Loans and Allowance for Credit Losses

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



	September 30, 2015		December 31, 2014
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,126,881	$	1,052,109
Real estate construction	179,710		120,785
Residential real estate	1,204,220		1,226,344
Commercial real estate	1,435,954		1,405,256
Loans to individuals	628,970		652,814
Total loans and leases net of unearned income	$	4,575,735	$	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:



	September 30, 2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,043,458	$	179,229	$	1,192,888	$	1,394,506	$	628,735	$	4,438,816
Non-Pass
OAEM	22,447		450		2,926		29,373		—		55,196
Substandard	60,976		31		8,406		12,075		235		81,723
Doubtful	—		—		—		—		—		—
Total Non-Pass	83,423		481		11,332		41,448		235		136,919
Total	$	1,126,881	$	179,710	$	1,204,220	$	1,435,954	$	628,970	$	4,575,735



	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 September 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 September 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.



	September 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	$	3,817	$	59	$	149	$	17,334	$	21,359	$	1,105,522	$	1,126,881
Real estate construction	—		—		—		31		31		179,679		179,710
Residential real estate	3,562		1,187		618		6,563		11,930		1,192,290		1,204,220
Commercial real estate	35		442		331		4,640		5,448		1,430,506		1,435,954
Loans to individuals	2,624		756		956		235		4,571		624,399		628,970
Total	$	10,038	$	2,444	$	2,054	$	28,803	$	43,339	$	4,532,396	$	4,575,735



	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 no impaired loans held for sale at September 30, 2015 and December 31, 2014. During the nine months ended September 30, 2015, $2.4 million of impaired loans were sold, resulting in the recognition of a gain of $0.4 million. During the nine months ended September 30, 2014, $3.1 million of impaired loans were sold, resulting in the recognition of a gain of $0.1 million.

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


•	$6.1 million relationship of commercial industrial loans to an industrial manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. A valuation of the collateral was completed during the third quarter of 2015.

•

$5.7 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 $2.9 million was modified in 2014. During the nine months ended September 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 September 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.



	September 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	$	10,581	$	15,618			$	9,439	$	10,937
Real estate construction	31		119				236		476
Residential real estate	9,778		11,399				10,773		12,470
Commercial real estate	6,885		7,862				8,768		10,178
Loans to individuals	296		358				288		337
Subtotal	27,571		35,356				29,504		34,398
With an allowance recorded:
Commercial, financial, agricultural and other	12,812		13,254		4,202		24,826		25,583		9,304
Real estate construction	—		—		—		—		—		—
Residential real estate	364		556		20		367		380		56
Commercial real estate	80		80		33		554		554		101
Loans to individuals	—		—		—		—		—		—
Subtotal	13,256		13,890		4,255		25,747		26,517		9,461
Total	$	40,827	$	49,246	$	4,255	$	55,251	$	60,915	$	9,461



	For the Nine Months Ended September 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	$	19,199	$	161	$	15,209	$	77
Real estate construction	102		—		1,506		19
Residential real estate	10,987		118		11,047		167
Commercial real estate	8,545		69		9,007		78
Loans to individuals	312		14		309		3
Subtotal	39,145		362		37,078		344
With an allowance recorded:
Commercial, financial, agricultural and other	6,125		100		11,944		125
Real estate construction	—		—		—		—
Residential real estate	275		—		1,178		12
Commercial real estate	83		4		90		3
Loans to individuals	—		—		—		—
Subtotal	6,483		104		13,212		140
Total	$	45,628	$	466	$	50,290	$	484



	For the Three Months Ended September 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	$	14,215	$	40	$	10,973	$	39
Real estate construction	32		—		295		1
Residential real estate	10,748		39		10,590		38
Commercial real estate	7,894		26		8,873		24
Loans to individuals	314		5		346		1
Subtotal	33,203		110		31,077		103
With an allowance recorded:
Commercial, financial, agricultural and other	7,700		29		14,140		48
Real estate construction	—		—		—		—
Residential real estate	351		—		1,406		3
Commercial real estate	81		1		88		2
Loans to individuals	—		—		—		—
Subtotal	8,132		30		15,634		53
Total	$	41,335	$	140	$	46,711	$	156

Unfunded commitments related to nonperforming loans were $0.5 million at September 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 September 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:



	September 30, 2015		December 31, 2014
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	12,024	$	12,584
Nonaccrual status	8,583		16,952
Total	$	20,607	$	29,536
Commitments
Unused lines of credit	$	1,162	$	4,120

