Loans and Allowance for Credit Losses

The following table provides outstanding balances related to each of our loan types as of December 31:



	2014		2013
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,052,109	$	1,021,056
Real estate construction	120,785		93,289
Residential real estate	1,226,344		1,262,718
Commercial real estate	1,405,256		1,296,472
Loans to individuals	652,814		610,298
Total loans and leases net of unearned income	$	4,457,308	$	4,283,833

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 provide 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 category for the years ended December 31:



	2014
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	983,357	$	112,536	$	1,214,920	$	1,353,773	$	652,596	$	4,317,182
Non-Pass
OAEM	32,563		8,013		2,315		29,479		—		72,370
Substandard	32,028		236		9,109		22,004		218		63,595
Doubtful	4,161		—		—		—		—		4,161
Total Non-Pass	68,752		8,249		11,424		51,483		218		140,126
Total	$	1,052,109	$	120,785	$	1,226,344	$	1,405,256	$	652,814	$	4,457,308



	2013
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	943,107	$	79,679	$	1,245,422	$	1,243,170	$	610,094	$	4,121,472
Non-Pass
OAEM	35,429		9,710		5,161		28,823		1		79,124
Substandard	42,520		3,900		12,135		24,479		203		83,237
Doubtful	—		—		—		—		—		—
Total Non-Pass	77,949		13,610		17,296		53,302		204		162,361
Total	$	1,021,056	$	93,289	$	1,262,718	$	1,296,472	$	610,298	$	4,283,833

Portfolio Risks

The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital, regulatory agency relationships, investment community 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.

Total gross charge-offs for the years ended December 31, 2014 and 2013 were $17.5 million and $35.2 million, respectively.

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of December 31, 2014. 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.

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 December 31. 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.



	2014
	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	$	2,816	$	213	$	264	$	27,007	$	30,300	$	1,021,809	$	1,052,109
Real estate construction	—		1		—		236		237		120,548		120,785
Residential real estate	5,162		1,295		1,077		7,900		15,434		1,210,910		1,226,344
Commercial real estate	1,797		122		—		7,306		9,225		1,396,031		1,405,256
Loans to individuals	3,698		1,059		1,278		218		6,253		646,561		652,814
Total	$	13,473	$	2,690	$	2,619	$	42,667	$	61,449	$	4,395,859	$	4,457,308



	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	$	594	$	319	$	185	$	23,631	$	24,729	$	996,327	$	1,021,056
Real estate construction	—		—		—		2,567		2,567		90,722		93,289
Residential real estate	4,002		524		1,041		10,520		16,087		1,246,631		1,262,718
Commercial real estate	1,199		23		13		8,966		10,201		1,286,271		1,296,472
Loans to individuals	2,895		990		1,266		204		5,355		604,943		610,298
Total	$	8,690	$	1,856	$	2,505	$	45,888	$	58,939	$	4,224,894	$	4,283,833

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 or repayment for 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 $4.1 million to $55.3 million at December 31, 2014 compared to $59.4 million at December 31, 2013. Contributing to this decrease was the sale of four real estate construction loans totaling $3.0 million and the payoff of six loans totaling $12.5 million. The payoffs included a $4.7 million commercial relationship with a local developer, a $3.1 million commercial real estate loan with a non-profit organization in western Pennsylvania, a $2.9 million commercial real estate loan to a real estate investor in western Pennsylvania, a $0.9 million residential real estate loan in western Pennsylvania, a $0.6 million commercial relationship with a western Pennsylvania glass manufacturer and a $0.3 million commercial real estate loan with a western Pennsylvania real estate investor. Net charge-offs recognized during 2014 totaled $13.4 million, including $5.8 million for a commercial industrial loan relationship with a gas drilling business and $0.6 million for a commercial loan in western Pennsylvania.

A total of $32.2 million of loans were moved into nonaccrual status during the year ended December 31, 2014. Three commercial loan relationships comprised $22.1 million of this total. These relationships include:


•	A $9.9 million relationship of commercial industrial and real estate loans to a local water facility construction company.


