First Commonwealth Announces Record Net Income for Fourth Quarter and Full-Year 2016; Declares Increased Quarterly Dividend

INDIANA, PA--(Marketwired - January 25, 2017) - First Commonwealth Financial Corporation (NYSE: FCF) today announced financial results for the fourth quarter and full-year of 2016.

Fourth Quarter 2016 Highlights

Franchise Growth

• Completed the acquisition of 13 FirstMerit branches in Canton and Ashtabula, Ohio enhancing our presence in Northeast Ohio by building on existing loan production offices in Cleveland and suburban Akron; and
• Announced the acquisition of DCB Financial Corp. in Lewis Center, Ohio building upon our acquisition of Columbus-based First Community Bank in 2015. This transaction has received all necessary regulatory approvals and is expected to close in the second quarter of 2017.

Profitability

• Return on average assets improved to 1.07% and is at the highest level since the second quarter of 2005;
  
  - Core return on average assets (excluding acquisition expenses) improved to 1.18%;

• Return on average tangible common equity improved to 12.46%, the highest level since the second quarter of 2008;
  
  - Core return on average tangible common equity (excluding acquisition expenses) improved to 13.73%; and

• The net interest margin improved 15 basis points to 3.44%.

Net Income

• Record fourth quarter net income was $17.9 million, or $0.20 diluted earnings per share. Core net income (adjusted for acquisition expenses) was $19.7 million, or $0.22 diluted earnings per share. Net income was impacted by the following items:
  
  - Net interest income of $52.5 million increased by $2.0 million compared to the prior quarter, primarily as a result of the increase in interest rates in December combined with the ability to pay down short-term borrowings following the aforementioned branch acquisition;
  
  - Noninterest income of $17.7 million, excluding net securities gains, increased by $0.7 million compared to the prior quarter, driven by service charges on deposit accounts, including increased interchange income, and a positive derivative mark-to-market of commercial loan interest rate swaps;
  
  - Noninterest expense of $45.7 million increased $7.0 million from the previous quarter primarily due to $2.8 million, or $0.02 diluted earnings per share, of one-time acquisition expense related to the FirstMerit branch purchase and increased incentive accruals to align with improved financial performance and productivity; and
  
  - Provision for credit losses of ($1.8) million, a decrease of $5.2 million from the previous quarter, primarily due to recoveries on loans previously charged off in prior periods and improved asset quality.

As a result of our improved financial performance, we are announcing today an increase in the quarterly dividend from $0.07 to $0.08 per share, an increase of 14.3%.

"This was yet another solid quarter for First Commonwealth, providing a strong finish to a busy year. We are especially pleased by this year's earnings per share growth of 20% over last year and our sub-60% core efficiency ratio," stated T. Michael Price, President and Chief Executive Officer. "This continued momentum across our fundamental core businesses and expanded geographies is a reflection of our mission to build a top-performing banking franchise and thoughtfully grow shareholder value."

Financial Summary

Financial Results Summary

For the three months ended December 31, 2016, net income was $17.9 million, or $0.20 diluted earnings per share, compared to net income of $17.2 million, or $0.19 diluted earnings per share, in the third quarter of 2016 and net income of $10.1 million, or $0.11 diluted earnings per share, in the fourth quarter of 2015. The increase in net income compared to the third quarter of 2016 was driven by a $5.2 million decrease in the provision for credit losses and a $2.0 million increase in net interest income, offset by an increase of $7.0 million in noninterest expense, which includes $2.8 million, or $0.02 diluted earnings per share, of one-time acquisition expenses related to the FirstMerit branch purchase. The increase in net income compared to the fourth quarter of 2015 was primarily driven by an $8.0 million decrease in the provision for credit losses, an increase of $3.4 million in net interest income, an increase in noninterest income of $2.2 million, offset by an increase of $2.5 million in noninterest expense which includes the aforementioned $2.8 million of one-time acquisition expenses.

For the year ended December 31, 2016, net income was $59.6 million, or $0.67 diluted earnings per share, compared to net income of $50.1 million, or $0.56 diluted earnings per share, for the comparable period in 2015. The increase in net income compared to 2015 was primarily the result of an increase of $10.9 million in net interest income and a decrease in noninterest expense of $3.9 million, despite $2.8 million of the aforementioned one-time acquisition expenses, offset by a $3.5 million increase in the provision for credit losses.

