7, 2012, he served as Interim President and Chief Executive Officer of First Commonwealth Financial Corporation. He was formerly Chief Executive Officer of the Cincinnati and Northern Kentucky Region of National City Bank from July 2004 to November 2007 and Executive Vice President and Head of Small Business Banking of National City Bank prior to July 2004.
Carrie L. Riggle, age 44, has served as Executive Vice President / Human Resources since March 1, 2013. Ms. Riggle has been with First Commonwealth for more than 20 years. Over the course of her tenure, Ms. Riggle has been responsible for the daily operations of the Human Resources function and was actively involved in the establishment and development of a centralized corporate human resources function within the Company.
Robert E. Rout, age 62, joined First Commonwealth Financial Corporation as Executive Vice President and Chief Financial Officer in February 2010. Prior to joining First Commonwealth, Mr. Rout served as Chief Financial Officer and Secretary for S&T Bancorp, Inc. in Indiana, PA, since 1999 and as Chief Administrative Officer of S&T Bancorp, Inc. since April 2008. On November 27, 2013, Mr. Rout notified the Company of his intention to retire during the first half of 2014.
Matthew C. Tomb, age 37, has served as Executive Vice President, Chief Risk Officer and General Counsel of First Commonwealth Financial Corporation since November 2010. He previously served as Senior Vice President / Legal and Compliance since September 2007. Before joining First Commonwealth, Mr. Tomb practiced law with Sherman & Howard L.L.C. in Denver, Colorado.


14


PART II

ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
First Commonwealth is listed on the NYSE under the symbol “FCF.” As of December 31, 2013, there were approximately 7,300 holders of record of First Commonwealth’s common stock. The table below sets forth the high and low sales prices per share and cash dividends declared per share for common stock of First Commonwealth for each quarter during the last two fiscal years.
 
Period
High Sale
 
Low Sale
 
Cash Dividends
Per Share
2013
 
 
 
 
 
First Quarter
$
7.73

 
$
7.03

 
$
0.05

Second Quarter
7.49

 
6.79

 
0.06

Third Quarter
8.09

 
7.31

 
0.06

Fourth Quarter
9.36

 
7.49

 
0.06

 
Period
High Sale
 
Low Sale
 
Cash Dividends
Per Share
2012
 
 
 
 
 
First Quarter
$
6.68

 
$
5.47

 
$
0.03

Second Quarter
6.73

 
5.73

 
0.05

Third Quarter
7.55

 
6.67

 
0.05

Fourth Quarter
7.30

 
5.92

 
0.05

Federal and state regulations contain restrictions on the ability of First Commonwealth to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1 “Business—Supervision and Regulation—Restrictions on Dividends” and Part II, Item 8, “Financial Statements and Supplementary Data—Note 26, Regulatory Restrictions and Capital Adequacy.” In addition, under the terms of the capital securities issued by First Commonwealth Capital Trust I, II, and III, First Commonwealth could not pay dividends on its common stock if First Commonwealth deferred payments on the junior subordinated debt securities which provide the cash flow for the payments on the capital securities.

15


The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of dividends) on First Commonwealth’s common stock to the KBW Regional Banking Index and the Russell 2000 Index. The stock performance graph assumes $100 was invested on December 31, 2008, and the cumulative return is measured as of each subsequent fiscal year end.

 

 
Period Ending
Index
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
First Commonwealth Financial Corporation
100.00

 
38.43

 
59.10

 
44.86

 
59.81

 
79.74

Russell 2000
100.00

 
127.17

 
161.32

 
154.59

 
179.86

 
249.69

KBW Regional Banking Index
100.00

 
77.87

 
93.75

 
88.93

 
100.86

 
148.09

 
Unregistered Sales of Equity Securities and Use of Proceeds
On June 19, 2012, the Company announced a share repurchase program through which the Board of Directors authorized management to repurchase up to $50.0 million of the Company’s common stock. On January 29, 2013, an additional share repurchase program was authorized for up to $25.0 million in shares of the Company’s common stock. The following table details the amount of shares repurchased under this program during the fourth quarter of 2013:
 
Month Ending:
Total Number of
Shares  Purchased
 
Average Price
Paid per  Share
(or Unit)
 
Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs *
October 31, 2013
294,550

 
$
7.52

 
294,550

 
619,392

November 30, 2013

 

 

 
575,055

December 31, 2013

 

 

 
610,262

Total
294,550

 
$
7.52

 
294,550

 
 
*    Remaining number of shares approved under the Plan is estimated based on the market value of the Company’s common stock of $8.69 at October 31, 2013, $9.36 at November 30, 2013 and $8.82 at December 31, 2013.

16



ITEM 6.    Selected Financial 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. 
 
Periods Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(dollars in thousands, except share data)
Interest income
$
206,358

 
$
219,075

 
$
231,545

 
$
268,360

 
$
293,281

Interest expense
21,707

 
30,146

 
41,678

 
61,599

 
86,771

Net interest income
184,651

 
188,929

 
189,867

 
206,761

 
206,510

Provision for credit losses
19,227

 
20,544

 
55,816

 
61,552

 
100,569

Net interest income after provision for credit losses
165,424

 
168,385

 
134,051

 
145,209

 
105,941

Net impairment losses

 

 

 
(9,193
)
 
(36,185
)
Net securities (losses) gains
(1,158
)
 
192

 
2,185

 
2,422

 
273

Other income
61,321

 
65,242

 
55,484

 
56,005

 
55,237

Other expenses
168,824

 
177,207

 
176,826

 
171,226

 
171,151

Income (loss) before income taxes
56,763

 
56,612

 
14,894

 
23,217

 
(45,885
)
Income tax provision (benefit)
15,281

 
14,658

 
(380
)
 
239

 
(25,821
)
Net Income (Loss)
$
41,482

 
$
41,954

 
$
15,274

 
$
22,978

 
$
(20,064
)
Per Share Data—Basic
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
0.43

 
$
0.40

 
$
0.15

 
$
0.25

 
$
(0.24
)
Dividends declared
$
0.23

 
$
0.18

 
$
0.12

 
$
0.06

 
$
0.18

Average shares outstanding
97,028,157

 
103,885,396

 
104,700,227

 
93,197,225

 
84,589,780

Per Share Data—Diluted
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
0.43

