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Mergers and Acquisitions

6 Months Ended

Jun. 30, 2011

Note 4 — Mergers and Acquisitions

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

Habersham Bank Acquisition

On February 18, 2011, the Company’s wholly-owned subsidiary, SCBT, N.A. (the “Bank”), entered into a purchase and assumption (“P&A”) agreement with loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of Habersham, a full service Georgia state-chartered community bank headquartered in Clarkesville, Georgia. Habersham operated eight branches in the northeast region of Georgia.

Pursuant to the P&A agreement, the Bank received a discount of $38.3 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. Most of the loans and foreclosed real estate purchased are covered by a loss share agreement between the FDIC and the Bank. Under this loss share agreement, the FDIC has agreed to cover 80% of loan and foreclosed real estate losses. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. The loss sharing agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The loss share agreement applicable to commercial loans provides for FDIC loss sharing for five years and Bank reimbursement to the FDIC for eight years. As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the covered assets based on the credit adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferable with them in the event of disposal. The balance of the FDIC indemnification asset increases and decreases as the expected and actual cash flows from the covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC indemnification asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreement. This discount will be accreted to non-interest income over future periods.

The Bank did not immediately acquire the real estate, banking facilities, furniture or equipment of Habersham as a part of the P&A agreement. However, the Bank had the option to purchase the real estate and furniture and equipment from the FDIC. The term of this option expired on May 19, 2011. On May 19, 2011, the Bank notified the FDIC that it planned to acquire four bank facilities with an appraised value of approximately $6.7 million. In addition, the Bank notified the FDIC that it plans to purchase approximately $362,000 of furniture or equipment related to five locations being retained by the Bank. The Bank will settle this purchase along with other settlement items identified no later than February 17, 2012, and currently has a payable of $4.3 million as of June 30, 2011. These five banking facilities include both leased and owned locations. In June of 2011, the Bank closed 3 bank branches and converted the operating system of the acquired Georgia franchise.

As of June 30, 2011, there have been no adjustments or changes to the initial fair values related to the Habersham acquisition. The purchase accounting adjustments and the loss sharing arrangement with the FDIC significantly impact the effects of the acquired entity on the ongoing operations of the Company. Disclosure of pro forma financial information is also made more difficult by the troubled nature of Habersham prior to the date of the combination.

As of June 30, 2011, noninterest income included a pre-tax gain of $5.5 million which resulted from the acquisition of Habersham. The amount of the gain was equal to the amount by which the fair value of assets acquired exceeded the fair value of liabilities assumed, and resulted from the discount bid on the assets acquired and the impact of the FDIC loss share agreement, both of which are attributable to the troubled nature of Habersham prior to the acquisition. The Company recognized $598,000 and $1.2 million in merger-related expense during the three months and six months ended June 30, 2011.

The following table presents the assets acquired and liabilities assumed as of February 18, 2011, as recorded by Habersham on the acquisition date and as adjusted for purchase accounting adjustments.

			Balances			Balances
	As Recorded		Kept by			Acquired			Fair Value			As Recorded
(Dollars in thousands)	by Habersham		FDIC			from FDIC			Adjustments			by SCBT
Assets
Cash and cash equivalents	$	31,924	$	(4	)	$	31,920		$	—		$	31,920
Investment securities	65,018		(3,582		)	61,436			(566		)(a)	60,870
Loans	212,828		9,039			221,867			(94,414		)(b)	127,453
Premises and equipment	16,915		(16,915		)	—			—			—
Intangible assets	—		—			—			3,262		(c)	3,262
FDIC receivable for loss sharing agreement	—		—			—			87,418		(d)	87,418
Other real estate owned and repossessed assets	42,024		(616		)	41,408			(26,915		)(e)	14,493
Other assets	14,446		(11,227		)	3,219			—			3,219
Total assets	$	383,155	$	(23,305	)	$	359,850		$	(31,215	)	$	328,635

Liabilities
Deposits:
Noninterest-bearing	$	76,205	$	(5	)	$	76,200		$	—		$	76,200
Interest-bearing	263,246		—			263,246			1,203		(f)	264,449
Total deposits	339,451		(5		)	339,446			1,203			340,649
Other borrowings	39,433		(6		)	39,427			344		(g)	39,771
Other liabilities	2,819		(1,710		)	1,109			—			1,109
Total liabilities	381,703		(1,721		)	379,982			1,547			381,529
Net assets acquired over liablities assumed	$	1,452	$	(21,584	)	$	(20,132	)	$	(32,762	)	$	(52,894	)
Excess of assets acquired over liabilities assumed	$	1,452	$	(21,584	)	$	(20,132	)
Aggregate fair value adjustments									$	(32,762	)

Cash received from the FDIC												$	59,360
Cash due to FDIC												(938		)
Total												58,422
Gain on acquisition (noninterest income)												$	5,528

Explanation of fair value adjustments

Adjustment reflects:

(a)—Adjustment reflects marking the available-for-sale portfolio to fair value as of the acquisition date.

