FIRST FINANCIAL HOLDINGS INC /DE/ - FORM 10-Q

Attached files

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EX-32 - FIRST FINANCIAL HOLDINGS INC /DE/	c71506_ex32.htm
EX-31.2 - FIRST FINANCIAL HOLDINGS INC /DE/	c71506_ex31-2.htm
EX-31.1 - FIRST FINANCIAL HOLDINGS INC /DE/	c71506_ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
Or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________

Commission File Number 000-17122

FIRST FINANCIAL HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


Delaware		57-0866076

(State or other jurisdiction of		I.R.S. Employer
Incorporation or organization		Identification No.)

2440 Mall Drive, Charleston, South Carolina		29406

(Address of principal executive offices)		(Zip Code)

(843) 529-5933

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “and smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at November 08, 2012

Common Stock, $0.01 par value		16,526,752

FIRST FINANCIAL HOLDINGS, INC.
Index to Form 10-Q


Part I – Financial Information

Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Comprehensive Income		5
Consolidated Statements of Changes in Shareholders’ Equity		6
Consolidated Statements of Cash Flows		7
Notes to Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

Item 3. Quantitative and Qualitative Disclosures About Market Risk		57

Item 4. Controls and Procedures		57

Part II – Other Information

Item 1. Legal Proceedings		58

Item 1A. Risk Factors		58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		58

Item 3. Defaults Upon Senior Securities		58

Item 4. Mine Safety Disclosures		58

Item 5. Other Information		58

Item 6. Exhibits		60

Signatures		61




FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)	September 30, 2012			December 31, 2011			September 30, 2011

ASSETS
Cash and due from banks	$	50,749		$	61,400		$	54,307
Interest-bearing deposits with banks		35,668			15,275			31,630

Total cash and cash equivalents		86,417			76,675			85,937
Investment securities
Securities available for sale, at fair value		236,048			404,550			412,108
Securities held to maturity at amortized cost, approximate fair value $19,830, $23,242, and $24,162, respectively		17,331			20,486			21,671
Nonmarketable securities		23,254			32,694			35,782

Total investment securities		276,633			457,730			469,561
Loans		2,574,369			2,385,457			2,355,334
Less: Allowance for loan losses		46,351			53,524			54,333

Net loans		2,528,018			2,331,933			2,301,001
Loans held for sale		53,761			48,303			94,872
FDIC indemnification asset, net		75,017			51,021			50,465
Premises and equipment, net		83,916			82,907			83,423
Bank owned life insurance		50,241			—			—
Other intangibles, net		8,478			2,401			2,491
Other assets		83,006			95,994			118,560

Total assets	$	3,245,487		$	3,146,964		$	3,206,310


LIABILITIES
Deposits
Noninterest-bearing checking	$	382,077		$	279,310		$	278,944
Interest-bearing checking		507,262			429,907			440,584
Savings and money market		730,365			522,496			505,059
Retail time deposits		869,544			791,544			824,875
Wholesale time deposits		127,509			215,941			253,395

Total deposits		2,616,757			2,239,198			2,302,857
Advances from FHLB		253,000			561,000			558,000
Long-term debt		47,204			47,204			47,204
Other liabilities		36,026			22,384			29,743

Total liabilities		2,952,987			2,869,786			2,937,804

SHAREHOLDERS’ EQUITY
Preferred stock, Series A, $.01 par value, authorized 3,000,000 shares, issued 65,000 shares at September 30, 2012, December 31, 2011, and September 30, 2011, respectively (Redemption value $65,000)		1			1			1
Common stock, $.01 par value, authorized 34,000,000 shares, issued 21,465,163 shares at September 30, 2012, December 31, 2011 and September 30, 2011, respectively		215			215			215
Additional paid-in capital		196,612			196,002			195,790
Treasury stock at cost, 4,938,411 shares at September 30, 2012, December 31, 2011, and September 30, 2011, respectively		(103,563	)		(103,563	)		(103,563	)
Retained earnings		202,832			187,367			173,587
Accumulated other comprehensive (loss) income		(3,597	)		(2,844	)		2,476

Total shareholders’ equity		292,500			277,178			268,506

Total liabilities and shareholders’ equity	$	3,245,487		$	3,146,964		$	3,206,310



See accompanying notes to consolidated financial statements.




FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,

(in thousands, except per share data)	2012			2011			2012			2011

INTEREST INCOME
Interest and fees on loans	$	37,104		$	33,828		$	105,223		$	103,169
Interest and dividends on investments		2,771			4,390			10,176			13,691
Other		139			338			317			1,352

Total interest income		40,014			38,556			115,716			118,212

INTEREST EXPENSE
Interest on deposits		3,747			5,323			11,679			18,131
Interest on borrowed money		3,070			4,169			10,875			12,314

Total interest expense		6,817			9,492			22,554			30,445

NET INTEREST INCOME		33,197			29,064			93,162			87,767
Provision for loan losses		4,533			8,940			15,975			99,418

Net interest income (loss) after provision for loan losses		28,664			20,124			77,187			(11,651	)
NONINTEREST INCOME
Service charges and fees on deposit accounts		7,772			7,196			22,632			20,559
Mortgage and other loan income		4,061			2,743			11,868			5,918
Trust and plan administration		1,117			1,333			3,276			3,561
Brokerage fees		655			588			2,194			1,911
Other		754			647			2,222			1,992
Other-than-temporary impairment on investment securities		(145	)		(169	)		(359	)		(345	)
Gain on acquisition		—			—			14,550			—
Gain on sale or call of investments		334			—			3,877			1,419
Gain on sold loan pool, net		—			1,900			—			1,900

Total noninterest income		14,548			14,238			60,260			36,915

NONINTEREST EXPENSE
Salaries and employee benefits		15,621			14,672			45,975			47,441
Occupancy costs		2,333			2,187			7,533			6,512
Furniture and equipment		2,132			1,724			5,834			5,318
Other real estate expenses, net		1,030			3,115			1,694			3,782
FDIC insurance and regulatory fees		693			576			2,448			2,910
Professional services		1,980			1,589			5,320			4,161
Advertising and marketing		964			868			2,582			2,665
Other loan expense		1,620			990			4,254			3,014
Intangible amortization		512			80			970			244
Other expense		6,144			3,787			15,853			11,655
FHLB prepayment termination charge		—			—			8,525			—
Goodwill impairment		—			—			—			630

Total noninterest expense		33,029			29,588			100,988			88,332

Net income (loss) from continuing operations before taxes		10,183			4,774			36,459			(63,068	)
Income tax expense (benefit) from continuing operations		3,516			1,893			15,469			(24,308	)

NET INCOME (LOSS) FROM CONTINUING OPERATIONS		6,667			2,881			20,990			(38,760	)
Loss from discontinued operations, net of tax		—			(1,804	)		—			(3,593	)

NET INCOME (LOSS)		6,667			1,077			20,990			(42,353	)
Preferred stock dividends		813			813			2,438			2,438
Accretion on preferred stock discount		160			151			474			446

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	5,694		$	113		$	18,078		$	(45,237	)


Net income (loss) per common share from continuing operations
Basic	$	0.34		$	0.12		$	1.09		$	(2.52	)
Diluted		0.34			0.12			1.09			(2.52	)

Net loss per common share from discontinued operations
Basic	$	—		$	(0.11	)	$	—		$	(0.22	)
Diluted		—			(0.11	)		—			(0.22	)

Net income (loss) per common share
Basic	$	0.34		$	0.01		$	1.09		$	(2.74	)
Diluted		0.34			0.01			1.09			(2.74	)

Average common shares outstanding
Basic		16,527			16,527			16,527			16,527
Diluted		16,529			16,527			16,528			16,527


See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,

(in thousands)	2012			2011			2012			2011

NET INCOME (LOSS)	$	6,667		$	1,077		$	20,990		$	(42,353	)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on securities available for sale		463			4,274			(1,163	)		586
Change in pension liability		—			(261	)		—			(261	)
Other-than-temporary impairment		145			169			359			345

		608			4,182			(804	)		670
Less: Reclassification of other-than-temporary impairment included in income for the period		(145	)		(169	)		(359	)		(345	)
Tax (expense) benefit		(162	)		(1,551	)		410			(124	)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		301			2,462			(753	)		201

TOTAL COMPREHENSIVE INCOME (LOSS)	$	6,968		$	3,539		$	20,237		$	(42,152	)



See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


																	Accumulated Other Comprehensive Income (Loss)
											Treasury Stock at Cost
(in thousands, except per share data)	Preferred Stock				Common Stock				Additional Paid- in Capital					Retained Earnings
(in thousands, except per share data)	Shares		Amount		Shares		Amount		Additional Paid- in Capital					Retained Earnings						Total

Balance at December 31, 2010		65	$	1		16,527	$	215	$	195,090	$	(103,563	)	$	221,304		$	2,275		$	315,322
Net loss															(42,353	)					(42,353	)
Other comprehensive income, net of tax																		201			201
Stock based compensation expense										254											254
Accretion of preferred stock										446					(446	)					—
Cash dividends
Common stock ($0.05 per share)															(2,480	)					(2,480	)
Preferred stock ($12.50 per share)															(2,438	)					(2,438	)

Balance at September 30, 2011		65	$	1		16,527	$	215	$	195,790	$	(103,563	)	$	173,587		$	2,476		$	268,506



Balance at December 31, 2011		65	$	1		16,527	$	215	$	196,002	$	(103,563	)	$	187,367		$	(2,844	)	$	277,178
Net income															20,990						20,990
Other comprehensive loss, net of tax																		(753	)		(753	)
Stock based compensation expense										136											136
Accretion of preferred stock										474					(474	)					—
True-up preferred stock dividend payable															(134	)					(134	)
Cash dividends
Common stock ($0.05 per share)															(2,479	)					(2,479	)
Preferred stock ($12.50 per share)															(2,438	)					(2,438	)

Balance at September 30, 2012		65	$	1		16,527	$	215	$	196,612	$	(103,563	)	$	202,832		$	(3,597	)	$	292,500



See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,

(in thousands)	2012			2011

Operating Activities
Net Income (loss)	$	20,990		$	(42,353	)
Less: loss from discontinued operations		—			(3,593	)

Net income (loss) from continuing operations		20,990			(38,760	)
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		15,975			99,418
Depreciation		4,744			4,100
Amortization of intangibles		872			244
Net decrease (increase) in current & deferred income tax		24,450			(19,035	)
Mark-to-market adjustments		(7,817	)		(4,300	)
Fair value of adjustments on other real estate owned		7,224			6,015
Amortization (accretion) of unearned premiums/discounts on investments, net		197			(960	)
Other-than-temporary impairment on investment securities		359			345
Loans originated for sale		(576,662	)		(222,541	)
Proceeds from loans held for sale		586,659			213,089
Gain on sale of loans, net		(11,019	)		(2,120	)
Gain on sold loan pool, net		—			(1,900	)
Gain on sale of other real estate owned, net		(1,566	)		(921	)
Gain on sale or call of investments		(3,877	)		(1,419	)
Gain on sale of premises and equipment		(74	)		(91	)
Gain on acquisition		(14,550	)		—
Recognition of stock-based compensation expense		136			254
Decrease in prepaid FDIC insurance premium		1,997			2,278
FDIC reimbursement of covered asset losses		11,684			19,212
Goodwill impairment		—			630
FDIC indemnification asset impairment		563			—
Other		(6,737	)		(2,696	)
Discontinued operations, net		—			(10,700	)

Net cash provided by operating activities		53,548			40,142


Investing Activities
Securities available-for-sale
Proceeds from sales		207,705			1,419
Proceeds from maturities, calls, and payments		80,605			76,163
Purchases		(103,725	)		(114,700	)
Proceeds from maturities, calls, and payments; securities held to maturity		3,478			350
Decrease in nonmarketable securities, net		9,440			5,492
Purchase of bank owned life insurance		(50,000	)		—
Plantation acquisition, net of cash received		126,225			—
Liberty branch acquisition, net of cash received		84,195			—
Decrease in loans, net		74,018			14,897

Proceeds from sales of other real estate owned		23,681			14,946
Proceeds from sold loan pool		—			3,672
Proceeds from sale of business		—			40,278
Increase in premises and equipment, net		(3,670	)		(2,626	)
Discontinued operations, net		—			33

Net cash provided by investing activities		451,952			39,924



See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)


	Nine Months Ended September 30,

(in thousands)	2012			2011

Financing Activities
Increase in demand and savings deposits, net		114,930			114,120
Decrease in time deposits, net		(269,416	)		(220,757	)
(Repayments of) proceeds from FHLB advances, net		(336,355	)		61,000
Dividends paid on common stock		(2,479	)		(2,480	)
Dividends paid on preferred stock		(2,438	)		(2,438	)

Net cash used by financing activities		(495,758	)		(50,555	)



Net increase in cash and cash equivalents		9,742			29,511


Cash and cash equivalents at beginning of period, continuing operations		76,675			53,404
Cash and cash equivalents at beginning of period, discontinued operations		—			3,022

Cash and cash equivalents at beginning of period		76,675			56,426


Cash and cash equivalents at end of period, continuing operations		86,417			85,937
Cash and cash equivalents at end of period, discontinued operations		—			—

Cash and cash equivalents at end of period	$	86,417		$	85,937


Supplemental disclosures
Cash paid during the period for
Interest	$	24,606		$	33,472
Income taxes		2,321			3,282
FHLB prepayment termination charge		8,525			—
Loans transferred to OREO		21,019			26,438
Loans transferred to held for sale		—			159,739
Loans securitized into mortgage-backed securities		469,635			167,695


See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2012

NOTE 1. Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements for First Financial Holdings, Inc. (“First Financial”) and its wholly-owned subsidiaries, including First Federal Bank (“First Federal”), a South Carolina-chartered commercial bank, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X pursuant to the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Certain amounts have been reclassified to conform with the current year presentation. First Financial’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in First Financial’s 2011 Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (“SEC”) on December 13, 2011. For interim reporting purposes, First Financial follows the same basic accounting policies, as updated by the information contained in this report. For further information, refer to the consolidated financial statements and footnotes included in First Financial’s 2011 Annual Report on Form 10-K.

First Financial has one active wholly-owned trust formed for the purpose of issuing securities which qualify as regulatory capital and is considered a Variable Interest Entity (“VIE”). First Financial is not the primary beneficiary, and consequently, the trust is not consolidated in the accompanying consolidated financial statements. The trust issued $46.4 million in trust preferred securities to investors in 2004, which remains outstanding at September 30, 2012. The net proceeds from the issuance were used to purchase junior subordinated deferrable interest debentures issued by First Financial, which is the sole asset of the trust. The trust preferred securities held by this entity qualify as Tier 1 capital for First Financial and are classified as long-term debt on the Consolidated Balance Sheets, with the associated interest expense recorded in interest on borrowed money on the Consolidated Statements of Operations. The expected losses and residual returns for this entity are absorbed by the trust preferred security holders and, consequently, First Financial is not exposed to loss related to this VIE.

Change in Fiscal Year

On December 20, 2011, First Financial’s Board of Directors approved an amendment to Article VIII of First Financial’s bylaws to change First Financial’s fiscal year end from September 30^th to December 31^st of each year. The change was effective December 31, 2011 and the current fiscal year began on January 1, 2012 and will end on December 31, 2012. The change in fiscal year end resulted in a three-month transition period which began on October 1, 2011 and ended on December 31, 2011. As a result of its change in fiscal year, First Financial filed a Transition Report on Form 10-Q with the SEC on February 9, 2012 which covered the transition period from October 1, 2011 to December 31, 2011.

Discontinued Operations

As a result of First Financial’s sale of its insurance agency subsidiary, First Southeast Insurance Services, Inc., which was completed on June 1, 2011, and its managing general insurance agency subsidiary, Kimbrell Insurance Group, Inc., which was completed on September 30, 2011, the financial condition, operating results, and the gain or loss on the sales, net of transaction costs and taxes, for these subsidiaries have been segregated from the financial condition and operating results of First Financial’s continuing operations throughout this report and, as such, are presented as discontinued operations. While all prior periods have been revised retrospectively to align with this treatment, these changes do not affect First Financial’s reported consolidated financial condition or operating results for any of the prior periods.

Recently Adopted Accounting Pronouncements

FASB ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Assets for Impairment.”

This ASU simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments will allow First Financial to make a qualitative evaluation about the likelihood of impairment of an indefinite-lived intangible asset to determine whether it should apply the quantitative test and calculate the fair value of the indefinite-lived intangible asset. Specifically, First Financial has the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If, after considering all relevant events and circumstances, First Federal concludes that it is more likely than not that the indefinite-lived intangible asset is impaired then First Financial is required to determine the fair value of the indefinite-lived intangible asset and compare the fair value with the carrying amount to determine the amount of impairment loss, if any. However, if First Financial concludes otherwise, then it is not required to take any further action. Under the amended guidance, First Financial may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. The amendments do not change how an impairment loss is measured or how First Financial measures an impairment loss. ASU 2012-2 is effective for annual and interim impairment tests performed after September 15, 2012. The adoption of ASU 2012-02 did not have a material impact on its financial condition or results of operations.

FASB ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” as amended by Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-12, “Comprehensive Income (Topic 220)-Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update (“ASU”) 2011-05.”

This ASU increases the prominence of other comprehensive income (“OCI”) in financial statements and provides two options for presenting OCI. The ASU eliminates the current placement near the statement of shareholders’ equity or detailed in the Consolidated Statement of Changes in Shareholders’ Equity. The ASU provides for an OCI statement to be included with the net income statement, and together the two will make a statement of total comprehensive income. Alternatively, businesses can have an OCI statement separate from a net income statement, but the two statements should appear consecutively within a financial report. The ASU does not affect the calculation of earnings per share. The adoption of ASU 2011-05 was effective December 15, 2011. First Financial elected to present a separate OCI statement which is located immediately following its Consolidated Statements of Operations.

FASB ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

This ASU amends the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The ASU clarifies the application of existing fair value measurement requirements and changes principles or requirement for measuring fair value or for disclosing information about fair value measurements. The ASU requires new disclosures for any transfers between Levels 1 and 2 of the fair value hierarchy, not just significant transfers, and further expands focus on Level 3 measurements, including quantitative information about the significant unobservable inputs used for all Level 3 measurements, a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, and a description of the valuation processes. The adoption of ASU 2011-04 was effective for reporting periods beginning on or after December 15, 2011 and is included in Note 8 to the Consolidated Financial Statements.

FASB ASU 2011-03, “Transfer and Servicing (Topic 860) – Reconsideration of Effective Control of Repurchase Agreements”

This ASU improves the accounting for repurchase agreements and other agreements that entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation related to that criterion. Other criterions applicable to the assessment of effective control are not changed by the amendments in this ASU. The adoption of ASU 2011-03 was effective December 15, 2011 and did not have a material impact on First Financial’s financial condition or results of operations.

Recently Issued Accounting Pronouncements

FASB ASU 2012-06. “Business Combinations (Topic 805) - Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”

This ASU addresses the diversity in practice about how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation or National Credit Union Administration) acquisition of a financial institution that includes a loss sharing agreement (indemnification agreement). When First Financial recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), First Financial should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). This guidance is effective for annual periods beginning on or after December 15, 2012 and interim periods within those annual periods. First Financial has previously accounted for its indemnification asset in accordance with this guidance; accordingly, this guidance will have no impact on First Financial’s consolidated financial position, results of operations, or cash flows.

FASB ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.”

This ASU addresses the differences in reporting between GAAP and International Financial Reporting Standards (“IFRS”) regarding offsetting (netting) assets and liabilities and enhances current disclosures. ASU 2011-11 requires First Financial to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and reverse sales and repurchase agreements, as well as securities borrowing and securities lending arrangements. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. First Financial does not expect the adoption of ASU 2011-11 to have a material impact on its financial condition or results of operations.

NOTE 2. Acquisitions

Acquisitions are accounted for in accordance with Accounting Standards Codification (“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 complex process involving significant judgment regarding the methods and assumptions used to calculate estimated fair values. 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. Acquisition-related costs are recognized as expenses in the period they are incurred. As of September 30, 2012, there have been no adjustments or changes to the initial fair values.

