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Business Combinations
 9 Months Ended
Sep. 30, 2012
Business Combinations [Abstract]  
Business Combinations

Note 3. Business Combinations

The Company accounts for business combinations under FASB Accounting Standard Codification (“ASC”) Topic 805, “Business Combinations”, which requires the use of the acquisition method of accounting. In accordance with the acquisition method of accounting, all identifiable assets acquired, including loans, are recorded at fair value. No allowance is recorded on the acquisition date for acquired loans because the fair values of the loans incorporate assumptions regarding credit risk. Acquired loans 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 (“FDIC”). The fair value estimates associated with the loans include expected prepayments and the amount and timing of expected principal, interest, and other cash flows. Fair values are 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 purchase credit impaired 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 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 with an estimated fair value of $12.27 per share. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in an addition to goodwill of $9.10 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 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

     166,471  

Property, plant, and equipment

     3,432  

Other assets

     11,407  
   

 

 

  

Identifiable assets

     266,061  

Identifiable liabilities

        

Total deposits

     234,146  

Other liabilities

     741  
   

 

 

  

Identifiable liabilities

     234,887  

Identifiable net assets acquired

     31,174  
   

 

 

  

Goodwill recorded for acquisition

   $ 9,103  
   

 

 

  

The following table presents the carrying amount of acquired loans at May 31, 2012, which consist of loans with no credit deterioration, or performing loans, and loans with credit deterioration, or impaired loans.

 

                         
    May 31, 2012  
(Amounts in thousands)   Purchased
Performing		     Purchased
Impaired		     Total  

Commercial loans

                        

Construction, development, and other land

   $ 9,641     $ 9,426     $ 19,067  

Commercial and industrial

     17,583       2,418       20,001  

Multi-family residential

     2,111       3,152       5,263  

Non-farm, non-residential

     75,399       12,193       87,592  
   

 

 

    

 

 

    

 

 

  

Total commercial loans

     104,734       27,189       131,923  

Consumer real estate loans

                        

Home equity lines

     7,637       336       7,973  

Single family owner occupied

     18,767       5,078       23,845  
   

 

 

    

 

 

    

 

 

  

Total consumer real estate loans

     26,404       5,414       31,818  

Consumer and other loans

                        

Consumer loans

     2,730       —         2,730  
   

 

 

    

 

 

    

 

 

  

Loans held for investment, net of unearned income

   $ 133,868     $ 32,603     $ 166,471  
   

 

 

    

 

 

    

 

 

  

 

The following table presents the acquired performing loans receivable at the acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

 

         
(Amounts in thousands)   May 31, 2012  

Contractually required principal payments receivable

   $ 139,275  

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

     (5,407 ) 
   

 

 

  

Fair value of performing loans receivable

   $ 133,868  
   

 

 

  

The following table presents the acquired impaired loans receivable at acquisition. The Company has not noted any further deterioration in the acquired impaired loan portfolio.

 

         
(Amounts in thousands)   May 31, 2012  

Contractually required payments receivable

   $ 48,826  

Nonaccretable difference

     (12,823 ) 
   

 

 

  

Cash flows expected to be collected

     36,003  

Accretable difference

     (3,400 ) 
   

 

 

  

Fair value of acquired impaired loans

   $ 32,603  
   

 

 

  

 

The Company’s operating results for the three and nine months ended September 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 nine months ended September 30, 2012, the Company incurred merger related expenses related to the Peoples acquisition of $163 thousand and $3.15 million, respectively.

 

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

Interest income

   $ 74,343     $ 8,191     $ 1,663     $ 84,197  

Interest expense

     14,192       1,867       (371 )      15,688  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income

     60,151       6,324       2,034       68,509  

Provision for loan losses

     4,458       100       —         4,558  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provision for loan losses

     55,693       6,224       2,034       63,951  

Noninterest income

     27,459       383       —         27,842  

Noninterest expense (1)

     55,625       3,946       0       59,571  
   

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) before taxes

     27,527       2,661       2,034       32,222  

Income tax expense (benefit)

     9,868       —         303       10,171  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     17,659       2,661       1,731       22,051  

Dividends on preferred stock

     786       —         —         786  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) available to common shareholders