For the year ended December 31, 2016, return on average assets and return on average equity were 0.89% and 8.02%, respectively, as compared to 0.78% and 6.98% in the same period of 2015. Return on average tangible common equity was 10.43% for the year ended 2016 and 9.10% for the same period of 2015.

Net Interest Income and Net Interest Margin

Fourth quarter 2016 net interest income, on a fully taxable-equivalent basis, increased by $2.0 million to $52.5 million compared to the third quarter of 2016. The increase from the prior quarter was primarily the result of improved yields on our variable and adjustable loan portfolios in keeping with the Federal Reserve's decision to increase short-term rates in December of 2016, along with the ability to pay down relatively more expensive short-term borrowings following the aforementioned branch acquisition. The yield on interest-earning assets increased by 12 basis points and funding costs declined three basis points during the quarter.

As compared to the fourth quarter of 2015, net interest income, on a fully taxable-equivalent basis, increased by $3.4 million, driven largely by favorable replacement rates on commercial and consumer loan yields and a $102.0 million, or 1.7%, increase in average interest-earning assets, which included an average $31.7 million related to the FirstMerit branch acquisition. The net interest margin of 3.44% in the fourth quarter of 2016 was 18 basis points higher than in the fourth quarter of 2015. The increase came despite a three basis point increase in funding costs over the year ago period that was more than offset by a 19 basis point increase in the yield on interest-earning assets between the periods, and benefited from an increase of $98.8 million in average noninterest-bearing deposits, which included an average of $33.8 million related to the FirstMerit branch acquisition.

For the year ended December 31, 2016, net interest income, on a fully taxable-equivalent basis, increased $10.9 million to $202.9 million as compared to the same period in 2015. The increase in net interest income was a result of a $257.7 million increase in the volume of average interest-earning assets (which includes $8.0 million related to the FirstMerit branch acquisition) over the prior year, and an eight basis point increase in the yield on interest-earning assets, offset by a five basis point increase in funding costs.

Total deposits grew by $488.4 million, or 11.0%, in the fourth quarter of 2016 compared to last quarter, and increased by $751.5 million in the fourth quarter of 2016 from the prior year quarter; however this included the addition of $605.3 million in deposits acquired at the time the FirstMerit branch acquisition closed.

Compared to the prior quarter, average noninterest-bearing demand deposits increased $41.9 million in the fourth quarter of 2016, due in part to the addition of $33.8 million related to the FirstMerit branch acquisition. Noninterest-bearing demand deposits currently comprise 25.6% of total deposits. Average interest-bearing demand and savings deposits increased $115.7 million from the prior quarter despite the addition of $143.9 million of average interest-bearing demand and savings deposits related to the FirstMerit branch acquisition, as deposits gathered through special deposit rate programs earlier in 2016 were allowed to run off in favor of the newly acquired FirstMerit deposits. Average time deposits decreased by $8.6 million compared to the prior quarter.

Comparing average deposit balances in the fourth quarter of 2016 with the same quarter in 2015, average deposits increased by $321.8 million from the year-ago quarter, which includes the addition of $187.0 million in average deposits acquired as part of the FirstMerit branch acquisition. The year-over-year comparison of average deposit balances is driven by increases of $149.3 million of core deposit growth in average interest-bearing demand and savings deposits, which includes the addition of $36.2 million of average interest-bearing demand and savings deposits related to the FirstMerit branch acquisition. Core deposit growth of $93.3 million in average noninterest-bearing deposits, which includes the addition of $8.5 million of average noninterest-bearing deposits related to the FirstMerit branch acquisition, was offset by a decrease of $104.8 million in relatively more expensive average time deposits. Less than 7% of the acquired FirstMerit deposits were time deposits.

Average short-term borrowings decreased $181.1 million from the prior quarter and $218.2 million over the year-ago period as the FirstMerit acquired deposits were utilized to pay down relatively more expensive borrowing levels.

Credit Quality

The provision for credit losses totaled ($1.8) million for the quarter ended December 31, 2016, a decrease of $5.2 million as compared to the prior quarter and a decrease of $8.0 million from the same quarter last year. The decrease from the prior quarter is primarily attributable to $5.1 million in recoveries on loans previously charged off in prior periods and improved asset quality.

