Note 10 Loans and Allowance for Credit Losses

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


	March 31,		December 31,
	2012		2011
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,051,209	$	996,739
Real estate construction		64,158		76,564
Residential real estate		1,174,572		1,137,059
Commercial real estate		1,264,060		1,267,432
Loans to individuals		574,589		565,849

Total loans and leases net of unearned income		4,128,588	$	4,043,643

During the three-months ended March 31, 2012, loans increased $84.9 million or 2% compared to balances outstanding at December 31, 2011. Decreases in the real estate construction and commercial real estate categories can be attributed to our continued focus of managing down our large credit exposures while increases in residential real estate and loans to individuals are primarily due to growth in home equity loans and indirect auto lending.

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 adversely 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 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:


	March 31, 2012
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	956,928	$	36,011	$	1,162,979	$	1,132,559	$	574,585	$	3,863,062
Non-Pass
OAEM		27,792		798		5,213		53,898		4		87,705
Substandard		62,138		21,638		6,380		77,603		0		167,759
Doubtful		4,351		5,711		0		0		0		10,062

Total Non-Pass		94,281		28,147		11,593		131,501		4		265,526

Total	$	1,051,209	$	64,158	$	1,174,572	$	1,264,060	$	574,589	$	4,128,588


	December 31, 2011
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	904,057	$	44,914	$	1,126,143	$	1,110,664	$	565,842	$	3,751,620
Non-Pass
OAEM		27,627		4,238		5,484		61,855		7		99,211
Substandard		60,114		21,701		5,432		94,913		0		182,160
Doubtful		4,941		5,711		0		0		0		10,652

Total Non-Pass		92,682		31,650		10,916		156,768		7		292,023

Total	$	996,739	$	76,564	$	1,137,059	$	1,267,432	$	565,849	$	4,043,643

Portfolio Risks

Credit quality measures as of March 31, 2012 improved compared to December 31, 2011 as criticized loans decreased $26.5 million, or 9%, to $265.5 million. Further indications of improvement in credit quality can be seen in the $10.2 million, or 29% decrease in delinquency on accruing loans. For this same period, nonaccrual loans decreased $0.4 million as a result of payments and charge-offs during the quarter.

Charge-offs for the three-months ended March 31, 2012 totaled $5.0 million compared to $8.6 million for the three-months ended March 31, 2011. The most significant charge-off during the three months ended March 31, 2012 was a $1.2 million charge taken on a $2.0 million commercial loan. During the three-months ended March 31, 2011, the most significant charge-offs totaled $4.9 million and related to construction loan projects in Florida, western Pennsylvania and Ohio.

Criticized loans, or loans designated OAEM, substandard or doubtful, totaled $265.5 million at March 31, 2012 and represented 6% of the loan portfolio, compared to 7% of the portfolio as of December 31, 2011. These loans have been evaluated when determining the appropriateness 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.

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.

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 evidenced little recovery strength.

In addition, during the first three months of 2012, one relationship consisting of two loans, was classified as troubled debt restructuring. These loans increased the nonperforming loan balance by $53 thousand with no increase in specific reserves.

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, 2012 and December 31, 2011. 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, 2012
	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	$	1,517	$	670	$	410	$	31,921	$	34,518	$	1,016,691	$	1,051,209
Real estate construction		0		0		0		13,951		13,951		50,207		64,158
Residential real estate		6,378		1,521		5,353		3,995		17,247		1,157,325		1,174,572
Commercial real estate		3,389		1,257		620		28,228		33,494		1,230,566		1,264,060
Loans to individuals		1,866		563		1,743		0		4,172		570,417		574,589

Total	$	13,150	$	4,011	$	8,126	$	78,095	$	103,382	$	4,025,206	$	4,128,588


	December 31, 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	$	5,433	$	824	$	287	$	33,459	$	40,003	$	956,736	$	996,739
Real estate construction		0		180		0		14,911		15,091		61,473		76,564
Residential real estate		7,144		2,100		8,767		3,153		21,164		1,115,895		1,137,059
Commercial real estate		3,671		1,241		157		26,953		32,022		1,235,410		1,267,432
Loans to individuals		2,952		962		1,804		0		5,718		560,131		565,849

Total	$	19,200	$	5,307	$	11,015	$	78,476	$	113,998	$	3,929,645	$	4,043,643

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.

