10-K 1 fcf-20161231x10k.htm FORM 10-K Document

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, 2016
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  x No ¨
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, 2016) was approximately $807,350,876.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of March 13, 2017, was 89,099,100.
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 25, 2017 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.

3


PART I

ITEM 1.    Business
Overview
First Commonwealth Financial Corporation (“First Commonwealth,” the “Company” 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, 2016, we had total assets of $6.7 billion, total loans of $4.9 billion, total deposits of $4.9 billion and shareholders’ equity of $749.9 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, 2016, the Bank operated 105 community banking offices throughout western and central Pennsylvania, 17 community banking offices in central and northern Ohio, as well as a Corporate Banking Center in northeast Ohio and mortgage offices in Stow and Dublin, Ohio. The Bank also operates a network of 133 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, and 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 prior acquisitions and de novo strategy, FCB operates 59 branches in the Pittsburgh metropolitan statistical area and currently ranks tenth in deposit market share.
In 2015, we entered central Ohio through the acquisition of First Community Bank with $102.8 million in assets and four branches in the Columbus area. In 2016, we acquired 13 branches from FirstMerit Bank, National Association, in Canton-Massillon and Ashtabula, Ohio, and we entered into an agreement and plan of merger to acquire DCB Financial Corp and its banking subsidiary The Delaware County Bank and Trust Company with approximately $550 million in total assets, $477 million in total deposits, $388 million in total loans and nine full-service banking offices in the Columbus MSA. This merger is expected to be completed in the second quarter of 2017.
First Commonwealth regularly evaluates merger and acquisition opportunities and from time to time conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations, may take place and future merger acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of First Commonwealth’s tangible book value and net income per common share may occur in connection with any future transaction.

4


Loan Portfolio
The Company’s loan portfolio includes several categories of loans that are discussed in detail below.

Commercial, Financial, Agricultural and Other
Commercial, financial, agricultural and other loans represent term loans used to acquire business assets or revolving lines of credit used to finance working capital. These loans are generally secured by a first lien position on the borrower’s business assets as a secondary source of repayment. The type and amount of the collateral varies depending on the amount and terms of the loan, but generally may include accounts receivable, inventory, equipment or other assets. Loans also may be supported by personal guarantees from the principals of the commercial loan borrowers.

Commercial loans are underwritten for credit-worthiness based on the borrowers’ financial information, cash flow, net worth, prior loan performance, existing debt levels, type of business and the industry in which it operates. Advance rates on commercial loans are generally collateral-dependent and are determined based on the type of equipment, the mix of inventory and the quality of receivables.

Credit risk for commercial loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of secured loans, from a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. The Company’s Credit Policy establishes loan concentration limits by borrower, geography and industry.

Commercial Real Estate
Commercial real estate loans represent term loans secured by owner-occupied and non-owner occupied properties. Commercial real estate loans are underwritten based on an evaluation of each borrower’s cash flow as the principal source of loan repayment, and are generally secured by a first lien on the property as a secondary source of repayment. Our underwriting process for non-owner occupied properties evaluates the history of occupancy, quality of tenants, lease terms, operating expenses and cash flow. Commercial real estate loans are subject to the same credit evaluation as previously described for commercial loans. Approximately 21%, by principal amount, of our commercial real estate loans involve owner-occupied properties.

For loans secured by commercial real estate, at origination the Company obtains current and independent appraisals from licensed or certified appraisers to assess the value of the underlying collateral. The Company’s general policy for commercial real estate loans is to limit the terms of the loans to not more than 10 years with loan-to-value ratios not exceeding 80% on owner-occupied and income producing properties. For non-owner occupied commercial real estate loans, the loan terms are generally aligned with the property’s lease terms and are generally underwritten with a loan-to-value ratio not exceeding 75%.

Credit risk for commercial real estate loans can arise from economic conditions that could impact market demand, rental rates and property vacancy rates and declines in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral.
 
Real Estate Construction
Real estate construction represents financing for real estate development.  The underwriting process for these loans is designed to confirm that the project will be economically feasible and financially viable and is generally conducted as though the Company would be providing permanent financing for the project. Development and construction loans are secured by the properties under development or construction, and personal guarantees are typically obtained as a secondary repayment source. The Company considers the financial condition and reputation of the borrower and any guarantors and generally requires a global cash flow analysis in order to assess the overall financial position of the developer. 

Construction loans to residential builders are generally made for the construction of residential homes for which a binding sales contract exists and for which the prospective buyers have been pre-qualified for permanent mortgage financing by either third-party lenders or the Company.  These loans are generally for a period of time sufficient to complete construction. The Company no longer provides builder lot development lending.

Credit risk for real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.


5


Residential Real Estate Loans
During the third quarter of 2014, First Commonwealth reentered the residential mortgage business, after a strategic decision in 2005 to discontinue mortgage lending. Residential real estate loans include first lien mortgages used by the borrower to purchase or refinance a principal residence and home equity loans and lines of credit secured by residential real estate. The Company’s underwriting process for these loans determines credit-worthiness based upon debt-to-income ratios, collateral values and other relevant factors.

Credit risk for residential real estate loans can arise from a borrower’s inability or unwillingness to repay the loan or a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent liquidation of the real estate collateral. 

The residential real estate portfolio includes both conforming and non-conforming mortgage loans. Conforming mortgage loans represent loans originated in accordance with underwriting standards set forth by the government-sponsored entities, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association, which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage lenders. These loans are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or less (or have mortgage insurance to insure down to 80%), and are made to borrowers in good credit standing.  Non-conforming mortgage loans represent loans that generally are not saleable in the secondary market to the government-sponsored entities due to factors such as the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan. The Company does not offer “subprime,” “interest-only” or “negative amortization” mortgages.

Home equity lines of credit and other home equity loans are originated by the Company for typically up to 90% of the appraised value, less the amount of any existing prior liens on the property. Additionally, the Company’s credit policy requires borrower FICO scores of not less than 661 and a debt-to-income ratio of not more than 43%.

Loans to Individuals
The Loans to Individuals category includes consumer installment loans, personal lines of credit, consumer credit cards and indirect automobile loans. Credit risk for consumer loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of secured loans, by a shortfall in the value of the collateral in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. 
The underwriting criteria for automobile loans allow for such loans to be made for up to 100% of the purchase price or the retail value of the vehicle as listed by the National Automobile Dealers Association. The terms of the loan are determined by the age and condition of the collateral, and range from 36 to 84 months. Collision insurance policies are required on all automobile loans. The Company also makes other consumer loans, which may or may not be secured. The terms of secured consumer loans generally depend upon the nature of the underlying collateral. Unsecured consumer loans and consumer credit cards usually do not exceed $35 thousand. Unsecured consumer loans usually have a term of no longer than 36 months.
Deposits
Deposits are our primary source of funds to support our revenue-generating assets. We offer traditional deposit products to businesses and other customers with a variety of rates and terms. Deposits at our bank are insured by the FDIC up to statutory limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business and prudently managing our cost of funds. At December 31, 2016, we held $4.9 billion of total deposits, which consisted of $1.3 billion, or 26%, in non-interest bearing checking accounts, $3.0 billion, or 62%, in interest bearing checking accounts, money market and savings accounts, and $0.6 billion, or 12%, in CDs and IRAs.
Our deposit base is diversified by client type. As of December 31, 2016, no individual depositor represented more than 1% of our total deposits, and our top ten depositors represented only 0.8% of our total deposits. The composition of our deposit mix continues to reflect an increased proportion of non-interest-bearing deposits and other transaction accounts and a lower proportion of more expensive time deposits. This shift in deposit mix has been largely responsible for the decline in our average cost of deposits to 0.17% at December 31, 2016 from 0.18% at December 31, 2015.
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, higher

