Strength and Stability - SNL Financial

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies and Significant Estimates (Continued)
Fair Values of Financial Instruments (Continued)
Fair values for single issue trust preferred securities were obtained from pricing sources with
reasonable pricing transparency, taking into account other unobservable inputs related to the risks for
each issuer. These valuations are classified as Level 3 due to the inactivity in the markets.
Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. While management believes our valuation methodologies are appropriate
and consistent with other market participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation
dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts
presented herein.
In addition to valuation, on a quarterly basis we assess whether there are any declines in value below the carrying
value of our assets that should be considered other than temporary. Methodologies and estimates used by
management are discussed in detail in management’s discussion and analysis of financial condition and results of
operations and in Note 10 “Impairment of Investment Securities” and Note 21 “Fair Values of Financial
Instruments” of Notes to Financial Statements.
Allowance for Credit Losses
We account for the credit risk associated with our lending activities through the allowance and provision for
credit losses. The allowance represents management’s best estimate of probable losses that are inherent in our
existing loan portfolio as of the balance sheet date. The provision is a periodic charge to earnings in an amount
necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable
estimated losses. Management determines and reviews with the Board of Directors the adequacy of the allowance
on a quarterly basis in accordance with the methodology described below.
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• Individual loans are selected for review in accordance with FASB Statement No. 114, “Accounting by
Creditors for Impairment of a Loan,” as amended by FASB Statement No. 118 (which we refer to as
“Statement 114”). These are generally large balance commercial loans and commercial mortgages that
are rated less than “satisfactory” based on our internal credit-rating process.
• We assess whether the loans identified for review are “impaired,” which means that it is probable that
all amounts will not be collected according to the contractual terms of the loan agreement, which
generally represents loans that management has placed on nonaccrual status.
• We calculate the estimated fair value of the loans that are selected for review based on observable
market prices, discounted cash flows and the value of the underlying collateral.
• We then select pools of homogenous smaller balance loans having similar risk characteristics for
evaluation collectively under the provisions of FASB Statement No. 5, “Accounting for Contingencies”
(which we refer to as “Statement 5”). These loans generally include residential mortgages, consumer
loans, installment loans and smaller balance commercial loans.
• Statement 5 loans are segmented into groups with similar characteristics and an allowance for credit
losses is allocated to each segment based on recent loss history and other relevant information.