Fair Values Of Assets And Liabilities

6 Months Ended

Jun. 30, 2011

Fair Values Of Assets And Liabilities

Fair Values Of Assets And Liabilities

Note 12 Fair Values of Assets and Liabilities

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 Condensed Consolidated Statements of Financial Condition or in the "Other assets" category of the Condensed 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 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange ("NYSE"). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using quoted market prices.

• Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, certain equity securities, FHLB stock, interest rate derivatives that include interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.

The fair values for Mortgage Backed Securities – Residential and Mortgage Backed Securities – Commercial were based on market data for these types of asset classes including broker quotes and trade and bid prices.

Obligations of States and Political Subdivisions fair value is based on pricing models that incorporated other benchmark quoted securities with similar issuer, credit support, state of issuance and credit rating.

The fair values for the corporate securities, which include our single issue trust preferred securities, were obtained from market data including trade and bid prices.

The equity investments included in Level 2 are based on broker prices and are included in Level 2 because they are not traded on an active exchange market.

Other Investments is comprised of FHLB stock whose fair value is based on its par value. Additional information on FHLB stock is provided in Note 8, "Other investments."

Interest rate derivatives are reported at fair value utilizing Level 2 inputs and are included in Other assets and Other liabilities. First Commonwealth values its interest rate swap 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 three months, Eurodollar futures contracts and swap rates from three years 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. To date, we have not realized any losses due to a counterparty's inability to pay any net uncollateralized position.

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

• Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain other real estate owned and certain impaired loans.

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities for approximately twenty-four months; therefore it was more appropriate to determine fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 9, "Impairment of Investment Securities." The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

The fair value of the non-marketable equity investments included in Level 3 is based on par value.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at June 30, 2011:

	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Securities Available for Sale
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential	$	0	$	37,691	$	0	$	37,691
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage Backed Securities – Residential		0		685,091		0		685,091
Mortgage Backed Securities – Commercial		0		212		0		212
Other Government-Sponsored Enterprises		0		243,256		0		243,256
Obligations of States and Political Subdivisions		0		1,057		0		1,057
Corporate Securities		0		11,965		0		11,965
Pooled Trust Preferred Collateralized Debt Obligations		0		0		26,984		26,984
Total Debt Securities		0		979,272		26,984		1,006,256
Equities		442		1,064		1,570		3,076
Total Securities Available for Sale		442		980,336		28,554		1,009,332
Other Investments		0		44,095		0		44,095
Other Assets (a)		0		15,712		0		15,712
Total Assets	$	442	$	1,040,143	$	28,554	$	1,069,139
Other Liabilities (a)	$	0	$	16,973	$	0	$	16,973
Total Liabilities	$	0	$	16,973	$	0	$	16,973

(a) Non-hedging interest rate derivatives

For the six months ended June 30, 2011, there were no transfers between fair value Levels 1 and 2.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at December 31, 2010:

	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Securities Available for Sale
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential	$	0	$	40,593	$	0	$	40,593
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage Backed Securities – Residential		0		641,981		0		641,981
Mortgage Backed Securities – Commercial		0		233		0		233
Other Government-Sponsored Enterprises		0		183,887		0		183,887
Obligations of States and Political Subdivisions		0		47,476		343		47,819
Corporate Securities		0		0		21,376		21,376
Pooled Trust Preferred Collateralized Debt Obligations		0		0		26,352		26,352
Total Debt Securities		0		914,170		48,071		962,241
Equities		1,462		2,442		1,570		5,474
Total Securities Available for Sale		1,462		916,612		49,641		967,715
Other Investments		0		48,859		0		48,859
Other Assets (a)		0		15,939		0		15,939
Total Assets	$	1,462	$	981,410	$	49,641	$	1,032,513
Other Liabilities (a)	$	0	$	16,663	$	0	$	16,663
Total Liabilities	$	0	$	16,663	$	0	$	16,663

(a) Non-hedging interest rate derivatives

For the six month periods ended June 30, 2011 and 2010, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	For the Six Months Ended June 30, 2011
Securities Available for Sale	Obligations of States and Political Subdivisions			Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Balance, beginning of period	$	343		$	21,376		$	26,352		$	1,570	$	49,641
Total gains or losses
Included in earnings		4			387			0			0		391
Included in other comprehensive income		(20	)		(98	)		3,020			0		2,902
Purchases, issuances, sales and settlements
Purchases		0			0			0			0		0
Issuances		0			0			0			0		0
Sales		(327	)		(6,700	)		0			0		(7,027	)
Settlements		0			(3,000	)		(2,388	)		0		(5,388	)
Transfers from Level 3		0			(11,965	)		0			0		(11,965	)
Transfers into Level 3		0			0			0			0		0
Balance, end of period	$	0		$	0		$	26,984		$	1,570	$	28,554

	For the Six Months Ended June 30, 2010
Securities Available for Sale	Obligations of States and Political Subdivisions			Corporate Securities		Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Balance, beginning of period	$	3,600		$	18,830	$	29,730		$	1,570	$	53,730
Total gains or losses
Included in earnings		0			0		(4,714	)		0		(4,714	)
Included in other comprehensive income		(2,316	)		1,744		3,827			0		3,255
Purchases, issuances, sales and settlements
Purchases		0			0		0			0		0
Issuances		0			0		0			0		0
Sales		(941	)		0		0			0		(941	)
Settlements		0			0		(182	)		0		(182	)
Transfers from Level 3		0			0		0			0		0
Transfers into Level 3		0			0		0			0		0
Balance, end of period	$	343		$	20,574	$	28,661		$	1,570	$	51,148

For the six months ended June 30, 2011, $12.0 million of corporate securities were transferred from Level 3 to Level 2. Corporate securities were transferred from Level 3 to Level 2 based on increased frequency in the volume of observable trades. Fair values on these securities at June 30, 2011 were determined based on market data, including trade and bid prices. In previous periods, the fair value for these securities were obtained from pricing sources, taking into account unobservable inputs related to the risk of each issuer. In the second quarter, a change was made in pricing sources since the market data was considered more reliable than in previous periods because of frequency and volume of observed trades.

