XML 44 R14.htm IDEA: XBRL DOCUMENT v2.4.0.6
DERIVATIVE INSTRUMENTS
12 Months Ended
Dec. 31, 2011
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 8 – Derivative Instruments

The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. Derivative instruments held by the Company at December 31, 2011 and 2010 are summarized as follows:

December 31,
2011 2010
Notional Credit Notional Credit
      Amount       Exposure       Amount       Exposure
(dollars expressed in thousands)
Interest rate swap agreements $ 50,000 75,000
Customer interest rate swap agreements 47,240 441 53,696 869
Interest rate lock commitments 38,985 1,381 41,857 276
Forward commitments to sell mortgage-backed securities 58,800 84,100 1,538
 

The notional amounts of derivative instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of the Company’s credit exposure through its use of these instruments. The credit exposure represents the loss the Company would incur in the event the counterparties failed completely to perform according to the terms of the derivative instruments and the collateral held to support the credit exposure was of no value. The Company’s credit exposure on interest rate swaps is limited to the net fair value and related accrued interest receivable reduced by the amount of collateral pledged by the counterparty. The Company had not pledged any assets at December 31, 2011 as collateral in connection with its interest rate swap agreements. At December 31, 2010, the Company had pledged cash of $1.1 million as collateral in connection with its interest rate swap agreements. Collateral requirements are monitored on a daily basis and adjusted as necessary.

For the years ended December 31, 2010 and 2009, the Company realized net interest income of $5.7 million and $12.5 million, respectively, on its derivative instruments. The Company also recorded net losses on derivative instruments, which are included in noninterest income in the statements of operations, of $193,000, $2.9 million and $4.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Interest Rate Swap Agreements. The Company entered into four interest rate swap agreements with an aggregate notional amount of $125.0 million, which were designated as cash flow hedges prior to August 2009, with the objective of stabilizing the long-term cost of capital and cash flow and, accordingly, net interest expense on junior subordinated debentures to the respective call dates of certain junior subordinated debentures. These swap agreements provide for the Company to receive an adjustable rate of interest equivalent to the three-month LIBOR plus a range of 1.65% to 2.25%, and pay a fixed rate of interest. The terms of the swap agreements provide for the Company to pay and receive interest on a quarterly basis.

The amount receivable by the Company under these swap agreements was $36,000 and $149,000 at December 31, 2011 and 2010, respectively, and the amount payable by the Company under these swap agreements was $72,000 and $335,000 at December 31, 2011 and 2010, respectively.

In August 2009, the Company reclassified a cumulative fair value adjustment of $4.6 million on its interest rate swap agreements previously designated as cash flow hedges on its junior subordinated debentures from accumulated other comprehensive income to loss on derivative instruments as a result of the discontinuation of hedge accounting following the announcement of the deferral of interest payments on the underlying trust preferred securities. In conjunction with the discontinuation of hedge accounting, the net interest differential on these interest rate swap agreements was recorded as a reduction of noninterest income effective August 2009.

The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements, previously designated as cash flow hedges on certain junior subordinated debentures, as of December 31, 2011 and 2010 were as follows:

Notional Interest Rate Interest Rate
Maturity Date       Amount       Paid       Received       Fair Value
(dollars expressed in thousands)
December 31, 2011:
       March 30, 2012 $ 25,000 4.71 % 2.19 % $ (159 )
       December 15, 2012 25,000 5.57 2.80 (648 )
$ 50,000 5.14 2.50 $ (807 )
 
December 31, 2010:
       July 7, 2011 $ 25,000 4.40 % 1.94 % $ (313 )
       March 30, 2012 25,000 4.71 1.91 (822 )
       December 15, 2012 25,000 5.57 2.55 (1,267 )
$ 75,000 4.89 2.13 $ (2,402 )
 

In 2006, the Company entered into a $200.0 million notional amount three-year interest rate swap agreement and a $200.0 million notional amount four-year interest rate swap agreement. These interest rate swap agreements were designated as cash flow hedges, to effectively lengthen the re-pricing characteristics of certain loans to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income over time. In December 2008, the Company terminated these swap agreements. The pre-tax gain of $20.8 million, in the aggregate, was being amortized as an increase to interest and fees on loans in the consolidated statements of operations over the remaining terms of the respective interest rate swap agreements, which had contractual maturity dates of September 18, 2009 and September 20, 2010. For the year ended December 31, 2010, the amount of the pre-tax gain amortized as an increase to interest and fees on loans was $5.7 million.

