Note 12—Loans and Allowance for Credit Losses

The following table provides outstanding balances related to each of our loan types as of December 31:


	2011		2010
	(dollars in thousands)
Commercial, financial, agricultural and other	$	996,739	$	913,814
Real estate construction		76,564		261,482
Residential real estate		1,137,059		1,127,273
Commercial real estate		1,267,432		1,354,074
Loans to individuals		565,849		561,440

Total loans net of unearned income		4,043,643	$	4,218,083

During 2011, outstanding loans decreased $174.4 million or 4% compared to balances outstanding at December 31, 2010. Decreases were experienced in the real estate construction and commercial real estate categories and can be attributed to our focus of managing down our large credit exposures as well as weaker loan demand. In an effort to do this, $13.4 million in real estate commercial loans were transferred to loans held for sale accounting for a small portion of the decrease in loans.

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 since origination 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 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 category for the years ended December 31:


	2011
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commerical 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


	2010
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commerical 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 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.

The credit quality of all bank loan portfolios was negatively impacted in recent years by the economic recession. First Commonwealth's loan portfolio incurred significant stress during the past three years in commercial real estate and real estate construction loans. Both in 2010 and 2009, many of the newly identified credit issues were out-of-market and generally of larger size in overvalued real estate markets, such as Nevada, Florida, and Arizona, and higher risk type projects, such as condominiums, resorts and water parks. Deterioration of collateral values related to these loans continued in 2011 as we worked to resolve many of these credits.

Credit quality measures improved with criticized loans or loans designated OAEM, substandard, impaired or doubtful decreasing $226.9 million, or 44%, from December 31, 2010 with a current outstanding balance of $292.0 million at December 31, 2011. These loans comprise 7% of the total portfolio in comparison to 12% in the prior year. Further indications of improvement in credit quality can be seen in the $7.9 million, or 18%, decrease in delinquency on accruing loans. As of December 31, 2011, nonaccrual loans decreased $37.7 million, or 32%, compared to December 31, 2010 as a result of charge-offs, paydowns, and payoffs, as well as transfers to held for sale. Total charge-offs for the year ended December 31, 2011 were $68.3 million, including charge-offs of $9.5 million recognized on loans transferred to held for sale. Total charge-offs for the year ended December 31, 2010 were $75.3 million.

Criticized 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 91% 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 adhering to tighter geographic markets and credit standards 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.

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 December 31. 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.


	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


	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

Nonaccrual Loans

The previous table 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.

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 probably 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 decreased $5.3 million to $112.2 million at December 31, 2011 compared to $117.5 million at December 31, 2010. Included in the 2011 total of nonperforming loans is $13.4 million of loans held for sale. 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. Nonperforming loans at December 31, 2011 included an $11.3 million loan for a waste management company, which was classified as a troubled debt restructured loan. This loan was paid off in full in January 2012.

Unfunded commitments related to nonperforming loans were $6.7 million and $13.1 million at December 31, 2011 and 2010, respectively. An off balance sheet reserve of $0.2 million and $0.6 million was established for these commitments at December 31, 2011 and 2010.

Significant nonaccrual loans as of December 31, 2011 include the following;

•

$19.9 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.

•

$16.7 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.

•

$10.3 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 and a $2.7 million charge-off has been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the third quarter of 2011. When transferred to held for sale, the fair value of this loan was determined by a discounted cash flow analysis.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of December 31, 2011 and 2010. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired for the years ended December 31, 2011, 2010 and 2009. Average balances are calculated based on month-end balances of the loans for the period reported.


	2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	2,010	$	3,418	$	0	$	3,887	$	20
Real estate construction		10,814		20,161		0		23,254		10
Residential real estate		3,125		3,513		0		2,702		9
Commercial real estate		36,777		41,974		0		35,817		799
Loans to individuals		0		0		0		10		0

Subtotal		52,726		69,066		0		65,670		838
With an allowance recorded:
Commercial, financial, agricultural and other		34,056		34,341		9,069		30,456		152
Real estate construction		6,298		21,402		2,960		14,465		0
Residential real estate		955		955		93		615		7
Commercial real estate		4,717		4,863		1,114		28,716		396
Loans to individuals		0		0		0		0		0

Subtotal		46,026		61,561		13,236		74,252		555

Total	$	98,752	$	130,627	$	13,236	$	139,922	$	1,393


	2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	2,963	$	5,745	$	0	$	6,051	$	0
Real estate construction		14,319		62,317		0		35,898		0
Residential real estate		1,961		2,534		0		3,165		0
Commercial real estate		22,970		23,830		0		24,198		12
Loans to individuals		60		125		0		58		0

Subtotal		42,273		94,551		0		69,370		12
With an allowance recorded:
Commercial, financial, agricultural and other		23,118		38,940		6,709		43,778		14
Real estate construction		30,351		34,954		11,855		16,641		0
Residential real estate		344		344		56		237		0
Commercial real estate		21,401		21,626		5,287		10,711		4
Loans to individuals		0		0		0		0		0

Subtotal		75,214		95,864		23,907		71,367		18

Total	$	117,487	$	190,415	$	23,907	$	140,737	$	30


	2009
	Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	13,248	$	7
Real estate construction		26,016		0
Residential real estate		3,740		0
Commercial real estate		13,891		0
Loans to individuals		14		0

Subtotal		56,909		7
With an allowance recorded:
Commercial, financial, agricultural and other		5,502		0
Real estate construction		16,352		0
Residential real estate		339		0
Commercial real estate		4,741		6
Loans to individuals		0		0

Subtotal		26,934		6

Total	$	83,843	$	13

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 considering the new guidance. 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.

