Loans and Allowance for Credit Losses | 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 60 - 89 90 days Nonaccrual Total past 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 60 - 89 90 days Nonaccrual Total past 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 Unpaid Related Average Interest (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 Unpaid Related Average Interest 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 Interest (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 Extend Modify Modify Total Post- Specific (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 Extend Modify Modify Other Total Post- Specific (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 Extend Modify Modify Other Total Post- Specific (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 Recorded Number of Recorded Number of Recorded (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, Real estate Residential Commercial Loans to 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, Real estate Residential Commercial Loans to 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, Real estate Residential Commercial Loans to 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 |