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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Commission file number 000-19297
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction
of incorporation)
P.O. Box 989
Bluefield, Virginia
(Address of principal executive offices)
55-0694814
(I.R.S. Employer
Identification No.)
24605-0989
(Zip Code)
Registrant’s telephone number, including area code: (276) 326-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 par value
Name of exchange on which registered
NASDAQ Global Select
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. (cid:1) Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. (cid:1) Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (cid:1) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes (cid:1) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer (cid:1)
Accelerated filer
(cid:1) (Do not check if a smaller reporting company)
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:1) Yes No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.
Approximately $209.94 million based on the closing sales price at June 30, 2013.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date.
Class – Common Stock, $1.00 Par Value; 18,384,279 shares outstanding as of February 28, 2014.
Smaller reporting company
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 29, 2014, are incorporated by reference
in Part III of this Form 10-K.
(cid:1)
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We may make forward-looking statements in filings with the Securities and Exchange Commission (the “SEC”), including this Annual Report
on Form 10-K and the Exhibits hereto, filings incorporated by reference, reports to our shareholders, and other communications that we make
in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
represent our beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions. Such statements are subject to
significant risks, uncertainties, and change based on various factors, many of which are beyond our control. The words “may,” “could,”
“should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and other similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from that
expressed in such forward-looking statements:
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the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;
the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve
System;
inflation, interest rate, market and monetary fluctuations;
our timely development of competitive new products and services and the acceptance of these products and services by new and
existing customers;
the willingness of customers to substitute competitors’ products and services for our products and services and vice versa;
the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities, and
insurance, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;
the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address
capital and liquidity in the banking system; further, future and proposed rules, including those that are part of the process outlined in
the International Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for More Resilient Banks
and Banking Systems,” which are expected to require banking institutions to increase levels of capital;
technological changes;
the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings
from such acquisitions;
the growth and profitability of our noninterest, or fee, income being less than expected;
unanticipated regulatory or judicial proceedings;
changes in consumer spending and saving habits; and
our success at managing the risks involved in the foregoing.
We caution that the foregoing list of important factors is not all-inclusive. If one or more of the factors affecting these forward-looking
statements proves incorrect, our actual results, performance, or achievements could differ materially from those expressed in, or implied by,
forward-looking statements contained in this Annual Report on Form 10-K and other reports we filed with the SEC. Therefore, we caution you
not to place undue reliance on our forward-looking information and statements. We do not intend to update any forward-looking statements,
whether written or oral, to reflect changes. All forward-looking statements attributable to our Company are expressly qualified by these
cautionary statements. See Item 1A, “Risk Factors,” in Part I of this report.
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FIRST COMMUNITY BANCSHARES, INC.
2013 FORM 10-K
INDEX
Business.
Item 1.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13 Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
PART III
Item 15. Exhibits, Financial Statement Schedules.
Signatures
PART IV
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PART I
Unless the context suggests otherwise, the use of the terms “First Community,” “Company,” “we,” “our,” and “us” in this Annual Report on
Form 10-K refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity.
Item 1.
Business.
Corporate Overview
First Community Bancshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of
Nevada in 1997. The Company provides banking products and services through its wholly-owned subsidiary First Community Bank (the
“Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates under the trade names First Community Bank in
Virginia, West Virginia, and North Carolina and Peoples Community Bank, a Division of First Community Bank, in Tennessee and South
Carolina.
The Company provides insurance services through its wholly-owned, full-service insurance agency subsidiary Greenpoint Insurance Group,
Inc. (“Greenpoint”), acquired in 2007. Greenpoint operates under the Greenpoint name and under the trade names First Community Insurance
Services (“FCIS”) and Carolina Insurers Associates in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West
Virginia. During 2013 we purchased one insurance agency. See Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial
Statements in Part II, Item 8 of this report.
In addition, the Bank offers wealth management and investment advice through its wholly-owned subsidiary First Community Wealth
Management and the Bank’s Trust Division. The Company is the common stockholder of FCBI Capital Trust (the “Trust”), which was created
in October 2003 to issue trust preferred securities to raise capital for the Company.
Our focus is on organic growth that may be supplemented by strategic acquisitions.
The Company is a legal entity that is separate and distinct from its affiliates. As a financial holding company, the Company is required to act as
a source of financial strength for its subsidiary bank. The Company’s principal source of revenue is derived from dividends paid from the Bank,
which are subject to certain restrictions by regulatory agencies and determined in relation to earnings, asset growth, and capital position. For
additional information see “Regulation and Supervision” below.
Operations
We operate in one business segment, Community Banking, which consists of commercial and consumer banking, lending activities, wealth
management, and insurance services. Our principal executive office is located at One Community Place, Bluefield, Virginia. As of
December 31, 2013, our Community Banking operations were conducted through 80 locations in 5 states: Virginia, West Virginia, North
Carolina, South Carolina, and Tennessee. We serve a diverse base of individuals and businesses that include a variety of industries, such as
manufacturing, mining services, construction, retail, healthcare, military, and transportation. We have no material concentrations of deposits or
loans from any single customer or industry. See Item 6, “Selected Financial Data,” in Part II of this report for a summary of our financial
performance.
We offer a wide range of services and products to our customers that include:
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demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;
commercial, consumer, and real estate mortgage loans, and lines of credit;
various credit card, debit card, and automated teller machine card services;
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corporate and personal trust services;
investment management services; and
life, health, and property and casualty insurance products.
Employees
We had 729 full-time equivalent employees as of December 31, 2013. No employees are represented by collective bargaining agreements, and
management considers employee relations to be excellent.
Competition
The financial services industry is highly competitive and there is substantial competition in attracting deposit and loan relationships in our
market areas. The ability of non-bank financial entities to provide services previously reserved for commercial banks has intensified
competition. We compete with other commercial banks and financial service providers, including thrifts, savings and loan associations, credit
unions, consumer finance companies, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies.
Competition for deposits generally comes from other commercial banks, savings institutions, credit unions, mutual funds, and other investment
alternatives. The primary factors that influence our ability to attract and retain deposits include interest rates, personalized services, quality and
variety of financial offerings, convenience of office locations, automated services, and office hours. Competition for commercial and business
loans generally comes from other commercial banks and commercial finance and leasing companies while competition for mortgage loans
primarily comes from other commercial banks, savings institutions, mortgage banking firms, mortgage brokers, and insurance companies. The
primary factors that influence our ability to originate loans include interest rates, loan origination fees, quality and variety of lending offerings,
and personalized services. Our competitors may have greater resources and higher lending limits that allow for services to be offered that we do
not provide. Competition could also intensify in the future as a result of general and local economic conditions, industry consolidation, bank
failures, technological developments, and banking regulatory reform. See “Competition” in the “Executive Overview” section in Part II, Item 7
of this report.
Available Information
Under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are required to file annual, quarterly, and current reports;
proxy statements; and other information with the Securities and Exchange Commission (the “SEC”). Any document we file with the SEC may
be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330
for further information about the public reference room. The SEC maintains a website at www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.
Our website, www.fcbinc.com, makes available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and other information, including any amendments thereto, as soon as reasonably practicable after we file such reports
with, or furnish them to, the SEC. Investors are encouraged to access these reports and other information about our business. Information
regarding our Board of Directors, executive officers, and corporate governance policies and principles is included on our website and includes
the Standards of Conduct governing the Company’s directors, officers, and employees; the charters of the standing committees of the
Company’s Board of Directors; and the Company’s Insider Trading and Disclosure Policy. Additional information found on our website is not
part of this report.
Regulation and Supervision
Banks and financial holding companies operate in a highly regulated industry and are subject to examination, supervision, and comprehensive
regulation under applicable federal and state laws and various regulatory agencies. Regulations are intended primarily for the protection of
depositors, the Deposit Insurance Fund (“DIF”)
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of the Federal Deposit Insurance Corporation (“FDIC”), and the banking system as a whole and are generally not for the protection of
stockholders or creditors. Banking agencies have broad enforcement powers over banks and financial holding companies to impose substantial
fines and penalties for violations of laws and regulations.
The following discussion summarizes certain laws, rules, and regulations that affect our Company. These summaries are not intended to be
complete and are qualified in their entirety by reference to the applicable statute or regulation. A change in laws, rules, and regulations may
have a material effect on our Company.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, sweeping financial regulatory reform legislation entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape,
including the following provisions:
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Centralizes responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the
“CFPB”), responsible for implementing, examining and enforcing compliance with federal consumer financial laws.
Requires financial holding companies, such as the Company, to be well capitalized and well managed as of July 21, 2011. Bank holding
companies and banks must also be well capitalized and well managed to engage in interstate bank acquisitions.
Imposes comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would
effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institutions themselves.
Implements corporate governance revisions, including executive compensation and proxy access by shareholders.
Makes permanent the $250 thousand limit for federal deposit insurance.
Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest
on business transaction and other accounts.
Amends the Electronic Fund Transfer Act to, among other things, give the Board of Governors of the Federal Reserve System (the
“Federal Reserve”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card
issuers having assets over $10 billion and enforces a new statutory requirement that such fees be reasonable and proportional to the actual
cost of a transaction to the issuer.
Increases the authority of the Federal Reserve to examine bank holding companies, such as the Company, and their non-bank
subsidiaries.
Another section of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (the “Mortgage Reform Act”), contains new
underwriting and servicing standards for the mortgage industry, as well as restrictions on compensation for mortgage originators. In addition,
the Mortgage Reform Act grants broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts, or practices relating
to residential mortgage loans that the CFPB finds abusive, unfair, deceptive, or predatory, as well as to take other actions that the CFPB finds
are necessary or proper to ensure that responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also
contains laws affecting the securitization of mortgages, and other assets, with requirements for risk retention by securitizers and requirements
for regulating credit rating agencies. Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on our Company, our customers, or the general financial industry. Provisions
in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase costs
associated with deposits, as well as place limitations on certain revenues those deposits may generate.
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First Community Bancshares, Inc.
The Company is a financial holding company organized pursuant to the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) and a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Accordingly, the Company is subject to
supervision, regulation, and examination by the Federal Reserve. The GLB Act, BHC Act, and other federal laws subject financial and bank
holding companies to particular restrictions on the types of activities they may engage in and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws and regulations. The BHC Act generally provides for umbrella
regulation of financial holding companies, such as the Company, by the Federal Reserve, as well as functional regulation of banking activities
by bank regulators, securities activities by securities regulators, and insurance activities by insurance regulators.
