Acquisitions

6 Months Ended

Jun. 30, 2012

Business Combination Disclosure [Text Block]

NOTE 2. Acquisitions

     Acquisitions are accounted for in accordance with ASC 805, Business Combinations, and assets acquired and liabilities assumed are recorded at their estimated fair value as of acquisition date. Determining the fair value of the assets and liabilities, especially the loan portfolio and other real estate owned (“OREO”), is a complicated process involving significant judgment regarding the methods and assumptions used to calculate estimated fair values. The fair value assigned to loans and OREO, are preliminary and subject to refinement for up to one year after the closing date of the acquisition, as additional information becomes available. In addition, acquisition-related costs are recognized as period expenses as they are incurred.

Liberty Savings Bank Branch Acquisition

     On April 20, 2012, First Federal acquired five branches from Liberty Savings Bank (“Liberty”) in the Hilton Head, South Carolina market and the transaction included $22.2 million of performing loans and $113.2 million of deposits, as of the transaction date. First Federal consolidated three of the acquired branches with existing First Federal financial centers, adding a net of two new financial centers in the Hilton Head market. The acquired loans and time deposits were recorded at their estimated fair value based on expected contractual cash flows, which were discounted at current market rates. The estimated fair value for the loans did not include a discount for credit quality as they were all performing loans as of the acquisition date. First Federal also recorded an intangible asset totaling $5.2 million, which represented the estimated fair value of the assumed core deposits (noninterest-bearing checking, interest-bearing checking, savings, and money market accounts) as well as the estimated value of a non-compete agreement between First Federal and Liberty. The amortization of the purchase accounting adjustments for the loans and time deposits is recorded in net interest income while the amortization of the intangible asset is recorded in noninterest expense on the Consolidated Statements of Operations.

Plantation Federal Bank FDIC-Assisted Acquisition

     On April 27, 2012, First Federal assumed all deposits and substantially all assets and certain other liabilities of Plantation Federal Bank (“Plantation”), a full-service community bank headquartered in Pawleys Island, South Carolina, from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Plantation (the “Transaction”). Plantation operated three branches along the coast of South Carolina under the name of Plantation Federal and three branches in the Greenville, South Carolina market under the name of First Savers Bank. The Transaction was made pursuant to a purchase and assumption agreement, in the FDIC’s customary form, entered into by First Federal and the FDIC as of April 27, 2012 (the “P&A Agreement”). The Transaction included all six branch offices of Plantation, which now operate as branches of First Federal.

     In connection with the Transaction, the FDIC made a cash payment to First Federal of $46.0 million, and First Federal did not pay the FDIC a premium to assume the customer deposits. The P&A Agreement includes a customary loss sharing agreement with the FDIC, which covers $216.2 million at carrying value of acquired commercial loans and commercial OREO ($169.5 million at estimated fair value). First Federal will share in the losses on the covered asset pools and the FDIC is obligated to reimburse First Federal for 80% of all eligible losses with respect to covered assets, beginning with the first dollar of loss incurred through $55 million in losses. First Federal absorbs losses greater than $55 million up to $65 million. The FDIC will reimburse First Federal for 60% of all eligible losses in excess of $65 million. First Federal has a corresponding obligation to reimburse the FDIC according to the same arrangement for eligible recoveries with respect to the covered assets. The loss share agreement provides for FDIC loss sharing for five years and First Federal reimbursement to the FDIC for eight years.

     The fair value of the loans acquired was estimated based on discounted cash flows, which take into consideration current portfolio interest rates and repricing characteristics as well as assumptions related to prepayment speeds. Loans with an estimated fair value of $139.8 million with credit deterioration were acquired and accounted for in accordance with ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. First Federal estimated the fair value of the ASC 310-30 loans based on projected cash flows, the type of loan and related collateral, risk rating classification status and current market interest rates. Loans were grouped into pools according to similar characteristics and are treated in the aggregate when applying various valuation techniques. First Federal also estimated the amount of credit losses that are expected to be realized for the loan portfolio by estimating the liquidation value of collateral securing loans on nonaccrual status or classified as substandard or doubtful. Certain amounts related to these loans were estimates, such as “as-is” and liquidation collateral values provided for by appraisers, and are highly subjective. The discount rates take into consideration the current market interest rate environment and a credit risk component based on the credit characteristics of each loan pool. The accretion of the fair value discount on the acquired loans is recorded in net interest income on the Consolidated Statements of Operations. The accretion of the fair value discount on the acquired OREO is recorded in noninterest expense on the Consolidated Statements of Operations.

     The fair value of the FDIC indemnification asset associated with the covered assets was estimated at $34.3 million using projected cash flows related to the loss sharing agreement, based on the expected reimbursement for loses and the applicable loss sharing percentages for each loss tranche. The expected cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The amount that First Federal realizes on the FDIC indemnification asset could differ materially from the carrying value, based on the timing and amount of collections on the acquired covered assets in future periods. To the extent the actual values realized are different from the estimate, the indemnification asset will generally be affected in an offsetting manner due to the loss share support from the FDIC. There is no contractual interest rate associated with the FDIC indemnification asset; however, a present value discount was recorded against the initial balance of the FDIC indemnification asset and this discount is accreted into net interest income on the Consolidated Statement of Operations. A true-up payment related to the FDIC indemnification was established totaling $3.5 million and the estimated fair value included a present value discount. The true-up payment was recorded in other liabilities on the Consolidated Balance Sheets and the amortization of the fair value discount is recorded in noninterest expense on the Consolidated Statements of Operations.

