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: June 30, 2016 December 31, 2015 (dollars in thousands) Commercial, financial, agricultural and other $ 1,185,062 $ 1,150,906 Real estate construction 242,132 220,736 Residential real estate 1,199,005 1,224,465 Commercial real estate 1,648,222 1,479,000 Loans to individuals 569,355 608,643 Total loans $ 4,843,776 $ 4,683,750 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 Company’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. Movement 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: June 30, 2016 Commercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals Total (dollars in thousands) Pass $ 1,095,516 $ 241,840 $ 1,183,847 $ 1,625,206 $ 569,087 $ 4,715,496 Non-Pass OAEM 11,923 292 6,846 7,221 — 26,282 Substandard 77,623 — 8,312 15,795 268 101,998 Doubtful — — — — — — Total Non-Pass 89,546 292 15,158 23,016 268 128,280 Total $ 1,185,062 $ 242,132 $ 1,199,005 $ 1,648,222 $ 569,355 $ 4,843,776 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 Portfolio Risks The credit quality of our loan portfolio can potentially represent 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 June 30, 2016 . 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 June 30, 2016 and December 31, 2015 . 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. June 30, 2016 30 - 59 60 - 89 90 days Nonaccrual Total past Current Total (dollars in thousands) Commercial, financial, agricultural and other $ 2,344 $ 714 $ 283 $ 37,429 $ 40,770 $ 1,144,292 $ 1,185,062 Real estate construction — — — — — 242,132 242,132 Residential real estate 4,544 1,542 243 6,448 12,777 1,186,228 1,199,005 Commercial real estate 1,166 — 1 3,931 5,098 1,643,124 1,648,222 Loans to individuals 2,072 700 857 268 3,897 565,458 569,355 Total $ 10,126 $ 2,956 $ 1,384 $ 48,076 $ 62,542 $ 4,781,234 $ 4,843,776 December 31, 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 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 becomes 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 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 also 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. Significant nonaccrual loans as of June 30, 2016 , include the following: • $11.4 million relationship of commercial industrial loans to a steel and aluminum servicing company. These loans were originated in 2011 and were placed in nonaccrual status during the first quarter of 2016. A valuation of the collateral was completed during the second quarter of 2016. • $10.5 million relationship of commercial industrial loans to a manufacturer of mine safety products. These loans were originated from 2014 to 2015 and were placed in nonaccrual status during the second quarter of 2016. All collateral valuations were completed in June 2016. • $4.4 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. During the six months ended June 30, 2016 , charge-offs of $2.0 million related to this relationship were recorded. All collateral valuations were completed in June 2016. • $3.7 million relationship of commercial industrial loans to a local energy company involved in the drilling and production of natural gas wells. 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 $1.3 million was modified in 2012, and the other loan totaling $2.4 million was modified in 2014. During the six months ended June 30, 2016 , charge-offs of $1.1 million related to this relationship were recorded. A valuation of the collateral was updated during the first quarter of 2016. • $3.5 million relationship of commercial industrial loans to a gear manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. During the six months ended June 30, 2016 , charge-offs of $0.2 million related to this relationship were recorded. A valuation of the collateral was completed during the second quarter of 2016. The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of June 30, 2016 and December 31, 2015 . 