 
$
0.40

 
$
0.15

 
$
0.25

 
$
(0.24
)
Average shares outstanding
97,029,832

 
103,885,663

 
104,700,393

 
93,199,773

 
84,589,780

At End of Period
 
 
 
 
 
 
 
 
 
Total assets
$
6,214,861

 
$
5,995,390

 
$
5,841,122

 
$
5,812,842

 
$
6,446,293

Investment securities
1,353,809

 
1,199,531

 
1,182,572

 
1,016,574

 
1,222,045

Loans and leases, net of unearned income
4,283,833

 
4,204,704

 
4,057,055

 
4,218,083

 
4,636,501

Allowance for credit losses
54,225

 
67,187

 
61,234

 
71,229

 
81,639

Deposits
4,603,863

 
4,557,881

 
4,504,684

 
4,617,852

 
4,535,785

Short-term borrowings
626,615

 
356,227

 
312,777

 
187,861

 
958,932

Subordinated debentures
72,167

 
105,750

 
105,750

 
105,750

 
105,750

Other long-term debt
144,385

 
174,471

 
101,664

 
98,748

 
168,697

Shareholders’ equity
711,697

 
746,007

 
758,543

 
749,777

 
638,811

Key Ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.68
%
 
0.71
%
 
0.27
%
 
0.37
%
 
(0.31
)%
Return on average equity
5.70

 
5.46

 
2.00

 
3.33

 
(3.06
)
Net loans to deposits ratio
91.87

 
90.78

 
88.70

 
89.80

 
100.42

Dividends per share as a percent of net income per share
53.49

 
44.57

 
82.26

 
23.72

 
NA

Average equity to average assets ratio
11.87

 
12.95

 
13.33

 
11.26

 
10.16


17





ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents an overview of the financial condition and the results of operations of First Commonwealth and its subsidiaries, FCB, First Commonwealth Insurance Agency, Inc. (“FCIA”) and First Commonwealth Financial Advisors, Inc. (“FCFA”), as of and for the years ended December 31, 2013, 2012 and 2011. The purpose of this discussion is to focus on information concerning our financial condition and results of operations that is not readily apparent from the Consolidated Financial Statements. In order to obtain a clear understanding of this discussion, you should refer to the Consolidated Financial Statements, the notes thereto and other financial information presented in this Annual Report.

Company Overview
First Commonwealth provides a diversified array of consumer and commercial banking services through our bank subsidiary, FCB. We also provide trust and wealth management services through FCFA and insurance products through FCIA. At December 31, 2013, FCB operated 110 community banking offices throughout western Pennsylvania and one loan production office in downtown Pittsburgh, Pennsylvania.
Our consumer services include Internet, mobile and telephone banking, an automated teller machine network, personal checking accounts, interest-earning checking accounts, savings accounts, insured money market accounts, debit cards, investment certificates, fixed and variable rate certificates of deposit, secured and unsecured installment loans, construction and real estate loans, safe deposit facilities, credit lines with overdraft checking protection and IRA accounts. Commercial banking services include commercial lending, small and high-volume business checking accounts, on-line account management services, ACH origination, payroll direct deposit, commercial cash management services and repurchase agreements. We also provide a variety of trust and asset management services and a full complement of auto, home and business insurance as well as term life insurance. We offer annuities, mutual funds, stock and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. Most of our commercial customers are small and mid-sized businesses in central and western Pennsylvania.
As a financial institution with a focus on traditional banking activities, we earn the majority of our revenue through net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing our net interest margin, which is net interest income (on a fully taxable-equivalent basis) as a percentage of our average interest-earning assets. We also generate revenue through fees earned on various services and products that we offer to our customers and through sales of assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses on loans, loss on sale or other-than-temporary impairments on investment securities, operating expenses and income taxes.
General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan growth, and impacting the credit strength of existing and potential borrowers.

Critical Accounting Policies and Significant Accounting Estimates
First Commonwealth’s accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practice in the banking industry. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may significantly affect our reported results and financial position for the period presented or in future periods. We currently view the determination of the allowance for credit losses, fair value of financial instruments, goodwill and other intangible assets, and income taxes to be critical because they are highly dependent on subjective or complex judgments, assumptions and estimates made by management.
Allowance for Credit Losses
We account for the credit risk associated with our lending activities through the allowance and provision for credit losses. The allowance represents management’s best estimate of probable losses that are inherent in our existing loan portfolio as of the balance sheet date. The provision is a periodic charge to earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated losses. Management determines and reviews with the Board of Directors the adequacy of the allowance on a quarterly basis in accordance with the methodology described below.

18


Individual loans are selected for review in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, “Receivables.” These are generally large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based on our internal credit-rating process.
We assess whether the loans identified for review in step one are “impaired,” which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement, which generally represents loans that management has placed on nonaccrual status.
For impaired loans we calculate the estimated fair value of the loans that are selected for review based on observable market prices, discounted cash flows or the value of the underlying collateral and record an allowance if needed.
We then select pools of homogenous smaller balance loans having similar risk characteristics as well as unimpaired larger commercial loans for evaluation collectively under the provisions of FASB ASC Topic 450, “Contingencies.” These smaller balance loans generally include residential mortgages, consumer loans, installment loans and some commercial loans.
FASB ASC Topic 450 loans are segmented into groups with similar characteristics and an allowance for credit losses is allocated to each segment based on recent loss history and other relevant information.
We then review the results to determine the appropriate balance of the allowance for credit losses. This review includes consideration of additional factors, such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and nonperforming assets, trends in the overall risk profile in the portfolio, trends in delinquencies and nonaccrual loans, and local and national economic information and industry data, including trends in the industries we believe are higher risk.
There are many factors affecting the allowance for credit losses; some are quantitative while others require qualitative judgment. These factors require the use of estimates related to the amount and timing of expected future cash flows, appraised values on impaired loans, estimated losses for each loan category based on historical loss experience by category using an eight to twenty quarter average, and consideration of current economic trends and conditions, all of which may be susceptible to significant judgment and change. To the extent that actual outcomes differ from estimates, additional provisions for credit losses could be required that could adversely affect our earnings or financial position in future periods. The loan portfolio represents the largest asset category on our Consolidated Statements of Financial Condition.
Fair Values of Financial Instruments
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair value. In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 valuations are for instruments that trade in less active dealer or broker markets and incorporates values obtained for identical or comparable instruments. Level 3 valuations are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. Management validates the market values provided by the third party service by having another recognized pricing service price 100% of securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and on a monthly basis evaluating pricing changes compared to expectations based on changes in the financial markets.
Level 3 investments include pooled trust preferred collateralized debt obligations. The fair values of these investments are determined by a specialized third party valuation service. Management validates the fair value of the pooled trust preferred collateralized debt obligations by monitoring the performance of the underlying collateral, discussing the discount rate, cash flow assumptions and general market trends with the specialized third party and by confirming changes in the underlying collateral to the trustee and underwriter reports. Management’s monitoring of the underlying collateral includes deferrals of interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings or actions and general news related to the underlying collateral. Management also evaluates fair value changes compared to expectations based on changes in the interest rates used in determining the discount rate and general financial markets.
Methodologies and estimates used by management when determining the fair value for pooled trust preferred collateralized debt obligations and testing those securities for other-than-temporary impairment are discussed in detail in Management’s

