Loans and Allowance for Credit Losses

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



	September 30, 2013		December 31, 2012
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,008,316	$	1,019,822
Real estate construction	74,025		87,438
Residential real estate	1,280,990		1,241,565
Commercial real estate	1,272,366		1,273,661
Loans to individuals	604,307		582,218
Total loans and leases net of unearned income	$	4,240,004	$	4,204,704

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 provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movements between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas, loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

The following tables represent our credit risk profile by creditworthiness:



	September 30, 2013
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	940,572	$	60,322	$	1,263,936	$	1,190,752	$	603,829	$	4,059,411
Non-Pass
OAEM	25,287		1,046		5,375		41,688		1		73,397
Substandard	42,457		12,657		11,679		39,926		477		107,196
Doubtful	—		—		—		—		—		—
Total Non-Pass	67,744		13,703		17,054		81,614		478		180,593
Total	$	1,008,316	$	74,025	$	1,280,990	$	1,272,366	$	604,307	$	4,240,004



	December 31, 2012
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	925,868	$	64,353	$	1,224,849	$	1,119,093	$	582,039	$	3,916,202
Non-Pass
OAEM	31,049		925		5,647		82,581		3		120,205
Substandard	62,905		18,638		11,069		71,987		176		164,775
Doubtful	—		3,522		—		—		—		3,522
Total Non-Pass	93,954		23,085		16,716		154,568		179		288,502
Total	$	1,019,822	$	87,438	$	1,241,565	$	1,273,661	$	582,218	$	4,204,704

Portfolio Risks

The credit quality of our loan portfolio represents significant risk to our earnings, capital, regulatory agency relationships, investment community reputation 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.

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of September 30, 2013. 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.

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

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, 2013 and December 31, 2012. 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, 2013
	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	$	601	$	109	$	203	$	24,365	$	25,278	$	983,038	$	1,008,316
Real estate construction	12		—		—		2,850		2,862		71,163		74,025
Residential real estate	3,942		1,072		988		10,456		16,458		1,264,532		1,280,990
Commercial real estate	570		210		116		22,074		22,970		1,249,396		1,272,366
Loans to individuals	2,581		859		1,057		184		4,681		599,626		604,307
Total	$	7,706	$	2,250	$	2,364	$	59,929	$	72,249	$	4,167,755	$	4,240,004



	December 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	$	991	$	620	$	288	$	29,258	$	31,157	$	988,665	$	1,019,822
Real estate construction	2		19		15		9,778		9,814		77,624		87,438
Residential real estate	6,597		2,357		730		9,283		18,967		1,222,598		1,241,565
Commercial real estate	3,339		1,389		195		46,023		50,946		1,222,715		1,273,661
Loans to individuals	3,140		934		1,219		176		5,469		576,749		582,218
Total	$	14,069	$	5,319	$	2,447	$	94,518	$	116,353	$	4,088,351	$	4,204,704

Nonaccrual Loans

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed in nonaccrual status at 150 days past due.

When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal 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 categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are considered to be impaired loans.

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 $36.3 million during the nine-months ended September 30, 2013. Contributing to this decrease was the sale of $17.2 million of loans related to a real estate developer in eastern Pennsylvania as well as a $2.5 million commercial real estate loan in Nevada and a $3.5 million construction loan for a Florida condominium project. Also, a $3.8 million hotel resort syndication loan in the state of Washington and a $2.3 million commercial loan to a western Pennsylvania excavation company were returned to accrual status during the first nine months of 2013. Additionally, $21.2 million in charge-offs were recognized on four commercial loan relationships during the first nine months of 2013, including $2.8 million for a commercial real estate loan to a western Pennsylvania non-profit healthcare facility who recently filed for bankruptcy, $3.0 million for a commercial real estate loan to a western Pennsylvania student housing project which paid off during the third quarter of 2013, $2.3 million for a commercial industrial loan to a local energy company and $13.1 million for an unsecured commercial loan to a western Pennsylvania real estate developer.

