Fair Values of Assets and Liabilities

FNB utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, derivative assets, certain FHLB advances hedged by interest rate swaps designated as fair value hedges, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time-to-time, FNB may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for sale, loans held for investment, impaired loans and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets or liabilities.

Fair Value Hierarchy

FNB groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investments Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 may include asset-backed securities in less liquid markets.

Liquidity is a significant factor in the determination of the fair values of available-for-sale debt securities. Market price quotes may not be readily available for some positions, or positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management's best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market's perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer's financial statements and changes in credit ratings made by one or more ratings agencies.

Loans Held for Sale

Loans held for sale represent problem commercial loans reclassified from loans held for investment that either are or were under contract to be sold, and are carried at the lower of cost or fair value, based on contractual agreements with independent third-party buyers, less estimated costs to sell. FNB classifies loans held for sale as nonrecurring Level 2.

Loans

FNB does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and the related impairment is charged against the allowance or a specific allowance is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, management determines the fair value of the loan to quantify impairment, should such exist. The fair value of impaired loans is estimated using one of several methods, including collateral net liquidation value, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investments in such loans. At March 31, 2012 and December 31, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. FNB records impaired loans as nonrecurring Level 3.

Other Real Estate Owned

OREO is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. Given the lack of observable market prices for identical properties, FNB records the OREO as nonrecurring Level 3.

Derivative Assets and Liabilities

Substantially all derivative instruments held or issued by FNB for risk management or customer-initiated activities are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, FNB measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. FNB classifies derivatives instruments held or issued for risk management or customer-initiated activities as Level 2.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities carried at fair value on a recurring basis at March 31, 2012 for continuing operations, including financial instruments that FNB accounts for under the fair value option, are summarized in the following table:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale debt securities:
U.S. Treasury and government agencies	$	6,990	$	—	$	6,990	$	—
U.S. government sponsored agencies	23,980		—		23,980		—
States and political subdivisions	6,088		—		6,088		—
Residential mortgage-backed securities-GSE	396,211		—		396,211		—
Residential mortgage-backed securities-Private	32,128		—		32,128		—
Commercial mortgage-backed securities-Private	5,358		—		5,358		—
Corporate notes	3,161		—		3,161		—
Total available-for-sale debt securities	473,916		—		473,916		—
Total assets at fair value from continuing operations	$	473,916	$	—	$	473,916	$	—

Assets and liabilities carried at fair value on a recurring basis at December 31, 2011 for continuing operations, including financial instruments that FNB accounts for under the fair value option, are summarized in the following table:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale debt securities:
U.S. Treasury and government agencies	$	7,188	$	—	$	7,188	$	—
U.S. government sponsored agencies	32,364		—		32,364		—
States and political subdivisions	6,090		—		6,090		—
Residential mortgage-backed securities-GSE	350,273		—		350,273		—
Residential mortgage-backed securities-Private	32,217		—		32,217		—
Corporate notes	3,174		—		3,174		—
Total available-for-sale debt securities	431,306		—		431,306		—
Total assets at fair value from continuing operations	$	431,306	$	—	$	431,306	$	—

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods indicated.



	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Servicing Rights
(dollars in thousands)	For Three Months Ended
	March 31, 2012		March 31, 2011
Beginning balance at January 1,	$	—	$	2,359
Total gains or losses (realized/unrealized):
Included in earnings	—		(117		)
Purchases, issuances and settlements	—		—
Servicing rights sold	—		(2,242		)
Ending balance at March 31,	$	—	$	—

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

FNB may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. This is due to further deterioration in the value of the assets.

Assets measured at fair value on a nonrecurring basis are included in the following table at March 31, 2012 for continuing operations:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans held for sale	$	3,938	$	—	$	3,938	$	—
Impaired loans, net	35,800		—		—		35,800
Other real estate owned	68,658		—		—		68,658
Total assets at fair value from continuing operations	$	108,396	$	—	$	3,938	$	104,458

There has been no further fair value adjustment for acquired performing and acquired credit-impaired loans since their initial recognition at fair value during the quarter ended December 31, 2011, and these loans are not included in the above table of assets measured at fair value on a nonrecurring basis at March 31, 2012.

Assets measured at fair value on a nonrecurring basis are included in the following table at December 31, 2011 for continuing operations:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans held for sale	$	4,529	$	—	$	4,529	$	—
Impaired loans, net	31,266		—		—		31,266
Acquired performing loans	308,594		—		—		308,594
Acquired credit-impaired loans	65,283		—		—		65,283
Other real estate owned	84,794		—		—		84,794
Total assets at fair value from continuing operations	$	494,466	$	—	$	4,529	$	489,937

There are no assets measured at fair value on a nonrecurring basis at March 31, 2012 for discontinued operations.