19


Discussion and Analysis of Financial Condition and Results of Operations and in Note 9 “Impairment of Investment Securities” and Note 19 “Fair Values of Assets and Liabilities” of Notes to the Consolidated Financial Statements.
Goodwill and Other Intangible Assets
We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.
The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third-party sources, when available. When third-party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes.
Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. Intangible assets that have finite useful lives will continue to be amortized over their useful lives and are periodically evaluated for impairment.
As of December 31, 2013, goodwill and other intangible assets were not considered impaired; however, changing economic conditions that may adversely affect our performance and stock price could result in impairment, which could adversely affect earnings in future periods. Our Step 1 goodwill impairment analysis as of November 30, 2013, determined that the fair value of our goodwill exceeded its carrying value by approximately 30%. An assessment of qualitative factors was completed as of December 31, 2013 and indicated that it is more likely than not that our fair value exceeded its carrying value.
Income Taxes
We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year.
Deferred income tax assets and liabilities are determined using the asset and liability method and are reported in the Consolidated Statements of Financial Condition. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management assesses all available positive and negative evidence on a quarterly basis to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The amount of future taxable income used in management’s valuation is based upon management approved forecasts, evaluation of historical earnings levels, proven ability to raise capital to support growth or during times of economic stress and consideration of prudent and feasible potential tax strategies. If future events differ from our current forecasts, a valuation allowance may be required, which could have a material impact on our financial condition and results of operations.
Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other liabilities in the Consolidated Statements of Financial Condition. Management evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to our operating results.

Results of Operations—2013 Compared to 2012
Net Income
Net income for 2013 was $41.5 million, or $0.43 per diluted share, as compared to net income of $42.0 million, or $0.40 per diluted share, in 2012. Net income in 2013 was positively impacted by improvements in the credit quality of our loan portfolio as losses on the sale or write-down of assets decreased $6.3 million and collection and repossession expenses decreased $1.9 million. Additionally, operational losses decreased $3.3 million during 2013. Offsetting these positives were $2.6 million in technology related conversion expenses, $1.2 million in net securities losses and a $4.3 million decrease in net interest income.

20


Our return on average equity was 5.7% and return on average assets was 0.68% for 2013, compared to 5.5% and 0.71%, respectively, for 2012.
Average diluted shares for the year 2013 were 7% less than the comparable period in 2012 primarily due to the common stock buyback programs that were authorized during 2013 and 2012.
Net Interest Income
Net interest income, which is our primary source of revenue, is the difference between interest income from earning assets (loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and long-term debt). The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a fully taxable equivalent basis, to average interest-earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretaxable equivalent amounts based on the marginal corporate federal income tax rate of 35%. The taxable equivalent adjustment to net interest income for 2013 was $4.1 million compared to $4.4 million in 2012. Net interest income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at 75% and 74% for the years ended December 31, 2013 and 2012, respectively.
Net interest income, on a fully taxable equivalent basis, was $188.7 million for the year-ended December 31, 2013, a $4.6 million, or 2%, decrease compared to $193.3 million for the same period in 2012. The net interest margin, on a fully taxable equivalent basis decreased 22 basis points, or 6%, to 3.39% in 2013 from 3.61% in 2012. The net interest margin is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
The low interest rate environment and resulting decline in rates earned on interest-earning assets challenged the net interest margin during the year-ended December 31, 2013. Yields and spreads on new loan volumes continued to experience competitive pricing pressures in 2013, specifically home equity and indirect loans. Also contributing to lower yields on earning assets is the runoff of existing assets which are earning higher interest rates than new volumes as well as growth in the investment portfolio. Growth in earning assets has helped to offset the spread compression as average earning assets for the year-ended December 31, 2013 increased $210.5 million, or 4%, compared to the comparable period in 2012. However, approximately 58% of the growth in earning assets relates to the investment portfolio, which is earning approximately 180 basis points less than the rate earned on growth in the loan portfolio. Investment portfolio purchases during 2013 have been primarily in the mortgage-related assets with approximate durations of 36-48 months. The majority of these investments have monthly principal payments which provide for reinvestment opportunities as interest rates rise. It is expected that the challenges to the net interest margin will continue as $2.9 billion in interest-sensitive assets either reprice or mature over the next twelve months.
The taxable equivalent yield on interest-earning assets was 3.79% for the year-ended December 31, 2013, a decrease of 39 basis points from the 4.18% yield for the same period in 2012. This decline can be attributed to the repricing of our variable rate assets in a declining interest rate environment as well as lower interest rates available on new investments and loans. Reductions in the cost of interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities was 0.48% for the year-ended December 31, 2013, compared to 0.70% for the same period in 2012.
Comparing the year-ended December 31, 2013 with the same period in 2012, changes in interest rates negatively impacted net interest income by $10.3 million. The lower yield on interest-earning assets adversely impacted net interest income by $20.4 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $10.1 million. We have been able to partially mitigate the impact of lower interest rates and the effect on net interest income through improving the mix of deposits and borrowed funds, disciplined pricing strategies, loan growth and increasing our investment volumes within established interest rate risk management guidelines. As part of these strategies, on April 1, 2013, the Company redeemed $32.5 million in issued and outstanding 9.50% mandatorily redeemable capital securities issued by First Commonwealth Capital Trust I and replaced these capital securities with lower cost funding alternatives.
While decreases in interest rates and yields compressed the net interest margin, increases in average interest-earning assets and a lower cost of funds tempered the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $5.7 million in the year-ended December 31, 2013 compared to the same period in 2012. Higher levels of interest-earning assets resulted in an increase of $7.4 million in interest income, while volume changes primarily attributed to short-term and long-term borrowings increased interest expense by $1.7 million.
Positively affecting net interest income was a $41.1 million increase in average net free funds at December 31, 2013 as compared to December 31, 2012. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in

