FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the Consolidated Statements of Financial Condition or in the “Other assets” category of the Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.

FASB ASC Topic 825, “Financial Instruments”, permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.

In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:

Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

Management validates the market values provided by the third party service by having another recognized pricing service price 100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.

Other investments recorded in the Consolidated Statements of Financial Condition are primarily comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 8, “Impairment of Investment Securities.”

Loans held for sale primarily include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair value for these loans was determined on the basis of rates obtained in the respective secondary market. Loans held for sale could also include commercial loans for which fair value is determined using an executed trade or market bid obtained from potential buyers.

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' (loan customers') credit risk since origination of the interest rate swap as well as interest rate caps, interest rate collars and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 13, “Derivatives.”

For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.

We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2019, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.

Interest rate derivatives also include interest rate forwards entered into to hedge residential mortgage loans held for sale and the related interest-rate lock commitments. This includes forward commitments to sell mortgage loans. The fair value of these derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

In addition, the Company hedges foreign currency risk through the use of foreign exchange forward contracts. The fair value of foreign exchange forward contracts is based on the differential between the contract price and the market-based forward rate.

The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.

For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).

In accordance with ASU No. 2011-4, "Fair Value Measurements (Topic 820)," the following table provides information related to quantitative inputs and assumptions used in June 30, 2019 Level 3 fair value measurements.



	Fair Value (dollars in thousands)			Valuation Technique	Unobservable Inputs	Range / (weighted average)
Other Investments	$	1,670		CarryingValue	N/A	N/A
Impaired Loans	979		(a)	Reserve study	Discount rate	10.00%
					Gas per MMBTU	$2.61 - $3.49 (b)
					Oil per BBL/d	$47.09 - $53.14 (b)
	2,518		(a)	Discounted Cash Flow	Discount Rate	3.84% - 9.50%
Limited Partnership Investments	3,312			Par Value	N/A	N/A

The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in a higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil and natural gas prices. Increases in these prices would result in an increase in the estimated fair value of the loans, while a decrease in these prices would result in a lower fair value measurement.



	June 30, 2019
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	8,953	$	—	$	8,953
Mortgage-Backed Securities - Commercial	—		170,545		—		170,545
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		625,579		—		625,579
Other Government-Sponsored Enterprises	—		10,003		—		10,003
Obligations of States and Political Subdivisions	—		26,889		—		26,889
Corporate Securities	—		23,934		—		23,934
Total Securities Available for Sale	—		865,903		—		865,903
Other Investments	—		27,898		1,670		29,568
Loans Held for Sale	—		16,036		—		16,036
Other Assets(a)	—		19,529		3,312		22,841
Total Assets	$	—	$	929,366	$	4,982	$	934,348
Other Liabilities(a)	$	—	$	19,841	$	—	$	19,841
Total Liabilities	$	—	$	19,841	$	—	$	19,841



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	9,406	$	—	$	9,406
Mortgage-Backed Securities - Commercial	—		167,744		—		167,744
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		673,361		—		673,361
Other Government-Sponsored Enterprises	—		10,012		—		10,012
Obligations of States and Political Subdivisions	—		27,712		—		27,712
Corporate Securities	—		21,012		—		21,012
Total Securities Available for Sale	—		909,247		—		909,247
Other Investments	—		30,456		1,670		32,126
Loans Held for Sale	—		11,881		—		11,881
Other Assets(a)	—		1,769		2,696		4,465
Total Assets	$	—	$	953,353	$	4,366	$	957,719
Other Liabilities(a)	$	—	$	2,081	$	—	$	2,081
Total Liabilities	$	—	$	2,081	$	—	$	2,081



	2019
	Other Investments		Other Assets			Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	2,696		$	4,366
Total gains or losses
Included in earnings	—		(47		)	(47		)
Included in other comprehensive income	—		—			—
Purchases, issuances, sales and settlements
Purchases	—		663			663
Issuances	—		—			—
Sales	—		—			—
Settlements	—		—			—
Transfers from Level 3	—		—			—
Transfers into Level 3	—		—			—
Balance, end of period	$	1,670	$	3,312		$	4,982



	2018
	Pooled Trust Preferred Collateralized Debt Obligations			Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	23,646		$	1,670	$	2,143	$	27,459
Total gains or losses
Included in earnings	8,102			—		—		8,102
Included in other comprehensive income	(118		)	—		—		(118		)
Purchases, issuances, sales and settlements
Purchases	—			—		154		154
Issuances	—			—		—		—
Sales	(12,289		)	—		—		(12,289		)
Settlements	(19,341		)	—		—		(19,341		)
Transfers from Level 3	—			—		—		—
Transfers into Level 3	—			—		—		—
Balance, end of period	$	—		$	1,670	$	2,297	$	3,967

During the six months ended June 30, 2019 and 2018, there were no transfers between fair value Levels 1, 2 or 3. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at June 30, 2019 and 2018.

