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ACQUISITIONS AND FDIC INDEMNIFICATION ASSET:
 12 Months Ended
Dec. 31, 2011
ACQUISITIONS AND FDIC INDEMNIFICATION ASSET:  
ACQUISITIONS AND FDIC INDEMNIFICATION ASSET:

 

6.    ACQUISITIONS AND FDIC INDEMNIFICATION ASSET:

 

On December 30, 2011, the Bank completed a purchase and assumption agreement with PNB Holding Co (PNB), an Illinois corporation, to purchase all of the issued and outstanding stock of Freestar Bank, National Association, and assume certain liabilities of PNB (the “Transaction”).  Immediately following the acquisition of the stock of Freestar Bank, First Financial merged Freestar Bank with and into its wholly-owned subsidiary, First Financial Bank, National Association.

 

The acquisition provided a strategic entry into the Champaign-Urbana, Bloomington-Normal and Pontiac, Illinois markets. Each of these markets are characterized by higher growth rates.

 

First Financial  paid PNB cash in the amount of $47 million and assumed certain liabilities of PNB in the aggregate amount of approximately $8.2 million. The acquisition consisted of assets and liabilities with a fair value of approximately $414.0 million, including $245.3 million of loans, $95.5 million of investment securities, $62.0 million of cash and cash equivalents and $361.2 million of deposits. A customer related core deposit intangible asset of $2.1 million was also recorded. Based upon the acquisition date fair values of the net assets acquired, goodwill of $29.8 million was recorded, all of which is expected to be tax deductable. Loans acquired include purchase credit impaired loans with a fair value of $48.1 million which have a contractual amount due of $55.6 million. These factors, purchase premium paid, holding company debt assumed and amount paid in excess of the loans fair value are the primary components of goodwill. Management is still in the process of obtaining information needed to finalize fair value estimates, particularly related to loans, and any adjustment to their fair value would also impact goodwill.

 

Pro Forma Results

 

The following schedule includes pro forma results for the periods ended December 31, 2011 and 2010 as if the Freestar acquisition has occurred as of the beginning of the periods presented after giving effect to certain adjustments. The un-audited pro forma information is provided for illustrative purposes only and is not indicative of the results of operations or financial condition that would have been achieved if the Freestar acquisition would have take place at the beginning of the periods presented and should not be taken as indicative of the Corporation’s future consolidated results of operations or financial condition.

 

(Dollar amounts in thousands, except per share data)

 

12/31/2011

 

12/31/2010

 

Net interest income

 

$

116,534

 

$

116,295

 

Non-interest income

 

39,412

 

34,684

 

Total revenue

 

155,946

 

150,979

 

 

 

 

 

 

 

Net Income

 

42,075

 

34,481

 

Earnings per share

 

$

3.20

 

$

2.63

 

 

No provision expense was included in either period for Freestar. In accordance with accounting for business combinations, there was no allowance brought forward on any of the acquired loans, as the credit losses evident in the loans were included in the determination of the fair value of the loans at acquisition date. A tax rate of 27.91% was used to adjust tax provision expense for the income statement impact in both periods. On July 2, 2009, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits (excluding brokered deposits) and certain assets of The First National Bank of Danville, a full-service commercial bank headquartered in Danville, Illinois, that had failed and been placed in receivership with the FDIC. The acquisition consisted of assets worth a fair value of approximately $151.8 million, including $77.5 million of loans, $24.2 million of investment securities, $31.0 million of cash and cash equivalents and $146.3 million of liabilities, including $145.7 million of deposits. A customer related core deposit intangible asset of $4.6 million was also recorded. In addition to the excess of liabilities over assets, the Bank received approximately$14.6 million in cash from the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. The transaction resulted in a gain of $5.1 million, which is included in non-interest income in the December 31, 2009 Consolidated Statement of Operations  Under the loss-sharing agreement (“LSA”), the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 million, the FDIC has agreed to reimburse the Bank for 80 percent of the losses. On losses exceeding $29 million, the FDIC has agreed to reimburse the Bank for 95 percent of the losses. The loss-sharing agreement is subject to following servicing procedures as specified in the agreement with the FDIC. Loans acquired that are subject to the loss-sharing agreement with the FDIC are referred to as covered loans for disclosure purposes. Since the acquisition date the Bank has been reimbursed $14.5 million for losses and carrying expenses and currently carries a balance of $2.4 million in the indemnification asset. Included in the current balance is the estimate of $1.0 million for 80% of the loans subject to the loss-sharing agreement identified in the allowance for loan loss evaluation as future potential losses at December 31, 2011.

 

FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. FASB ASC 310-30 prohibits carrying over or creating an allowance for loan losses upon initial recognition. The carrying amount of covered assets at December 31, 2011and 2010, consisted of loans accounted for in accordance with FASB ASC 310-30, loans not subject to FASB ASC 310-30 and other assets as shown in the following table:

 

 

 

ASC 310-30

 

Non ASC
310-30

 

 

 

2011

 

(Dollar amounts in thousands) 

 

Loans

 

Loans

 

Other

 

Total

 

Loans

 

$

6,875

 

$

28,173

 

$

—

 

$

35,048

 

Foreclosed Assets

 

—

 

—

 

1,665

 

1,665

 

Total Covered Assets

 

$

6,875

 

$

28,173

 

$

1,665

 

$

36,713

 

 

 

 

ASC 310-30

 

Non ASC
310-30

 

 

 

2010

 

(Dollar amounts in thousands)

 

Loans

 

Loans

 

Other

 

Total

 

Loans

 

$

10,948

 

$

35,485

 

$

—

 

$

46,433

 

Foreclosed Assets

 

—

 

—

 

2,586

 

2,586

 

Total Covered Assets

 

$

10,948

 

$

35,485

 

$

2,586

 

$

49,019

 

 

The rollforward of the FDIC Indemnification asset is as follows:

 

 

 

December 31,

 

(Dollar amounts in thousands) 

 

2011

 

2010

 

Beginning balance

 

$

3,977

 

$

12,124

 

Accretion

 

38

 

339

 

Net changes in losses and expenses added

 

(192

)

4,570

 

Reimbursements from the FDIC

 

(1,439

)

(13,056

)

TOTAL

 

$

2,384

 

$

3,977

 

 

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all FASB ASC310-30 loans acquired in the acquisition were $31.6 million, the cash flows expected to be collected were $18.4 million including interest, and the estimated fair value of the loans was $16.7 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments. At December 31, 2011, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. There was a $1.0 million allowance for credit losses related to these loans at December 31, 2011. On the acquisition date, the preliminary estimate of the contractually required payments receivable for all non FASB ASC310-30 loans acquired in the acquisition was $58.4 million and the estimated fair value of the loans was $60.7 million. The impact to the Corporation from the amortization and accretion of premiums and discounts was immaterial.