Assets measured at fair value on a nonrecurring basis are included in the following table at December 31, 2011 for discontinued operations:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans held for sale	$	233	$	—	$	233	$	—
Total assets at fair value from discontinued operations	$	233	$	—	$	233	$	—

Quantitative Information about Level 3 Fair Value Measurements



(dollars in thousands)	Fair Value at March 31, 2012		Valuation Techniques	Unobservable Input	Range
Nonrecurring measurements:
Impaired loans, net	$	35,800	Discounted appraisals	Collateral discounts	6.00%-40.00%
Other real estate owned	68,658		Discounted appraisals	Collateral discounts	6.00%-40.00%

Level 3 Valuation Methodologies. Following is a description of the unobservable inputs used for Level 3 fair value measurements.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value is required. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time FNB's entire holdings of a particular financial instrument.

Because no market exists for a portion of FNB's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value for each class of FNB's financial instruments.

Cash and cash equivalents. Fair value equals the carrying value of such assets due to their nature and is classified as Level 1.

Investment securities. The fair value of investment securities is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The fair value of equity investments in the restricted stock of the FRBR and FHLB approximates the carrying value. The fair value of investment securities is classified as Level 2.

Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Substantially all residential mortgage loans held for sale are pre-sold and their carrying value approximates fair value. The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value. The fair value of loans is further discounted by credit and liquidity factors. FNB classified the fair value of loans as Level 3.

Accrued interest receivable and payable. The carrying amounts of accrued interest approximate fair value and are classified as Level 2.

Deposits. The fair value of noninterest-bearing and interest-bearing demand deposits and savings are the amounts payable on demand because these products have no stated maturity. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities and are classified as Level 2.

Borrowed funds. The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. The fair value of Federal Home Loan Bank advances and other borrowed funds is estimated using the rates currently offered for advances of similar remaining maturities and are classified as Level 2.

Junior subordinated debentures. Included in junior subordinated debentures are variable rate trust preferred securities issued by FNB. Fair values for the trust preferred securities were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The estimated fair value for FNB's junior subordinated debentures is significantly lower than carrying value since credit spreads (i.e., spread to LIBOR) on similar trust preferred issues are currently much wider than when these securities were originally issued. FNB classified the fair value of junior subordinated debentures as Level 3.

Financial instruments with off-balance sheet risk. The fair value of financial instruments with off-balance sheet risk is considered to approximate carrying value, since the large majority of these future financing commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value.

The estimated fair values of financial instruments for continuing operations are as follows at the periods indicated.



	At March 31, 2012
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets of Continuing Operations:
Cash and cash equivalents	$	468,549	$	468,549	$	468,549	$	—	—
Investment securities: Available-for-sale	473,916		473,916		—		473,916		—
Loans held for sale	3,938		3,938		—		3,938		—
Loans, net	1,205,964		1,197,267		—		—		1,197,267
Accrued interest receivable	6,148		6,148		—		6,148		—
Financial Liabilities of Continuing Operations:
Deposits	2,120,081		2,126,245		—		2,126,245		—
Retail repurchase agreements	8,338		8,338		—		8,338		—
Federal Home Loan Bank advances	58,360		62,109		—		62,109		—
Junior subordinated debentures	56,702		38,155		—		—		38,155
Accrued interest payable	1,671		1,671		—		1,671		—



	At December 31, 2011
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets of Continuing Operations:
Cash and cash equivalents	$	553,416	$	553,416	$	553,416	$	—	$	—
Investment securities: Available-for-sale	431,306		431,306		—		431,306		—
Loans held for sale	4,529		4,529		—		4,529		—
Loans, net	1,178,175		1,176,795		—		—		1,176,795
Accrued interest receivable	5,919		5,919		—		5,919		—
Financial Liabilities of Continuing Operations:
Deposits	2,129,111		2,139,093		—		2,139,093		—
Retail repurchase agreements	8,838		8,838		—		8,838		—
Federal Home Loan Bank advances	58,370		62,555		—		62,555		—
Junior subordinated debentures	56,702		36,218		—		—		36,218
Accrued interest payable	1,654		1,654		—		1,654		—

The estimated fair values of financial instruments for discontinued operations are as follows:



	As of March 31, 2012				As of December 31, 2011
(dollars in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets of Discontinued Operations	$	—	$	—	$	233	$	233
Financial Liabilities of Discontinued Operations	—		—		—		—

There were no transfers between valuation levels for any assets during the quarter ended March 31, 2012 or the quarter ended March 31, 2011. If different valuation techniques are deemed necessary, we would consider those transfers to occur at the end of the period when the assets are valued.