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Commitments and Letters of Credit | 12 Months Ended
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Dec. 31, 2012
Commitments and Letters of Credit | Note 14—Commitments and Letters of Credit First Commonwealth is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. First Commonwealth’s exposure to credit loss in the event of nonperformance by the other party of the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contract or notional amount of those instruments. First Commonwealth uses the same credit policies for underwriting all loans, including these commitments and conditional obligations. As of December 31, 2012 and 2011, First Commonwealth did not own or trade other financial instruments with significant off-balance sheet risk including derivatives such as futures, forwards, option contracts and the like, although such instruments may be appropriate to use in the future to manage interest rate risk. See Note 7 “Derivatives” for a description of interest rate swaps provided to customers. The following table identifies the notional amount of those instruments at December 31:
|  | 2012 |  |  | 2011 |
|  | (dollars in thousands) |
Financial instruments whose contract amounts represent credit risk: |  |  |  |  |  |  |  |
Commitments to extend credit |  | $ | 1,506,618 |  |  | $ | 1,495,009 |
Financial standby letters of credit |  |  | 47,185 |  |  |  | 53,689 |
Performance standby letters of credit |  |  | 69,240 |  |  |  | 76,371 |
Commercial letters of credit |  |  | 685 |  |  |  | 1,297 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First Commonwealth evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by First Commonwealth upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral that is held varies but may include accounts receivable, inventory, property, plant and equipment, and residential and income-producing commercial properties. Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The current notional amounts outstanding at December 31, 2012 include financial standby letters of credit of $0.4 million, performance standby letters of credit of $10.9 million and commercial letters of credit of $0.4 million issued during 2012. A liability of $0.2 million has been recorded as of December 31, 2012 and 2011, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued. Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk in these commitments resulted in the recording of a liability of $2.4 million and $1.5 million as of December 31, 2012 and 2011, respectively. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

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- Definition The entire disclosure for commitments, contingencies, and guarantees. + References No definition available. + Details
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