Loans And Allowance For Credit Losses

6 Months Ended

Jun. 30, 2011

Loans And Allowance For Credit Losses

Loans And Allowance For Credit Losses

Note 10 Loans and Allowance for Credit Losses

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

	June 30, 2011		December 31, 2010
	(dollars in thousands)
Commercial, financial, agricultural and other	$	943,186	$	913,814
Real estate construction		146,113		261,482
Residential real estate		1,101,859		1,127,273
Commercial real estate		1,270,797		1,354,074
Loans to individuals		530,103		561,440
Total loans	$	3,992,058	$	4,218,083

During the six months ended June 30, 2011, loans decreased $226.0 million or 5% compared to balances outstanding at December 31, 2010. Declines were experienced in all categories except commercial, financial, agricultural and other and can be attributed to the following: real estate construction declined as the result of the completion of construction projects which upon completion were moved to the commercial real estate category; the decline in residential real estate loans can be attributed to planned runoff in this portfolio; commercial real estate decreased largely as a result of payoffs by the conduit markets which provided longer term, lower rate financing to several borrowers; and loans to individuals declined primarily because of weaker consumer loan demand.

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	No change in credit rating of borrower. Acceptable levels of risk exist in the relationship.
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 Bank'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 is based on experiences with similarly graded loans. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors, to track the migration of 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, 2011
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	832,569	$	84,295	$	1,091,117	$	993,340	$	530,074	$	3,531,395
Non-Pass
OAEM		38,929		9,923		5,385		98,770		10		153,017
Substandard		65,099		46,184		5,357		178,687		19		295,346
Doubtful		6,589		5,711		0		0		0		12,300
Total Non-Pass		110,617		61,818		10,742		277,457		29		460,663
Total	$	943,186	$	146,113	$	1,101,859	$	1,270,797	$	530,103	$	3,992,058

	December 31, 2010
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	778,260	$	181,348	$	1,115,825	$	1,062,400	$	561,360	$	3,699,193
Non-Pass
OAEM		54,318		10,845		6,198		82,361		6		153,728
Substandard		81,236		60,712		5,250		209,313		74		356,585
Doubtful		0		8,577		0		0		0		8,577
Total Non-Pass		135,554		80,134		11,448		291,674		80		518,890
Total	$	913,814	$	261,482	$	1,127,273	$	1,354,074	$	561,440	$	4,218,083

Portfolio Risks

Credit quality of our loan portfolio represents significant risk to our earnings, capital, regulatory agency relationships, investment community and shareholder returns. First Commonwealth devotes a substantial amount of resources to 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.

Our loan portfolio risks include increased credit quality risks due to high levels of classified loans that need to be worked through to resolution, the large amount of loans exceeding recently established internal lending limits and uncertain economic conditions.

Classified loans, or loans designated OAEM, substandard or doubtful, total $460.7 million at June 30, 2011 decreasing $58.2 million from December 31, 2010. As of June 30, 2011, classified loans total 11.5% of the loan portfolio, a decrease from 12.3% as of December 31, 2010. These loans have been evaluated with respect to the adequacy of the allowance for credit losses which we believe is adequate at this time. 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. The credit administration department continually monitors and evaluates those evolving factors in order to adjust the allowance for credit losses.

Our local markets of western Pennsylvania, which comprise 92% of our loan portfolio, have not been as intensely affected by the most recent economic recession as some other regions of the country and are evidencing a quicker economic recovery. We believe focusing on originating loans in our local markets will improve ongoing credit quality in the portfolios.

Risk factors associated with commercial real estate and construction related loans are monitored closely since this is an area that represents the most significant portion of the loan portfolio and has experienced the most stress during the economic downturn and has evidenced little recovery strength.

Credit quality measures as of June 30, 2011 were mixed as delinquency 90 days and greater and still accruing decreased $0.2 million compared to December 31, 2010. Loans classified as non-pass decreased $58.2 million while delinquency 30 to 59 days increased $22.4 million. However, the increase in 30 to 59 day delinquency is primarily due to $19.8 million related to one relationship as the result of modifications on related accounts which have not been completed yet.

In addition, during the first half of 2011, 15 relationships were classified as troubled debt restructuring. These loans increased the nonperforming loans balance by $21.5 million and increased specific reserves by $2.4 million. The most significant additions were a $6.9 million commercial real estate loan for a retail strip development in western Pennsylvania and two commercial real estate loans totaling $10.0 million; one in western Pennsylvania and one in Maryland. All three of these loans were provided extensions at the maturity of a balloon payment.