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 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 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 (a “P&A Agreement”).

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 $55.0 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 with respect to the covered assets. The loss share agreement provides for FDIC loss sharing for five years and First Federal to reimburse the FDIC for recoveries 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 market interest rate environment as of the acquisition date 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 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. 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 liability for a potential true-up payment which may be owed to the FDIC related to the indemnification asset was established at an estimated fair value of $3.5 million, net of present value discount. The true-up liability 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 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.

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 $5.6 million 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 during the three months ended June 30, 2012. 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.

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 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 the 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.

During the three months ended September 30, 2012, 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, and the closing is expected to occur during the fourth quarter of 2012. 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 third quarter of 2012, for no net increase in financial centers along the South Carolina coast. First Federal 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.

Note 3. Investment Securities

The following table presents amortized cost, gross unrealized gains and losses, and estimated fair value on investment securities.




	As of September 30, 2012								As of December 31, 2011

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Securities available for sale
Obligations of the U.S. Government agencies and corporations	$	1,339	$	23	$	—	$	1,362	$	1,790	$	33	$	—	$	1,823
State and municipal obligations		6,535		37		—		6,572		450		38		—		488
Collateralized debt obligations		6,343		—		3,231		3,112		7,012		—		3,765		3,247
Mortgage-backed securities		49,061		2,308		6		51,363		80,696		3,719		16		84,399
Collateralized mortgage obligations		171,572		1,175		5,506		167,241		312,124		3,289		6,118		309,295
Other securities		5,548		1,087		237		6,398		5,582		56		340		5,298

Total securities available for sale	$	240,398	$	4,630	$	8,980	$	236,048	$	407,654	$	7,135	$	10,239	$	404,550


Securities held to maturity
State and municipal obligations	$	16,831	$	2,499	$	—	$	19,330	$	19,978	$	2,756	$	—	$	22,734
Certificates of deposit		500		—		—		500		508		—		—		508

Total securities held to maturity	$	17,331	$	2,499	$	—	$	19,830	$	20,486	$	2,756	$	—	$	23,242


Nonmarketable securities
Federal Home Loan Bank stock	$	19,043	$	—	$	—	$	19,043	$	32,694	$	—	$	—	$	32,694
Federal Reserve Bank stock		4,211		—		—		4,211		—		—		—		—

Total nonmarketable securities	$	23,254	$	—	$	—	$	23,254	$	32,694	$	—	$	—	$	32,694

Securities with a fair market value of $127.2 million at September 30, 2012 and $237.8 million at December 31, 2011 were pledged to secure public and certain customer deposits, repurchase agreements, and advances from FHLB and the Federal Reserve Bank of Richmond. During the three months ended June 30, 2012, mortgage-backed securities totaling $203.6 million with an average yield of 1.79% were sold as part of a balance sheet restructuring initiative, generating a $3.5 million gain ($2.2 million after-tax). All of the sold investment securities were classified as Level 2 fair value financial instruments and had not previously recorded an other-than-temporary impairment (“OTTI”) charge. As of September 30, 2012, the only investment position that exceeded 10% of shareholders’ equity was mortgage-backed securities issued by Bank of America, representing 15.4% of shareholders’ equity.

The amortized cost and estimated fair value of investment securities by contractual maturity are presented in the following table. Expected maturities may differ from contractual maturities, as borrowers have the right to call or prepay obligations with or without call or prepayment penalties.




	As of September 30, 2012

(in thousands)	Amortized Cost		Fair Value

Securities available for sale
Due within one year	$	—	$	—
Due after one year through five years		1,339		1,362
Due after five years through ten years		1,005		1,150
Due after ten years		14,874		11,444

		17,218		13,956
Mortgage-backed securities		49,061		51,363
Collateralized mortgage obligations		171,572		167,241
Other securities with no stated maturity		2,547		3,488

Total	$	240,398	$	236,048

Securities held to maturity
Due within one year	$	500	$	500
Due after one year through five years		—		—
Due after five years through ten years		1,990		2,084
Due after ten years		14,841		17,246

Total	$	17,331	$	19,830

The following table presents gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.




	Less than 12 Months						12 Months or Longer						Total

September 30, 2012 (dollars in thousands)	#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses

Securities available for sale
Collateralized debt obligations		—	$	—	$	—		14	$	3,112	$	3,231		14	$	3,112	$	3,231
Mortgage-backed securities		—		—		—		1		452		6		1		452		6
Collateralized mortgage obligations		11		58,338		2,007		17		53,887		3,499		28		112,225		5,506
Other securities		—		—		—		2		1,759		237		2		1,759		237

Total		11	$	58,338	$	2,007		34	$	59,210	$	6,973		45	$	117,548	$	8,980


	Less than 12 Months						12 Months or Longer						Total

December 31, 2011 (dollars in thousands)	#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses

Securities available for sale
Collateralized debt obligations		1	$	260	$	47		14	$	2,987	$	3,718		15	$	3,247	$	3,765
Mortgage-backed securities		—		—		—		1		577		16		1		577		16
Collateralized mortgage obligations		16		88,673		3,359		14		34,310		2,759		30		122,983		6,118
Other securities		2		1,977		29		1		685		311		3		2,662		340

Total		19	$	90,910	$	3,435		30	$	38,559	$	6,804		49	$	129,469	$	10,239

Other-Than-Temporary Impairment

Management evaluates securities for OTTI on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to ASC 320-10 and management considers many factors including: (1) the length of time and extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether First Financial has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and is based on information available to management on the assessment date. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost increases.

At September 30, 2012, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and private-label collateralized mortgage obligations (“CMOs”) as discussed below. For the three and nine months ended September 30, 2012, credit-related OTTI of $145 thousand and $359 thousand, respectively, were recorded in “Other-than-temporary-impairment on investment securities” on the Consolidated Statements of Operations. The total carrying value of securities affected by credit-related OTTI represents 9.5% of the carrying value of First Financial’s investment portfolio at September 30, 2012, which does not materially impact First Financial’s current liquidity and capital positions.

Collateralized Debt Obligations

The CDO portfolio is collateralized primarily with trust preferred securities issued by other financial institutions in pooled issuances. To determine the fair value, cash flow models for trust preferred CDOs provided by a third-party pricing service are utilized. The models estimate default vectors for the underlying issuers within each CDO security, estimate expected bank failures across the entire banking system to determine the impact on each CDO, and assign a risk rating to each individual issuer in the collateral pool. The individual risk ratings for the underlying securities in the pools were determined by a number of factors including Tier 1 capital ratio, return on assets, percent of nonperforming loans, percent of commercial and construction loans, and level of broker deposits for each underlying issuer. The risk ratings were used to determine an expected default vector for each CDO. The models assign assumptions for constant default rate, loss severity, recovery lags, and prepayment assumptions, which were reviewed for reasonableness and consistency by management. The projected cash flows were compared to book value to determine the amount of OTTI, if any. If a security is rated below investment grade by a credit rating agency, a stress test is performed to determine if the security has any OTTI. See Note 8 to the Consolidated Financial Statements for additional information on fair value.

The following table provides information regarding the CDO portfolio characteristics and OTTI losses.

Collateralized Debt Obligations at September 30, 2012

(dollars in thousands)


									Nine Months Ended September 30, 2012 OTTI ¹

Name	Single/ Pooled	Class/ Tranche	Amortized Cost		Fair Value		Unrealized Loss		Credit Portion		Other		Total

ALESCO I	Pooled	B-1	$	526	$	293	$	233	$	—	$	—	$	—
ALESCO II	Pooled	B-1		356		286		70		—		—		—
MCAP III	Pooled	B		287		137		150		—		—		—
MCAP IX	Pooled	B-1		334		171		163		—		—		—
MCAP XVIII	Pooled	C-1		179		167		12		—		—		—
PRETZL XI	Pooled	B-1		842		308		534		—		—		—
PRETZL XIII	Pooled	B-1		325		128		197		—		—		—
PRETZL IV	Pooled	MEZ		116		54		62		—		—		—
PRETZL VII	Pooled	MEZ		321		277		44		—		—		—
PRETZL XII	Pooled	B-2		523		316		207		—		—		—
PRETZL XIV	Pooled	B-1		634		204		430		30		—		30
TRPREF II	Pooled	B		646		253		393		—		—		—
USCAP II	Pooled	B-1		952		284		668		11		—		11
USCAP III	Pooled	B-1		302		234		68		—		—		—

Total			$	6,343	$	3,112	$	3,231	$	41		—	$	41


		Dollar Basis

	Lowest Rating	% Performing		% Deferrals / Defaults²		Constant Default Rate		Discount Margin³

Name						High	Low

ALESCO I	C	83.72	%	16.28	%	0.97	0.26	11.70	%
ALESCO II	C	85.78		14.22		1.18	0.32	11.65
MCAP III	B	58.89		41.11		2.19	0.59	10.50
MCAP IX	CC	56.40		43.60		1.25	0.34	16.80
MCAP XVIII	C	68.70		31.30		0.79	0.25	11.05
PRETZL XI	C	67.68		32.32		0.45	0.25	11.60
PRETZL XIII	C	61.24		38.76		0.85	0.25	11.57
PRETZL IV	CCC	72.93		27.07		2.25	0.61	11.00
PRETZL VII	C	54.50		45.50		1.72	0.46	16.80
PRETZL XII	C	65.96		34.04		0.57	0.25	11.62
PRETZL XIV	C	59.66		40.34		0.25	0.25	11.57
TRPREF II	C	61.19		38.81		1.16	0.31	11.92
USCAP II	C	78.78		21.27		0.39	0.25	11.65
USCAP III	C	68.63		31.37		0.43	0.25	11.53

Total		66.88	%	33.12	%



¹	Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Operations
²	Represents percentage of the underlying trust preferred collateral not currently making dividend payments or issued by financial institutions that have been placed into receivership by the FDIC
³	Fair market value discount margin to LIBOR

As of September 30, 2012, management does not intend to sell these securities, nor is it more likely than not that First Financial will be required to sell the securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.

Collateralized Mortgage Obligations

The CMO portfolio is mainly comprised of private-label, non-agency mortgage-backed securities. To determine the fair value, cash flow models provided by a third-party pricing service are utilized. The models incorporate recent transaction volumes, price quotations and related price variability, available broker information, and market liquidity. As a result, the models estimate each security’s cash flow and adjusted price based on coupon, credit rating, constant prepayment rate, and required yields or spreads. If a private label security is rated below investment grade by a credit rating agency, a stress test is performed to determine if the

security has any OTTI. See Note 8 to the Consolidated Financial Statements for additional information on fair value.

The following table presents the investment grades assigned by the rating agencies and OTTI losses for the CMO securities which were in a loss position at September 30, 2012.




(in thousands)	As of September 30, 2012					Nine Months Ended September 30, 2012 OTTI ¹

Moody/S&P Ratings	#	Fair Value		Unrealized Loss		Credit Portion		Other		Total

AAA	1	$	1,655	$	45	$	—	$	—	$	—
AA	5		31,576		590		—		—		—
A	2		9,409		381		—		—		—
BBB	8		17,869		941		18		—		18
Below investment grade	12		51,716		3,549		300		—		300

Total	28	$	112,225	$	5,506	$	318	$	—	$	318



¹	Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Operations

The OTTI in the table above was related to three securities with the following characteristics:




Description	2004 ARM Senior Support	2005 Fixed 5 Year Senior	2004-2005 ARM Super Senior

	As of September 30, 2012

Credit rating	C	CC	B
Rating agency	Moody’s	Standard & Poor’s	Fitch
Twelve-month average loss severity	45.96%	76.71%	38.06%
Twelve-month average default rate	9.31	2.37	3.67
60 day or more delinquency rate	25.19	19.71	13.09



	As of December 31, 2011

Credit rating	C	CC	B
Rating agency	Moody’s	Standard & Poor’s	Fitch
Twelve-month average loss severity	38.36%	76.71%	51.57%
Twelve-month average default rate	3.89	1.94	2.97
60 day or more delinquency rate	28.28	19.23	12.02

The credit ratings displayed in the above table reflect the lowest credit ratings by the major rating agencies. As of September 30, 2012, management does not intend to sell these securities, nor is it more likely than not that it will be required to sell these securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.

The following table presents the cumulative credit-related losses recognized in earnings.




	Three Months Ended September 30, 2012								Three Months Ended September 30, 2011

(in thousands)	CDOs		CMOs		Other Securities		Total		CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,823	$	1,682	$	1,100	$	8,605	$	5,587	$	1,355	$	1,100	$	8,042
Additions
Credit loss for which previous OTTI was recognized		—		145		—		145		169		—		—		169

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	1,827	$	1,100	$	8,750	$	5,756	$	1,355	$	1,100	$	8,211


	Nine Months Ended September 30, 2012								Nine Months Ended September 30, 2011

	CDOs		CMOs		Other Securities		Total		CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,782	$	1,509	$	1,100	$	8,391	$	5,411	$	1,355	$	1,100	$	7,866
Additions
Credit loss for which previous OTTI was recognized		41		318		—		359		345		—		—		345

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	1,827	$	1,100	$	8,750	$	5,756	$	1,355	$	1,100	$	8,211

NOTE 4. Loans and Other Repossessed Assets Acquired

The following table presents the loan portfolio by major category.


LOANS (in thousands)	September 30, 2012		December 31, 2011

Residential loans
Residential 1-4 family	$	1,008,130	$	975,405
Residential construction		19,660		15,117
Residential land		52,616		41,612

Total residential loans		1,080,406		1,032,134

Commercial loans
Commercial business		125,345		83,814
Commercial real estate		520,135		456,541
Commercial construction		1,801		16,477
Commercial land		74,306		61,238

Total commercial loans		721,587		618,070

Consumer loans
Home equity		380,000		357,270
Manufactured housing		277,744		275,275
Marine		69,314		52,590
Other consumer		45,318		50,118

Total consumer loans		772,376		735,253

Total loans		2,574,369		2,385,457
Less: Allowance for loan losses		46,351		53,524

Net loans	$	2,528,018	$	2,331,933


Loans held for sale	$	53,761	$	48,303

Total loans at September 30, 2012 included $275.0 million of loans acquired at estimated fair value in the Plantation and Liberty transactions. See Note 2 to the Consolidated Financial Statements for additional information regarding acquired loans. The loans held for sale are comprised of residential mortgage loans to be sold in the secondary market, and generally settle in 45 to 60 days.

On April 10, 2009, First Federal entered into a P&A Agreement with the FDIC to acquire certain assets and liabilities of Cape Fear Bank (“Cape Fear”). For Cape Fear, the entire loan portfolio and OREO is covered under the loss sharing agreement with the FDIC, while the P&A Agreement for Plantation covers certain commercial loans and commercial OREO. These “covered loans” are included in the table above and totaled $241.8 million at September 30, 2012 ($94.0 million related to Cape Fear and $147.8 million related to Plantation), compared with $141.4 million at December 31, 2011 (solely Cape Fear covered loans). See Note 5 to

the Consolidated Financial Statements for additional information regarding the FDIC indemnification asset associated with these acquisitions.

The following table presents the loan portfolio by age of delinquency.




Age Analysis Past Due Loans
	As of September 30, 2012

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Accruing		Total Past Due		Current¹		Total Loans

Residential loans
Residential 1-4 family	$	256	$	2,105	$	10,881	$	—	$	13,242	$	994,888	$	1,008,130
Residential construction		—		—		—		—		—		19,660		19,660
Residential land		157		—		1,558		—		1,715		50,901		52,616

Total residential loans		413		2,105		12,439		—		14,957		1,065,449		1,080,406

Commercial loans
Commercial business		364		218		1,407		—		1,989		123,356		125,345
Commercial real estate		1,965		432		15,853		—		18,250		501,885		520,135
Commercial construction		—		—		247		—		247		1,554		1,801
Commercial land		243		75		2,990		—		3,308		70,998		74,306

Total commercial loans		2,572		725		20,497		—		23,794		697,793		721,587

Consumer loans
Home equity		1,676		528		10,145		—		12,349		367,651		380,000
Manufactured housing		1,674		832		2,221		—		4,727		273,017		277,744
Marine		227		—		90		—		317		68,997		69,314
Other consumer		577		165		228		74		1,044		44,274		45,318

Total consumer loans		4,154		1,525		12,684		74		18,437		753,939		772,376

Total loans	$	7,139	$	4,355	$	45,620	$	74	$	57,188	$	2,517,181	$	2,574,369


Total loans excluding covered loans	$	5,698	$	4,355	$	35,598	$	74	$	45,725	$	2,286,838	$	2,332,563


Age Analysis Past Due Loans
	As of December 31, 2011
(in thousands)		30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Accruing		Total Past Due		Current¹		Total Loans
Residential loans
Residential 1-4 family	$	1,796	$	1,190	$	4,977	$	—	$	7,963	$	967,442	$	975,405
Residential construction		—		—		—		—		—		15,117		15,117
Residential land		511		50		1,448		—		2,009		39,603		41,612
Total residential loans		2,307		1,240		6,425		—		9,972		1,022,162		1,032,134

Commercial loans
Commercial business		676		232		3,665		—		4,573		79,241		83,814
Commercial real estate		2,250		1,264		17,160		—		20,674		435,867		456,541
Commercial construction		—		—		573		—		573		15,904		16,477
Commercial land		743		442		5,232		—		6,417		54,821		61,238
Total commercial loans		3,669		1,938		26,630		—		32,237		585,833		618,070

Consumer loans
Home equity		2,599		1,926		8,192		—		12,717		344,553		357,270
Manufactured housing		2,515		752		3,461		—		6,728		268,547		275,275
Marine		410		187		246		—		843		51,747		52,590
Other consumer		520		311		224		121		1,176		48,942		50,118
Total consumer loans		6,044		3,176		12,123		121		21,464		713,789		735,253
Total loans	$	12,020	$	6,354		45,178	$	121	$	63,673	$	2,321,784		2,385,457

Total loans excluding covered loans	$	11,002	$	5,069	$	28,389	$	121	$	44,581	$	2,199,490	$	2,244,071

¹Included in current loans are $2.4 million of performing troubled debt restructurings ("TDRs") of which $734 thousand are covered.

Nonperforming assets include nonaccrual loans, loans delinquent 90 days or more and still accruing, restructured loans still accruing, and other repossessed assets acquired through foreclosure. With the exception of the credit card portfolio, loans are placed on nonaccrual status when they become 90 days delinquent. In addition, loans that were not delinquent in excess of 90 days but exhibited doubt as to the borrowers’ ability to repay all contractual principal and interest have been classified as impaired under ASC 310-10-35 and placed on nonaccrual status. The following table summarizes nonperforming assets.




Nonperforming Assets (in thousands)	September 30, 2012		December 31, 2011

Nonaccrual loans	$	45,620	$	45,178
Loans 90+ days, still accruing		74		121
Restructured loans, still accruing		3,340		2,411

Total nonperforming loans		49,034		47,710
Other repossessed assets acquired		21,579		20,487

Total nonperforming assets	$	70,613	$	68,197


Total nonperforming loans excluding nonperforming covered loans	$	39,012	$	30,187


Total nonperforming assets excluding nonperforming covered assets	$	45,986	$	43,124

Loans acquired in the Cape Fear and Plantation acquisitions that were performing at the time of acquisition, but have subsequently become nonaccrual are included in the tables above. Nonperforming loans acquired at acquisition are included in the current loan category in the “Age Analysis Past Due Loans” table above and, as such, are not included in the “Nonperforming Assets” table since these loans were adjusted to fair value at the acquisition date and accounted for under ASC 310-30.

Impaired Loans

In accordance with ASC 310-10-35, a loan is considered impaired when First Federal determines it is probable that the principal and interest due under the contractual terms of the loan will not be collected. Criticized and classified commercial loans (as defined in the “Criticized Loans, Classified Loans and Other Risk Characteristics” section of this Note) greater than $500,000 are reviewed for potential impairment as part of a monthly problem loan review process. In addition, homogeneous loans which have been modified are reviewed for potential impairment.