The Company is also under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of
1933, as amended, and the Exchange Act as administered by the SEC. The Company’s common stock is listed on the NASDAQ Global Select
Market (“NASDAQ”) under the trading symbol “FCBC”, and is subject to the rules of NASDAQ for listed companies.
Regulatory Restrictions on Dividends; Source of Strength
The Federal Reserve’s policy has historically required bank holding companies to act as a source of financial and managerial strength to their
subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to
commit resources to support the Bank, even when it may not be in a financial position to provide such resources. According to Federal Reserve
policy, bank holding companies may pay cash dividends on common stock only from income available over the past year and only if
prospective earnings retention is consistent with the organization’s expected future needs and financial condition. In addition, bank holding
companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. A bank
holding company may be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary in certain situations.
In addition, the Company and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine
that the payment of dividends would be an unsafe or unsound practice, under certain circumstances regarding the financial condition of a bank
holding company or a bank, and to prohibit payment thereof. The appropriate federal regulatory authorities have stated that paying dividends
that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations
should generally pay dividends only out of current operating earnings. In the current financial and economic environment, the Federal Reserve
has discouraged payment ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that
bank holding companies should carefully review their dividend policy.
Scope of Permissible Activities
Under the BHC Act, bank holding companies are limited to banking, managing or controlling banks, furnishing services to or performing
services for their subsidiaries, or other activities that the Federal Reserve has determined to be closely related to banking or managing and
controlling banks as to be a proper incident thereto. The BHC Act requires every bank holding company to obtain the prior approval of the
Federal Reserve before it may acquire all, or substantially all, of the assets of any bank or ownership or control of any voting shares of any
bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. When approving
bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future
prospects of the bank holding company and the target bank, the convenience and needs of the communities to be served, and various
competitive factors. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless such business is determined by the Federal Reserve to be
so closely related to banking as to be a proper incident thereto.
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Notwithstanding the foregoing, the GLB Act eliminated the barriers to affiliations among banks, securities firms, insurance companies, and
other financial service providers and permits bank holding companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature”
to include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. Regulatory
approval is not generally required for a financial holding company to acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature, or incidental to activities that are financial in nature, as determined by the Federal Reserve.
Under the GLB Act, a bank holding company may become a financial holding company by filing a declaration with the Federal Reserve if each
of its subsidiary banks is well capitalized under the FDIC Improvement Act prompt corrective action provisions, is well managed, and has at
least a satisfactory rating under the Community Reinvestment Act. The Company elected financial holding company status in December 2006.
Since July 2011, the Company’s status is dependent on maintaining a well capitalized and well-managed status under applicable Federal
Reserve regulations. If a financial holding company ceases to meet these requirements, the Federal Reserve may impose corrective capital
and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities
permissible for financial holding companies. In addition, the Federal Reserve may require divestiture of the holding company’s depository
institutions if the deficiencies persist.
The Dodd-Frank Act amended the BHC Act to require federal financial regulatory agencies to adopt rules that prohibit banks and their
affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge
funds and private equity funds). The statutory provision is commonly called the “Volcker Rule.” The Federal Reserve adopted final rules
implementing the Volcker Rule on December 10, 2013. The Volcker Rule became effective on July 21, 2012 and the final rules are effective
April 1, 2014, but the Federal Reserve issued an order extending the period during which institutions have to conform their activities and
investments to the requirements of the Volcker Rule to July 21, 2015. On January 14, 2014, the banking agencies approved an interim rule to
permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the
prohibitions under the Volcker Rule. Although we continue to evaluate the impact of the Volcker Rule and the final rules adopted, we do not
currently anticipate that the Volcker Rule will have a material effect on the operations of the Company and subsidiaries, as the Company does
not engage in the businesses prohibited by the Volcker Rule. The Company may incur costs to adopt additional policies and systems to ensure
compliance with the Volcker Rule, but any such costs are not expected to be material.
Anti-Tying Restrictions
Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other
services offered by a holding company or its affiliates.
Stock Repurchases
A bank holding company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities,
subject to certain exemptions, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the
preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it
believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation.
Capital Adequacy Requirements
The Federal Reserve currently uses two types of capital adequacy guidelines for holding companies, a two-tiered risk-based capital guideline
and a leverage capital ratio guideline. The two-tiered risk-based capital guideline assigns risk weightings to all assets and certain off-balance
sheet items of the holding company’s operations and
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then establishes a minimum ratio of the holding company’s Tier 1 capital to the aggregate dollar amount of risk-weighted assets (which amount
is usually less than the aggregate dollar amount of such assets without risk weighting) and a minimum ratio of the holding company’s total
capital (Tier 1 capital plus Tier 2 capital, as adjusted) to the aggregate dollar amount of such risk-weighted assets. The leverage ratio guideline
establishes a minimum ratio of the holding company’s Tier 1 capital to its total tangible assets (total assets less goodwill and certain identifiable
intangibles) without risk-weighting. As discussed below, the Bank is subject to similar capital requirements.
Under both guidelines, Tier 1 capital is defined to include common shareholders’ equity, including retained earnings; qualifying noncumulative
perpetual preferred stock and related surplus; qualifying cumulative perpetual preferred stock and related surplus; minority interests in the
equity accounts of consolidated subsidiaries, which are limited to a maximum of 25% of Tier 1 capital; and certain trust preferred securities.
The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010, from being included in Tier 1 capital, unless the issuing
company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued before that date continue to
count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as the Company. Goodwill and most
intangible assets are deducted from Tier 1 capital. For purposes of the total risk-based capital guidelines Tier 2 capital, sometimes referred to as
supplementary capital, is defined to include, subject to limitations: perpetual preferred stock not included in Tier 1 capital, intermediate-term
preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, allowances
for loan and lease losses, and intermediate-term subordinated debt instruments. The maximum amount of qualifying Tier 2 capital is 100% of
qualifying Tier 1 capital. For purposes of the total capital guideline, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus
investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other
deductions. The Federal Reserve’s current capital adequacy guidelines require that a bank holding company maintain a Tier 1 risk-based capital
ratio of at least 4.0% and a total risk-based capital ratio of at least 8.0%. As of December 31, 2013, the Company’s ratio of Tier 1 capital to
total risk-weighted assets was 15.19% and ratio of total capital to risk-weighted assets was 16.44%.
In addition, the Federal Reserve uses a leverage ratio as an added tool to evaluate the capital adequacy of bank holding companies. The
leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may
maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of 4.0% or more,
depending on their overall condition. As of December 31, 2013, the Company’s leverage ratio was 9.95%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are
expected to operate with capital positions well above the minimum ratios. Federal Reserve guidelines provide that regulatory agencies may set
capital requirements for a particular banking organization that are higher than the minimum when circumstances warrant. These guidelines also
provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance on intangible assets.
The current risk-based capital guidelines that apply to the Company and the Bank are based on the 1988 capital accord of the International
Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, implemented by the Federal Reserve. In July
2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking
organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international
capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital
requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current
U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in
banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other
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issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was
derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized
approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of
Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital
Rules are effective for the Company and the Bank, subject to a phase-in period, on January 1, 2015.
The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify
that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by
requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and
(iv) expand the scope of the deductions/adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain (i) a minimum ratio of
CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer
is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum
ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital
ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio
of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the
8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation),
and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage
ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory
authority’s risk-adjusted measure for market risk).
The Basel III Capital Rules also provides for a “countercyclical capital buffer” that is applicable to only certain covered institutions and is not
expected to have any current applicability to the Company or the Bank. The capital conservation buffer is designed to absorb losses during
periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation
buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on
dividends, equity repurchases and compensation based on the amount of the shortfall.
Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015, will be as follows:
•
•
•
4.5% CET1 to risk-weighted assets.
6.0% Tier 1 capital to risk-weighted assets.
8.0% Total capital to risk-weighted assets.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement
that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss
carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category
exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated
other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel
III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking
organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The
Company and the Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of
interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio. The Basel III Capital Rules also preclude
certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The rules do not
require a phase-out of trust preferred securities issued prior to May 19, 2010, for holding companies of depository institutions with
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less than $15 billion in consolidated total assets, as of December 1, 2009, which includes the Company. Therefore, the Company’s trust
preferred securities that were issued prior to May 19, 2010, are permanently grandfathered in as Tier 1 or Tier 2 capital instruments,
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased in over a four-year period
(beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will
begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1
st
, until it reaches 2.5% on January 1, 2019).
With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the
Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current
four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the
nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting
in higher risk weights for a variety of asset categories. Specifics changes to current rules impacting the Company’s determination of risk-
weighted assets include, among other things:
•
•
•
•
•
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development
and construction loans.
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is
not unconditionally cancellable (currently set at 0%).
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk
weight category of the underlying collateral securing the transaction.
Providing for a 100% risk weight for claims on securities firms. Eliminating the current 50% cap on the risk weight for OTC derivatives.
In addition, the Basel III Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared
through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk
mitigation. Management believes that, as of December 31, 2013, the Company and the Bank would meet all capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without
required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against
specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management
and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is
designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected
net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The
other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and
activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S.
Treasury securities and other sovereign debt as a component of assets and increase the use of
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long-term debt as a funding source. In October 2013, the federal banking agencies proposed rules implementing the LCR for advanced
approaches banking organizations and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated
assets that are not advanced approaches banking organizations, neither of which would apply to the Company or the Bank. The federal banking
agencies have not yet proposed rules to implement the NSFR.
Incentive Compensation
In June 2010, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), and the FDIC issued their final guidance on policies
intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such
organizations by encouraging excessive risk taking. The final guidance, which covers all employees who have the ability to materially affect
the risk profile of an organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should
(i) provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks, (ii) be
compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and
effective oversight by the organization’s board of directors. The Federal Reserve indicated that all banking organizations are to evaluate their
incentive compensation arrangements and related risk management, controls, and corporate governance processes and immediately address
deficiencies in these arrangements or processes that are inconsistent with safety and soundness.
The Federal Reserve reviews, as part of their regular, risk-focused examination process, the incentive compensation arrangements of banking
organizations, such as ours, that are not large, complex banking organizations. These reviews will be tailored to each organization based on the
scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the
supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings,
which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking
organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the
organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In February 2011, the Federal Reserve, the OCC, and the FDIC approved a joint proposed rulemaking to implement Section 956 of the Dodd-
Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial
institutions and are deemed to be excessive, or that may lead to material losses.