(b)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.

(c)—Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

(d)—Adjustment reflects the estimated fair value of payments the Company will receive from the FDIC under the loss share agreements.

(e)—Adjustment reflects the fair value adjustments to OREO based on the Company’s evaluation of the acquired OREO portfolio.

(f)—Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.

(g)—Adjustment reflects the prepayment fee paid when Federal Home Loan Bank (“FHLB”) advances were completely paid off in February 2011.

Community Bank and Trust Acquisition

On January 29, 2010, the Bank entered into a P&A agreement, including loss share arrangements, with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of CBT, a full service Georgia state-chartered community bank headquartered in Cornelia, Georgia. CBT operated 38 locations, including 36 branches, one loan production office and one trust office in the northeast region of Georgia.

Pursuant to the P&A agreement, the Bank received a discount of $158.0 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. The loans and foreclosed real estate purchased are covered by a loss share agreement between the FDIC and the Bank. Under this loss share agreement, the FDIC has agreed to cover 80% of loan and foreclosed real estate losses up to $233.0 million and 95% of losses that exceed that amount. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. The loss sharing agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The loss share agreement applicable to commercial loans provides for FDIC loss sharing for five years and Bank reimbursement to the FDIC for eight years. The loss share agreement applicable to single family loans provides for FDIC loss sharing for ten years and Bank reimbursement to the FDIC for ten years. As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the covered assets based on the credit adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferable with them in the event of disposal. The balance of the FDIC indemnification asset increases and decreases as the expected and actual cash flows from the covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC indemnification asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreements. This discount will be accreted to non-interest income over future periods.

The Bank did not immediately acquire the real estate, banking facilities, furniture or equipment of CBT as a part of the P&A agreement. However, on October 27, 2010, the Bank acquired seven bank facilities with an appraised value of approximately $10.9 million. In addition, the Bank purchased approximately $700,000 of furniture or equipment related to 27 locations retained by the Bank. In late May and early June of 2010, the Bank closed 10 bank branches, 1 trust office, and converted the operating system of the acquired Georgia franchise.

There were no adjustments or changes to the initial fair values related to the CBT acquisition within the one year time frame from the date of acquisition. The purchase accounting adjustments and the loss sharing arrangement with the FDIC will significantly impact the effects of the acquired entity on the ongoing operations of the Company.

For the year ended December 31, 2010, noninterest income included a pre-tax gain of $98.1 million as a result of the acquisition of CBT. The amount of the gain was equal to the amount by which the fair value of assets acquired exceeded the fair value of liabilities assumed, and resulted from the discount bid on the assets acquired and the impact of the FDIC loss share agreement, both of which are attributable to the troubled nature of CBT prior to the acquisition. The Company recognized $5.5 million in merger-related expense during the twelve months ended December 31, 2010.

The following table presents the assets acquired and liabilities assumed as of January 29, 2010, as recorded by CBT on the acquisition date and as adjusted for purchase accounting adjustments.

			Balances			Balances
	As Recorded		Kept by			Acquired			Fair Value			As Recorded
(Dollars in thousands)	by CBT		FDIC			from FDIC			Adjustments			by SCBT
Assets
Cash and cash equivalents	$	80,615	$	(12	)	$	80,603		$	—		$	80,603
Investment securities	116,270		(10,046		)	106,224			(613		)(a)	105,611
Loans	828,223		(56,725		)	771,498			(312,033		)(b)	459,465
Premises and equipment	24,063		(24,015		)	48			—			48
Intangible assets	—		—			—			8,535		(c)	8,535
FDIC receivable for loss sharing agreement	—		—			—			276,789		(d)	276,789
Other real estate owned and repossessed assets	46,271		4,852			51,123			(25,194		)(e)	25,929
Other assets	26,414		(18,541		)	7,873			—			7,873
Total assets	$	1,121,856	$	(104,487	)	$	1,017,369		$	(52,516	)	$	964,853

Liabilities
Deposits:
Noninterest-bearing	$	107,617	$	(11,602	)	$	96,015		$	—		$	96,015
Interest-bearing	907,288		311			907,599			4,892		(f)	912,491
Total deposits	1,014,905		(11,291		)	1,003,614			4,892			1,008,506
Other borrowings	80,250		—			80,250			2,316		(g)	82,566
Other liabilities	10,748		(3,614		)	7,134			194		(h)	7,328
Total liabilities	1,105,903		(14,905		)	1,090,998			7,402			1,098,400
Net assets acquired over liablities assumed	$	15,953	$	(89,582	)	$	(73,629	)	$	(59,918	)	$	(133,547	)
Excess of assets acquired over liabilities assumed	$	15,953	$	(89,582	)	$	(73,629	)
Aggregate fair value adjustments									$	(59,918	)

Cash received from the FDIC												$	225,695
Cash due from FDIC												5,933
Total												231,628
Gain on acquisition (noninterest income)												$	98,081