Acquisitions

9 Months Ended

Sep. 30, 2011

Acquisitions

Acquisitions

9. Acquisitions

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 with 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 in 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 and entered into a loss sharing agreement with the FDIC. Under the loss sharing agreement, 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 $14.3 million for losses and carrying expenses and currently carries a balance of $3.8 million for expected future reimbursements. 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 expected loan losses.

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 September 30, 2011 and December 31, 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:

	September 30, 2011
	ASC 310-30		Non ASC 310-30
(Dollar amounts in thousands)	Loans		Loans		Other		Total
Loans	$	7,327	$	33,785	$	—	$	38,079
Foreclosed Assets	—		—		1,781		1,781
Total Covered Assets	$	7,327	$	33,785	$	1,781	$	42,893

	December 31, 2010
	ASC 310-30		Non ASC 310-30
(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:

				Nine Months
	Quarter Ended			Ended			Year Ended
	September 30,			September 30,			December 31,
(Dollar amounts in thousands)	2011			2011			2010
Beginning balance	$	4,765		$	3,977		$	12,124
Accretion	—			38			339
Net changes in losses and expenses added	(194		)	995			4,570
Reimbursements from the FDIC	(763		)	(1,202		)	(13,056		)
TOTAL	$	3,808		$	3,808		$	3,977

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all ASC 310-30 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 were $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 September 30, 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 $1.1 million allowance for credit losses related to these loans at September 30, 2011. On the acquisition date, the preliminary estimate of the contractually required payments receivable for all Non FASB ASC 310-30 loans acquired in the acquisition were $58.4 million and the estimated fair value of the loans were $60.7 million.

On October 11, 2011 the Corporation entered into a definitive agreement to acquire all of the stock of Freestar Bank and certain liabilities of PNB Holding Co. located in Pontiac Illinois. Freestar Bank has assets of approximately $400 million and 13 offices located in east-central Illinois. Under the terms of the acquisition agreement, First Financial Corporation will pay PNB Holding cash in the amount of $47 million and assume liabilities of PNB Holding Co. totaling approximately $8.2 million.  The transaction value may change due to fluctuations in the tangible book value of PNB Holding, determined as of the time of closing to the effective date of the transaction. If PNB Holding’s tangible book value is less than $28,431,000, the purchase price will decrease by an amount equal to 1.657 times the difference between PNB Holding’s tangible book value and $28,431,000. If PNB Holding’s tangible book value is greater than $28,987,000, the purchase price will increase by an amount equal to 1.657 times the difference between PNB Holding’s tangible book value and $28,987,000.

The transaction is expected to close by December 31, 2011, and is subject to approval by regulatory authorities, PNB Holding’s shareholders and the satisfaction of the closing conditions provided in the acquisition agreement.  First Financial Corporation anticipates that it will merge Freestar Bank into First Financial Bank soon after the closing of the transaction.