The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue
evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to
attract, hire, retain, and motivate key employees.
First Community Bank
The Bank is a Virginia state-chartered bank supervised and regulated by the Virginia Bureau of Financial Institutions (“Virginia Bureau”). As a
member of the Federal Reserve, the Bank’s primary federal regulator is the Federal Reserve Bank (“FRB”) of Richmond. The Virginia Bureau
and FRB of Richmond are based in the Company’s home state of Virginia. The regulations of these agencies govern most aspects of the Bank’s
business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends, and location and
number of branch offices.
Restrictions on Transactions with Affiliates and Insiders
Transactions between the Bank and its non-banking subsidiaries or affiliates, including the Company, are subject to Section 23A of the Federal
Reserve Act the (“FRA”). In general, Section 23A imposes limits on the amount of
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such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third
parties that are collateralized by the securities or obligations of the Company.
Affiliate transactions are also subject to Section 23B of the FRA which generally requires that certain transactions between the Bank and its
affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions
with or involving other non-affiliated persons. The Federal Reserve has issued Regulation W which codifies prior regulations under Sections
23A and 23B of the FRA and interpretive guidance with respect to affiliate transactions.
The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the FRA, including an
expanded definition of covered transactions and increased amount of time for which collateral requirements regarding covered credit
transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the
expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse
repurchase agreements, and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an
insider to an institution, including that such sales be on market terms and, in certain circumstances, approved by the institution’s board of
directors.
The restrictions on loans to directors, executive officers, principal shareholders, and their related interests contained in the FRA and Regulation
O apply to all insured institutions, their subsidiaries, and holding companies. These restrictions include limits on loans to one borrower and
conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to such persons. These loans
cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets
Dividends paid by the Bank to the Company provide and are anticipated to remain the primary source of the Company’s operating funds.
Capital adequacy requirements applicable to insured depository institutions serve to limit the amount of dividends that may be paid by the
Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, it will be classified as undercapitalized. Further, prior
approval of the FRB is required if cash dividends declared in any given year exceed the total of the Bank’s net profits for such year, plus its
retained profits for the preceding two years. Virginia law also imposes restrictions on the ability of Virginia-chartered banks to pay dividends if
such dividends would impair a bank’s paid-in capital. The payment of dividends by the Bank may also be limited by other factors, such as
requirements to maintain capital above regulatory guidelines. The Virginia Bureau and the FRB of Richmond have the general authority to
limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of
liquidation or other resolution of an insured depository institution, such as the Bank, the claims of depositors and other general or subordinated
creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any
depository institution holding company or any shareholder or creditor thereof.
Examinations
Under the FDIC Improvement Act, all insured institutions must undergo regular on-site examination by their appropriate banking agency and
such agency may assess the institution for its costs of conducting the examination. As a state-chartered Federal Reserve member bank, the
Bank is subject to examination by the Virginia Bureau and FRB of Richmond. These examinations review areas such as capital adequacy,
reserves, loan portfolio quality, investments, information systems, disaster recovery, contingency planning, management practices, and other
compliance issues.
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Capital Adequacy Requirements
The various federal bank regulatory agencies have adopted risk-based capital requirements for assessing the capital adequacy of banks and
bank holding companies. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-
balance sheet exposure, as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital
requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure
and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with
appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
Pursuant to the Federal Reserve’s risk-based capital requirements, state member banks are required to meet a minimum ratio of Tier 1 capital to
total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. The capital categories for the Bank are the
same as those for the Company. In addition to the risk-based capital requirements, the Federal Reserve has adopted regulations that supplement
the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to quarterly average assets of 3.0%. The Federal Reserve has
emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such
minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not
experiencing or anticipating significant growth. All other banking organizations are required to maintain a leverage ratio of at least 4.0% to
5.0% of Tier 1 capital. See “Capital Adequacy Requirements” in the “First Community Bancshares, Inc.” section above.
Corrective Measures for Capital Deficiencies
The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations
define, for each capital category, the levels at which institutions are well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. A well capitalized institution has a total risk-based capital ratio of 10.0% or higher, a Tier 1
risk-based capital ratio of 6.0% or higher, a leverage ratio of 5.0% or higher, and is not subject to any written agreement, order, or directive
requiring it to maintain a specific capital level for any capital measure. An adequately capitalized institution has a total risk-based capital ratio
of 8.0% or higher, a Tier 1 risk-based capital ratio of 4.0% or higher, a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a
composite 1 in its most recent examination report and is not experiencing significant growth), and does not meet the criteria for a well
capitalized bank. An undercapitalized institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less
than 4.0%, or a leverage ratio of less than 4.0%. A significantly undercapitalized institution has a total risk-based capital ratio of less than
6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. A critically undercapitalized institution’s tangible
equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital
category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying
prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial
condition or prospects for other purposes. The Bank was classified as well capitalized for purposes of the FDIC’s prompt corrective action
regulation as of December 31, 2013.
The Basel III Capital Rules revise the current prompt corrective action requirements effective January 1, 2015 by (i) introducing a CET1 ratio
requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status;
(ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1
capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a
bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do
not change the total risk-based capital requirement for any prompt corrective action category.
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In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on
certain activities of undercapitalized institutions, including asset growth, acquisitions, branch establishment, and expansion into new lines of
business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
As an institution’s capital decreases, the federal regulators’ enforcement powers become more severe. A significantly undercapitalized
institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of
management, and other restrictions. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally
required to appoint a receiver or conservator. Banks with risk-based capital and leverage ratios below the required minimums may be subject to
certain administrative actions, including termination of deposit insurance upon notice and hearing or temporary suspension of insurance
without a hearing if the institution has no tangible capital.
Deposit Insurance Assessments
The Bank’s deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the
DIF. Currently the FDIC utilizes a risk-based assessment system to evaluate the risk of each financial institution based on three primary sources
of information: its supervisory rating, its financial ratios, and its long-term debt issuer rating, if the institution has one. The FDIC’s initial base
assessment schedule can be adjusted up or down, and premiums in effect from January 1, 2010, through March 31, 2011, ranged from 12 basis
points in the lowest risk category to 45 basis points for banks in the highest risk category. Effective April 1, 2011, the FDIC set initial base
assessment rates from 5 basis points in the lowest risk category to 35 basis points for banks in the highest risk category.
The Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will necessitate increased deposit insurance
premiums that are to be borne primarily by institutions with assets of greater than $10 billion. In October 2010, the FDIC addressed plans to
bolster the DIF by increasing the required reserve ratio for the industry to 1.35 percent (ratio of reserves to insured deposits) by September 30,
2020, as required by the Dodd-Frank Act. The FDIC also proposed to raise its industry target ratio of reserves to insured deposits to 2 percent,
65 basis points above the statutory minimum.
In February 2011, the FDIC adopted new rules that amend its current deposit insurance assessment regulations. The new rules implement a
provision in the Dodd-Frank Act that changed the assessment base for deposit insurance premiums from one based on domestic deposits to one
based on average consolidated total assets minus average tangible equity. The rules also changed the assessment rate schedules for insured
depository institutions so that approximately the same amount of revenue would be collected using the new assessment base as would be
collected using the current rate schedule and the schedules previously proposed by the FDIC in October 2010. In addition, the new rules revised
the risk-based assessment system for large insured depository institutions, which generally include institutions with at least $10 billion in total
assets and highly complex institutions, by requiring the FDIC to use a scorecard method to calculate assessment rates for all such institutions.
The Bank is not considered a highly complex institution for these purposes.
Under the Federal Deposit Insurance Act, as amended (the “FDIA”), the FDIC may terminate deposit insurance upon a finding that the
institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
In addition to deposit insurance assessments by the DIF, all FDIC-insured depository institutions must pay an annual assessment to provide
funds for the repayment of debt obligations of the Financing Corporation (“FICO”). The FICO is a government-sponsored entity that was
formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust
Corporation. The FICO
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assessments are set quarterly. The Bank’s FICO assessments totaled $154 thousand in 2013 and $140 thousand in 2012. The Bank’s FDIC
deposit insurance assessments and premiums totaled $1.72 million in 2013 and $1.57 million in 2012.
Safety and Soundness Standards
The FDIA requires that the federal bank regulatory agencies prescribe standards, by regulations or guidelines, relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, stock valuation and compensation, fees and benefits, and other operational and managerial standards the agencies deem appropriate.
Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive
when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal
stockholder. The agencies adopted regulations that authorize them to order an institution that has been given notice by an agency not satisfying
any of such safety and soundness standards to submit a compliance plan. If after being so notified an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to
correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the
prompt corrective action provisions of the FDIA. If an institution fails to comply with such an order, the agency may seek to enforce such order
in judicial proceedings and to impose civil money penalties. See “Corrective Measures for Capital Deficiencies” in the “Bank” section above.
Enforcement Powers
The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose
substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws,
regulations, and supervisory agreements could subject us, including officers, directors, and other institution-affiliated parties, to administrative
sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the banking institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.
Consumer Laws and Regulations
In addition to the laws and regulations discussed in this report, the Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the list set forth is not exhaustive, these laws and regulations include the Truth
in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, the Fair Housing Act, and various state counterparts. These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The
Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.
In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must
provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures
regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited
exceptions, a
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financial institution may provide such personal information to unaffiliated third parties only if the institution discloses to the customer that such
information may be so provided and the customer is given the opportunity to opt out of such disclosure.
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, which is responsible for implementing,
examining and enforcing compliance with federal consumer protection laws. The CFPB has broad rulemaking, supervisory and enforcement
authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans, and credit cards.
The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions, and
enforcing rules related to consumer financial products and services. Banks with less than $10 billion in assets, such as the Bank, will be subject
to these federal consumer financial laws and will continue to be examined for compliance with these laws by their primary federal banking
agency.
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
Patriot Act”) was enacted in October 2001. The USA Patriot Act has broadened existing anti-money laundering legislation while imposing new
compliance and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money
laundering transactions involving domestic or international customers. The U.S. Department of the Treasury (the “Treasury”) has issued and
will continue to issue regulations clarifying the USA Patriot Act’s requirements. The USA Patriot Act requires all financial institutions, as
defined, to establish certain anti-money laundering compliance and due diligence programs. Recently, the regulatory agencies have intensified
their examination procedures of the USA Patriot Act’s anti-money laundering and Bank Secrecy Act requirements. We believe our controls and
procedures were in compliance with the USA Patriot Act as of December 31, 2013.
