Loans and Allowance for Credit Losses

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



	2015		2014
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,150,906	$	1,052,109
Real estate construction	220,736		120,785
Residential real estate	1,224,465		1,226,344
Commercial real estate	1,479,000		1,405,256
Loans to individuals	608,643		652,814
Total loans and leases net of unearned income	$	4,683,750	$	4,457,308

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 provide 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 category for the years ended December 31:



	2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,074,858	$	220,267	$	1,209,606	$	1,436,714	$	608,342	$	4,549,787
Non-Pass
OAEM	11,825		442		5,244		30,012		—		47,523
Substandard	64,223		27		9,615		12,274		301		86,440
Doubtful	—		—		—		—		—		—
Total Non-Pass	76,048		469		14,859		42,286		301		133,963
Total	$	1,150,906	$	220,736	$	1,224,465	$	1,479,000	$	608,643	$	4,683,750



	2014
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	983,357	$	112,536	$	1,214,920	$	1,353,773	$	652,596	$	4,317,182
Non-Pass
OAEM	32,563		8,013		2,315		29,479		—		72,370
Substandard	32,028		236		9,109		22,004		218		63,595
Doubtful	4,161		—		—		—		—		4,161
Total Non-Pass	68,752		8,249		11,424		51,483		218		140,126
Total	$	1,052,109	$	120,785	$	1,226,344	$	1,405,256	$	652,814	$	4,457,308

The change in the amount of OAEM and Substandard loans at December 31, 2015 compared to December 31, 2014 is primarily the result of two commercial industrial borrowers that migrated from OAEM to non-accrual status during 2015. Additional details on these loans are provided on page 75.

Portfolio Risks

The credit quality of our loan portfolio can potentially represent 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.

Total gross charge-offs for the years ended December 31, 2015 and 2014 were $18.9 million and $17.5 million, respectively.

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 December 31, 2015. 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.

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.



	2015
	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	$	364	$	49	$	129	$	23,653	$	24,195	$	1,126,711	$	1,150,906
Real estate construction	280		—		—		28		308		220,428		220,736
Residential real estate	4,175		1,055		1,315		6,500		13,045		1,211,420		1,224,465
Commercial real estate	781		—		65		6,223		7,069		1,471,931		1,479,000
Loans to individuals	2,998		774		946		301		5,019		603,624		608,643
Total	$	8,598	$	1,878	$	2,455	$	36,705	$	49,636	$	4,634,114	$	4,683,750



	2014
	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	$	2,816	$	213	$	264	$	27,007	$	30,300	$	1,021,809	$	1,052,109
Real estate construction	—		1		—		236		237		120,548		120,785
Residential real estate	5,162		1,295		1,077		7,900		15,434		1,210,910		1,226,344
Commercial real estate	1,797		122		—		7,306		9,225		1,396,031		1,405,256
Loans to individuals	3,698		1,059		1,278		218		6,253		646,561		652,814
Total	$	13,473	$	2,690	$	2,619	$	42,667	$	61,449	$	4,395,859	$	4,457,308

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 or repayment for 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.

There were no impaired loans held for sale at December 31, 2015 and December 31, 2014; sales of impaired loans during the years ended December 31, 2015 and 2014 resulted in gains of $0.4 million and $77 thousand, respectively.

Significant nonaccrual loans as of December 31, 2015, included the following:


•	A $7.5 million relationship of commercial industrial loans to an oil and gas well services company. These loans were originated in 2014 and were placed in nonaccrual status during the fourth quarter of 2015. All collateral valuations were completed in June or November of 2015.

•

A $5.6 million relationship 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. Two of these loans were modified resulting in TDR classification: one loan totaling $2.3 million was modified in 2012, and the other loan totaling $2.9 million was modified in 2014. During the year ended December 31, 2015, chargeoffs of $3.3 million related to this relationship were recorded. A gas reserve study was obtained in March 2015 and was internally updated in December 2015 for adjustments to the pricing forecast and production estimates. All other collateral was valued in November 2015.


