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Loans And Allowance For Credit Losses

9 Months Ended

Sep. 30, 2011

Loans And Allowance For Credit Losses [Abstract]

Note 10 Loans and Allowance for Credit Losses

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


	September 30, 2011		December 31, 2010
	(dollars in thousands)
Commercial, financial, agricultural and other	$	950,547	$	913,814
Real estate construction		97,354		261,482
Residential real estate		1,096,339		1,127,273
Commercial real estate		1,284,720		1,354,074
Loans to individuals		544,763		561,440

Total loans	$	3,973,723	$	4,218,083

During the nine months ended September 30, 2011, loans decreased $244.4 million or 6% 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 completed construction projects being 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 and other lenders 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.

Credit Quality Information (Continued)

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:


	September 30, 2011
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	860,553	$	43,295	$	1,084,381	$	1,040,685	$	544,746	$	3,573,660
Non-Pass
OAEM		24,063		6,490		6,449		83,318		10		120,330
Substandard		60,902		41,858		5,509		160,717		7		268,993
Doubtful		5,029		5,711		0		0		0		10,740

Total Non-Pass		89,994		54,059		11,958		244,035		17		400,063

Total	$	950,547	$	97,354	$	1,096,339	$	1,284,720	$	544,763	$	3,973,723


	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 measures as of September 30, 2011 improved compared to December 31, 2010 as criticized loans decreased $118.8 million, or 23%, and delinquency on accruing loans declined $3.8 million, or 9%. For this same period, nonaccrual loans increased $11.2 million as some non-pass credits were placed on nonaccrual status.

Portfolio Risks (Continued)

Charge-offs for the nine months ended September 30, 2011 totaled $30.1 million compared to $52.5 million for the nine months ended September 30, 2010. The decrease of $22.4 million compared to 2010 is primarily the result of a charge-off in the second quarter of 2010 for a construction loan in Florida.

Criticized loans, or loans designated OAEM, substandard or doubtful, totaled $400.1 million at September 30, 2011 and represented 10% of the loan portfolio, compared to 12% of the portfolio as of December 31, 2010. 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 nine months of 2011, 20 relationships were classified as troubled debt restructuring. These loans increased the nonperforming loans balance by $22.2 million and increased specific reserves by $2.1 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 $9.9 million. All three of these loans were modified with maturity extensions after reaching the maturity of a balloon payment.

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 September 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 well-secured and in the process of collection.


	September 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	$	1,537	$	772	$	424	$	35,641	$	38,374	$	912,173	$	950,547
Real estate construction		0		0		0		36,191		36,191		61,163		97,354
Residential real estate		6,318		2,021		10,104		3,636		22,079		1,074,260		1,096,339
Commercial real estate		5,118		7,557		798		51,909		65,382		1,219,338		1,284,720
Loans to individuals		2,851		778		1,240		7		4,876		539,887		544,763

Total	$	15,824	$	11,128	$	12,566	$	127,384	$	166,902	$	3,806,821	$	3,973,723


	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.

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. 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 $44.4 million to $161.9 million at September 30, 2011 compared to $117.5 million at December 31, 2010. As a result, the specific allowance for nonperforming loans increased by $11.0 million at September 30, 2011 compared to December 31, 2010. Unfunded commitments related to nonperforming loans were $6.7 million at September 30, 2011 and an off balance sheet reserve of $0.5 million has been established for these commitments.

Significant additions to nonaccrual loans for the nine months ended September 30, 2011 include the following:

•

$20.7 million commercial real estate loan in Pennsylvania

•

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

•

$9.7 million loan for a western Pennsylvania office complex

•

$8.7 million for three real estate construction projects in eastern Pennsylvania

•

$3.3 million commercial real estate project in Pennsylvania

•

$3.1 million loan for a western Pennsylvania manufacturer

Significant reductions to nonaccrual loans for the nine months ended September 30, 2011 include the following:

•

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

Impaired Loans (Continued)

•

$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 land development loan in central Pennsylvania which was transferred to OREO

•

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

•

$2.0 million in commercial real estate loans in western Pennsylvania which was transferred to OREO

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of September 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.