Interstate Banking and Branching
Federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether the transaction is prohibited
by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, as amended, (the “Riegle-Neal Act”) or by adopting a law after the date of enactment
of the Riegle-Neal Act and before June 1, 1997, that applies equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits
such acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit
concentration limitations described in the Riegle-Neal Act.
Before the enactment of the Dodd-Frank Act, national and state-chartered banks were generally permitted to branch across state lines by
merging with banks in other states if allowed by the applicable states’ laws. However, interstate branching is now permitted for all national and
state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located
would also be permitted to establish a branch, thus effectively giving out-of-state banks parity with in-state banks with respect to de novo
branching.
Troubled Asset Relief Program Capital Purchase Program
On November 21, 2008, we issued and sold to the Treasury 41,500 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
and a warrant to purchase 176,546 shares of our common stock, par value $1.00 per share, for an aggregate cash purchase price of $41.50
million. The warrant was immediately exercisable upon its issuance, had an initial exercise price per share of $35.26, and a 10 year term. On
June 5, 2009, we completed a public offering of our common stock to reduce the amount of shares underlying the
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warrant to 88,273. On July 8, 2009, we repurchased all preferred stock from the Treasury that had previously been issued. On November 23,
2011, we repurchased the warrant from the Treasury for approximately $31 thousand through our bid in a public auction that took place on
November 17, 2011.
Item 1A. Risk Factors.
The risk factors described below discuss potential events, trends, or other circumstances that could adversely affect our business, financial
condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common
stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial
performance. If any of the following risks occur and the market price of our common stock declines significantly, individuals may lose all, or
part, of their investment in our Company. Individuals should carefully consider our risk factors and the additional information included in, or
incorporated by reference to, this report before making an investment decision. There may be risks and uncertainties that we have not identified
or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be an
exhaustive list of all risks we face. All forward-looking statements are qualified by the risks described below.
Risks Related to Our Business
The current economic environment poses significant challenges.
The U.S. economy has faced a severe economic crisis in recent years, including a major recession from which it is slowly recovering. Business
activity across a wide range of industries and regions in the U.S. continues to remain reduced and local governments and many businesses
continue to experience financial difficulty. While reflecting some improvement, unemployment levels remain elevated. There can be no
assurance that these conditions will continue to improve or that these conditions could worsen.
Our financial performance is generally highly dependent upon the business environment in the markets we operate, specifically Virginia and
the U.S. as a whole, which includes the ability of borrowers to pay interest, repay principal on outstanding loans, the value of collateral
securing those loans, and demand for loans and other products and services we offer. A favorable business environment is generally
characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and
investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in
economic growth, business activity or investor or business confidence; limitations on the availability, or increases, in the cost of credit and
capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
Overall, during recent years, the business environment has been adverse for many households and businesses in the U.S. and worldwide.
Although economic conditions in Virginia, the U.S., and worldwide have improved since the recession, there can be no assurance that this
improvement will continue. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in
changes in consumer and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of the
Bank’s loans and the Company’s business, financial condition, and results of operations.
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon net interest income. Net interest income is the difference between interest income
earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and
policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in monetary policy and interest rates
could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings. Further, such
changes could also affect our ability to originate loans and obtain deposits and the fair
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value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest
rates received on loans and other investments, our net interest income and earnings could be adversely affected. Conversely, if interest rates
received on loans and other investments fall more quickly than interest rates paid on deposits and other borrowings, our net interest income and
earnings could also be adversely affected.
Our estimated allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable loan losses. Our allowance may not be adequate
to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results. The appropriate
level of the allowance is determined by management and inherently involves a high degree of subjectivity and significant estimates of current
credit risks and future trends, all of which may undergo material changes. Our allowance is determined by analyzing historical loan losses,
current trends in delinquencies and charge-offs, plans for problem loan resolution, changes in the size and composition of the loan portfolio,
and industry information. Management’s estimates also include considerations concerning the impact of economic events, which are uncertain.
Future losses are susceptible to changes in economic, operating, and other conditions, including changes in interest rates, which may be beyond
our control; these losses may exceed our current estimates. Federal regulatory agencies regularly review our loans and allowance for loan
losses as an integral part of the examination process. We believe our allowance for loan losses is adequate to provide for probable losses. There
is no assurance that we will not, or that regulators will not require us to, increase our allowance in future periods, which could materially and
adversely affect our earnings and profitability.
Non-covered nonperforming assets were $27.79 million as of December 31, 2013, $35.69 million as of December 31, 2012, and $31.0 million
as of December 31, 2011. We incurred net charge-offs of $10.35 million in 2013, $6.11 million in 2012, and $9.32 million in 2011. Our
provision for loan losses charged to operations was $8.21 million in 2013, $5.68 million in 2012, and $9.05 million in 2011. The provision
attributed to purchased credit impaired (“PCI”) loans was $747 thousand in 2013, of which $296 thousand was included in the provision
charged to operations and $451 thousand was recorded through the FDIC indemnification asset. As of December 31, 2013, our ratio of the
allowance attributed to non-PCI loans to non-covered nonperforming loans was 113.92% and ratio of the allowance attributed to non-PCI loans
to total non-covered loans was 1.50%. If nonperforming assets or net charge-offs increase in future periods, we may be required to increase our
allowance for loan losses, which could have an adverse effect on our future results of operations.
Our level of credit risk may increase due to our focus on commercial, small business, and middle market customers who may have
significant vulnerability to economic conditions.
Commercial business and real estate loans are generally considered riskier than single family residential loans because larger balances are
extended to single borrowers or groups of related borrowers. Commercial business and real estate loans involve risks because the borrowers’
ability to repay the loans typically depends on the success of the business’ operations or the properties securing the loans. The majority of our
commercial business loans are made to small business or middle market customers. A portion of our commercial business and real estate loans
made or acquired in recent years has not experienced a complete business or economic cycle. As of December 31, 2013, our largest outstanding
commercial business loan was $6.09 million and largest outstanding commercial real estate loan was $6.93 million. As of the same date, our
commercial business loans totaled $101.27 million, or 5.92% of our total loan portfolio, and our commercial real estate loans totaled $759.18
million, or 44.38% of our total loan portfolio.
In addition, we hold a portfolio of commercial construction loans. Construction loans generally have a higher risk of loss primarily due to the
critical nature of certain assumptions and estimates used to value the initial property value upon completion of construction compared to the
estimated costs, including interest. If estimates prove inaccurate, final property values may fall below related loan amounts. While we are not
currently aware of any specific, material impediments impacting any of our builder or developer borrowers, there continues to be
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nationwide reports of problems that adversely affect many property developers, builders, and institutions that provide those loans. If a
significant number of our construction loans experience these types of difficulties, we could have adverse consequences on our future financial
condition and results of operations. As of December 31, 2013, our largest outstanding commercial construction loan was $2.59 million. As of
the same date, our commercial construction loans totaled $51.12 million, or 2.99% of our total loan portfolio.
We may suffer losses in our loan portfolio despite our underwriting practices.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. These practices include the analysis
of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent
appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer;
however, losses may occur on these loans that exceed the reserves established in our allowance for loan losses.
Changes in the fair value of our investment securities may reduce stockholders’ equity and net income.
As of December 31, 2013, securities available for sale were $519.82 million and the aggregate unrealized losses on those securities were
$26.29 million. Stockholders’ equity is increased or decreased by the change in unrealized gain or loss on these securities, net of the related tax
effect, through accumulated other comprehensive income (“AOCI”). The unrealized gain or loss represents the difference between the
estimated fair value and the amortized cost of the securities. A decline in the estimated fair value of the portfolio results in a decline in
stockholders’ equity, book value per common share, and tangible book value per common share. The decrease is recorded even though the
securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security’s
maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time.
We conduct quarterly reviews of our securities portfolio to determine if the declines are other-than-temporary. Factors we consider in our
analysis of debt securities include: our intent to sell the securities, the evidence available to determine if it is more likely than not that we will
have to sell the securities before recovery of the amortized cost, and the probable credit losses. Probable credit losses are evaluated on the
present value of future cash flows; the severity and duration of the decline in fair value of the security below its amortized cost; the financial
condition and near-term prospects of the issuer; whether the decline appears to be related to issuer conditions; general market, or industry
conditions; the payment structure of the security; failure of the security to make scheduled interest or principal payments; and changes to the
rating of the security by rating agencies. Decreases in the fair value of debt securities caused by changes in interest rates are generally
considered temporary, which is consistent with our experience. If we determine that fair value decreases are other-than-temporary, the security
is written down to a new cost basis and the resulting loss is charged to earnings as a component of noninterest income. We recognized other-
than-temporary impairment (“OTTI”) charges of $320 thousand in our debt securities portfolio in 2013.
Factors we consider in our analysis of equity securities include: our intent to sell the security before recovery of the cost; the severity and
duration of the decline in fair value below cost; the financial condition and near-term prospects of the issuer; and whether the decline appears to
be related to issuer conditions, general market, or industry conditions. We recognized no OTTI charges in our equity securities portfolio in
2013.
We continue to monitor the fair value of our securities portfolio as part of our ongoing OTTI evaluation process. No assurance can be given
that we will not need to recognize OTTI charges in the future. Additional OTTI charges may materially affect our financial condition and
earnings.
We are subject to extensive regulation, possible enforcement, and other legal action.
We operate in a highly regulated industry subject to examination, supervision, and comprehensive regulation by various federal and state
governmental authorities, laws, and judicial and administrative decisions that impose requirements and restrictions on our operations. Banking
regulations are primarily intended to protect depositors’
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funds, federal deposit insurance funds, and the banking system as a whole, not stockholders. Congress and federal regulatory agencies
continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, and regulatory policies,
including changes in interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types
of financial services and products offered, or allow non-banks to offer competing financial services and products. The Dodd-Frank Act, enacted
in July 2010, instituted major changes to banking and financial institutions regulatory regimes. Failure to comply with laws, regulations, and
policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation,
business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no
assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more
difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges
earned on loans we originate or sell; and adversely affect our overall business, financial condition, and results of operations.
The Bank’s ability to pay dividends is subject to regulatory limitations, to the extent such dividends are required, that may affect the
Company’s ability to pay expenses and dividends to shareholders.
