Loans and Allowance for Credit Losses

The following table provides outstanding balances related to each of our loan types:



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,057,663	$	1,019,822
Real estate construction	70,461		87,438
Residential real estate	1,255,515		1,241,565
Commercial real estate	1,243,676		1,273,661
Loans to individuals	591,495		582,218
Total loans and leases net of unearned income	$	4,218,810	$	4,204,704

Credit Quality Information

As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:



Pass		Acceptable levels of risk exist in the relationship. Includes all loans not adversely classified as OAEM, substandard or doubtful.



Other Assets Especially Mentioned (OAEM)
		Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Bank’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.



Substandard		Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.



Doubtful		Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movements between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas, loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

The following tables represent our credit risk profile by creditworthiness:



	March 31, 2013
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	942,673	$	50,664	$	1,238,633	$	1,140,648	$	591,326	$	3,963,944
Non-Pass
OAEM	43,909		911		5,075		59,894		2		109,791
Substandard	71,081		15,364		11,807		43,134		167		141,553
Doubtful	—		3,522		—		—		—		3,522
Total Non-Pass	114,990		19,797		16,882		103,028		169		254,866
Total	$	1,057,663	$	70,461	$	1,255,515	$	1,243,676	$	591,495	$	4,218,810



	December 31, 2012
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	925,868	$	64,353	$	1,224,849	$	1,119,093	$	582,039	$	3,916,202
Non-Pass
OAEM	31,049		925		5,647		82,581		3		120,205
Substandard	62,905		18,638		11,069		71,987		176		164,775
Doubtful	—		3,522		—		—		—		3,522
Total Non-Pass	93,954		23,085		16,716		154,568		179		288,502
Total	$	1,019,822	$	87,438	$	1,241,565	$	1,273,661	$	582,218	$	4,204,704

Portfolio Risks

The credit quality of our loan portfolio represents significant risk to our earnings, capital, regulatory agency relationships, investment community reputation and shareholder returns. First Commonwealth devotes a substantial amount of resources managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting activities. Credit administration is independent of lending departments and oversight is provided by the credit committee of the First Commonwealth Board of Directors.

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate at this time. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

Risk factors associated with commercial real estate and construction related loans are monitored closely since this is an area that represents a significant portion of the loan portfolio and has experienced the most stress during the economic downturn.

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of March 31, 2013 and December 31, 2012. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.



	March 31, 2013
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	3,054	$	2,380	$	1,108	$	28,666	$	35,208	$	1,022,455	$	1,057,663
Real estate construction	206		15		500		7,112		7,833		62,628		70,461
Residential real estate	6,282		2,420		963		9,740		19,405		1,236,110		1,255,515
Commercial real estate	9,903		921		279		18,456		29,559		1,214,117		1,243,676
Loans to individuals	2,565		576		1,077		167		4,385		587,110		591,495
Total	$	22,010	$	6,312	$	3,927	$	64,141	$	96,390	$	4,122,420	$	4,218,810



	December 31, 2012
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	991	$	620	$	288	$	29,258	$	31,157	$	988,665	$	1,019,822
Real estate construction	2		19		15		9,778		9,814		77,624		87,438
Residential real estate	6,597		2,357		730		9,283		18,967		1,222,598		1,241,565
Commercial real estate	3,339		1,389		195		46,023		50,946		1,222,715		1,273,661
Loans to individuals	3,140		934		1,219		176		5,469		576,749		582,218
Total	$	14,069	$	5,319	$	2,447	$	94,518	$	116,353	$	4,088,351	$	4,204,704

Nonaccrual Loans

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed in nonaccrual status at 150 days past due.

When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal become current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer doubtful.

