Loans and Allowance for Credit Losses

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



	2017						2016
	Originated Loans		Acquired Loans		Total Loans		Originated Loans		Acquired Loans		Total Loans
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,122,741	$	40,642	$	1,163,383	$	1,131,148	$	8,399	$	1,139,547
Real estate construction	242,905		5,963		248,868		217,840		1,781		219,621
Residential real estate	1,206,119		220,251		1,426,370		1,165,851		63,341		1,229,192
Commercial real estate	1,892,185		126,911		2,019,096		1,717,043		25,167		1,742,210
Loans to individuals	543,411		6,248		549,659		546,589		2,188		548,777
Total loans	$	5,007,361	$	400,015	$	5,407,376	$	4,778,471	$	100,876	$	4,879,347

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 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 assist 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:



	2017
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated Loans
Pass	$	1,061,147	$	242,905	$	1,194,352	$	1,855,253	$	543,175	$	4,896,832
Non-Pass
OAEM	26,757		—		1,435		13,326		—		41,518
Substandard	30,431		—		10,332		23,606		236		64,605
Doubtful	4,406		—		—		—		—		4,406
Total Non-Pass	61,594		—		11,767		36,932		236		110,529
Total	$	1,122,741	$	242,905	$	1,206,119	$	1,892,185	$	543,411	$	5,007,361

Acquired Loans
Pass	$	34,573	$	5,963	$	217,824	$	121,536	$	6,231	$	386,127
Non-Pass
OAEM	5,567		—		798		3,517		—		9,882
Substandard	502		—		1,629		1,858		17		4,006
Doubtful	—		—		—		—		—		—
Total Non-Pass	6,069		—		2,427		5,375		17		13,888
Total	$	40,642	$	5,963	$	220,251	$	126,911	$	6,248	$	400,015



	2016
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated Loans
Pass	$	1,038,844	$	217,565	$	1,152,511	$	1,691,220	$	546,316	$	4,646,456
Non-Pass
OAEM	27,387		275		5,923		7,596		—		41,181
Substandard	64,917		—		7,417		18,227		273		90,834
Doubtful	—		—		—		—		—		—
Total Non-Pass	92,304		275		13,340		25,823		273		132,015
Total	$	1,131,148	$	217,840	$	1,165,851	$	1,717,043	$	546,589	$	4,778,471

Acquired Loans
Pass	$	7,591	$	1,781	$	62,919	$	24,043	$	2,185	$	98,519
Non-Pass
OAEM	486		—		—		—		—		486
Substandard	322		—		422		1,124		3		1,871
Doubtful	—		—		—		—		—		—
Total Non-Pass	808		—		422		1,124		3		2,357
Total	$	8,399	$	1,781	$	63,341	$	25,167	$	2,188	$	100,876

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, 2017 and 2016 were $12.5 million and $26.3 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, 2017. 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.



	2017
	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)
Originated Loans
Commercial, financial, agricultural and other	$	378	$	61	$	40	$	18,741	$	19,220	$	1,103,521	$	1,122,741
Real estate construction	199		—		—		—		199		242,706		242,905
Residential real estate	4,618		1,025		1,076		6,225		12,944		1,193,175		1,206,119
Commercial real estate	2,198		28		6		3,240		5,472		1,886,713		1,892,185
Loans to individuals	1,899		769		623		236		3,527		539,884		543,411
Total	$	9,292	$	1,883	$	1,745	$	28,442	$	41,362	$	4,965,999	$	5,007,361

Acquired Loans
Commercial, financial, agricultural and other	$	6	$	7	$	—	$	436	$	449	$	40,193	$	40,642
Real estate construction	—		—		—		—		—		5,963		5,963
Residential real estate	148		9		83		705		945		219,306		220,251
Commercial real estate	—		—		—		1,077		1,077		125,834		126,911
Loans to individuals	36		20		26		17		99		6,149		6,248
Total	$	190	$	36	$	109	$	2,235	$	2,570	$	397,445	$	400,015



	2016
	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)
Originated Loans
Commercial, financial, agricultural and other	$	2,380	$	171	$	75	$	17,928	$	20,554	$	1,110,594	$	1,131,148
Real estate construction	183		—		—		—		183		217,657		217,840
Residential real estate	4,133		1,089		995		5,792		12,009		1,153,842		1,165,851
Commercial real estate	265		327		57		3,443		4,092		1,712,951		1,717,043
Loans to individuals	1,640		776		970		273		3,659		542,930		546,589
Total	$	8,601	$	2,363	$	2,097	$	27,436	$	40,497	$	4,737,974	$	4,778,471