The Company is a separate legal entity from the Bank. The Company currently depends on tits other subsidiaries’ and the Bank’s cash,
liquidity, and payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the
Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to
satisfy obligations. The Bank’s dividend payment is governed by various statutes and regulations. Depending on factors such as the Bank’s
financial condition, the FRB of Richmond or the Virginia Bureau, the Bank’s primary regulators, may deem dividends or other payments an
unsafe or unsound practice. If the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, the Company may not be
able to service obligations as they become due; these obligations include required payments to the Trust or dividends on our Series A
Noncumulative Convertible Preferred Stock (the “Series A Preferred Stock”) or our common stock. Consequently, the inability to receive
dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.
We face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to
our offerings.
We primarily conduct our operations in Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. We may be unsuccessful
against current and future competitors in regions that offer products and services similar to those we offer; therefore, increased competition
may result in reduced loan originations and deposits. Our competitors include savings associations, national banks, regional banks, and
community banks. We also face competition from finance companies, brokerage firms, insurance companies, credit unions, mortgage banks,
and other financial intermediaries. In particular, our competitors include state and national banks and major financial companies with resources
that may provide a marketplace advantage by expanding and maintaining numerous banking locations and mounting extensive promotional and
advertising campaigns.
Financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have higher lending
limits that enable them to serve the credit needs of larger clients and, to the extent they are more diversified than us, may be able to offer the
same products and services at more competitive rates and prices. If we are unable to attract and retain banking clients, our loan and deposit
growth, general business, financial condition, and prospects may be negatively affected.
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Potential acquisitions may disrupt our business and dilute stockholder value.
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We may seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market
presence or the potential for improved profitability through financial management, economies of scale, or expanded services. Risks inherent in
acquiring other banks, businesses, and banking branches may include the following:
Potential exposure to unknown or contingent liabilities of the target company,
Exposure to potential asset quality issues of the target company,
Difficulty, expense, and delays of integrating the operations and personnel of the target company,
Potential disruption to our business,
Potential diversion of management’s time and attention,
Loss of key employees and customers of the target company,
Difficulty in estimating the value of the target company,
Potential changes in banking or tax laws or regulations that may affect the target company,
Unexpected costs and delays,
The target company’s performance does not meet our growth and profitability expectations,
Limited experience in new markets or product areas,
Increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management, and
Potential short-term decreases in profitability.
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We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other
financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take
place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time.
Acquisitions typically involve goodwill, a purchase premium over the acquired company’s book and market values; therefore, dilution of our
tangible book value and net income per common share may occur. If we are unable to realize revenue increases, cost savings, geographic or
product presence growth, or other projected benefits from acquisitions, our financial condition and results of operations may be adversely
affected.
We may engage in FDIC-assisted transactions.
We may acquire assets and liabilities of failed financial institutions that are in FDIC receivership. FDIC-assisted acquisitions include risks
inherent in acquiring other banks, businesses, and banking branches, as well as risks specific to each transaction. FDIC-assisted acquisitions
generally provide limited diligence and term negotiation and may require additional resources, expenses, and time to service acquired loans,
including PCI loans, integrate personnel and operating systems, and establish processes to service acquired assets. Acquisitions may also
require us to raise additional capital that could have a dilutive effect on existing stockholders. If we are unable to manage these risks, FDIC-
assisted acquisitions could have a material adverse effect on our business, financial condition, and results of operations.
Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and
interpretation, and contractual term limitations.
We receive benefits under loss share agreements with the FDIC in connection with the FDIC-assisted acquisition of Waccamaw Bank
(“Waccamaw”) in June 2012. Under these loss share agreements, the FDIC agreed to cover 80% of most loans and foreclosed real estate losses.
Loans covered under the agreements represented 13.21% of
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our total loans held for investment as of June 30, 2012. We are subject to certain obligations under these agreements that prescribe and specify
how to manage, service, report, and request reimbursement for losses incurred on covered assets. Our obligations under the loss share
agreements are extensive, and failure to comply with any obligations could result in a specific asset, or group of assets, losing loss share
coverage. Requests for reimbursement are subject to FDIC review and may be delayed or disallowed if we are not in compliance with our
obligations. Losses projected to occur during the loss share term may not be realized until after the expiration of the applicable agreement;
consequently, those losses may have a material adverse impact on our results of operations. Our current loss estimates only include those
projected to occur during the loss share period we expect reimbursement from the FDIC at the applicable reimbursement rate. In addition, we
are subject to FDIC audits to ensure compliance with the loss share agreements. The loss share agreements are subject to interpretation by us
and the FDIC; therefore, disagreements may arise regarding the coverage of losses, expenses, and contingencies.
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to
estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the
use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or
other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other
flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may
incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining
probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models we use to
measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may
not accurately reflect what we could realize upon the sale or settlement of such financial instruments. Any such failure in our analytical or
forecasting models could have a material adverse effect on our business, financial condition, and results of operations.
The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-
Frank Act beginning on July 21, 2011. As a result, some financial institutions have commenced offering interest on demand deposits to
compete for customers. We do not yet know what interest rates other institutions may offer as market interest rates begin to increase. Our
interest expense will increase and net interest margin will decrease if we begin offering interest on demand deposits to attract additional
customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of
operations.
Attractive acquisition opportunities may not be available in the future.
We expect banking and financial companies, many with significantly greater resources, to compete for the acquisition of financial services
businesses. This competition could increase the price of potential acquisitions that we believe are attractive. Acquisitions are subject to various
regulatory approvals, and if we fail to receive appropriate regulatory approvals we will not be able to consummate an acquisition. Our
regulators consider our capital, liquidity, profitability, regulatory compliance, level of goodwill and intangible assets, and other factors when
considering acquisition and expansion proposals. Future acquisitions may be dilutive to our earnings and equity per share of our common stock
and Series A Preferred Stock.
Our goodwill may be determined to be impaired.
As of December 31, 2013, our carrying balance of goodwill was $105.46 million. We test goodwill for impairment on an annual basis, or more
frequently if necessary, using quantitative and qualitative factors. When
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available, quoted market prices in active markets are the best evidence of fair value and are used as the basis for measuring impairment. Other
acceptable valuation methods include present value measurements based on multiples of earnings, revenues, or similar performance measures.
If the carrying amount of goodwill exceeds its implied fair value, goodwill is determined to be impaired. Impairment charges may cause an
adverse affect on our earnings and financial position. We recognized no goodwill impairment in 2013.
We may lose members of our management team and have difficulty attracting skilled personnel.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense. The
unexpected loss of key personnel could have a material adverse impact on our business due to the loss of certain skills, market knowledge, and
industry experience and the difficulty of promptly finding qualified replacement personnel. Certain existing and proposed regulatory guidance
on compensation may also negatively impact our ability to retain and attract skilled personnel.
We may be required to pay higher FDIC insurance premiums or special assessments.
Our deposits are insured up to applicable limits by the FDIC’s DIF and we are subject to deposit insurance premiums and assessments to
maintain deposit insurance. We are unable to predict future insurance assessment rates; however, deterioration in our risk-based capital ratios
or adjustments to base assessment rates may result in higher insurance premiums or special assessments. In addition, deterioration in banking
and economic conditions and financial institution failures deplete the FDIC’s DIF and reduced the ratio of reserves to insured deposits. If the
DIF is unable to meet funding requirements, increases in deposit insurance premium rates or special assessments may also be required. Future
assessments, increases, or required prepayments related to FDIC insurance premiums may negatively affect our financial condition and results
of operations.
We may require additional capital in the future that may not be available when needed.
We may need to raise additional capital in the future to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue
growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and
our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to
customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB’s
discount window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our
business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital
will be available, on acceptable terms or at all, in the future.
Liquidity risk could impair our ability to fund operations.
Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources
could have a materially negative effect on our liquidity. Access to funding, with acceptable terms, adequate to finance our activities could be
impaired by factors specific to our company, such as a decline in our credit rating; an increase in the cost of capital from financial capital
markets; a decrease in business activity due to adverse regulatory action or other company specific event; or a decrease in depositor or investor
confidence. Our access to liquidity could also be impaired by factors that affect the general financial services industry such as a severe
disruption of financial markets, negative views and expectations concerning the industry, or decreases in business activity as a result of political
or environmental events.
We are subject to credit risk associated with the financial condition of other financial institutions.
Financial institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different
industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment
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banks, investment companies, and other institutional clients. Our ability to engage in routine funding transactions could be adversely affected
by the failure, actions, and commercial soundness of other financial institutions. These transactions may expose us to credit risk if our
counterparty or client defaults on their contractual obligation. Our credit risk may increase if the collateral we hold cannot be realized or
liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the event of default, we may be required
to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such
counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was
holding collateral in excess of the obligation to such counterparty. Any losses resulting from our routine funding transactions may materially
and adversely affect our financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. In the ordinary course of business, we foreclose on and take title to
properties that secure certain loans. Hazardous or toxic substances could be found on properties we own. If substances are present, we may be
liable for remediation costs, personal injury claims, and property damage and our ability to use or sell the property would be limited. We have
policies and procedures in place that require environmental reviews before initiating foreclosure action on real property; however, these
reviews may not detect all potential environmental hazards. Environmental laws that require us to incur substantial remediation costs, which
could materially reduce the affected property’s value, and other liabilities associated with environmental hazards could have a material adverse
effect on our financial condition and results of operations.
Our controls and procedures may fail or be circumvented.
We review our internal controls over financial reporting quarterly and enhance controls in response to these assessments, internal and external
audit, and regulatory recommendations. A control system, no matter how well conceived and operated, include certain assumptions and can
only provide reasonable assurance that the objectives of the control system are met. These controls may be circumvented by individual acts,
collusion, or management override. Any failure or circumvention related to our controls and procedures or failure to comply with regulations
related to controls and procedures could have a material adverse effect on our business, reputation, results of operations, and financial
condition.
We continue to encounter technological change.
The financial services industry continues to experience rapid technological change with the introduction of new, and increasingly complex,
technology-driven products and services. In addition, the effective use of technology increases operational efficiency that enables financial
service institutions to reduce costs. Our future success depends, in part, on our ability to provide products and services that satisfactorily meet
the financial needs of our customers, as well as to realize additional efficiencies in our operations. We may fail to effectively use technology-
driven products and services to better serve our customers and increase operational efficiency or sufficiently invest in technology solutions and
upgrades to ensure systems are operating properly. Further, many of our competitors have substantially greater resources to invest in
technology, which may adversely affect our ability to compete.
