Acquisitions

12 Months Ended

Dec. 31, 2012

Business Combination Disclosure [Text Block]

NOTE 2. Acquisitions

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. As part of the branch acquisition, First Federal acquired $1.0 million in buildings, $500 thousand in land, as well as $500 thousand in cash. The acquired loans and time deposits were recorded at their estimated fair value based on expected contractual cash flows, which were discounted at market rates as of the acquisition date. 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 FDIC, as receiver for Plantation (the “Acquisition”). 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 Acquisition 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 (a “P&A Agreement”).

In connection with the Acquisition, the FDIC made a cash payment to First Federal of $45.9 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 $216.4 million at carrying value of acquired commercial loans and commercial OREO ($168.6 million at estimated fair value). First Federal will share in the losses and the FDIC is obligated to reimburse First Federal for 80% of all eligible losses, beginning with the first dollar of loss incurred through $55.0 million in losses. First Federal absorbs losses greater than $55.0 million up to $65.0 million. The FDIC will reimburse First Federal for 60% of all eligible losses in excess of $65.0 million. First Federal has a corresponding obligation to reimburse the FDIC according to the same arrangement for eligible recoveries. The loss share agreement provides for FDIC loss sharing for five years and First Federal to reimburse the FDIC for recoveries for eight years.

In accordance with ASC 805, the Plantation loans were recorded at estimated fair value based on discounted cash flows, which considered current portfolio interest rates and repricing characteristics as well as assumptions related to prepayment speeds, The Plantation loans were also assessed to determine which loans met the scope of ASC 310-30. Some of the primary factors used to determine the projected collectability of the contractual cash flows included: type of loan and related collateral, default rate, loss severity rates assuming default, prepayment speeds and estimated collateral values. Generally, commercial loans rated substandard or worse and nonrated residential and consumer loans past due at least 90 days or with a history of past due occurrences over the life of the loan were considered to be have a high risk of default or likelihood of loss and were classified as credit impaired loans. In addition, there were several specifically identified loans that were considered credit impaired by proxy as they displayed uncertainty as to the source of repayment, underlying cash flows, or current financial information. The acquired credit impaired loans were grouped into eight pools based on loan type or purpose, collateral, risk ratings, repayment terms and other similar characteristics, with no distinction for geography as all of the loans were within the state of South Carolina. 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 used to estimate the fair value take into consideration the market interest rate environment as of the acquisition date and a credit risk component based on the credit characteristics of each loan pool.

The fair value of the FDIC indemnification asset associated with the covered assets was estimated using projected cash flows related to the loss sharing agreement, based on the expected reimbursement for losses 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. A liability for a potential true-up payment which may be owed to the FDIC related to the indemnification asset was established net of present value discount.

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 Federal Home Loan Bank (“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.

Subsequent to the Acquisition, First Federal exercised an option under the P&A Agreement to acquire Plantation’s Pawleys Island branch location at fair market value for $2.8 million. First Federal consolidated an existing financial center into this location and consolidated Plantation’s remaining two coastal locations into First Federal’s existing financial centers during the fourth quarter of 2012, for no net increases in financial centers along the South Carolina coast. First Federal also assumed the leases associated with the three locations in the Greenville, South Carolina market and acquired certain fixed assets totaling $625 thousand associated with the former Plantation locations during the third quarter of 2012.

A bargain purchase gain of $13.9 million was recorded in noninterest income on the Consolidated Statements of Operations. A deferred tax liability, 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 potential true-up liability.

In accordance with the relief granted in a letter dated May 21, 2012 from the staff of the Division of Corporate Finance of the Securities and Exchange Commission to First Financial and the guidance provided in Staff Accounting Bulletin Topic 1:K, Financial Statements of Acquired Troubled Financial Institutions (“SAB 1:K”), First Financial has omitted certain financial information of Plantation required by Rule 3-05 of Regulation S-X. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X under certain circumstances, including the Acquisition, in which the registrant engages in an acquisition of a troubled financial institution for which historical financial statements are not reasonably available and in which federal assistance is an essential and significant part of the transaction. Instead, as permitted by the relief letter, First Financial has provided a Statement of Assets Acquired and Liabilities Assumed pursuant to the Acquisition. Due to the significant amount of fair value adjustments, the resulting accretion and amortization of those adjustments and the protection from the FDIC loss share agreement, historical operating results for Plantation are not relevant to First Federal’s ongoing results of operations. The fair value assigned to loans and OREO is preliminary and subject to refinement for the earlier of up to one year after the closing date of the acquisition or as additional information becomes available. 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
Non-impaired loans		129,405		(3,993	)			125,412
Impaired loans		197,153		(44,125	)			153,028
Total loans		326,558		(48,118	)	1		278,440
FDIC indemnification asset, net		—		35,920		2		35,920
Other real estate owned		25,260		(16,584	)	3		8,676
Other intangibles, net		—		1,710		4		1,710
Other assets		1,264		—				1,264
Total assets acquired	$	447,438	$	(27,072	)		$	420,366
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		—		5,000		7		5,000
Other liabilities		533		3,500		8		4,033
Total liabilities assumed		446,288	$	11,029				457,317
Excess of liabilities assumed over assets acquired	$	1,150					$	(36,951	)

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 FHLB.
7	Establishes a deferred tax liability related to the gain on acquisition.
8	Establishes the true-up liability that may be owed to the FDIC at the end of the loss share agreement.