Note 2.

Business Combinations and Branching Activity

The Company accounts for business combinations under FASB 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. 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. 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 – 1^st lien, residential real estate – 2^nd lien, and lines of credit.

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 $275.76 million, total loans of $184.84 million, total deposits of $232.75 million, and common equity of $42.27 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 $10.21 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		10,295

Identifiable assets	$	264,949


Identifiable liabilities
Total deposits		234,146
Other liabilities		741

Identifiable liabilities		234,887
Identifiable net assets acquired		30,062

Goodwill recorded for acquisition	$	10,215

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
	Purchased Performing		Purchased Impaired		Total
(Amounts in thousands)
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 acquired at fair value	$	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:


	May 31, 2012
(Amounts in thousands)
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.


	May 31, 2012
(Amounts in thousands)
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 year ended December 31, 2012, include the impact of the Peoples acquisition since May 31, 2012. The following table presents proforma information as if the acquisition had occurred on January 1, 2011. Proforma adjustments totaling $1.32 million included $1.49 million related to loan interest income, $547 thousand related to the reduction of time deposit interest expense, and $713 thousand related to income tax expense. 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. The Company incurred merger related expenses related to the Peoples acquisition of $3.33 million during the year ended December 31, 2012.


	Actual Since Acquisition through December 31, 2012		Proforma Year Ended December 31,
	Actual Since Acquisition through December 31, 2012		2012		2011
(Amounts in thousands)
Total revenues	$	6,906	$	151,201	$	144,170
Net income		2,635		28,263		22,743

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 $15.0 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 share agreement applicable to single family assets, including 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, including 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 share agreements 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 share 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 share agreements. This discount will be accreted to non-interest income over future periods.

The purchase accounting adjustments and the loss share arrangements 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 $10.90 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. The Company incurred merger related expenses related to the Waccamaw acquisition of $1.76 million during the year ended December 31, 2012.

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		60,002		—			60,002
Loans held for investment, net of unearned income		318,348		(65,498	)		252,850
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	$	483,375	$	(19,896	)	$	463,479


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		1,646			1,991

Total Liabilities	$	466,512	$	7,869		$	474,381

Net assets acquired over (under) liabilities assumed	$	16,863	$	(27,765	)	$	(10,902	)

Excess of net assets acquired over liabilities assumed	$	16,863

Aggregate fair value and purchase adjustments			$	(27,765	)

Goodwill on acquisition						$	10,902

(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	$	7,314	$	27,004
Commercial and industrial		9,027		1,817		10,844
Multi-family residential		2,462		926		3,388
Non-farm, non-residential		45,768		24,440		70,208
Agricultural		321		2		323
Farmland		1,522		1,045		2,567

Total commercial loans		78,790		35,544		114,334
Consumer real estate loans
Home equity lines		21,439		68,081		89,520
Single family owner occupied		25,509		13,026		38,535

Total consumer real estate loans		46,948		81,107		128,055
Consumer and other loans
Consumer loans		9,540		921		10,461

Loans acquired at fair value	$	135,278	$	117,572	$	252,850


	June 8, 2012
(Amounts in thousands)
Contractually required principal payments receivable	$	151,883
Fair value of adjustment for credit, interest rate, and liquidity		(16,605	)

Fair value of performing loans receivable	$	135,278

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.


	June 8, 2012
(Amounts in thousands)
Contractually required payments receivable	$	211,042
Nonaccretable difference		(66,989	)

Cash flows expected to be collected		144,053
Accretable difference		(26,481	)

Fair value of acquired impaired loans	$	117,572

Greenpoint

Greenpoint has acquired seven insurance agencies and sold three since its acquisition by the Company in 2007. During 2012, Greenpoint did not acquire or sell any insurance agencies; however, $366 thousand was received from earn-out payments related to agency sales in 2011. During 2011, Greenpoint received aggregate cash of $1.58 million from the sale of two insurance agencies. During 2010, Greenpoint paid aggregate cash consideration of $190 thousand in connection with the acquisition of one insurance agency. For acquisitions that occurred prior to 2009, terms call for issuing further cash consideration of $1.31 million if certain operating targets are met. If those targets are met, the value of the consideration ultimately paid will be added to the costs of the acquisitions. Acquisitions that occurred prior to 2012 added $692 thousand, $680 thousand, and $1.17 million of goodwill and intangibles to the Company’s balance sheet in 2012, 2011, and 2010, respectively. As of December 31, 2012, the acquisition of Greenpoint, and subsequent agency acquisitions and sales, have added $9.82 million of goodwill and intangibles to the Company’s balance sheet, net of corresponding amortization of $1.96 million.

Net Cash Paid (Received) for Acquisitions

The following table summarizes the net cash provided by or used in acquisitions and divestitures during the three years ended December 31, 2012. Net cash paid (received) for acquisitions include transactions that occurred during the current and prior years.


	2012			2011			2010
(Amounts in thousands)
Fair value of investments acquired	$	62,919		$	—		$	—
Fair value of loans acquired		419,320			—			—
Fair value of premises and equipment acquired		7,535			—			—
Fair value of other assets		255,924			—			—
Fair value of deposits assumed		(649,184	)		—			—
Fair value of other liabilities assumed		(60,085	)		—			—
Purchase price in excess of net assets acquired		21,810			680			1,650

Total purchase price		58,239			680			1,650

Less non-cash purchase price		26,469			—			768
Less cash acquired		184,053			—			—

Net cash (received) paid for acquisition	$	(152,283	)	$	680		$	882


Book value of assets sold	$	—		$	(1,678	)	$	—
Book value of liabilities sold		—			170			—
Sales price in excess of net liabilities assumed		—			(67	)		—

Total sales price		—			(1,575	)		—

Add cash on hand sold		—			—			—
Less amount due remaining on books		—			60			—

Net cash paid (received) for divestiture	$	—		$	(1,515	)	$	—