FDIC Indemnification Asset

12 Months Ended

Dec. 31, 2012

FDIC Indemnification Asset [Text Block]

NOTE 6. FDIC Indemnification Asset

First Federal has loss sharing agreements with the FDIC related to the Cape Fear and Plantation acquisitions which afford First Federal significant protection regarding certain acquired assets. Under the loss sharing agreement for Cape Fear, First Federal assumes the first $32.4 million of losses and the FDIC reimburses First Federal for 80% of the losses greater than $32.4 million and up to $110.0 million. On losses exceeding $110.0 million, the FDIC will reimburse First Federal for 95% of the losses. The expected reimbursements under the loss sharing agreement were recorded as an indemnification asset at the time of the Cape Fear acquisition in April 2009.

Under the loss sharing agreement for Plantation, First Federal shares in the losses on certain commercial loans and commercial OREO in three tranches. On losses up to $55.0 million, the FDIC reimburses First Federal for 80% of all eligible losses; First Federal absorbs losses greater than $55.0 million up to $65.0 million; and the FDIC reimburses First Federal for 60% of all eligible losses in excess of $65.0 million.

The following table presents the change in the FDIC indemnification asset.

	Gross						Net
(in thousands)	Receivable			Discount			Receivable
Balance at September 30, 2010	$	70,079		$	(2,496	)	$	67,583
Payments from FDIC for losses		(19,212	)		—			(19,212	)
Valuation adjustment		79			—			79
Discount accretion		—			2,015			2,015
Balance at September 30, 2011	$	50,946		$	(481	)	$	50,465
Payments from FDIC for losses		(14	)		—			(14	)
Valuation adjustment		281			—			281
Discount accretion		—			289			289
Balance at December 31, 2011	$	51,213		$	(192	)	$	51,021
Establish indemnification asset related to Plantation		36,641			(721	)		35,920
Payments from FDIC for losses		(13,467	)		—			(13,467	)
Amortization of potential impairment		(3,986	)		—			(3,986	)
Valuation adjustment		10,400			—			10,400
Discount accretion		—			380			380
Balance at December 31, 2012	$	80,801		$	(533	)	$	80,268

During 2012, First Federal began recognizing a potential impairment on the indemnification asset. The performance of an underlying Cape Fear loan pool has been better than originally projected and cumulative payments received exceeded First Federal’s initial investment in the pool. As a result, First Federal may claim lower future reimbursements than projected at the time of the Cape Fear acquisition in 2009. The impairment was recorded in noninterest expense on the Consolidated Statement of Operations. Additional expected losses related to Plantation increased the FDIC indemnification asset by approximately $9.5 million during the year ended December 31, 2012.

During the year ended December 31, 2012, First Federal received payments totaling $15.5 million from the FDIC, of which $2.0 million was credited to OREO expenses and other loan expense on the Consolidated Statement of Operations. These payments satisfied all claims through June 30, 2012. During the quarter ended December 31, 2011, First Federal received payments totaling $14 thousand from the FDIC. During the year ended September 30, 2011, First Federal received payments totaling $20.5 million from the FDIC, of which $1.3 million was credited to OREO expenses and other loan expense.

As of the December 31, 2012 quarterly reporting period, First Federal filed a $19.2 million claim with the FDIC under the terms of the loss share agreement, and payment is expected during the first quarter of 2013.