Impaired Loans

Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are considered to be impaired loans.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

Nonperforming loans decreased $29.3 million during the three months ended March 31, 2013. Contributing to this decrease was the sale of $17.2 million of loans related to a real estate developer in eastern Pennsylvania as well as a $2.5 million commercial real estate loan in Nevada. Also, a $3.8 million hotel resort syndication loan in the state of Washington was retruned to accrual status during the first quarter of 2013. Additionally, $5.3 million in charge-offs were recognized on two commercial real estate loans during the quarter, including $2.8 million for a loan to a western Pennsylvania non-profit healthcare facility who recently filed for bankruptcy and $2.5 million for a western Pennsylvania student housing project which is in the foreclosure process.

A total of $2.7 million of loans were moved into nonaccrual status during the three-months ended March 31, 2013. Included in this total was the movement to nonaccrual status of $1.1 million in consumer loans which were 150 days or more past due. Beginning in the third quarter of 2012, consumer loans are moved to nonaccrual status once they reach 150 days past due, however, in prior periods, these loans were not placed in nonaccrual status if they were well secured and in the process of collection.

The specific allowance for nonperforming loans decreased by $5.1 million at March 31, 2013 compared to December 31, 2012, primarily due to charge-offs of amounts reserved for in prior periods. Unfunded commitments related to nonperforming loans were $1.2 million at March 31, 2013 and after consideration of available collateral related to these commitments, an off balance sheet reserve of $0.2 million was established.

There were no loans held for sale at March 31, 2013 and December 31, 2012; however, sales of loans during the three-months ended March 31, 2013 and 2012 resulted in gains of $0.1 million and $1.8 million, respectively.

Significant nonaccrual loans as of March 31, 2013, include the following;

•

$18.7 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in 2004 and was placed in nonaccrual status in the fourth quarter of 2009. A settlement plan with the borrower and three other lenders was reached in the fourth quarter of 2010 and resulted in an $8.0 million principal payment and a $15.4 million partial charge-off.


•	$3.5 million commercial real estate loan to an in-patient facility in western Pennsylvania. This loan was originated in 2008 and placed in nonaccrual status in September 2012. Charge-offs of $2.8 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the fourth quarter of 2012.


•	$3.5 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. This loan was originated in 2007 and placed in nonaccrual status in the second quarter of 2009. Charge-offs of $17.3 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the second quarter of 2012.


•	$3.2 million, real estate secured loan to a western Pennsylvania nonprofit corporation. This loan was originated in 2008 and placed in nonaccrual status in the second quarter of 2012. The most recent appraisals for the various real estate collateral were completed in the fourth quarter of 2012 and the first quarter of 2013.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of March 31, 2013 and December 31, 2012. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated based on month-end balances of the loans for the period reported.



	March 31, 2013						December 31, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	8,649	$	9,601	$	—	$	8,080	$	8,983	$	—
Real estate construction	6,122		27,005		—		8,491		35,555		—
Residential real estate	8,666		9,269		—		7,928		8,401		—
Commercial real estate	16,711		23,250		—		33,259		35,401		—
Loans to individuals	240		247		—		256		256		—
Subtotal	40,388		69,372		—		58,014		88,596		—
With an allowance recorded:
Commercial, financial, agricultural and other	25,702		26,655		9,846		26,532		27,412		10,331
Real estate construction	2,860		3,169		503		2,756		3,087		300
Residential real estate	2,663		2,666		1,091		2,695		2,696		780
Commercial real estate	6,668		7,263		1,249		17,558		17,896		6,367
Loans to individuals	—		—		—		—		—		—
Subtotal	37,893		39,753		12,689		49,541		51,091		17,778
Total	$	78,281	$	109,125	$	12,689	$	107,555	$	139,687	$	17,778



	For the Three-Months Ended March 31,
	2013				2012
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	8,592	$	51	$	3,258	$	18
Real estate construction	7,877		—		3,646		—
Residential real estate	8,516		37		3,354		5
Commercial real estate	33,978		11		24,275		23
Loans to individuals	247		1		—		—
Subtotal	59,210		100		34,533		46
With an allowance recorded:
Commercial, financial, agricultural and other	25,803		19		30,350		3
Real estate construction	2,685		13		10,432		—
Residential real estate	2,457		4		952		7
Commercial real estate	6,704		25		5,889		9
Loans to individuals	—		—		—		—
Subtotal	37,649		61		47,623		19
Total	$	96,859	$	161	$	82,156	$	65