	September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	1,336	$	1,425	$	0
Real estate construction		12,422		34,912		0
Residential real estate		3,215		3,741		0
Commercial real estate		18,059		19,116		0
Loans to individuals		7		7		0

Subtotal		35,039		59,201		0

With an allowance recorded:
Commercial, financial, agricultural and other		36,959		37,261		10,503
Real estate construction		23,769		26,018		12,551
Residential real estate		737		738		171
Commercial real estate		65,380		65,621		11,674
Loans to individuals		0		0		0

Subtotal		126,845		129,638		34,899

Total	$	161,884	$	188,839	$	34,899

Impaired Loans (Continued)


	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 Nine Months Ended September 30, 2011				For the Nine Months Ended September 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	$	3,695	$	11	$	2,455	$	2
Real estate construction		21,611		1		25,435		0
Residential real estate		2,519		4		1,831		0
Commercial real estate		27,322		246		19,636		9
Loans to individuals		13		0		57		0

Subtotal		55,160		262		49,414		11

With an allowance recorded:
Commercial, financial, agricultural and other		29,614		126		49,639		7
Real estate construction		19,858		0		33,823		0
Residential real estate		422		1		1,562		0
Commercial real estate		35,595		301		12,420		0
Loans to individuals		0		0		0		0

Subtotal		85,489		428		97,444		7

Total	$	140,649	$	690	$	146,858	$	18

Impaired Loans (Continued)


	For the Three Months Ended September 30, 2011					For the Three Months Ended September 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	$	1,989	$	6		$	1,620	$	2
Real estate construction		16,465		(1	)		20,583		0
Residential real estate		3,131		3			1,777		0
Commercial real estate		19,676		228			22,646		3
Loans to individuals		7		0			67		0

Subtotal		41,268		236			46,693		5

With an allowance recorded:
Commercial, financial, agricultural and other		37,552		50			49,598		3
Real estate construction		20,237		(2	)		13,358		0
Residential real estate		669		1			1,980		0
Commercial real estate		51,677		124			15,961		0
Loans to individuals		0		0			0		0

Subtotal		110,135		173			80,897		3

Total	$	151,403	$	409		$	127,590	$	8

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 a result of adopting the amendments in ASU 2011-02, all restructurings that occurred on or after January 1, 2011 were assessed for identification as troubled debt restructurings. No additional troubled debt restructurings were identified for loans for which the allowance for credit losses would have previously been measured under a general allowance for credit losses methodology.

As of September 30, 2011, troubled debt restructured loans totaled $35.1 million. In 2011, 20 relationships, comprised of 33 loans, totaling $22.2 million were identified as troubled debt restructurings resulting in specific reserves of $2.1 million. In the first nine months of 2010, four relationships, comprised of seven loans, totaling $13.2 million were identified as troubled debt restructurings resulting in specific reserves of $0.8 million. Of the $13.2 million identified in the nine month period ended September 30, 2010, $12.8 million related to loans in nonaccrual status. Commitments outstanding on troubled debt restructured loans totaled $12.6 million as of September 30, 2011, all of which related to letters of credit for one loan relationship.

In all cases, in the tables below the decrease in the post-modification balance compared to the pre-modification balance is a result of customer payments and not forgiveness of debt.

Impaired Loans (Continued)

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings during the first nine months of 2011:


	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, agricultural and other		9	$	2,317	$	2,298	$	569
Real estate construction		3		354		398		0
Residential real estate		4		267		264		7
Commercial real estate		17		19,350		19,212		1,551
Loans to individuals		0		0		0		0

Total		33	$	22,288	$	22,172	$	2,127


	Reason for Modification
	Extend Maturity		Modify Rate		Modify Payments
Commercial, financial, agricultural and other	$	100	$	0	$	2,217
Real estate construction		354		0		0
Residential real estate		0		88		179
Commercial real estate		17,202		170		1,978
Loans to individuals		0		0		0

Total	$	17,656	$	258	$	4,374

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings during the first nine months of 2010:


	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, agricultural and other		4	$	518	$	500	$	250
Real estate construction		1		2,070		556		556
Residential real estate		0		0		0		0
Commercial real estate		2		10,616		9,781		0
Loans to individuals		0		0		0		0

Total		7	$	13,204	$	10,837	$	806

Impaired Loans (Continued)


	Reason for Modification
	Extend Maturity		Modify Rate		Modify Payments
Commercial, financial, agricultural and other	$	250	$	94	$	174
Real estate construction		0		2,070		0
Residential real estate		0		0		0
Commercial real estate		0		10,616		0
Loans to individuals		0		0		0

Total	$	250	$	12,780	$	174

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 September 30, 2011:


	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, agricultural and other		1	$	49	$	46	$	0
Real estate construction		0		0		0		0
Residential real estate		2		177		175		7
Commercial real estate		3		520		517		0
Loans to individuals		0		0		0		0

Total		6	$	746	$	738	$	7


	Reason for Modification
	Extend Maturity		Modify Rate		Modify Payments
Commercial, financial, agricultural and other	$	0	$	0	$	49
Real estate construction		0		0		0
Residential real estate		0		73		104
Commercial real estate		39		0		481
Loans to individuals		0		0		0

