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Business Combinations
 6 Months Ended
Jun. 30, 2012
Business Combinations [Abstract]  
Business Combinations

Note 3. Business Combinations

The Company accounts for business combinations under FASB ASC 805 which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures, exclusive of the loss share agreements with the Federal Deposit Insurance Corporation (the “FDIC”). The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest, and other cash flows. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans exhibit evidence of credit deterioration when it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration, as of the purchase date, may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the amount deemed paid for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable yield). The Company records a discount on these loans at acquisition to record them at their realizable cash flows. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. In accordance with FASB ASC Topic 310-30, the Company aggregated loans that have common risk characteristics into pools within the following loan categories: construction and development, commercial and industrial, commercial real estate, consumer, home equity lines of credit, residential real estate – 1st lien, residential real estate – 2nd lien, and lines of credit.

Purchased performing loans are recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments, as accounted for under the contractual cash flow method of accounting. The fair value adjustment is accreted as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition. In accordance with GAAP, there was no carryover of previously established allowance for loan losses on acquired portfolios.

Peoples Bank of Virginia

On May 31, 2012, the Company completed the acquisition of Peoples Bank of Virginia (“Peoples”), a commercial bank headquartered in Richmond, Virginia. At acquisition, Peoples had total assets of $276.88 million, total loans of $184.84 million, total deposits of $232.75 million, and common equity of $43.38 million. The transaction was accounted for under the purchase method of accounting and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. The acquisition expands the Company’s existing presence in the Richmond, Virginia market by four branches and affords the opportunity to realize certain operating cost savings.

Peoples’ shareholders received $6.08 in cash and 1.07 shares of the Company’s Common Stock for each share of Peoples’ common stock resulting in a purchase price of approximately $40.28 million, which includes Common Stock valued at $26.47 million and total cash consideration of $12.26 million. In connection with the transaction, the Company issued 2,157,005 shares of Common Stock valued based on the five-day variable weighted average price of $12.27 for the two days immediately preceding, two days immediate proceeding, and including May 31, 2012. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in an addition to goodwill of $9.02 million. Because the consideration paid was greater than the net fair value of the assets acquired and liabilities assumed, the Company recorded goodwill as part of the acquisition. The Company does not expect any goodwill recorded in connection with the acquisition to be deductible for tax purposes.

The Company estimated the fair value of assets acquired and liabilities assumed using expected cash flows discounted at appropriate rates of interest. The estimated fair values, including identifiable intangible assets, are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

 

The consideration transferred and the net assets acquired in connection with the Peoples acquisition are presented as of the acquisition date:

 

         
(Amounts in thousands, except per share data)      

Consideration

        

Cash consideration

   $ 12,259  

Common stock — 2,157,005 shares

     26,469  

Cash in lieu of fractional shares

     2  

Stock option consideration

     1,547  
   

 

 

  

Fair value of consideration paid

   $ 40,277  
   

 

 

  

Identifiable assets

        

Cash and cash equivalents

   $ 81,834  

Securities

     2,917  

Loans

     166,609  

Property, plant, and equipment

     3,434  

Other assets

     11,354  
   

 

 

  

Identifiable assets

     266,148  

Identifiable liabilities

        

Total deposits

     234,146  

Other liabilities

     741  
   

 

 

  

Identifiable liabilities

     234,887  

Identifiable net assets acquired

     31,261  
   

 

 

  

Goodwill recorded for acquisition

   $ 9,016  
   

 

 

  

The Company is currently in the process of identifying the purchased performing and credit impaired loans from the Peoples acquisition; therefore, disclosures related to the division of the purchased loans have been omitted in this current quarterly filing.

 

The Company’s operating results for the three and six months ended June 30, 2012, include the impact of the Peoples acquisition since May 31, 2012. The following table presents unaudited proforma information as if the acquisition had occurred on January 1, 2011. The information presented does not necessarily reflect the results of operation that would have occurred had the acquisition been completed at the beginning of each fiscal period, nor does it indicate future consolidated results. For the three and six months ended June 30, 2012, the Company incurred merger related expenses related to the Peoples acquisition of $2.83 million and $2.99 million, respectively.

 

                                 
    For the Six Months Ended June 30, 2012  
(Amounts in thousands)   First Community     Peoples     Proforma
Adjustments		     Proforma
Combined		  

Interest income

   $ 46,013     $ 5,479     $ —       $ 51,492  

Interest expense

     9,212       1,521       (122 )      10,611  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income

     36,801       3,958       122       40,881  

Provision for loan losses

     2,542       100       —         2,642  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provision for loan losses

     34,259       3,858       122       38,239  

Noninterest income

     16,287       254       —         16,541  

Noninterest expense (1)

     33,188       2,932       2,988       39,108  
   

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) before taxes

     17,358       1,180       (2,866 )      15,672  

Income tax expense (benefit)

     5,852       397       (1,133 )      5,116  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     11,506       783       (1,733 )      10,556  

Dividends on preferred stock

     566       —         —         566  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) available to common shareholders

   $ 10,940     $ 783     $ (1,733 )    $ 9,990  
   

 

 

    

 

 

    

 

 

    

 

 

  
   
    For the Six Months Ended June 30, 2011  
    First Community     Peoples     Proforma
Adjustments		     Proforma
Combined		  

Interest income

   $ 47,925     $ 6,337     $ —       $ 54,262  

Interest expense

     11,896       1,800       (122 )      13,574  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income

     36,029       4,537       122       40,688  

Provision for loan losses

     4,691       750       —         5,441  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provision for loan losses

     31,338       3,787       122       35,247  

Noninterest income

     20,862       226       —         21,088  

Noninterest expense (1)

     35,801       2,489       2,988       41,278  
   

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) before taxes

     16,399       1,524       (2,866 )      15,057  

Income tax expense (benefit)

     4,920       513       (1,133 )      4,300  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     11,479       1,011       (1,733 )      10,757  

Dividends on preferred stock

     131       —         —         131  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) available to common shareholders

   $ 11,348     $ 1,011     $ (1,733 )    $ 10,626  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) Proforma adjustments in noninterest expense result from merger related expense.