At December 31, 2016, nonperforming loans were $41.8 million, a decrease of $13.0 million from September 30, 2016 and a decrease of $9.0 million from December 31, 2015. The decrease from the third quarter of 2016 was related to the resolution of two commercial credits that were paid off during the fourth quarter and charge-offs for two commercial credits that were placed into nonperforming status in the fourth quarter of 2015 and first quarter of 2016. Nonperforming loans as a percentage of total loans were 0.86%, 1.13% and 1.08% for the periods ended December 31, 2016, September 30, 2016 and December 31, 2015, respectively.

During the fourth quarter of 2016, net charge-offs were $2.7 million, compared to $8.5 million in the prior quarter and $3.8 million in the fourth quarter of 2015. Net charge-offs in the fourth quarter of 2016 included a $4.2 million charge-off of a previously established reserve for a steel servicing company classified as nonaccrual in the first quarter of 2016 and a $1.3 million charge-off of a previously established reserve for an energy company classified as nonaccrual in the fourth quarter of 2015. Offsetting these charge-offs were recoveries totaling $5.1 million, which included commercial loans previously charged off in prior periods.

The allowance for credit losses was $50.2 million at December 31, 2016, and as a percentage of total loans outstanding was 1.03%, 1.13% and 1.08% for December 31, 2016, September 30, 2016 and December 31, 2015, respectively. General reserves as a percentage of non-impaired loans were 0.97%, 0.97% and 0.94% for December 31, 2016, September 30, 2016 and December 31, 2015, respectively. The reserve coverage ratio (the ratio of total reserves to nonperforming loans) was 120.0%, 99.8% and 99.9% for December 31, 2016, September 30, 2016 and December 31, 2015, respectively.

Other real estate owned (OREO) acquired through foreclosure declined to $6.8 million at December 31, 2016 from $7.7 million at September 30, 2016 and $9.4 million at December 31, 2015. There were no significant additions to OREO in the fourth quarter of 2016.

Noninterest Income

Noninterest income (excluding net securities gains) increased $0.7 million in the fourth quarter of 2016 as compared to the prior quarter and $2.2 million compared to the same quarter last year. The increase from the prior quarter is primarily the result of a $0.8 million positive variance from the prior quarter in the adjustment for the derivative mark-to-market of commercial loan interest rate swaps, which was $1.3 million in the fourth quarter. Noninterest income also benefited from an increase of $0.4 million in service charges on deposit accounts as compared with the prior quarter, offset by a $0.3 million decline in trust income.

The increase in noninterest income (excluding net securities gains) of $2.2 million compared with the fourth quarter of 2015 is primarily related to a positive variance of $1.1 million in the adjustment for the derivative mark-to-market of commercial loan interest rate swaps, as well as a $0.3 million increase in customer swap income, a $0.7 million increase in gain on sale of mortgage loans and an increase of $0.3 million in service charges on deposit accounts.

For the year ended December 31, 2016, noninterest income (excluding net securities gains) increased $2.5 million to $64.0 million as compared to the same period of 2015. Noninterest income included increases of $1.7 million in gain on sale of mortgage loans, $1.5 million in swap fee income, $0.6 million in service charges on deposit accounts, $0.5 million in card-related interchange income and a $0.5 million positive variance from prior year in the adjustment for the derivative mark-to-market of commercial loan interest rate swaps. Offsetting these increases were decreases of $0.5 million in trust income and $0.6 million in insurance and retail brokerage commissions.

Noninterest Expense

Noninterest expense increased $7.0 million to $45.7 million in the fourth quarter of 2016 as compared to the prior quarter. The increase is attributable to $2.8 million, or $0.02 diluted earnings per share, of one-time acquisition expenses associated with the FirstMerit branch acquisition, an increase in salaries and benefits of $4.3 million as compared to the prior quarter primarily attributable to higher incentives as a result of improved financial performance and productivity, higher payroll taxes and hospitalization costs, and increased expense related to the sale or write-down of foreclosed assets. Also impacting noninterest expense as compared to the prior quarter were decreases of $0.3 million in collection and repossession expenses, $0.4 million in FDIC insurance expense and $0.4 million for the reserve for unfunded loan commitments (which is included in other operating expenses).

Noninterest expense increased $2.5 million in the fourth quarter of 2016 as compared to the fourth quarter of 2015, primarily attributable to the aforementioned $2.8 million of one-time acquisition expenses and an increase in salaries and benefits of $2.1 million as compared to the prior year due to increased incentives of $4.1 million in keeping with improved financial performance and productivity, offset by reduced salary expense due to the realignment of our consumer banking businesses and lower benefits costs. These expenses were further offset by decreases of $0.3 million in FDIC insurance expense, $0.5 million on the loss on sale of other assets and $0.6 million in the reserve for unfunded loan commitments (which is included in other operating expenses).

