Loans and Allowance for Credit Losses

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



	March 31, 2015		December 31, 2014
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,066,788	$	1,052,109
Real estate construction	107,882		120,785
Residential real estate	1,210,511		1,226,344
Commercial real estate	1,400,276		1,405,256
Loans to individuals	652,144		652,814
Total loans and leases net of unearned income	$	4,437,601	$	4,457,308

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 Company’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. Movement 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, 2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,006,516	$	107,180	$	1,198,876	$	1,350,930	$	651,883	$	4,315,385
Non-Pass
OAEM	31,642		466		1,661		30,054		—		63,823
Substandard	28,630		236		9,974		19,292		261		58,393
Doubtful	—		—		—		—		—		—
Total Non-Pass	60,272		702		11,635		49,346		261		122,216
Total	$	1,066,788	$	107,882	$	1,210,511	$	1,400,276	$	652,144	$	4,437,601



	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

Portfolio Risks

The credit quality of our loan portfolio can potentially represent 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 to absorb losses inherent to the portfolio as of March 31, 2015. 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 March 31, 2015 and December 31, 2014. 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, 2015
	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	$	292	$	320	$	149	$	18,654	$	19,415	$	1,047,373	$	1,066,788
Real estate construction	—		—		—		236		236		107,646		107,882
Residential real estate	3,815		1,054		2,438		7,583		14,890		1,195,621		1,210,511
Commercial real estate	1,283		124		382		6,831		8,620		1,391,656		1,400,276
Loans to individuals	2,692		612		1,276		261		4,841		647,303		652,144
Total	$	8,082	$	2,110	$	4,245	$	33,565	$	48,002	$	4,389,599	$	4,437,601



	December 31, 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

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.

There were $3.0 million of impaired loans held for sale at March 31, 2015. There were no impaired loans held for sale at December 31, 2014. During the three months ended March 31, 2014, $0.7 million of impaired loans were sold at carrying value. No gains were recognized on the sale of impaired loans during the three months ended March 31, 2015 and 2014.

Significant nonaccrual loans as of March 31, 2015, include the following:


•	$9.3 million relationship of commercial 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 first quarter of 2015.

•

$6.1 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 $2.4 million, was modified, resulting in TDR classification in the second quarter of 2012. A second of these loans was modified resulting in TDR classification in the first quarter of 2013 and paid in full during the first quarter of 2015. Another portion, totaling $3.1 million, was modified resulting in a TDR classification during the fourth quarter of 2014. During the three months ended March 31, 2015, charge-offs of $3.3 million related to this relationship were recorded. A valuation of the collateral was updated during the first quarter of 2015.

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, 2015 and December 31, 2014. 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 using month-end balances of the loans for the period reported and are included in the table below based on its period-end allowance position.



	March 31, 2015						December 31, 2014
	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	$	14,650	$	20,137			$	9,439	$	10,937
Real estate construction	236		479				236		476
Residential real estate	9,901		11,749				10,773		12,470
Commercial real estate	7,958		9,317				8,768		10,178
Loans to individuals	318		383				288		337
Subtotal	33,063		42,065				29,504		34,398
With an allowance recorded:
Commercial, financial, agricultural and other	10,829		10,942		3,397		24,826		25,583		9,304
Real estate construction	—		—		—		—		—		—
Residential real estate	992		1,105		165		367		380		56
Commercial real estate	1,311		1,341		267		554		554		101
Loans to individuals	—		—		—		—		—		—
Subtotal	13,132		13,388		3,829		25,747		26,517		9,461
Total	$	46,195	$	55,453	$	3,829	$	55,251	$	60,915	$	9,461



