Note 7—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 determined by taking into consideration the risk rating, probability of default and loss of given default for all counterparties.

We have six 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.

The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks at December 31:


	2011			2010
	(dollars in thousands)
Credit value adjustment	$	(2,963	)	$	(724	)
Notional Amount:
Interest rate derivatives		187,368			180,447
Risk participation agreements		128,098			125,680
Sold credit protection on risk participation agreements		(22,147	)		(22,497	)

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 Consolidated Statements of Income for the years ended December 31:


	2011			2010		2009
	(dollars in thousands)
Non-hedging interest rate derivatives:
Increase/(decrease) in other income	$	(6,687	)	$	141	$	(661	)

Of the total $6.7 million in credit risk expense recognized in 2011, $4.4 million relates to two interest rate swaps that were terminated at the end of the fourth quarter. The increase compared to 2010 in risk relates to larger mark-to-market adjustments in a declining interest rate environment and from the deterioration in the credit risk of the counterparties (loan customers). The fair value of our derivatives is included in a table in Note 21 "Fair Values of Assets and Liabilities," in the line items "Other assets" and "Other liabilities."