Nonaccrual Loans

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. When the loan is collateral dependent, the appraised value less 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.

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, excluding loans held for sale, decreased $17.2 million to $81.6 million at March 31, 2012 compared to $98.8 million at December 31, 2011. Contributing to this decrease was the payoff of an $11.3 million loan to a waste management company and the transfer to OREO of collateral for a $1.2 million loan. The most significant loans placed into nonperforming status during the first quarter of 2012 included $1.3 million for a consumer mortgage loan and $1.0 million for a western Pennsylvania commercial real estate loan.

The specific allowance for nonperforming loans decreased by $1.3 million at March 31, 2012 compared to December 31, 2011. Unfunded commitments related to nonperforming loans were $10.0 million at March 31, 2012 and an off balance sheet reserve of $0.2 million has been established for these commitments.

Loans held for sale totaled $8.1 million and $13.4 million at March 31, 2012 and December 31, 2011, respectively. The entire balance of loans held for sale in both of these periods was considered nonperforming. While these loans are considered to be nonperforming, they are not taken into consideration when determining the allowance for credit losses as they are carried at the lower of cost or fair value.

Significant nonaccrual loans as of March 31, 2012, include the following;

•

$19.6 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in the first quarter of 2004 and was placed in nonaccrual status in the fourth quarter of 2009. A settlement plan with the borrower and three other lenders was reached in the fourth quarter of 2010 and resulted in an $8.0 million principal payment and a $15.4 million partial charge-off.

•

$16.6 million commercial real estate loan for a real estate developer in eastern Pennsylvania. This loan was originated in the third quarter of 2007 and restructured in the fourth quarter of 2011 and resulted in a charge-off of $4.2 million. The most recent appraisal for the real estate collateral was completed in the third quarter of 2011.

•

$9.1 million to an information technology company in Maryland. This loan was originated in the fourth quarter of 2007 and was placed in nonaccrual in the second quarter of 2011.

•

$5.7 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. This loan was originated in the second quarter of 2007. Charge-offs of $15.1 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the fourth quarter of 2011.

•

$4.1 million commercial real estate loan for retail development in western Pennsylvania. This loan was originated in the third quarter of 2008 and transferred to held for sale in the fourth quarter of 2011. When transferred to held for sale, the fair value of this loan was determined by a discounted cash flow analysis. The sale of this loan was completed in April 2012 and resulted in a gain of $1.2 million which will be reflected in the Company's second quarter net income.

Compared to December 31, 2011, there were no changes in the composition of the most significant nonaccrual 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, 2012 and December 31, 2011. 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.


	March 31, 2012						December 31, 2011
	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	$	2,282	$	3,267	$	0	$	2,010	$	3,418	$	0
Real estate construction		3,571		6,546		0		10,814		20,161		0
Residential real estate		3,048		3,479		0		3,125		3,513		0
Commercial real estate		23,702		24,950		0		36,777		41,974		0
Loans to individuals		0		0		0		0		0		0

Subtotal		32,603		38,242		0		52,726		69,066		0


	March 31, 2012						December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(dollars in thousands)

With an allowance recorded:
Commercial, financial, agricultural and other		30,139		31,457		7,555		34,056		34,341		9,069
Real estate construction		10,380		31,375		2,891		6,298		21,402		2,960
Residential real estate		1,823		1,823		553		955		955		93
Commercial real estate		6,632		8,295		921		4,717		4,863		1,114
Loans to individuals		0		0		0		0		0		0

Subtotal		48,974		72,950		11,920		46,026		61,561		13,236

Total	$	81,577	$	111,192	$	11,920	$	98,752	$	130,627	$	13,236


	For the Three-Months Ended March 31,
	2012				2011
	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	$	3,258	$	18	$	1,408	$	3
Real estate construction		3,646		0		15,738		0
Residential real estate		3,354		5		1,938		1
Commercial real estate		24,275		23		18,989		11
Loans to individuals		0		0		25		0

Subtotal		34,533		46		38,098		15

With an allowance recorded:
Commercial, financial, agricultural and other		30,350		3		25,911		2
Real estate construction		10,432		0		30,061		1
Residential real estate		952		7		375		0
Commercial real estate		5,889		9		32,242		13
Loans to individuals		0		0		0		0

