Loans and Allowance for Credit Losses

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



	March 31, 2019						December 31, 2018
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,143,885	$	36,435	$	1,180,320	$	1,100,947	$	37,526	$	1,138,473
Real estate construction	383,164		6,223		389,387		353,008		5,970		358,978
Residential real estate	1,325,740		239,609		1,565,349		1,313,645		248,760		1,562,405
Commercial real estate	1,946,482		191,894		2,138,376		1,922,349		201,195		2,123,544
Loans to individuals	593,481		4,157		597,638		585,347		5,392		590,739
Total loans	$	5,392,752	$	478,318	$	5,871,070	$	5,275,296	$	498,843	$	5,774,139

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, 2019
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,107,013	$	374,201	$	1,315,339	$	1,894,745	$	593,253	$	5,284,551
Non-Pass
OAEM	31,225		8,963		809		32,635		—		73,632
Substandard	5,647		—		9,592		19,102		228		34,569
Doubtful	—		—		—		—		—		—
Total Non-Pass	36,872		8,963		10,401		51,737		228		108,201
Total	$	1,143,885	$	383,164	$	1,325,740	$	1,946,482	$	593,481	$	5,392,752

Acquired loans
Pass	$	30,627	$	5,602	$	236,594	$	189,052	$	4,143	$	466,018
Non-Pass
OAEM	5,672		621		725		423		—		7,441
Substandard	136		—		2,290		2,419		14		4,859
Doubtful	—		—		—		—		—		—
Total Non-Pass	5,808		621		3,015		2,842		14		12,300
Total	$	36,435	$	6,223	$	239,609	$	191,894	$	4,157	$	478,318



	December 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	$	1,055,394	$	337,367	$	1,302,912	$	1,880,139	$	585,141	$	5,160,953
Non-Pass
OAEM	33,723		15,641		1,026		28,904		—		79,294
Substandard	11,830		—		9,707		13,306		206		35,049
Doubtful	—		—		—		—		—		—
Total Non-Pass	45,553		15,641		10,733		42,210		206		114,343
Total	$	1,100,947	$	353,008	$	1,313,645	$	1,922,349	$	585,347	$	5,275,296

Acquired loans
Pass	$	31,399	$	5,337	$	245,637	$	198,201	$	5,377	$	485,951
Non-Pass
OAEM	5,890		633		736		441		—		7,700
Substandard	237		—		2,387		2,553		15		5,192
Doubtful	—		—		—		—		—		—
Total Non-Pass	6,127		633		3,123		2,994		15		12,892
Total	$	37,526	$	5,970	$	248,760	$	201,195	$	5,392	$	498,843

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 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, 2019. 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, 2019 and December 31, 2018. 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, 2019
	30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	207	$	1,037	$	83	$	4,390	$	5,717	$	1,138,168	$	1,143,885
Real estate construction	507		—		—		—		507		382,657		383,164
Residential real estate	2,995		1,739		460		6,126		11,320		1,314,420		1,325,740
Commercial real estate	1,161		122		—		8,539		9,822		1,936,660		1,946,482
Loans to individuals	2,406		481		759		228		3,874		589,607		593,481
Total	$	7,276	$	3,379	$	1,302	$	19,283	$	31,240	$	5,361,512	$	5,392,752

Acquired loans
Commercial, financial, agricultural and other	$	—	$	—	$	—	$	100	$	100	$	36,335	$	36,435
Real estate construction	—		—		—		—		—		6,223		6,223
Residential real estate	98		35		171		1,816		2,120		237,489		239,609
Commercial real estate	185		—		—		947		1,132		190,762		191,894
Loans to individuals	22		7		36		14		79		4,078		4,157
Total	$	305	$	42	$	207	$	2,877	$	3,431	$	474,887	$	478,318



	December 31, 2018
	30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	130	$	247	$	92	$	10,223	$	10,692	$	1,090,255	$	1,100,947
Real estate construction	212		—		—		—		212		352,796		353,008
Residential real estate	3,697		710		790		6,238		11,435		1,302,210		1,313,645
Commercial real estate	492		69		—		3,437		3,998		1,918,351		1,922,349
Loans to individuals	2,362		532		662		207		3,763		581,584		585,347
Total	$	6,893	$	1,558	$	1,544	$	20,105	$	30,100	$	5,245,196	$	5,275,296

Acquired loans
Commercial, financial, agricultural and other	$	1	$	—	$	—	$	204	$	205	$	37,321	$	37,526
Real estate construction	—		—		—		—		—		5,970		5,970
Residential real estate	226		24		27		1,904		2,181		246,579		248,760
Commercial real estate	—		—		—		1,042		1,042		200,153		201,195
Loans to individuals	46		12		11		15		84		5,308		5,392
Total	$	273	$	36	$	38	$	3,165	$	3,512	$	495,331	$	498,843

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.

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.