Acquired Loans
Commercial, financial, agricultural and other	$	486	$	—	$	—	$	—	$	486	$	7,913	$	8,399
Real estate construction	—		—		—		—		—		1,781		1,781
Residential real estate	148		39		34		422		643		62,698		63,341
Commercial real estate	—		—		—		162		162		25,005		25,167
Loans to individuals	1		7		—		3		11		2,177		2,188
Total	$	635	$	46	$	34	$	587	$	1,302	$	99,574	$	100,876

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 in doubt.

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, 2017 and December 31, 2016. Total gains of $21 thousand were recognized on sales of impaired loans during the year ended December 31, 2017. No gains were recognized on sales of impaired loans during the year ended December 31, 2016.

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, 2017 and 2016. 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, 2017, 2016 and 2015. 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.



	2017
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
Originated Loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	5,548	$	12,153			$	10,282	$	394
Real estate construction	—		—				—		—
Residential real estate	10,625		12,470				11,366		355
Commercial real estate	5,155		5,489				6,469		583
Loans to individuals	347		383				353		19
Subtotal	21,675		30,495				28,470		1,351
With an allowance recorded:
Commercial, financial, agricultural and other	16,866		21,094		$	3,478	9,391		96
Real estate construction	—		—		—		—		—
Residential real estate	456		478		107		167		—
Commercial real estate	954		954		128		143		4
Loans to individuals	—		—		—		—		—
Subtotal	18,276		22,526		3,713		9,701		100
Total	$	39,951	$	53,021	$	3,713	$	38,171	$	1,451
Acquired Loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	436	$	449			$	476	$	—
Real estate construction	—		—				25		—
Residential real estate	666		965				535		—
Commercial real estate	940		1,842				2,135		—
Loans to individuals	17		17				6		—
Subtotal	2,059		3,273				3,177		—
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—
Real estate construction	—		—		—		—		—
Residential real estate	93		122		4		74		—
Commercial real estate	137		150		29		155		—
Loans to individuals	—		—		—		—		—
Subtotal	230		272		33		229		—
Total	$	2,289	$	3,545	$	33	$	3,406	$	—



	2016
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
Originated Loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	9,549	$	15,369			$	23,146	$	576
Real estate construction	—		—				4		44
Residential real estate	10,873		13,004				10,957		312
Commercial real estate	5,765		6,905				6,718		170
Loans to individuals	382		507				409		15
Subtotal	26,569		35,785				41,234		1,117
With an allowance recorded:
Commercial, financial, agricultural and other	13,423		19,226		$	2,530	13,885		99
Real estate construction	—		—		—		—		—
Residential real estate	424		475		164		241		4
Commercial real estate	810		810		434		555		25
Loans to individuals	—		—		—		—		—
Subtotal	14,657		20,511		3,128		14,681		128
Total	$	41,226	$	56,296	$	3,128	$	55,915	$	1,245
Acquired Loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	—	$	—			$	—	$	—
Real estate construction	—		—				—		—
Residential real estate	406		480				406		—
Commercial real estate	162		162				162		—
Loans to individuals	3		3				3		—
Subtotal	571		645				571		—
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—
Real estate construction	—		—		—		—		—
Residential real estate	16		16		16		16		—
Commercial real estate	—		—		—		—		—
Loans to individuals	—		—		—		—		—
Subtotal	16		16		16		16		—
Total	$	587	$	661	$	16	$	587	$	—



	2015
	Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	17,692	$	216
Real estate construction	95		—
Residential real estate	10,635		172
Commercial real estate	7,890		90
Loans to individuals	338		4
Subtotal	36,650		482
With an allowance recorded:
Commercial, financial, agricultural and other	7,731		129
Real estate construction	—		—
Residential real estate	403		—
Commercial real estate	674		4
Loans to individuals	—		—
Subtotal	8,808		133
Total	$	45,458	$	615

Unfunded commitments related to nonperforming loans were $2.4 million and $1.8 million at December 31, 2017 and 2016, respectively. After considering the collateral related to these commitments, a reserve of $178 thousand and $12 thousand was established for these off balance sheet exposures at December 31, 2017 and 2016, 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:



	2017		2016		2015
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	11,563	$	13,790	$	14,139
Nonaccrual status	11,222		11,569		12,360
Total	$	22,785	$	25,359	$	26,499
Commitments
Letters of credit	$	60	$	—	$	—
Unused lines of credit	$	54	$	358	$	3,252
Total	$	114	$	358	$	3,252

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:



	2017
		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	$	6,768	$	1,806	$	987	$	9,561	$	6,946	$	566
Residential real estate	20	134		261		573		968		851		1
Commercial real estate	5	179		—		269		448		412		29
Loans to individuals	10	—		28		49		77		65		—
Total	41	$	7,081	$	2,095	$	1,878	$	11,054	$	8,274	$	596



	2016
		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	5	$	23	$	6,318	$	3,854	$	10,195	$	6,210	$	317
Residential real estate	39	107		214		2,619		2,940		2,698		124
Commercial real estate	8	1,368		—		25		1,393		1,271		59
Loans to individuals	13	23		82		25		130		96		—
Total	65	$	1,521	$	6,614	$	6,523	$	14,658	$	10,275	$	500



	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

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, 2017, 2016 and 2015, $0.3 million, $6.6 million and $3.7 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 year ending December 31:



	2017			2016			2015
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	—	$	—	4	$	313	3	$	97
Loans to individuals	1	2		—	—		—	—
Total	1	$	2	4	$	313	3	$	97

The following tables provide detail related to the allowance for credit losses for the years ended December 31.



	2017
	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:
Originated Loans:
Beginning balance	$	35,974		$	577		$	2,492		$	6,619		$	4,504		$	50,166
Charge-offs	(6,176		)	—			(1,261		)	(340		)	(4,220		)	(11,997		)
Recoveries	3,900			465			304			274			460			5,403
Provision (credit)	(10,280		)	307			1,218			10,775			2,660			4,680
Ending balance	23,418			1,349			2,753			17,328			3,404			48,252
Acquired Loans:
Beginning balance	$	—		$	—		$	19		$	—		$	—		$	19
Charge-offs	(458		)	—			(26		)	—			(28		)	(512		)
Recoveries	1			5			67			4			55			132
Provision (credit)	468			(5		)	(54		)	25			(27		)	407
Ending balance	11			—			6			29			—			46
Total ending balance	$	23,429		$	1,349		$	2,759		$	17,357		$	3,404		$	48,298
Ending balance: individually evaluated for impairment	$	3,478		$	—		$	111		$	157		$	—		$	3,746
Ending balance: collectively evaluated for impairment	19,951			1,349			2,648			17,200			3,404			44,552
Loans:
Ending balance	1,163,383			248,868			1,426,370			2,019,096			549,659			5,407,376
Ending balance: individually evaluated for impairment	22,450			—			6,698			6,003			—			35,151
Ending balance: collectively evaluated for impairment	1,140,933			248,868			1,419,672			2,013,093			549,659			5,372,225



	2016
	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	$	31,035		$	887		$	2,606		$	11,924		$	4,360		$	50,812
Charge-offs	(19,603		)	—			(1,189		)	(570		)	(4,943		)	(26,305		)
Recoveries	4,164			562			481			1,522			469			7,198
Provision (credit)	20,378			(872		)	594			(6,257		)	4,618			18,461
Ending balance on originated loans	35,974			577			2,492			6,619			4,504			50,166
Ending balance on acquired loans ⁽¹⁾	—			—			19			—			—			19
Total ending balance	$	35,974		$	577		$	2,511		$	6,619		$	4,504		$	50,185
Ending balance: individually evaluated for impairment	$	2,530		$	—		$	180		$	434		$	—		$	3,144
Ending balance: collectively evaluated for impairment	33,444			577			2,331			6,185			4,504			47,041
Loans:
Ending balance	1,139,547			219,621			1,229,192			1,742,210			548,777			4,879,347
Ending balance: individually evaluated for impairment	22,325			—			5,875			5,468			—			33,668
Ending balance: collectively evaluated for impairment	1,117,222			219,621			1,223,317			1,736,742			548,777			4,845,679

⁽¹⁾ Amount reflects provision expense and ending allowance balance for loans acquired in 2016 as part of the purchase of FirstMerit branches.



	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