21


net free funds was a $66.1 million increase in average noninterest-bearing demand deposits as a result of marketing promotions aimed at attracting new and retaining existing customers. Additionally, higher costing time deposits continue to mature and reprice to lower costing certificates or other deposit alternatives. Average time deposits for the year-ended December 31, 2013 increased $16.9 million million, or 1%, compared to the comparable period in 2012, while the average rate paid on time deposits decreased 42 basis points. The positive change in deposit mix is expected to continue as $750.7 million in certificates of deposits either mature or reprice over the next twelve months.
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the periods presented:
 
 
For the Years Ended December 31,
 
2013
 
2012
 
2011
 
(dollars in thousands)
Interest income per Consolidated Statements of Income
$
206,358

 
$
219,075

 
$
231,545

Adjustment to fully taxable equivalent basis
4,081

 
4,392

 
5,500

Interest income adjusted to fully taxable equivalent basis (non-GAAP)
210,439

 
223,467

 
237,045

Interest expense
21,707

 
30,146

 
41,678

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
188,732

 
$
193,321

 
$
195,367

 

22


The following table provides information regarding the average balances and yields and rates on interest-earning assets and interest-bearing liabilities for the periods ended December 31:
 
 
Average Balance Sheets and Net Interest Analysis
 
2013
 
2012
 
2011
 
Average
Balance
 
Income /
Expense (a)
 
Yield or
Rate
 
Average
Balance
 
Income /
Expense (a)
 
Yield or
Rate
 
Average
Balance
 
Income /
Expense (a)
 
Yield or
Rate
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
3,355

 
$
7

 
0.21
%
 
$
4,329

 
$
6

 
0.14
%
 
$
26,477

 
$
64

 
0.24
%
Tax-free investment securities (e)
83

 
6

 
7.40

 
271

 
18

 
6.85

 
4,852

 
328

 
6.76

Taxable investment securities
1,300,538

 
30,218

 
2.32

 
1,179,169

 
31,799

 
2.70

 
1,043,798

 
33,812

 
3.24

Loans, net of unearned
income (b)(c)
4,255,593

 
180,208

 
4.23

 
4,165,292

 
191,644

 
4.60

 
4,061,822

 
202,841

 
4.99

Total interest-earning assets
5,559,569

 
210,439

 
3.79

 
5,349,061

 
223,467

 
4.18

 
5,136,949

 
237,045

 
4.61

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
71,930

 
 
 
 
 
75,044

 
 
 
 
 
75,071

 
 
 
 
Allowance for credit losses
(62,800
)
 
 
 
 
 
(65,279
)
 
 
 
 
 
(76,814
)
 
 
 
 
Other assets
563,283

 
 
 
 
 
581,321

 
 
 
 
 
593,248

 
 
 
 
Total noninterest-earning assets
572,413

 
 
 
 
 
591,086

 
 
 
 
 
591,505

 
 
 
 
Total Assets
$
6,131,982

 
 
 
 
 
$
5,940,147

 
 
 
 
 
$
5,728,454

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
deposits (d)
$
670,524

 
$
236

 
0.04
%
 
$
645,970

 
$
286

 
0.04
%
 
$
607,756

 
$
515

 
0.08
%
Savings deposits (d)
1,942,323

 
2,962

 
0.15

 
1,921,417

 
4,233

 
0.22

 
1,877,321

 
7,252

 
0.39

Time deposits
1,154,984

 
12,398

 
1.07

 
1,138,112

 
16,935

 
1.49

 
1,343,281

 
25,729

 
1.92

Short-term borrowings
478,388

 
1,262

 
0.26

 
402,196

 
1,070

 
0.27

 
182,864

 
728

 
0.40

Long-term debt
233,483

 
4,849

 
2.08

 
202,598

 
7,622

 
3.76

 
184,185

 
7,454

 
4.05

Total interest-bearing liabilities
4,479,702

 
21,707

 
0.48

 
4,310,293

 
30,146

 
0.70

 
4,195,407

 
41,678

 
0.99

Noninterest-bearing liabilities and shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand
deposits (d)
876,111

 
 
 
 
 
810,041

 
 
 
 
 
720,005

 
 
 
 
Other liabilities
48,335

 
 
 
 
 
50,859

 
 
 
 
 
49,163

 
 
 
 
Shareholders’ equity
727,834

 
 
 
 
 
768,954

 
 
 
 
 
763,879

 
 
 
 
Total noninterest-bearing funding sources
1,652,280

 
 
 
 
 
1,629,854

 
 
 
 
 
1,533,047

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
6,131,982

 
 
 
 
 
$
5,940,147

 
 
 
 
 
$
5,728,454

 
 
 
 
Net Interest Income and Net Yield on Interest-Earning Assets
 
 
$
188,732

 
3.39
%
 
 
 
$
193,321

 
3.61
%
 
 
 
$
195,367

 
3.80
%
 
(a)
Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
(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 loan fees.
(d)
Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes.
(e)
Yield on tax-free investment securities calculated using fully taxable equivalent interest income of $6.18 thousand, $18.58 thousand and $328.01 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.