•	A $3.9 million relationship of commercial industrial loans to an industrial manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. Charge-offs of $2.0 million related to this relationship were recognized during the fourth quarter of 2015. A valuation of the collateral was completed during the fourth quarter of 2015.


•	A $3.9 million relationship of commercial industrial loans to a manufacturer of sporting goods. These loans were originated from 2012 to 2015 and were placed in nonaccrual status during the fourth quarter of 2015. A valuation of the collateral was completed during the fourth quarter of 2015.

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, 2015 and 2014. 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, 2015, 2014 and 2013. Average balances are calculated based on month-end balances of the loans for the period reported and are included in the table below based on its period end allowance position.



	2015
	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	$	11,344	$	15,673			$	17,692	$	216
Real estate construction	28		117				95		—
Residential real estate	9,952		11,819				10,635		172
Commercial real estate	7,562		9,449				7,890		90
Loans to individuals	421		507				338		4
Subtotal	29,307		37,565				36,650		482
With an allowance recorded:
Commercial, financial, agricultural and other	20,132		22,590		$	6,952	7,731		129
Real estate construction	—		—		—		—		—
Residential real estate	461		672		51		403		—
Commercial real estate	944		1,008		42		674		4
Loans to individuals	—		—		—		—		—
Subtotal	21,537		24,270		7,045		8,808		133
Total	$	50,844	$	61,835	$	7,045	$	45,458	$	615



	2014
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest Income Recognized

With no related allowance recorded:
Commercial, financial, agricultural and other	$	9,439	$	10,937			$	11,536	$	133
Real estate construction	236		476				1,190		19
Residential real estate	10,773		12,470				11,592		210
Commercial real estate	8,768		10,178				8,830		98
Loans to individuals	288		337				308		4
Subtotal	29,504		34,398				33,456		464
With an allowance recorded:
Commercial, financial, agricultural and other	24,826		25,583		$	9,304	15,797		143
Real estate construction	—		—		—		—		—
Residential real estate	367		380		56		357		14
Commercial real estate	554		554		101		184		4
Loans to individuals	—		—		—		—		—
Subtotal	25,747		26,517		9,461		16,338		161
Total	$	55,251	$	60,915	$	9,461	$	49,794	$	625



	2013
	Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	14,454	$	73
Real estate construction	5,923		47
Residential real estate	9,280		211
Commercial real estate	27,881		250
Loans to individuals	255		3
Subtotal	57,793		584
With an allowance recorded:
Commercial, financial, agricultural and other	16,479		64
Real estate construction	515		—
Residential real estate	3,200		31
Commercial real estate	188		—
Loans to individuals	—		—
Subtotal	20,382		95
Total	$	78,175	$	679

Unfunded commitments related to nonperforming loans were $0.1 million and $46 thousand at December 31, 2015 and 2014, respectively. After consideration of available collateral related to these commitments, a reserve of $13 thousand and $14 thousand was established for these off balance sheet exposures at December 31, 2015 and 2014, respectively.

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 as of December 31:



	2015		2014		2013
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	14,139	$	12,584	$	13,495
Nonaccrual status	12,360		16,952		16,980
Total	$	26,499	$	29,536	$	30,475
Commitments
Unused lines of credit	3,252		4,120		452

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:



	2015
		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	12	$	1,751	$	3,195	$	4,527	$	9,473	$	8,823	$	1,330
Residential real estate	32	—		296		1,414		1,710		1,575		2
Commercial real estate	1	—		—		464		464		389		—
Loans to individuals	16	3		167		35		205		169		—
Total	61	$	1,754	$	3,658	$	6,440	$	11,852	$	10,956	$	1,332



	2014
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Other		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	9	$	5,487	$	—	$	14,529	$	—	$	20,016	$	13,785	$	4,665
Residential real estate	52	—		629		1,797		—		2,426		2,062		—
Commercial real estate	1	—		—		8		—		8		6		—
Loans to individuals	15	—		103		47		—		150		114		—
Total	77	$	5,487	$	732	$	16,381	$	—	$	22,600	$	15,967	$	4,665



