Commitments and Contingencies

6 Months Ended

Mar. 31, 2012

Commitments and Contingencies Disclosure [Text Block]

NOTE 9. Commitments and Contingencies

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 twelve 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. Outstanding commitments on loans not yet closed include commitments issued to correspondent lenders and are principally commitments for loans on single-family residential and commercial property.

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 from the borrower for the amounts paid. 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 March 31, 2012 and December 31, 2011, there was no recorded liability associated with these standby letters of credit.

     The following table presents First Federal’s loan commitments.

(in thousands)	March 31, 2012		December 31, 2011
Avaliable unused lines of credit	$	345,174	$	345,734
Commitments to fund commercial real estate, construction and land development loans		31,091		30,531
Other unused commitments		61,290		73,835
Standby letters of credit		4,511		574

Derivative Instruments

          First Federal utilizes derivatives as part of its risk management strategy in conducting its mortgage activities. These instruments may consist of financial forward and future contracts, when-issued securities and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. First Federal does not elect hedge accounting treatment for any of its derivative transactions; consequently, changes in fair value, both gains and losses, of the instrument are recorded in the Consolidated Statements of Operations in mortgage and other loan income.

          Derivative contracts related to MSRs are used to offset changes in fair value and are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between the parties, and are not a measure of financial risk. On March 31, 2012 and December 31, 2011, First Federal had derivative financial instruments outstanding with notional amounts totaling $52.5 million and $48.0 million, respectively. The estimated net fair value of the open contracts related to the MSRs was a loss of $166 thousand at March 31, 2012 compared to a gain of $354 thousand at December 31, 2011.

          The following table presents First Federal’s mortgage loan pipeline and obligations under forward commitments along with the fair value of those obligations.

(in thousands)	March 31, 2012		December 31, 2011
Mortgage loan pipeline	$	123,808	$	85,460
Expected pipeline closures		92,603		63,945
Fair value of mortgage loan pipeline		1,134		1,104
Forward commitments		178,196		148,902
Fair value of forward commitments		569		358