23


The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated:
 
 
Analysis of Year-to-Year Changes in Net Interest Income
 
2013 Change from 2012
 
2012 Change from 2011
 
Total
Change
 
Change Due
To Volume
 
Change Due
To Rate (a)
 
Total
Change
 
Change Due
To Volume
 
Change Due
To Rate (a)
 
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
1

 
$
(1
)
 
$
2

 
$
(58
)
 
$
(53
)
 
$
(5
)
Tax-free investment securities
(12
)
 
(13
)
 
1

 
(310
)
 
(310
)
 

Taxable investment securities
(1,581
)
 
3,277

 
(4,858
)
 
(2,013
)
 
4,386

 
(6,399
)
Loans
(11,436
)
 
4,154

 
(15,590
)
 
(11,197
)
 
5,163

 
(16,360
)
Total interest income (b)
(13,028
)
 
7,417

 
(20,445
)
 
(13,578
)
 
9,186

 
(22,764
)
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
(50
)
 
10

 
(60
)
 
(229
)
 
31

 
(260
)
Savings deposits
(1,271
)
 
46

 
(1,317
)
 
(3,019
)
 
172

 
(3,191
)
Time deposits
(4,537
)
 
251

 
(4,788
)
 
(8,794
)
 
(3,939
)
 
(4,855
)
Short-term borrowings
192

 
206

 
(14
)
 
342

 
877

 
(535
)
Long-term debt
(2,773
)
 
1,161

 
(3,934
)
 
168

 
746

 
(578
)
Total interest expense
(8,439
)
 
1,674

 
(10,113
)
 
(11,532
)
 
(2,113
)
 
(9,419
)
Net interest income
$
(4,589
)
 
$
5,743

 
$
(10,332
)
 
$
(2,046
)
 
$
11,299

 
$
(13,345
)
 
(a)
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b)
Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.

Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of allowance for credit losses needed to absorb probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.

The table below provides a breakout of the provision for credit losses by loan category for the years ended December 31: 
 
2013
 
2012
 
Dollars
 
Percentage
 
Dollars
 
Percentage
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
20,755

 
108
 %
 
$
6,416

 
31
%
Real estate construction
(2,056
)
 
(11
)
 
5,191

 
26

Residential real estate
2,369

 
12

 
1,077

 
5

Commercial real estate
(286
)
 
(1
)
 
3,921

 
19

Loans to individuals
4,371

 
23

 
2,849

 
14

Unallocated
(5,926
)
 
(31
)
 
1,090

 
5

Total
$
19,227

 
100
 %
 
$
20,544

 
100
%
The provision for credit losses for the year 2013 totaled $19.2 million million, a decrease of $1.3 million, or 6.41%, compared to the year 2012. The majority of the 2013 provision expense, or $13.5 million of the $19.2 million, related to two commercial borrowers. Deterioration in the value of certain assets of a local real estate developer, for which net equity is the expected repayment source, resulted in provision expense of $10.4 million and a related charge-off of $13.1 million. In addition, two non-accrual commercial real estate loans which were sold in the first quarter of 2013, required a combined charge-off and related provision expense of $3.1 million. These two non-accrual loans were to the same borrower and relate to a $15.5 million loan secured by an apartment building in eastern Pennsylvania and a $1.7 million loan secured by mixed use property in eastern Pennsylvania.

24


As evidenced by the table above, the current year provision is largely the result of the commercial, financial, agricultural and other portion of the portfolio. The primary reason for this increase is a $13.1 million charge-off taken due to deterioration in the value of certain assets of a local real estate developer, for which net equity is our expected repayment source. Also, an additional $1.6 million in specific reserves were recorded on a $12.7 million commercial industrial loan relationship with a local energy company that was moved into nonaccrual status during 2013.
The negative provision expense for real estate construction loans can be attributed to a decline in the historical loss percentage used to determine the appropriate level of allowance for credit losses for that category.
The provision related to loans to individuals can be largely attributed to the addition of a $1.2 million specific reserve related to $6.9 million of consumer loans in nonaccrual status as well as net charge-offs of $3.0 million.
The negative $5.9 million provision for credit losses related to the unallocated portion of the allowance is a result of it no longer being treated as a separate component of the allowance but instead is now incorporated into the reserve provided for each loan category. This portion of the allowance for credit losses reflects the qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience.
The allowance for credit losses was $54.2 million, or 1.27%, of total loans outstanding at December 31, 2013, compared to $67.2 million, or 1.60%, at December 31, 2012. Nonperforming loans as a percentage of total loans decreased to 1.39% at December 31, 2013 from 2.56% at December 31, 2012. The allowance to nonperforming loan ratio was 91% as of December 31, 2013 and 62% at December 31, 2012.
Net credit losses were $32.2 million for the year-ended December 31, 2013 compared to $14.6 million for the same period in 2012. The most significant credit losses recognized during the year-ended December 31, 2013, were the aforementioned $13.1 million charge-off, a $2.3 million charge-off of a loan to a local energy company, a $2.8 million charge-off taken on a loan to a western Pennsylvania non-profit healthcare facility which was moved to OREO in the fourth quarter of 2013, and a $3.1 million charge-off on two commercial real estate loans which were sold during the first quarter of 2013. These loans relate to a $15.5 million loan secured by an apartment building in eastern Pennsylvania and a $1.7 million loan secured by mixed use property in eastern Pennsylvania.
The provision is a result of management’s assessment of credit quality statistics and other factors that would have an impact on probable losses in the loan portfolio and the methodology used for determination of the adequacy of the allowance for credit losses. The change in the allowance for credit losses is consistent with the decrease in estimated losses within the loan portfolio determined by factors including certain loss events, portfolio migration analysis, historical loss experience, delinquency trends, deterioration in collateral values and volatility in economic indicators such as the housing market, consumer price index, vacancy rates and unemployment levels. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at December 31, 2013.
 

25


A detailed analysis of our credit loss experience for the previous five years is shown below:
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
(dollars in thousands)
Loans outstanding at end of year
$
4,283,833

 
$
4,204,704

 
$
4,057,055

 
$
4,218,083

 
$
4,636,501

Average loans outstanding
$
4,255,593

 
$
4,165,292

 
$
4,061,822

 
$
4,467,338

 
$
4,557,227

Balance, beginning of year
$
67,187

 
$
61,234

 
$
71,229

 
$
81,639

 
$
52,759

Loans charged off:
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural and other
18,399

 
5,207

 
7,114

 
22,293

 
20,536

Real estate construction
773

 
3,601

 
28,886

 
41,483

 
36,892

Residential real estate
1,814

 
3,828

 
4,107

 
5,226

 
4,604

Commercial real estate
10,513

 
851

 
24,861

 
2,466

 
7,302

Loans to individuals
3,679

 
3,482

 
3,325

 
3,841

 
4,378

Total loans charged off
35,178

 
16,969

 
68,293

 
75,309

 
73,712

Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural and other
455

 
443

 
473

 
2,409

 
448

Real estate construction
501

 
582

 
955

 

 