A total of $39.8 million of loans were moved into nonaccrual status during the nine-months ended September 30, 2013. Five commercial loan relationships comprise $32.7 million of this total. These relationships include:


•	$12.7 million in commercial industrial loans to a local energy company,


•	a $7.6 million commercial real estate loan to a real estate management company in western Pennsylvania,


•	a $5.7 million commercial real estate relationship to a western Pennsylvania commercial real estate developer, of which $0.5 million was charged-off and $4.8 million was moved to OREO, all during the nine-months ended September 30, 2013,


•	a $3.6 million commercial relationship to a specialty metal processor in western Pennsylvania, and


•	a $3.1 million commercial relationship with a western Pennsylvania glass manufacturer.

In addition to this, $2.7 million in consumer loans which were 150 days or more past due were moved to nonaccrual status. Beginning in the third quarter of 2012, consumer loans are moved to nonaccrual status once they reach 150 days past due, however, in prior periods, these loans were not placed in nonaccrual status if they were well secured and in the process of collection.

The specific allowance for nonperforming loans decreased by $9.5 million at September 30, 2013 compared to December 31, 2012, primarily due to charge-offs of amounts reserved for in prior periods as well as the payoff of certain nonaccrual loans previously discussed. Unfunded commitments related to nonperforming loans were $0.5 million at September 30, 2013 and after consideration of available collateral related to these commitments, an off balance sheet reserve of $0.2 million was established.

There were no loans held for sale at September 30, 2013 and December 31, 2012; however, sales of loans during the nine-months ended September 30, 2013 and 2012 resulted in gains of $0.6 million and $2.9 million, respectively.

Significant nonaccrual loans as of September 30, 2013, include the following:


•	$12.7 million of commercial industrial loans to a local energy company. These loans were originated from 2008 to 2011 and were placed in nonaccrual status during the third quarter of 2013. One of these loans, totaling $3.3 million, was modified resulting in TDR classification in the second quarter of 2012. An updated valuation of the collateral was completed during the third quarter of 2013.


•	$7.6 million commercial industrial loan to a real estate management company in western Pennsylvania. These loans were originated in 2008 and were placed on nonaccrual status in the second quarter of 2013. The most recent appraisal for this real estate collateral was completed in the second quarter of 2013.


•	$2.8 million, the remaining portion net of reserves, of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in 2004 and was placed on nonaccrual status in the fourth quarter of 2009. Charge-offs of $28.5 million have been recorded on this loan, of which $13.1 million occurred in the second quarter of 2013.


•	$3.5 million commercial real estate and industrial loans to a specialty metal processor in western Pennsylvania. This loan was originated in 2003 and was placed on nonaccrual status in the second quarter of 2013. The assets collateralizing this relationship as well as the appraisal for the real estate collateral were valued in the first quarter of 2013.


•	$3.4 million commercial real estate loan to an in-patient facility in western Pennsylvania. This loan was originated in 2008 and placed on nonaccrual status in September 2012. Charge-offs of $2.8 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the fourth quarter of 2012.

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, 2013 and December 31, 2012. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on its period end allowance position.



	September 30, 2013						December 31, 2012
	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	$	10,209	$	11,137			$	8,080	$	8,983
Real estate construction	2,251		5,795				8,491		35,555
Residential real estate	9,493		10,118				7,928		8,401
Commercial real estate	21,695		23,111				33,259		35,401
Loans to individuals	257		272				256		256
Subtotal	43,905		50,433				58,014		88,596
With an allowance recorded:
Commercial, financial, agricultural and other	16,530		17,064		4,889		26,532		27,412		10,331
Real estate construction	1,866		2,181		165		2,756		3,087		300
Residential real estate	3,406		3,440		1,377		2,695		2,696		780
Commercial real estate	5,512		8,924		1,808		17,558		17,896		6,367
Loans to individuals	—		—		—		—		—		—
Subtotal	27,314		31,609		8,239		49,541		51,091		17,778
Total	$	71,219	$	82,042	$	8,239	$	107,555	$	139,687	$	17,778