   $ 16,873     $ 2,661     $ 1,731     $ 21,265  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

                                 
    For the Nine Months Ended September 30, 2011  
    First
Community		     Peoples     Proforma
Adjustments		     Proforma
Combined		  

Interest income

   $ 70,975     $ 9,506     $ 1,663     $ 82,144  

Interest expense

     17,212       2,700       (371 )      19,541  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income

     53,763       6,806       2,034       62,603  

Provision for loan losses

     6,611       1,125       —         7,736  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provision for loan losses

     47,152       5,681       2,034       54,867  

Noninterest income

     28,928       339       —         29,267  

Noninterest expense (1)

     51,861       3,733       0       55,594  
   

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) before taxes

     24,219       2,287       2,034       28,540  

Income tax expense (benefit)

     7,422       770       303       8,495  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     16,797       1,517       1,731       20,045  

Dividends on preferred stock

     417       —         —         417  
   

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) available to common shareholders

   $ 16,380     $ 1,517     $ 1,731     $ 19,628  
   

 

 

    

 

 

    

 

 

    

 

 

  

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 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 and committed to purchase two properties during the 30-day option extended from the FDIC.

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 $11.66 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 nine months ended September 30, 2012, the Company incurred merger related expenses related to the Waccamaw acquisition of $482 thousand and $1.08 million, respectively.

 

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       —         59,816  

Loans held for investment, net of unearned income

     318,317       (67,686 )      250,631  

FDIC receivable under loss share agreements

     —         49,755       49,755  

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       (194 )      5,070  
   

 

 

    

 

 

    

 

 

  

Total assets

   $ 483,158     $ (22,084 )    $ 461,074  
   

 

 

    

 

 

    

 

 

  

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     $ (28,307 )    $ (11,661 ) 
   

 

 

    

 

 

    

 

 

  

Excess of net assets acquired over liabilities assumed

   $ 16,646                  
   

 

 

                  

Aggregate fair value and purchase adjustments

           $ (28,307 )         
           

 

 

    

 

 

  

Goodwill on acquisition

                   $ 11,661  
                   

 

 

  

 

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

 

The following table presents the carrying amount of acquired loans at June 8, 2012, which consist of loans with no credit deterioration, or performing loans, and loans with credit deterioration, or impaired loans.

 

                         
    June 8, 2012  
(Amounts in thousands)   Purchased
Performing		     Purchased
Impaired		     Total  

Commercial loans

                        

Construction, development, and other land

   $ 19,690     $ 6,524     $ 26,214  

Commercial and industrial

     9,027       1,817       10,844  

Multi-family residential

     2,462       926       3,388  

Non-farm, non-residential

     45,737       23,372       69,109  

Agricultural

     321       2       323  

Farmland

     1,522       1,045       2,567  
   

 

 

    

 

 

    

 

 

  

Total commercial loans

     78,759       33,686       112,445  

Consumer real estate loans

                        

Home equity lines

     21,439       68,081       89,520  

Single family owner occupied

     25,509       12,696       38,205  
   

 

 

    

 

 

    

 

 

  

Total consumer real estate loans

     46,948       80,777       127,725  

Consumer and other loans

                        

Consumer loans

     9,540       921       10,461  
   

 

 

    

 

 

    

 

 

  

Loans held for investment, net of unearned income

   $ 135,247     $ 115,384     $ 250,631  
   

 

 

    

 

 

    

 

 

  

The following table presents the acquired performing loans receivable at the acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

 

         
(Amounts in thousands)   June 8, 2012  

Contractually required principal payments receivable

   $ 151,852  

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

     (16,605 ) 
   

 

 

  

Fair value of performing loans receivable

   $ 135,247  
   

 

 

  

The following table presents the acquired impaired loans receivable at acquisition. The Company has not noted any further deterioration in the acquired impaired loan portfolio.

 

         
(Amounts in thousands)   June 8, 2012  

Contractually required payments receivable

   $ 211,042  

Nonaccretable difference

     (69,177 ) 
   

 

 

  

Cash flows expected to be collected

     141,865  

Accretable difference

     (26,481 ) 
   

 

 

  

Fair value of acquired impaired loans

   $ 115,384