For interest rate swap agreements designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into interest income or interest expense in the same period the hedged transaction affects earnings. The ineffective portion of the change in the cash flow hedge’s gain or loss is recorded in noninterest income on each monthly measurement date. The Company did not recognize any ineffectiveness related to interest rate swap agreements that were designated as cash flow hedges on junior subordinated debentures in the consolidated statements of operations from January 1, 2009 through the discontinuation of hedge accounting in August 2009. The net cash flows on the interest rate swap agreements on junior subordinated debentures were recorded as an adjustment to interest expense on junior subordinated debentures until the discontinuation of hedge accounting in August 2009. The Company also did not recognize any ineffectiveness related to interest rate swap agreements designated as cash flow hedges on loans in the consolidated statements of operations for the years ended December 31, 2010 and 2009. The net cash flows on the interest rate swap agreements on loans were recorded as an adjustment to interest income on loans.

Customer Interest Rate Swap Agreements. First Bank offers interest rate swap agreements to certain customers to assist in hedging their risks of adverse changes in interest rates. First Bank serves as an intermediary between its customers and the financial markets. Each interest rate swap agreement between First Bank and its customers is offset by an interest rate swap agreement between First Bank and various counterparties. These interest rate swap agreements do not qualify for hedge accounting treatment. Changes in the fair value are recognized in noninterest income on a monthly basis. Each customer contract is paired with an offsetting contract, and as such, there is no significant impact to net income (loss). The notional amount of these interest rate swap agreement contracts at December 31, 2011 and 2010 was $47.2 million and $53.7 million, respectively.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in March 2012. The fair value of the interest rate lock commitments, which is included in other assets in the consolidated balance sheets, was an unrealized gain of $1.4 million and $276,000 at December 31, 2011 and 2010, respectively. The fair value of the forward contracts to sell mortgage-backed securities, which is included in other assets in the consolidated balance sheets, was an unrealized loss of $729,000 at December 31, 2011 and an unrealized gain of $1.5 million at December 31, 2010. Changes in the fair value of interest rate lock commitments and forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis.

The following table summarizes derivative instruments held by the Company, their estimated fair values and their location in the consolidated balance sheets at December 31, 2011 and 2010:

December 31, 2011 December 31, 2010
Balance Sheet Fair Value Balance Sheet Fair Value
      Location       Gain (Loss)       Location       Gain (Loss)
(dollars expressed in thousands)
Derivative Instruments not Designated as Hedging Instruments
       Under ASC Topic 815:
 
Customer interest rate swap agreements Other assets $ 370 Other assets $ 792
Interest rate lock commitments Other assets 1,381 Other assets 276
Forward commitments to sell mortgage-backed securities Other assets (729 ) Other assets 1,538
              Total derivatives in other assets $ 1,022 $ 2,606
 
Interest rate swap agreements Other liabilities $ (807 ) Other liabilities $ (2,402 )
Customer interest rate swap agreements Other liabilities (307 ) Other liabilities (636 )
              Total derivatives in other liabilities $ (1,114 ) $ (3,038 )
 
The following table summarizes amounts included in the consolidated statements of operations and in accumulated other comprehensive income (loss) in the consolidated balance sheets as of and for the years ended December 31, 2011, 2010 and 2009 related to interest rate swap agreements designated as cash flow hedges:
      2011       2010       2009
(dollars expressed in thousands)
Derivative Instruments Designated as Hedging Instruments Under ASC Topic 815:
 
Interest Rate Swap Agreements (Loans):
Amount reclassified from accumulated other comprehensive income to interest income on
       loans
$ 5,745 13,730
 
Interest Rate Swap Agreements (Subordinated Debentures) (1):
Amount reclassified from accumulated other comprehensive loss to interest expense on junior
       subordinated debentures
1,279
Amount reclassified from accumulated other comprehensive loss to net loss on derivative
       instruments
(4,587 )
Amount of unrealized loss recognized in other comprehensive loss (990 )
____________________
 
(1)        In August 2009, the Company discontinued hedge accounting following the announcement of the deferral of interest payments on the underlying trust preferred securities associated with its junior subordinated debentures.

The unamortized gain related to the fair value of the cash flow hedges on loans terminated in December 2008 was fully amortized in September 2010, as previously discussed.

The following table summarizes amounts included in the consolidated statements of operations for the years December 31, 2011, 2010 and 2009 related to non-hedging derivative instruments:

      2011       2010       2009
(dollars expressed in thousands)
Derivative Financial Instruments Not Designated as Hedging
       Instruments Under ASC Topic 815:
 
Interest rate swap agreements (subordinated debentures):
       Net loss on derivative instruments $ (194 ) (2,929 ) (5,585 )
 
Customer interest rate swap agreements:
       Net loss on derivative instruments 1 4 711
 
Interest rate lock commitments:
       Gain on loans sold and held for sale 1,105 (93 ) (462 )
 
Forward commitments to sell mortgage-backed securities:
       Gain on loans sold and held for sale (2,267 ) 891 972