In assessing the impairment of a loan and the related reserve required for that loan, various methodologies are employed. Impairment measurement on loans that are not collateral dependent is determined primarily using the present value of expected future cash flows discounted at the loan’s effective interest rate. With respect to most real estate loans, and specifically if the loan is considered to be collected through a probable foreclosure, an approach that estimates the fair value of the underlying collateral is used. The collateral is appraised to reflect estimated realizable value (usually “as is” or liquidation value), with the market value being adjusted for estimated selling costs. First Federal’s policy is to update collateral appraisals on impaired loans at least annually, and more frequently if deemed necessary based on market conditions or specific circumstances. Significant downward trends in the real estate market can adversely affect First Federal’s collateral position. For larger credits or loans that are classified “substandard” or worse that rely primarily on real estate collateral for repayment, re-appraisal would occur earlier than the stated policy if management believes the market conditions have changed such that the existing appraisal may no longer reflect the current market value of the property. At a minimum, at the time a commercial loan with a principal balance of over $500,000 is downgraded to “substandard” or worse, or if the loan is determined to be impaired, the property securing the loan is re-appraised to update the value. In addition to updated appraisals, market bids or current offers may be utilized to estimate current value.

First Federal maintains a valuation reserve for impaired loans as part of the allowance for loan losses. Cash collected on impaired nonaccrual loans is applied to outstanding principal. A summary of impaired loans, related valuation reserves, and their effect on interest income follows.



Impaired Loans
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Specific Allowance		Recorded Investment With Specific Allowance		Total Recorded Investment		Specific Allowance		Year to Date Average Balance		Interest Income Recognized Year to Date

September 30, 2012
Residential loans
Residential 1-4 family	$	6,231	$	5,514	$	279	$	5,793	$	91	$	4,019	$	18
Residential land		475		109		—		109		—		55		—

Total residential loans		6,706		5,623		279		5,902		91		4,074		18

Commercial loans		.
Commercial business		1,414		761		—		761		—		2,207		27
Commercial real estate		12,198		8,329		696		9,025		23		10,649		93
Commercial construction		311		248		—		248		—		255		—
Commercial land		3,879		1,133		1,093		2,226		283		2,977		—

Total commercial loans		17,802		10,471		1,789		12,260		306		16,087		120

Consumer loans
Home equity		7,693		5,892		404		6,296		70		5,036		5
Manufactured housing		154		136		—		136		—		135		—
Marine		—		—		—		—		—		—		—

Total consumer loans		7,847		6,028		404		6,432		70		5,170		5

Total impaired loans	$	32,355	$	22,122	$	2,472	$	24,594	$	467	$	25,332	$	143


December 31, 2011
Residential loans
Residential 1-4 family	$	2,366	$	1,957	$	288	$	2,245	$	93	$	1,637	$	10
Residential land		—		—		—		—		—		—		—

Total residential loans		2,366		1,957		288		2,245		93		1,637		10

Commercial loans
Commercial business		4,134		2,143		1,510		3,653		11		3,400		—
Commercial real estate		14,336		8,819		3,453		12,272		967		12,928		10
Commercial construction		311		261		—		261		—		261		—
Commercial land		6,258		2,024		1,704		3,728		327		4,495		—

Total commercial loans		25,039		13,247		6,667		19,914		1,305		21,084		10

Consumer loans
Home equity		4,356		2,978		797		3,775		1		3,017		—
Manufactured housing		155		133		—		133		—		134		—
Marine		—		—		—		—		—		—		—

Total consumer loans		4,511		3,111		797		3,908		1		3,151		—

Total impaired loans	$	31,916	$	18,315	$	7,752	$	26,067	$	1,399	$	25,872	$	20

The total recorded investment in covered impaired loans was $4.6 million as of September 30, 2012. These loans did not have a specific allowance as of September 30, 2012. The following table rolls forward the accretable yield associated with the ASC-310-30 loan portfolio associated with the Cape Fear and Plantation acquisitions.




(in thousands)

2009 Cape Fear balance at acquisition			$	10,713
2009 accretion	(4,305	)
2010 accretion	(4,162	)
2011 accretion	(2,684	)
2011 reclassification from nonaccretable balance	14,592
2012 Plantation balance at acquisition	8,692
2012 accretion	(5,062	)
2012 reclassification from nonaccretable balance	6,000
				13,071

Balance, at September 30, 2012			$	23,784

During 2011 and 2012, First Federal reclassified some of the nonaccretable balance to accretable yield for the Cape Fear loans that were impaired at purchase. The reclassification was primarily the result of increased cash flow estimates due to revising loss projections based on actual

performance. This amount is recognized as a prospective yield adjustment and increases interest income over the remaining life of the loan pool.

Troubled Debt Restructuring (“TDR”)

First Federal accounts for certain loan modifications or restructurings as a TDR. In general, the modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure of the note or other actions. In accordance with GAAP, loans acquired under ASC 310-30 are not initially considered to be TDRs. The following table provides a summary of TDRs by accrual status. The TDRs on nonaccrual status are included in the nonperforming asset table above.




Troubled Debt Restructurings
	September 30, 2012						December 31, 2011

(in thousands)	Still Accruing		Nonaccrual		Total		Still Accruing		Nonaccrual		Total

Residential 1-4 family	$	328	$	4,458	$	4,786	$	734	$	1,269	$	2,003
Residential land		—		66		66		—		—		—

Residential Loans		328		4,524		4,852		734		1,269		2,003

Commercial loans
Commercial business		689		—		689		700		1,113		1,813
Commercial real estate		1,512		3,475		4,987		977		5,293		6,270
Commercial land		499		1,727		2,226		—		2,192		2,192

Total commercial loans		2,700		5,202		7,902		1,677		8,598		10,275

Consumer loans
Home equity		176		4,607		4,783		—		3,775		3,775
Manufactured housing		136		—		136		—		133		133

Total consumer loans		312		4,607		4,919		—		3,908		3,908

Total loans	$	3,340	$	14,333	$	17,673	$	2,411	$	13,775	$	16,186

Once a loan is deemed to be a TDR, it is reviewed for potential impairment in accordance with ASC 310-10-35. The following table provides a summary of the loans that were restructured as TDRs during the three and nine months ended September 30, 2012 and 2011 and displays the incremental impact to the allowance for loan losses as a result of the modification.




Troubled Debt Restructurings
	As of and for the Three Months Ended September 30, 2012

	Outstanding Recorded Investment¹

(dollars in thousands)	#		Pre-Modification		Post-Modification By Type				Total Post- Modification Investment		Increase to Allowance

			Total		Rate		Structure

Residential 1-4		1	$	790	$	—	$	790	$	790	$	—
Residential land		1		345		345		—		345		—
Commercial real estate		3		1,052		—		1,117		1,117		—
Commercial land		1		621		—		351		351		—
Home equity		3		551		453		98		551		3

Total restructured loans		9	$	3,359	$	798	$	2,356	$	3,154	$	3


	As of and for the Three Months Ended September 30, 2011

	Outstanding Recorded Investment¹

(dollars in thousands)	#		Pre-Modification		Post-Modification By Type				Total Post- Modification Investment		Increase to Allowance

			Total		Rate		Structure

Commercial real estate		2	$	1,171	$	—	$	1,171	$	1,171	$	3
Home Equity		4		1,412		1,412		—		1,412		—

Total restructured loans		6	$	2,583	$	1,412	$	1,171	$	2,583	$	3

¹Outstanding recorded investment as defined by ASC 310-35-24, includes the loan balance, accrued interest, loan fees or costs, and unamortized premium or discount.



	As of and for the Nine Months Ended September 30, 2012

	Outstanding Recorded Investment¹

(dollars in thousands)	#		Pre-Modification		Post-Modification By Type				Total Post- Modification Investment		Increase to Allowance

			Total		Rate		Structure

Residential 1-4		5	$	2,913	$	1,699	$	1,236	$	2,935	$	—
Residential land		1		345		345	$	—		345		—
Commercial real estate		4		1,610		—		1,675		1,675		—
Commercial land		1		621		—		351		351		—
Home equity		12		2,556		2,066		490		2,556		3

Total restructured loans		23	$	8,045	$	4,110	$	3,752	$	7,862	$	3


	As of and for the Nine Months Ended September 30, 2011

	Outstanding Recorded Investment¹

(dollars in thousands)	#		Pre-Modification		Post-Modification By Type				Total Post- Modification Investment		Increase to Allowance

			Total		Rate		Structure

Residential 1-4		1	$	202	$	206	$	—	$	206	$	—
Commercial business		1		299		—		299		299		—
Commercial real estate		11		6,274		—		6,274		6,274		167
Commercial land		4		13,447		—		11,423		11,423		395
Home equity		6		1,864		1,864		—		1,864		—
Manufactured housing		1		156		156		—		156		—

Total restructured loans		24	$	22,242	$	2,226	$	17,996	$	20,222	$	562

The following table provides a summary of the loans that were modified for rate or structure as a TDR during the twelve months ended September 30, 2012 and 2011 and which subsequently defaulted during the three and nine months ended September 30,

2012 and 2011. There was no incremental impact to the allowance for loan losses as a result of the defaults as the defaulted loans were already reviewed for impairment in accordance with ASC 310-10-35.




Defaulted TDRs with Structure or Rate Modifications
As of and for the Three Months Ended September 30,

	2012								2011

(dollars in thousands)	#		Recorded Investment				Total Recorded Investment		#		Recorded Investment				Total Recorded Investment

			Rate		Structure						Rate		Structure

Commercial real estate		—	$	—	$	—	$	—		5	$	—	$	1,979	$	1,979
Commercial land		—		—		—		—		1		—		1,200		1,200
Home equity		5		1,757		—		1,757		—		—		—		—

Defaulted TDRs		5	$	1,757	$	—	$	1,757		6	$	—	$	3,179	$	3,179


	As of and for the Nine Months Ended September 30,

	2012								2011

(dollars in thousands)	#		Recorded Investment				Total Recorded Investment		#		Recorded Investment				Total Recorded Investment

			Rate		Structure						Rate		Structure

Residential 1-4		1	$	461	$	—	$	461		—	$	—	$	—	$	—
Commercial real estate		1		—		677		677		6		—		2,633		2,633
Commercial land		1		—		1,210		1,210		1		—		1,200		1,200
Home equity		6		1,916		—		1,916		—		—		—		—

Defaulted TDRs		9	$	2,377	$	1,887	$	4,264		7	$	—	$	3,833	$	3,833

Criticized Loans, Classified Loans and Other Risk Characteristics

Federal regulations provide for the designation of lower quality loans as special mention, substandard, doubtful or loss. Loans designated as special mention are considered “criticized” by regulatory definitions and possess characteristics of weakness that may not necessarily manifest into future loss. Loans designated as substandard, doubtful or loss are considered “classified” by regulatory definitions. Substandard loans are inadequately protected by the current net worth, liquidity and paying capacity of the borrower or any collateral pledged and include loans characterized by the distinct possibility that some loss will occur if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of existing facts, conditions and values. Loans classified as loss are those considered uncollectible and of such little value that their continuance without the establishment of a specific loss reserve is not warranted. When First Federal classifies problem loans as a loss, they are charged-off in the period in which they are deemed uncollectible. First Federal evaluates its commercial loans regularly to determine whether they are appropriately risk rated in accordance with applicable regulations and internal policies.

The following table presents the risk profiles for the commercial loan portfolio by the primary categories monitored.




Commercial Credit Quality¹	As of September 30, 2012

(in thousands)	Commercial Business		Commercial Real Estate		Commercial Construction			Commercial Land		Total Commercial Loans

Pass	$	78,918	$	369,273	$	1,882		$	19,581	$	469,654
Special mention		3,886		38,675		—			16,511		59,072
Substandard		9,689		57,318		247			9,577		76,831
Doubtful		43		419		—			—		462

Total		92,536		465,685		2,129			45,669		606,019
ASC 310-30 loans		32,809		54,450		(328	)		28,637		115,568

Total	$	125,345	$	520,135	$	1,801		$	74,306	$	721,587

¹Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

For residential and consumer loans, First Federal evaluates credit quality based on payment activity, accrual status, and if a loan was modified from its original contractual terms. In addition, residential and consumer loans that are part of a classified commercial relationship (i.e., the non-commercial loans in a commercial or guarantor’s relationship) are also rated as classified loans unless the underlying facts support otherwise.

The following tables present the risk indicators for the residential and consumer loan portfolios.




Residential Credit Quality¹	As of September 30, 2012

(in thousands)	Residential 1-4 Family		Residential Construction		Residential Land		Total Residential Loans

Performing	$	976,822	$	19,660	$	44,891	$	1,041,373
Performing classified		6,761		—		430		7,191
Nonperforming		11,209		—		1,558		12,767

Total		994,792		19,660		46,879		1,061,331
ASC 310-30 loans		13,338		—		5,737		19,075

Total	$	1,008,130	$	19,660	$	52,616	$	1,080,406


¹Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.




Consumer Credit Quality¹	As of September 30, 2012

(in thousands)	Home Equity		Manufactured Housing		Marine		Other Consumer		Total Consumer Loans

Performing	$	351,670	$	275,387	$	69,198	$	44,528	$	740,783
Performing classified		7,445		—		26		115		7,586
Nonperforming		10,321		2,357		90		302		13,070

Total		369,436		277,744		69,314		44,945		761,439
ASC 310-30 loans		10,564		—		—		373		10,937

Total	$	380,000	$	277,744	$	69,314	$	45,318	$	772,376


¹Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

An analysis of changes in the allowance for loan losses follows.




Allowance for Loan Losses
	As of and for the Three Months Ended September 30, 2012

(in thousands)	Residential			Commercial Business			Commercial Real Estate			Commercial Construction			Commercial Land			Consumer			Total

Allowance for loan losses
Balance at beginning of period	$	7,929		$	3,988		$	10,272		$	231		$	4,798		$	21,581		$	48,799

Provision for loan losses		1,000			410			1,909			(182	)		44			1,352			4,533

Loan charge-offs		(730	)		(1,045	)		(2,042	)		(14	)		(1,054	)		(2,730	)		(7,615	)
Recoveries		33			121			48			3			17			412			634

Net charge-offs		(697	)		(924	)		(1,994	)		(11	)		(1,037	)		(2,318	)		(6,981	)


Balance at end of period	$	8,232		$	3,474		$	10,187		$	38		$	3,805		$	20,615		$	46,351





	As of and for the Three Months Ended September 30, 2011

(in thousands)	Residential			Commercial Business			Commercial Real Estate			Commercial Construction			Commercial Land			Consumer			Total

Allowance for loan losses
Balance at beginning of period	$	7,649		$	4,339		$	12,044		$	1,064		$	7,559		$	22,836		$	55,491

Provision for loan losses		726			282			380			236			1,966			5,350			8,940

Loan charge-offs		(688	)		(194	)		(459	)		(645	)		(2,118	)		(6,655	)		(10,759	)
Recoveries		109			58			26			10			66			392			661

Net charge-offs		(579	)		(136	)		(433	)		(635	)		(2,052	)		(6,263	)		(10,098	)


Balance at end of period	$	7,796		$	4,485		$	11,991		$	665		$	7,473		$	21,923		$	54,333




	As of and for the Nine Months Ended September 30, 2012

(in thousands)	Residential			Commercial Business			Commercial Real Estate			Commercial Construction			Commercial Land			Consumer			Total

Allowance for loan losses
Balance at beginning of period	$	8,748		$	4,106		$	11,711		$	397		$	5,981		$	22,581		$	53,524

Provision for loan losses		2,537			1,450			2,646			(350	)		1,023			8,669			15,975

Loan charge-offs		(3,359	)		(2,357	)		(4,808	)		(14	)		(3,299	)		(11,506	)		(25,343	)
Recoveries		306			275			638			5			100			871			2,195

Net charge-offs		(3,053	)		(2,082	)		(4,170	)		(9	)		(3,199	)		(10,635	)		(23,148	)


Balance at end of period	$	8,232		$	3,474		$	10,187		$	38		$	3,805		$	20,615		$	46,351


Loans as of September 30, 2012
Individually evaluated for impairment	$	5,902		$	761		$	9,025		$	248		$	2,226		$	6,432		$	24,594
Collectively evaluated for impairment		1,055,429			91,775			456,660			1,881			43,443			755,007			2,404,195
ASC 310-30 loans		19,075			32,809			54,450			(328	)		28,637			10,937			145,580

Total loans	$	1,080,406		$	125,345		$	520,135		$	1,801		$	74,306		$	772,376		$	2,574,369





	As of and for the Nine Months Ended September 30, 2011

(in thousands)	Residential			Commercial Business			Commercial Real Estate			Commercial Construction			Commercial Land			Consumer			Total

Allowance for loan losses
Balance at beginning of period	$	9,955		$	8,558		$	25,159		$	1,723		$	20,940		$	22,014		$	88,349

Provision for loan losses		16,291			4,717			30,481			2,641			27,405			17,883			99,418

Loan charge-offs		(18,882	)		(8,979	)		(43,829	)		(3,743	)		(41,590	)		(18,918	)		(135,941	)
Recoveries		432			189			180			44			718			944			2,507

Net charge-offs		(18,450	)		(8,790	)		(43,649	)		(3,699	)		(40,872	)		(17,974	)		(133,434	)


Balance at end of period	$	7,796		$	4,485		$	11,991		$	665		$	7,473		$	21,923		$	54,333


Loans as of September 30, 2011
Individually evaluated for impairment	$	1,028		$	3,147		$	13,583		$	261		$	5,261		$	2,393		$	25,673
Collectively evaluated for impairment		965,603			75,973			448,223			14,225			57,052			750,684			2,311,760
ASC 310-30 loans		432			1,751			9,490			565			5,119			544			17,901

Total loans	$	967,063		$	80,871		$	471,296		$	15,051		$	67,432		$	753,621		$	2,355,334

Other Repossessed Assets Acquired

The following table presents the components of other repossessed assets acquired, comprised of OREO and other consumer-related repossessed items, such as manufactured houses and boats, which is included in other assets on the Consolidated Balance Sheets.




(in thousands)	September 30, 2012		December 31, 2011

Residential real estate	$	5,041	$	7,753
Commercial real estate		4,649		5,382
Land		10,261		5,824
Consumer related assets		1,628		1,528

Total other repossessed assets acquired	$	21,579	$	20,487


Total covered other repossessed assets acquired	$	14,605	$	7,550

The following table presents the components of other real estate expenses, net.




	Three Months Ended September 30,						Nine Months Ended September 30,

(in thousands)	2012			2011			2012			2011

Gain on sale of other real estate, net	$	(439	)	$	(324	)	$	(1,566	)	$	(921	)
Fair value writedown		1,336			2,953			2,720			4,462
Expenses, net		393			726			1,566			1,942
Rental income		(29	)		(82	)		(112	)		(186	)
Covered OREO expense reimbursement		(231	)		(158	)		(914	)		(1,515	)

Total other real estate expenses, net	$	1,030		$	3,115		$	1,694		$	3,782

NOTE 5. FDIC Indemnification Asset

First Federal has loss share 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 the covered asset pools (including 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 will reimburse First Federal for 60% of all eligible losses in excess of $65.0 million. The expected reimbursements under the loss sharing agreement were recorded as an addition to the indemnification asset during the quarter ended June 30, 2012.

The following table presents the change in the FDIC indemnification asset during the current year.




(in thousands)	Gross Receivable			Discount			Net Receivable

Balance at December 31, 2011	$	51,213		$	(192	)	$	51,021
Establish indemnification asset related to Plantation		35,021			(721	)		34,300
Payments from FDIC for losses on covered assets		(11,684	)		—			(11,684	)
Amortization of potential impairment		(563	)		—			(563	)
Valuation adjustment on covered assets		1,652			—			1,652
Discount accretion		—			291			291

Balance at September 30, 2012	$	75,639		$	(622	)	$	75,017

During the nine months ended September 30, 2012, First Federal received payments totaling $13.3 million from the FDIC for loss claims on loans, of which $11.7 million was credited to the FDIC indemnification asset and the remaining balance was credited to OREO expenses, net and other loan expense on the Consolidated Statements of Operations. As of the September 30, 2012 quarterly reporting period, First Federal has claims in process totaling $28.3 million, which are subject to FDIC review. Payment is expected during the fourth quarter of 2012.