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 their period-end allowance position. June 30, 2016 December 31, 2015 Recorded Unpaid Related Recorded Unpaid Related (dollars in thousands) With no related allowance recorded: Commercial, financial, agricultural and other $ 16,078 $ 23,373 $ 11,344 $ 15,673 Real estate construction — — 28 117 Residential real estate 11,580 13,674 9,952 11,819 Commercial real estate 6,390 8,043 7,562 9,449 Loans to individuals 376 450 421 507 Subtotal 34,424 45,540 29,307 37,565 With an allowance recorded: Commercial, financial, agricultural and other 28,522 30,849 15,018 20,132 22,590 6,952 Real estate construction — — — — — — Residential real estate 551 680 48 461 672 51 Commercial real estate 911 939 464 944 1,008 42 Loans to individuals — — — — — — Subtotal 29,984 32,468 15,530 21,537 24,270 7,045 Total $ 64,408 $ 78,008 $ 15,530 $ 50,844 $ 61,835 $ 7,045 For the Six Months Ended June 30, 2016 2015 Average Interest Average Interest (dollars in thousands) With no related allowance recorded: Commercial, financial, agricultural and other $ 20,116 $ 249 $ 21,691 $ 120 Real estate construction 9 44 137 — Residential real estate 11,232 137 11,025 86 Commercial real estate 7,136 67 8,760 43 Loans to individuals 442 3 312 2 Subtotal 38,935 500 41,925 251 With an allowance recorded: Commercial, financial, agricultural and other 17,939 91 5,337 72 Real estate construction — — — — Residential real estate 347 — 319 — Commercial real estate 861 11 194 3 Loans to individuals — — — — Subtotal 19,147 102 5,850 75 Total $ 58,082 $ 602 $ 47,775 $ 326 For the Three Months Ended June 30, 2016 2015 Average Interest Average Interest (dollars in thousands) With no related allowance recorded: Commercial, financial, agricultural and other $ 18,995 $ 95 $ 18,526 $ 65 Real estate construction — — 36 — Residential real estate 11,462 90 11,302 45 Commercial real estate 6,887 29 8,682 24 Loans to individuals 405 2 316 1 Subtotal 37,749 216 38,862 135 With an allowance recorded: Commercial, financial, agricultural and other 22,788 65 5,237 42 Real estate construction — — — — Residential real estate 476 — 329 — Commercial real estate 921 6 193 1 Loans to individuals — — — — Subtotal 24,185 71 5,759 43 Total $ 61,934 $ 287 $ 44,621 $ 178 Unfunded commitments related to nonperforming loans were $2.2 million at June 30, 2016 and $0.1 million at December 31, 2015 . After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $24 thousand and $13 thousand was established for these off balance sheet exposures at June 30, 2016 and December 31, 2015 , 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: June 30, 2016 December 31, 2015 (dollars in thousands) Troubled debt restructured loans Accrual status $ 16,332 $ 14,139 Nonaccrual status 9,672 12,360 Total $ 26,004 $ 26,499 Commitments Unused lines of credit $ 577 $ 3,252 The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings: For the Six Months Ended June 30, 2016 Type of Modification Number Extend Modify Modify Total Post- Specific (dollars in thousands) Commercial, financial, agricultural and other 5 $ 92 $ 4,009 $ — $ 4,101 $ 3,708 $ 40 Residential real estate 26 — 114 2,416 2,530 2,440 — Commercial real estate 6 1,264 — 25 1,289 1,227 74 Loans to individuals 5 — 29 11 40 30 — Total 42 $ 1,356 $ 4,152 $ 2,452 $ 7,960 $ 7,405 $ 114 For the Six Months Ended June 30, 2015 Type of Modification Number Extend Modify Modify Total Post- Specific (dollars in thousands) Commercial, financial, agricultural and other 3 $ 1,751 $ — $ 109 $ 1,860 $ 1,812 $ 53 Residential real estate 16 — 296 503 799 723 7 Commercial real estate 1 — — 463 463 428 — Loans to individuals 6 — 61 18 79 66 — Total 26 $ 1,751 $ 357 $ 1,093 $ 3,201 $ 3,029 $ 60 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 may 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 six months ended June 30, 2016 and 2015 , $4.2 million and $0.4 million , respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of reamortization. For both 2016 and 2015 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments. The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings: For the Three Months