DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 7–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 June 30, 2012 and December 31, 2011 are summarized as follows:

	June 30, 2012			December 31, 2011
	Notional		Credit	Notional	Credit
	Amount		Exposure	Amount	Exposure
	(dollars expressed in thousands)
Interest rate swap agreements	$	25,000	—	50,000	—
Customer interest rate swap agreements		14,428	172	47,240	441
Interest rate lock commitments		85,648	3,090	38,985	1,381
Forward commitments to sell mortgage-backed securities		110,500	—	58,800	—

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 as collateral in connection with its interest rate swap agreements at June 30, 2012 and December 31, 2011. Collateral requirements are monitored on a daily basis and adjusted as necessary.

The Company recorded net losses on derivative instruments, which are included in noninterest income in the consolidated statements of operations, of $2,000 and $38,000 for the three and six months ended June 30, 2012, respectively, compared to $165,000 and $221,000 for the comparable periods in 2011.

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 London Interbank Offering Rate (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 $30,000 and $36,000 at June 30, 2012 and December 31, 2011, respectively, and the amount payable by the Company under these swap agreements was $62,000 and $72,000 at June 30, 2012 and December 31, 2011, respectively.

In August 2009, the Company reclassified a cumulative fair value adjustment of $4.6 million on its interest rate swap agreements 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 June 30, 2012 and December 31, 2011 were as follows:

		Notional	Interest Rate		Interest Rate
Maturity Date		Amount	Paid		Received		Fair Value
	(dollars expressed in thousands)
June 30, 2012:
December 15, 2012	$	25,000	5.57	%	2.72	%	$	(337	)
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	)

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 June 30, 2012 and December 31, 2011 was $14.4 million and $47.2 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 September 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 $3.1 million and $1.4 million at June 30, 2012 and December 31, 2011, 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 $1.2 million and $729,000 at June 30, 2012 and December 31, 2011, respectively. 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 June 30, 2012 and December 31, 2011:

	June 30, 2012				December 31, 2011
	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	$	142		Other assets	$	370
Interest rate lock commitments	Other assets		3,090		Other assets		1,381
Forward commitments to sell mortgage-backed securities	Other assets		(1,157	)	Other assets		(729	)
Total derivatives in other assets		$	2,075			$	1,022
Interest rate swap agreements	Other liabilities	$	(337	)	Other liabilities	$	(807	)
Customer interest rate swap agreements	Other liabilities		(142	)	Other liabilities		(307	)
Total derivatives in other liabilities		$	(479	)		$	(1,114	)

The following table summarizes amounts included in the consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 related to non-hedging derivative instruments:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012		2011
	(dollars expressed in thousands)
Derivative Instruments Not Designated as Hedging Instruments
Under ASC Topic 815:
Interest rate swap agreements – subordinated debentures:
Net loss on derivative instruments	$	(2	)	(165	)	(41	)	(221	)
Customer interest rate swap agreements:
Net loss on derivative instruments		—		—		3		—
Interest rate lock commitments:
Gain on loans sold and held for sale		1,582		106		1,709		410
Forward commitments to sell mortgage-backed securities:
Gain on loans sold and held for sale		(1,200	)	8		(428	)	(1,634	)