Total	$	39	$	73	$	634

Impaired Loans (Continued)


	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, agricultural and other		3	$	424	$	424	$	250
Real estate construction		0		0		0		0
Residential real estate		0		0		0		0
Commercial real estate		0		0		0		0
Loans to individuals		0		0		0		0

Total		3	$	424	$	424	$	250


	Reason for Modification
	Extend Maturity		Modify Rate		Modify Payments
Commercial, financial, agricultural and other	$	250	$	0	$	174
Real estate construction		0		0		0
Residential real estate		0		0		0
Commercial real estate		0		0		0
Loans to individuals		0		0		0

Total	$	250	$	0	$	174

The trouble 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 nine months ended September 30, 2011 and 2010, $0.2 million and $0.1 million, respectively, of total rate modifications represent troubled debt restructured loans with modifications to the rate as well as payment due to reamortization. All rate modifications reported for the three month periods ended September 30, 2011 were modifications of the rate only.

A trouble debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. For the three and nine months ended September 30, 2011 and 2010, there were no loans restructured within the preceding twelve months which were considered to be in default.

Impaired Loans (Continued)

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


	For the Nine Months Ended September 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		(3,642	)		(14,570	)		(2,686	)		(6,918	)		(2,332	)		0			(30,148	)
Recoveries		335			0			118			239			440			0			1,132
Provision		196			11,984			3,770			12,443			1,708			(197	)		29,904

Ending balance	$	18,589		$	15,416		$	6,656		$	22,677		$	4,031		$	4,748		$	72,117

Ending balance: individually evaluated for impairment	$	10,503		$	12,551		$	171		$	11,674		$	0		$	0		$	34,899
Ending balance: collectively evaluated for impairment	$	8,086		$	2,865		$	6,485		$	11,003		$	4,031		$	4,748		$	37,218

Loans:
Ending balance	$	950,547		$	97,354		$	1,096,339		$	1,284,720		$	544,763					$	3,973,723
Ending balance: individually evaluated for impairment	$	37,738		$	35,957		$	2,290		$	81,375		$	0					$	157,360
Ending balance: collectively evaluated for impairment	$	912,809		$	61,397		$	1,094,049		$	1,203,345		$	544,763					$	3,816,363

Impaired Loans (Continued)


	For the Nine Months Ended September 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		(2,949	)		(41,374	)		(3,673	)		(1,824	)		(2,695	)		0		(52,515	)
Recoveries		2,270			0			154			119			427			0		2,970
Provision		7,805			36,574			2,696			3,495			1,796			1,186		53,552

Ending balance	$	38,495		$	13,424		$	5,024		$	19,316		$	4,259		$	5,128	$	85,646

Ending balance: individually evaluated for impairment	$	23,494		$	5,915		$	8		$	4,729		$	0		$	0	$	34,146
Ending balance: collectively evaluated for impairment	$	15,001		$	7,509		$	5,016		$	14,587		$	4,259		$	5,128	$	51,500

Loans:
Ending balance	$	953,447		$	317,491		$	1,142,583		$	1,316,142		$	569,910				$	4,299,573
Ending balance: individually evaluated for impairment	$	51,055		$	25,824		$	2,246		$	41,570		$	0				$	120,695
Ending balance: collectively evaluated for impairment	$	902,392		$	291,667		$	1,140,337		$	1,274,572		$	569,910				$	4,178,878


	For the Three Months Ended September 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	$	23,175		$	17,701		$	6,870		$	18,780		$	3,870		$	4,770		$	75,166
Charge-offs		(685	)		(6,522	)		(986	)		(1,343	)		(810	)		0			(10,346	)
Recoveries		74			0			22			75			151			0			322
Provision		(3,975	)		4,237			750			5,165			820			(22	)		6,975

Ending balance	$	18,589		$	15,416		$	6,656		$	22,677		$	4,031		$	4,748		$	72,117

Impaired Loans (Continued)


	For the Three Months Ended September 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	$	34,981		$	24,520		$	4,925		$	13,756		$	4,571		$	5,293		$	88,046
Charge-offs		(1,404	)		(3,192	)		(1,133	)		(765	)		(749	)		0			(7,243	)
Recoveries		82			0			106			4			129			0			321
Provision		4,836			(7,904	)		1,126			6,321			308			(165	)		4,522

Ending balance	$	38,495		$	13,424		$	5,024		$	19,316		$	4,259		$	5,128		$	85,646