Loans and Allowance for Credit Losses

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



	March 31, 2018						December 31, 2017
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,093,192	$	38,402	$	1,131,594	$	1,122,741	$	40,642	$	1,163,383
Real estate construction	245,841		1,120		246,961		242,905		5,963		248,868
Residential real estate	1,220,989		213,634		1,434,623		1,206,119		220,251		1,426,370
Commercial real estate	1,901,609		125,463		2,027,072		1,892,185		126,911		2,019,096
Loans to individuals	535,484		5,571		541,055		543,411		6,248		549,659
Total loans	$	4,997,115	$	384,190	$	5,381,305	$	5,007,361	$	400,015	$	5,407,376

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, 2018
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,020,603	$	245,841	$	1,209,290	$	1,871,008	$	535,240	$	4,881,982
Non-Pass
OAEM	31,480		—		1,574		7,748		—		40,802
Substandard	34,140		—		10,125		22,853		244		67,362
Doubtful	6,969		—		—		—		—		6,969
Total Non-Pass	72,589		—		11,699		30,601		244		115,133
Total	$	1,093,192	$	245,841	$	1,220,989	$	1,901,609	$	535,484	$	4,997,115

Acquired loans
Pass	$	32,439	$	1,120	$	211,361	$	122,411	$	5,554	$	372,885
Non-Pass
OAEM	5,486		—		745		1,251		—		7,482
Substandard	477		—		1,528		1,801		17		3,823
Doubtful	—		—		—		—		—		—
Total Non-Pass	5,963		—		2,273		3,052		17		11,305
Total	$	38,402	$	1,120	$	213,634	$	125,463	$	5,571	$	384,190



	December 31, 2017
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,061,147	$	242,905	$	1,194,352	$	1,855,253	$	543,175	$	4,896,832
Non-Pass
OAEM	26,757		—		1,435		13,326		—		41,518
Substandard	30,431		—		10,332		23,606		236		64,605
Doubtful	4,406		—		—		—		—		4,406
Total Non-Pass	61,594		—		11,767		36,932		236		110,529
Total	$	1,122,741	$	242,905	$	1,206,119	$	1,892,185	$	543,411	$	5,007,361

Acquired loans
Pass	$	34,573	$	5,963	$	217,824	$	121,536	$	6,231	$	386,127
Non-Pass
OAEM	5,567		—		798		3,517		—		9,882
Substandard	502		—		1,629		1,858		17		4,006
Doubtful	—		—		—		—		—		—
Total Non-Pass	6,069		—		2,427		5,375		17		13,888
Total	$	40,642	$	5,963	$	220,251	$	126,911	$	6,248	$	400,015

Portfolio Risks

The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital and liquidity. First Commonwealth devotes substantial resources to managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting loans. Credit administration is independent of our 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, 2018. 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, 2018 and December 31, 2017. 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, 2018
	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)
Originated loans
Commercial, financial, agricultural and other	$	2,163	$	23	$	168	$	24,298	$	26,652	$	1,066,540	$	1,093,192
Real estate construction	—		—		—		—		—		245,841		245,841
Residential real estate	2,849		996		649		6,187		10,681		1,210,308		1,220,989
Commercial real estate	1,751		783		304		5,675		8,513		1,893,096		1,901,609
Loans to individuals	1,369		463		768		244		2,844		532,640		535,484
Total	$	8,132	$	2,265	$	1,889	$	36,404	$	48,690	$	4,948,425	$	4,997,115

Acquired loans
Commercial, financial, agricultural and other	$	11	$	—	$	26	$	411	$	448	$	37,954	$	38,402
Real estate construction	—		—		—		—		—		1,120		1,120
Residential real estate	119		110		21		718		968		212,666		213,634
Commercial real estate	—		—		—		1,000		1,000		124,463		125,463
Loans to individuals	66		11		19		17		113		5,458		5,571
Total	$	196	$	121	$	66	$	2,146	$	2,529	$	381,661	$	384,190