Residential real estate
1,264

 
422

 
132

 
252

 
81

Commercial real estate
136

 
410

 
349

 
163

 
914

Loans to individuals
633

 
521

 
573

 
523

 
580

Total recoveries
2,989

 
2,378

 
2,482

 
3,347

 
2,023

Net credit losses
32,189

 
14,591

 
65,811

 
71,962

 
71,689

Provision charged to expense
19,227

 
20,544

 
55,816

 
61,552

 
100,569

Balance, end of year
$
54,225

 
$
67,187

 
$
61,234

 
$
71,229

 
$
81,639

Ratios:
 
 
 
 
 
 
 
 
 
Net credit losses as a percentage of average loans outstanding
0.76
%
 
0.35
%
 
1.62
%
 
1.61
%
 
1.57
%
Allowance for credit losses as a percentage of end-of-period loans outstanding
1.27
%
 
1.60
%
 
1.51
%
 
1.69
%
 
1.76
%
 

Noninterest Income
The components of noninterest income for each year in the three-year period ended December 31 are as follows: 
 
 
 
 
 
 
 
2013 compared to 2012
 
2013
 
2012
 
2011
 
$ Change
 
% Change
 
(dollars in thousands)
Noninterest Income:
 
 
 
 
 
 
 
 
 
Trust income
$
6,166

 
$
6,206

 
$
6,498

 
$
(40
)
 
(1
)%
Service charges on deposit accounts
15,652

 
14,743

 
14,775

 
909

 
6

Insurance and retail brokerage commissions
6,005

 
6,272

 
6,376

 
(267
)
 
(4
)
Income from bank owned life insurance
5,539

 
5,850

 
5,596

 
(311
)
 
(5
)
Card related interchange income
13,746

 
13,199

 
11,968

 
547

 
4

Other income
10,632

 
13,610

 
12,803

 
(2,978
)
 
(22
)
Subtotal
57,740

 
59,880

 
58,016

 
(2,140
)
 
(4
)
Net securities (losses) gains
(1,158
)
 
192

 
2,185

 
(1,350
)
 
(703
)
Gain on sale of assets
2,153

 
4,607

 
4,155

 
(2,454
)
 
(53
)
Derivatives mark to market
1,428

 
755

 
(6,687
)
 
673

 
89

Total noninterest income
$
60,163

 
$
65,434

 
$
57,669

 
$
(5,271
)
 
(8
)%
Noninterest income, excluding net securities (losses) gains, gains on sale of assets and the derivatives mark to market adjustment decreased $2.1 million, or 3.57%, in 2013, largely due to a decline in the other income category. This decrease can be attributed to a $1.9 million joint venture termination fee received in 2012 from the dissolution of a mortgage banking joint

26


venture with another financial institution. In 2014, the Company will reenter the mortgage banking business by establishing its own residential mortgage division. Also contributing to the decline in other income category is a $1.0 million decrease in income from other real estate owed due to rental income received in 2012 from a western Pennsylvania office complex foreclosed on in 2011 and sold in March 2012. Increases in service charges on deposits and card related interchange income can be attributed to growth in the number of deposit customers as well as continued increases in electronic payments by our customers.
Total noninterest income decreased $5.3 million or 8% in comparison to the year ended 2012. The most notable change includes a $2.5 million decrease in the gain on sale of assets. The higher level of gains in 2012 is primarily the result of a $2.9 million gain recognized on the sale of two commercial real estate loans compared to gains of $0.6 million recognized on the sale of loans during 2013. Loans were sold in both years in an effort to decrease total nonperforming loans and criticized assets.
Comparing the year 2013 to the year 2012, net securities (losses) gains decreased $1.4 million. This change is primarily the result of a $1.3 million loss recognized on the early redemption of one of our pooled trust preferred securities. This security was called when the senior note holders elected to liquidate all assets of the trust, resulting in losses for the mezzanine notes owned by the Company.
 
Noninterest Expense
The components of noninterest expense for each year in the three-year period ended December 31 are as follows: 
 
 
 
 
 
 
 
2013 Compared to 2012
 
2013
 
2012
 
2011
 
$ Change
 
% Change
 
(dollars in thousands)
Noninterest Expense:
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
$
86,012

 
$
86,069

 
$
84,669

 
$
(57
)
 
 %
Net occupancy expense
13,607

 
13,255

 
14,069

 
352

 
3

Furniture and equipment expense
15,118

 
12,460

 
12,517

 
2,658

 
21

Data processing expense
6,009

 
7,054

 
6,027

 
(1,045
)
 
(15
)
Pennsylvania shares tax expense
5,638

 
5,706

 
5,480

 
(68
)
 
(1
)
Intangible amortization
1,064

 
1,467

 
1,534

 
(403
)
 
(27
)
Collection and repossession expense
3,836

 
5,756

 
7,583

 
(1,920
)
 
(33
)
Other professional fees and services
3,731

 
4,329

 
5,297

 
(598
)
 
(14
)
FDIC insurance
4,366

 
5,032

 
5,490

 
(666
)
 
(13
)
Other operating expenses
23,057

 
24,318

 
23,953

 
(1,261
)
 
(5
)
Subtotal
162,438

 
165,446

 
166,619

 
(3,008
)
 
(2
)
Loss on sale or write-down of assets
1,054

 
7,394

 
9,428

 
(6,340
)
 
(86
)
Operational losses
1,115

 
4,367

 
779

 
(3,252
)
 
(74
)
Loss on early redemption of subordinated debt
1,629

 

 

 
1,629

 
100

Conversion related expenses
2,588

 

 

 
2,588

 
100

Total noninterest expense
$
168,824

 
$
177,207

 
$
176,826

 
$
(8,383
)
 
(5
)%
Total noninterest expense for the year 2013 decreased $8.4 million in comparison to the year 2012, largely due to improvements in the credit quality of our loan portfolio, cost saving initiatives and a decline in operational losses. Improvements in the level of noninterest expenses in 2013 were partially offset by $4.6 million in technology conversion charges and a $1.6 million loss on the early redemption of subordinated debt.
Salaries and employee benefit expense remained flat compared to 2012, despite a $1.8 million increase in hospitalization expense, largely due to continued cost savings initiatives.
Collection and repossession expenses and loss on sale or write-down of assets declined $1.9 million and $6.3 million, respectively. The decrease in both items is largely attributable to the resolution of several large credits during 2013 and improvements in the credit quality of the loan portfolio.
Data processing expense decreased $1.0 million as a result of a 2013 change in vendors which provided savings of $0.9 million in ATM/debit card related expenses.