The following tables delineate the aging analysis of the recorded investments in past due loans as of June 30, 2011 and December 31, 2010. Also included in these tables are loans that are 90 days or more past due and still accruing because they are either well-secured and in the process of collection.

	June 30, 2011
	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	$	13,920	$	377	$	464	$	38,160	$	52,921	$	890,265	$	943,186
Real estate construction		2,127		1,021		184		37,264		40,596		105,517		146,113
Residential real estate		7,999		1,883		10,362		3,441		23,685		1,078,174		1,101,859
Commercial real estate		14,440		1,916		567		33,795		50,718		1,220,079		1,270,797
Loans to individuals		2,568		824		1,383		7		4,782		525,321		530,103
Total	$	41,054	$	6,021	$	12,960	$	112,667	$	172,702	$	3,819,356	$	3,992,058

	December 31, 2010
	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	$	2,195	$	513	$	731	$	25,586	$	29,025	$	884,789	$	913,814
Real estate construction		363		2,279		0		44,670		47,312		214,170		261,482
Residential real estate		8,322		2,545		10,144		2,249		23,260		1,104,013		1,127,273
Commercial real estate		5,076		5,302		459		43,586		54,423		1,299,651		1,354,074
Loans to individuals		2,745		848		1,869		60		5,522		555,918		561,440
Total	$	18,701	$	11,487	$	13,203	$	116,151	$	159,542	$	4,058,541	$	4,218,083

The previous tables summarizes 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, 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 unless they are well-secured and in the process of collection.

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 become 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 doubtful.

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 segments. 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 or repayment for the loan is the operation or liquidation of collateral. In these cases, management uses the current fair value of collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. 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.

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.

Nonperforming loans increased $29.4 million to $146.9 million at June 30, 2011 compared to $117.5 million at December 31, 2010. Unfunded commitments related to nonperforming loans were $0.3 million at June 30, 2011 and an off balance sheet reserve of $0.1 million has been established for these commitments.

Significant additions in nonaccrual loans for the six months ended June 30, 2011 include the following:

• $9.7 million loan for a western Pennsylvania office complex.

• $3.1 million loan for a western Pennsylvania manufacturer.

• $13.7 million shared national credit commercial loan for an information technology firm in Maryland.

• $3.3 million commercial real estate project in Pennsylvania.

Significant reductions in nonaccrual loans for the six months ended June 30, 2011 include the following:

• $4.0 million land development loan in central Pennsylvania which was transferred to OREO.

• $10.0 million commercial real estate loan for an office building for which a charge-off was taken and was subsequently transferred to OREO.

• $4.0 million construction loan in Florida which was transferred to OREO.

• Movement of $11.3 million loan for a waste management company to accrual status. This loan continues to be classified as nonperforming because modifications made to original loan contract have resulted in classification as a troubled debt restructuring.

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, 2011 and December 31, 2010. 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 based on month-end balances of the loans of the period reported.

	June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	921	$	1,009	$	0
Real estate construction		7,011		23,742		0
Residential real estate		2,194		2,550		0
Commercial real estate		18,323		19,350		0
Loans to individuals		7		7		0
Subtotal		28,456		46,658		0
With an allowance recorded:
Commercial, financial, agricultural and other		39,880		40,182		12,717
Real estate construction		30,252		34,538		14,222
Residential real estate		1,391		1,473		216
Commercial real estate		46,896		47,300		7,711
Loans to individuals		0		0		0
Subtotal		118,419		123,493		34,866
Total	$	146,875	$	170,151	$	34,866

	December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	2,963	$	5,745	$	0
Real estate construction		14,319		62,317		0
Residential real estate		1,961		2,534		0
Commercial real estate		22,970		23,830		0
Loans to individuals		60		125		0
Subtotal		42,273		94,551		0
With an allowance recorded:
Commercial, financial, agricultural and other		23,118		38,940		6,709
Real estate construction		30,351		34,954		11,855
Residential real estate		344		344		56
Commercial real estate		21,401		21,626		5,287
Loans to individuals		0		0		0
Subtotal		75,214		95,864		23,907
Total	$	117,487	$	190,415	$	23,907

	For the Six Months Ended   June 30, 2011				For the Six Months Ended   June 30, 2010
	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	$	3,167	$	5	$	2,873	$	4
Real estate construction		12,727		2		27,862		0
Residential real estate		2,005		2		1,858		0
Commercial real estate		29,407		18		18,131		0
Loans to individuals		16		0		52		0
Subtotal		47,322		27		50,776		4
With an allowance recorded:
Commercial, financial, agricultural and other		27,026		76		49,660		0
Real estate construction		31,124		2		44,054		0
Residential real estate		506		0		1,353		0
Commercial real estate		29,292		177		10,649		6
Loans to individuals		0		0		0		0
Subtotal		87,948		255		105,716		6
Total	$	135,270	$	282	$	156,492	$	10