•	A $8.0 million relationship of commercial loans with a gas drilling business that operated in western Pennsylvania with headquarters in Louisiana, of which $5.8 million was subsequently charged-off.


•	A $4.2 million in commercial industrial loans to an audio visual equipment distributor.

In addition to this, $3.8 million in consumer loans that were 150 days or more past due were moved to nonaccrual status.

The specific allowance for nonperforming loans increased by $0.6 million at December 31, 2014 compared to December 31, 2013, primarily due to additions to nonaccrual loans. Unfunded commitments related to nonperforming loans were $46 thousand at December 31, 2014 and after consideration of available collateral related to these commitments, an off-balance sheet reserve of $14 thousand was established.

There were no impaired loans held for sale at December 31, 2014 and December 31, 2013; sales of impaired loans during the years ended December 31, 2014 and 2013 resulted in gains of $77 thousand and $0.6 million, respectively.

Significant nonaccrual loans as of December 31, 2014, included the following:

•

A $10.0 million relationship of commercial industrial loans to a local energy company. These loans were originated from 2008 to 2011 and were placed in nonaccrual status during the third quarter of 2013. One of these loans, totaling $2.6 million, was modified, resulting in TDR classification in the second quarter of 2012. A second of these loans, totaling $0.3 million, was modified, resulting in TDR classification in the first quarter of 2013. The final piece of this relationship totaling $6.3 million, was modified in the fourth quarter of 2014, resulting in TDR classification. During the year ended December 31, 2014, chargeoffs of $0.5 million related to this relationship were recorded. A valuation of the collateral was completed during the third quarter of 2013, with updates to significant inputs completed in December 2014.


•	A $9.9 million relationship of commercial industrial and real estate loans to a local water facility construction company. These loans were originated from 2009 to 2013 and were placed in nonaccrual status during the fourth quarter of 2014. A valuation of the collateral was completed during the third quarter of 2013. Updated appraisals have been ordered but were not received prior to year end.

•

A $4.2 million in commercial industrial loans to an audio visual equipment distributor. These loans were originated in 2008 and refinanced by the Company in 2013. In the second quarter of 2014, the loans were placed on nonaccrual status. In the fourth quarter of 2014, this relationship was modified, resulting in a TDR classification. An updated valuation of the collateral was completed during the second quarter of 2014.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of December 31, 2014 and 2013. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired for the years ended December 31, 2014, 2013 and 2012. Average balances are calculated based on month-end balances of the loans for the period reported and are included in the table below based on its period end allowance position.



	2014
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	9,439	$	10,937			$	11,536	$	133
Real estate construction	236		476				1,190		19
Residential real estate	10,773		12,470				11,592		210
Commercial real estate	8,768		10,178				8,830		98
Loans to individuals	288		337				308		4
Subtotal	29,504		34,398				33,456		464
With an allowance recorded:
Commercial, financial, agricultural and other	24,826		25,583		$	9,304	15,797		143
Real estate construction	—		—		—		—		—
Residential real estate	367		380		56		357		14
Commercial real estate	554		554		101		184		4
Loans to individuals	—		—		—		—		—
Subtotal	25,747		26,517		9,461		16,338		161
Total	$	55,251	$	60,915	$	9,461	$	49,794	$	625



	2013
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest Income Recognized

With no related allowance recorded:
Commercial, financial, agricultural and other	$	6,752	$	7,649			$	14,454	$	73
Real estate construction	3,486		6,664				5,923		47
Residential real estate	9,333		9,952				9,280		211
Commercial real estate	13,606		14,719				27,881		250
Loans to individuals	289		307				255		3
Subtotal	33,466		39,291				57,793		584
With an allowance recorded:
Commercial, financial, agricultural and other	21,482		22,082		$	7,364	16,479		64
Real estate construction	414		737		94		515		—
Residential real estate	3,533		3,585		1,282		3,200		31
Commercial real estate	488		612		84		188		—
Loans to individuals	—		—		—		—		—
Subtotal	25,917		27,016		8,824		20,382		95
Total	$	59,383	$	66,307	$	8,824	$	78,175	$	679



	2012
	Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	9,217	$	173
Real estate construction	11,912		—
Residential real estate	8,114		72
Commercial real estate	28,574		66
Loans to individuals	103		2
Subtotal	57,920		313
With an allowance recorded:
Commercial, financial, agricultural and other	21,979		9
Real estate construction	1,457		—
Residential real estate	1,599		15
Commercial real estate	5,024		32
Loans to individuals	—		—
Subtotal	30,059		56
Total	$	87,979	$	369

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.

