XML 18 R9.htm IDEA: XBRL DOCUMENT

Note 2 - Divestitures and Acquisitions

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]

Note 2. Divestitures and Acquisitions

On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank (the "Emporia Branch Sale"). The sale included the branch real estate, certain personal property, and all deposits associated with the branch. There were no loans included in the transaction. Benchmark paid a deposit premium of two percent for certain deposits. In addition, Benchmark paid $1.50 million for branch real estate and certain personal property. Total deposits acquired by Benchmark totaled $61.05 million. The deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. The Company recognized a gain of $1.66 million from the Emporia Branch Sale.

On November 18, 2022, the Company and NC-based Surrey Bancorp ("Surrey"), parent company of Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. Under the terms of the agreement and plan of merger, each share of Surrey common stock immediately converted into the right to receive 0.7159 shares of the Company's common stock. The transaction was consummated on April 21, 2023. The total purchase price for the transaction was $71.37 million.

The strategic combination of the Company and Surrey united two high-performing community banks that historically produced returns on average assets well-above one percent and efficiency ratios below sixty percent while maintaining low-risk profiles. In addition, the combination will create a leading community banking institution in northwestern North Carolina and southwestern Virginia. Significant synergies and efficiencies are anticipated to be gained from the acquisition. The Company's commercial loan customers are anticipated to benefit from Surrey's government guarantee lending expertise, while Surrey's customers will benefit from additional scale, increased lending limits, and enhanced product and technology offerings.

The Surrey transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition. The Company incurred a total of $2.99 million in merger expenses related to the Surrey transaction, $596 thousand was recorded in the last quarter of 2022 and $2.39 million in the first nine months of 2023. These costs were primarily related to data conversion, investment banking fees, and legal fees.

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the fair value of the liabilities assumed. The Surrey acquisition resulted in the Company recognizing $14.38 million in goodwill.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. Core deposit intangibles for the Surrey transaction totaled $12.70 million.

When loans are acquired they are identified as either purchased credit deteriorated PCD or non-PCD. PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date. The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise. Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances. The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans. The fair value of purchased loans with credit deterioration was $101.42 million on the date of acquisition with the gross contractual amount totaling $111.22 million. The Company estimates that $2.01 million of contractual cash flows specific to the purchased loans with credit deterioration will not be collected. Non purchased credit deteriorated loans acquired had a fair value of $137.55 million with a gross contractual value of $143.55 million.

		*As recorded by*				*Fair Value*					*As recorded by*
(Amounts in thousands)		*Surrey*				*Adjustments*					*the Company*
Assets
Cash and cash equivalents		$	176,700			$	-				$	176,700
Securities available for sale			22,027				(1,093	)	( a )			20,934
Loans held for investment, net of allowance and mark			251,944				(12,864	)	( b )			239,080
Premises and equipment			5,501				774		( c )			6,275
Other assets			10,787				(229	)	( d ), ( e )			10,558
Intangible assets			-				12,700		( f )			12,700
Total assets		$	466,959			$	(712	)			$	466,247

LIABILITIES
Deposits:
Noninterest-bearing		$	158,389			$	-				$	158,389
Interest-bearing			246,460				(1,214	)	( g )			245,246
Total deposits			404,849				(1,214	)				403,635
Long term debt			-				-					-
Other liabilities			6,004				(381	)	( h )			5,623
Total liabilities			410,853				(1,595	)				409,258

Net identifiable assets acquired over liabilities assumed			56,106				883					56,989

Goodwill			-				14,381					14,381
Net assets acquired over liabilities assumed		$	56,106			$	15,264				$	71,370

Consideration:
First Community Bankshares, Inc. common stock issued												2,996,786
Purchase price per share of the Company's common stock											$	23.81
Fair value of Company common stock issued												71,354
Cash paid for fractional shares												16
Fair Value of total consideration transferred											$	71,370

Explanation of fair value adjustments:

(a)

Adjustment reflects the fair value adjustment based on the Company's evaluation of the acquired investment portfolio.

(b)

Adjustment reflects the fair value adjustments of $(15.80) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for credit losses and deferred loans fees of $2.94 million as recorded by Surrey.

(c)

Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.

(d)

Adjustment reflects the fair value adjustment based on the Company's evaluation of stocks with other banks of $47 thousand.

(e)

Adjustment to record the deferred tax asset related to the fair value adjustments $(177) thousand.

(f)

Adjustment to record the core deposit intangible on the acquired deposit accounts.

(g)

Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.

(h)

Adjustment to reclass deferred tax asset $(99) thousand, goodwill $(282) thousand, federal income tax payable $(389) thousand, and state income tax payable $8 thousand.

Comparative and Pro Forma Financial Information for Acquisitions

The following table discloses the financial impact of the merger. The table presents certain pro forma information as if Surrey had been acquired on January 1, 2022. These results combine the historical results of Surrey in the Company's consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2022.

No adjustments have been made to the pro formas to eliminate the recovery of provision for credit losses for the quarter and year-to-date periods ended September 30, 2022 of Surrey in the amounts of $37 thousand and $1.12 million, respectively . The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:

		*ProForma*
		*Three months ended September 30,*								*Nine Months Ended September 30,*
(Dollars in thousands)		*2023*				*2022*				*2023*				*2022*
Total revenues (net interest income plus noninterest income)		$	42,969			$	44,669			$	122,611			$	123,566
Net adjusted income available to the common shareholder		$	14,640			$	15,554			$	38,493			$	39,535