Loans and Allowance for Credit Losses

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



	June 30, 2015		December 31, 2014
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,098,019	$	1,052,109
Real estate construction	125,010		120,785
Residential real estate	1,204,499		1,226,344
Commercial real estate	1,416,841		1,405,256
Loans to individuals	646,485		652,814
Total loans and leases net of unearned income	$	4,490,854	$	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 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:



	June 30, 2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,034,313	$	124,518	$	1,192,296	$	1,372,966	$	646,255	$	4,370,348
Non-Pass
OAEM	7,902		458		2,228		29,994		—		40,582
Substandard	55,804		34		9,975		13,881		230		79,924
Doubtful	—		—		—		—		—		—
Total Non-Pass	63,706		492		12,203		43,875		230		120,506
Total	$	1,098,019	$	125,010	$	1,204,499	$	1,416,841	$	646,485	$	4,490,854



	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 June 30, 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 June 30, 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.



	June 30, 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	$	636	$	73	$	33	$	15,587	$	16,329	$	1,081,690	$	1,098,019
Real estate construction	—		—		—		34		34		124,976		125,010
Residential real estate	3,013		677		686		8,199		12,575		1,191,924		1,204,499
Commercial real estate	137		739		—		6,345		7,221		1,409,620		1,416,841
Loans to individuals	2,707		625		873		230		4,435		642,050		646,485
Total	$	6,493	$	2,114	$	1,592	$	30,395	$	40,594	$	4,450,260	$	4,490,854



	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 becomes 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 in doubt.

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 also 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 $2.4 million of impaired loans held for sale at June 30, 2015. These loans were transferred to held for sale status in the first quarter of 2015 and were sold in July 2015, at which time a gain of $0.4 million was recognized. There were no impaired loans held for sale at December 31, 2014. During the six months ended June 30, 2014, $3.1 million of impaired loans were sold, resulting in the recognition of a gain of $0.1 million. No gains were recognized on the sale of impaired loans during the six months ended June 30, 2015.

Significant nonaccrual loans as of June 30, 2015, include the following:

•

$7.4 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. During the six months ended June 30, 2015, charge-offs of $2.3 million related to this relationship were recorded. A valuation of the collateral was completed during the first quarter of 2015.

•

$5.9 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. Two of these loans were modified resulting in TDR classification: one loan totaling $2.3 million was modified in 2012, and the other loan totaling $3.0 million was modified in 2014. During the six months ended June 30, 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 June 30, 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 their period-end allowance position.



	June 30, 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	$	16,809	$	24,267			$	9,439	$	10,937
Real estate construction	34		120				236		476
Residential real estate	11,277		12,861				10,773		12,470
Commercial real estate	8,534		9,402				8,768		10,178
Loans to individuals	302		360				288		337
Subtotal	36,956		47,010				29,504		34,398
With an allowance recorded:
Commercial, financial, agricultural and other	5,195		5,555		1,596		24,826		25,583		9,304
Real estate construction	—		—		—		—		—		—
Residential real estate	328		500		35		367		380		56
Commercial real estate	192		192		44		554		554		101
Loans to individuals	—		—		—		—		—		—
Subtotal	5,715		6,247		1,675		25,747		26,517		9,461
Total	$	42,671	$	53,257	$	1,675	$	55,251	$	60,915	$	9,461



	For the Six Months Ended June 30,
	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	$	21,691	$	120	$	13,841	$	32
Real estate construction	137		—		2,112		18
Residential real estate	11,025		86		10,602		124
Commercial real estate	8,760		43		8,494		55
Loans to individuals	312		2		290		2
Subtotal	41,925		251		35,339		231
With an allowance recorded:
Commercial, financial, agricultural and other	5,337		72		14,333		76
Real estate construction	—		—		—		—
Residential real estate	319				1,738		15
Commercial real estate	194		3		670		2
Loans to individuals	—		—		—		—
Subtotal	5,850		75		16,741		93
Total	$	47,775	$	326	$	52,080	$	324



	For the Three Months Ended June 30,
	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	$	18,526	$	65	$	12,658	$	14
Real estate construction	36		—		1,148		6
Residential real estate	11,302		45		9,858		75
Commercial real estate	8,682		24		7,388		22
Loans to individuals	316		1		310		1
Subtotal	38,862		135		31,362		118
With an allowance recorded:
Commercial, financial, agricultural and other	5,237		42		15,086		32
Real estate construction	—		—		—		—
Residential real estate	329		—		1,836		7
Commercial real estate	193		1		1,136		1
Loans to individuals	—		—		—		—
Subtotal	5,759		43		18,058		40
Total	$	44,621	$	178	$	49,420	$	158

Unfunded commitments related to nonperforming loans were $0.6 million at June 30, 2015 and $46 thousand at December 31, 2014. After consideration of available collateral related to these commitments, a reserve of $13 thousand and $14 thousand was established for these off balance sheet exposures at June 30, 2015 and December 31, 2014, respectively.