6


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 or taxation than that imposed on us.
Employees
At December 31, 2016, First Commonwealth and its subsidiaries employed 1,217 full-time employees and 159 part-time employees.
Supervision and Regulation
The following discussion sets forth the material elements of the regulatory framework applicable to financial holding companies, such as First Commonwealth, and their 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.
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. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the financial, including capital, position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's performance record under the Community Reinvestment Act ("CRA") and its compliance with fair housing and other consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities.
Non-Banking Activities. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as First Commonwealth may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, without in either case the prior approval of the FRB. Activities that are financial in nature include securities underwriting and dealing, insurance agency activities and making merchant banking investments.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be well capitalized and well managed. A depository institution subsidiary is considered to be well capitalized if it satisfies the requirements for this status discussed in the section captioned Prompt Corrective Action, included elsewhere in this item. A depository institution subsidiary is considered well managed if it received a composite rating and management rating of at least satisfactory in its most recent examination. A financial holding company’s status will also depend upon its maintaining its status as well capitalized and well managed under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions.

In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least satisfactory in its most recent examination under the CRA.

The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or

7


such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
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 under federal banking laws. The Federal Reserve Act imposes quantitative and qualitative requirements and collateral requirements on covered transactions by FCB with, or for the benefit of, its affiliates, and generally requires those transactions to be on terms at least as favorable to FCB as if the transaction were conducted with an unaffiliated third party. 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 FRB) 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, any such transaction by FCB (or its subsidiaries) must be limited to certain thresholds on an individual and aggregate basis and, for credit transactions with any affiliate, must be secured by designated amounts of specified collateral.
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 Regulation
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.
Dividends and Stress Testing. First Commonwealth is a legal entity separate and distinct from its banking and other subsidiaries. As a bank holding company, First Commonwealth is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations. Federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In particular, federal bank regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
A significant portion of our income comes from dividends from our bank, which is also the primary source of our liquidity. In addition to the restrictions discussed above, our bank is subject to limitations under Pennsylvania law regarding the level of dividends that it may pay to us. In general, 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. As of December 31, 2016, FCB could pay dividends to First Commonwealth of $59.1 million without reducing its capital levels below "well capitalized" levels and without the approval of the Pennsylvania Department of Banking.
In October 2012, as required by the Dodd-Frank Act, the FRB and the FDIC published final rules regarding company-run stress testing. These rules require bank holding companies and banks with average total consolidated assets greater than $10 billion to conduct an annual company-run stress test of capital, consolidated earnings and losses under one base and at least two stress scenarios provided by the federal bank regulators. Although our assets are currently below this threshold, we have nevertheless commenced stress testing to ensure that we are able to meet these requirements in a timely fashion. Neither we nor our bank is

8


currently subject to the stress testing requirements, but we expect that once we are subject to those requirements, the FRB, the FDIC and the Pennsylvania Department of Banking and Securities will consider our results as an important factor in evaluating our capital adequacy, and that of our bank, in evaluating any proposed acquisitions and in determining whether any proposed dividends or stock repurchases by us or by our bank may be an unsafe or unsound practice.
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 Financial Protection. We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
The Dodd-Frank Act created a new, independent federal agency, the Consumer Financial Protection Bureau ("CFPB"), which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary responsibility for examination of our bank and enforcement with respect to federal consumer protection laws so long as our bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance with all state consumer laws. The CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as our bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

9


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 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. As an institution with less than $10 billion in assets, FCB’s assessment rates are based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). For institutions with $10 billion or more in assets, assessment rates are calculated using a scorecard that combines the supervisory risk ratings of the institution with certain forward-looking financial measures. These assessment rates are subject to adjustments based upon the insured depository institution’s ratio of long-term unsecured debt to the assessment base, long-term unsecured debt issued by other insured depository institutions to the assessment base, and brokered deposits to the assessment base. However, the adjustments based on brokered deposits to the assessment base will not apply so long as the institution is well capitalized and has a composite CAMELS rating of 1 or 2. The CAMELS rating system is a bank rating system where bank supervisory authorities rate institutions according to six factors: capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk. The FDIC may make additional discretionary assessment rate adjustments.
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. In August 2016, the FDIC announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment ranges for all institutions were adjusted downward such that the initial base deposit insurance assessment rate ranges from 3 to 30 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to 40 basis points on an annualized basis. In March 2016, the FDIC adopted a final rule increasing the reserve ratio for the Deposit Insurance Fund to 1.35% of total insured deposits. The rule imposes a surcharge on the assessments of depository institutions with $10 billion or more in assets beginning the third quarter of 2016 and continuing through the earlier of the quarter that the reserve ratio first reaches or exceeds 1.35% and December 31, 2018. This surcharge does not currently impact FCB.
Repeal Of Federal Prohibitions On Payment Of Interest On Demand Deposits. The federal prohibition restricting depository institutions from paying interest on demand deposit accounts was repealed effective on July 21, 2011 as part of the Dodd-Frank Act.
Capital Requirements
First Commonwealth and FCB are each required to comply with applicable capital adequacy standards established by the FRB. The current risk-based capital standards applicable to First Commonwealth and FCB, parts of which are currently in the process of being phased-in, are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (the “Basel Committee”).
Prior to January 1, 2015, the risk-based capital standards applicable to First Commonwealth and FCB were based on the 1988 Capital Accord, known as Basel I, of the Basel Committee. In July 2013, the federal bank regulators approved final rules (the “Basel III Capital Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including First Commonwealth and FCB, as compared to the Basel I risk-based capital rules. The Basel III Capital Rules became effective for First Commonwealth and FCB on January 1, 2015 (subject to a phase-in period for certain provisions).
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.
Under the Basel III Capital Rules, the initial minimum capital ratios that became effective on January 1, 2015 are as follows:
4.5% CET1 to risk-weighted assets
6.0% Tier 1 capital to risk-weighted assets
8.0% Total capital to risk-weighted assets

10


4.0% Tier 1 capital to average quarterly assets
When fully phased in on January 1, 2019, the Basel III Capital Rules will require First Commonwealth and FCB to maintain a 2.5% “capital conservation buffer” over the required ratios of CET1 to risk-weighted assets, Tier 1 capital to risk-weighted assets and Total capital to risk-weighted assets, effectively resulting in minimum ratios of 7.0%, 8.5% and 10.5%, respectively.
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer 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. During 2015, First Commonwealth and FCB made a one-time permanent election, as permitted under Basel III Capital Rules, to exclude the effects of accumulated other comprehensive income items for the purposes of determining regulatory capital ratios.
Implementation of the deductions and other adjustments to CET1 began 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 began on January 1, 2016 at the 0.625% level and will continue to 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).
With respect to FCB, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.” The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the 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. Specific changes to the rules impacting First Commonwealth’s determination of risk-weighted assets include, among other things:
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%).
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.
Providing for a 100% risk weight for claims on securities firms.
Eliminating the current 50% cap on the risk weight for OTC derivatives.
Management believes that, as of December 31, 2016, 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 in effect as of that date.
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 such 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 September 2014, the federal bank regulators approved final rules implementing the LCR for advanced approaches banking organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to First Commonwealth or FCB. While not required, FCB nevertheless utilizes a modified version of the LCR as a helpful tool for monitoring its liquidity position. In the second quarter of 2016, the federal banking regulators issued a proposed rule that would implement the NSFR for certain U.S. banking organizations. The proposed rule would require certain U.S. banking

11


organizations to ensure they have access to stable funding over a one-year time horizon and has an effective date of January 1, 2018. The proposed rule would not apply to U.S. banking organizations with less than $50 billion in total consolidated assets such as First Commonwealth or FCB.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the CET1 capital ratio (a new ratio requirement under the Basel III Capital Rules), the Tier 1 capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan and must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
First Commonwealth believes that, as of December 31, 2016, FCB was a “well-capitalized” bank as defined by the FDIC. See Note 24 “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.