	For the Nine-Months Ended September 30
	2013				2012
	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	$	14,482	$	147	$	9,281	$	116
Real estate construction	5,390		—		6,641		—
Residential real estate	9,376		129		7,604		17
Commercial real estate	26,390		119		27,869		50
Loans to individuals	248		3		9		—
Subtotal	55,886		398		51,404		183
With an allowance recorded:
Commercial, financial, agricultural and other	15,552		46		21,025		5
Real estate construction	1,848		35		7,381		—
Residential real estate	3,001		24		1,532		20
Commercial real estate	5,628		1		2,713		11
Loans to individuals	—		—		—		—
Subtotal	26,029		106		32,651		36
Total	$	81,915	$	504	$	84,055	$	219




	For the Three-Months Ended September 30
	2013				2012
	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	$	14,000	$	41	$	6,664	$	94
Real estate construction	2,340		—		4,954		—
Residential real estate	9,977		52		4,374		6
Commercial real estate	23,428		42		29,878		14
Loans to individuals	251		1		28		—
Subtotal	49,996		136		45,898		114
With an allowance recorded:
Commercial, financial, agricultural and other	10,370		16		25,469		2
Real estate construction	1,541		8		8,848		—
Residential real estate	3,349		10		2,130		6
Commercial real estate	5,371		1		4,754		11
Loans to individuals	—		—		—		—
Subtotal	20,631		35		41,201		19
Total	$	70,627	$	171	$	87,099	$	133

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:



	September 30, 2013		December 31, 2012
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	11,290	$	13,037
Nonaccrual status	17,807		50,979
Total	$	29,097	$	64,016
Commitments
Letters of credit	$	—	$	1,574
Unused lines of credit	3,244		—
Total	$	3,244	$	1,574

At September 30, 2013, troubled debt restructured loans decreased $34.9 million compared to December 31, 2012 and commitments related to troubled debt restructured loans increased $1.7 million for the same period. This decrease in loans is primarily a result of the sale of a $17.2 million loan for a commercial real estate developer in eastern Pennsylvania and the charge-off of $13.1 million related to an unsecured loan to a western Pennsylvania real estate developer. The increase in unused line of credit commitments is related to two commercial borrowers.

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings:



	For the Nine-Months Ended September 30, 2013
		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	7	$	2,969	$	—	$	105	$	3,074	$	1,041	$	198
Residential real estate	32	347		350		1,552		2,249		1,924		274
Commercial real estate	6	758		244		1,551		2,553		2,484		1,062
Loans to individuals	12	9		70		28		107		83		—
Total	57	$	4,083	$	664	$	3,236	$	7,983	$	5,532	$	1,534



	For the Nine-Months Ended September 30, 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)
Commercial, financial, agricultural and other	10	$	1,599	$	187	$	7,538	$	9,324	$	8,885	$	3,140
Real estate construction	1	823		—		—		823		791		—
Residential real estate	3	—		97		83		180		131		—
Commercial real estate	1	—		516		—		516		529		98
Total	15	$	2,422	$	800	$	7,621	$	10,843	$	10,336	$	3,238

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate 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, 2013 and 2012, $0.6 million and $0.8 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization. For both 2013 and 2012 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.




	For the Three-Months Ended September 30, 2013
		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	4	$	2,442	$	—	$	93	$	2,535	$	601	$	198
Residential real estate	10	67		24		269		360		361		—
Commercial real estate	5	758		—		1,551		2,309		2,252		1,062
Loans to individuals	6	10		36		21		67		58		—
Total	25	$	3,277	$	60	$	1,934	$	5,271	$	3,272	$	1,260




	For the Three-Months Ended September 30, 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)
Commercial, financial, agricultural and other	6	$	1,153	$	169	$	1,509	$	2,831	$	3,004	$	746
Commercial real estate	1	—		516		—		516		529		98
Total	7	$	1,153	$	685	$	1,509	$	3,347	$	3,533	$	844