Effective July 1, 2012, First Federal began to amortize a potential impairment on the FDIC indemnification asset related to the Cape Fear transaction as the performance of the underlying loans has been better than originally projected and may result in lower future reimbursements under the loss share agreement. In addition, the accretable yield on the Cape Fear covered loans was adjusted during the June 30, 2012 quarter, which contributed $472 thousand to net interest income and significantly offset the amortization expense related to the FDIC indemnification asset.

NOTE 6. Advances from the FHLB

During the three months ended June 30, 2012, FHLB advances totaling $125.0 million with an average yield of 3.15% were prepaid as part of a balance sheet repositioning initiative, incurring a prepayment termination charge of $8.5 million ($5.3 million after-tax). The following table presents the contractual maturity schedule for the outstanding FHLB advances. Expected maturities may differ from contractual maturities, as the FHLB has the right to call certain advances.



(dollars in thousands)	As of September 30, 2012

Due in	Balance		Weighted Average Rate

1 year	$	20,000		0.26	%
2 years		—		—
3 years		33,000		3.75
4 years		125,000		3.83
5 years		25,000		4.53
Thereafter		50,000		3.47

Total due FHLB	$	253,000		3.53	%

NOTE 7. Earnings Per Share

The following table displays the components of the numerators and denominators for the basic and diluted earnings per common share.




	Three Months Ended September 30,					Nine Months Ended September 30,

(in thousands, except per share data)	2012		2011			2012		2011

Net income (loss) from continuing operations	$	6,667	$	2,881		$	20,990	$	(38,760	)
Preferred stock dividends		813		813			2,438		2,438
Accretion on preferred stock discount		160		151			474		446

Net income (loss) from continuing operations
available to common shareholders		5,694		1,917			18,078		(41,644	)
Loss from discontinued operations, net of tax		—		(1,804	)		—		(3,593	)

Net income (loss) available to common shareholders	$	5,694	$	113		$	18,078	$	(45,237	)


Weighted average basic shares		16,527		16,527			16,527		16,527
Effect of dilutive stock options		2		—			1		—

Weighted average dilutive shares		16,529		16,527			16,528		16,527


Net income (loss) per common share from continuing operations
Basic	$	0.34	$	0.12		$	1.09	$	(2.52	)
Diluted		0.34		0.12			1.09		(2.52	)

Net loss per common share from discontinued operations
Basic	$	—	$	(0.11	)	$	—	$	(0.22	)
Diluted		—		(0.11	)		—		(0.22	)

Net income (loss) per common share
Basic	$	0.34	$	0.01		$	1.09	$	(2.74	)
Diluted		0.34		0.01			1.09		(2.74	)

As of September 30, 2012 and 2011, there were 590,246 and 743,333 potential additional shares issued through the exercise of stock options and warrants, respectively, which were excluded from the calculation of diluted earnings per share as a result of being anti-dilutive.

NOTE 8. Fair Value of Financial Instruments

Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, First Financial has made estimates using discounted cash flow or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties, and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts First Financial could realize in a current market exchange.

Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the

fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.


•	Level 1 – Valuation is based on quoted prices for identical instruments in active markets.
•	Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•	Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.

The following table presents the carrying value and fair value of the financial instruments.




	As of September 30, 2012				As of December 31, 2011

(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value

Assets
Cash and cash equivalents	$	86,417	$	86,417	$	76,675	$	76,675
Securities available for sale		236,048		236,048		404,550		404,550
Securities held to maturity		17,331		19,830		20,486		23,242
Nonmarketable securities		23,254		23,254		32,694		32,694
Net loans		2,528,018		2,589,327		2,331,933		2,427,526
Loans held for sale		53,761		53,761		48,303		48,303
FDIC indemnification asset, net		75,017		75,017		51,021		51,021
Other repossessed assets acquired¹		21,579		21,579		20,487		20,487
Residential mortgage servicing rights¹		12,504		12,504		10,663		10,663
Accrued interest receivable¹		9,654		9,654		8,759		8,759
Derivative financial instruments¹		2,887		2,887		2,238		2,238
Liabilities
Deposits		2,616,757		2,632,401		2,239,198		2,253,138
Advances from FHLB		253,000		282,373		561,000		598,616
Long-term debt		47,204		46,286		47,204		43,487
FDIC true-up liability²		3,599		3,599		—		—
Accrued interest payable²		6,043		6,043		8,095		8,095


¹ Included as part of Other Assets in the Consolidated Balance Sheets.
² Included as part of Other Liabilities in the Consolidated Balance Sheets.

The methods and assumptions used to estimate the fair value of financial instruments are set forth below. There have been no changes to the valuation methods used to estimate fair value since December 31, 2011.

Assets Recorded at Fair Value on a Recurring Basis

The following tables present the financial instruments measured at fair value on a recurring basis.




	As of September 30, 2012

(in thousands)	Level 1		Level 2		Level 3		Total

Obligations of the U.S. government agencies and corporations	$	—	$	1,362	$	—	$	1,362
State and municipal obligations		—		6,572		—		6,572
Collateralized debt obligations		—		—		3,112		3,112
Mortgage-backed securities		—		51,363		—		51,363
Collateralized mortgage obligations		—		167,241		—		167,241
Other securities		1,941		2,928		1,529		6,398

Securities available for sale		1,941		229,466		4,641		236,048

Residential mortgage servicing rights		—		—		12,504		12,504
Derivative financial instruments		2,887		—		—		2,887

Total assets at fair value	$	4,828	$	229,466	$	17,145	$	251,439






	As of December 31, 2011

(in thousands)	Level 1		Level 2		Level 3		Total

Obligations of the U.S. government agencies and corporations	$	—	$	1,823	$	—	$	1,823
State and municipal obligations		—		488		—		488
Collateralized debt obligations		—		—		3,247		3,247
Mortgage-backed securities		—		84,399		—		84,399
Collateralized mortgage obligations		—		256,615		52,680		309,295
Other securities		1,000		3,197		1,101		5,298

Securities available for sale		1,000		346,522		57,028		404,550

Residential mortgage servicing rights		—		—		10,663		10,663
Derivative financial instruments		2,238		—		—		2,238

Total assets at fair value	$	3,238	$	346,522	$	67,691	$	417,451

Securities Available for Sale

Securities available for sale include obligations of the U.S. government agencies and corporations, state and municipal obligations, CDOs mortgage-backed securities, CMOs, and other securities. For securities classified as Level 2, valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques, such as cash flow models, for which all significant assumptions are observable in the market.

To determine the fair value of securities available for sale that are classified as level 2, cash flow models provided by a third-party pricing service and other observable inputs are utilized. The cash flow models incorporate market participant data and knowledge of the structures of each security to develop cash flows specific to each security and apply appropriate discount rates. The discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Specific securities that have increased uncertainty regarding the receipt of cash flows are discounted at higher rates due to the addition of a security-specific credit premium.

For private-label CMOs, the pricing model estimates each security’s cash flows and adjusted price based on coupon, constant prepayment rate, default rate, and required yields or spreads. If a security is rated below investment grade by a credit agency, a stress test is performed to determine OTTI.

The fair value of securities available for sale that are classified as Level 3 primarily include trust preferred CDOs. In the absence of observable or corroborated market data, estimates that incorporate market-based assumptions are used when such information is available. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, the valuation of the security is subjective and may involve substantial judgment. For trust preferred CDOs, the models estimate default vectors for the underlying issuers within each CDO security, estimate expected bank failures across the entire banking system to determine the impact on each CDO, and assign a risk rating to each individual issuer in the collateral pool. If a security is rated below investment grade by a credit agency, a stress test is performed to determine OTTI.

Residential Mortgage Servicing Rights

The estimated fair value of residential mortgage servicing rights (“MSRs”) is obtained through an independent third party analysis of future cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, as well as the market’s perception of future interest rate movements.

Derivative Financial Instruments

The fair value of derivative instruments is based on quoted market prices.

The following table presents quantitative information regarding the assumptions used for valuing Level 3 assets.




(dollars in thousands)	Fair Value as of September 30, 2012¹		Valuation Technique¹	Unobervable Input	Range (Weighted Average)

Collateralized debt obligations	$	3,112	Discounted	Discount margin to LIBOR		10.50% - 16.80% (12.30%)
			cash flow	Constant default rate		0.25% - 2.25% (0.59%)
				Default percentage		14.22% - 45.50% (33.12%)

MSRs	$	12,504	Discounted	Constant prepayment rate		18.10%
			cash flow	Discount rate		10.45%
				Delinquency percentage		1.97%


¹Other level 3 securities totaling $1.5 million are valued based on data provided by the issuer

Changes in Fair Value Measurement Levels

First Financial evaluates the holdings within its investment portfolio on a quarterly basis to determine the most appropriate pricing level based on current economic and market conditions and credit trends. Transfers between levels are recorded during the quarter in which the transfer was deemed necessary. During the quarter ended September 30, 2012, First Financial transferred certain CMOs from Level 3 to Level 2 as the observable market activity increased. There were no gains or losses as a result of the transfers.

The following table includes changes in Level 3 fair value measurements based on the hierarchy levels previously discussed.




	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012

(in thousands)	Securities Available For Sale			Residential Mortgage Servicing Rights			Securities Available For Sale			Residential Mortgage Servicing Rights

Balance, beginning of period	$	49,878		$	11,764		$	57,028		$	10,663
Total net losses for the year included in
Income		(145	)		(1,469	)		(359	)		(4,129	)
Other comprehensive income, gross		286			—			305			—
Transfers to level 2		(39,778	)		—			(39,778	)		—
Purchases		51			—			428			—
Sales		—			—			—			—
Servicing assets that resulted from transfers of financial assets		—			2,209			—			5,970
Paydowns		(5,651	)		—			(12,983	)		—

Balance, end of period	$	4,641		$	12,504		$	4,641		$	12,504

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The following table presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation for each asset and the corresponding realized loss.




(in thousands)	As of September 30, 2012		Level 1		Level 2		Level 3		Year-to- Date Losses

Assets
Loans held for sale	$	53,761	$	—	$	53,671	$	—	$	—
Impaired loans, net of specific allowance		24,127						24,127		3,895
Other repossessed assets acquired		21,579		—		—		21,579		1,092

Loans Held for Sale

Loans held for sale are comprised of residential mortgage loans originated for sale in the secondary market. The fair value is based on purchase commitments or quoted prices for the same or similar loans.

Impaired Loans, net of Specific Allowance

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. These loans are generally collateral dependent and their value is usually measured based on the “as is” or liquidation value of the collateral securing these loans. Certain assumptions and unobservable inputs are currently being used by appraisers. Year-to-date losses include charge-offs which had a specific reserve established in prior quarters. Specific reserves for impaired loans were $467 thousand at September 30, 2012.

Other Repossessed Assets Acquired

Other repossessed assets acquired in the settlement of loans are recorded at the lower of the principal balance of the loan at the time of foreclosure or fair value of the property less estimated selling expenses. Certain assumptions and unobservable inputs are currently being used by appraisers.

Financial Instruments Not Recorded at Fair Value

The following table presents the assets not recorded at fair value categorized by the level of inputs.




	As of September 30, 2012

(in thousands)	Level 1		Level 2		Level 3		Total

Assets
Cash and cash equivalents	$	86,417	$	—	$	—	$	86,417
Securities held to maturity		—		19,830		—		19,830
Nonmarketable securities		—		—		23,254		23,254
Net loans¹		—		—		2,565,200		2,565,200
FDIC indemnification asset, net		—		—		75,017		75,017
Accrued interest receivable		9,654		—		—		9,654
Liabilities
Deposits		—		—		2,632,401		2,632,401
Advances from FHLB		—		—		282,373		282,373
Long term debt		—		—		46,286		46,286
Accrued interest payable		6,043		—		—		6,043
FDIC true-up liability		—		—		3,599		3,599



¹	Excludes impaired loans.

Accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contract that creates a

contractual obligation or right to deliver or receive cash or another financial instrument from a second entity. For the financial instruments that First Financial does not record at fair value, estimates of fair value are calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. No readily available market exists for a significant portion of First Financial’s financial instruments. Fair value estimates for these instruments are based on current economic conditions, currency and interest rate characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be sustained by comparison to independent markets, and may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by First Financial in estimating the fair value of these financial instruments.

Cash and Cash Equivalents

The carrying amounts are a reasonable estimate of their fair values.

Securities Held to Maturity

The fair value of securities classified as held to maturity is based on quoted prices for similar assets.

Nonmarketable Securities

The carrying amount of FHLB and Federal Reserve stock is used to approximate the fair value of these securities as they are not readily marketable, are recorded at cost (par value), and are evaluated for impairment based on the ultimate recoverability of the par value. First Financial considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. First Financial believes its investments in FHLB and Federal Reserve stock are ultimately recoverable at par.

Net Loans

The fair value of net loans is estimated based on discounted cash flows. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market. The carrying amount of accrued interest approximates fair value.

FDIC Indemnification Asset, net

The fair value of the FDIC indemnification asset is determined by the projected cash flows based on expected reimbursements for losses in accordance with the loss share agreements with the FDIC. Cash flows are discounted to reflect the timing and receipt of reimbursements from the FDIC.

Deposits

The fair value of core deposits, which include checking, savings and money market accounts, are, by definition, equal to the amount payable on demand as of the valuation date (i.e. their carrying amounts). Fair values for time deposits are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of First Financial’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. The carrying amount of accrued interest approximates fair value.

Advances from FHLB and Long-Term Debt

The fair value of these financial instruments is estimated using observable market prices and by discounting future cash flows using current interest rates for similar financial instruments.

FDIC True-up Liability

The fair value of the FDIC true-up liability is determined by the projected cash flows based on expected payments for recoveries in accordance with the loss share agreements with the FDIC. Cash flows are discounted to reflect the timing and payment of recoveries due to the FDIC.

NOTE 9. Income Tax

The income tax expense for the three months ended September 30, 2012 was $3.5 million, compared with $1.9 million for the three months ended September 30, 2011. The income tax expense for the nine months ended September 30, 2012 was $15.5 million, compared with an income tax benefit of $24.3 million for the same period of 2011. The quarter ended June 30, 2012 included the establishment of a $5.6 million deferred tax liability related to the gain on the Plantation acquisition. The quarter ended March 31, 2012 included a $2.1 million write-down of the state deferred tax asset in connection with First Federal’s conversion to a state-chartered commercial bank related to a difference in South Carolina income tax laws for banks versus thrifts. The effective tax rate for the three months ended September 30, 2012, was 34.53%, compared with 39.65% for the same period of the prior year. The effective tax rate for the nine months ended September 30, 2012 was 42.43%, compared with 38.54% for the same period of the prior year.

First Financial regularly monitors its deferred tax position. At September 30, 2012, First Financial had a net deferred tax liability of $6.1 million, as compared with a deferred tax asset of $3.2 million at December 31, 2011. While currently in a net liability position, First Financial continues to evaluate its deferred tax assets and considers the cumulative three-year pretax operating results as well as the timing, nature and amount of future taxable income, various plans to maximize the realization of deferred tax assets and taxable income within the carryback and carryforward periods, the reversal of taxable temporary differences as well as future events and uncertainties. After evaluating all positive and negative evidence available as of September 30, 2012, First Financial concluded that it is more likely than not that it will be able to realize all remaining deferred tax assets and that a valuation allowance was not needed at September 30, 2012.

NOTE 10. Share-Based Payment Arrangements

First Financial has two share-based compensation plans from which new awards may be granted. These plans may issue qualified and non-qualified options, restricted stock awards, and stock appreciation rights to employees and nonemployee directors. First Financial also has four plans that currently have option grants outstanding, but no new issuances may be made since these plans have been abandoned. Forfeited or expired options under the abandoned plans cannot be reissued. At September 30, 2012, there were 153,394 options which remained outstanding under the four abandoned plans. Stock options currently granted under the plans generally expire five years from the date of grant. Restrictions on non-vested stock generally lapse in three annual installments beginning on the first anniversary of the grant date.

Compensation expense for stock options is recognized in salaries and employee benefits in the Consolidated Statements of Operations. First Financial recorded share-based compensation expense of $43 thousand and $136 thousand for the three and nine months ended September 30, 2012, respectively, and $42 thousand and $254 thousand for the three and nine months ended September 30 2011, respectively. First Financial recognized an income tax benefit of less than $100 thousand in each of the three and nine months ended September 30, 2012 and 2011.

A summary of stock option activity is presented below.




	Number of Shares				Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($000)

Outstanding at December 31, 2011		404,387		$	23.80
Granted		—
Exercised		—
Forfeited or expired		(45,948	)		27.31

Outstanding at September 30, 2012		358,439		$	23.35	1.3	$	40


Exercisable at September 30, 2012		327,094		$	24.08	1.2	$	40

As of September 30, 2012, there was $76 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements (share options) granted under the plans.

NOTE 11. Commitments and Contingencies

Loan Commitments

Commitments to extend credit are agreements to lend to borrowers as long as there is no violation of any condition established by the commitment letter. Commitments generally have fixed expiration dates or other termination clauses. The majority of the commitments will be funded within a twelve month period. First Federal evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but primarily consists of residential or income producing commercial properties. Outstanding commitments on loans not yet closed include commitments issued to correspondent lenders and are principally commitments for loans on single-family residential and commercial property. Available unused lines of credit include revolving home equity lines and credit cards, while other unused commitments includes commercial and industrial loan commitments

Standby Letters of Credit

Standby letters of credit represent First Federal’s obligations to a third party contingent on the failure of its customer to perform under the terms of an underlying contract with the third party or obligate First Federal to stand as surety for the benefit of the third party. The underlying contract may entail either financial or non-financial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will generally be drawn only when the underlying event fails to occur as intended. First Federal can seek reimbursement from the borrower for the amounts paid. In addition, some of these standby letters of credit are collateralized. Commitments under standby letters of credit are usually for one year or less. As of September 30, 2012 and December 31, 2011, there was no recorded liability associated with these standby letters of credit.

The following table presents First Federal’s loan commitments and standby letters of credit.




(in thousands)	September 30, 2012		December 31, 2011

Available unused lines of credit	$	389,641	$	345,734
Commitments to fund commercial real estate, construction and land development loans		27,320		30,531
Other unused commitments		47,758		73,835
Standby letters of credit		10,915		574

Derivative Instruments

First Federal utilizes derivatives as part of its risk management strategy for its mortgage activities. These instruments may consist of financial forward and future contracts, when-issued securities and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. First Federal does not elect hedge accounting treatment for any of its derivative transactions. As a result, changes in fair value of the instrument (both gains and losses) are recorded in the Consolidated Statements of Operations in mortgage and other loan income.

Derivative contracts related to MSRs are used to offset changes in fair value and are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between the parties, and are not a measure of financial risk. On September 30, 2012, First Federal had derivative financial instruments outstanding with notional amounts totaling $43.0 million, compared with $48.0 million at December 31, 2011. The estimated net fair value of the open contracts related to the MSRs was a gain of $138 thousand at September 30, 2012, compared with a gain of $354 thousand at December 31, 2011.

The following table presents First Federal’s mortgage loan pipeline and obligations under forward commitments along with the fair value of those obligations.