As a result of adopting the amendments in ASU 2011-2, all restructurings that occurred on or after January 1, 2011 were assessed for identification as troubled debt restructurings considering the new guidance. No additional troubled debt restructurings were identified for loans for which the allowance for credit losses would have previously been measured under a general allowance for credit losses methodology.

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans as of December 31:



	2014		2013		2012
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	12,584	$	13,495	$	13,037
Nonaccrual status	16,952		16,980		50,979
Total	$	29,536	$	30,475	$	64,016
Commitments
Letters of credit	$	—	$	—	$	1,574
Unused lines of credit	4,120		452		—
Total	$	4,120	$	452	$	1,574

At December 31, 2014, troubled debt restructured loans decreased $0.9 million compared to December 31, 2013 and commitments related to troubled debt restructured loans increased $3.7 million for the same period. This decrease in loans is primarily the result of a payoff of four commercial loans totaling $11.3 million, including a $4.7 million relationship related to a local real estate developer, a $3.1 million commercial real estate loan with a non-profit organization and a $2.9 million commercial real estate loan in western Pennsylvania. These payoffs were offset by the addition of two large commercial relationships totaling $10.5 million; a $6.3 million loan related to a local energy company and a $4.2 million relationship with an audio visual distributer. The increase in commitments is due to addition of a $3.0 million unfunded commitment related to a local lumber company for which there is no outstanding balance. This relationship was modified in the fourth quarter of 2014.

During 2014 and 2013, all decreases in balances between the pre-modification and post-modification balance are due to customer payments.

During 2012, a $2.8 million nonaccrual loan to a water treatment plant and a $3.7 million accruing loan to a gas well servicing operation were each restructured with a twelve month principal forbearance. At December 31, 2012, the nonaccrual loan was fully reserved for while the the loan that was on accruing status was secured by company assets. During 2013, the accruing loan was placed in nonaccrual status. These loans are part of a $17.0 million commercial loan relationship with a shallow gas well operator whose business has been impacted by the sharp decline in natural gas prices due in part to the success of Marcellus deep well drilling. In addition to these two loans, other loans in this relationship include loans to a related exploration and production company and loans to the principal, which are secured by real estate and investment securities. Also, in 2012 a $3.3 million commercial real estate loan was restructured with a six month maturity extension. This loan has remained on accruing status and the collateral shortfall is fully reserved. The remainder of changes in loan balances for 2012 between the pre-modification balance and the post-modification balance is due to customer payments.

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings during the years ending December 31:



	2014
		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	9	$	5,487	$	—	$	14,529	$	20,016	$	13,785	$	4,665
Residential real estate	52	—		629		1,797		2,426		2,062		—
Commercial real estate	1	—		—		8		8		6		—
Loans to individuals	15	—		103		47		150		114		—
Total	77	$	5,487	$	732	$	16,381	$	22,600	$	15,967	$	4,665



	2013
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Other		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	14	$	3,462	$	—	$	1,677	$	—	$	5,139	$	3,104	$	906
Residential real estate	46	347		418		2,116		—		2,881		2,316		161
Commercial real estate	5	571		1,499		145		—		2,215		2,184		34
Loans to individuals	17	10		101		33		—		144		109		—
Total	82	$	4,390	$	2,018	$	3,971	$	—	$	10,379	$	7,713	$	1,101