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate 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 September 30, 2013 and 2012, $45 thousand and $0.7 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization. For both 2013 and 2012 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to restructured loans that were considered to default during the nine-months ended September 30:



	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	1	$	9	—	$	—
Loans to individuals	2	9		—	—
Total	3	$	18	—	$	—

The following table provides information related to restructured loans that were considered to default during the three-months ended September 30:



	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	1	$	9	—	$	—
Loans to individuals	1	5		—	—
Total	2	$	14	—	$	—

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



	For the Nine-Months Ended September 30, 2013
	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	$	19,852		$	8,928		$	5,908		$	22,441		$	4,132		$	5,926	$	67,187
Charge-offs	(17,302		)	(773		)	(1,400		)	(10,051		)	(2,669		)	—		(32,195		)
Recoveries	345			140			883			121			465			—		1,954
Provision (credit)	12,038			(1,865		)	446			4,318			2,266			808		18,011
Ending Balance	$	14,933		$	6,430		$	5,837		$	16,829		$	4,194		$	6,734	$	54,957
Ending balance: individually evaluated for impairment	$	4,889		$	165		$	1,377		$	1,808		$	—		$	—	$	8,239
Ending balance: collectively evaluated for impairment	10,044			6,265			4,460			15,021			4,194			6,734		46,718
Loans:
Ending balance	1,008,316			74,025			1,280,990			1,272,366			604,307					4,240,004
Ending balance: individually evaluated for impairment	25,620			4,028			9,794			25,197			—					64,639
Ending balance: collectively evaluated for impairment	982,696			69,997			1,271,196			1,247,169			604,307					4,175,365



	For the Nine-Months Ended September 30, 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	(4,939		)	(2,356		)	(2,984		)	(638		)	(2,494		)	—		(13,411		)
Recoveries	349			121			331			256			396			—		1,453
Provision (credit)	4,470			4,341			1,120			1,855			2,074			978		14,838
Ending Balance	$	18,080		$	8,862		$	6,704		$	20,434		$	4,220		$	5,814	$	64,114
Ending balance: individually evaluated for impairment	$	7,306		$	973		$	719		$	3,916		$	—		$	—	$	12,914
Ending balance: collectively evaluated for impairment	10,774			7,889			5,985			16,518			4,220			5,814		51,200
Loans:
Ending balance	1,087,019			95,425			1,228,328			1,217,249			586,278					4,214,299
Ending balance: individually evaluated for impairment	32,833			11,427			7,224			37,369			—					88,853
Ending balance: collectively evaluated for impairment	1,054,186			83,998			1,221,104			1,179,880			586,278					4,125,446



	For the Three-Months Ended September 30, 2013
	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	$	16,575		$	8,246		$	6,439		$	16,128		$	4,142		$	5,922	$	57,452
Charge-offs	(3,081		)	(18		)	(757		)	(813		)	(914		)	—		(5,583		)
Recoveries	81			81			71			13			128			—		374
Provision (credit)	1,358			(1,879		)	84			1,501			838			812		2,714
Ending Balance	$	14,933		$	6,430		$	5,837		$	16,829		$	4,194		$	6,734	$	54,957




	For the Three-Months Ended September 30, 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	$	19,302		$	8,001		$	6,619		$	17,638		$	4,209		$	5,907		$	61,676
Charge-offs	(1,271		)	(2,016		)	(530		)	(97		)	(756		)	—			(4,670		)
Recoveries	74			29			49			70			132			—			354
Provision (credit)	(25		)	2,848			566			2,823			635			(93		)	6,754
Ending Balance	$	18,080		$	8,862		$	6,704		$	20,434		$	4,220		$	5,814		$	64,114

Additional discussion related to changes in the allowance for credit losses can be found in Management's Discussion and Analysis of financial results on pages 42 and 49 of this Form 10-Q.