(in thousands)	September 30, 2012			December 31, 2011

Mortgage loan pipeline	$	156,389		$	85,460
Expected pipeline closures		109,478			63,945
Fair value of mortgage loan pipeline commitments		4,437			1,104
Forward commitments		190,470			148,902
Fair value of forward commitments		(1,237	)		358

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations




Five Quarter Summary of Selected Financial Data

	As of and for the Quarters Ended

(dollars in thousands, except per share data)	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011

Summary of Operations
Interest income	$	40,014		$	39,343		$	36,359		$	37,612		$	38,556
Interest expense		6,817			7,630			8,107			8,713			9,492

Net interest income		33,197			31,713			28,252			28,899			29,064
Provision for loan losses		4,533			4,697			6,745			7,445			8,940

Net interest income after provision for loan losses		28,664			27,016			21,507			21,454			20,124
Noninterest income		14,548			32,530			13,182			32,770			14,238
Noninterest expense		33,029			39,250			28,709			28,886			29,588

Income from continuing operations before taxes		10,183			20,296			5,980			25,338			4,774
Income tax expense from continuing operations		3,516			7,712			4,241			9,766			1,893

Net income from continuing operations		6,667			12,584			1,739			15,572			2,881
Loss from discontinued operations		—			—			—			—			(1,804	)

Net income		6,667			12,584			1,739			15,572			1,077
Preferred stock dividends		813			812			813			813			813
Accretion on preferred stock		160			158			156			153			151

Net income available to common shareholders	$	5,694		$	11,614		$	770		$	14,606		$	113

Per Common Share Data
Net income per common share from continuing operations
Basic	$	0.34		$	0.70		$	0.05		$	0.88		$	0.12
Diluted		0.34			0.70			0.05			0.88			0.12
Net loss per common share from discontinued operations
Basic	$	—		$	—		$	—		$	—		$	(0.11	)
Diluted		—			—			—			—			(0.11	)
Net income per common share
Basic	$	0.34		$	0.70		$	0.05		$	0.88		$	0.01
Diluted		0.34			0.70			0.05			0.88			0.01

Market price, end of period	$	12.99		$	10.72		$	11.00		$	8.93		$	4.01
Book value per common share		13.77			13.45			12.89			12.84			12.31
Tangible book value per common share (non-GAAP)¹		13.25			12.91			12.75			12.69			12.16
Dividends		0.05			0.05			0.05			0.05			0.05
Shares outstanding, at period end		16,527			16,527			16,527			16,527			16,527
Balance Sheet Summary, at period end
Assets	$	3,245,487		$	3,304,174		$	3,145,538		$	3,146,964		$	3,206,310
Investment securities		276,633			293,400			500,331			457,730			469,561
Loans		2,574,369			2,632,483			2,355,567			2,385,457			2,355,334
Allowance for loan losses		46,351			48,799			50,776			53,524			54,333
Deposits		2,616,757			2,703,202			2,264,489			2,239,198			2,302,857
Advances from FHLB and long-term debt		300,204			280,204			580,204			608,204			605,204
Shareholders’ equity		292,500			287,264			278,043			277,178			268,506
Balance Sheet Summary, average for the quarter
Assets	$	3,283,512		$	3,339,705		$	3,151,385		$	3,153,286		$	3,201,416
Investment securities		291,223			443,181			490,356			469,925			468,360
Loans		2,673,438			2,619,409			2,420,000			2,428,743			2,442,071
Allowance for loan losses		48,329			50,547			52,282			54,178			55,503
Deposits		2,664,207			2,596,642			2,228,613			2,272,035			2,302,518
Advances from FHLB and long-term debt		294,796			428,505			609,665			565,114			595,508
Shareholders’ equity		290,047			285,672			277,390			279,066			267,404
Selected Ratios from Continuing Operations
Return on average assets²		0.81	%		1.51	%		0.22	%		1.98	%		0.36	%
Return on average equity²		9.20			17.62			2.51			22.32			4.31
Net interest margin (FTE)³		4.35			4.08			3.84			3.91			3.87
Efficiency ratio (non-GAAP)¹		69.19			66.04			68.87			70.12			70.90
Pre-tax, pre-provision earnings	$	14,716		$	24,725		$	12,725		$	32,783		$	13,714
Selected Ratios from Consolidated Operations
Return on average assets²		0.81	%		1.51	%		0.22	%		1.98	%		0.13	%
Return on average equity²		9.20			17.62			2.51			22.32			1.61



¹	See Item 2. Management’s Discussion and Anaylsis of Financial Condition and Results of Operations - Use of Non-GAAP Financial Measures
²	Annualized percentages
³	Net interest margin includes taxable equivalent adjustments to interest income based on a federal tax rate of 35%.




Five Quarter Summary of Selected Financial Data (Continued)

	As of and for the Quarters Ended

(dollars in thousands)	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011

Capital Ratios
Equity to assets		9.01	%		8.69	%		8.84	%		8.81	%		8.37	%
Tangible common equity to tangible assets (non-GAAP)		6.77			6.47			6.70			6.67			6.27
Leverage capital ratio		10.12			9.79			10.22				⁽¹⁾			⁽¹⁾
Tier 1 risk-based capital ratio		14.42			13.89			14.81				⁽¹⁾			⁽¹⁾
Total risk-based capital ratio		15.70			15.16			16.08				⁽¹⁾			⁽¹⁾
Leverage capital ratio - First Federal		9.47			9.06			9.00			8.92			8.26
Tier 1 risk-based capital ratio - First Federal		13.50			12.86			13.05			12.35			11.26
Total risk-based capital ratio - First Federal		14.78			14.13			14.32			13.61			12.53
Asset Quality Metrics
Allowance for loan losses as a percent of loans		1.80	%		1.85	%		2.16	%		2.24	%		2.31	%
Allowance for loan losses as a percent of nonperforming loans		94.53			97.72			101.75			112.19			126.64
Nonperforming loans as a percent of loans		1.90			1.90			2.12			2.00			1.82
Nonperforming assets as a percent of loans and other repossessed assets acquired²		2.72			2.94			3.02			2.83			4.48
Nonperforming assets as a percent of total assets		2.18			2.36			2.28			2.17			3.38
Net loans charged-off as a percent of average loans³		1.07			1.04			1.60			1.39			1.71
Net loans charged-off	$	6,981		$	6,673		$	9,493		$	8,254		$	10,098
Asset Quality Metrics Excluding Covered Loans
Allowance for loan losses as a percent of non-covered loans		1.99	%		2.06	%		2.28	%		2.39	%		2.47	%
Allowance for loan losses as a percent of non-covered nonperforming loans		118.82			123.61			148.22			177.35			227.09
Nonperforming loans as a percent of non-covered loans		1.67			1.67			1.54			1.34			1.09
Nonperforming assets as a percent of non-covered loans and other repossessed assets acquired²		1.97			2.01			2.00			1.91			3.58
Nonperforming assets as a percent of total assets		1.42			1.45			1.42			1.37			2.52


¹	The quarter ended March 31, 2012 represents the first period holding company ratios for First Financial were required to be filed with the Federal Reserve Bank included within FR Y-9C, Consolidated Financial Statements for Bank Holding Companies. The capital ratios presented above for the quarter ended September 30, 2012 at the holding company are considered preliminary until the regulatory report is filed with the Federal Reserve Bank.
²	Nonperforming loans held for sale in the amount of $39,412 are included in loans at September 30, 2011.
³	Annualized percentage

The following presents management’s discussion and analysis of First Financial Holdings, Inc. (“First Financial”) and its wholly-owned subsidiaries, including First Federal Bank (“First Federal”), a South Carolina-chartered commercial bank, with regard to their financial condition and results of operations for the three and nine months ended September 30, 2012. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in First Financial’s 2011 Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities Exchange Commission (“SEC”) on December 13, 2011. In addition, the following discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in First Financial’s 2011 Annual Report on Form 10-K, which contains important additional information that is necessary to understand First Financial and its financial condition and results of operations for the periods covered by this report.

All of First Financial’s electronic filings with the SEC, including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible at no cost on First Financial’s website, www.firstfinancialholdings.com. The information on the website does not constitute a part of this report and is not incorporated herein by reference. First Financial’s filings are also available through the SEC’s website at www.sec.gov.

Change in Fiscal Year

Discontinued Operations

As a result of First Financial’s sale of its insurance agency subsidiary, First Southeast Insurance Services, Inc., which was completed on June 1, 2011, and its managing general insurance agency subsidiary, Kimbrell Insurance Group, Inc., which was completed on September 30, 2011, the financial condition, operating results, and the gain or loss on the sales, net of transaction costs and taxes, for these subsidiaries have been segregated from the financial condition and operating results of First Financial’s continuing operations throughout this document and, as such, are presented as discontinued operations. While all prior periods have been revised retrospectively to align with this treatment, these changes do not affect First Financial’s reported consolidated financial condition or operating results for any of the prior periods.

Forward-Looking Statements

Statements in this report that are not statements of historical fact, including without limitation, statements that include terms such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” or “could” constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding First Financial’s future financial and operating results, plans, objectives, expectations and intentions involve risks and uncertainties, many of which are beyond First Financial’s control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially from those anticipated by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:


•	A large portion of First Financial’s loan portfolio is secured by residential and commercial real estate. Continued deterioration in residential and commercial real estate values could lead to additional losses, which may cause First Financial’s net income to decline and could have a negative impact on its capital, financial condition, and results of operations.
•	Repayment of First Financial’s commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans, which may fluctuate in value due to, among other things, current national and local economic conditions.
•	First Financial’s allowance for loan losses may not be sufficient to absorb losses in its loan portfolio. Additions to the allowance for loan losses may be required by increasing the provision for loan losses, which would cause net income to decline and could have a negative impact on First Financial’s capital and financial position.
•	Negative developments in the financial industry, the domestic and international credit markets, and the economy in general may continue to adversely impact First Financial’s earnings and could increase its credit risk associated with the loan portfolios, and these adverse impacts could be exacerbated by potential negative economic developments that may occur if certain federal tax reductions expire and spending cuts go into effect as currently scheduled.
•	First Financial’s business is predominately conducted throughout coastal South Carolina, as well as in the Florence and Greenville, South Carolina and Wilmington, North Carolina markets; continuation of the economic downturn in First Financial’s primary market area could negatively impact its results of operations and its financial position.
•	First Financial’s net interest income may decline based on the interest rate environment.
•	First Financial may not be able to adequately anticipate and respond to changes in market interest rates.
•	Further economic downturns may adversely affect First Financial’s investment securities portfolio and profitability.
•	If First Financial is unable to continue to attract or retain core deposits, to obtain third party borrowings on favorable terms, or to have access to interbank or other liquidity sources, its cost of funds will increase, adversely affecting its ability to generate funds necessary for lending operations, reducing net interest margin and negatively affecting results of operations.
•	Economic and other circumstances may require First Financial to raise capital at times or in amounts that are unfavorable. If First Financial has to issue shares of stock, such additional shares will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of common stock and adversely affect the terms on which First Financial may obtain additional capital.
•	The terms of First Financial’s Series A Preferred Stock impose restrictions and obligations that may limit First Financial’s ability to pay or increase dividends, repurchase shares of preferred or common stock, and access the equity capital markets.
•	If First Financial is unable or chooses not to redeem its Series A Preferred Stock within five years from the issuance date, the cost of this capital will increase.
•	First Financial is subject to extensive and evolving regulations, which could restrict its activities, have an adverse impact on its operations, and impose financial requirements or limitations on the conduct of its business.
•	First Financial may become subject to more stringent capital requirements.
•	Financial reform legislation enacted by the U.S. Congress, and further changes in regulation to which First Financial is exposed, will result in additional laws and regulations that are expected to increase costs of operations.
•	Competition with other financial institutions may have an adverse effect on First Financial’s ability to retain and grow its client base, which could have a negative effect on its financial condition and results of operations.
•	First Financial may be adversely affected by the soundness of other financial institutions.
•	First Financial depends on the accuracy and completeness of information about its clients and counterparties.
•	The accuracy of First Financial’s financial statements and related disclosures could be affected because it is exposed to conditions or assumptions different from the judgments, assumptions, or estimates used in its critical accounting policies.
•	First Financial’s potential inability to integrate companies it may acquire in the future could expose it to financial, execution, and operational risks that could negatively affect its financial condition and results of operations. Acquisitions may be dilutive


	to common shareholders and Federal Deposit Insurance Corporation (“FDIC”)-assisted transactions have additional compliance risk that other acquisitions do not have.
•	Negative public opinion regarding First Financial and the financial institutions industry in general could damage First Financial’s reputation and adversely impact earnings.
•	First Financial is exposed to a possible loss of its senior management team and key employees. If First Financial were to lose key employees, it may experience a disruption in its relationships with certain customers.
•	First Financial is party to various lawsuits incidental to its business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.
•	First Financial’s business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, business and a negative impact on results of operations.
•	First Financial’s controls and procedures may fail or be circumvented, which could have a material adverse effect on business, results of operations, and financial condition.
•	First Financial’s stock price may be volatile, which could result in losses to our investors and litigation against First Financial.
•	Future sales of First Financial’s stock by its shareholders or the perception that those sales could occur may cause its stock price to decline.
•	Anti-takeover provisions could negatively impact First Financial shareholders.

These factors also include risks and uncertainties detailed from time to time in First Financial’s other filings with the SEC, such as the risk factors listed in “Item 1A. Risk Factors,” of First Financial’s 2011 Annual Report on Form 10-K and subsequent Forms 10-Q (including this Form 10-Q). Other factors not currently anticipated may also materially and adversely affect First Financial’s results of operations, cash flows, and financial condition. There can be no assurance that future results will meet expectations. While First Financial believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. First Financial does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Critical Accounting Policies

First Financial’s Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the financial institutions industry. Application of these principles requires management to make estimates, assumptions, and complex judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ significantly from these estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include those relating to the allowance for loan losses, fair value measurements, and income taxes. First Financial believes that these estimates and the related accounting policies are important to the portrayal of its financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. First Financial’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements contained in First Financial’s 2011 Annual Report on Form 10-K, and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Results of Operations – Critical Accounting Policies and Estimates” in First Financial’s 2011 Annual Report on Form 10-K. For additional information regarding updates, see Note 1 to the Consolidated Financial Statements in this report.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. GAAP, this report includes non-GAAP financial measures such as the efficiency ratio, tangible common equity to tangible assets ratio, tangible common book value, and pre-tax pre-provision earnings. First Financial believes these non-GAAP financial measures provide additional information that is useful to investors in understanding its underlying performance, business and performance trends, and such measures help facilitate performance comparisons with others in the banking industry. Non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious in their use of such measures. To mitigate these limitations, First Financial has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that its performance is properly reflected to facilitate consistent period-to-period comparisons. Although First Financial believes the above non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures. Investors should consider First Financial’s performance and financial condition as reported under GAAP and all other relevant information when assessing First Financial’s performance or financial condition.

The efficiency ratio measures the amount of revenue (defined as the sum of net interest income on a fully tax-equivalent basis and noninterest income) needed to cover noninterest expenses. In accordance with industry standards, First Financial believes that presenting net interest income on a taxable equivalent basis when calculating the efficiency ratio, using a 35% effective federal tax rate, allows comparability with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt investments.

First Financial believes that the exclusion of goodwill and other intangible assets facilitates the comparison of results for ongoing business operations. The tangible common equity (“TCE”) ratio and tangible common book value (“TBV”) have become a focus of some investors, analysts and banking regulators. Management believes these measures may assist in analyzing First Financial’s capital position absent the effects of intangible assets and preferred stock. Because TCE and TBV are not formally defined by GAAP or codified in federal banking regulations, these measures are considered to be non-GAAP financial measures. However, analysts and banking regulators may assess First Financial’s capital adequacy using TCE or TBV and, therefore, management believes that it is useful to provide investors the ability to assess its capital adequacy on the same basis.

First Financial believes that pre-tax pre-provision earnings are a useful measure in assessing its core operating performance, particularly during times of economic stress. This measurement, as defined by management, represents total revenue (net interest income plus noninterest income) less noninterest expense. As recent results for the banking industry demonstrate, credit write-downs, loan charge-offs, and related provisions for loan losses can vary significantly from period to period, making a measure that helps isolate the impact of credit costs on profitability important to investors.

The following table presents the calculation of these non-GAAP measures for the past five quarters.




FIRST FINANCIAL HOLDINGS, INC. NON-GAAP RECONCILIATION (Unaudited)	As of and for the Quarters Ended

(dollars in thousands, except per share data)	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011

Efficiency Ratio from Continuing Operations
Net interest income (A)	$	33,197		$	31,713		$	28,252		$	28,899		$	29,064
Taxable equivalent adjustment (B)		184			226			182			145			159
Noninterest income (C)		14,548			32,530			13,182			32,770			14,238
Gain on acquisition (D)		—			14,550			—			—			—
Net securities gains (losses) (E)		189			3,398			(69	)		(180	)		(169	)
Gain on sold loan pool, net (F)		—			—			—			20,796			1,900
Noninterest expense (G)		33,029			39,250			28,709			28,886			29,588
FHLB prepayment termination charge (H)		—			8,525			—			—			—
Efficiency Ratio: (G-H)/(A+B+C-D-E-F) (non-GAAP)		69.19	%		66.05	%		68.87	%		70.12	%		70.90	%

Tangible Assets and Tangible Common Equity
Total assets	$	3,245,487		$	3,304,174		$	3,145,538		$	3,146,964		$	3,206,310
Goodwill		—			—			—			—			—
Other intangible assets, net		(8,478	)		(8,931	)		(2,310	)		(2,401	)		(2,491	)

Tangible assets (non-GAAP)	$	3,237,009		$	3,295,243		$	3,143,228		$	3,144,563		$	3,203,819


Total shareholders’ equity	$	292,500		$	287,264		$	278,043		$	277,178		$	268,506
Preferred stock		(65,000	)		(65,000	)		(65,000	)		(65,000	)		(65,000	)
Goodwill		—			—			—			—			—
Other intangible assets, net		(8,478	)		(8,931	)		(2,310	)		(2,401	)		(2,491	)

Tangible common equity (non-GAAP)	$	219,022		$	213,333		$	210,733		$	209,777		$	201,015


Shares outstanding, end of period (000s)		16,527			16,527			16,527			16,527			16,527

Tangible common equity to tangible assets (non-GAAP)		6.77	%		6.47	%		6.70	%		6.67	%		6.27	%
Book value per common share	$	13.77		$	13.45		$	12.89		$	12.84		$	12.31
Tangible book value per common share (non-GAAP)		13.25			12.91			12.75			12.69			12.16

Pre-tax Pre-provision Earnings from Continuing Operations
Income before income taxes	$	10,183		$	20,296		$	5,980		$	25,338		$	4,774
Provision for loan losses		4,533			4,697			6,745			7,445			8,940

Pre-tax pre-provision earnings (non-GAAP)	$	14,716		$	24,993		$	12,725		$	32,783		$	13,714

Charter Conversion

On February 3, 2012, First Financial received approval from the Board of Governors of the Federal Reserve (the “Federal Reserve”) to convert from a savings and loan holding company to a bank holding company and First Federal received approval to become a member of the Federal Reserve System. On February 22, 2012 First Federal (formerly known as First Federal Savings and Loan Association of Charleston) converted from a federal savings and loan association to a South Carolina-chartered commercial bank and became a member of the Federal Reserve System. In connection with First Federal’s conversion, First Financial registered with the Federal Reserve as a bank holding company. As a result of the charter conversion and membership in the Federal Reserve System, the South Carolina State Board of Financial Institutions and the Federal Reserve serve as First Federal’s primary regulators. The Federal Reserve also serves as First Financial’s primary regulator.

As a result of First Federal’s charter conversion and Federal Reserve membership, First Federal is subject to Federal Reserve Supervisory Letter SR 91-17, which provides application and supervision standards for de novo state member banks and converting thrifts. The guidance includes standards for senior management and directors, policies, cash flows between the bank

and the holding company, and capital levels, among other things. With respect to capital levels, the guidance provides that de novo state member banks and converting thrifts maintain a Tier 1 leverage capital ratio of 9.00% for the first three years as a state member bank unless an exception is granted. First Federal had a Tier 1 leverage capital ratio of 9.47% at September 30, 2012.

Acquisitions

Liberty Savings Bank Branch Acquisition

Plantation Federal Bank FDIC-Assisted Transaction

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 “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 (a “P&A Agreement”).

During the three months ended June 30, 2012 a bargain purchase gain of $14.6 million was recorded in noninterest income on the Consolidated Statement of Operations. A deferred tax liability of $5.6 million representing the difference between the financial statement and tax bases 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 liability.

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. In accordance with the relief granted in a letter dated May 21, 2012, from the staff of the Division of Corporate Finance of the SEC to First Financial and the guidance provided by Staff Accounting Bulletin Topic 1:K, Financial Statements of Acquired Troubled Financial Institutions, no pro forma financial information has been presented.

As of the filing date of this report, there have been no adjustments or changes to the initial fair values. However, the fair value assigned to loans and OREO is preliminary and subject to refinement for up to one year after the closing date of the acquisition, as additional information becomes available.