	2013
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Other		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	14	$	3,462	$	—	$	1,677	$	—	$	5,139	$	3,104	$	906
Residential real estate	46	347		418		2,116		—		2,881		2,316		161
Commercial real estate	5	571		1,499		145		—		2,215		2,184		34
Loans to individuals	17	10		101		33		—		144		109		—
Total	82	$	4,390	$	2,018	$	3,971	$	—	$	10,379	$	7,713	$	1,101

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, 2015, 2014 and 2013, $3.7 million, $0.6 million and $2.0 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 table provides information related to restructured loans that were considered to be in default during the as of December 31:



	2015			2014			2013
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	3	$	97	2	$	7	1	$	19
Commercial real estate	—	—		1	6		—	—
Total	3	$	97	3	$	13	1	$	19

The following tables provide detail related to the allowance for credit losses for the years ended December 31. During 2013, the negative $5.9 million provision for credit losses related to the unallocated portion of the allowance is a result of it no longer being treated as a separate component of the allowance but instead is now incorporated into the reserve provided for each loan category. This portion of the allowance for credit losses reflects the qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience.



	2015
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	29,627		$	2,063		$	3,664		$	11,881		$	4,816		$	52,051
Charge-offs	(11,429		)	(8		)	(1,539		)	(1,538		)	(4,354		)	(18,868		)
Recoveries	1,097			84			587			229			684			2,681
Provision (credit)	11,740			(1,252		)	(106		)	1,352			3,214			14,948
Ending Balance	$	31,035		$	887		$	2,606		$	11,924		$	4,360		$	50,812
Ending balance: individually evaluated for impairment	$	6,952		$	—		$	51		$	42		$	—		$	7,045
Ending balance: collectively evaluated for impairment	24,083			887			2,555			11,882			4,360			43,767
Loans:
Ending balance	1,150,906			220,736			1,224,465			1,479,000			608,643			4,683,750
Ending balance: individually evaluated for impairment	30,767			—			6,099			7,143			—			44,009
Ending balance: collectively evaluated for impairment	1,120,139			220,736			1,218,366			1,471,857			608,643			4,639,741



	2014
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	22,663		$	6,600		$	7,727		$	11,778		$	5,457		$	54,225
Charge-offs	(8,911		)	(296		)	(3,153		)	(1,148		)	(3,964		)	(17,472		)
Recoveries	734			1,340			650			612			766			4,102
Provision (credit)	15,141			(5,581		)	(1,560		)	639			2,557			11,196
Ending Balance	$	29,627		$	2,063		$	3,664		$	11,881		$	4,816		$	52,051
Ending balance: individually evaluated for impairment	$	9,304		$	—		$	56		$	101		$	—		$	9,461
Ending balance: collectively evaluated for impairment	20,323			2,063			3,608			11,780			4,816			42,590
Loans:
Ending balance	1,052,109			120,785			1,226,344			1,405,256			652,814			4,457,308
Ending balance: individually evaluated for impairment	33,332			193			7,127			7,790			—			48,442
Ending balance: collectively evaluated for impairment	1,018,777			120,592			1,219,217			1,397,466			652,814			4,408,866



	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	(18,399		)	(773		)	(1,814		)	(10,513		)	(3,679		)	—			(35,178		)
Recoveries	455			501			1,264			136			633			—			2,989
Provision (credit)	20,755			(2,056		)	2,369			(286		)	4,371			(5,926		)	19,227
Ending Balance	$	22,663		$	6,600		$	7,727		$	11,778		$	5,457		$	—		$	54,225
Ending balance: individually evaluated for impairment	$	7,364		$	94		$	1,282		$	84		$	—		$	—		$	8,824
Ending balance: collectively evaluated for impairment	15,299			6,506			6,445			11,694			5,457			—			45,401
Loans:
Ending balance	1,021,056			93,289			1,262,718			1,296,472			610,298						4,283,833
Ending balance: individually evaluated for impairment	27,251			3,844			9,349			12,151			—						52,595
Ending balance: collectively evaluated for impairment	993,805			89,445			1,253,369			1,284,321			610,298						4,231,238