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:



	June 30, 2015		December 31, 2014
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	12,276	$	12,584
Nonaccrual status	8,619		16,952
Total	$	20,895	$	29,536
Commitments
Unused lines of credit	$	2,540	$	4,120

At June 30, 2015, $2.4 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 Six Months Ended June 30, 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	3	$	1,751	$	—	$	109	$	1,860	$	1,812	$	53
Residential real estate	16	—		296		503		799		723		7
Commercial real estate	1	—		—		463		463		428		—
Loans to individuals	6	—		61		18		79		66		—
Total	26	$	1,751	$	357	$	1,093	$	3,201	$	3,029	$	60



	For the Six Months Ended June 30, 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	2	$	1,480	$	—	$	—	$	1,480	$	1,463	$	20
Residential real estate	21	—		291		644		935		895		48
Commercial real estate	1	—		—		12		12		7		—
Loans to individuals	10	—		73		27		100		85		—
Total	34	$	1,480	$	364	$	683	$	2,527	$	2,450	$	68

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 six months ended June 30, 2015 and 2014, $0.4 million and $0.3 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.

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 June 30, 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	2	$	252	$	—	$	109	$	361	$	317	$	53
Residential real estate	11	$	—	$	45	$	485	$	530	$	525	$	7
Loans to individuals	5	—		61		—		61		56		—
Total	18	$	252	$	106	$	594	$	952	$	898	$	60



	For the Three Months Ended, June 30, 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	$	1,420	$	—	$	—	$	1,420	$	1,433	$	—
Residential real estate	8	—		120		126		246		243		2
Loans to individuals	4	—		42		7		49		42		—
Total	13	$	1,420	$	162	$	133	$	1,715	$	1,718	$	2

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 June 30, 2015 and 2014, $0.1 million and $0.1 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. The following table provides information related to restructured loans that were considered to be in default during the six months ended June 30:



	2015			2014
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	2	$	56	2	$	51
Total	2	$	56	2	$	51

The following table provides information related to restructured loans that were considered to be in default during the three months ended June 30:



	2015			2014
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	2	$	56	1	$	6
Total	2	$	56	1	$	6

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



	For the Six Months Ended June 30, 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	(7,940		)	—			(1,050		)	(688		)	(2,383		)	(12,061		)
Recoveries	358			84			239			153			323			1,157
Provision (credit)	1,710			(629		)	70			881			2,165			4,197
Ending Balance	$	23,755		$	1,518		$	2,923		$	12,227		$	4,921		$	45,344
Ending balance: individually evaluated for impairment	$	1,596		$	—		$	35		$	44		$	—		$	1,675
Ending balance: collectively evaluated for impairment	22,159			1,518			2,888			12,183			4,921			43,669
Loans:
Ending balance	1,098,019			125,010			1,204,499			1,416,841			646,485			4,490,854
Ending balance: individually evaluated for impairment	21,419			—			7,700			7,625			—			36,744
Ending balance: collectively evaluated for impairment	1,076,600			125,010			1,196,799			1,409,216			646,485			4,454,110



	For the Six Months Ended June 30, 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	(7,859		)	(296		)	(1,735		)	(297		)	(1,562		)	(11,749		)
Recoveries	421			337			323			255			365			1,701
Provision (credit)	6,731			(742		)	(190		)	(75		)	824			6,548
Ending Balance	$	21,956		$	5,899		$	6,125		$	11,661		$	5,084		$	50,725
Ending balance: individually evaluated for impairment	$	4,995		$	—		$	546		$	531		$	—		$	6,072
Ending balance: collectively evaluated for impairment	16,961			5,899			5,579			11,130			5,084			44,653
Loans:
Ending balance	1,062,001			100,709			1,238,791			1,306,752			625,961			4,334,214
Ending balance: individually evaluated for impairment	24,573			486			7,624			6,965			—			39,648
Ending balance: collectively evaluated for impairment	1,037,428			100,223			1,231,167			1,299,787			625,961			4,294,566




	For the Three Months Ended June 30, 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	$	24,406		$	1,528		$	3,387		$	12,487		$	4,889		$	46,697
Charge-offs	(2,860		)	—			(484		)	(486		)	(1,122		)	(4,952		)
Recoveries	158			84			143			15			161			561
Provision (credit)	2,051			(94		)	(123		)	211			993			3,038
Ending Balance	$	23,755		$	1,518		$	2,923		$	12,227		$	4,921		$	45,344




	For the Three Months Ended, June 30, 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	$	26,125		$	6,214		$	6,026		$	11,119		$	5,022		$	54,506
Charge-offs	(6,258		)	(296		)	(640		)	(157		)	(752		)	(8,103		)
Recoveries	336			168			79			235			187			1,005
Provision (credit)	1,753			(187		)	660			464			627			3,317
Ending Balance	$	21,956		$	5,899		$	6,125		$	11,661		$	5,084		$	50,725