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



	For the Nine Months Ended September 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	4	$	1,751	$	—	$	652	$	2,403	$	2,314	$	52
Residential real estate	24	—		296		958		1,254		1,165		—
Commercial real estate	1	—		—		464		464		407		—
Loans to individuals	8	—		61		35		96		77		—
Total	37	$	1,751	$	357	$	2,109	$	4,217	$	3,963	$	52



	For the Nine Months Ended September 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	$	1,505	$	—	$	—	$	1,505	$	1,648	$	27
Residential real estate	44	—		468		1,767		2,235		2,091		22
Commercial real estate	1	—		—		8		8		6		—
Loans to individuals	13	—		81		42		123		101		—
Total	60	$	1,505	$	549	$	1,817	$	3,871	$	3,846	$	49

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 nine months ended September 30, 2015 and 2014, $0.4 million and $0.5 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 September 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	1	$	—	$	—	$	543	$	543	$	525	$	—
Residential real estate	8	$	—	$	—	$	455	$	455	$	455	$	—
Loans to individuals	2	—		—		18		18		16		—
Total	11	$	—	$	—	$	1,016	$	1,016	$	996	$	—



	For the Three Months Ended, September 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)
Residential real estate	24	—		164		1,116		1,280		1,233		2
Loans to individuals	3	—		8		15		23		20		—
Total	27	$	—	$	172	$	1,131	$	1,303	$	1,253	$	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. None of the rate modifications for the three months ended September 30, 2015 represent loans with modifications to the rate as well as payment. For the three months ended September 30, 2014, $0.1 million 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 nine months ended September 30:



	2015			2014
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	3	$	108	3	$	18
Total	3	$	108	3	$	18

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



	2015			2014
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	2	$	105	1	$	5
Total	2	$	105	1	$	5

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



	For the Nine Months Ended September 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	(8,579		)	—			(1,351		)	(1,249		)	(3,283		)	(14,462		)
Recoveries	922			84			417			186			502			2,111
Provision (credit)	5,230			(554		)	(54		)	1,584			2,612			8,818
Ending Balance	$	27,200		$	1,593		$	2,676		$	12,402		$	4,647		$	48,518
Ending balance: individually evaluated for impairment	$	4,202		$	—		$	20		$	33		$	—		$	4,255
Ending balance: collectively evaluated for impairment	22,998			1,593			2,656			12,369			4,647			44,263
Loans:
Ending balance	1,126,881			179,710			1,204,220			1,435,954			628,970			4,575,735
Ending balance: individually evaluated for impairment	22,852			—			6,037			5,706			—			34,595
Ending balance: collectively evaluated for impairment	1,104,029			179,710			1,198,183			1,430,248			628,970			4,541,140



	For the Nine Months Ended September 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	(8,357		)	(296		)	(2,286		)	(1,109		)	(2,581		)	(14,629		)
Recoveries	625			469			420			432			621			2,567
Provision (credit)	4,773			1,331			(407		)	1,453			1,471			8,621
Ending Balance	$	19,704		$	8,104		$	5,454		$	12,554		$	4,968		$	50,784
Ending balance: individually evaluated for impairment	$	4,271		$	—		$	332		$	29		$	—		$	4,632
Ending balance: collectively evaluated for impairment	15,433			8,104			5,122			12,525			4,968			46,152
Loans:
Ending balance	1,071,531			115,788			1,234,842			1,345,302			644,018			4,411,481
Ending balance: individually evaluated for impairment	23,773			199			6,854			6,890			—			37,716
Ending balance: collectively evaluated for impairment	1,047,758			115,589			1,227,988			1,338,412			644,018			4,373,765




	For the Three Months Ended September 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	$	23,755		$	1,518	$	2,923		$	12,227		$	4,921		$	45,344
Charge-offs	(639		)	—		(301		)	(561		)	(900		)	(2,401		)
Recoveries	564			—		178			33			179			954
Provision (credit)	3,520			75		(124		)	703			447			4,621
Ending Balance	$	27,200		$	1,593	$	2,676		$	12,402		$	4,647		$	48,518




	For the Three Months Ended, September 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	$	21,956		$	5,899	$	6,125		$	11,661		$	5,084		$	50,725
Charge-offs	(498		)	—		(551		)	(812		)	(1,019		)	(2,880		)
Recoveries	204			132		97			177			256			866
Provision (credit)	(1,958		)	2,073		(217		)	1,528			647			2,073
Ending Balance	$	19,704		$	8,104	$	5,454		$	12,554		$	4,968		$	50,784