See Note 2 to the Consolidated Financial Statements for additional details.

Balance Sheet Repositioning

In conjunction with the acquisition strategies completed during the second quarter of 2012, First Financial initiated a number of transactions to better position its balance sheet. The repositioning is expected to enhance net interest income, noninterest income, and net interest margin in future periods. During the quarter ended June 30, 2012 First Financial prepaid $125.0 million of long-term Federal Home Loan Bank (“FHLB”) advances with an average rate of 3.15%, incurring a termination charge of $8.5 million ($5.3 million after-tax). To fund the debt prepayment, mortgage-backed securities totaling $203.6 million with an average yield of 1.79% were sold, generating a $3.5 million gain ($2.2 million after-tax). In aggregate, these transactions resulted in a net charge of $3.1 million after-tax, or $(0.19) per common share. The remaining proceeds from the investment sales were reinvested during the second and third quarters of 2012 in assets with higher projected returns for the current interest rate environment and outlook. First Financial believes the balance sheet repositioning is an economically accretive transaction as the net loss is expected to have a breakeven point of less than two years. In addition to the future enhancements, deleveraging the balance sheet created capital capacity to support the recent acquisitions.

Results of Operations

First Financial recorded net income available to common shareholders of $5.7 million for the three months ended September 30, 2012, compared with $113 thousand for the three months ended September 30, 2011. Diluted net income per common share was $0.34 for the quarter ended September 30, 2012, compared with $0.01 for the same quarter last year.

For the nine months ended September 30, 2012, net income available to common shareholders was $18.1 million, compared with a net loss of $(45.2) million for the same period of 2011. Diluted net income per common share from continuing operations was $1.09 for the first nine months of 2012, compared with a net loss per common share of $(2.52) for the first nine months of 2011.

Net Interest Income

The following tables present an analysis of net interest income, interest spread and net interest margin with average balances and related weighted average interest rates.



Average Balances, Net Interest Income, Average Rates	Three Months Ended September 30,
	2012								2011

(dollars in thousands)	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate

Earning assets
Interest-bearing deposits with banks	$	19,130		$	7		0.15	%	$	23,251		$	11		0.19	%
Securities available for sale		246,497			2,283		3.70			409,431			4,021		3.93
Securities held to maturity¹		18,694			336		11.13			21,905			298		8.35
Nonmarketable securities		26,032			152		2.32			37,024			71		0.76
Loans²		2,673,438			37,104		5.53			2,442,071			33,828		5.50
FDIC indemnification asset, net		77,641			132		0.68			58,399			327		2.22

Total earning assets		3,061,432			40,014		5.23	%		2,992,081			38,556		5.13	%

Nonearning assets
Cash and due from banks		55,526								88,938
Allowance for loan losses		(48,329	)							(55,503	)
Other assets		214,883								175,900

Total assets	$	3,283,512							$	3,201,416


Interest-bearing liabilities
Deposit accounts
Interest-bearing checking	$	509,029		$	186		0.15	%	$	433,988		$	284		0.26	%
Savings		262,471			89		0.13			191,494			107		0.22
Money market		467,182			507		0.43			321,413			350		0.43
Time deposits		1,053,424			2,965		1.12			1,106,226			4,582		1.64

Total deposits		2,292,106			3,747		0.65	%		2,053,121			5,323		1.03	%
Advances from FHLB		248,984			2,273		3.63			549,684			3,372		2.43
Long-term debt		45,812			797		6.96			45,824			797		6.96

Total interest-bearing liabilities		2,586,902			6,817		1.05	%		2,648,629			9,492		1.42	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		372,101								249,397
Other liabilities		34,462								35,986

Total liabilities		2,993,465								2,934,012
Shareholders’ equity		290,047								267,404

Total liabilities and shareholders’ equity	$	3,283,512							$	3,201,416

Net interest income/interest spread				$	33,197		4.18	%				$	29,064		3.71	%

Contribution of noninterest-bearing sources of funds³							0.17								0.16

Net interest margin (FTE)⁴							4.35	%							3.87	%


¹	Interest income used in the average rate calculation includes the tax equivalent adjustment of $184 thousand, and $159 thousand for the quarters ended September 30, 2012 and 2011, respectively, calculated based on a federal tax rate of 35%.
²	Average balances of loans include loans held for sale and nonaccrual loans.
³	Equates to total cost of funds of 0.92% and 1.30% for the quarters ended September 30, 2012 and 2011, respectively.
⁴	Net interest margin exceeds the interest spread due to noninterest-bearing funding sources supporting earning assets.



Average Balances, Net Interest Income, Average Rates	Nine Months Ended September 30,
	2012								2011

(dollars in thousands)	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate

Earning assets
Interest-bearing deposits with banks	$	12,625		$	27		0.29	%	$	10,946		$	15		0.18	%
Securities available for sale		356,016			8,582		3.21			395,077			12,548		4.24
Securities held to maturity¹		19,599			1,086		11.42			21,942			842		7.83
Nonmarketable securities		32,211			508		2.11			39,169			301		1.03
Loans²		2,571,323			105,223		5.46			2,538,159			103,169		5.43
FDIC indemnification asset, net		65,455			290		0.59			61,755			1,337		2.90

Total earning assets		3,057,229			115,716		5.08	%		3,067,048			118,212		5.17	%

Nonearning assets
Cash and due from banks		65,064								67,452
Allowance for loan losses		(50,379	)							(74,752	)
Assets from discontinued operations		—								22,142
Other assets		186,379								186,563

Total assets	$	3,258,293							$	3,268,453


Interest-bearing liabilities
Deposit accounts:
Interest-bearing checking	$	470,653		$	469		0.13	%	$	429,814		$	1,066		0.33	%
Savings		240,612			269		0.15			183,742			341		0.25
Money market		410,471			1,288		0.42			319,727			1,080		0.45
Time deposits		1,042,345			9,653		1.24			1,180,200			15,644		1.77

Total deposits		2,164,081			11,679		0.72	%		2,113,483			18,131		1.15	%
Advances from FHLB		397,887			8,484		2.85			535,744			9,923		2.48
Long-term debt		45,889			2,391		6.95			45,849			2,391		6.95

Total interest-bearing liabilities		2,607,857			22,554		1.16	%		2,695,076			30,445		1.51	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		333,097								240,736
Liabilities from discontinued operations		—								4,116
Other liabilities		32,949								33,875

Total liabilities		2,973,903								2,973,803
Shareholders’ equity		284,390								294,650

Total liabilities and shareholder’s equity	$	3,258,293							$	3,268,453

Net interest income/interest spread				$	93,162		3.92	%				$	87,767		3.66	%

Contribution of noninterest bearing sources of funds³							0.17								0.18

Net interest margin (FTE)⁴							4.09	%							3.84	%


¹	Interest income used in the average rate calculation includes the tax equivalent adjustment of $592 thousand, and $447 thousand for the nine months ended September 30, 2012, and 2011, respectively, calculated based on a federal tax rate of 35%.
²	Average balances of loans include loans held for sale and nonaccrual loans.
³	Equates to total cost of funds of 1.02% and 1.39% for the nine months ended September 30, 2012 and 2011, respectively.
⁴	Net interest margin exceeds the interest spread due to noninterest-bearing funding sources supporting earning assets.

The increase in net interest margin over the three month period of 2011 was primarily the result of (1) lower cost of deposits related to organic growth in core deposits and acquired deposits from Liberty and Plantation; (2) the balance sheet repositioning strategy completed in the second quarter of 2012; (3) improved performance on the Cape Fear nonperforming loans, which resulted in a shift to accretable yield; and (4) the accretion and amortization of purchase accounting adjustments from the Plantation acquisition. The increase in net interest margin over the nine month period of 2011 was primarily the result of average rates paid on interest-bearing liabilities declining 35 basis points while interest-earning asset yields declined only 9 basis points. The impact of the acquisitions contributed to the improved margin, as well as organic growth in low-cost core deposits during the twelve month period.

Net interest income can be analyzed in terms of the impact of changes in volume as well as changes to interest rates. The following table presents changes in interest income, interest expense and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities.




	Three Months Ended September 30, 2012 Versus 2011 Increase (Decrease) due to									Nine Months Ended September 30, 2012 Versus 2011 Increase (Decrease) due to

(in thousands)	Volume			Rate			Net			Volume			Rate			Net

Interest income
Interest-bearing deposits with banks	$	(2	)	$	(2	)	$	(4	)	$	3		$	9		$	12
Securities available for sale		(1,520	)		(218	)		(1,738	)		(1,252	)		(2,714	)		(3,966	)
Securities held to maturity		(47	)		85			38			(181	)		425			244
Nonmarketable securities		(26	)		107			81			(61	)		268			207
Loans		3,153			123			3,276			1,401			653			2,054
FDIC indemnification asset, net		84			(279	)		(195	)		76			(1,123	)		(1,047	)

Total interest income	$	1,642		$	(184	)	$	1,458		$	(14	)	$	(2,482	)	$	(2,496	)

Interest expense
Interest-bearing deposits
Interest-bearing checking	$	43		$	(141	)	$	(98	)	$	93		$	(690	)	$	(597	)
Savings and money market		190			(51	)		139			378			(242	)		136
Time deposits		(211	)		(1,406	)		(1,617	)		(1,671	)		(4,320	)		(5,991	)

Total interest-bearing deposits		22			(1,598	)		(1,576	)		(1,200	)		(5,252	)		(6,452	)
Advances from FHLB and long-term debt		(2,308	)		1,209			(1,099	)		(2,792	)		1,353			(1,439	)

Total interest expense		(2,286	)		(389	)		(2,675	)		(3,992	)		(3,899	)		(7,891	)

Net interest income	$	3,928		$	205		$	4,133		$	3,978		$	1,417		$	5,395



Note: The change in interest not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

The increases in net interest income for the three and nine month periods reflect volume and rate variances that were positive in the aggregate. The positive volume and rate variances were primarily the result of the Plantation and Liberty acquisitions completed in the second quarter of 2012. The effects of the acquisitions were partially offset by negative volume and rate variances on investment securities available for sale and negative rate variances on advances from FHLB and long-term debt. The variances on investment securities were the result of the balance sheet repositioning (which negatively impacted volume, but positively impacted rate) as well as normal portfolio cash flows (which are being replaced with new, lower-yielding securities). The variances on advances from FHLB and long-term debt were due to the balance sheet repositioning. Both periods also reflect a positive rate variance on deposits due to the continued decline in rates paid on core and time deposits resulting from an ongoing strategy to reduce maturing high rate retail and wholesale time deposits and a shift in funding to core deposits. In addition, both the three and nine month periods reflect a positive loan rate and volume variance due primarily to the acquisition of Plantation loans, the related purchase accounting, and the improved performance of loans acquired from the former Cape Fear Bank.

Provision for Loan Losses

After determining what First Financial believes is an adequate allowance for loan losses based on the estimated risk inherent in the loan portfolio, the provision for loan losses is calculated based on the net effect of the change in the allowance for loan losses and net charge-offs. The provision for loan losses was $4.5 million for the quarter ended September 30, 2012, compared with $8.9 million for the same quarter last year. For the nine months ended September 30, 2012, the provision for loan losses totaled $16.0 million, compared with $99.4 million for the same period of the prior year. The decreases were primarily the result of continued improvement in historical loss trends and general stabilization of credit metrics through September 30, 2012. In addition, the year-to-date decrease was due to $65.7 million in additional provision associated with reclassifying $155.3 million of portfolio loans to loans held for sale in June 2011. See the “Asset Quality” and “Allowance for Loan Losses” sections below for additional discussion regarding the calculation of the allowance for loan losses and information related to loan charge-offs.

Noninterest Income

The following table summarizes the components of noninterest income.




Noninterest Income
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Month Change						Nine Month Change

(dollars in thousands)	2012			2011			2012			2011			$			%			$			%

Service charges and fees on deposit accounts	$	7,772		$	7,196		$	22,632		$	20,559		$	576			8.0	%	$	2,073			10.1	%
Mortgage and other loan income		4,061			2,743			11,868			5,918			1,318			48.0			5,950			100.5
Trust and plan administration		1,117			1,333			3,276			3,561			(216	)		(16.2	)		(285	)		(8.0	)
Brokerage fees		655			588			2,194			1,911			67			11.4			283			14.8
Other		754			647			2,222			1,992			107			16.5			230			11.5
Other-than-temporary impairment on investment securities		(145	)		(169	)		(359	)		(345	)		24			(14.2	)		(14	)		4.1
Gain on acquisition		—			—			14,550			—			—			NM			14,550			NM
Gain on sale or call of investment securities		334			—			3,877			1,419			334			NM			2,458			173.2
Gain on sold loan pool, net		—			1,900			—			1,900			(1,900	)		(100.0	)		(1,900	)		(100.0	)

Total noninterest income	$	14,548		$	14,238		$	60,260		$	36,915		$	310			2.2	%	$	23,345			63.2	%



NM - Not meaningful.

The increase over the three months ended September 30, 2011 was primarily the result of higher service charges on deposit accounts which continue to trend upward due to a higher number of transaction accounts, higher mortgage and other loan income due to higher residential mortgage origination levels related to the continued low interest rate environment and the addition of correspondent lenders, and a gain on the sale or call of investment securities due to securities called in the September 30, 2012 quarter. The increases were partially offset by the effect of a net gain recorded in the same quarter last year related to the resolution of some of the loans previously identified as part of the bulk loan pool.

The increase over the nine months ended September 30, 2011 was principally caused by the gain on the Plantation acquisition and the gain on the sale of investment securities related to the balance sheet repositioning strategy. In addition, both mortgage and other loan income and service charges on deposit accounts increased due to a higher volume of transactions. The increases were partially offset by the gain on sold loan pool, as discussed above.

Noninterest Expense

The following table summarizes the components of noninterest expense.




Noninterest Expense
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Month Change						Nine Month Change

(dollars in thousands)	2012		2011		2012		2011		$			%			$			%

Salaries and employee benefits	$	15,621	$	14,672	$	45,975	$	47,441	$	949			6.5	%	$	(1,466	)		(3.1	)%
Occupancy costs		2,333		2,187		7,533		6,512		146			6.7			1,021			15.7
Furniture and equipment		2,132		1,724		5,834		5,318		408			23.7			516			9.7
Other real estate expenses, net		1,030		3,115		1,694		3,782		(2,085	)		(66.9	)		(2,088	)		(55.2	)
FDIC insurance and regulatory fees		693		576		2,448		2,910		117			20.3			(462	)		(15.9	)
Professional services		1,980		1,589		5,320		4,161		391			24.6			1,159			27.9
Advertising and marketing		964		868		2,582		2,665		96			11.1			(83	)		(3.1	)
Other loan expense		1,620		990		4,254		3,014		630			63.6			1,240			41.1
Intangible amortization		512		80		970		244		432			NM			726			NM
Other expense		6,144		3,787		15,853		11,655		2,357			62.2			4,198			36.0
FHLB prepayment termination charge		—		—		8,525		—		—			NM			8,525			NM
Goodwill impairment		—		—		—		630		—			NM			(630	)		(100.0	)

Total noninterest expense	$	33,029	$	29,588	$	100,988	$	88,332	$	3,441			11.6	%	$	12,656			14.3	%



NM - Not meaningful.

In addition to the impact of the Plantation and Liberty transactions, the increase over the three months ended September 30, 2011 was due to higher professional services, other loan expense, and other expense, partially offset by lower OREO expenses. The increase in professional fees was a direct result of acquisition expenses related to Plantation and Liberty and other strategic initiatives. Other loan expense increased due to higher foreclosure-related costs as well as higher loan origination and servicing costs. Other expenses increased primarily the result of (1) beginning to amortize a projected impairment on the FDIC indemnification asset related to the Cape Fear transaction (because performance of the underlying loans has been better than originally projected and may result in lower future reimbursements under the loss share agreement), (2) a post-sale settlement on one of the insurance agencies sold during 2011 (3) and conversion-related expenses associated with migrating

Plantation customers to First Federal’s core operating systems during the current quarter. OREO expenses decreased due to the effect of fewer write-downs on OREO properties, recognition of more gains on the sales of properties, and less OREO related expense.

The increase over the nine months ended September 30, 2011 was primarily the result of the FHLB termination charge related to the balance sheet repositioning strategy. Other significant variances included higher occupancy costs, professional services, other loan expense, and other expenses, partially offset by lower salaries and employee benefits, FDIC insurance and regulatory fees, and a goodwill impairment in 2011. Occupancy costs increased due to expenses associated with closing four in-store branches during the June 30, 2012 quarter. In addition to the factors discussed above for the quarterly results, other expenses increased due to deposit rewards management expenses related to higher customer debit card usage. The decrease in salaries and employee benefits was primarily the effect of compensation agreements entered into during the prior year. The decrease in FDIC insurance and regulatory fees was due to the new assessment methodology implemented by the FDIC during 2011. The variances in the other categories were essentially caused by the factors discussed above in the quarterly analysis.

Income Taxes

The income tax expense for the three months ended September 30, 2012 was $3.5 million, compared with $1.9 million for the same period of the prior year. For the nine months ended September 30, 2012, the income tax expense was $15.5 million, compared with an income tax benefit of $24.3 million for the same period of 2011. The increases over both prior periods were primarily the result of the change in pre-tax income, partially offset by higher tax-exempt income resulting from purchasing bank owned life insurance. Additionally, the year-to-date variance was due to a $2.1 million write-down of the state deferred tax asset during the first quarter of 2012 in connection with First Federal’s conversion from a thrift to a South Carolina state-chartered commercial bank due to a difference in South Carolina tax laws for banks versus thrifts, and the establishment of a $5.6 million deferred tax liability related to the gain on the Plantation acquisition during the second quarter of 2012.

The effective tax rate for the three months ended September 30, 2012, was 34.53%, compared with 39.65% for the same period of the prior year. The effective tax rate for the nine months ended September 30, 2012 was 42.43%, compared with 38.54% for the same period of the prior year. The increase over the nine month period of 2011 was primarily the result of the write-down of the state deferred tax asset as discussed above. See Note 8 to the Consolidated Financial Statements for additional information regarding income taxes.

Financial Condition

Total assets at September 30, 2012 were $3.2 billion, an increase of $98.5 million or 3.1% over December 31, 2011 and an increase of $39.2 million or 1.2% over September 30, 2011. The increases were primarily the result of the Plantation and Liberty acquisitions, partially offset by a decrease in investment securities due to the balance sheet repositioning.

Cash and Cash Equivalents

Cash and cash equivalents totaled $86.4 million at September 30, 2012, an increase of $9.7 million or 12.7% over December 31, 2011 and essentially unchanged from September 30, 2011. The variance was primarily the result of holding short-term excess funds at the Federal Reserve.

Investment Securities

Investment securities at September 30, 2012 totaled $276.6 million, a decrease of $181.1 million or 39.6% from December 31, 2011 and a decrease of $192.9 million or 41.1% from September 30, 2011. The decreases were the result of the strategic balance sheet repositioning discussed above which involved selling $203.6 million of mortgage-backed securities during the three months ended June 30, 2012 as well as normal portfolio cash flows, partially offset by new securities purchases. See Note 3 to the Consolidated Financial Statements and the “Balance Sheet Repositioning” section above for additional information regarding investment securities.

Loans

The following table summarizes the loan portfolio by major categories.