     For the other assets acquired and liabilities assumed, First Federal used various methods to estimate fair value as of the acquisition date. For the investment securities and advances from the FHLB, the fair value was estimated using quoted or current market prices, including applicable prepayment termination charges. The fair value of time deposits was estimated based on expected contractual cash flows, which were discounted at current market rates. The accretion of the discount on the time deposits is recorded in net interest income on the Consolidated Statements of Operations. First Federal recorded a core deposit intangible representing the fair value of the assumed core deposits and the amortization of this intangible is recorded in noninterest expense on the Consolidated Statements of Operations.

     During the three months ended June 30, 2012 a bargain purchase gain of $14.6 million was recorded in noninterest income on the Consolidated Statements of Operations. A deferred tax liability of $5.6 million representing the difference between the financial statement and tax bases of the assets acquired and liabilities assumed was recorded in other liabilities on the Consolidated Balance Sheets. The bargain purchase gain represents the amount by which the estimated fair value of the assets acquired exceeded the estimated fair value of the liabilities assumed, adjusted for the discount bid cash payment received from the FDIC as well as the establishment of the FDIC indemnification asset and its associated true-up payment.

     Due to the significant amount of fair value adjustments, the resulting accretion and amortization of those adjustments and the protection resulting from the FDIC loss share agreement, historical operating results for Plantation are not relevant to First Federal’s ongoing results of operations. The following table presents the assets acquired and liabilities assumed as of April 27, 2012, including the purchase accounting adjustments.

Statement of Assets Acquired and Liabilities Assumed
As of April 27, 2012

(in thousands)
	Balances Acquired from the FDIC		Fair Value Adjustments				As Recorded by First Federal
ASSETS
Cash and due from banks	$	71,535	$	---			$	71,535
Interest-bearing deposits with banks		8,690		---				8,690
Total cash and cash equivalents		80,225		---				80,225
Investment securities
Securities available for sale, at fair value		10,824		---				10,824
Nonmarketable securities		3,307		---				3,307
Total investment securities		14,131		---				14,131
Loans		326,558		(47,907	)	1		278,651
FDIC indemnification asset, net		---		34,300		2		34,300
Other real estate owned		25,260		(14,524	)	3		10,736
Other intangibles, net		---		1,710		4		1,710
Other assets		1,263		---				1,263
Total assets acquired	$	447,437	$	(26,421	)		$	421,016
LIABILITIES
Deposits
Noninterest-bearing checking	$	25,942	$	---			$	25,942
Interest-bearing checking		34,806		---				34,806
Savings and money market		127,043		---				127,043
Retail time deposits		229,313		2,174		5		231,487
Wholesale time deposits		651		---				651
Total deposits		417,755		2,174				419,929
Advances from FHLB		28,000		355		6		28,355
Deferred tax liability		---		5,583		7		5,583
Other liabilities		533		3,500		8		4,033
Total liabilities assumed		446,288	$	11,612				457,900
Excess of liabilities assumed over assets acquired	$	1,149					$	(36,884	)

Explanation of fair value adjustments

¹ Reflects the fair value adjustments based on First Federal’s evaluation of the acquired loan portfolio.

² Reflects the estimated fair value of payments First Federal anticipates receiving from the FDIC under the loss share agreement.

³ Reflects estimated OREO losses based on First Federal’s evaluation of the acquired OREO.

⁴ Reflects recording the core deposit intangible on the acquired core deposits.

⁵ Adjusts for interest rates that are higher than rates available on similar deposits as of the acquistion date.

⁶ Reflects the fair value as quoted by the FHLB.

⁷ Establishes the deferred tax liability of the gain on acquisition.

⁸ Establishes the true-up payment that may be owed to the FDIC at the end of the loss share agreement.

     As of June 30, 2012, there have been no adjustments or changes to the initial fair values.

     Under the P&A Agreement, First Federal has options to acquire at fair market value any bank premises and equipment that were owned by, or assume any leases relating to bank premises leased by, Plantation and to assume or reject service provider contracts. First Federal has indicated its intention to purchase Plantation’s Pawleys Island location for $2.8 million, and the closing is expected to occur during the third quarter of 2012. First Federal will consolidate an existing financial center into the former Plantation location and will consolidate Plantation’s remaining two coastal locations into First Federal’s existing financial centers during the third quarter of 2012, for no net increase in financial centers along the South Carolina coast. First Federal will assume the leases associated with the three locations in the Greenville, South Carolina market and those financial centers will remain open. First Federal will acquire certain fixed assets totaling $625 thousand associated with the former Plantation locations during the third quarter of 2012.