XML 64 R21.htm IDEA: XBRL DOCUMENT v3.19.3
Derivatives
 9 Months Ended
Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives Derivatives
Derivatives Not Designated as Hedging Instruments
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 given default for all counterparties.
We have 35 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. We have 12 risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.
First Commonwealth is also party to interest rate caps and collars that are not designated as hedging instruments. The interest rate caps relate to contracts that First Commonwealth enters into with loan customers that provide a maximum interest rate on their variable rate loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap contracts are identical. The interest rate collars relate to contracts that First Commonwealth enters into with loan customers that provides both a maximum and minimum interest rate on their variable rate loan. At the same time the interest rate collar is entered into with the customer, First Commonwealth enters into an offsetting interest rate collar with another financial institution. The notional amount and the maximum and minimum interest rates on both interest collar contracts are identical.
The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.
Derivatives Designated as Hedging Instruments
In 2015, the Company entered into an interest rate swap contract that was designated as a cash flow hedge. This contract, which had a notional amount of $65.0 million, matured on March 4, 2019. The periodic net settlement of interest rate swaps was recorded as an adjustment to "Interest and fees on loans" in the Consolidated Statements of Income. For the nine months ended September 30, 2019 there was a $0.1 million negative impact on net interest income as a result of these interest rate swaps.
In August 2019, the Company entered into two interest rate swap contracts that are designated as cash flow hedges. These contracts mature on August 15, 2024 and August 15, 2026 and have notional amounts of $30.0 million and $40.0 million, respectively. The Company's risk management objective for these hedges is to reduce its exposure to variability in expected future cash flows related to interest payments made on subordinated debentures benchmarked to the 3-month LIBOR rate. Therefore, the interest rate swaps convert the interest rate benchmark on the first $70.0 million of 3-month LIBOR based subordinated debentures to a fixed rate.
The periodic net settlement of these interest rate swaps are recorded as an adjustment to "Interest on subordinated debentures" in the Consolidated Statements of Income. For the three and nine months ended September 30, 2019 there was a $0.1 million positive impact on net interest income as a result of these interest rate swaps. Changes in the fair value of the cash flow hedges are reported on the balance sheet and in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in "Interest on subordinated debentures", the same line item in the Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at September 30, 2019, and changes in the fair value attributed to hedge ineffectiveness were not material.
The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Other noninterest income" in the Consolidated Statements of Income. The impact to noninterest income for the three and nine months ended September 30, 2019 was an increase of $12 thousand and $0.5 million, respectively.
Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At September 30, 2019, the underlying funded mortgage loan commitments had a carrying value of $23.4 million and a fair value of $24.8 million, while the underlying unfunded mortgage loan commitments had a notional amount of $32.7 million. At December 31, 2018, the underlying funded mortgage loan commitments had a carrying value of $6.9 million and a fair value of $7.6 million, while the underlying unfunded mortgage loan commitments had a notional amount of $9.9 million. The interest rate lock commitments decreased other noninterest income by $0.2 million and $0.1 million for the three and nine months ended September 30, 2019, respectively.
In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Consolidated Statements of Income. The increase in other noninterest expense for the nine months ended September 30, 2019 totaled $4 thousand and $3 thousand for the three months ended September 30, 2019. At September 30, 2019 and December 31, 2018, the underlying loans had a carrying value of $4.9 million and $1.9 million, respectively, and a fair value of $4.8 million and $1.9 million, respectively.

The following table depicts the credit value and fair value adjustments recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:
 
September 30, 2019
 
December 31, 2018
 
(dollars in thousands)
Derivatives not Designated as Hedging Instruments
 
 
 
Credit value adjustment
$
(91
)
 
$
(3
)
Notional amount:
 
 
 
Interest rate derivatives
480,872

 
411,645

Interest rate caps
87,401

 
36,111

Interest rate collars
35,354

 
—

Risk participation agreements
178,502

 
162,139

Sold credit protection on risk participation agreements
(70,016
)
 
(59,315
)
Interest rate options
32,720

 
9,900

Derivatives Designated as Hedging Instruments
 
 
 
Interest rate swaps:
 
 
 
Fair value adjustment
(124
)
 
(133
)
Notional amount
70,000

 
65,000

Interest rate forwards:
 
 
 
Fair value adjustment
(48
)
 
(170
)
Notional amount
47,000

 
15,000

Foreign exchange forwards:
 
 
 
Fair value adjustment
50

 
(6
)
Notional amount
4,874

 
1,927

 

The table below presents the change in the fair value of derivative assets and derivative liabilities attributable to credit risk or fair value changes included in "Other income," 'Other expense," "Interest on subordinated debentures" or "Interest and fees on loans" in the Consolidated Statements of Income:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(dollars in thousands)
Non-hedging interest rate derivatives
 
 
 
 
 
 
 
(Decrease) increase in other income
$
(33
)
 
$
—

 
$
420

 
$
789

Increase (decrease) in other expense
—

 
221

 
—

 
(432
)
Hedging interest rate derivatives
 
 
 
 
 
 
 
Decrease in interest and fees on loans
—

 
(193
)
 
(118
)
 
(424
)
Decrease in interest from subordinated debentures
(70
)
 
—

 
(70
)
 
—

Increase in other expense
—

 
—

 
7

 
10

Hedging interest rate forwards
 
 
 
 
 
 
 
Increase in other income
201

 
—

 
122

 
—

Increase in other expense
—

 
125

 
—

 
96

Hedging foreign exchange forwards
 
 
 
 
 
 
 
Increase in other expense
3

 
2

 
4

 
10


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.”