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans as of December 31:


	2011		2010		2009
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	20,276	$	1,336	$	619
Nonaccrual status		44,841		31,410		0

Total	$	65,117	$	32,746	$	619

Commitments
Letters of credit	$	12,580	$	11,321	$	0
Unused lines of credit		42		1,095		0

Total	$	12,622	$	12,416	$	0

The outstanding commitments as of December 31, 2011 and 2010 are primarily committed to one loan relationship that paid off in full in January 2012.

During 2011, a $2.7 million charge-off was recorded in relation to the transfer of one of the loans included in commercial real estate in the table below to held for sale. The remaining balance of this loan is $4.1 million. Three commercial real estate loans, totaling $10.2 million, were classified as troubled debt restructured loans during 2011 and subsequently paid off prior to year end. In addition, $5.6 million was charged-off in the restructuring of one relationship modified during the fourth quarter. The remaining balance of the loans included in this relationship is $18.5 million. The remainder of changes in loan balances for 2011 between the pre-modification balance and the post-modification balance is due to customer payments.

During 2010, $15.4 million in debt forgiveness was granted to a Pennsylvania real estate developer. The remaining changes between pre-modification balances and post-modification balances during 2010 are due to customer payments.

During 2009, all decreases in balances between the pre-modification and post-modification balance 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 years ending December 31:


	2011
			Reason for 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		13	$	100	$	475	$	2,218	$	2,793	$	2,749	$	743
Real estate construction		6		2,554		86		0		2,640		2,852		0
Residential real estate		10		0		515		601		1,116		1,100		65
Commercial real estate		22		17,202		24,226		2,311		43,739		25,292		507

Total		51	$	19,856	$	25,302	$	5,130	$	50,288	$	31,993	$	1,315


	2010
			Reason for 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		7	$	250	$	105	$	36,591	$	36,946	$	21,180	$	4,972
Real estate construction		2		109		2,070		0		2,179		1,051		0
Residential real estate		2		0		13		57		70		67		0
Commercial real estate		4		0		10,685		241		10,926		9,870		3

Total		15	$	359	$	12,873	$	36,889	$	50,121	$	32,168	$	4,975


	2009
			Reason for 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 real estate		1	$	0	$	506	$	0	$	506	$	503	$	255

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 years ended December 31, 2011, 2010 and 2009, $25.2 million, $0.1 million and $0.5 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. As of December 31, 2011, one commercial real estate loan, restructured during the first quarter of 2011 with a current recorded balance of $4.1 million, was considered to be in default. As of December 31, 2011, this loan was transferred to held for sale. As of December 31, 2010 and 2009, there were no loans restructured within the preceding twelve months which were considered to be in default.

The following tables provide detail related to the allowance for credit losses for the years ended December 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		(7,114	)		(28,886	)		(4,107	)		(24,861	)		(3,325	)		0			(68,293	)
Recoveries		473			955			132			349			573			0			2,482
Provision		3,141			16,685			6,758			26,560			2,781			(109	)		55,816

Ending Balance	$	18,200		$	6,756		$	8,237		$	18,961		$	4,244		$	4,836		$	61,234

Ending balance: individually evaluated for impaired	$	9,069		$	2,960		$	93		$	1,114		$	0		$	0		$	13,236
Ending balance: collectively evaluated for impaired		9,131			3,796			8,144			17,847			4,244			4,836			47,998
Loans:
Ending balance		996,739			76,564			1,137,059			1,267,432			565,849						4,043,643
Ending balance: individually evaluated for impaired		37,639			14,667			2,606			39,832			0						94,744
Ending balance: collectively evaluated for impaired		959,100			61,897			1,134,453			1,227,600			565,849						3,948,899


	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		(22,293	)		(41,483	)		(5,226	)		(2,466	)		(3,841	)		0		(75,309	)
Recoveries		2,409			0			252			163			523			0		3,347
Provision		10,215			41,261			4,581			1,690			2,802			1,003		61,552

Ending Balance	$	21,700		$	18,002		$	5,454		$	16,913		$	4,215		$	4,945	$	71,229

Ending balance: individually evaluated for impaired	$	6,709		$	11,855		$	56		$	5,287		$	0		$	0	$	23,907
Ending balance: collectively evaluated for impaired		14,991			6,147			5,398			11,626			4,215			4,945		47,322
Loans:
Ending balance		913,814			261,482			1,127,273			1,354,074			561,440					4,218,083
Ending balance: individually evaluated for impaired		25,694			44,485			832			42,863			0					113,874
Ending balance: collectively evaluated for impaired		888,120			216,997			1,126,441			1,311,211			561,440					4,104,209


	2009
	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	$	17,558		$	12,961		$	4,347		$	9,424		$	4,195		$	4,274		$	52,759
Charge-offs		(20,536	)		(36,892	)		(4,604	)		(7,302	)		(4,378	)		0			(73,712	)
Recoveries		448			0			81			914			580			0			2,023
Provision		33,899			42,155			6,023			14,490			4,334			(332	)		100,569

Ending Balance	$	31,369		$	18,224		$	5,847		$	17,526		$	4,731		$	3,942		$	81,639

Ending balance: individually evaluated for impaired	$	19,635		$	11,886		$	124		$	1,621		$	0		$	0		$	33,266
Ending balance: collectively evaluated for impaired		11,734			6,338			5,723			15,905			4,731			3,942			48,373
Loans:
Ending balance		1,127,320			428,744			1,202,386			1,320,715			557,336						4,636,501
Ending balance: individually evaluated for impaired		51,256			68,242			928			23,748			0						144,174
Ending balance: collectively evaluated for impaired		1,076,064			360,502			1,201,458			1,296,967			557,336						4,492,327