12


The Volcker Rule
The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds (so called "covered funds"). The statutory provision is commonly called the “Volcker Rule.” Banks with less than $10 billion in total consolidated assets, such as FCB, that do not engage in any covered activities, other than trading in certain government, agency, state or municipal obligations, do not have any significant compliance obligations under the rules implementing the Volcker Rule. We do not currently anticipate that the Volcker Rule will have a material effect on our operations.
Depositor Preference
Under federal law, depositors (including the FDIC with respect to the subrogated claims of insured depositors) and certain claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims against such an institution in the liquidation or other resolution of such an institution by any receiver.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the FRB adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Under the final rules, the maximum permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. The FRB also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the FRB. The FRB also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
The Dodd-Frank Act contained an exemption from the interchange fee cap for any debit card issuer that, together with its affiliates, has total assets of less than $10 billion as of the end of the previous calendar year. We currently qualify for this exemption. If we did not qualify for the exemption, it is projected that the interchange fee cap would adversely impact interchange income by $6.1 million. We would become subject to the interchange fee cap beginning July 1 of the year following the time when our total assets reaches or exceeds $10 billion.
Heightened Requirements for Bank Holding Companies with $10 Billion or More in Assets
Various federal banking laws and regulations, including rules adopted by the FRB pursuant to the requirements of the Dodd-Frank Act, impose heightened requirements on certain large banks and bank holding companies. Most of these rules apply primarily to bank holding companies with at least $50 billion in total consolidated assets, but certain rules also apply to banks and bank holding companies with at least $10 billion in total consolidated assets. Following the time at which our or our bank’s total consolidated assets, as applicable, equal or exceed $10 billion, we or our bank, as applicable, will, among other requirements:
be required to perform annual stress tests as described above under Dividends and Stress Testing;
be required to establish a dedicated risk committee of our board of directors responsible for overseeing our enterprise-wide risk management policies, which must be commensurate with our capital structure, risk profile, complexity, activities, size and other appropriate risk-related factors, and including as a member at least one risk management expert;
calculate our FDIC deposit assessment base using the performance score and a loss-severity score system described above under Deposit Insurance; and
be examined for compliance with federal consumer protection laws primarily by the CFPB as described above under Consumer Financial Protection.
While neither we nor our bank currently have $10 billion or more in total consolidated assets, we have begun analyzing these rules to ensure we are prepared to comply with the rules when and if they become applicable.

13


Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
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. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and 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, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Commonwealth is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.

14


Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and modify our business strategy, and limit our ability to pursue business opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely affected, perhaps materially, as a result.
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 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, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil

15


money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. 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.
Declines in real estate values could adversely affect our earnings and financial condition.
As of December 31, 2016, approximately 66% of our loans were secured by real estate. These loans consist of residential real estate loans (approximately 25% of total loans), commercial real estate loans (approximately 36% of total loans) and real estate construction loans (approximately 5% 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 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 or losses, 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. Any of the foregoing could have a material adverse effect on First Commonwealth's business, financial condition and results of operations.

16


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, 2016, 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.
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.
FCB faces 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.
Our controls and procedures may fail or be circumvented.
Our internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on First Commonwealth’s business, financial condition and results of operations.

17


We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on First Commonwealth’s business, financial condition and results of operations.
Our operations rely on external vendors.
We rely on certain vendors to provide products and services necessary to maintain the day-to-day operations of First Commonwealth and FCB. In particular, we contracted with an external vendor for our core processing system 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. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to First Commonwealth’s operations and financial reporting, which could have a material adverse effect on First Commonwealth’s business and, in turn, First Commonwealth’s financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of FCB's loan portfolio is secured by real property. During the ordinary course of business, FCB may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on First Commonwealth’s business, financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of FCB’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on First Commonwealth’s financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on First Commonwealth’s business, financial condition and results of operations.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Within the financial services industry, loss of public confidence, including through default by any one institution, could lead to liquidity challenges or to defaults by other institutions. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as

18


the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial intermediaries, such as clearing agencies, banks and exchanges with which we interact on a daily basis or key funding providers such as the Federal Home Loan Banks, any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition or results of operations.
First Commonwealth’s stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. First Commonwealth’s stock price can fluctuate significantly in response to a variety of factors including, among other things:
Actual or anticipated variations in quarterly results of operations.
Recommendations by securities analysts.
Operating and stock price performance of other companies that investors deem comparable to First Commonwealth.
News reports relating to trends, concerns and other issues in the financial services industry.
Perceptions in the marketplace regarding First Commonwealth and/or its competitors.
New technology used, or services offered, by competitors.
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving First Commonwealth or its competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
Changes in government regulations.
Geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, including real or anticipated changes in the strength of the Pennsylvania economy; industry factors and general economic and political conditions and events, such as economic slowdowns or recessions; interest rate changes or credit loss trends could also cause First Commonwealth’s stock price to decrease regardless of operating results.
The trading volume in First Commonwealth’s common stock is less than that of other larger financial services companies.
Although First Commonwealth’s common stock is listed for trading on the NYSE, the trading volume in its common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of First Commonwealth’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of First Commonwealth’s common stock, significant sales of First Commonwealth’s common stock, or the expectation of these sales, could cause First Commonwealth’s stock price to fall.
First Commonwealth may not continue to pay dividends on its common stock in the future.
Holders of First Commonwealth common stock are only entitled to receive such dividends as its board of directors may declare out of funds legally available for such payments. Although First Commonwealth has historically declared cash dividends on its common stock, it is not required to do so and may reduce or eliminate its common stock dividend in the future. This could adversely affect the market price of First Commonwealth’s common stock. Also, First Commonwealth is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the FRB regarding capital adequacy and dividends.
As more fully discussed in Part II, Item 8, Financial Statements and Supplementary Data-Note 24, Regulatory Restrictions and Capital Adequacy, which is located elsewhere in this report, the ability of First Commonwealth to declare or pay dividends on its common stock may also be subject to certain restrictions in the event that First Commonwealth elects to defer the payment of interest on its junior subordinated debt securities.
An investment in First Commonwealth’s common stock is not an insured deposit.
First Commonwealth’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in First Commonwealth’s common stock is inherently risky for the reasons described in this Risk Factors section and elsewhere in this report and is subject to the same

19


market forces that affect the price of common stock in any company. As a result, if you acquire First Commonwealth’s common stock, you could lose some or all of your investment.
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.
 
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 122 banking offices, of which 43 are leased and 79 are owned. We also lease two loan production offices. During 2016, we acquired 13 banking offices from FirstMerit Bank, National Association, in Canton-Massillon and Ashtabula, Ohio, of which eight are owned and five are leased.
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 22, “Contingent Liabilities,” which is incorporated herein by reference in response to this item.
 
ITEM 4.    Mine Safety Disclosures
Not applicable.

20


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, 2016 is set forth below:
I. Robert Emmerich, age 66, served as Executive Vice President and Chief Credit Officer of First Commonwealth Bank since 2009. He retired from his position at First Commonwealth Bank on December 31, 2016. 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 58, 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.

