XML 22 R19.htm IDEA: XBRL DOCUMENT v2.3.0.15
Fair Values Of Assets And Liabilities
9 Months Ended
Sep. 30, 2011
Fair Values Of Assets And Liabilities [Abstract] 
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 are 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 included in Level 2 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. 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, for those instruments included in Level 2, 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 and certain interest rate derivatives.

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

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).

To date, we have not realized any losses due to a counterparty's inability to pay any net uncollateralized position. However, as the result of deterioration in the counterparties (loan customers) credit quality for certain interest rate derivatives, future amounts previously believed to be collectible under the terms of the interest rate derivative have now been deemed to be uncollectible.

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at September 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      $ 36,518      $ 0      $ 36,518  

Obligations of U.S. Government – Sponsored Enterprises:

            

Mortgage Backed Securities – Residential

      0        716,330        0        716,330  

Mortgage Backed Securities – Commercial

      0        202        0        202  

Other Government-Sponsored Enterprises

      0        243,572        0        243,572  

Obligations of States and Political Subdivisions

      0        465        0        465  

Corporate Securities

      0        11,367        0        11,367  

Pooled Trust Preferred Collateralized Debt Obligations

      0        0        24,698        24,698  
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Debt Securities

      0        1,008,454        24,698        1,033,152  

Equities

      440        38        1,570        2,048  
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Securities Available for Sale

      440        1,008,492        26,268        1,035,200  

Other Investments

      0        41,891        0        41,891  

Other Assets (a)

      0        17,439        0        17,439  
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Assets

    $ 440      $ 1,067,822      $ 26,268      $ 1,094,530  
  

 

 

     

 

 

     

 

 

     

 

 

  

Other Liabilities (a)

    $ 0      $ 23,763      $ 0      $ 23,763  
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Liabilities

    $ 0      $ 23,763      $ 0      $ 23,763  
  

 

 

     

 

 

     

 

 

     

 

 

  

(a) Non-hedging interest rate derivatives

For the nine months ended September 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 nine month periods ended September 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 Nine Months Ended September 30, 2011  
     Obligations of
States and
Political
Subdivisions		     Corporate
Securities		     Pooled Trust
Preferred
Collateralized
Debt Obligations		     Equity
Securities		      Other
Assets		     Total
Estimated
Fair Value		  
     (dollars in thousands)  

Balance, beginning of period

    $ 343     $ 21,376     $ 26,352     $ 1,570      $ 0      $ 49,641  

Total gains or losses

              

Included in earnings

      4       387       0       0        (4,520 )      (4,129 ) 

Included in other comprehensive income

      (20 )      (98 )      809       0        0        691  

Purchases, issuances, sales and settlements

              

Purchases

      0       0       0       0        0        0  

Issuances

      0       0       0       0        0        0  

Sales

      (327 )      (6,700 )      0       0        0        (7,027 ) 

Settlements

      0        (3,000 )      (2,463 )      0        0        (5,463 ) 

Transfers from Level 3

      0       (11,965 )      0       0        0        (11,965 ) 

Transfers into Level 3

      0       0        0       0        4,520        4,520  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Balance, end of period

    $ 0     $ 0     $ 24,698     $ 1,570      $ 0      $ 26,268  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

 

     For the Nine Months Ended September 30, 2010  
     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        (8,688 )      0        (8,688 ) 

Included in other comprehensive income

      (2,310 )      2,411        2,452       0        2,553  

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        (661 )      0        (661 ) 

Transfers into Level 3

      0       0        0       0        0  
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Balance, September 30, 2010

    $ 349     $ 21,241      $ 22,833     $ 1,570      $ 45,993  
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

For the nine months ended September 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 September 30, 2011 were determined based on market data, including trade and bid prices.

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

For the three month periods ended September 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 September 30, 2011  
     Obligations of
States and
Political
Subdivisions		      Corporate
Securities		      Pooled Trust
Preferred
Collateralized
Debt Obligations		     Equity
Securities		      Other
Assets		     Total
Estimated
Fair Value		  
     (dollars in thousands)  

Balance, beginning of quarter

    $ 0      $ 0      $ 26,984     $ 1,570      $ 0      $ 28,554  

Total gains or losses

                

Included in earnings

      0        0        0       0        (4,520 )      (4,520 ) 

Included in other comprehensive income

      0        0        (2,211 )      0        0        (2,211 ) 

Purchases, issuances, sales and settlements

                

Purchases

      0        0        0       0        0        0  

Issuances

      0        0        0       0        0        0  

Sales

      0        0        0       0        0        0  

Settlements

      0        0        (75 )      0        0        (75 ) 

Transfers into Level 3

      0        0        0       0        4,520        4,520   
  

 

 

     

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

Balance, end of quarter

    $ 0      $ 0      $ 24,698     $ 1,570      $ 0      $ 26,268  
  

 

 

     

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

 

     For the Three Months Ended September 30, 2010  
     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

    $ 343      $ 20,574      $ 28,661     $ 1,570      $ 51,148  

Total gains or losses

              

Included in earnings

      0        0        (3,974 )      0        (3,974 ) 

Included in other comprehensive income

      6        667        (1,375 )      0        (702 ) 

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        0        (479 )      0        (479 ) 

Transfers into Level 3

      0        0        0       0        0  
  

 

 

     

 

 

     

 

 

    

 

 

     

 

 

  

Balance, September 30, 2010

    $ 349      $ 21,241      $ 22,833     $ 1,570      $ 45,993  
  

 

 

     

 

 

     

 

 

    

 

 

     

 

 

  

 

For the three months ended September 30, 2011 and 2010, there were no transfers between levels of fair value for available for sale securities.

Losses of $4.0 million included in earnings for the three month period ended September 30, 2010, are attributable to the change in realized gains (losses) related to assets held at September 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 September 30, 2011:

 

     Level 1      Level 2      Level 3      Total
Estimated
Fair Value		  
     (dollars in thousands)  

Impaired loans

    $ 0      $ 100,556      $ 35,298      $ 135,854  

Other real estate owned

      0        34,564        32        34,596  
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Assets

    $ 0      $ 135,120      $ 35,330      $ 170,450  
  

 

 

     

 

 

     

 

 

     

 

 

  

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 $33.3 million as of September 30, 2011 and consisted primarily of a Pennsylvania based manufacturing plant with related real estate, 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 September 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 nine months ended September 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." At September 30, 2011, the Company completed a Step 2 goodwill impairment analysis which incorporated an exit price for loans under FASB ASC Topic 820 of $3.6 billion.

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 September 30, 2011 and $0.1 million at 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:

 

     September 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

    $ 84,810      $ 84,810      $ 69,854      $ 69,854  

Interest-bearing bank deposits

      5,036        5,036        4        4  

Securities available for sale

      1,035,200        1,035,200        967,715        967,715  

Other investments

      41,891        41,891        48,859        48,859  

Loans

      3,973,723        4,023,037        4,218,083        4,213,293  

Financial Liabilities

            

Deposits

    $ 4,484,878      $ 4,390,910      $ 4,617,852      $ 4,560,070  

Short-term borrowings

      173,779        173,792        187,861        182,931  

Long-term debt

      72,709        74,797        98,748        102,038  

Subordinated debt

      105,750        67,592        105,750        86,870  

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