For the year ended December 31, 2016, noninterest expense decreased $3.9 million, or 2.4%, as compared to the same period of 2015, despite $3.2 million, or $0.02 diluted earnings per share, of one-time acquisition expenses. The decrease is primarily attributable to a decline in salaries and benefits of $2.0 million due to the previously mentioned realignment of our consumer businesses and lower benefits costs, a $0.9 million decrease in Pennsylvania shares tax expense, $0.6 million of decreased collection and repossession expenses, $0.7 million of lower operational losses, a $2.0 million decrease in loss on sale or write-down of assets and lower provision expense of $1.7 million associated with the reserve for unfunded loan commitments (which is included in other operating expenses). These decreases were offset by an increase of $1.3 million in data processing expense due to the issuance of chip debit cards during the first nine months of 2016.

Full time equivalent staff increased to 1,274 at December 31, 2016 from 1,179 at September 30, 2016 and from 1,265 at December 31, 2015, respectively. The increase from September 30, 2016 and December 31, 2015 is the result of the addition of employees from the FirstMerit branch acquisition and the recent expansion of our mortgage and commercial banking businesses in our Ohio market.

The core efficiency ratio, which excludes securities gains and losses, amortization of intangible assets and other nonrecurring items, was 61.70% and 58.71% for the three months and year ended December 31, 2016 as compared to 60.31% and 61.99% for the three months and year ended December 31, 2015. The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations of non-GAAP financial measures to reported amounts, including a reconciliation of the core efficiency ratio.

Dividends and Capital

First Commonwealth Financial Corporation declared a common stock quarterly dividend of $0.08 per share, which is payable on February 17, 2017 to shareholders of record as of February 6, 2017. This dividend represents a 2.3% projected annual yield utilizing the January 24, 2017 closing market price of $13.86.

On January 27, 2016, First Commonwealth's Board of Directors authorized an additional $25.0 million common stock repurchase program, under which the corporation repurchased 45,612 shares at an average price of $8.44 per share during 2016, totaling $0.4 million. This repurchase program was discontinued in July of 2016 to finance the FirstMerit branch acquisition.

First Commonwealth's capital ratios for Total, Tier I, Leverage and Common Equity Tier I at December 31, 2016 were 12.3%, 11.3%, 9.8% and 10.1%, respectively. Our current capital levels exceed the fully-phased in Basel III capital requirements issued by U.S. bank regulators.

Conference Call

First Commonwealth will host a quarterly conference call to discuss its financial results for the fourth quarter and full-year 2016 on Wednesday, January 25, 2017 at 2:00 PM (ET). The call can be accessed by dialing (toll free) 1-844-792-3645 or through the company's web page, http://www.fcbanking.com/InvestorRelations. A replay of the call will be available approximately one hour following the conclusion of the conference by dialing 1-877-344-7529 and entering the access code #10098900. A link to the webcast replay will also be accessible on the company's web page for 30 days.

About First Commonwealth Financial Corporation

First Commonwealth Financial Corporation (NYSE: FCF), headquartered in Indiana, Pennsylvania, is a financial services company with $6.7 billion in total assets and 122 banking offices in 19 counties throughout western and central Pennsylvania and central Ohio, as well as a Corporate Banking Center in northeast Ohio and mortgage offices in Stow and Dublin, Ohio. First Commonwealth provides a full range of commercial banking, consumer banking, mortgage, wealth management and insurance products and services through its subsidiaries First Commonwealth Bank and First Commonwealth Insurance Agency. For more information about First Commonwealth or to open an account today, please visit www.fcbanking.com.

Forward-Looking Statements

This release contains forward-looking statements about First Commonwealth's future plans, strategies and financial performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often include 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." Such statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control. Factors that could cause actual results, performance or achievements to differ from those discussed in the forward-looking statements include, but are not limited to: (1) local, regional, national and international economic conditions and the impact they may have on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth's goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth's borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth's ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth's markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (19) the reliability of First Commonwealth's vendors, internal control systems or information systems; (20) the costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals; and (21) other risks and uncertainties described in the reports that First Commonwealth files with the Securities and Exchange Commission, including its most recent Annual Report on Form 10‐K. Forward-looking statements speak only as of the date on which they are made. First Commonwealth undertakes no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.