Brian Karrip, age 56, has served as Executive Vice President and Chief Credit Officer of First Commonwealth Bank since September 2016.  Prior to joining First Commonwealth, Mr. Karrip served as Executive Vice President, Specialized Lending for FirstMerit Bank.  Prior to joining FirstMerit Bank, Mr. Karrip served as Managing Director and Group Head of Loan Syndications and Sales at KeyBanc Capital Markets.  Mr. Karrip’s financial services career also includes 16 years with National City Bank where he held a variety of roles in the commercial lending division and served as Regional President of Michigan and Illinois.
Leonard V. Lombardi, age 57, 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 49, 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 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 54, has served as President and Chief Executive Officer of First Commonwealth Financial Corporation and Chief Executive Officer of First Commonwealth Bank since March 2012. Mr. Price served as President of First Commonwealth Bank from November 2007 to May 2013. 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.
James R. Reske, age 53, joined First Commonwealth Financial Corporation as Executive Vice President, Chief Financial Officer and Treasurer on April 28, 2014. Prior to joining First Commonwealth, Mr. Reske served as Executive Vice President, Chief Financial Officer, and Treasurer at United Community Financial Corporation in Youngstown, Ohio from 2008 until April 2014. Mr. Reske's financial services career includes investment banking roles within the Financial Institutions Groups at Keybanc Capital Markets, Inc. in Cleveland, Ohio and at Morgan Stanley & Company in New York. Mr. Reske also provided expertise and counsel to financial institutions and other organizations on mergers and acquisitions and capital markets activities as an attorney at Wachtell, Lipton, Rosen & Katz, as well as at Sullivan & Cromwell. Earlier in his career, Mr. Reske worked at the Board of Governors of the Federal Reserve System in Washington, DC and at the Federal Reserve Bank of Boston.
Carrie L. Riggle, age 47, 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.
Matthew C. Tomb, age 40, 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.


21


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, 2016, there were approximately 6,334 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
2016
 
 
 
 
 
First Quarter
$
9.28

 
$
7.89

 
$
0.07

Second Quarter
9.47

 
8.35

 
0.07

Third Quarter
10.33

 
8.87

 
0.07

Fourth Quarter
14.25

 
9.71

 
0.07

 
Period
High Sale
 
Low Sale
 
Cash Dividends
Per Share
2015
 
 
 
 
 
First Quarter
$
9.14

 
$
7.85

 
$
0.07

Second Quarter
9.84

 
8.90

 
0.07

Third Quarter
9.77

 
8.31

 
0.07

Fourth Quarter
9.88

 
8.85

 
0.07

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 24, Regulatory Restrictions and Capital Adequacy.” In addition, under the terms of the capital securities issued by First Commonwealth Capital Trust II and III, First Commonwealth could not pay dividends on its common stock if First Commonwealth deferred payments on the junior subordinated debt securities that provide the cash flow for the payments on the capital securities.

22


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, 2011, and the cumulative return is measured as of each subsequent fiscal year end.
performancegraph.gif 
 
Period Ending
Index
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
First Commonwealth Financial Corporation
100.00

 
133.32

 
177.76

 
191.96

 
194.71

 
313.82

Russell 2000
100.00

 
116.35

 
161.52

 
169.43

 
161.95

 
196.45

KBW Regional Banking Index
100.00

 
113.25

 
166.31

 
170.34

 
180.41

 
250.80

 



23


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,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(dollars in thousands, except share data)
Interest income
$
217,614

 
$
204,071

 
$
202,181

 
$
206,358

 
$
219,075

Interest expense
18,579

 
15,595

 
18,501

 
21,707

 
30,146

Net interest income
199,035

 
188,476

 
183,680

 
184,651

 
188,929

Provision for credit losses
18,480

 
14,948

 
11,196

 
19,227

 
20,544

Net interest income after provision for credit losses
180,555

 
173,528

 
172,484

 
165,424

 
168,385

Net securities (losses) gains
617

 
(153
)
 
550

 
(1,158
)
 
192

Other income
63,982

 
61,478

 
60,309

 
61,321

 
65,242

Other expenses
159,925

 
163,874

 
171,210

 
168,824

 
177,207

Income before income taxes
85,229

 
70,979

 
62,133

 
56,763

 
56,612

Income tax provision
25,639

 
20,836

 
17,680

 
15,281

 
14,658

Net Income
$
59,590

 
$
50,143

 
$
44,453

 
$
41,482

 
$
41,954

Per Share Data—Basic
 
 
 
 
 
 
 
 
 
Net Income
$
0.67

 
$
0.56

 
$
0.48

 
$
0.43

 
$
0.40

Dividends declared
$
0.28

 
$
0.28

 
$
0.28

 
$
0.23

 
$
0.18

Average shares outstanding
88,851,573

 
89,356,767

 
93,114,654

 
97,028,157

 
103,885,396

Per Share Data—Diluted
 
 
 
 
 
 
 
 
 
Net Income
$
0.67

 
$
0.56

 
$
0.48

 
$
0.43

 
$
0.40

Average shares outstanding
88,851,573

 
89,356,767

 
93,114,654

 
97,029,832

 
103,885,663

At End of Period
 
 
 
 
 
 
 
 
 
Total assets
$
6,684,018

 
$
6,566,890

 
$
6,360,285

 
$
6,214,861

 
$
5,995,380

Investment securities
1,187,623

 
1,333,836

 
1,354,364

 
1,353,809

 
1,199,531

Loans and leases, net of unearned income
4,879,347

 
4,683,750

 
4,457,308

 
4,283,833

 
4,204,704

Allowance for credit losses
50,185

 
50,812

 
52,051

 
54,225

 
67,187

Deposits
4,947,408

 
4,195,894

 
4,315,511

 
4,603,863

 
4,557,881

Short-term borrowings
867,943

 
1,510,825

 
1,105,876

 
626,615

 
356,227

Subordinated debentures
72,167

 
72,167

 
72,167

 
72,167

 
105,750

Other long-term debt
8,749

 
9,314

 
89,459

 
144,385

 
174,471

Shareholders’ equity
749,929

 
719,546

 
716,145

 
711,697

 
746,007

Key Ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.89
%
 
0.78
%
 
0.71
%
 
0.68
%
 
0.71
%
Return on average equity
8.02

 
6.98

 
6.18

 
5.70

 
5.46

Net loans to deposits ratio
97.61

 
110.42

 
102.08

 
91.87

 
90.78

Dividends per share as a percent of net income per share
41.79

 
50.00

 
58.33

 
53.49

 
44.57

Average equity to average assets ratio
11.15

 
11.23

 
11.45

 
11.87

 
12.95


24





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 and First Commonwealth Insurance Agency, Inc. (“FCIA”) and First Commonwealth Financial Advisors, Inc. (“FCFA”), as of and for the years ended December 31, 2016, 2015 and 2014. 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 more thorough 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 FCB and insurance products through FCIA. At December 31, 2016, FCB operated 122 community banking offices throughout western Pennsylvania and central and northern Ohio, as well as loan production offices in Akron and Cleveland, Ohio.
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, mortgage loans, secured and unsecured installment loans, construction and real estate loans, safe deposit facilities, credit cards, 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 and 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, less frequently, through sales of assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses on loans, operating expenses, income taxes and, less frequently, loss on sale or other-than-temporary impairments on investment securities.
General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan growth, as well as 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 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 have been incurred 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.

