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" ("Topic 825"), 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

In accordance with 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 defined in Note 1, "Statement of Accounting Policies."

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 source price 100% of the securities on a monthly basis, 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.

Loans held for sale 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 the Small Business Administration guaranteed portion of small business loans. The estimated fair value of these loans is based on the contract with the third party investor.

During the third quarter of 2020, the company announced the consolidation of 29 branch locations into nearby offices prior to December 31, 2020. As a result, 17 owned locations were moved to held for sale and are being carried at the lower of cost or fair value. At December 31, 2021, three locations were remaining in held for sale, all of which were being carried at cost. At December 31, 2020, four of these locations were carried at fair value, determined by an independent market-based appraisal less estimated costs to sell, and are classified as Level 2.

Interest rate derivatives are reported at estimated fair value utilizing Level 2 inputs and are included in "Other assets" and "Other liabilities" in the Consolidated Statements of Financial Condition. These 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 6, “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 estimated 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 2021 and 2020, we have not realized any losses due to a counterparty's inability to pay any net uncollateralized position.

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 credit quality of the underlying counterparties (loan customers).

Fair Value
(dollars in
thousands)

Valuation Technique

Unobservable Inputs

Range / (weighted
average)

December 31, 2021

Other Investments

1,170

Carrying Value

N/A

Nonperforming Loans

598

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$2.00 - $2.00 (b)

Oil per BBL/d

$50.00 - $50.00 (b)

Limited Partnership Investments

14,981

Par Value

N/A

December 31, 2020

Other Investments

1,670

Carrying Value

N/A

Nonperforming Loans

798

(a)

Gas Reserve study

Discount rate

10.00%

Gas per MMBTU

$1.46 - $1.48 (b)

Oil per BBL/d

$36.00 - $36.00 (b)

Limited Partnership Investments

6,619

Par Value

N/A

The discount rate is the significant unobservable input used in the fair value measurement of nonperforming 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 nonperforming 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.


	2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential	$	—	$	5,662	$	—	$	5,662
Mortgage-Backed Securities—Commercial	—		362,290		—		362,290
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential	—		629,974		—		629,974

Other Government-Sponsored Enterprises	—		981		—		981
Obligations of States and Political Subdivisions	—		9,524		—		9,524
Corporate Securities	—		32,949		—		32,949



Total Securities Available for Sale	—		1,041,380		—		1,041,380
Other Investments	—		11,668		1,170		12,838
Loans Held for Sale	—		18,583		—		18,583

Other Assets (a)	—		26,805		14,981		41,786
Total Assets	$	—	$	1,098,436	$	16,151	$	1,114,587
Other Liabilities (a)	$	—	$	34,263	$	—	$	34,263
Total Liabilities	$	—	$	34,263	$	—	$	34,263


	2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential	$	—	$	7,230	$	—	$	7,230
Mortgage-Backed Securities—Commercial	—		191,180		—		191,180
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential	—		496,033		—		496,033

Other Government-Sponsored Enterprises	—		100,998		—		100,998
Obligations of States and Political Subdivisions	—		11,397		—		11,397
Corporate Securities	—		24,385		—		24,385



Total Securities Available for Sale	—		831,223		—		831,223
Other Investments	—		10,557		1,670		12,227
Loans Held for Sale	—		33,436		—		33,436
Premises and Equipment	—		442		—		442
Other Assets (a)	—		54,362		6,619		60,981
Total Assets	$	—	$	930,020	$	8,289	$	938,309
Other Liabilities (a)	$	—	$	61,308	$	—	$	61,308
Total Liabilities	$	—	$	61,308	$	—	$	61,308


	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of year	$	1,670	$	6,619	$	8,289
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales, and settlements
Purchases	—		8,511		8,511
Issuances	—		—		—
Sales	—		—		—
Settlements	(500)		(149)		(649)
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of year	$	1,170	$	14,981	$	16,151


	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of year	$	1,670	$	5,795	$	7,465
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales, and settlements
Purchases	—		824		824
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of year	$	1,670	$	6,619	$	8,289

The tables below present the balances of assets measured at fair value on a nonrecurring basis at December 31 and total gains and losses realized on these assets during the year ended December 31:


	2021
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(dollars in thousands)
Nonperforming loans	$	—	$	42,538	$	12,247	$	54,785	$	352
Other real estate owned	—		729		—		729		—
Total Assets	$	—	$	43,267	$	12,247	$	55,514	$	352


	2020
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(dollars in thousands)
Nonperforming loans	$	—	$	35,543	$	13,604	$	49,147	$	(7,905)
Other real estate owned	—		1,319		—		1,319		(30)
Total Assets	$	—	$	36,862	$	13,604	$	50,466	$	(7,935)

Nonperforming loans over $250 thousand are individually reviewed to determine the amount of each loan considered to be at risk of noncollection. The fair value for nonperforming 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 nonperforming 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 nonperforming 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. Other real estate owned had a current carrying value of $0.6 million as of December 31, 2021 and consisted primarily of 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 costs to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill, core deposit intangibles and customer list 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 this measurement is provided in Note 11 “Goodwill and Other Amortizing Intangible Assets.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during 2021.

FASB ASC Topic 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 available for sale and held to maturity securities 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, 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 estimated fair value for standby letters of credit was $0.1 million at both December 31, 2021 and 2020. See Note 9, “Commitments and Letters of Credit,” 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 the fair value 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 types of 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 and long-term debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements.


	2021
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	84,738	$	84,738	$	84,738	$	—	$	—
Interest-bearing deposits	310,634		310,634		310,634		—		—
Securities available for sale	1,041,380		1,041,380		—		1,041,380		—
Securities held to maturity	541,311		536,651		—		536,651		—
Other investments	12,838		12,838		—		11,668		1,170
Loans held for sale	18,583		18,583		—		18,583		—
Loans	6,839,230		7,169,768		—		42,538		7,127,230
Financial liabilities
Deposits	7,982,498		7,980,101		—		7,980,101		—
Short-term borrowings	138,315		136,473		—		136,473		—
Long-term debt	5,573		6,065		—		6,065		—
Subordinated debt	170,775		175,040		—		—		175,040
Capital lease obligation	5,921		5,921		—		5,921		—


	2020
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	100,009	$	100,009	$	100,009	$	—	$	—
Interest-bearing deposits	256,572		256,572		256,572		—		—
Securities available for sale	831,223		831,223		—		831,223		—
Securities held to maturity	361,844		369,851		—		369,851		—
Other investments	12,227		12,227		—		10,557		1,670
Loans held for sale	33,436		33,436		—		33,436		—
Loans	6,761,183		7,202,763		—		35,543		7,167,220
Financial liabilities
Deposits	7,438,666		7,440,906		—		7,440,906		—
Short-term borrowings	117,373		117,037		—		117,037		—
Long-term debt	56,258		57,881		—		57,881		—
Subordinated debt	170,612		165,665		—		—		165,665
Capital lease obligation	6,385		6,385		—		6,385		—