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Derivatives

9 Months Ended

Sep. 30, 2011

Note 13 Derivatives

First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is calculated by taking into consideration the risk rating, probability of default and loss given default for all counterparties.

We have five risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.

The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.

A credit value adjustment of $6.4 million was recorded for credit risk on an aggregate notional amount outstanding of $198.8 million for interest rate derivatives and $126.9 million of risk participation agreements at September 30, 2011. Of the total $6.4 million credit value adjustment, $4.5 million relates to mark-to-market adjustments on two interest rate swaps as a result of deterioration in the credit risk of the counterparties (loan customers), which resulted in future amounts previously believed to be collectible under the terms of the interest rate swap to be deemed uncollectible. A credit value adjustment of $0.7 million was recorded for credit risk on an aggregate notional amount outstanding of $180.4 million for interest rate derivatives and $125.7 million for risk participation agreements at December 31, 2010. Of the existing risk participation agreements, $22.2 million and $22.5 million was participated to other financial institutions at September 30, 2011 and December 31, 2010, respectively. The fair value of our derivatives is included in a table in Note 12 "Fair Values of Assets and Liabilities," in the line items "Other assets" and "Other liabilities."

The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in "Other income" on the Condensed Consolidated Statements of Income:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
	(dollars in thousands)
Non-hedging interest rate derivatives:
Decrease in other income	$	(5,108	)	$	(542	)	$	(5,643	)	$	(836	)