LOANS (in thousands)	September 30, 2012		June 30, 2012		March 31, 2012		December 31, 2011		September 30, 2011

Residential loans
Residential 1-4 family	$	1,008,130	$	1,023,800	$	972,881	$	975,405	$	909,907
Residential construction		19,660		19,601		15,501		15,117		16,431
Residential land		52,616		56,073		40,794		41,612		40,725

Total residential loans		1,080,406		1,099,474		1,029,176		1,032,134		967,063

Commercial loans
Commercial business		125,345		107,804		88,054		83,814		80,871
Commercial real estate		520,135		555,588		447,339		456,541		471,296
Commercial construction		1,801		17,201		16,289		16,477		15,051
Commercial land		74,306		78,011		54,786		61,238		67,432

Total commercial loans		721,587		758,604		606,468		618,070		634,650

Consumer loans
Home equity		380,000		388,534		347,825		357,270		369,213
Manufactured housing		277,744		276,607		275,845		275,275		276,047
Marine		69,314		59,643		50,458		52,590		55,243
Other consumer		45,318		49,621		45,795		50,118		53,118

Total consumer loans		772,376		774,405		719,923		735,253		753,621

Total loans		2,574,369		2,632,483		2,355,567		2,385,457		2,355,334
Less: Allowance for loan losses		46,351		48,799		50,776		53,524		54,333

Net loans	$	2,528,018	$	2,583,684	$	2,304,791	$	2,331,933	$	2,301,001

Total loans at September 30, 2012 increased $188.9 million or 7.9% over December 31, 2011 and increased $219.0 million or 9.3% over September 30, 2011. The Plantation and Liberty acquisitions were the catalyst to the growth in loan balances.

At September 30, 2012, loans held for sale totaled $53.7 million, an increase of $5.5 million or 11.3% over December 31, 2011 and a decrease of $41.1 million or 43.3% from September 30, 2011. The increase over December 31, 2011 was due to higher levels of residential mortgage loans to be sold in the secondary market as a result of expanding First Federal’s correspondent lending channel. Secondary market sales generally settle in 45 to 60 days. Loans held for sale at September 30, 2011 were comprised of $40.8 million in residential mortgage loans awaiting sale in the secondary market and $54.1 million of loans in the bulk loan sale pool. The decrease from September 30, 2011 was primarily the result of completing the bulk loan sale in October 2011, partially offset by the correspondent lending expansion.

Included in the table below are loans covered under loss share agreements with the FDIC (“covered loans”), as discussed in Notes 4 and 5 to the Consolidated Financial Statements. The following table provides a summary of the covered loans as well as several credit metrics by loan type.




	As of September 30, 2012						As of December 31, 2011

Loans Covered Under Loss Share Agreements (in thousands)	Loans Outstanding		Covered Delinquent Loans		Covered Nonperforming Loans		Loans Outstanding		Covered Delinquent Loans		Covered Nonperforming Loans

Residential loans
Residential 1-4 family	$	5,209	$	—	$	714	$	2,796	$	—	$	734
Residential land		14,344		114		8		7,464		53		253

Total residential loans		19,553		114		722		10,260		53		987

Commercial loans
Commercial business		24,404		241		380		11,127		148		2,851
Commercial real estate		140,517		772		7,746		77,834		1,149		10,661
Commercial construction		—		—		—		1,036		—		312
Commercial land		32,823		—		789		13,951		274		2,102

Total commercial loans		197,744		1,013		8,915		103,948		1,571		15,926

Consumer loans
Home equity		23,197		243		380		25,493		637		506
Other consumer		1,312		71		6		1,685		42		104

Total consumer loans		24,509		314		386		27,178		679		610

Total loans	$	241,806	$	1,441	$	10,023	$	141,386	$	2,303	$	17,523

Other repossessed assets acquired	$	14,605					$	7,550
Criticized loans¹		6,145						6,902
Classified loans¹		20,623						33,509


¹ See Note 4 to the Consolidated Financial Statements for the regulatory definition of criticized and classified.

The table above includes $147.8 million of covered loans related to the Plantation acquisition as of September 30, 2012. Covered delinquent loans and covered nonperforming loans related to Plantation totaled $1.1 million and $24 thousand, respectively, as of September 30, 2012.

Asset Quality

National credit conditions have contributed to the historical high credit costs realized by the financial industry over the last several years. The markets in which First Financial operates are not immune to these conditions, which have been a factor in the higher levels of nonperforming assets and charge-offs First Financial has reported since fiscal 2009.

Loan Monitoring

Management monitors the loan portfolio on a regular basis to determine where risk mitigation efforts can be utilized to assist in preventing or mitigating future losses. An element of the credit risk management process is monthly loan reviews to determine risk levels and exposure to loss. The monthly problem loan review process evaluates all commercial loans greater than $200,000 that are more than 30 days past due and all criticized and classified loans over $500,000. The depth of the review varies by asset type, depending on the nature of those assets and their risk characteristics. While certain assets may represent a substantial investment and warrant individual reviews, other assets may have less risk because the asset size is small, the risk is spread over a large number of obligors or the obligations are well collateralized and further analysis of individual assets would expand the review process without measurable improvement to risk assessment. Asset types with these characteristics may be reviewed as a total homogenous portfolio (as is the case with residential and consumer loans) on the basis of risk indicators such as delinquency or credit rating. In addition, a formal review process may be conducted on individual assets within the homogenous pool that represent potential risk. For the larger credits, action plans to address the credit weaknesses are presented and approved plans are monitored. Loan reviews emphasize the borrower’s and guarantor’s global cash flow analysis as a key determinant in the credit quality risk rating and to identify deterioration in the financial condition of the borrowers that may limit their ability to continue to service their debt or to carry their obligations to contractual term. In addition, reviews may include evaluations of collateral values as determined necessary based on credit policies and credit risk rating. First Federal’s policy is to update real estate collateral appraisals on problem loans at least annually, or more frequently if deterioration in market value is observed.

Delinquent Loans

The following table presents loans that were past due 30-89 days which were not otherwise on nonaccrual status. The table includes covered loans which became delinquent since acquisition and which were not acquired with deteriorated credit quality and accounted for in accordance with ASC 310-30. Details of delinquent covered loans are presented in the “Loans Covered Under Loss Share Agreements” table in the “Loans” section above.



DELINQUENT LOANS (30-89 days past due) (dollars in thousands)	September 30, 2012					June 30, 2012					March 31, 2012					December 31, 2011					September 30, 2011

	$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio

Residential loans
Residential 1-4 family	$	2,361		0.23	%	$	1,244		0.12	%	$	1,889		0.19	%	$	2,986		0.31	%	$	1,722		0.19	%
Residential land		157		0.30			475		0.85			123		0.30			561		1.35			65		0.16

Total residential loans		2,518		0.23			1,719		0.16			2,012		0.20			3,547		0.34			1,787		0.18

Commercial loans
Commercial business		582		0.46			903		0.84			1,677		1.90			908		1.08			868		1.07
Commercial real estate		2,397		0.46			3,014		0.54			3,065		0.69			3,514		0.77			3,394		0.72
Commercial construction		—		—			—		—			—		—			—		—			595		3.95
Commercial land		318		0.43			675		0.87			2,271		4.15			1,185		1.94			537		0.80

Total commercial loans		3,297		0.46			4,592		0.61			7,013		1.16			5,607		0.91			5,394		0.85

Consumer loans
Home equity		2,204		0.58			2,017		0.52			3,315		0.95			4,525		1.27			3,408		0.92
Manufactured housing		2,506		0.90			1,835		0.66			1,502		0.54			3,267		1.19			2,600		0.94
Marine		227		0.33			300		0.50			358		0.71			597		1.14			980		1.77
Other consumer		742		1.64			626		1.26			445		0.97			831		1.66			629		1.18

Total consumer loans		5,679		0.74			4,778		0.62			5,620		0.78			9,220		1.25			7,617		1.01

Total delinquent loans	$	11,494		0.45	%	$	11,089		0.42	%	$	14,645		0.62	%	$	18,374		0.77	%	$	14,798		0.63	%

Total delinquent loans at September 30, 2012 decreased $6.9 million or 37.4% from December 31, 2011 and decreased $3.3 million or 22.3% from September 30, 2011. The decreases were primarily the result of improvements in the commercial portfolio, partially offset by higher delinquent residential and consumer loans as they work through the credit cycle.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, loans delinquent 90 days or more and still accruing, restructured loans still accruing, and other repossessed assets acquired through foreclosure. With the exception of the credit card portfolio, loans are placed on nonaccrual status when they become 90 days delinquent. In addition, loans that were not delinquent in excess of 90 days but exhibited doubt as to their ability to repay all contractual principal and interest have been classified as impaired under ASC 310-10-35 and placed on nonaccrual status, as discussed further below.

The following table presents the composition of nonperforming assets. The table includes covered loans which have migrated to nonaccrual status since acquisition and which were not acquired with deteriorated credit quality and accounted for in accordance with ASC 310-30. Loans classified as nonperforming at acquisition are not included below since these loans were adjusted to fair value, which included estimates of credit loss at acquisition date. Details of nonperforming covered loans are presented in the “Loans Covered Under Loss Share Agreements” table in the “Loans” section above.



NONPERFORMING ASSETS (dollars in thousands)	September 30, 2012					June 30, 2012					March 31, 2012					December 31, 2011					September 30, 2011

	$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio

Residential loans
Residential 1-4 family	$	10,881		1.08	%	$	10,460		1.02	%	$	6,649		0.68	%	$	4,977		0.51	%	$	1,595		0.18	%
Residential land		1,558		2.96			1,423		2.54			1,398		3.43			1,448		3.48			1,140		2.80

Total residential loans		12,439		1.15			11,883		1.08			8,047		0.78			6,425		0.62			2,735		0.28

Commercial loans
Commercial business		1,407		1.12			1,198		1.11			1,931		2.19			3,666		4.37			4,322		5.34
Commercial real estate		15,853		3.05			15,918		2.87			18,474		4.13			17,127		3.75			18,400		3.90
Commercial construction		247		13.71			261		1.52			261		1.60			605		3.67			266		1.77
Commercial land		2,990		4.02			4,577		5.87			5,240		9.56			5,232		8.54			6,310		9.36

Total commercial loans		20,497		2.84			21,954		2.89			25,906		4.27			26,630		4.31			29,298		4.62

Consumer loans
Home equity		10,145		2.67			10,636		2.74			9,779		2.81			8,192		2.29			6,871		1.86
Manufactured housing		2,221		0.80			2,197		0.79			2,648		0.96			3,461		1.26			2,922		1.06
Marine		90		0.13			29		0.05			63		0.12			246		0.47			47		0.09
Other consumer		228		0.50			306		0.62			131		0.29			224		0.45			127		0.24

Total consumer loans		12,684		1.64			13,168		1.70			12,621		1.75			12,123		1.65			9,967		1.32

Total nonaccrual loans		45,620		1.77			47,005		1.79			46,574		1.98			45,178		1.89			42,000		1.78
Loans 90+ days still accruing		74					75					51					121					171
Restructured loans, still accruing		3,340					2,857					3,276					2,411					734

Total nonperforming loans		49,034		1.90	%		49,937		1.90	%		49,901		2.12	%		47,710		2.00	%		42,905		1.82	%
Nonperforming loans held for sale		―					―					―					―					39,412
Other repossessed assets acquired		21,579					28,191					21,818					20,487					26,212

Total nonperforming assets	$	70,613				$	78,128				$	71,719				$	68,197				$	108,529

Total nonperforming assets at September 30, 2012 increased $2.4 million or 3.5% over December 31, 2011 and decreased $37.9 million or 34.9% from September 30, 2011. The increase over December 31, 2011 was primarily the result of $10.7 million of OREO acquired as part of the Plantation transaction, partially offset by $7.0 million in OREO reductions due to legacy First Federal OREO sales and write-downs. In addition, the effects of higher nonperforming residential loans and higher nonperforming home equity loans due to prolonged foreclosure processes were substantially offset by lower nonperforming commercial loans. The decrease from September 30, 2011 was primarily the result of completing the bulk loan sale in October 2011 as well as the decline in nonperforming commercial loans and OREO, partially offset by higher nonperforming residential and consumer loans due to the aformentioned factors. Covered nonperforming loans decreased $7.5 million from December 31, 2011 to $10.0 million at September 30, 2012. Covered OREO totaled $14.6 million at September 30, 2012, an increase of $7.1 million over December 31, 2011 due to the Plantation acquisition.

First Federal accounts for certain loan modifications or restructurings as a troubled debt restructuring (“TDR”). In general, the modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that First Federal would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure of the note or other actions. As part of First Federal’s action plan for individual loan relationships, First Federal may restructure loan terms to assist borrowers facing challenges in the current economic environment. See Note 4 to the Consolidated Financial Statements for additional details on TDRs.

The following table presents net charge-offs by loan category.



	September 30, 2012					June 30, 2012						March 31, 2012						December 31, 2011						September 30, 2011

NET CHARGE-OFFS (dollars in thousands)	$		% of Portfolio*			$			% of Portfolio*			$			% of Portfolio*			$			% of Portfolio*			$		% of Portfolio*

Residential loans
Residential 1-4 family	$	294		0.12	%	$	1,070			0.42	%	$	507			0.21	%	$	391			0.16	%	$	414		0.18	%
Residential land		403		2.91			78			0.59			701			6.75			532			5.31			165		1.58

Total residential loans		697		0.26			1,148			0.42			1,208			0.47			923			0.37			579		0.24

Commercial loans
Commercial business		924		3.22			334			1.34			825			3.60			640			3.22			136		0.69
Commercial real estate		1,994		1.47			714			0.54			1,462			1.30			1,417			1.22			433		0.36
Commercial construction		11		0.56			(2	)		(0.05	)		(2	)		(0.05	)		(3	)		(0.07	)		635		16.12
Commercial land		1,037		5.43			723			4.00			1,439			9.87			804			4.94			2,052		12.15

Total commercial loans		3,966		2.14			1,769			0.99			3,724			2.41			2,858			1.83			3,256		2.04

Consumer loans
Home equity		1,125		1.17			2,580			2.71			2,264			2.57			2,955			3.26			4,910		5.28
Manufactured housing		778		1.12			666			0.97			1,467			2.13			845			1.23			978		1.42
Marine		146		0.88			82			0.60			361			2.83			142			1.05			158		1.12
Other consumer		269		2.22			428			3.48			469			3.90			531			4.09			217		1.61

Total consumer loans		2,318		1.20			3,756			1.98			4,561			2.51			4,473			2.41			6,263		3.31

Total net charge-offs	$	6,981		1.07	%	$	6,673			1.04	%	$	9,493			1.60	%	$	8,254			1.39	%	$	10,098		1.71	%



*Represents an annualized rate

Total net charge-offs for the quarter ended September 30, 2012 decreased $1.3 million or 15.4% and decreased $3.1 million or 30.9% from the quarters ended December 31, 2011 and September 30, 2011, respectively. However, the level of future net charge-offs is expected to fluctuate, primarily as residential and home equity problem loans are worked through their credit cycle.

The following table details classified assets by category.




	September 30, 2012								December 31, 2011
CLASSIFIED ASSETS (dollars in thousands)
CLASSIFIED ASSETS (dollars in thousands)	Covered Classified		Non-covered Classified			Total Classified			Covered Classified		Non-covered Classified			Total Classified

Residential loans
Residential 1-4 family	$	714	$	17,256		$	17,970		$	734	$	7,232		$	7,966
Residential land		246		1,742			1,988			253		1,518			1,771

Total residential loans		960		18,998			19,958			987		8,750			9,737

Commercial loans
Commercial business		1,333		8,399			9,732			4,386		9,466			13,852
Commercial real estate		14,817		42,920			57,737			22,569		39,936			62,505
Commercial construction		—		247			247			588		261			849
Commercial land		1,370		8,207			9,577			3,516		10,697			14,213

Total commercial loans		17,520		59,773			77,293			31,059		60,360			91,419

Consumer loans
Home equity		2,131		15,635			17,766			1,359		8,087			9,446
Manufactured housing		—		2,357			2,357			—		3,461			3,461
Marine		—		116			116			15		231			246
Other consumer		12		405			417			89		256			345

Total consumer loans		2,143		18,513			20,656			1,463		12,035			13,498

Total classified loans		20,623		97,284			117,907			33,509		81,145			114,654
Other repossessed assets acquired		14,605		6,974			21,579			7,550		12,937			20,487

Total classified assets	$	35,228	$	104,258		$	139,486		$	41,059	$	94,082		$	135,141


Classified assets/FFCH tier 1 capital + ALL				27.60	%		36.93	%				25.15	%		36.12	%

The increases in classified residential loans and home equity loans were essentially the result of inflows related to nonperforming loans not being offset by outflows due to the current prolonged foreclosure process. The decrease in classified commercial loans was due to continued improvements in credit quality since the bulk loan sale in late 2011.

Allowance for Loan Losses

First Federal maintains an allowance for loan losses (the “allowance”) which is management’s best estimate of probable losses inherent in the outstanding loan portfolio. The allowance is decreased by actual loan charge-offs, net of recoveries, and is

increased as necessary by charges to current period operating results through the provision for loan losses. The allowance is based on management’s continuing review and credit risk evaluation of the losses inherent in the loan portfolio.

A committee consisting of members of lending management, credit risk management, and accounting meets at least quarterly with executive management to review the credit quality of the loan portfolios and to evaluate the allowance. First Federal utilizes an external firm to review the credit quality of the loan portfolio and reports the results of its reviews to executive management and the Audit Committee of the Board of Directors on a quarterly basis. Such reviews also assist management in validating the accuracy of the credit risk rating process and establishing the level of the allowance.

The portfolio evaluation and allowance calculation process determines specific reserves for specifically identified impaired loans and general reserves for pools of homogeneous loans to arrive at the required allowance. In addition an unallocated or non-specific reserve may be deemed necessary based on the committee’s judgment. As of September 30, 2012, there was no unallocated portion in the allowance for loan losses. In addition to being used to categorize risk, First Federal’s internal credit risk rating system is used to determine the allocated allowance for the loan portfolio. Loans are segmented into categories for analysis based in part on the risk profile inherent in each category. Loans are further segmented into risk rating pools within each category to appropriately recognize changes in inherent risk.

A primary component in determining the reserve factors utilized in the allowance calculation is the actual loss history tracked by major loan category. First Federal currently estimates the losses inherent in the loan portfolio based on a rolling eighteen month historical loss period to evaluate the allowance. The loss history is reviewed by loan sector along with more recent trends, such as one-year and the most recent quarter historical loss ratios to determine the direction and anticipation of probable future losses. First Federal’s policy is to adjust the loss history with internal and external qualitative factors at each period end, as appropriate, given the facts available at the time. The following qualitative factors that are likely to cause estimated credit losses in First Federal’s existing portfolio to differ from historical loss experience include, but are not limited to:


	•	Changes in lending policies and procedures;
	•	Changes in economic conditions;
	•	Changes to the nature and volume of the portfolio;
	•	Experience, ability, and depth of management;
	•	Past due, nonaccrual, and graded loans;
	•	Quality of the loan review system;
	•	Collateral value changes for collateral dependent loans;
	•	Changes in credit concentration; and
	•	Competitive, legal, and regulatory environment.

Upon completion of the qualitative adjustments, the allowance is allocated to the components of the portfolio based on the adjusted loss rates. The specific reserve associated with impaired loans is primarily determined by estimating the loss inherent in each problem credit utilizing a discounted cash flow methodology or based on the value of the underlying collateral.

The following table sets forth the changes in the allowance.




	Three Months Ended						Nine Months Ended

(in thousands)	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011

Balance, beginning of period	$	48,799		$	55,491		$	53,524		$	88,349
Provision for loan losses		4,533			8,940			15,975			99,418
Charge-offs		(7,615	)		(10,759	)		(25,343	)		(135,941	)
Recoveries		634			661			2,195			2,507

Net charge-offs		(6,981	)		(10,098	)		(23,148	)		(133,434	)

Balance, end of period	$	46,351		$	54,333		$	46,351		$	54,333

The allowance for loan losses at September 30, 2012 represented 1.80% of total loans, compared with 2.31% of total loans at September 30, 2011. The decrease in the allowance ratio was primarily the result of acquiring loans that are carried at fair value and do not currently have an associated allowance. Excluding the impact related to the $294.6 million of loans acquired from Plantation and Liberty during the June 30, 2012 quarter, the allowance for loan losses was 2.02% and the decrease was primarily the result of the continued improvement in historical loss factors and stable credit metrics since the bulk loan sale in October 2011. The allowance for loan losses at September 30, 2012 was 1.99% of loans excluding covered loans, and represented 1.19 times coverage of the non-covered nonperforming loans.