Troubled debt 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 financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	14,140	$	13,037
Nonaccrual status	32,565		50,979
Total	$	46,705	$	64,016
Commitments
Letters of credit	$	—	$	1,574
Unused lines of credit	1,083		—
Total	$	1,083	$	1,574

At March 31, 2013, troubled debt restructured loans decreased $17.3 million compared to December 31, 2012 and commitments related to troubled debt restructured loans decreased $0.5 million for the same period. These decreases are primarily a result of the sale of a $17.2 million loan for a commercial real estate developer in eastern Pennsylvania.

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings:



	For the Three-Months Ended March 31, 2013
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	2	$	426	$	—	$	12	$	438	$	377	$	—
Residential real estate	9	7		214		514		735		677		—
Commercial real estate	1	—		244		—		244		242		—
Loans to individuals	4	—		23		4		27		25
Total	16	$	433	$	481	$	530	$	1,444	$	1,321	$	—



	For the Three-Months Ended March 31, 2012
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Residential real estate	2	$	—	$	97	$	—	$	97	$	53	$	—

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the three-months ended March 31, 2013 and 2012, $0.5 million and $97 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization. For both 2013 and 2012 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following provides information related to restructured loans that were considered to default during the three-months ended March 31,:



	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	1	10		—	—
Commercial real estate	—	$	—	2	$	980
Loans to individuals	1	6		—	—
Total	2	$	16	2	$	980

The following tables provide detail related to the allowance for credit losses:



	For the Three-Months Ended March 31, 2013
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	19,852		$	8,928		$	5,908		$	22,441		$	4,132		$	5,926		$	67,187
Charge-offs	(538		)	(84		)	(322		)	(8,544		)	(988		)	—			(10,476		)
Recoveries	128			12			723			97			94			—			1,054
Provision (credit)	833			(1,123		)	(560		)	4,476			901			(30		)	4,497
Ending Balance	$	20,275		$	7,733		$	5,749		$	18,470		$	4,139		$	5,896		$	62,262
Ending balance: individually evaluated for impaired	$	9,846		$	503		$	1,091		$	1,249		$	—		$	—		$	12,689
Ending balance: collectively evaluated for impaired	10,429			7,230			4,658			17,221			4,139			5,896			49,573
Loans:
Ending balance	1,057,663			70,461			1,255,515			1,243,676			591,495						4,218,810
Ending balance: individually evaluated for impaired	33,322			8,917			7,813			21,369			—						71,421
Ending balance: collectively evaluated for impaired	1,024,341			61,544			1,247,702			1,222,307			591,495						4,147,389



	For the Three-Months Ended March 31, 2012
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	18,200		$	6,756		$	8,237		$	18,961		$	4,244		$	4,836	$	61,234
Charge-offs	(1,914		)	(190		)	(1,712		)	(235		)	(941		)	—		(4,992		)
Recoveries	238			56			133			158			118			—		703
Provision (credit)	1,619			(195		)	44			487			831			1,001		3,787
Ending Balance	$	18,143		$	6,427		$	6,702		$	19,371		$	4,252		$	5,837	$	60,732
Ending balance: individually evaluated for impaired	$	7,555		$	2,891		$	553		$	921		$	—		$	—	$	11,920
Ending balance: collectively evaluated for impaired	10,588			3,536			6,149			18,450			4,252			5,837		48,812
Loans:
Ending balance	1,051,209			64,158			1,174,572			1,264,060			574,589					4,128,588
Ending balance: individually evaluated for impaired	31,599			13,800			3,217			28,874			—					77,490
Ending balance: collectively evaluated for impaired	1,019,610			50,358			1,171,355			1,235,186			574,589					4,051,098