	For the Three Months Ended March 31,
	2015				2014
	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	$	19,375	$	57	$	10,953	$	17
Real estate construction	239		—		2,438		12
Residential real estate	10,155		38		9,825		49
Commercial real estate	7,711		20		9,498		33
Loans to individuals	307		1		271		1
Subtotal	37,787		116		32,985		112
With an allowance recorded:
Commercial, financial, agricultural and other	10,917		28		17,649		45
Real estate construction	—		—		638		—
Residential real estate	901		3		3,161		8
Commercial real estate	1,323		1		307		1
Loans to individuals	—		—		—		—
Subtotal	13,141		32		21,755		54
Total	$	50,928	$	148	$	54,740	$	166

Unfunded commitments related to nonperforming loans were $0.6 million at March 31, 2015 and $46 thousand at December 31, 2014. After consideration of available collateral related to these commitments, a reserve of $14 thousand was established for these off balance sheet exposures at both March 31, 2015 and December 31, 2014.

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, 2015		December 31, 2014
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	12,630	$	12,584
Nonaccrual status	8,978		16,952
Total	$	21,608	$	29,536
Commitments
Unused lines of credit	$	391	$	4,120

At March 31, 2015, $3.0 million of nonaccrual loans considered to be troubled debt restructured loans are excluded from the above table as they are classified as loans held for sale.

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



	For the Three Months Ended March 31, 2015
		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	1	$	1,498	$	—	$	—	$	1,498	$	1,476	$	—
Residential real estate	5	—		252		17		269		203		—
Commercial real estate	1	—		—		464		464		449		—
Loans to individuals	1	—		—		18		18		11		—
Total	8	$	1,498	$	252	$	499	$	2,249	$	2,139	$	—



	For the Three Months Ended March 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	1	$	60	$	—	$	—	$	60	$	60	$	29
Residential real estate	13	—		172		517		689		676		5
Commercial real estate	1	—		—		12		12		8		—
Loans to individuals	6	—		31		20		51		47		—
Total	21	$	60	$	203	$	549	$	812	$	791	$	34

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 may 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, 2015 and 2014, $0.3 million and $0.2 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of reamortization. For both 2015 and 2014 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. There were no restructured loans that were considered to default during the three months ended March 31, 2015 and 2014.

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



	For the Three Months Ended March 31, 2015
	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	$	29,627		$	2,063		$	3,664		$	11,881		$	4,816		$	52,051
Charge-offs	(5,080		)	—			(566		)	(202		)	(1,261		)	(7,109		)
Recoveries	200			—			96			138			162			596
Provision (credit)	(341		)	(535		)	193			670			1,172			1,159
Ending Balance	$	24,406		$	1,528		$	3,387		$	12,487		$	4,889		$	46,697
Ending balance: individually evaluated for impairment	$	3,397		$	—		$	165		$	267		$	—		$	3,829
Ending balance: collectively evaluated for impairment	21,009			1,528			3,222			12,220			4,889			42,868
Loans:
Ending balance	1,066,788			107,882			1,210,511			1,400,276			652,144			4,437,601
Ending balance: individually evaluated for impairment	24,586			199			7,071			7,803			—			39,659
Ending balance: collectively evaluated for impairment	1,042,202			107,683			1,203,440			1,392,473			652,144			4,397,942



	For the Three Months Ended March 31, 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	(1,601		)	—			(1,095		)	(140		)	(810		)	(3,646		)
Recoveries	85			169			244			20			178			696
Provision (credit)	4,978			(555		)	(850		)	(539		)	197			3,231
Ending Balance	$	26,125		$	6,214		$	6,026		$	11,119		$	5,022		$	54,506
Ending balance: individually evaluated for impairment	$	9,886		$	74		$	496		$	47		$	—		$	10,503
Ending balance: collectively evaluated for impairment	16,239			6,140			5,530			11,072			5,022			44,003
Loans:
Ending balance	1,017,412			95,110			1,240,169			1,290,852			608,670			4,252,213
Ending balance: individually evaluated for impairment	31,730			2,797			9,103			5,773			—			49,403
Ending balance: collectively evaluated for impairment	985,682			92,313			1,231,066			1,285,079			608,670			4,202,810