Waccamaw Bank

On June 8, 2012, the Company’s wholly-owned subsidiary, First Community Bank (the “Bank”), entered into a Purchase and Assumption Agreement (the “Agreement”) with loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of Waccamaw Bank (“Waccamaw”), a full service community bank, headquartered in Whiteville, North Carolina. Waccamaw operated sixteen branches in total throughout North Carolina and South Carolina.

Pursuant to the Agreement, the Bank received a discount of $15.00 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. Most of the loans and foreclosed real estate purchased are covered by loss share agreements between the FDIC and the Bank. Under the loss share agreements, the FDIC will cover 80% of loan and foreclosed real estate losses and certain collection costs. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. The loss sharing agreement applicable to single family assets, both loans and OREO, provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The loss share agreement applicable to commercial assets, both loans and OREO, provides for FDIC loss sharing for five years and Bank reimbursement of recoveries to the FDIC for eight years. As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the loss sharing based on the adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferable with them in the event of disposal. The balance of the FDIC indemnification asset increases and decreases as the expected and actual cash flows from the covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC indemnification asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreement. This discount will be accreted to non-interest income over future periods.

The Bank did not immediately acquire all the real estate, furniture, and equipment of Waccamaw as a part of the purchase agreement. The bank purchased two properties at acquisition; however, the Bank has the option to purchase the remaining real estate, furniture, and equipment from the FDIC. The term of this option expires approximately 30 days from the date of the acquisition; additionally, the Bank has approximately 90 days to assume or repudiate leases for leased branch properties.

As of June 30, 2012, there have been no adjustments or changes to the initial fair values related to the Waccamaw acquisition. The purchase accounting adjustments and the loss sharing arrangement with the FDIC significantly impact the effects of the acquired entity on the ongoing operations of the Company. Additionally, disclosure of pro forma financial information is made more difficult by the nature of Waccamaw’s operations prior to the date of the combination. Accordingly, no pro forma financial information has been presented.

Goodwill of $7.13 million was recorded as part of the acquisition of Waccamaw. The amount of the goodwill was equal to the amount by which the fair value of liabilities assumed exceeded the fair value of assets acquired, and resulted from the discount bid on the assets acquired and the impact of the FDIC loss share agreements. For the three and six months ended June 30, 2012, the Company incurred merger related expenses related to the Waccamaw acquisition of $594 thousand.

 

The following table presents the assets acquired and liabilities assumed as of June 8, 2012, as recorded by Waccamaw on the acquisition date and as adjusted for purchase accounting adjustments:

 

                         
(Amounts in thousands)   Balances Acquired
from FDIC		     Fair Value and
Purchase  Adjustments		     Recorded
Investment		  

Assets

                        

Cash and due from banks (1)

   $ 44,809     $ —       $ 44,809  

Interest-bearing deposits in banks

     40,140       —         40,140  
   

 

 

    

 

 

    

 

 

  

Total cash and cash equivalents

     84,949       —         84,949  

Securities available-for-sale

     59,816       (194 )      59,622  

Loans held for investment, net of unearned income

     318,317       (65,464 )      252,853  

FDIC receivable under loss share agreements

     —         52,067       52,067  

Property, plant, and equipment, net

     4,102       —         4,102  

Other real estate owned

     9,347       (3,959 )      5,388  

Interest receivable

     1,363       —         1,363  

Other assets

     5,264       —         5,264  
   

 

 

    

 

 

    

 

 

  

Total assets

   $ 483,158     $ (17,550 )    $ 465,608  
   

 

 

    

 

 

    

 

 

  

Liabilities

                        

Deposits:

                        

Noninterest-bearing

   $ 47,892     $ —       $ 47,892  

Interest-bearing

     366,233       912       367,145  
   

 

 

    

 

 

    

 

 

  

Total deposits

     414,125       912       415,037  

Securities sold under agreements to repurchase

     17,042       3,040       20,082  

FHLB advances

     35,000       2,271       37,271  

Other borrowings

     345       —         345  
   

 

 

    

 

 

    

 

 

  

Total liabilities

   $ 466,512     $ 6,223     $ 472,735  
   

 

 

    

 

 

    

 

 

  

Net assets acquired over (under) liabilities assumed

   $ 16,646     $ (23,773 )    $ (7,127 ) 
   

 

 

    

 

 

    

 

 

  

Excess of net assets acquired over liabilities assumed

   $ 16,646                  
   

 

 

                  

Aggregate fair value and purchase adjustments

           $ (23,773 )         
           

 

 

    

 

 

  

Goodwill on acquisition

                   $ 7,127  
                   

 

 

  

 

(1) Includes $17.27 million transferred to the FDIC in connection with the acquisition.

The Company is currently in the process of identifying the purchased performing and credit impaired loans from the Waccamaw acquisition; therefore, disclosures related to the division of the purchased loans have been omitted in this current quarterly filing.

The following table presents fair value of loans acquired from Peoples and Waccamaw at their acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

 

                 
    Peoples     Waccamaw  
(Amounts in thousands)   May 31, 2012     June 8, 2012  

Contractually required principal payments receivable

   $ 185,624     $ 328,939  

Fair value of adjustment for credit, interest rate, and liquidity

     (19,015 )      (76,086 ) 
   

 

 

    

 

 

  

Fair value of loans receivable

   $ 166,609     $ 252,853