First Federal believes that it uses relevant information available to make determinations about the allowance and that it has established its existing allowance in accordance with GAAP. Management and the Board of Directors have implemented appropriate policies surrounding loan loss identification, loan monitoring and allowance for loan loss methodologies, have consistently applied processes implemented, and have determined that the controls in place are adequate to ensure that the allowance is appropriate at each balance sheet date. If circumstances differ substantially from the assumptions used in making

determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral charge-offs cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate. Management believes that the allowance is adequate for the risk inherent in the portfolio as of each balance sheet date.

Other Intangible Assets

Other intangible assets, net totaled $8.5 million at September 30, 2012, an increase of $6.1 million over December 31, 2011 and an increase of $6.0 million over September 30, 2011. The increases were the result of establishing intangibles related to the Liberty and Plantation acquisitions of $5.2 million and $1.7 million, respectively. These increases were partially offset by the ongoing amortization of the existing and new intangibles.

Other Assets

Other assets totaled $83.0 million at September 30, 2012, a decrease of $13.0 million or 13.5% over December 31, 2011 and a decrease of $35.6 million or 30.0% from September 30, 2011. The decreases were principally due to current tax adjustments recorded, federal refunds received during the twelve month period ended September 30, 2012 and a $2.1 million write-down of the state deferred tax asset during the first quarter of 2012 after First Federal’s conversion to a South Carolina–state chartered commercial bank related to a difference in applicable South Carolina tax laws for banks versus thrifts. In addition, OREO decreased as property sales outpaced foreclosures.

Deposits

Deposits totaled $2.6 billion at September 30, 2012, an increase of $377.6 million or 16.9% over December 31, 2011 and an increase of $313.9 million or 13.6% over September 30, 2011. Core deposits, which include checking, savings, and money market accounts, totaled $1.6 billion at September 30, 2012, an increase of $388.0 million or 31.5% over December 31, 2011 and an increase of $395.1 million or 32.3% over September 30, 2011. The increases were primarily the result of the Plantation and Liberty acquisitions as well as the introduction of new retail deposit products and sales processes during 2012 of Time deposits at September 30, 2012 totaled $997.1 million, a decrease of $10.4 million or 1.0% from December 31, 2011 and a decrease of $81.2 million or 7.5% from September 30, 2011. The increase over December 31, 2011 was primarily the result of the Plantation and Liberty acquisitions, partially offset by the continued planned reductions in maturing high rate retail and wholesale time deposits. The decrease from September 30, 2011 was primarily the result of the continued planned reductions in maturing high rate time deposits, partially offset by the additional time deposits acquired in the Plantation and Liberty transactions.

Borrowed Funds

Borrowed funds are comprised of advances from the FHLB and long-term debt. Borrowings totaled $300.2 million at September 30, 2012, a decrease of $308.0 million or 50.6% from December 31, 2011 and a decrease of $305.0 million or 50.4% from September 30, 2011. The decreases were primarily the result of prepaying $125.0 million of long-term FHLB advances during the three months ended June 30, 2012 as part of the balance sheet repositioning strategy, as well as payments made during the last twelve months as core deposits increased and the funding mix shifted from away from wholesale funding. See Note 6 to the Consolidated Financial Statements above for additional information regarding the FHLB paydown.

Capital

Shareholders’ equity at September 30, 2012 was $292.5 million, an increase of $15.3 million or 5.5% over December 31, 2011 and an increase of $24.0 million or 8.9% over September 30, 2011. The increases were due to the effect of net operating results, partially offset by a reduction in accumulated other comprehensive income related to investment securities valuations during the last twelve months. Both First Financial’s and First Federal’s regulatory capital ratios are in excess of “well-capitalized” minimums, as presented in the following table.




	For the Quarters Ended

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011

First Financial
Equity to assets		9.01	%		8.69	%		8.84	%		8.81	%		8.37	%
Tangible common equity to tangible assets (non-GAAP)		6.77			6.47			6.70			6.67			6.27
Book value per common share	$	13.77		$	13.45		$	12.89		$	12.84		$	12.31
Tangible book value per common share (non-GAAP)		13.25			12.91			12.75			12.69			12.16
Dividends paid per common share, authorized		0.05			0.05			0.05			0.05			0.05
Common shares outstanding, end of period (000s)		16,527			16,527			16,527			16,527			16,527


	Regulatory Minimum for “Well-Capitalized”

Tier 1 leverage capital ratio		5.00%	10.12	%	9.79	%	10.22	%		⁽¹⁾		⁽¹⁾
Tier 1 risk-based capital ratio		6.00	14.42		13.89		14.81			⁽¹⁾		⁽¹⁾
Total risk-based capital ratio		10.00	15.70		15.16		16.08			⁽¹⁾		⁽¹⁾

First Federal²
Tier 1 leverage capital ratio		5.00%	9.47	%	9.06	%	9.00	%	8.92	%	8.26	%
Tier 1 risk-based capital ratio		6.00	13.50		12.86		13.05		12.35		11.26
Total risk-based capital ratio		10.00	14.78		14.13		14.32		13.61		12.53


¹	The quarter ended March 31, 2012 represented the first period holding company ratios for First Financial were required to be filed with the Federal Reserve Bank included within FR Y-9C, Consolidated Financial Statements for Bank Holding Companies . The capital ratios presented above for the quarter ended September 30, 2012 at the holding company are considered preliminary until the regulatory report is filed with the Federal Reserve Bank.
²	Capital ratios beginning with the quarter ended March 31, 2012 for First Federal Bank are based on reporting requirements for financial institutions filing FFIEC 041, FDIC Consolidated Reports of Condition and Income (the “Call Report”). Prior period ratios are reported based on superseded regulatory requirements previously issued by the Office of Thrift Supervision.

As a result of First Federal’s charter conversion and Federal Reserve membership in February 2012, First Federal is subject to Federal Reserve Supervisory Letter SR 91-17, which provides guidance that de novo state member banks and converting thrifts maintain a Tier 1 leverage capital ratio of 9.00% for the first three years as a member bank unless an exception is granted. First Federal had a Tier 1 leverage capital ratio of 9.47% at September 30, 2012.

On March 29, 2012, the U.S. Treasury completed the sale of its $65 million Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“preferred stock”) investment in First Financial to private investors through a registered public offering. There was no impact to First Financial’s financial condition or operating results due to the transaction. On October 25, 2012, First Financial declared a quarterly cash dividend of $12.50 per preferred share payable on November 15, 2012 to preferred shareholders of record as of November 5, 2012.

On October 25, 2012, First Financial declared a quarterly cash dividend of $0.05 per common share, payable on November 23, 2012 to common shareholders of record as of November 8, 2012.

In June 2012, the Federal Reserve approved three notices of proposed rulemaking (“NPRs”) to, among other things, implement the Basel III minimum capital requirements and capital conservation buffer. The three NPRs were subsequently published jointly by the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency. The comment period on the NPRs ended on October 22, 2012. If approved in their proposed form, the NPRs would be effective over a phased-in period from 2013 to 2019. If adopted, the final rules could make First Financial and First Federal subject to enhanced, complex capital requirements. First Federal is in the process of evaluating the impact of the proposed rules on its financial condition and operations.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations and off-balance sheet arrangements are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in First Financial’s 2011 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business. See Note 11 to the Consolidated Financial Statements for additional information.

Liquidity

First Federal Liquidity

An important component of First Federal’s asset/liability structure is the level of liquidity available to meet the needs of its customers and creditors. First Federal’s primary sources of funds consist of retail and commercial deposits, borrowings from the FHLB and Federal Reserve, other short term borrowings, principal repayments on loans and cash flows on investment securities,

the sale of loans and securities, and brokered deposits. First Federal’s desired level of liquidity is determined by management in conjunction with the Asset/Liability Committee (“ALCO”) of First Federal. The level of liquidity is based on management’s strategic direction, commitments to make loans and the ALCO’s assessment of First Federal’s ability to generate funds. Management believes First Federal has sufficient liquidity to meet future funding needs.

As of September 30, 2012, First Federal had the capacity to borrow an additional $744.9 million from the FHLB of Atlanta, the Federal Reserve of Richmond, and through federal funds lines with three unaffiliated banks. Neither the line with the Federal Reserve nor the federal funds lines had outstanding balances at September 30, 2012.

First Financial Liquidity

As a holding company, First Financial conducts its business through its subsidiaries and is not subject to any regulatory liquidity requirements. Potential sources for First Financial’s payment of principal and interest on its borrowings, preferred and common stock dividends and future funding needs include dividends from First Federal and other subsidiaries, payments from existing cash reserves, sales of marketable securities, and additional borrowings or stock offerings. Potential uses of First Financial’s cash and cash equivalents include dividend and interest payments, operating expenses, or capital contributions to its subsidiaries, including First Federal. As of September 30, 2012, First Financial had cash and cash equivalents of $19.5 million, compared with $39.0 million at December 31, 2011. The decrease was primarily the result of quarterly dividend payments to preferred and common shareholders. In April 2012 and June 2012, the Board of Directors approved a combined total of $12.0 million downstream of capital to First Federal to support acquisition activities.

Asset and Liability Management

First Federal’s treasury function manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Management’s objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate risk, credit risk, market risk and liquidity risk, and optimizing capital utilization. Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. First Federal’s market risk arises primarily from interest rate risk inherent in its lending, deposit-gathering, and other funding activities. The structure of its loan, investment, deposit, and borrowing portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income. In managing the investment portfolio to achieve its stated objective, First Federal invests predominately in agency securities, agency and private label mortgage-backed securities, asset-backed and collateralized debt securities including trust preferred securities, corporate bonds and municipal bonds. Treasury strategies and activities are overseen by First Federal’s ALCO and Investment Committee. ALCO activities are summarized and reviewed quarterly with the Board of Directors.

Interest Rate Risk

The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, net interest margin, earnings and the market value of assets and liabilities are subject to fluctuations arising from the movement of interest rates. First Federal manages several forms of interest rate risk, including asset/liability mismatch, basis risk and prepayment risk. An objective of First Federal’s asset/liability management policy is to maintain a balanced risk profile so that variations to net interest income stay within policy limits. A sudden and substantial increase or decrease in interest rates may adversely impact earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same degree or on the same basis. Asset/liability management is the process by which First Federal evaluates and changes, when appropriate, the mix, maturity and pricing of assets and liabilities in an attempt to reduce a materially adverse impact on earnings resulting from the direction, frequency, and magnitude of change in market interest rates. Although the net interest income of any financial institution is perceived as being vulnerable to fluctuations in interest rates, management has attempted to maintain this vulnerability within board limits.

First Federal’s prepayment risk arises from the loans originated and investment securities purchased in which the underlying assets are real estate secured mortgage loans and may payoff prior to their contractual maturities. Both of these types of assets are subject to principal reduction due to principal prepayments resulting from borrowers’ elections to refinance the underlying mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on similar instruments. The prepayment rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market projections.

First Federal’s ALCO has established policies and monitors results to manage interest rate risk. The dynamic repricing gap analysis provides a measurement of repricing risk as of a point in time by allocating rate sensitive assets and liabilities to repricing periods. The sum of assets and liabilities maturing or repricing in each of these periods is compared for mismatches within each period. Core deposits lacking contractual maturities or repricing frequencies are placed into repricing and maturity periods based on the historical price sensitivity of such liabilities to interest rate movements. Repricing periods for assets include the effects of expected prepayments on cash flows. Particular assets and liabilities, such as adjustable rate mortgages, are also evaluated for the manner in which changes in interest rates or selected indices may affect their repricing. Another measurement is asset/liability modeling and interest income simulation to assess varying interest rate and balance sheet mix assumptions. First Federal utilizes various balance sheet strategies to adjust its interest rate sensitivity position as necessary, including decisions on the pricing, maturity, and marketing of particular loan or deposit products, and to make decisions regarding the structure of maturities for borrowings or wholesale funding options.

Based on the dynamic gap analysis, First Federal is liability-sensitive within one year, with rate-sensitive liabilities exceeding rate-sensitive assets by $152.6 million or 4.70% of total assets as of September 30, 2012. This is compared with a liability-sensitive position of $201.4 million or 6.40% of total assets as of December 31, 2011. The decrease in the liability-sensitive position was primarily the result of the reduction in certificates of deposit and the addition of core deposits during the current quarter.

Repricing gap analysis is limited in its ability to measure interest rate sensitivity. The repricing characteristics of assets, liabilities, and off-balance sheet derivatives can change in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis. Basis risk is the risk that changes in interest rates will reprice interest-bearing liabilities differently from interest-earning assets, thus causing an asset/liability mismatch. This analysis does not take into consideration the repricing dynamics in adjustable-rate loans, such as minimum and maximum annual and lifetime interest rate adjustments and also the index utilized and whether the index is a current or lagging index. Included in the analysis are estimates of prepayments on fixed-rate loans and mortgage-backed securities in a one-year period and expectations that under current interest rates, certain advances from the FHLB will not be called and loans will not reprice due to floors. Also included in the analysis are estimates of core deposit decay rates, based on recent studies and regression analysis of core deposits.

An institution which is liability-sensitive would normally have a negative effect on net interest income in a rising rate environment. The opposite would generally occur when an institution has a positive gap position, or is asset-sensitive. Net interest income simulations were performed as of September 30, 2012 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming a static balance sheet composition. Based on the simulations, while First Federal is slightly liability-sensitivity, net interest income would be expected to increase from what it would be if rates were to remain at September 30, 2012 levels by 0.39% if market interest rates were to increase immediately by 100 basis points in a parallel shift, while the increase in net interest income would be expected to be approximately 0.67% if market interest rates were to increase immediately by 200 basis points in a parallel shift. While the anticipated increase in net interest income is contrary for an institution with a negative gap, the nominal movement is primarily related to the lag matrix on the repricing of liabilities and the timing and magnitude of asset repricing relative to liabilities. There are fewer assets adjusting immediately, however loans generally move fully with the related index or yield curve change, while deposits may not change on a one-to-one correlation with the index or yield curve. The difference in the rate of change for assets relative to liabilities and the lagged timing of the liability changes has resulted in the projected slight increase in net interest income in a rising rate environment.

Net interest income simulation for 100 and 200 basis point declines in market rates were not performed at September 30, 2012 as the results would not have been meaningful given the current levels of short-term market interest rates. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Another test measures the economic value of equity at risk by analyzing the impact of an immediate change in interest rates on the market value of portfolio equity. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift in the yield curve), the economic value of equity would increase by 1.62% and increase by 2.78%, respectively, from where it would be if rates were to remain at September 30, 2012 levels. The increases are primarily the result of the core deposit intangibles, which increase in value as interest rates rise. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.

Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that may be taken in response to changes in interest rates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of First Financial’s 2011 Annual Report on Form 10-K, except as set forth in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk” of this Form 10-Q.

Item 4. Controls and Procedures

a) An evaluation of First Financial’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”) was carried out under the supervision and with the participation of First Financial’s Chief Executive Officer, Chief Financial Officer and First Financial’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating First Financial’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on their evaluation, First Financial’s Chief Executive Officer and its Chief Financial Officer concluded that First Financial’s disclosure controls and procedures as of September 30, 2012, are effective in ensuring that the information required to be disclosed by First Financial in the reports it files or submits under the Act is (i) accumulated and communicated to First Financial’s management (including the Chief Executive Officer

and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

b) There have been no changes in First Financial’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, First Financial’s internal control over financial reporting. First Financial does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within First Financial have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in cost-effective control procedures, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, First Financial is subject to various legal proceedings and claims which arise in the ordinary course of business. As of September 30, 2012, First Financial believes that such litigation will not materially affect First Financial’s consolidated financial position or results of operations.

Item 1A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Cautionary Note Regarding Any Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this From 10-Q and in our other filings with the SEC, and the following:

First Financial may become subject to more stringent capital requirements.

Federal banking regulators have jointly proposed and requested comment on proposed rules that, taken together, would establish an integrated regulatory capital framework that would generally implement the Basel III regulatory capital reforms in the United States. The comment period on the proposed rules expired on October 22, 2012. As proposed, the U.S. implementation of Basel III would generally lead to higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. If adopted in their proposed form, these new capital requirements would generally be phased in from 2013 to 2019. Additionally, the proposed rules contemplate that, for banking organizations with less than $15 billion in assets, such as First Financial, the ability to treat trust preferred securities as Tier 1 capital would be phased out over a ten-year period. Compliance with these rules could impact our capital plans, affect returns on capital, and impose additional costs on First Financial and First Feceral. The potential impact of the proposed new rules on First Financial and First Federal is being reviewed. There is no assurance that the Basell III-related proposals will be adopted in their current form, what changes may be made prior to adoption, or when the final rules would be effective.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Rule 14a-8 Shareholder Proposal Deadline

The 2013 annual meeting of shareholders will be held on April 25, 2013, which is more than 30 days after the anniversary of the 2012 annual meeting of shareholders which was held on January 26, 2012. As a result, pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the Company has set a revised deadline for the receipt of any shareholder proposals submitted pursuant to Rule 14a-8 for inclusion in the Company’s proxy materials for the 2013 annual meeting of shareholders. The new extended deadline for delivering shareholder proposals to the Company is the close of business on November 30, 2012, which date was determined in accordance with Rule 14a-8(e). Any shareholder proposal requested to be included in the proxy materials for the 2013 annual meeting of shareholders must (i) be received by Robert L. Davis, Executive Vice President, Corporate Counsel and Corporate Secretary, at the Company’s principal executive offices at 2440 Mall Drive, Charleston, South Carolina 29406 on or before November 30, 2012; and (ii) satisfy all of the requirements of, and not otherwise be permitted to be excluded under, Rule 14a-8 promulgated by the SEC and our Bylaws. To ensure prompt receipt by the Company, the Company recommends that such proposals be sent certified mail, return receipt requested.

Certificate of Incorporation and Bylaws Deadline

The Company’s Certificate of Incorporation and Bylaws provide that, in order for a shareholder to make nominations for the election of directors or proposals for business to be brought before the annual meeting, a shareholder must deliver notice of such nominations and/or proposals to the Corporate Secretary not less than 30 days nor more than 60 days prior to the date of the annual meeting; provided, that if less than 31 days’ notice of the date of the annual meeting is given to shareholders, such notice must be received no later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was provided to shareholders. A copy of the Certificate of Incorporation and Bylaws may be obtained from the Company. Shareholders may recommend qualified director candidates by writing to Robert L. Davis, Executive Vice President, Corporate Counsel and Corporate Secretary, First Financial Holdings, Inc., 2440 Mall Drive, Charleston, South Carolina 29406. Submissions should include information regarding a candidate’s background, qualifications, experience and willingness to serve as a director. To ensure prompt receipt by the Company, the proposal should be sent certified mail, return receipt requested. Proposals must comply with our Bylaws related to shareholder proposals and with SEC Rule 14a-8 in order to be included in our proxy materials for the 2013 annual meeting of shareholders.

Item 6. Exhibits




EXHIBIT INDEX

Exhibit Number	Description



31.1	Rule 13a-14(a)/15(d)-149a) Certificate of Chief Executive Officer

31.2	Rule 13a-14(a)/15(d)-149a) Certificate of Chief Financial Officer

32	Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer

101*	The follow ing material from First Financial’s Form 10-Q for the quarterly period ended September 30, 2012, formatted in Extensible Business Reporting Language (“XBRL”): 1) Consolidated Balance Sheets, 2) Consolidated Statements of Operations, 3) Consolidated Statement of Comprehensive Income, 4) Consolidated Statements of Changes in Shareholders’ Equity, 5) Consolidated Statements of Cash Flow s, and 6) Notes to Consolidated Financial Statements

* In addition to and not in lieu of any other relief granted by the SEC as a result of Hurricane Sandy, in accordance with the temporary hardship exemption provided by Rule 201 of Regulation S-T, the date by which the interactive data file was originally required to be submitted has been extended by six business days.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, First Financial Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FIRST FINANCIAL HOLDINGS, INC.

Date: November 9, 2012	/s/ Blaise B. Bettendorf

	Blaise B. Bettendorf
	Executive Vice President and Chief Financial Officer
	(Duly Authorized Officer and Principal Financial and Accounting Officer)

FIRST FINANCIAL HOLDINGS INC /DE/ - FORM 10-Q - November 9, 2012

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FIRST FINANCIAL HOLDINGS INC /DE/ Reports