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Acquisitions - Completed and Pending
 12 Months Ended
Dec. 31, 2011
Acquisitions - Completed And Pending  
Acquisitions - Completed and Pending

Note 2. Acquisitions – Completed and Pending

 

The Company did not complete any significant acquisitions during 2010. The Company completed the acquisitions described below during 2009 and 2011. The results of each acquired company/branch are included in the Company’s results beginning on its respective acquisition date.

 

(1) On June 19, 2009, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (FDIC), as receiver for Cooperative Bank, in Wilmington, North Carolina. Earlier that day, the North Carolina Commissioner of Banks issued an order requiring the closure of Cooperative Bank and appointing the FDIC as receiver. According to the terms of the agreement, the Bank acquired all deposits (except certain brokered deposits) and borrowings, and substantially all of the assets of Cooperative Bank and its subsidiary, Lumina Mortgage. All deposits were assumed by the Bank with no losses to any depositor.

 

Cooperative Bank operated through twenty-one branches in North Carolina and three branches in South Carolina, with assets totaling approximately $959 million and approximately 200 employees.

 

The loans and foreclosed real estate purchased are covered by two loss share agreements between the FDIC and the Bank, which affords the Bank significant loss protection. Under the loss share agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to $303 million and 95% of losses in excess of that amount. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.

 

The Bank received a $123 million discount on the assets acquired and paid no deposit premium. The acquisition was accounted for under the purchase method of accounting in accordance with relevant accounting guidance. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values were subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values became available. The Company recorded an estimated receivable from the FDIC in the amount of $185.1 million as of June 30, 2009, which represented the FDIC’s portion of the losses that were expected to be incurred and reimbursed to the Company.

 

An acquisition gain totaling $67.9 million resulted from the acquisition and is included as a component of noninterest income in the Company’s statement of income. In the Company’s filings for the second quarter 2009, this gain was reported as being $53.8 million. During the third and fourth quarters of 2009, the Company obtained third-party appraisals for the majority of Cooperative Bank’s collateral dependent problem loans. Overall, the appraised values were higher than the Company’s original estimates made as of the acquisition date. In addition, during the third and fourth quarters of 2009, the Company received payoffs related to certain loans for which losses had been anticipated. Accordingly, as required by accounting guidance, the Company retrospectively adjusted the fair value of the loans acquired for these factors, which resulted in a higher gain being reflected in the second quarter of 2009.

  

The statement of net assets acquired as of June 19, 2009 and the resulting gain (as adjusted) are presented in the following table.

 

($ in thousands)   As Recorded by Cooperative Bank   Fair Value Adjustments   As Recorded by the Company
Assets                        
Cash and cash equivalents   $ 66,096       —       66,096  
Securities     40,189       —       40,189  
Presold mortgages     3,249       —       3,249  
Loans     828,958       (227,854 )(a)     601,104  
Core deposit intangible     —       3,798 (b)     3,798  
FDIC indemnification asset     —       185,112 (c)     185,112  
Foreclosed properties     15,993       (3,534 )(d)     12,459  
Other assets     4,178       (137 )(e)     4,041  
Total     958,663       (42,615 )     916,048  
                         
Liabilities                        
Deposits   $ 706,139       5,922 (f)     712,061  
Borrowings     153,056       6,409 (g)      159,465  
Other     2,227       160 (e)     2,387  
Total     861,422       12,491       873,913  
                         
Excess of assets received over liabilities   $ 97,241       (55,106 )     42,135  
Less:  Asset discount     (123,000 )                
Cash received from FDIC at closing     25,759               25,759  
                         
Total gain recorded                   $ 67,894  

  

Explanation of Fair Value Adjustments

 

  (a) This estimated fair value adjustment was necessary as of the acquisition date to write down Cooperative Bank’s book value of loans to the estimated fair value as a result of future expected loan losses.
     
  (b) This estimated fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm.  This amount was recorded by the Company as an identifiable intangible asset and will be amortized as an expense on a straight-line basis over the average life of the core deposit base, which is estimated to be 8 years.
     
  (c) This estimated fair value adjustment represents the amount that the Company will receive from the FDIC under its loss share agreements as a result of future loan losses.
     
  (d) This estimated fair value adjustment was necessary to write down Cooperative Bank’s book value of foreclosed real estate properties to their estimated fair value as of the acquisition date.
     
  (e) These estimated fair value adjustments are other immaterial adjustments made to acquired assets and assumed liabilities to reflect fair value.
     
  (f) This estimated fair value adjustment was recorded because the weighted average interest rate of Cooperative Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition.  This amount was amortized to reduce interest expense on a declining basis over the average life of the portfolio of approximately 15 months.
     
  (g) This estimated fair value adjustment was recorded because the interest rates of Cooperative Bank’s fixed rate borrowings exceeded current interest rates on similar borrowings.  This amount was realized shortly after the acquisition by prepaying the borrowings at a premium, and thus there will be no future amortization related to this adjustment.

  

The operating results of the Company for the year ended December 31, 2009 include the operating results of the acquired assets and assumed liabilities since the acquisition date of June 19, 2009.