Ended June 30, 2016 Type of Modification Number Extend Modify Modify Total Post- Specific (dollars in thousands) Commercial, financial, agricultural and other 4 $ 92 $ 240 $ — $ 332 $ 217 $ 40 Residential real estate 17 — — 1,435 1,435 1,428 — Commercial real estate 4 1,198 — — 1,198 1,173 74 Loans to individuals 2 — 11 6 17 15 — Total 27 $ 1,290 $ 251 $ 1,441 $ 2,982 $ 2,833 $ 114 For the Three Months Ended, June 30, 2015 Type of Modification Number Extend Modify Modify Total Post- Specific (dollars in thousands) Commercial, financial, agricultural and other 2 $ 252 $ — $ 109 $ 361 $ 317 $ 53 Residential real estate 11 — 45 485 530 525 7 Loans to individuals 5 — 61 — 61 56 — Total 18 $ 252 $ 106 $ 594 $ 952 $ 898 $ 60 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 may 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 June 30, 2016 and 2015 , $0.3 million and $0.1 million , respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of reamortization. For both 2016 and 2015 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 be in default during the six months ended June 30 : 2016 2015 Number of Recorded Number of Recorded (dollars in thousands) Residential real estate — $ — 2 $ 56 Total — $ — 2 $ 56 The following table provides information related to restructured loans that were considered to be in default during the three months ended June 30 : 2016 2015 Number of Recorded Number of Recorded (dollars in thousands) Residential real estate — $ — 2 $ 56 Total — $ — 2 $ 56 The following tables provide detail related to the allowance for credit losses: For the Six Months Ended June 30, 2016 Commercial, Real estate Residential Commercial Loans to Total (dollars in thousands) Allowance for credit losses: Beginning Balance $ 31,035 $ 887 $ 2,606 $ 11,924 $ 4,360 $ 50,812 Charge-offs (6,145 ) — (602 ) (408 ) (2,491 ) (9,646 ) Recoveries 198 227 260 783 289 1,757 Provision (credit) 21,269 (634 ) 341 (6,437 ) 2,359 16,898 Ending Balance $ 46,357 $ 480 $ 2,605 $ 5,862 $ 4,517 $ 59,821 Ending balance: individually evaluated for impairment $ 15,018 $ — $ 48 $ 464 $ — $ 15,530 Ending balance: collectively evaluated for impairment 31,339 480 2,557 5,398 4,517 44,291 Loans: Ending balance 1,185,062 242,132 1,199,005 1,648,222 569,355 4,843,776 Ending balance: individually evaluated for impairment 43,817 — 5,966 6,017 — 55,800 Ending balance: collectively evaluated for impairment 1,141,245 242,132 1,193,039 1,642,205 569,355 4,787,976 For the Six Months Ended June 30, 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 (7,940 ) — (1,050 ) (688 ) (2,383 ) (12,061 ) Recoveries 358 84 239 153 323 1,157 Provision (credit) 1,710 (629 ) 70 881 2,165 4,197 Ending Balance $ 23,755 $ 1,518 $ 2,923 $ 12,227 $ 4,921 $ 45,344 Ending balance: individually evaluated for impairment $ 1,596 $ — $ 35 $ 44 $ — $ 1,675 Ending balance: collectively evaluated for impairment 22,159 1,518 2,888 12,183 4,921 43,669 Loans: Ending balance 1,098,019 125,010 1,204,499 1,416,841 646,485 4,490,854 Ending balance: individually evaluated for impairment 21,419 — 7,700 7,625 — 36,744 Ending balance: collectively evaluated for impairment 1,076,600 125,010 1,196,799 1,409,216 646,485 4,454,110 For the Three Months Ended June 30, 2016 Commercial, Real estate Residential Commercial Loans to Total (dollars in thousands) Allowance for credit losses: Beginning Balance $ 41,721 $ 901 $ 2,628 $ 5,483 $ 4,489 $ 55,222 Charge-offs (4,753 ) — (220 ) (143 ) (1,022 ) (6,138 ) Recoveries 64 4 142 27 128 365 Provision (credit) 9,325 (425 ) 55 495 922 10,372 Ending Balance $ 46,357 $ 480 $ 2,605 $ 5,862 $ 4,517 $ 59,821 For the Three Months Ended, June 30, 2015 Commercial, Real estate Residential Commercial Loans to Total (dollars in thousands) Allowance for credit losses: Beginning Balance $ 24,406 $ 1,528 $ 3,387 $ 12,487 $ 4,889 $ 46,697 Charge-offs (2,860 ) — (484 ) (486 ) (1,122 ) (4,952 ) Recoveries 158 84 143 15 161 561 Provision (credit) 2,051 (94 ) (123 ) 211 993 3,038 Ending Balance $ 23,755 $ 1,518 $ 2,923 $ 12,227 $ 4,921 $ 45,344 |