Subtotal		47,623		19		88,589		16

Total	$	82,156	$	65	$	126,687	$	31

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,		December 31,
	2012		2011
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	3,482	$	20,276
Nonaccrual status		41,690		44,841

Total	$	45,172	$	65,117

Commitments
Letters of credit	$	2	$	12,580
Unused lines of credit		0		42

Total	$	2	$	12,622

At March 31, 2012, troubled debt restructured loans on accruing status decreased $16.8 million compared to December 31, 2011 and commitments related to troubled debt restructured loans decreased $12.6 million for the same period. These decreases are primarily a result of the payoff of an $11.3 million loan to a waste management company in Pennsylvania as a result of the sale of the business. In addition, a $2.2 million loan to a retail development company in western Pennsylvania paid off during the first quarter. During 2012, a $42 thousand charge-off was recorded as part of the restructuring for one borrower. The remainder of changes in loan balances for 2012 between the pre-modification balance and the post-modification balance is due to customer payments.

During 2011, the changes between pre-modification balances and post-modification balances are due to customer payments.

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings during the three-months ended March 31:


	2012
			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		2	$	0	$	97	$	0	$	97	$	53	$	0


	2011
			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		9	$	100	$	105	$	2,168	$	2,373	$	2,372	$	708
Real estate construction		3		354		0		0		354		364		18
Residential real estate		1		0		12		0		12		12		0
Commercial real estate		11		7,130		199		648		7,977		7,972		1,554

Total		24	$	7,584	$	316	$	2,816	$	10,716	$	10,720	$	2,280

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this footnote. Loans defined as modified due to a change in rate 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, 2012 and 2011, $0.1 million and $0.3 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following restructured loans were considered to default during the three-months ended March 31:


	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(dollars in thousands)
Commercial, financial, agricultural and other		0	$	0		1	$	150
Real estate construction		0		0		1		88
Residential real estate		0		0		0		0
Commercial real estate		2		980		0		0
Loans to individuals		0		0		0		0

Total		2	$	980		2	$	238

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


	For the Three-Months Ended March 31, 2012
	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	$	18,200		$	6,756		$	8,237		$	18,961		$	4,244		$	4,836	$	61,234
Charge-offs		(1,914	)		(190	)		(1,712	)		(235	)		(941	)		0		(4,992	)
Recoveries		238			56			133			158			118			0		703
Provision		1,619			(195	)		44			487			831			1,001		3,787

Ending Balance	$	18,143		$	6,427		$	6,702		$	19,371		$	4,252		$	5,837	$	60,732

Ending balance: individually evaluated for impaired	$	7,555		$	2,891		$	553		$	921		$	0		$	0	$	11,920
Ending balance: collectively evaluated for impaired		10,588			3,536			6,149			18,450			4,252			5,837		48,812

Loans:
Ending balance		1,051,209			64,158			1,174,572			1,264,060			574,589					4,128,588
Ending balance: individually evaluated for impaired		31,599			13,800			3,217			28,874			0					77,490
Ending balance: collectively evaluated for impaired		1,019,610			50,358			1,171,355			1,235,186			574,589					4,051,098


	For the Three-Months Ended March 31, 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		(960	)		(4,999	)		(1,104	)		(766	)		(779	)		0			(8,608	)
Recoveries		104			0			19			76			155			0			354
Provision		1,592			5,776			2,313			3,951			270			(85	)		13,817

Ending Balance	$	22,436		$	18,779		$	6,682		$	20,174		$	3,861		$	4,860		$	76,792

Ending balance: individually evaluated for impaired	$	8,280		$	14,168		$	2		$	9,915		$	0		$	0		$	32,365
Ending balance: collectively evaluated for impaired		14,156			4,611			6,680			10,259			3,861			4,860			44,427

Loans:
Ending balance		906,824			184,904			1,102,459			1,336,903			543,180						4,074,270
Ending balance: individually evaluated for impaired		29,165			45,915			946			60,941			0						136,967
Ending balance: collectively evaluated for impaired		877,659			138,989			1,101,513			1,275,962			543,180						3,937,303