25


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 homogeneous smaller balance loans, having similar risk characteristics, as well as unimpaired larger commercial loans, that have similar risk characteristics, 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, loss emergence periods for each loan category 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 into 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

26


Discussion and Analysis of Financial Condition and Results of Operations and in Note 9 “Impairment of Investment Securities” and Note 18 “Fair Values of Assets and Liabilities” of Notes to the Consolidated Financial Statements.
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—2016 Compared to 2015
Net Income
Net income for 2016 was $59.6 million, or $0.67 per diluted share, as compared to net income of $50.1 million, or $0.56 per diluted share, in 2015. The growth in net income is a result of an increase in net interest income of $10.6 million, combined with a decrease in noninterest expense of $3.9 million and growth in noninterest income of $3.3 million.
Our return on average equity was 8.0% and our return on average assets was 0.89% for 2016, compared to 7.0% and 0.78%, respectively, for 2015.
Average diluted shares for the year 2016 were 1% less than the comparable period in 2015 primarily due to a $25.0 million common stock buyback program completed during 2015.
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 pretax equivalent amounts based on the marginal corporate federal income tax rate of 35%. The taxable equivalent adjustment to net interest income for 2016 was $3.8 million compared to $3.5 million in 2015. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income) at 75% for the years ended December 31, 2016 and 2015.
Net interest income, on a fully taxable equivalent basis, was $202.9 million for the year-ended December 31, 2016, a $10.9 million, or 6%, increase compared to $191.9 million for the same period in 2015. The net interest margin, on a fully taxable equivalent basis, increased 4 basis points to 3.32% in 2016 from 3.28% in 2015. 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.

27


Growth in the both the level of interest-earning assets and the rates earned on those assets contributed to the increase in the net interest margin for the year ended December 31, 2016. Yields and spreads on new loan volumes in 2016 exceeded runoff levels, specifically for variable and adjustable rate commercial loans, home equity loans and indirect auto loans. Average earning assets for the year ended December 31, 2016 increased $257.7 million, or 4%, compared to the comparable period in 2015. Interest-sensitive assets totaling $3.3 billion will either reprice or mature over the next twelve months.
Although the FirstMerit branch acquisition, which was completed on December 2, 2016, provided ending balances of $593.4 million in lower costing deposits, the transaction had minimal impact on average interest-earning assets, average interest-bearing liabilities or net interest income for the full year-ended December 31, 2016. For the year-ended December 31, 2016, average interest-earning assets resulting from this acquisition totaled $6.4 million and average interest-bearing liabilities resulting from this transaction totaled $39.3 million.
The taxable equivalent yield on interest-earning assets was 3.63% for the year ended December 31, 2016, an increase of 8 basis points from the 3.55% yield for the same period in 2015. This increase can be attributed to higher replacement yields on loan portfolio runoff and maturities as a result of improvements in pricing spreads. Additionally, the investment portfolio yield increased by 11 basis points. This increase can be attributed to the runoff or sale of lower yielding U.S. Agency securities which were replaced with higher yielding investment securities. Investment portfolio purchases during the year ended December 31, 2016 have been primarily in mortgage-related assets with approximate durations of 48-60 months and municipal securities with durations of approximately five years. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities should interest rates rise.
Increases in the cost of interest-bearing liabilities partially offset the positive impact of higher yields on interest-earning assets. The cost of interest-bearing liabilities was 0.39% for the year-ended December 31, 2016, compared to 0.34% for the same period in 2015. This increase is primarily due to an 18 basis point increase in the cost of short term borrowings. Offsetting that increase was a 5 basis point decline in in the cost of time deposits, as maturities repriced to lower rates or were replaced with lower cost short-term borrowings.
Comparing the year ended December 31, 2016 with the same period in 2015, changes in rates negatively impacted net interest income by $0.5 million. The higher yield on interest-earning assets favorably impacted net interest income by $3.5 million, while a change in the mix of interest-bearing liabilities and an increase in short-term borrowing rates had a negative impact of $4.0 million on net interest income. The growth in net interest income for the year-ended December 31, 2016, can be primarily attributed to growth in the loan portfolio and changes in the mix of our investment portfolio.
While changes in rates had a slight negative impact on the net interest margin, increases in average interest-earning assets more than offset the effect on net interest income. Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $11.5 million in the year ended December 31, 2016 compared to the same period in 2015. Higher levels of interest-earning assets resulted in an increase of $10.4 million in interest income, while reductions in time deposits and long-term borrowings, partially offset by increased short-term borrowings, decreased interest expense by $1.0 million.
Positively affecting net interest income was a $116.2 million increase in average net free funds at December 31, 2016 as compared to December 31, 2015. 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 net free funds was a $93.3 million increase in average noninterest-bearing demand deposits. Additionally, higher cost time deposits continue to mature and reprice to lower cost certificates or other deposit alternatives. Average time deposits for the year ended December 31, 2016 decreased $104.8 million million, or 15%, compared to the comparable period in 2015, while the average rate paid on time deposits decreased 5 basis points. Over the next twelve months $319.3 million in certificates of deposits either mature or reprice.

28


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,
 
2016
 
2015
 
2014
 
(dollars in thousands)
Interest income per Consolidated Statements of Income
$
217,614

 
$
204,071

 
$
202,181

Adjustment to fully taxable equivalent basis
3,846

 
3,465

 
3,327

Interest income adjusted to fully taxable equivalent basis (non-GAAP)
221,460

 
207,536

 
205,508

Interest expense
18,579

 
15,595

 
18,501

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
202,881

 
$
191,941

 
$
187,007

 

29


The following table provides information regarding the average balances and yields or rates on interest-earning assets and interest-bearing liabilities for the periods ended December 31:
 
 
Average Balance Sheets and Net Interest Analysis
 
2016
 
2015
 
2014
 
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
$
5,799

 
$
27

 
0.46
%
 
$
8,640

 
$
14

 
0.16
%
 
$
4,728

 
$
12

 
0.25
%
Tax-free investment securities
62,632

 
2,305

 
3.68

 
40,459

 
1,534

 
3.79

 
12,274

 
478

 
3.89

Taxable investment securities
1,221,961

 
30,745

 
2.52

 
1,248,689

 
30,241

 
2.42

 
1,352,494

 
30,662

 
2.27

Loans, net of unearned
income (b)(c)(e)
4,818,759

 
188,383

 
3.91

 
4,553,634

 
175,747

 
3.86

 
4,356,566

 
174,356

 
4.00

Total interest-earning assets
6,109,151

 
221,460

 
3.63

 
5,851,422

 
207,536

 
3.55

 
5,726,062

 
205,508

 
3.59

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
70,408

 
 
 
 
 
66,937

 
 
 
 
 
71,139

 
 
 
 
Allowance for credit losses
(57,253
)
 
 
 
 
 
(49,776
)
 
 
 
 
 
(54,517
)
 
 
 
 
Other assets
538,310

 
 
 
 
 
530,068

 
 
 
 
 
538,429

 
 
 
 
Total noninterest-earning assets
551,465

 
 
 
 
 
547,229

 
 
 
 
 
555,051

 
 
 
 
Total Assets
$
6,660,616

 
 
 
 
 
$
6,398,651

 
 
 
 
 
$
6,281,113

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
deposits (d)
$
748,869

 
$
480

 
0.06
%
 
$
654,926

 
$
231

 
0.04
%
 
$
625,516

 
$
192

 
0.03
%
Savings deposits (d)
1,910,333

 
3,370

 
0.18

 
1,855,024

 
2,542

 
0.14

 
1,876,972

 
2,348

 
0.13

Time deposits
584,429

 
3,673

 
0.63

 
689,247

 
4,701

 
0.68

 
1,028,053

 
9,913

 
0.96

Short-term borrowings
1,387,737

 
8,076

 
0.58

 
1,252,531

 
5,018

 
0.40

 
815,394

 
2,449

 
0.30

Long-term debt
81,197

 
2,980

 
3.67

 
119,277

 
3,103

 
2.60

 
200,114

 
3,599

 
1.80

Total interest-bearing liabilities
4,712,565

 
18,579

 
0.39

 
4,571,005

 
15,595

 
0.34

 
4,546,049

 
18,501

 
0.41

Noninterest-bearing liabilities and shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand
deposits (d)
1,146,189