We are subject to information security risks associated with the use of technology.
We rely on communication and information systems, including those provided by third-party vendors, to conduct our business operations. Our
security risks increase as our reliance on technology increases; consequently, the expectation to safeguard information by monitoring systems
for potential failures, disruptions, and breakdowns has also increased. Risks associated with the use of technology include security breaches,
operational failures and service interruptions, and reputational damages. These risks also apply to our third-party service providers. Our third-
party vendors include large entities with significant market presence in their respective fields; therefore, their services could be difficult to
quickly replace in the event of operational failures or service interruption.
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We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and
retention of confidential financial and client information. We may be vulnerable to security breaches, such as employee error, cyber attacks,
and viruses, beyond our control. In addition to security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-
party vendor disruptions may cause operational failures and service interruptions to our communication and information systems. Further, our
systems may be temporarily disrupted during the period of implementation or upgrade. Security breaches and service interruptions related to
our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory scrutiny, or expose us to
civil litigation and financial liability.
We periodically review our information security policies, procedures, disaster recovery plans, and financial condition of third-party vendors;
however, there is no assurance that security risks will not occur, or if they do occur that our processes and procedures are implemented properly
to accurately address such risks. Security risks, including those of third-party vendors, could affect our ability to deliver products and services
to our customers, cause us to incur significant expense, or damage our reputation, which may have a material adverse effect on our financial
condition and results of operations.
We may be subject to claims and litigation pertaining to intellectual property.
Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology
products and services necessary to support the Company’s day-to-day operations. Technology companies frequently enter into litigation based
on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize
patents they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other individuals or companies, have from time
to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial
services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and
substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual
litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the
Company’s operations, and distracting to management. If the Company is found to infringe upon one or more patents or other intellectual
property rights, it may be required to pay substantial damages or royalties to a third party. In certain cases, the Company may consider entering
into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on
acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s operating expenses. If legal
matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments
in amounts that could have a material adverse effect on its business, financial condition, and results of operations.
Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to
conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding
loans, impair the value of collateral securing loans, cause significant property damage, result in a loss of revenue, and/or cause us to incur
additional expenses. Any such events could have a material adverse effect on our business, which, in turn, could have a material adverse effect
on our financial condition and results of operations.
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Risks Associated with Our Common Stock
Our common stock price can be volatile.
Stock price volatility may make it more difficult for holders of tour common stock to resell when desired. Our common stock price can
fluctuate significantly in response to a variety of factors, including, among other things:
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Actual or anticipated variations in quarterly results of operations.
Recommendations by securities analysts.
Operating and stock price performance of other companies that investors deem us comparable to.
News reports relating to trends, concerns, and other issues in the financial services industry.
Perceptions in the marketplace regarding our Company and/or competitors.
New technology used, or services offered, by competitors.
Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our
Company or competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
Changes in government regulations.
Geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors, political conditions, and general economic conditions and events, such as economic slowdowns,
recessions, interest rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger
financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the
presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual
decisions of investors and general economic and market conditions, over which we have no control. Given the lower trading volume of our
common stock, significant sales of our common stock, or the expectation of these sales, could cause the our stock price to fall.
We may not continue to pay dividends on our common stock in the future.
Our common stockholders are only entitled to receive dividends when declared by our Board of Directors out of funds legally available for
such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so, and may reduce or
eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. Also, the Company is a
financial holding company and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the
guidelines of the Federal Reserve regarding capital adequacy and dividends.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any
other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and
elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of
our common stock could lose some, or all, of their investment.
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Certain banking laws may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult to be acquired by a third party,
even if perceived to be beneficial to our shareholders. These provisions effectively inhibit a non-negotiated merger or other business
combination, which could adversely affect the market price of our common stock.
Our Series A Preferred Stock ranks senior to our common stock.
On May 20, 2011, we completed the private placement of 18,921 shares of our Series A Preferred Stock, which carries a 6% dividend rate.
Each share of Series A Preferred Stock is convertible into 69 shares of our common stock at any time and mandatorily converts after five years.
We may redeem the Series A Preferred Stock at face value after May 20, 2014, the third anniversary. The Series A Preferred Stock ranks senior
to shares of our common stock. As a result, we make dividend payments on our Series A Preferred Stock before our common stock, and in the
event of bankruptcy, dissolution, or liquidation, the holders of Series A Preferred Stock will be satisfied before distributions are made to
holders of our common stock. If we do not remain current in the payment of dividends on the Series A Preferred Stock, dividends may not be
paid on our common stock. In addition, dividends declared on the Series A Preferred Stock reduce any net income available to our common
stockholders and earnings per common share. As of December 31, 2013, 15,251 shares of Series A Preferred Stock were outstanding.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Our corporate headquarters is located at One Community Place, Bluefield, Virginia. Including our corporate headquarters, we operated 71
banking centers, loan production, administrative, and other financial services offices through our community bank subsidiary, the Bank. The
Bank operated 70 banking centers throughout Virginia, West Virginia, North Carolina, Tennessee, and South Carolina as of December 31,
2013, of which 49 properties were owned and 21 properties were leased or located on leased land. Greenpoint’s headquarters is located at 711
Gallimore Dairy Road, High Point, North Carolina. Including the headquarters, our insurance subsidiary operated 9 offices throughout
Virginia, West Virginia, and North Carolina as of December 31, 2013, of which 1 was owned, 4 were leased, and 4 were located within our
banking centers. There were no mortgages or liens against any properties. A list of all branch and ATM locations can be found on our website
at www.fcbinc.com. Information contained on our website is not part of this report. See Note 8, “Premises, Equipment, and Leases,” to the
Consolidated Financial Statements in Part II, Item 8 of this report.
Item 3.
Legal Proceedings.
We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the
ultimate outcome of each of these matters with certainty, we are of the belief that the resolution of these actions should not have a material
adverse effect on our financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information, Holders and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol, “FCBC”. As of February 28, 2014, there were 2,847
record holders and 18,384,279 outstanding shares of our common stock. The following table presents the quarterly high and low stock prices
and cash dividends paid per share on our common stock during the periods indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
2013
2012
Year Ended December 31,
Market Price
Cash Dividends per
Market Price
Cash Dividends per
High
$ 16.27
15.76
17.85
17.64
Low
$ 15.20
14.82
15.05
15.57
Common Share
$
0.12
0.12
0.12
0.12
High
$ 13.85
14.43
15.84
16.22
Low
$ 11.86
11.85
13.91
14.25
Common Share
$
0.10
0.11
0.11
0.11
The Company’s ability to pay dividends on its common stock is dependent on the Bank’s ability to pay dividends to the holding company,
which is subject to various regulatory restrictions and limitations. See “Regulatory Restrictions on Dividends; Source of Strength” in the
“Regulation and Supervision – First Community Bancshares, Inc.” section and “Restrictions on Distribution of Subsidiary Bank Dividends and
Assets” in the “Regulation and Supervision – First Community Bank” section in Part I, Item 1 of this report. We pay dividends on our common
stock only if all accrued and unpaid dividends are fully paid on our outstanding Series A Preferred Stock. There were 15,251 shares of Series A
Preferred Stock outstanding as of December 31, 2013, and 17,421 shares outstanding as of December 31, 2012. Cash dividends paid on Series
A Preferred Stock totaled $992 thousand in 2013, $1.12 million in 2012, and $558 thousand in 2011. Cash dividends paid on common stock
totaled $9.48 million in 2013, $8.16 million in 2012, and $7.16 million in 2011. Cash dividends paid per share on common stock totaled $0.48
in 2013, $0.43 in 2012, and $0.40 in 2011.
Purchases of Equity Securities
On October 22, 2013, our Board of Directors approved changes to our stock repurchase plan to authorize the repurchase and retention of up to
3,000,000 shares of our outstanding common stock, an increase of 1,900,000 shares. Share repurchases may be made from time to time on the
open market or in privately negotiated transactions. We repurchased 1,739,601 shares in 2013 and 67,438 shares in 2012 under the plan. As of
February 28, 2014, 131,500 shares had been repurchased in 2014.
The following table provides information regarding purchases of our common stock made by us or on our behalf by any affiliated purchaser, as
defined in Rule 10b-18(a)(3) under the Exchange Act, during the dates indicated:
October 1-31, 2013
November 1-30, 2013
December 1-31, 2013
Total
Average
Price Paid
per
Share
$ 16.77
16.47
16.52
$ 16.50
Total Number of
Shares Purchased as
Part of a Publicly
Announced Plan
Maximum Number of
Shares that May
Yet be Purchased
(1)
Under the Plan
108,504
1,107,905
188,000
1,404,409
2,301,745
1,196,459
1,021,522
Total
Number of
Shares
Purchased
108,504
1,107,905
188,000
1,404,409
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(1) Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 3,000,000 shares. The plan has no expiration date
and is currently in effect. No determination has been made to terminate the plan or to cease making purchases. We held 1,978,478 shares
in treasury as of December 31, 2013.
Stock Performance Graph
The following graph, compiled by SNL Financial LC (“SNL”), compares our cumulative total shareholder return on our common stock for the
five-year period ended December 31, 2013, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and SNL’s
Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 47 bank holding companies with total assets between $1
billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink
sheets. The cumulative returns assume reinvestment of dividends.
Year Ended December 31,
First Community Bancshares, Inc.
S&P 500 Index
NASDAQ Composite Index
SNL Asset & Regional Peer Group
(1)
2009
2011
2010
2008
100.00 35.40 45.18 38.97 51.44 55.45
100.00 126.46 145.51 148.59 172.37 228.19
100.00 145.36 171.74 170.38 200.63 281.22
100.00 79.57 84.30 74.75 83.80 122.51
2012
2013
(1)
Includes the following institutions: 1st United Bancorp, Inc.; American National Bankshares Inc.; Ameris Bancorp; Bank of the Ozarks,
Inc.; BNC Bancorp; Burke & Herbert Bank & Trust Company; Capital City Bank Group, Inc.; Cardinal Financial Corporation; Carter
Bank & Trust; CenterState Banks, Inc.; City Holding Company; CNLBancshares, Inc.; Colony Bankcorp, Inc.; Community Bankers
Trust Corporation; CommunityOne Bancorp; Eastern Virginia Bankshares, Inc.; Fidelity Southern Corporation; First Bancorp;
30
Table of Contents
First Citizens Bancshares, Inc.; First Security Group, Inc.; First Southern Bancorp, Inc.; Great Florida Bank; Hamilton State Bancshares,
Inc.; Hampton Roads Bankshares, Inc.; Home BancShares, Inc.; Middleburg Financial Corporation; Monarch Financial Holdings, Inc.;
National Bankshares, Inc.; NewBridge Bancorp; Palmetto Bancshares, Inc.; Park Sterling Corporation; Peoples Bancorp of North
Carolina, Inc.; Premier Financial Bancorp, Inc.; Seacoast Banking Corporation of Florida; Simmons First National Corporation;
Southeastern Bank Financial Corporation; Southern BancShares (N.C.), Inc.; State Bank Financial Corporation; Stonegate Bank; Summit
Financial Group, Inc.; TowneBank; Union First Market Bankshares Corporation; USAmeriBancorp, Inc.; Virginia Commerce Bancorp,
Inc.; WashingtonFirst Bankshares, Inc.; Wilson Bank Holding Company; and Yadkin Financial Corporation. The returns of each of the
foregoing institutions have been weighted according to their respective stock market capitalization at the beginning of each period for
which a return is indicated.