27



Other operating expenses decreased during 2013 largely due to a $1.1 million decline in advertising expense resulting from cost savings initiatives implemented during the year.
Operational losses decreased $3.3 million in 2013 due to a $3.5 million fraud loss recognized in 2012.
As a result of the April 1, 2013 early redemption of $32.5 million in redeemable capital securities issued by First Commonwealth Capital Trust I, a loss of $1.6 million was recognized. This loss includes a $1.1 million prepayment penalty and $0.5 million of unamortized deferred issuance costs.

On September 30, 2013, First Commonwealth executed a contract with Jack Henry and Associates to license the Jack Henry and Associates SilverLake System core processing software and to outsource certain data processing services. A system conversion is expected to occur during the third quarter of 2014. First Commonwealth will incur approximately $12.0 million of costs related to accelerated depreciation for data processing hardware and software, early termination charges on existing contracts and staffing and employee-related charges. The Company expects to achieve $6.0 to $8.0 million in lower annual technology related expenses as well as employment and other operational expenses as a result of the conversion. Accelerated depreciation for hardware and software to be replaced in the conversion is the primary cause of the $2.7 million increase in furniture and equipment expense. Conversion related expenses of $2.6 million recognized in 2013 include early termination charges on existing contracts and staffing and employment-related charges.

Income Tax
The provision for income taxes of $15.3 million in 2013 is comparable to the provision for income taxes of $14.7 million in 2012 mostly due to the consistent level of pretax income of $56.8 million and $56.6 million for 2013 and 2012, respectively.
The effective tax rate was 27% and 26% for tax expense in 2013 and 2012. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The consistent level of tax benefits that reduce our tax rate below the 35% statutory rate and the relatively low level of annual pretax income produced a low effective tax rate for 2013 and 2012.


Financial Condition
First Commonwealth’s total assets increased by $219.5 million in 2013. Loans increased $79.1 million, or 2%, and investments increased $147.1 million, or 13%. Factors impacting loan growth include underwriting guidelines which limit geography and size for commercial loans, our goal to manage down large credit relationships, generally weak borrower demand and expected declines in the 1-4 family mortgage loan portfolio. Underwriting guidelines provide little flexibility on exceptions and robust monitoring of loan to value, cash flow coverage, debt/equity and other credit quality measurement tools. Geographic limitations include restricting consumer and small business loans to Pennsylvania counties in which First Commonwealth has a branch or loan production office presence; commercial real estate and commercial loan markets were prescribed within a 250 mile radius of First Commonwealth’s headquarters location in Indiana, Pennsylvania. Commercial and industrial loan syndications are unlimited geographically in the United States for select, high quality industry segments in which we have expertise. First Commonwealth has a $200 million limit for out of market syndications.
First Commonwealth implemented a strategic decision in 2005 to exit the residential mortgage business, satisfying customer requests for these loans through a joint venture or home equity loans. As a result, the residential mortgage portfolio has declined approximately $40 million in 2013 from regularly scheduled repayments and payoffs. In 2012, the mortgage banking joint venture was terminated and in 2013 the Company announced plans to reenter the residential mortgage business. It is expected that the mortgage banking division will begin accepting applications in the second half of 2014.
During 2013, approximately $356.7 million in investment securities were called or matured. These securities were higher yielding securities and contributed to the decline in yield earned on the portfolio. As a result, $409.3 million in asset-backed securities and $130.6 million in agency securities were purchased in 2013 to help increase earnings from the portfolio with a reduced risk profile.
First Commonwealth’s total liabilities increased $253.8 million, or 5%, in 2013. Deposit growth of $46.0 million, or 1%, was augmented by an increase in short-term borrowings of $270.4 million, or 76% and offset by a decrease in long-term debt of $63.7 million million, or 23%.
We periodically utilize short-term and long-term borrowings to fund the origination of new loans as well as the purchase of investments. In 2013, $32.5 million in 9.50% debt issued by First Commonwealth Capital Trust I was redeemed and replaced

28


with lower cost funding alternatives. The decrease in interest paid on borrowings as well as lower rates being paid on deposits has helped to mitigate the contracting pressure on the net interest yield on interest-earning assets and interest-bearing liabilities.

Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(dollars in thousands)
Commercial, financial,
agricultural and other
$
1,021,056

 
24
%
 
$
1,019,822

 
24
%
 
$
996,739

 
25
%
 
$
913,814

 
22
%
 
$
1,127,320

 
25
%
Real estate construction
93,289

 
2

 
87,438

 
2

 
76,564

 
2

 
261,482

 
6

 
428,744

 
9

Residential real estate
1,262,718

 
30

 
1,241,565

 
30

 
1,137,059

 
28

 
1,127,273

 
27

 
1,202,386

 
26

Commercial real estate
1,296,472

 
30

 
1,273,661

 
30

 
1,267,432

 
31

 
1,354,074

 
32

 
1,320,715

 
28

Loans to individuals
610,298

 
14

 
582,218

 
14

 
565,849

 
14

 
561,440

 
13

 
557,336

 
12

Total loans and leases net of unearned income
$
4,283,833

 
100
%
 
$
4,204,704

 
100
%
 
$
4,043,643

 
100
%
 
$
4,218,083

 
100
%
 
$
4,636,501

 
100
%
The loan portfolio totaled $4.3 billion as of December 31, 2013, reflecting growth of $79.1 million or 2% compared to December 31, 2012. Loan growth was experienced in all categories, with the majority being recognized in the loans to individuals category as a result of growth in indirect auto lending. Additionally, the residential real estate portfolio increased due to the success of our installment home equity product. Increases in commercial, financial, agricultural and other portfolio can be attributed to growth in direct middle market lending and syndications in Pennsylvania and contiguous states.
The majority of our loan portfolio is with borrowers located in Pennsylvania. During the fourth quarter of 2013, the Company expanded into the Ohio market area with the opening of a loan production office in Cleveland, Ohio. As of December 31, 2013 and 2012, there were no concentrations of loans relating to any industry in excess of 10% of total loans.
The credit quality of loan portfolio continued to improve during 2013 with decreases in the level of criticized assets, delinquency and nonaccrual loans. As of December 31, 2013, criticized loans or loans designated OAEM, substandard, impaired or doubtful decreased $126.1 million, or 44%, from December 31, 2012. Criticized loans totaled $162.4 million at December 31, 2013 and represented 4% of the total loan portfolio. Additionally, delinquency on accruing loans decreased $8.8 million, or 40%, at December 31, 2013 compared to December 31, 2012. As of December 31, 2013, nonaccrual loans decreased $48.6 million, or 51%, compared to December 31, 2012.
 
