Loans and Allowance for Credit Losses

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



	March 31, 2016		December 31, 2015
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,190,384	$	1,150,906
Real estate construction	256,856		220,736
Residential real estate	1,212,962		1,224,465
Commercial real estate	1,552,904		1,479,000
Loans to individuals	585,649		608,643
Total loans	$	4,798,755	$	4,683,750

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:



	March 31, 2016
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,085,770	$	256,423	$	1,198,103	$	1,530,565	$	585,269	$	4,656,130
Non-Pass
OAEM	18,522		433		5,178		7,676		—		31,809
Substandard	86,092		—		9,681		14,663		380		110,816
Doubtful	—		—		—		—		—		—
Total Non-Pass	104,614		433		14,859		22,339		380		142,625
Total	$	1,190,384	$	256,856	$	1,212,962	$	1,552,904	$	585,649	$	4,798,755



	December 31, 2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,074,858	$	220,267	$	1,209,606	$	1,436,714	$	608,342	$	4,549,787
Non-Pass
OAEM	11,825		442		5,244		30,012		—		47,523
Substandard	64,223		27		9,615		12,274		301		86,440
Doubtful	—		—		—		—		—		—
Total Non-Pass	76,048		469		14,859		42,286		301		133,963
Total	$	1,150,906	$	220,736	$	1,224,465	$	1,479,000	$	608,643	$	4,683,750

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, 2016. 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, 2016 and December 31, 2015. 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, 2016
	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	$	277	$	92	$	130	$	34,851	$	35,350	$	1,155,034	$	1,190,384
Real estate construction	—		—		86		—		86		256,770		256,856
Residential real estate	3,639		1,308		205		6,642		11,794		1,201,168		1,212,962
Commercial real estate	1,270		—		—		4,963		6,233		1,546,671		1,552,904
Loans to individuals	1,732		548		909		380		3,569		582,080		585,649
Total	$	6,918	$	1,948	$	1,330	$	46,836	$	57,032	$	4,741,723	$	4,798,755



	December 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	$	364	$	49	$	129	$	23,653	$	24,195	$	1,126,711	$	1,150,906
Real estate construction	280		—		—		28		308		220,428		220,736
Residential real estate	4,175		1,055		1,315		6,500		13,045		1,211,420		1,224,465
Commercial real estate	781		—		65		6,223		7,069		1,471,931		1,479,000
Loans to individuals	2,998		774		946		301		5,019		603,624		608,643
Total	$	8,598	$	1,878	$	2,455	$	36,705	$	49,636	$	4,634,114	$	4,683,750

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.

Significant nonaccrual loans as of March 31, 2016, include the following:


•	$11.5 million relationship of commercial industrial loans to a steel and aluminum servicing company. These loans were originated in 2011 and were placed in nonaccrual status during the first quarter of 2016. A valuation of the collateral was completed during the first quarter of 2016.


•	$6.8 million relationship of commercial industrial loans to an oil and gas well services company. These loans were originated in 2014 and were placed in nonaccrual status during the fourth quarter of 2015. All collateral valuations were completed in June or November 2015 or March 2016.


•	$3.8 million relationship of commercial industrial loans to a manufacturer of sporting goods. These loans were originated from 2012 to 2015 and were placed in nonaccrual status during the fourth quarter of 2015. All collateral valuations were completed in December 2015 or March 2016.

•

$3.8 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 $1.3 million was modified in 2012, and the other loan totaling $2.5 million was modified in 2014. During the three months ended March 31, 2016, charge-offs of $1.1 million related to this relationship were recorded. A valuation of the collateral was updated during the first quarter of 2016.


•	$3.7 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 fourth 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, 2016 and December 31, 2015. 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.



	March 31, 2016						December 31, 2015
	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	$	18,120	$	23,975			$	11,344	$	15,673
Real estate construction	—		—				28		117
Residential real estate	10,848		12,893				9,952		11,819
Commercial real estate	6,805		8,474				7,562		9,449
Loans to individuals	498		615				421		507
Subtotal	36,271		45,957				29,307		37,565
With an allowance recorded:
Commercial, financial, agricultural and other	24,526		24,701		12,900		20,132		22,590		6,952
Real estate construction	—		—		—		—		—		—
Residential real estate	496		728		75		461		672		51
Commercial real estate	522		525		420		944		1,008		42
Loans to individuals	—		—		—		—		—		—
Subtotal	25,544		25,954		13,395		21,537		24,270		7,045
Total	$	61,815	$	71,911	$	13,395	$	50,844	$	61,835	$	7,045



	For the Three Months Ended March 31,
	2016				2015
	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	$	17,298	$	152	$	19,375	$	57
Real estate construction	17		44		239		—
Residential real estate	10,724		47		10,155		38
Commercial real estate	7,658		38		7,711		20
Loans to individuals	480		1		307		1
Subtotal	36,177		282		37,787		116
With an allowance recorded:
Commercial, financial, agricultural and other	17,027		28		10,917		28
Real estate construction	—		—		—		—
Residential real estate	497		—		901		3
Commercial real estate	529		5		1,323		1
Loans to individuals	—		—		—		—
Subtotal	18,053		33		13,141		32
Total	$	54,230	$	315	$	50,928	$	148

Unfunded commitments related to nonperforming loans were $2.5 million at March 31, 2016 and $0.1 million at December 31, 2015. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $43 thousand and $13 thousand was established for these off balance sheet exposures at March 31, 2016 and December 31, 2015, 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:



	March 31, 2016		December 31, 2015
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	14,979	$	14,139
Nonaccrual status	13,366		12,360
Total	$	28,345	$	26,499
Commitments
Unused lines of credit	$	1,367	$	3,252

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, 2016
		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	$	—	$	3,769	$	—	$	3,769	$	3,749	$	—
Residential real estate	8	—		114		874		988		910		—
Commercial real estate	3	65		—		133		198		169		—
Loans to individuals	3	—		18		5		23		16		—
Total	16	$	65	$	3,901	$	1,012	$	4,978	$	4,844	$	—



	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	$	—

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, 2016 and 2015, $3.9 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 2016 and 2015 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 three months ended March 31:



	2016			2015
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	2	$	70	—	$	—
Total	2	$	70	—	$	—

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



	For the Three Months Ended March 31, 2016
	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	$	31,035		$	887		$	2,606		$	11,924		$	4,360		$	50,812
Charge-offs	(1,392		)	—			(382		)	(265		)	(1,469		)	(3,508		)
Recoveries	134			223			118			756			161			1,392
Provision (credit)	11,944			(209		)	286			(6,932		)	1,437			6,526
Ending Balance	$	41,721		$	901		$	2,628		$	5,483		$	4,489		$	55,222
Ending balance: individually evaluated for impairment	$	12,900		$	—		$	75		$	420		$	—		$	13,395
Ending balance: collectively evaluated for impairment	28,821			901			2,553			5,063			4,489			41,827
Loans:
Ending balance	1,190,384			256,856			1,212,962			1,552,904			585,649			4,798,755
Ending balance: individually evaluated for impairment	42,016			—			6,246			5,934			—			54,196
Ending balance: collectively evaluated for impairment	1,148,368			256,856			1,206,716			1,546,970			585,649			4,744,559



	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