 
 
 
 
 
1,052,886

 
 
 
 
 
964,422

 
 
 
 
Other liabilities
58,918

 
 
 
 
 
56,036

 
 
 
 
 
51,347

 
 
 
 
Shareholders’ equity
742,944

 
 
 
 
 
718,724

 
 
 
 
 
719,295

 
 
 
 
Total noninterest-bearing funding sources
1,948,051

 
 
 
 
 
1,827,646

 
 
 
 
 
1,735,064

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
6,660,616

 
 
 
 
 
$
6,398,651

 
 
 
 
 
$
6,281,113

 
 
 
 
Net Interest Income and Net Yield on Interest-Earning Assets
 
 
$
202,881

 
3.32
%
 
 
 
$
191,941

 
3.28
%
 
 
 
$
187,007

 
3.27
%
 
(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)
Includes held for sale loans.


30


The following table sets forth certain information regarding changes in net interest income attributable to changes in the volume 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
 
2016 Change from 2015
 
2015 Change from 2014
 
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
$
13

 
$
(5
)
 
$
18

 
$
2

 
$
10

 
$
(8
)
Tax-free investment securities
771

 
840

 
(69
)
 
1,056

 
1,096

 
(40
)
Taxable investment securities
504

 
(647
)
 
1,151

 
(421
)
 
(2,356
)
 
1,935

Loans
12,636

 
10,234

 
2,402

 
1,391

 
7,883

 
(6,492
)
Total interest income (b)
13,924

 
10,422

 
3,502

 
2,028

 
6,633

 
(4,605
)
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
249

 
38

 
211

 
39

 
9

 
30

Savings deposits
828

 
77

 
751

 
194

 
(29
)
 
223

Time deposits
(1,028
)
 
(713
)
 
(315
)
 
(5,212
)
 
(3,253
)
 
(1,959
)
Short-term borrowings
3,058

 
541

 
2,517

 
2,569

 
1,311

 
1,258

Long-term debt
(123
)
 
(990
)
 
867

 
(496
)
 
(1,455
)
 
959

Total interest expense
2,984

 
(1,047
)
 
4,031

 
(2,906
)
 
(3,417
)
 
511

Net interest income
$
10,940

 
$
11,469

 
$
(529
)
 
$
4,934

 
$
10,050

 
$
(5,116
)
 
(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 the allowance for credit losses needed to absorb probable losses incurred 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: 
 
2016
 
2015
 
Dollars
 
Percentage
 
Dollars
 
Percentage
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
20,378

 
110
 %
 
$
11,740

 
79
 %
Real estate construction
(872
)
 
(5
)
 
(1,252
)
 
(8
)
Residential real estate
613

 
4

 
(106
)
 
(1
)
Commercial real estate
(6,257
)
 
(34
)
 
1,352

 
9

Loans to individuals
4,618

 
25

 
3,214

 
21

Total
$
18,480

 
100
 %
 
$
14,948

 
100
 %
The provision for credit losses for the year 2016 totaled $18.5 million, an increase of $3.5 million, or 23.6%, compared to the year 2015. The level of provision expense for the year-ended December 31, 2016 is primarily due to commercial, financial, agricultural and other loans as the result of specific reserves established for two loan relationships, as well as increases in historical loss factors and increases in qualitative factors related to portfolio mix and the external environment. The provision for loans to individuals is related to charge-offs in the indirect automobile portfolio as well as changes in collateral-related qualitative factors. The negative provision for commercial real estate loans and for real estate construction loans in 2016 are a result of declines in historical loss factors.

The majority of the 2015 provision expense is attributable to commercial, financial, agricultural and other loans as a result of specific reserves established or charge-offs recorded for three borrowers. Outstanding balances as of December 31, 2015 for these borrowers includes $3.9 million to a steel and mine equipment company, $7.5 million to an oil and gas well servicer and $3.9 million to a sporting goods manufacturer. These provisions were partially offset by the release of $1.1 million in specific reserves for loans transferred to held for sale in the first quarter of 2015. These held for sale loans were sold during the third quarter of 2015, at which time a gain of $0.4 million was recognized. The provision expense for commercial real estate loans is primarily due to charge-offs in this loan category, while the provision expense for loans to individuals is largely due to charge-offs in the indirect automobile portfolio. Real estate construction and residential real estate reflect a negative provision expense primarily due to a decline in historical loss factors for these categories.
The allowance for credit losses was $50.2 million, or 1.03%, of total loans outstanding at December 31, 2016, compared to $50.8 million, or 1.08%, at December 31, 2015. Nonperforming loans as a percentage of total loans decreased to 0.86% at December 31, 2016 from 1.09% at December 31, 2015. The allowance to nonperforming loan ratio was 120.0% as of December 31, 2016 and 99.9% at December 31, 2015. Net charge-offs were $19.1 million for the year-ended December 31, 2016 compared to $16.2 million for the same period in 2015.
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, loss emergence periods, historical loss experience, delinquency trends, deterioration in collateral values and volatility in economic indicators such as growth in GDP, 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, 2016.
 
A detailed analysis of our credit loss experience for the previous five years is shown below:
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
(dollars in thousands)
Loans outstanding at end of year
$
4,879,347

 
$
4,683,750

 
$
4,457,308

 
$
4,283,833

 
$
4,204,704

Average loans outstanding
$
4,818,759

 
$
4,553,634

 
$
4,356,566

 
$
4,255,593

 
$
4,165,292

Balance, beginning of year
$
50,812

 
$
52,051

 
$
54,225

 
$
67,187

 
$
61,234

Loans charged off:
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural and other
19,603

 
11,429

 
8,911

 
18,399

 
5,207

Real estate construction

 
8

 
296

 
773

 
3,601

Residential real estate
1,189

 
1,539

 
3,153

 
1,814

 
3,828

Commercial real estate
570

 
1,538

 
1,148

 
10,513

 
851

Loans to individuals
4,943

 
4,354

 
3,964

 
3,679

 
3,482

Total loans charged off
26,305

 
18,868

 
17,472

 
35,178

 
16,969

Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural and other
4,164

 
1,097

 
734

 
455

 
443

Real estate construction
562

 
84

 
1,340

 
501

 
582

Residential real estate
481

 
587

 
650

 
1,264

 
422

Commercial real estate
1,522

 
229

 
612

 
136

 
410

Loans to individuals
469

 
684

 
766

 
633

 
521

Total recoveries
7,198

 
2,681

 
4,102

 
2,989

 
2,378

Net charge-offs
19,107

 
16,187

 
13,370

 
32,189

 
14,591

Provision charged to expense
18,480

 
14,948

 
11,196

 
19,227

 
20,544

Balance, end of year
$
50,185

 
$
50,812

 
$
52,051

 
$
54,225

 
$
67,187

Ratios:
 
 
 
 
 
 
 
 
 
Net charge-offs as a percentage of average loans outstanding
0.40
%
 
0.36
%
 
0.31
%
 
0.76
%
 
0.35
%
Allowance for credit losses as a percentage of end-of-period loans outstanding
1.03
%
 
1.08
%
 
1.17
%
 
1.27
%
 
1.60
%
 


31


Noninterest Income
The components of noninterest income for each year in the three-year period ended December 31 are as follows: 
 
