Commitments and Contingencies

9 Months Ended

Jun. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

NOTE 10. Commitments and Contingencies

Branch Purchase and Assumption Agreement

On June 22, 2011, First Financial announced First Federal signed a purchase and assumption agreement with Liberty Savings Bank, FSB (“Liberty”) to acquire the deposits and select loans associated with Liberty’s five bank branches in the Hilton Head, South Carolina market. Based on information available at signing, First Federal expects to acquire approximately $110 million in deposits and $27 million in loans. The transaction is subject to regulatory approval and is expected to close in the fourth calendar quarter.

Loan commitments

          Commitments to extend credit are agreements to lend to borrowers as long as there is no violation of any condition established by the commitment letter. Commitments generally have fixed expiration dates or other termination clauses. The majority of the commitments will be funded within a 12 month period. First Federal evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but primarily consists of residential or income producing commercial properties. Unused lines of credit on equity loans, credit cards, other consumer and commercial loans and standby letters of credit were $354.8 million at June 30, 2011.

          Outstanding commitments on loans not yet closed, including commitments issued to correspondent lenders, totaled $24.0 million at June 30, 2011. These were principally commitments for loans on single-family residential and commercial property. Outstanding undisbursed closed construction loans, primarily consisting of permanent residential construction, and commercial property construction, totaled $28.4 million at June 30, 2011. In addition, at June 30, 2011, First Federal had undisbursed closed loans of $17.1 million.

Standby letters of credit

          Standby letters of credit represent First Federal’s obligations to a third party contingent on the failure of its customer to perform under the terms of an underlying contract with the third party or obligate First Federal to stand as surety for the benefit of the third party. The underlying contract may entail either financial or non-financial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will generally be drawn only when the underlying event fails to occur as intended. First Federal can seek recovery of the amounts paid from the borrower. In addition, some of these standby letters of credit are collateralized. Commitments under standby letters of credit are usually for one year or less. As of June 30, 2011, there was no current liability associated with these standby letters of credit. The maximum potential amount of undiscounted future payments related to standby letters of credit at June 30, 2011, was $900 thousand.

Derivative instruments

          First Financial uses derivatives as part of its interest rate management activities. First Financial does not elect hedge accounting treatment for any of its derivative transactions; consequently, all changes in the fair value of derivative instruments are recorded as noninterest income in the Consolidated Statements of Operations.

          As part of the risk management strategy in the mortgage banking area, various derivative instruments such as interest rate lock commitments and forward sales contracts are utilized. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified period of time. Forward contracts are agreements to purchase or sell loans, securities or other money market instruments at a future specified date at a specified price or yield. First Financial’s obligations under forward contracts consist of commitments to deliver mortgage loans in the secondary market at a future date and commitments to sell “to be issued” MBS. The commitments to originate fixed rate conforming loans totaled $39.7 million at June 30, 2011. It is anticipated that $31.6 million or approximately 80% of these loans will close. The fair value of this $31.6 million represents an asset, which totaled $41 thousand at June 30, 2011. The off-balance sheet obligations under the above derivative instruments totaled $72.0 million at June 30, 2011, with a fair value of $438 thousand as of June 30, 2011.

          First Financial utilizes derivative instruments, such as futures contracts and exchange-traded option contracts to achieve a fair value return that would substantially offset the changes in fair value of MSRs attributable to interest rates. Changes in the fair value of these derivative instruments are recorded net in noninterest income in loan servicing operations, and are offset by the changes in the fair value of the MSRs. During the nine months ended June 30, 2011, gross MSRs values decreased $912 thousand due to portfolio runoff, partially offset by positive interest rate movements, while hedge losses totaled $40 thousand. The notional value of off-balance sheet positions as of June 30, 2011 totaled $61.0 million with a fair value of an asset of $25 thousand.