	December 31, 2017
	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)
Originated loans
Commercial, financial, agricultural and other	$	378	$	61	$	40	$	18,741	$	19,220	$	1,103,521	$	1,122,741
Real estate construction	199		—		—		—		199		242,706		242,905
Residential real estate	4,618		1,025		1,076		6,225		12,944		1,193,175		1,206,119
Commercial real estate	2,198		28		6		3,240		5,472		1,886,713		1,892,185
Loans to individuals	1,899		769		623		236		3,527		539,884		543,411
Total	$	9,292	$	1,883	$	1,745	$	28,442	$	41,362	$	4,965,999	$	5,007,361

Acquired loans
Commercial, financial, agricultural and other	$	6	$	7	$	—	$	436	$	449	$	40,193	$	40,642
Real estate construction	—		—		—		—		—		5,963		5,963
Residential real estate	148		9		83		705		945		219,306		220,251
Commercial real estate	—		—		—		1,077		1,077		125,834		126,911
Loans to individuals	36		20		26		17		99		6,149		6,248
Total	$	190	$	36	$	109	$	2,235	$	2,570	$	397,445	$	400,015

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 on 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.

At March 31, 2018 and December 31, 2017, there were no nonaccrual loans held for sale. There were no gains or losses recognized on sales of impaired loans during the three months ended March 31, 2018 and 2017.

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, 2018 and December 31, 2017. 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, 2018						December 31, 2017
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Originated loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	4,791	$	9,559			$	5,548	$	12,153
Real estate construction	—		—				—		—
Residential real estate	10,129		12,000				10,625		12,470
Commercial real estate	4,624		5,038				5,155		5,489
Loans to individuals	339		379				347		383
Subtotal	19,883		26,976				21,675		30,495
With an allowance recorded:
Commercial, financial, agricultural and other	28,615		28,795		$	9,045	16,866		21,094		$	3,478
Real estate construction	—		—		—		—		—		—
Residential real estate	808		846		277		456		478		107
Commercial real estate	5,753		5,763		2,139		954		954		128
Loans to individuals	—		—		—		—		—		—
Subtotal	35,176		35,404		11,461		18,276		22,526		3,713
Total	$	55,059	$	62,380	$	11,461	$	39,951	$	53,021	$	3,713



	March 31, 2018						December 31, 2017
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Acquired loans
With no related allowance recorded:
Commercial, financial, agricultural and other	$	411	$	424			$	436	$	449
Real estate construction	—		—				—		—
Residential real estate	677		1,003				666		965
Commercial real estate	891		1,811				940		1,842
Loans to individuals	17		17				17		17
Subtotal	1,996		3,255				2,059		3,273
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—		$	—
Real estate construction	—		—		—		—		—		—
Residential real estate	93		122		10		93		122		4
Commercial real estate	109		124		2		137		150		29
Loans to individuals	—		—		—		—		—		—
Subtotal	202		246		12		230		272		33
Total	$	2,198	$	3,501	$	12	$	2,289	$	3,545	$	33



	For the Three Months Ended March 31,
	2018								2017
	Originated Loans				Acquired Loans				Originated Loans				Acquired Loans
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		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	$	8,130	$	10	$	411	$	—	$	12,034	$	38	$	—	$	—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	10,401		63		678		1		11,422		74		241		—
Commercial real estate	5,510		31		907		—		5,949		54		162		—
Loans to individuals	354		2		17		—		338		2		—		—
Subtotal	24,395		106		2,013		1		29,743		168		403		—
With an allowance recorded:
Commercial, financial, agricultural and other	17,720		66		—		—		12,787		26		—		—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	706		—		93		—		334		1		65		—
Commercial real estate	1,960		1		118		—		1,111		7		—		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	20,386		67		211		—		14,232		34		65		—
Total	$	44,781	$	173	$	2,224	$	1	$	43,975	$	202	$	468	$	—

Unfunded commitments related to nonperforming loans were $4.2 million at March 31, 2018 and $2.4 million at December 31, 2017. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $0.4 million and $0.2 million was established for these off balance sheet exposures at March 31, 2018 and December 31, 2017, 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, 2018		December 31, 2017
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	18,707	$	11,563
Nonaccrual status	10,233		11,222
Total	$	28,940	$	22,785
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	1,778		54
Total	$	1,838	$	114