 
 
 
 
 
 
2016 compared to 2015
 
2016
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
Noninterest Income:
 
 
 
 
 
 
 
 
 
Trust income
$
5,366

 
$
5,834

 
$
6,000

 
$
(468
)
 
(8
)%
Service charges on deposit accounts
15,869

 
15,319

 
15,661

 
550

 
4

Insurance and retail brokerage commissions
7,964

 
8,522

 
6,483

 
(558
)
 
(7
)
Income from bank owned life insurance
5,381

 
5,412

 
5,502

 
(31
)
 
(1
)
Card related interchange income
14,955

 
14,501

 
14,222

 
454

 
3

Swap fee income
2,359

 
847

 
511

 
1,512

 
179

Other income
6,372

 
7,041

 
7,279

 
(669
)
 
(10
)
Subtotal
58,266

 
57,476

 
55,658

 
790

 
1

Net securities gains(losses)
617

 
(153
)
 
550

 
770

 
(503
)
Gain on sale of mortgage loans
4,086

 
2,421

 
440

 
1,665

 
69

Gain on sale of loans and other assets
1,411

 
1,855

 
4,556

 
(444
)
 
(24
)
Derivatives mark to market
219

 
(274
)
 
(345
)
 
493

 
(180
)
Total noninterest income
$
64,599

 
$
61,325

 
$
60,859

 
$
3,274

 
5
 %
Noninterest income, excluding net securities gains (losses), gain on sale of loans and other assets and the derivatives mark to market, increased $0.8 million, or 1.4%, in 2016. Swap fee income increased $1.5 million, compared to the same period in 2015, as a result of growth in interest rate swaps entered into by our commercial loan customers. Service charges on deposit accounts increased $0.6 million and card-related interchange income increased $0.5 million, both due to increases in customer fee-related activity. Offsetting these increases were insurance and retail brokerage commissions and trust income, which decreased $0.6 million and $0.5 million, respectively, as a result of lower annuity and mutual fund sales.
Total noninterest income increased $3.3 million, or 5%, in comparison to the year ended December 31, 2015. The most notable change includes a $1.7 million increase in gain on the sale of mortgage loans due to continued growth in mortgage loan originations since the Company reentered the secondary mortgage market in 2014. Net securities gains (losses) increased $0.8 million, primarily due to the early redemption in 2016 of one of our pooled trust preferred securities. In 2015, a net security loss was recognized as a result of the sale of lower yielding US Agency securities. The higher level of gain on sale of loans and other assets in 2014 is a result of a $1.2 million gain recognized on the sale of the Company's registered investment advisory business, as well as the sale of three OREO properties that resulted in gains of $3.2 million.
If the Company's total assets would equal or exceed $10 billion we would no longer qualify for exemption from the interchange fee cap included in the Dodd-Frank Act. The estimated impact of this change would decrease interchange income by $6.1 million.
 

32


Noninterest Expense
The components of noninterest expense for each year in the three-year period ended December 31 are as follows: 
 
 
 
 
 
 
 
2016 Compared to 2015
 
2016
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
Noninterest Expense:
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
$
87,125

 
$
89,161

 
$
87,223

 
$
(2,036
)
 
(2
)%
Net occupancy
13,150

 
13,712

 
13,119

 
(562
)
 
(4
)
Furniture and equipment
11,624

 
10,737

 
12,235

 
887

 
8

Data processing
7,429

 
6,123

 
6,124

 
1,306

 
21

Advertising and promotion
2,601

 
2,638

 
2,953

 
(37
)
 
(1
)
Pennsylvania shares tax
3,825

 
4,693

 
3,776

 
(868
)
 
(18
)
Intangible amortization
547

 
605

 
631

 
(58
)
 
(10
)
Collection and repossession
2,250

 
2,826

 
2,754

 
(576
)
 
(20
)
Other professional fees and services
3,915

 
4,034

 
3,986

 
(119
)
 
(3
)
FDIC insurance
3,903

 
4,014

 
4,054

 
(111
)
 
(3
)
Other operating expenses
17,808

 
19,178

 
18,609

 
(1,370
)
 
(7
)
Subtotal
154,177

 
157,721

 
155,464

 
(3,544
)
 
(2
)
Loss on sale or write-down of assets
1,155

 
3,112

 
1,595

 
(1,957
)
 
(63
)
Litigation and operational losses
1,420

 
2,119

 
6,786

 
(699
)
 
(33
)
Furniture and equipment - related to IT conversion

 

 
5,577

 

 

Conversion related

 

 
1,788

 

 

Merger and acquisition related
3,173

 
922

 

 
2,251

 
244

Total noninterest expense
$
159,925

 
$
163,874

 
$
171,210

 
$
(3,949
)
 
(2
)%
Noninterest expense, excluding the loss on sale or write-down of assets, litigation and operational losses, furniture and equipment expense related to the IT conversion, conversion related and merger and acquisition related expense, decreased $3.5 million, or 2%, for the year ended 2016 compared to 2015. Contributing to the 2016 decrease is a $2.0 million decline in salaries and employee benefits, primarily due to $2.1 million in one-time severance charges recognized in 2015 as a result of the realignment of our consumer banking area.
Other operating expense decreased $1.4 million for the year 2016 compared to 2015, primarily due to a $1.7 million decline in expense related to the reserve for unfunded loan commitments. Pennsylvania shares tax expense decreased $0.9 million compared to last year due to a $0.7 million settlement paid in 2015 for a disputed tax assessment. Offsetting these decreases is a $1.3 million increase in data processing expense related to the issuance of chip debit cards in 2016.
Loss on the sale or write-down of assets decreased $2.0 million for the year 2016 compared to 2015. The loss in 2015 includes $1.5 million in write-downs on OREO properties as a result of updated appraisals obtained on properties for two commercial loan relationships and $0.9 million in write-downs related to the disposition of four branch offices that were closed or relocated due to cost or other market opportunities. In 2014, a former headquarters building was donated to a local university, resulting in a $0.6 million donation expense.
Litigation and operational losses decreased $0.7 million for the year 2016 compared to 2015 primarily due to higher fraud losses recognized in 2015 as a result of several merchant debit card breaches. The elevated level of litigation and operational losses in 2014 is a result of an $8.6 million litigation reserve recognized that year, partially offset by a $3.0 million recovery on an external fraud loss from a prior year.
Merger related expenses totaled $3.2 million and $0.9 million for the years 2016 and 2015, respectively. Expenses in 2016 reflect one-time expenses related to the acquisition of thirteen FirstMerit branches and the 2015 expense relates to the acquisition of Columbus, Ohio based First Community Bank.
During the third quarter of 2014, First Commonwealth completed a system conversion to the Jack Henry and Associates Silverlake core processing system and outsourced certain data processing services that had previously been performed in-house. Expenses related to this conversion included accelerated depreciation for data processing hardware and software, early

33


termination charges on previous contracts, and staffing and employment-related charges. For the year ended 2014, $5.6 million in accelerated depreciation and $1.8 million in other conversion related expenses were recognized.

Income Tax
The provision for income taxes of $25.6 million in 2016 reflects an increase compared to the provision for income taxes of $20.8 million in 2015 mostly due to the increase in the level of pretax income of $85.2 million and $71.0 million for 2016 and 2015, respectively.
The effective tax rate was 30% and 29% for tax expense in 2016 and 2015, respectively. 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.