	For the Three Months Ended June 30, 2011				For the Three Months Ended June 30, 2010
	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	$	2,297	$	2	$	1,956	$	2
Real estate construction		10,204		2		41,192		0
Residential real estate		1,987		1		1,759		0
Commercial real estate		26,255		7		23,361		0
Loans to individuals		7		0		89		0
Subtotal		40,750		12		68,357		2
With an allowance recorded:
Commercial, financial, agricultural and other		30,770		74		50,592		0
Real estate construction		31,701		1		30,230		0
Residential real estate		722		0		1,975		0
Commercial real estate		39,912		164		6,086		2
Loans to individuals		0		0		0		0
Subtotal		103,105		239		88,883		2
Total	$	143,855	$	251	$	157,240	$	4

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. As of June 30, 2011, troubled debt restructured loans totaled $34.7 million. In 2011, 15 relationships, comprised of 27 loans, totaling $21.5 million were identified as troubled debt restructurings resulting in specific reserves of $2.4 million. As of December 31, 2010, troubled debt restructured loans totaled $1.3 million. In the first six months of 2010, there were no loan modifications determined to be troubled debt restructurings. The following table provides detail related to loans identified as troubled debt restructurings during the first six months of 2011:

	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, agricultural and other		8	$	2,268	$	2,263
Real estate construction		3		354		371
Residential real estate		2		90		90
Commercial real estate		14		18,830		18,731
Loans to individuals		0		0		0
Total		27	$	21,542	$	21,455

The following table provides detail related to loans identified as troubled debt restructurings during the three months ended June 30, 2011:

	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, agricultural and other		0	$	0	$	0
Real estate construction		0		0		0
Residential real estate		2		90		90
Commercial real estate		4		10,882		10,839
Loans to individuals		0		0		0
Total		6	$	10,972	$	10,929

The trouble debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note.

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

	For the Six Months Ended June 30, 2011
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning balance	$	21,700		$	18,002		$	5,454		$	16,913		$	4,215		$	4,945		$	71,229
Charge-offs		(2,957	)		(8,048	)		(1,700	)		(5,575	)		(1,522	)		0			(19,802	)
Recoveries		261			0			96			164			289			0			810
Provision		4,171			7,747			3,020			7,278			888			(175	)		22,929
Ending balance	$	23,175		$	17,701		$	6,870		$	18,780		$	3,870		$	4,770		$	75,166
Ending balance: individually evaluated for impairment	$	12,717		$	14,222		$	216		$	7,711		$	0		$	0		$	34,866
Ending balance: collectively evaluated for impairment	$	10,458		$	3,479		$	6,654		$	11,069		$	3,870		$	4,770		$	40,300
Loans:
Ending balance	$	943,186		$	146,113		$	1,101,859		$	1,270,797		$	530,103					$	3,992,058
Ending balance: individually evaluated for impairment	$	40,447		$	37,087		$	2,174		$	63,743		$	0					$	143,451
Ending balance: collectively evaluated for impairment	$	902,739		$	109,026		$	1,099,685		$	1,207,054		$	530,103					$	3,848,607

Impaired Loans (Continued)

	For the Six Months Ended June 30, 2010
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning balance	$	31,369		$	18,224		$	5,847		$	17,526		$	4,731		$	3,942	$	81,639
Charge-offs		(1,545	)		(38,182	)		(2,540	)		(1,059	)		(1,946	)		0		(45,272	)
Recoveries		2,188			0			48			115			298			0		2,649
Provision		2,969			44,478			1,570			(2,826	)		1,488			1,351		49,030
Ending balance	$	34,981		$	24,520		$	4,925		$	13,756		$	4,571		$	5,293	$	88,046
Ending balance: individually evaluated for impairment	$	24,240		$	16,734		$	14		$	530		$	0		$	0	$	41,518
Ending balance: collectively evaluated for impairment	$	10,741		$	7,786		$	4,911		$	13,226		$	4,571		$	5,293	$	46,528
Loans:
Ending balance	$	1,031,568		$	406,085		$	1,161,012		$	1,272,972		$	562,654				$	4,434,291
Ending balance: individually evaluated for impairment	$	52,488		$	48,236		$	2,225		$	26,627		$	0				$	129,576
Ending balance: collectively evaluated for impairment	$	979,080		$	357,849		$	1,158,787		$	1,246,345		$	562,654				$	4,304,715