 

(2) On January 21, 2011, the Bank entered into a loss share purchase and assumption agreement with the FDIC, as receiver for The Bank of Asheville, Asheville, North Carolina. Earlier that day, the North Carolina Commissioner of Banks issued an order for the closure of The Bank of Asheville and appointed the FDIC as receiver. According to the terms of the agreement, First Bank acquired substantially all of the assets and liabilities of The Bank of Asheville. All deposits were assumed by First Bank with no losses to any depositor.

 

The Bank of Asheville operated through five branches in Asheville, North Carolina with total assets of approximately $198 million and 50 employees.

 

Substantially all of the loans and foreclosed real estate purchased are covered by loss share agreements between the FDIC and First Bank, which afford First Bank significant loss protection. Under the loss share agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.

 

First Bank received a $23.9 million discount on the assets acquired and paid no deposit premium. The acquisition was accounted for under the purchase method of accounting in accordance with relevant accounting guidance. The statement of net assets acquired as of January 21, 2011 and the resulting gain are presented in the following table. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. The Company recorded an estimated receivable from the FDIC in the amount of $42.2 million, which represents the fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed to the Company.

 

An acquisition gain totaling $10.2 million resulted from the acquisition and is included as a component of noninterest income in the statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed.

 

The statement of net assets acquired as of January 21, 2011 and the resulting gain that was recorded are presented in the following table.

 

($ in thousands)   As Recorded by The Bank of Asheville   Fair Value Adjustments   As Recorded by the Company
Assets                        
Cash and cash equivalents   $ 27,297       —       27,297  
Securities     4,461       —       4,461  
Loans     153,994       (51,726 ) (a)     102,268  
Core deposit intangible     —       277 (b)     277  
FDIC indemnification asset     —         42,218 (c)     42,218  
Foreclosed properties     3,501       (2,159 ) (d)     1,342  
Other assets     1,146       (370 ) (e)     776  
Total     190,399       (11,760 )     178,639  
                         
Liabilities                        
Deposits   $ 192,284       460 (f)     192,744  
Borrowings     4,004       77 (g)     4,081  
Other     111       1,447 (h)     1,558  
Total     196,399       1,984       198,383  
                         
Excess of liabilities received over assets   $ (6,000 )     (13,744 )     (19,744 )
Less:  Asset discount     (23,940 )                
Cash received/receivable from FDIC at closing     29,940               29,940  
                         
Total gain recorded                   $ 10,196  

 

Explanation of Fair Value Adjustments

 

  (a) This estimated adjustment is necessary as of the acquisition date to write down The Bank of Asheville’s book value of loans to the estimated fair value as a result of future expected loan losses.
     
  (b) This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm.  This amount was recorded by the Company as an identifiable intangible asset and will be amortized as an expense on a straight-line basis over the average life of the core deposit base, which is estimated to be seven years.
     
  (c) This adjustment is the estimated fair value of the amount that the Company expects to receive from the FDIC under its loss share agreements as a result of future loan losses.
     
  (d) This is the estimated adjustment necessary to write down The Bank of Asheville’s book value of foreclosed real estate properties to their estimated fair value as of the acquisition date.
     
  (e) This is an immaterial adjustment made to reflect fair value.
     
  (f) This fair value adjustment was recorded because the weighted average interest rate of The Bank of Asheville’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition.  This amount will be amortized to reduce interest expense on a declining basis over the life of the portfolio of approximately 48 months.
     
  (g) This fair value adjustment was recorded because the interest rates of The Bank of Asheville’s fixed rate borrowings exceeded current interest rates on similar borrowings.  This amount was realized shortly after the acquisition by prepaying the borrowings at a premium and thus there will be no future amortization related to this adjustment.
     
  (h) This adjustment relates primarily to the estimate of what the Company will owe to the FDIC at the conclusion of the loss share agreements based on a pre-established formula set forth in those agreements that is based on total expected losses in relation to the amount of the discount bid.

 

The operating results of the Company for the year ended December 31, 2011 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of January 21, 2011. Due primarily to the significant amount of fair value adjustments and the FDIC loss share agreements now in place, historical results of The Bank of Asheville are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.

 

(3) At December 31, 2011, the Company had one pending acquisition. On October 21, 2011, the Company entered into a Branch Purchase and Assumption Agreement (“The Agreement”) with Waccamaw Bankshares, Inc., and its subsidiary, Waccamaw Bank. The Agreement provides for First Bank to acquire eleven branches from Waccamaw Bank, which includes assuming all deposits, selected performing loans, and all premises and equipment. Deposits total approximately $180 million (unaudited) and loans total approximately $98 million (unaudited).

 

The Agreement provides for the deposits to be purchased at a premium that varies by account type. The estimated blended premium is approximately 1.5% of total deposits (unaudited).

 

The Agreement provides for loans to be purchased at par (the amount of principal outstanding and interest receivable) and for premises and equipment to be purchased at net book value. Approximately $31 million of the $98 million (unaudited) in loans being acquired are subject to a provision in the Agreement allowing First Bank to put the loans back to Waccamaw Bank at par value for any reason within 20 months following the closing date of the transaction. The Agreement is subject to regulatory approval and other customary conditions. No assurance can be provided that this Agreement will be approved.