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, 2019 and December 31, 2018, there were no impaired loans held for sale. During the three months ended, March 31, 2019 and 2018, there were no gains or losses recognized on sales of impaired loans.

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, 2019 and December 31, 2018. 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, 2019						December 31, 2018
	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	$	2,599	$	9,100			$	8,735	$	16,442
Real estate construction	—		—				—		—
Residential real estate	10,545		12,264				10,726		12,571
Commercial real estate	3,752		4,042				3,599		3,812
Loans to individuals	339		530				281		408
Subtotal	17,235		25,936				23,341		33,233
With an allowance recorded:
Commercial, financial, agricultural and other	3,317		3,479		$	1,012	3,042		3,181		$	797
Real estate construction	—		—		—		—		—		—
Residential real estate	713		713		119		486		495		107
Commercial real estate	7,017		7,035		914		1,866		1,878		596
Loans to individuals	—		—		—		—		—		—
Subtotal	11,047		11,227		2,045		5,394		5,554		1,500
Total	$	28,282	$	37,163	$	2,045	$	28,735	$	38,787	$	1,500



	March 31, 2019						December 31, 2018
	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	$	100	$	100			$	73	$	73
Real estate construction	—		—				—		—
Residential real estate	1,937		2,369				2,031		2,604
Commercial real estate	947		1,962				1,042		2,052
Loans to individuals	14		16				15		17
Subtotal	2,998		4,447				3,161		4,746
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	131		131		$	131
Real estate construction	—		—		—		—		—		—
Residential real estate	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Loans to individuals	—		—		—		—		—		—
Subtotal	—		—		—		131		131		131
Total	$	2,998	$	4,447	$	—	$	3,292	$	4,877	$	131



	For the Three Months Ended March 31,
	2019								2018
	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	$	2,707	$	13	$	439	$	—	$	8,130	$	10	$	411	$	—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	10,798		72		1,981		1		10,401		63		678		1
Commercial real estate	3,994		36		982		1		5,510		31		907		—
Loans to individuals	324		1		14		—		354		2		17		—
Subtotal	17,823		122		3,416		2		24,395		106		2,013		1
With an allowance recorded:
Commercial, financial, agricultural and other	3,068		3		—		—		17,720		66		—		—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	604		5		—		—		706		—		93		—
Commercial real estate	3,278		1		—		—		1,960		1		118		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	6,950		9		—		—		20,386		67		211		—
Total	$	24,773	$	131	$	3,416	$	2	$	44,781	$	173	$	2,224	$	1

Unfunded commitments related to nonperforming loans were $0.1 million at March 31, 2019 and $1.6 million at December 31, 2018. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $12 thousand was established for these off balance sheet exposures at both March 31, 2019 and December 31, 2018.

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:



	March 31, 2019		December 31, 2018
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	9,120	$	8,757
Nonaccrual status	5,874		11,761
Total	$	14,994	$	20,518
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	263		1,027
Total	$	323	$	1,087

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, 2019
		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	$	—	$	—	$	61	$	61	$	62	$	—
Residential real estate	6	17		49		514		580		570		40
Commercial real estate	2	—		556		242		798		767		—
Loans to individuals	3	—		—		48		48		46		—
Total	12	$	17	$	605	$	865	$	1,487	$	1,445	$	40



	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

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, 2019 and 2018, $0.6 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 re-amortization. For both 2019 and 2018 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:



	2019			2018
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Commercial, financial, agricultural and other	—	$	—	1	$	940
Loans to individuals	1	10		—	—
Total	1	$	10	1	$	940

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



	For the Three Months Ended March 31, 2019
	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	$	19,235		$	2,002	$	3,934		$	18,382		$	4,033		$	47,586
Charge-offs	(483		)	—		(136		)	(299		)	(1,110		)	(2,028		)
Recoveries	76			42		81			41			114			354
Provision (credit)	987			210		271			1,094			1,126			3,688
Ending balance	19,815			2,254		4,150			19,218			4,163			49,600
Acquired loans:
Beginning balance	139			—		35			4			—			178
Charge-offs	(526		)	—		(45		)	—			(5		)	(576		)
Recoveries	11			—		24			—			9			44
Provision (credit)	394			—		21			(4		)	(4		)	407
Ending balance	18			—		35			—			—			53
Total ending balance	$	19,833		$	2,254	$	4,185		$	19,218		$	4,163		$	49,653
Ending balance: individually evaluated for impairment	$	1,012		$	—	$	119		$	914		$	—		$	2,045
Ending balance: collectively evaluated for impairment	18,821			2,254		4,066			18,304			4,163			47,608
Loans:
Ending balance	1,180,320			389,387		1,565,349			2,138,376			597,638			5,871,070
Ending balance: individually evaluated for impairment	5,627			—		3,938			11,111			—			20,676
Ending balance: collectively evaluated for impairment	1,174,693			389,387		1,561,411			2,127,265			597,638			5,850,394



	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