For the six months ended June 30, 2010, there were no transfers between levels of fair value for available for sale securities.

For the three month periods ended June 30, 2011 and 2010, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	For the Three Months Ended June 30, 2011
Securities Available for Sale	Obligations of States and Political Subdivisions		Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Balance, beginning of quarter	$	0	$	14,815		$	27,665		$	1,570	$	44,050
Total gains or losses
Included in earnings		0		73			0			0		73
Included in other comprehensive income		0		77			898			0		975
Purchases, issuances, sales and settlements
Purchases		0		0			0			0		0
Issuances		0		0			0			0		0
Sales		0		0			0			0		0
Settlements		0		(3,000	)		(1,579	)		0		(4,579	)
Transfers from Level 3		0		(11,965	)		0			0		(11,965	)
Balance, end of quarter	$	0	$	0		$	26,984		$	1,570	$	28,554

	For the Three Months Ended June 30, 2010
Securities Available for Sale	Obligations of States and Political Subdivisions			Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Balance, beginning of quarter	$	3,628		$	20,967		$	28,161		$	1,570	$	54,326
Total gains or losses
Included in earnings		0			0			(1,964	)		0		(1,964	)
Included in other comprehensive income		(2,344	)		(393	)		2,640			0		(97	)
Purchases, issuances, sales and settlements
Purchases		0			0			0			0		0
Issuances		0			0			0			0		0
Sales		(941	)		0			0			0		(941	)
Settlements		0			0			(176	)		0		(176	)
Transfers into Level 3		0			0			0			0		0
Balance, end of quarter	$	343		$	20,574		$	28,661		$	1,570	$	51,148

For the three months ended June 30, 2011, $12.0 million of corporate securities were transferred from Level 3 to Level 2. Corporate securities were transferred from Level 3 to Level 2 based on increased frequency in the volume of observable trades. Fair values on these securities at June 30, 2011 were determined based on market data, including trade and bid prices. For the three months ended June 30, 2010, there were no transfers between levels of fair value for available for sale securities.

Losses of $2.1 million included in earnings for the three month period ended June 30, 2010, are attributable to the change in realized gains (losses) related to assets held at June 30, 2010. These amounts are reported in the lines "Net impairment losses" in the Condensed Consolidated Statements of Income.

The table below presents the balances of assets measured at fair value on a non-recurring basis at June 30, 2011:

	Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Impaired loans	$	0	$	80,302	$	40,489	$	120,791
Other real estate owned		0		38,103		17		38,120
Total Assets	$	0	$	118,405	$	40,506	$	158,911

The table below presents the balances of assets measured at fair value on a non-recurring basis at December 31, 2010:

	Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Impaired loans	$	0	$	78,967	$	26,715	$	105,682
Other real estate owned		0		24,871		10		24,881
Total Assets	$	0	$	103,838	$	26,725	$	130,563

Impaired loans over $0.1 million 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.

The fair value for other real estate owned is determined by either an independent market based appraisal less costs to sell or an executed sales agreement and is classified as Level 2. Other real estate owned has a book cost of $36.5 million as of June 30, 2011 and consisted primarily of a Pennsylvania based manufacturing plant with related real estate and equipment, an office building in western Pennsylvania and a parcel of land in Florida. 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 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 non-recurring 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. A goodwill impairment test for First Commonwealth was completed as of June 30, 2011. Based on this analysis, the fair value of First Commonwealth exceeded its book value. Additional information related to this measurement is provided in Note 14, "Goodwill." There were no other assets or liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2011.

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 non-recurring basis.

The methodologies for estimating the fair value of 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 fair values of such assets.

Securities: Fair values for securities available for sale and securities 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. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. 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 which is not an exit price under FASB ASC Topic 820, "Fair Value Measurements and Disclosures."

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 $0.1 million at June 30, 2011 and December 31, 2010. See Note 6, "Commitments and Contingent Liabilities" for additional information.

Deposit liabilities: Management estimates that the fair value of deposits is based on a market valuation of similar deposits. 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 types of borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased, securities sold under agreement to repurchase and treasury, tax and loan notes were used to approximate fair value due to the short-term nature of the borrowings.

Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth's estimated incremental borrowing rate for similar types of borrowing arrangements.

The following table presents carrying amounts and fair values of First Commonwealth's financial instruments:

	June 30, 2011				December 31, 2010
	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
	(dollars in thousands)
Financial Assets
Cash and due from banks	$	78,187	$	78,187	$	69,854	$	69,854
Interest-bearing bank deposits		52,320		52,320		4		4
Securities available for sale		1,009,332		1,009,332		967,715		967,715
Other investments		44,095		44,095		48,859		48,859
Loans held for sale		823		881		0		0
Loans		3,992,058		4,023,063		4,218,083		4,213,293
Financial Liabilities
Deposits	$	4,536,148	$	4,420,512	$	4,617,852	$	4,560,070
Short-term borrowings		161,935		156,067		187,861		182,931
Long-term debt		73,352		75,047		98,748		102,038
Subordinated debt		105,750		90,829		105,750		86,870

(a) As reported in the Condensed Consolidated Statements of Financial Condition.