	2012
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Other		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	12	$	1,599	$	187	$	9,476	$	—	$	11,262	$	11,335	$	4,237
Real estate construction	2	1,697		—		—		—		1,697		2,133		200
Residential real estate	25	200		132		697		48		1,077		973		69
Commercial real estate	4	3,280		4,308		71		—		7,659		7,607		409
Loans to individuals	17	—		97		88		6		191		173		—
Total	60	$	6,776	$	4,724	$	10,332	$	54	$	21,886	$	22,221	$	4,915

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this footnote. 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 years ended December 31, 2014, 2013 and 2012, $0.6 million, $2.0 million and $4.7 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. As of December 31, 2014, two residential real estate loans totaling $7 thousand and one commercial real estate loan totaling $6 thousand restructured during 2014 were considered to be in default. At December 31, 2013, there was one residential real estate loan totaling $19 thousand restructured within the preceding twelve months that was considered to be in default. As of December 31, 2012, no loans were considered to be in default.

The following tables provide detail related to the allowance for credit losses for the years ended December 31. During 2013, the negative $5.9 million provision for credit losses related to the unallocated portion of the allowance is a result of it no longer being treated as a separate component of the allowance but instead is now incorporated into the reserve provided for each loan category. This portion of the allowance for credit losses reflects the qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience.



	2014
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	22,663		$	6,600		$	7,727		$	11,778		$	5,457		$	54,225
Charge-offs	(8,911		)	(296		)	(3,153		)	(1,148		)	(3,964		)	(17,472		)
Recoveries	734			1,340			650			612			766			4,102
Provision (credit)	15,141			(5,581		)	(1,560		)	639			2,557			11,196
Ending Balance	$	29,627		$	2,063		$	3,664		$	11,881		$	4,816		$	52,051
Ending balance: individually evaluated for impairment	$	9,304		$	—		$	56		$	101		$	—		$	9,461
Ending balance: collectively evaluated for impairment	20,323			2,063			3,608			11,780			4,816			42,590
Loans:
Ending balance	1,052,109			120,785			1,226,344			1,405,256			652,814			4,457,308
Ending balance: individually evaluated for impairment	33,332			193			7,127			7,790			—			48,442
Ending balance: collectively evaluated for impairment	1,018,777			120,592			1,219,217			1,397,466			652,814			4,408,866



	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	(18,399		)	(773		)	(1,814		)	(10,513		)	(3,679		)	—			(35,178		)
Recoveries	455			501			1,264			136			633			—			2,989
Provision	20,755			(2,056		)	2,369			(286		)	4,371			(5,926		)	19,227
Ending Balance	$	22,663		$	6,600		$	7,727		$	11,778		$	5,457		$	—		$	54,225
Ending balance: individually evaluated for impairment	$	7,364		$	94		$	1,282		$	84		$	—		$	—		$	8,824
Ending balance: collectively evaluated for impairment	15,299			6,506			6,445			11,694			5,457			—			45,401
Loans:
Ending balance	1,021,056			93,289			1,262,718			1,296,472			610,298						4,283,833
Ending balance: individually evaluated for impairment	27,251			3,844			9,349			12,151			—						52,595
Ending balance: collectively evaluated for impairment	993,805			89,445			1,253,369			1,284,321			610,298						4,231,238



	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	(5,207		)	(3,601		)	(3,828		)	(851		)	(3,482		)	—		(16,969		)
Recoveries	443			582			422			410			521			—		2,378
Provision (credit)	6,416			5,191			1,077			3,921			2,849			1,090		20,544
Ending Balance	$	19,852		$	8,928		$	5,908		$	22,441		$	4,132		$	5,926	$	67,187
Ending balance: individually evaluated for impairment	$	10,331		$	300		$	780		$	6,367		$	—		$	—	$	17,778
Ending balance: collectively evaluated for impairment	9,521			8,628			5,128			16,074			4,132			5,926		49,409
Loans:
Ending balance	1,019,822			87,438			1,241,565			1,273,661			582,218					4,204,704
Ending balance: individually evaluated for impairment	33,443			11,177			6,444			49,123			—					100,187
Ending balance: collectively evaluated for impairment	986,379			76,261			1,235,121			1,224,538			582,218					4,104,517