For the three months ended June 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:



	2019
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	3,200	$	4,870
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		112		112
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	3,312	$	4,982



	2018
	Pooled Trust Preferred Collateralized Debt Obligations			Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	14,132		$	1,670	$	2,292	$	18,094
Total gains or losses
Included in earnings	5,262			—		—		5,262
Included in other comprehensive income	(4,647		)	—		—		(4,647		)
Purchases, issuances, sales and settlements
Purchases	—			—		5		5
Issuances	—			—		—		—
Sales	(12,289		)	—		—		(12,289		)
Settlements	(2,458		)	—		—		(2,458		)
Transfers from Level 3	—			—		—		—
Transfers into Level 3	—			—		—		—
Balance, end of period	$	—		$	1,670	$	2,297	$	3,967

During the three months ended June 30, 2019 and 2018, there were no transfers between fair value Levels 1, 2 or 3. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at June 30, 2019 and 2018.



	June 30, 2019
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	19,451	$	13,573	$	33,024
Other real estate owned	—		2,128		—		2,128
Total Assets	$	—	$	21,579	$	13,573	$	35,152



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	15,076	$	15,320	$	30,396
Other real estate owned	—		4,035		—		4,035
Total Assets	$	—	$	19,111	$	15,320	$	34,431



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
	(dollars in thousands)
Impaired loans	$	(497	)	$	992		$	(1,460	)	$	(6,544	)
Other real estate owned	(532		)	(437		)	(541		)	(437		)
Total losses	$	(1,029	)	$	555		$	(2,001	)	$	(6,981	)

Impaired loans over $100 thousand are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. The fair value for impaired loans that are collateral based is determined by reviewing real property appraisals, equipment valuations, accounts receivable listings and other financial information. A discounted cash flow analysis is performed to determine fair value for impaired loans when an observable market price or a current appraisal is not available. For real estate secured loans, First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve months on all impaired loans with balances of $250 thousand and over. For real estate secured loans with balances under $250 thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.

The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned, determined using an internal valuation, is classified as Level 3. OREO has a current carrying value of $1.9 million as of June 30, 2019 and consists primarily of residential and commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 14, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2019.

FASB ASC 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.

Securities: Fair values for securities available for sale and held to maturity are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of other investments, which includes FHLB stock and other equity investments, is considered a reasonable estimate of fair value.

Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans.

Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was $0.2 million at both June 30, 2019 and December 31, 2018, respectively. See Note 6, “Commitments and Contingent Liabilities,” for additional information.

Deposit liabilities: The estimated fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The carrying value of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities.

Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental borrowing rate for similar type borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.

Subordinated debt, long-term debt and capital lease obligation: The fair value is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements or an announced redemption price.



	June 30, 2019
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	95,047	$	95,047	$	95,047	$	—	$	—
Interest-bearing deposits	1,233		1,233		1,233		—		—
Securities available for sale	865,903		865,903		—		865,903		—
Securities held to maturity	373,453		373,335		—		373,335		—
Other investments	29,568		29,568		—		27,898		1,670
Loans held for sale	16,036		16,036		—		16,036		—
Loans	6,003,059		6,109,530		—		19,451		6,090,079
Financial liabilities
Deposits	6,155,965		6,158,427		—		6,158,427		—
Short-term borrowings	555,080		555,081		—		555,081		—
Subordinated debt	170,369		169,549		—		—		169,549
Long-term debt	57,236		57,863		—		57,863		—
Capital lease obligation	7,018		7,018		—		7,018		—



	December 31, 2018
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	95,934	$	95,934	$	95,934	$	—	$	—
Interest-bearing deposits	3,013		3,013		3,013		—		—
Securities available for sale	909,247		909,247		—		909,247		—
Securities held to maturity	393,855		383,993		—		383,993		—
Other investments	32,126		32,126		—		30,456		1,670
Loans held for sale	11,881		11,881		—		11,881		—
Loans	5,774,139		5,821,791		—		15,076		5,806,715
Financial liabilities
Deposits	5,897,992		5,904,147		—		5,904,147		—
Short-term borrowings	721,823		721,532		—		721,532		—
Subordinated debt	170,288		168,067		—		—		168,067
Long-term debt	7,551		7,720		—		7,720		—
Capital lease obligation	7,217		7,217		—		7,217		—