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, 2018
		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	$	4,709	$	—	$	162	$	4,871	$	3,942	$	531
Residential real estate	11	20		75		346		441		404		17
Commercial real estate	1	3,017		—		—		3,017		2,994		227
Loans to individuals	4	—		28		30		58		53		—
Total	18	$	7,746	$	103	$	538	$	8,387	$	7,393	$	775



	For the Three Months Ended March 31, 2017
		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	$	—	$	42	$	—	$	42	$	38	$	—
Residential real estate	7	129		101		306		536		504		—
Commercial real estate	2	179		—		16		195		193		—
Loans to individuals	3	—		14		30		44		43		—
Total	13	$	308	$	157	$	352	$	817	$	778	$	—

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 re-amortization of the principal and an extension of the maturity. For the three months ended March 31, 2018 and 2017, $0.1 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 re-amortization. For both 2018 and 2017 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 loans that were restructured within the past twelve months and that were considered to be in default during the three months ended March 31:



	2018			2017
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Commercial, financial, agricultural and other	1	$	940	—	$	—
Total	1	$	940	—	$	—

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



	For the Three Months Ended March 31, 2018
	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:
Originated loans:
Beginning balance	$	23,418			$	1,349		$	2,753		$	17,328		$	3,404		$	48,252
Charge-offs	(290		)		—			(455		)	(168		)	(1,169		)	(2,082		)
Recoveries	256				1			75			69			195			596
Provision (credit)	4,148				(236		)	768			1,265			986			6,931
Ending balance	27,532				1,114			3,141			18,494			3,416			53,697
Acquired loans:
Beginning balance	11				—			6			29			—			46
Charge-offs	—				—			(16		)	—			(4		)	(20		)
Recoveries	7			—	6			17			—			7			37
Provision (credit)	2				(6		)	6			(27		)	(3		)	(28		)
Ending balance	20				—			13			2			—			35
Total ending balance	$	27,552			$	1,114		$	3,154		$	18,496		$	3,416		$	53,732
Ending balance: individually evaluated for impairment	$	9,045			$	—		$	287		$	2,141		$	—		$	11,473
Ending balance: collectively evaluated for impairment	18,507				1,114			2,867			16,355			3,416			42,259
Loans:
Ending balance	1,131,594				246,961			1,434,623			2,027,072			541,055			5,381,305
Ending balance: individually evaluated for impairment	33,278				—			6,853			10,360			—			50,491
Ending balance: collectively evaluated for impairment	1,098,316				246,961			1,427,770			2,016,712			541,055			5,330,814



	For the Three Months Ended March 31, 2017
	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:
Originated loans:
Beginning balance	$	35,974			$	577		$	2,492		$	6,619		$	4,504		$	50,166
Charge-offs	(3,825		)		—			(465		)	(31		)	(1,198		)	(5,519		)
Recoveries	368				54			122			117			128			789
Provision (credit)	2,184				(17		)	265			(123		)	900			3,209
Ending balance	34,701				614			2,414			6,582			4,334			48,645
Acquired loans:
Beginning balance	—				—			19			—			—			19
Charge-offs	—				—			(8		)	—			(7		)	(15		)
Recoveries	—			—	—			6			—			1			7
Provision (credit)	—				—			14			—			6			20
Ending balance	—				—			31			—			—			31
Total ending balance	$	34,701			$	614		$	2,445		$	6,582		$	4,334		$	48,676
Ending balance: individually evaluated for impairment	$	2,466			$	—		$	175		$	376		$	—		$	3,017
Ending balance: collectively evaluated for impairment	32,235				614			2,270			6,206			4,334			45,659
Loans:
Ending balance	1,148,460				240,122			1,217,398			1,761,101			540,880			4,907,961
Ending balance: individually evaluated for impairment	26,260				—			6,287			5,819			—			38,366
Ending balance: collectively evaluated for impairment	1,122,200				240,122			1,211,111			1,755,282			540,880			4,869,595