Financial Condition
First Commonwealth’s total assets increased by $117.1 million in 2016. Loans, including loans held for sale, increased $196.9 million, or 4%, while investments decreased $119.8 million, or 9%.
Loan growth in 2016 was impacted by $100.9 million of loans acquired as part of the FirstMerit Bank, NA branch acquisition. Loan growth for the year was primarily in the commercial real estate category, which increased $263.2 million, of which $25.2 million can be attributed to the branch acquisition.
During 2016, approximately $278.0 million in investment securities were called or matured. Some of these securities were lower yielding securities and as such, their replacement contributed to the increase in yield earned on the portfolio. In total, $151.9 million in mortgage-backed securities, $10.4 million in agency securities and $7.7 million in municipal securities were purchased in 2016 to help increase earnings from the portfolio while maintaining a reduced risk profile.
First Commonwealth’s total liabilities increased $86.7 million, or 1%, in 2016. Deposits increased $751.5 million, or 18%, largely due to $593.4 million in deposits obtained as part of the FirstMerit Bank, NA branch acquisition. Short-term debt decreased $642.9 million or 43% and long-term debt decreased $0.6 million, or 1%, as funding needs were met with deposits from the FirstMerit Bank, NA branch acquisition.
Total shareholders equity increased $30.4 million in 2016. Growth in shareholders equity was a result of net income of $59.6 million, partially offset by $24.9 million in dividends declared, a $4.6 million decline in accumulated other comprehensive income and $0.9 million in stock repurchases.

Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(dollars in thousands)
Commercial, financial,
agricultural and other
$
1,139,547

 
23
%
 
$
1,150,906

 
25
%
 
$
1,052,109

 
24
%
 
$
1,021,056

 
24
%
 
$
1,019,822

 
24
%
Real estate construction
219,621

 
5

 
220,736

 
5

 
120,785

 
3

 
93,289

 
2

 
87,438

 
2

Residential real estate
1,229,192

 
25

 
1,224,465

 
26

 
1,226,344

 
27

 
1,262,718

 
30

 
1,241,565

 
30

Commercial real estate
1,742,210

 
36

 
1,479,000

 
31

 
1,405,256

 
31

 
1,296,472

 
30

 
1,273,661

 
30

Loans to individuals
548,777

 
11

 
608,643

 
13

 
652,814

 
15

 
610,298

 
14

 
582,218

 
14

Total loans and leases net of unearned income
$
4,879,347

 
100
%
 
$
4,683,750

 
100
%
 
$
4,457,308

 
100
%
 
$
4,283,833

 
100
%
 
$
4,204,704

 
100
%
The loan portfolio totaled $4.9 billion as of December 31, 2016, reflecting growth of $195.6 million, or 4%, compared to December 31, 2015. Loan growth was experienced in the commercial real estate and residential real estate categories. The increase in commercial real estate loans can be largely attributed to growth in direct middle market lending in Pennsylvania and Ohio. Residential real estate loans increased $4.7 million, although $63.3 million of loans in this category were acquired as part of the branch acquisition. Excluding the impact of the acquired loans, the residential real estate portfolio continues to experience runoff as many of the loans originated by our mortgage banking area are sold in the secondary market. The decrease

34


in commercial, financial, agricultural and other portfolio is a result of several large payoffs in the fourth quarter as competitors became more aggressive in both pricing and credit terms. Real estate construction loans decreased as projects were completed and moved to the commercial real estate category. The decline in the loans to individuals category is primarily due to runoff of indirect auto loans as a result of increased pricing spreads for this category.
The majority of our loan portfolio is with borrowers located in Pennsylvania. The Company expanded into the Ohio market area with the opening of a loan production office in Cleveland, Ohio in 2013, the acquisition of First Community Bank of Columbus, Ohio in the fourth quarter of 2015 and the purchase of thirteen FirstMerit Bank, NA branches in December 2016. As of December 31, 2016 and 2015, there were no concentrations of loans relating to any industry in excess of 10% of total loans.
The credit quality of the loan portfolio reflected improvement during 2016 with decreases in nonaccrual loans. As of December 31, 2016, criticized loans (i.e., loans designated OAEM, substandard, impaired or doubtful) increased $0.4 million, or 0.3%, from December 31, 2015. Criticized loans totaled $134.4 million at December 31, 2016 and represented 3% of the total loan portfolio. Additionally, delinquencies on accruing loans increased $0.8 million, or 7%, at December 31, 2016 compared to December 31, 2015. As of December 31, 2016, nonaccrual loans decreased $8.7 million, or 24%, compared to December 31, 2015.
 
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at December 31, 2016 were as follows:
 
 
Within
One Year
 
One to
5 Years
 
After
5 Years
 
Total
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
172,895

 
$
652,904

 
$
313,174

 
$
1,138,973

Real estate construction (a)
64,224

 
98,573

 
35,955

 
198,752

Commercial real estate
157,469

 
491,653

 
1,092,467

 
1,741,589

Other
1,269

 
18,797

 
116,380

 
136,446

Totals
$
395,857

 
$
1,261,927

 
$
1,557,976

 
$
3,215,760

Loans at fixed interest rates
 
 
286,026

 
350,727

 
 
Loans at variable interest rates
 
 
975,901

 
1,207,249

 
 
Totals
 
 
$
1,261,927

 
$
1,557,976

 
 
 
(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 legal lending limit of $92.6 million to any one borrower or closely related group of borrowers, but has established lower thresholds for credit risk management.
First Commonwealth defines exposure to the Oil and Gas Industry as any borrower who is involved in exploration and production, and any company in the industry supply chain, that generates 40% or more of their sales revenue from exploration and production activities.
As of December 31, 2016, the Company had a total of $117.9 million in commitments to the Oil and Gas Industry, with $56.2 million in outstanding loan balances against those commitments. Of this total, commitments of $29.4 million with outstanding balances of $3.7 million are for exploration and production, while $88.5 million in commitments, with outstanding balances of $52.4 million, are related to ancillary businesses.
Two customers account for 85.2% of the loans related to exploration and production and both are pass rated credits. These credit facilities are primarily used to support letters of credit and have little or no usage. One commercial relationships in this category, totaling $2.3 million, is on non-performing status and has been even before the oil price decline that began in the third quarter of 2014.
The ancillary business consists of well services, transportation, equipment and materials to support the Oil and Gas Industry. Two customers, which account for 26.6% of the ancillary exposure, are bulk transporters of refined product and are not expected to be negatively impacted from lower oil prices. There are two pass rated credits with total commitments of $23.3 million in the ancillary sector that may see some impact from reduced drilling activity due to lower oil and gas prices and two nonaccrual credits with total commitments of $3.3 million that have been impacted. The Company will continue to monitor their performance accordingly.


35


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. Consumer loans are placed in nonaccrual status at 150 days past due.  Other types of loans are 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. 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 and 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:
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
(dollars in thousands)
Nonperforming Loans:
 
Loans on nonaccrual basis
$
16,454

 
$
24,345

 
$
25,715

 
$
28,908

 
$
43,539

Loans held for sale on nonaccrual basis

 

 

 

 

Troubled debt restructured loans on nonaccrual basis
11,569

 
12,360

 
16,952

 
16,980

 
50,979

Troubled debt restructured loans on accrual basis
13,790

 
14,139

 
12,584

 
13,495

 
13,037

Total nonperforming loans
$
41,813

 
$
50,844

 
$
55,251

 
$
59,383

 
$
107,555

Loans past due in excess of 90 days and still accruing
$
2,097

 
$
2,455

 
$
2,619

 
$
2,505

 
$
2,447

Other real estate owned
$
6,805

 
$
9,398

 
$
7,197

 
$
11,728

 
$
11,262

Loans outstanding at end of period
$
4,879,347

 
$
4,683,750

 
$
4,457,308