First Community Bankshares in Bluefield, Va., found itself negotiating one-on-one with Surrey Bancorp in Mount Airy, N.C., after another potential bidder backed out early in the process.
The $3.6 billion-asset First Community agreed in November to buy the $500 million-asset Surrey for $113.2 million in stock in a deal expected to close in the second quarter.
First Community initially expressed interest in Surrey last summer, around the time Surrey was hiring an investment bank to explore potential merger partners, according to a regulatory filing tied to the pending merger. The investment bank contacted four potential acquirers, but only First Community and another, unnamed bank signed nondisclosure agreements.
Surrey’s management had in-person meetings in August with senior management at First Community and the other bank. Each bank was given a Sept. 9 deadline to submit an indication of interest.
The unnamed bank backed out, stating that it “was unable to offer a price that Surrey would find acceptable,” while adding that it would be willing to directly negotiate if Surrey was “dissatisfied with the outcome of the current bid process.”
First Community’s initial indication of interest was an all-stock offer valued at $96.3 million. Surrey’s board, at a Sept. 13 meeting, unanimously voted to negotiate a definitive agreement. The banks agreed to a 60-day exclusivity period.
The first draft of the merger agreement was sent to Surrey on Oct. 17. After First Community realized that transactional costs would be $750,000 more than first projected, the banks lowered the exchange ratio slightly.
First Community’s stock price increased by 20% between the time of the indication of interest and the adjusted exchange ratio.
Surrey’s board approved the deal on Nov. 13, while First Community’s directors signed off on it four days later. The deal, which was announced on Nov. 18, priced Surrey at 194% of its tangible book value.
Surrey has seven branches, $244 million of loans and $436 million of deposits. It also has a government-guaranteed lending program.
First Community plans to cut about 40% of Surrey’s annual noninterest expenses. It expects to incur $8.9 million of merger-related expenses.
First Community said it expects the deal to generate mid-single-digit earnings accretion. It should take a little more than two years for First Community to earn back any dilution to its tangible book value.
Ted Ashby, Surrey’s CEO, and Robert Moody are expected to join First Community’s board.
First Community entered into a 12-month consulting agreement with Ashby that will pay him $12,500 a month, subject to adjustment.
Peter Pequeno, Surrey’s president, has been offered the position of regional manager of First Community Bank.