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at December 31, 2013 were as follows:
 
 
Within
One Year
 
One to
5 Years
 
After
5 Years
 
Total
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
75,131

 
$
641,181

 
$
206,617

 
$
922,929

Real estate construction (a)
3,105

 
31,045

 
59,139

 
93,289

Commercial real estate
90,613

 
89,522

 
1,116,337

 
1,296,472

Other
19,781

 
5,169

 
73,177

 
98,127

Totals
$
188,630

 
$
766,917

 
$
1,455,270

 
$
2,410,817

Loans at fixed interest rates
 
 
33,362

 
369,290

 
 
Loans at variable interest rates
 
 
733,555

 
1,085,980

 
 
Totals
 
 
$
766,917

 
$
1,455,270

 
 
 
(a)
The maturity of real estate construction loans include term commitments that follow the construction period. Loans with these term commitments will be moved to the commercial real estate category when the construction phase of the project is completed.
First Commonwealth has a regulatory established legal lending limit of $95.6 million to any one borrower or closely related group of borrowers, but has established lower thresholds for credit risk management.


29


Nonperforming Loans
Nonperforming loans include nonaccrual loans and restructured loans. Nonaccrual loans represent loans on which interest accruals have been discontinued. Restructured loans are those loans whose 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 under terms not available in the market.
We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable to fully collect principal or interest due according to the contractual terms of the loan. A loan is typically placed in nonaccrual status when there is evidence of a significantly weakened financial condition or principal and interest is 90 days or more delinquent, except for consumer loans which are placed in nonaccrual status at 150 days past due. Interest received on a nonaccrual loan is normally applied as a reduction to loan principal rather than interest income utilizing the cost recovery methodology of revenue recognition.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized when a loss is probable and the amount is reasonably estimable.
 
The following is a comparison of nonperforming and impaired assets and the effects on interest due to nonaccrual loans for the period ended December 31:
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
(dollars in thousands)
Nonperforming Loans:
 
Loans on nonaccrual basis
$
28,908

 
$
43,539

 
$
33,635

 
$
84,741

 
$
147,937

Loans held for sale on nonaccrual basis

 

 
13,412

 

 

Troubled debt restructured loans on nonaccrual basis
16,980

 
50,979

 
44,841

 
31,410

 

Troubled debt restructured loans on accrual basis
13,495

 
13,037

 
20,276

 
1,336

 
619

Total nonperforming loans
$
59,383

 
$
107,555

 
$
112,164

 
$
117,487

 
$
148,556

Loans past due in excess of 90 days and still accruing
$
2,505

 
$
2,447

 
$
11,015

 
$
13,203

 
$
15,154

Other real estate owned
$
11,728

 
$
11,262

 
$
30,035

 
$
24,700

 
$
24,287

Loans outstanding at end of period
$
4,283,833

 
$
4,204,704

 
$
4,057,055

 
$
4,218,083

 
$
4,636,501

Average loans outstanding
$
4,255,593

 
$
4,165,292

 
$
4,061,822

 
$
4,467,338

 
$
4,557,227

Nonperforming loans as a percentage of total loans
1.39
%
 
2.56
%
 
2.76
%
 
2.79
%
 
3.20
%
Provision for credit losses
$
19,227

 
$
20,544

 
$
55,816

 
$
61,552

 
$
100,569

Allowance for credit losses
$
54,225

 
$
67,187

 
$
61,234

 
$
71,229

 
$
81,639

Net charge-offs
$
32,189

 
$
14,591

 
$
65,811

 
$
71,962

 
$
71,689

Net charge-offs as a percentage of average loans outstanding
0.76
%
 
0.35
%
 
1.62
%
 
1.61
%
 
1.57
%
Provision for credit losses as a percentage of net charge-offs
59.73
%
 
140.80
%
 
84.81
%
 
85.53
%
 
140.29
%
Allowance for credit losses as a percentage of end-of-period loans outstanding (a)
1.27
%
 
1.60
%
 
1.51
%
 
1.69
%
 
1.76
%
Allowance for credit losses as a percentage of nonperforming loans (a)
91.31
%
 
62.47
%
 
62.01
%
 
60.63
%
 
54.96
%
Gross income that would have been recorded at original rates
$
7,920

 
$
15,036

 
$
14,872

 
$
13,142

 
$
7,645

Interest that was reflected in income
679

 
369

 
1,393

 
30

 
13

Net reduction to interest income due to nonaccrual
$
7,241

 
$
14,667

 
$
13,479

 
$
13,112

 
$
7,632

 
(a)
End of period loans and nonperforming loans exclude loans held for sale.

30


Nonperforming loans decreased $48.2 million to $59.4 million at December 31, 2013 compared to $107.6 million at December 31, 2012. The nonperforming loans as a percentage of total loans decreased to 1.4% from 2.6% at December 31, 2013 compared to December 31, 2012. Other real estate owned totaled $11.7 million at December 31, 2013 compared to $11.3 million at December 31, 2012.
Also included in nonperforming loans are troubled debt restructured loans (“TDR’s”). TDR’s are those loans whose 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 under terms not available in the market. The $33.5 million decrease in TDR’s during 2013 is primarily the result of a $13.1 million charge-off on a loan relationship with a local real estate developer and the sale of $17.2 million of loans secured by commercial real estate in eastern Pennsylvania. For additional information on TDR’s please refer to Note 10 “Loans and Allowance for Credit Losses.”
Net credit losses were $32.2 million in 2013 compared to $14.6 million for the year 2012. The most significant credit losses recognized during the year were a $13.1 million charge-off taken on a loan relationship with a local real estate developer, a $2.8 million charge-off taken on a loan to a western Pennsylvania non-profit healthcare facility that was moved to OREO in the fourth quarter of 2013, a $2.5 million charge-off for a western Pennsylvania student housing project that paid off during the third quarter of 2013, and a $2.3 million charge-off taken on a loan to a local energy company. Additional detail on credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Provision for Credit Losses" and "Allowance for Credit Losses."