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Table of Contents
Item 6.
Selected Financial Data.
The following table presents our consolidated selected financial data, derived from audited financial statements, as of and for the five years
ended December 31, 2013. The table should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.
(Amounts in thousands, except share and per share data)
Selected Balance Sheet Data
Investment securities
Loans held for sale
Loans held for investment, net of unearned income
Allowance for loan losses
Total assets
Average assets
Deposits
Borrowings
Total liabilities
Preferred stock
Total stockholders’ equity
Average stockholders’ equity
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses charged to operations
Noninterest income
Noninterest expense
Income tax expense (benefit)
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common shareholders
Selected Share and Per Share Data
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Book value per common share at year-end
Cash dividends per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
Selected Ratios
Return on average assets
Return on average common equity
Average equity to average assets
Dividend payout
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Leverage ratio
(1)
2013
2012
2011
2010
2009
Year Ended December 31,
$
520,388 $
883
1,710,721
24,077
2,602,514
2,661,602
1,950,742
300,396
2,273,908
15,251
328,606
355,611
535,174 $
6,672
1,724,653
25,770
2,728,867
2,510,931
2,030,175
313,553
2,372,544
17,421
356,323
334,901
485,920 $
5,820
1,396,067
26,205
2,164,789
2,195,639
1,543,467
295,141
1,859,060
18,921
305,729
295,150
484,701
4,694
1,386,206
26,482
2,244,238
2,263,055
1,620,955
332,087
1,974,360
—
269,878
269,446
$
$
109,476 $
17,834
91,642
8,208
29,771
78,985
10,908
23,312
1,024
22,288
109,656 $
19,600
90,056
5,678
36,710
78,383
14,128
28,577
1,058
27,519
94,176 $
22,147
72,029
9,047
35,534
68,915
9,573
20,028
703
19,325
103,582
29,725
73,857
14,757
40,508
69,943
7,818
21,847
—
21,847
1.13 $
1.11
16.79
0.48
1.44 $
1.40
16.76
0.43
1.08 $
1.07
15.96
0.40
1.23
1.23
15.11
0.40
$
493,511
11,576
1,393,931
24,277
2,273,283
2,228,910
1,645,960
352,558
2,021,016
—
252,267
244,137
$
$
107,934
38,682
69,252
15,801
(53,677 )
66,624
(28,154 )
(38,696 )
2,160
(40,856 )
(2.75 )
(2.75 )
14.20
0.30
19,792,099
20,961,800
19,127,065
20,419,569
17,877,421
18,687,521
17,802,009
17,815,106
14,868,547
14,868,547
0.84 %
6.57 %
13.36 %
42.62 %
16.44 %
15.19 %
9.95 %
1.10 %
8.70 %
13.34 %
29.89 %
16.70 %
15.44 %
9.96 %
0.88 %
6.81 %
13.44 %
37.00 %
18.15 %
16.89 %
11.50 %
0.97 %
8.11 %
11.91 %
32.52 %
15.33 %
14.07 %
9.44 %
-1.83 %
-16.73 %
10.95 %
NM
(2)
13.81 %
12.56 %
8.51 %
(1) Book value per common share is defined as stockholders’ equity divided by as-converted common shares outstanding.
(2) NM – Not meaningful
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares,
Inc. and its subsidiaries as a consolidated entity. The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of
operations. This MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements and
accompanying notes, as well as other financial information included in this report.
Executive Overview
First Community Bancshares, Inc. (“the Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides
commercial banking services through its wholly-owned subsidiary First Community Bank (the “Bank”). The Bank operates under the trade
names First Community Bank in West Virginia, Virginia, and North Carolina and Peoples Community Bank, a Division of First Community
Bank, in Tennessee and South Carolina. The Bank has positioned itself as a regional community bank that provides an alternative to larger
banks, which often place less emphasis on personal relationships, and smaller community banks, which lack the capital and resources to
efficiently serve customer needs. The Company provides insurance services through its wholly-owned subsidiary Greenpoint Insurance Group,
Inc. (“Greenpoint”), which operates under the Greenpoint name and under the trade names First Community Insurance Services (“FCIS”) and
Carolina Insurers Associates in North Carolina, Carr &Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia. The Bank offers
wealth management and investment advice through its wholly-owned subsidiary First Community Wealth Management (“FCWM”) and the
Bank’s Trust Division.
Our efforts are focused on building financial partnerships and creating more enduring and complete relationships with businesses and
individuals through a personal and local approach to banking and financial services. Our operations are guided by a strategic plan focusing on
organic growth that may be supplemented by strategic acquisitions. While our mission remains that of a community bank, management
believes that entry into new markets may accelerate our growth rate by diversifying the demographics of our customer base and by generally
increasing our sales and service network.
Economy
The regional economies we operate in have shown positive and stable aspects; however, there have been significant declines in residential
development and construction activity, which are consistent with national trends. These declines have led to contraction in areas that have
historically been important components of our lending activities. The following list summarizes information related to the regional economies
we operate in:
•
•
•
•
•
West Virginia and Southwest Virginia – These economies have significant exposure to extractive industries, such as coal, timber, and
natural gas. Unemployment levels have generally been lower than the national average.
Central North Carolina – This economy has suffered in recent years due to foreign competition in the furniture and textile industries and
consolidation in the financial services industry. Despite these detractions, these economies continue to benefit from large regional and
national companies operating in the Triad and Central Piedmont regions.
Southeastern North Carolina and Northeastern South Carolina – These economies benefit from tourism and military activities.
Central Virginia – This economy has, in recent years, benefited from key corporate and government activities.
Eastern Tennessee – This economy continues to benefit from the stability of higher education, healthcare services, and tourism.
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Competition
We continue to encounter strong competition for growth in loans and deposits and increased market share. Many of the markets we target are
being entered into by other banks located in nearby and distant markets. The expansion of banks, credit unions, and other non-depository
financial institutions over recent years has intensified competitive pressures on core deposit generation and retention. Competitive factors that
impact our Company include pressure on interest yields, product fees, loan structure, and loan terms; however, we have countered these
pressures with our relationship style of banking, competitive pricing, cost efficiencies, and disciplined approach to loan underwriting.
Recent Acquisition and Divestiture Activity
On June 8, 2012, we entered into a purchase and assumption agreement with loss share arrangements with the Federal Deposit Insurance
Corporation (“FDIC”) to purchase certain assets and assume substantially all of the customer deposits and certain liabilities of Waccamaw
Bank (“Waccamaw”), a full service community bank headquartered in Whiteville, North Carolina. Under the loss share agreements, the FDIC
covers 80% of most loan and foreclosed real estate losses. Waccamaw’s results of operations are included in the consolidated financial
statements from the date of acquisition. As a result of the acquisition, the comparison between 2012 and 2011 is impacted by increased levels
of assets, liabilities, income, and expense. At acquisition, Waccamaw had total assets of approximately $500.64 million, loans of $318.35
million, and deposits of $414.13 million. Goodwill recorded in connection with the acquisition was $10.62 million.
On May 31, 2012, we completed the acquisition of Peoples Bank of Virginia (“Peoples”), a full service community bank headquartered in
Richmond, Virginia. Peoples’ results of operations are included in the consolidated financial statements from the date of acquisition. As a result
of the acquisition, the comparison between 2012 and 2011 is impacted by increased levels of assets, liabilities, common stock, income, and
expense. At acquisition, Peoples had total assets of approximately $275.76 million, loans of $184.84 million, and deposits of $232.75 million.
Goodwill recorded in connection with the acquisition was $10.32 million.
We issued cash consideration of $150 thousand in 2013 to purchase one insurance agency. We received aggregate cash proceeds of $1.58
million in 2011 from the sale of two insurance agencies. Acquisition and divestiture activity associated with insurance agencies is included in
the consolidated financial statements from the transaction date; therefore, comparisons between fiscal years are impacted by varying levels of
assets, liabilities, income, and expense.
Insurance Service s
We offer insurance services through Greenpoint, a full-service insurance agency that provides commercial and personal lines of insurance.
Revenues are primarily derived from commissions paid by issuing companies on the sale of policies. Commission revenue totaled $5.93
million in 2013, an increase of $190 thousand, or 3.31%, compared to the same period of 2012, which is due to an increase in direct bill
property and casualty insurance income. Commission revenue totaled $5.74 million in 2012, a decrease of $454 thousand, or 7.33%, compared
to the same period of 2011. The decrease in revenue reflects the sale of two agency offices during 2011.
Wealth Management Services
We offer trust management, estate administration, and investment advisory services through FCWM and the Bank’s Trust Division, which
reported combined assets under management of $706 million as of December 31, 2013, and $876 million as of December 31, 2012. These
assets are not our assets, but are managed under various fee-based arrangements as fiduciary or agent. The decrease in managed assets is
attributed to FCWM. The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and
individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size,
nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees.
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Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States
and conform to general practices within the banking industry. Our financial position and results of operations require management to make
judgments and estimates to develop the amounts reflected and disclosed in the consolidated financial statements. Different assumptions in the
application of these estimates could result in material changes to our consolidated financial position and consolidated results of operations.
Estimates, assumptions, and judgments are based on historical experience and other factors including expectations of future events believed to
be reasonable under the circumstances that are periodically evaluated. These estimates are generally necessary when assets and liabilities are
required to be recorded at estimated fair value, a decline in the value of an asset carried on the financial statements at fair value warrants an
impairment write-down or establishment of a valuation reserve, or an asset or liability needs to be recorded based upon the probability of
occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and
information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or, when available,
are provided by third-party sources. When third-party information is not available, valuation adjustments are estimated by management
primarily through the use of financial modeling techniques and appraisal estimates.
Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and
Supplementary Data,” of this report. See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements in
Item 8 of this report. These policies may involve significant estimates and assumptions that have a material impact on our financial condition or
operating performance due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of
such matters to change. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions,
and estimates underlying those amounts, we have identified the establishment and determination of investment securities, the allowance for
loan losses, business combinations, intangible assets, and income taxes as the accounting areas that require the most subjective or complex
judgments.
Investment Securities
Independent third parties are used to determine the fair values of our investment securities. Inputs provided by third parties are reviewed and
corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether the impairment is
temporary or other-than-temporary in nature. We review our investment portfolio on a quarterly basis for indications of other-than-temporary
impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. Considerations in determining
whether a security is other-than-temporarily impaired include, among others, our intent and ability to hold the security for a period of time
sufficient to allow for any anticipated recovery in fair value, or whether it is more likely than not we will be required to sell the security before
recovering its fair value; the severity of the loss and the length of time fair value has been below amortized cost; the expectation of the
security’s future performance; and the creditworthiness of the security’s issuer. If the impairment is determined to be other-than-temporary, the
value of the security is reduced and a corresponding charge to earnings is recognized. See Note 3, “Investment Securities,” to the Consolidated
Financial Statements in Item 8 of this report.
Allowance for Loan Losses
Our quarterly review of the allowance methodology and relevant factors serves as the primary means management evaluates the adequacy of
the allowance for loan losses. The determination of our allowance for loan losses requires management to make significant estimates and
assumptions. While management utilizes its best judgment and available information, the ultimate adequacy of the allowance is dependent
upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the
view of regulatory authorities. These uncertainties may result in material changes to the allowance for loan losses in the near term; however,
the amount of the change cannot reasonably be estimated.
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The Company’s allowance for loan losses consists of reserves assigned to specific loans and credit relationships and general reserves assigned
to loans not separately identified that have been segmented into groups with similar risk characteristics, according to our internal risk grades.
General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic
conditions reflected within the loan portfolio and the economy. Factors considered in this evaluation include, but are not limited to, probable
losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical
loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for each risk
grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. Individually significant
loans require additional analysis such as the borrower’s underlying cash flow and capacity for debt repayment, specific business conditions,
and value of secondary sources of repayment; consequently, this analysis may result in the identification of weakness and a corresponding need
for a specific reserve.
Third-party collateral valuations are regularly obtained and evaluated to assist management in determining potential credit impairment and the
amount of impairment to record. Internal collateral valuations are generally performed within two to four weeks of identifying the initial
potential impairment. The internal evaluation compares the original appraisal to current local real estate market conditions and considers
experience and expected liquidation costs. When a third-party evaluation is received, it is reviewed for reasonableness. Once the evaluation is
reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like
collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to
determine the appropriate amount of specific impairment reserve. Specific reserves are generally recorded for impaired loans while third-party
evaluations are in process and for impaired loans that continue to make some form of payment. While waiting for receipt of the third-party
appraisal, we regularly review the relationship to identify any potential adverse developments and begin the tasks necessary to gain control of
the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued
communication with the borrower, if appropriate.
Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan, less the
specific reserve, is any downward adjustment to appraised value that we determine appropriate, such as the costs to sell the property and a
deflator for the devaluation of property when banks are the sellers. Impaired loans that do not meet the aforementioned criteria and do not have
a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company
rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the
process towards ultimate resolution except in cases involving bankruptcy and various state judicial processes, which may extend the time for
ultimate resolution.
An independent third party is used to assist management in the determination of the changes in cash flows, and the amount of possible
impairment, related to our purchased performing loans and purchased credit impaired (“PCI”) loan pools. PCI loan pools are evaluated
separately from non-PCI loans in the determination of the allowance. See Note 6, “Allowance for Loan Losses,” to the Consolidated Financial
Statements in Item 8 of this report.
Business Combinations
The Company may engage in business combinations with other companies. In accordance with the acquisition method of accounting, all
identifiable acquired assets, including purchased loans, and liabilities 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.
Management makes significant estimates and exercises significant judgment in accounting for business combinations. Any excess of the
purchase price over the fair value of net assets acquired is recorded as goodwill. If the price of the acquired business is less than the net assets
acquired, a gain on the purchase is recorded. Financial assets and liabilities are typically valued using discount models that apply current
discount rates to streams of cash flow. Valuation
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methods require the use of assumptions, which can result in alternate valuations, varying levels of goodwill, or bargain purchase gains, and in
some cases amortization expense or accretion income. Management must also make estimates for the useful or economic lives of certain
acquired assets and liabilities. We review the purchased loan portfolio quarterly for changes in cash flows and possible impairment using input
provided from an independent third party. Management’s assumptions regarding purchased loans and intangible assets may significantly
influence the allowance for loan losses. See Note 2, “Acquisitions, Divestitures, and Branching Activity,” and Note 6, “Allowance for Loan
Losses,” to the Consolidated Financial Statements in Item 8 of this report.
The Company may also engage in FDIC-assisted business combinations. In 2012, we entered into a purchase and assumption agreement with
loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the customer deposits and certain liabilities of
Waccamaw. Pursuant to the loss share agreements, the FDIC agreed to cover 80% of covered assets consisting of most loan and other real
estate losses. Gains and recoveries on covered assets offset prior losses and are reimbursed to the FDIC at the loss share percentage at the time
of recovery. The loss share agreement for single family covered assets provides FDIC loss sharing and recovery reimbursement to the FDIC for
ten years. The loss share agreement for commercial covered assets provides for FDIC loss sharing for five years and recovery reimbursement to
the FDIC for eight years. In accordance with the acquisition method of accounting, the FDIC indemnification asset was recorded at fair value
using projected cash flows based on expected reimbursements and the applicable loss share percentages. We incur expenses related to covered
assets, and certain of these costs are reimbursable from the FDIC through monthly and quarterly claims we submit. Estimated reimbursements
from the FDIC are netted against covered expenses in the statements of income. We regularly review the fair value of the FDIC
indemnification asset with input from a third-party provider. Post-acquisition adjustments to the indemnification asset are measured on the
same basis as the underlying covered assets. See Note 7, “FDIC Indemnification Asset,” to the Consolidated Financial Statements in Item 8 of
this report.
Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is allocated
to the appropriate reporting unit when acquired. We maintain two reporting units, Community Banking and Insurance Services. Goodwill is
tested annually in the fourth quarter using a qualitative assessment to determine if it is more likely than not that the fair value of each reporting
unit is less than its carrying amount. Qualitative factors may include macroeconomic conditions, industry and market considerations, our
overall financial performance, and changes in our stock price. If we conclude that it is more likely than not that the fair value of either reporting
unit is less than its carrying amount, we perform a two-step quantitative goodwill impairment test. Step 1 consists of calculating and comparing
the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is greater than its book value,
no goodwill impairment exists. If the carrying amount of a reporting unit is greater than its calculated fair value, goodwill impairment may
exist and Step 2 is required to determine the amount of the impairment loss.
Core deposit intangible assets represent the future earnings potential of acquired deposit relationships. These deposits are amortized over their
estimated remaining useful lives, as determined by management. Other identifiable intangible assets primarily represent the rights arising from
contractual arrangements and are amortized using the straight-line method. See Note 9, “Goodwill and Other Intangible Assets,” to the
Consolidated Financial Statements in Item 8 of this report.
Income Taxes
The establishment of provisions for federal and state income taxes is a complex area of accounting that involves the use of judgments and
estimates in applying relevant tax statutes. We operate in multiple state tax jurisdictions, which requires the appropriate allocation of income
and expense to each state based on a variety of apportionment or allocation bases. In addition, audits by federal and state tax authorities may
reveal liabilities that differ from our estimates and provisions. We continually evaluate our exposure to possible tax assessments arising from
audits and record an estimate of possible exposure based on current facts and circumstances.
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Table of Contents
Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period temporary differences are expected to be
realized or settled. As changes in tax laws and rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income
taxes. When evidence indicates that it is more likely than not that some, or all, of the deferred tax asset will not be recovered, the carrying value
of the asset may be reduced by a valuation allowance. Increases or decreases in the valuation allowance result in increases or decreases to the
provision for income taxes. See Note 16, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report.
Performance Overview
Highlights of our results of operations in 2013 and financial condition as of December 31, 2013, include the following:
•
•
•
•
We repurchased 1,739,601 shares of our common stock in 2013.
The non-covered loan portfolio increased $15.73 million compared to year end 2012.
Specific reserves in the allowance for loan losses decreased $329 thousand, or 5.88%, compared to year end 2012 as a result of resolution
activity on nonperforming loans.
Non-covered nonperforming loans as a percentage of total non-covered loans decreased 10 basis points to 1.87% compared to year end
2012.
Results of Operations
Net Income
The following table presents our net income and related information in the periods indicated:
(Amounts in thousands, except per share data)
Net income
Net income available to common
shareholders
Basic earnings per common share
Diluted earings per common share
Return on average assets
Return on average common equity
Year Ended December 31,
2012
2011
2013
$ 23,312 $ 28,577 $ 20,028 $
2013 Compared to 2012
%
Increase
Change
(Decrease)
-18.42 % $
(5,265 )
2012 Compared to 2011
%
Increase
Change
(Decrease)
42.69 %
8,549
22,288
1.13
1.11
0.84 %
6.57 %
27,519
1.44
1.40
1.10 %
8.70 %
19,325
1.08
1.07
0.88 %
6.81 %
(5,231 )
(0.31 )
(0.29 )
-0.26 %
-2.13 %
-19.01 %
-21.53 %
-20.71 %
-23.64 %
-24.48 %
8,194
0.36
0.33
0.22 %
1.89 %
42.40 %
33.33 %
30.84 %
25.00 %
27.75 %
2013 Compared to 2012 . Net income decreased in 2013 due to net amortization related to the FDIC indemnification asset, an increased
provision for loan losses, a one-time contractual severance payment, and a decrease in other operating income resulting from an out-of-period
adjustment in 2012. These decreases were offset by a reduction in merger related expenses and a decline in interest expense on deposits and
borrowings.
During our core system conversion in 2012, we discovered that certain loan charge-offs reported in prior periods, beginning in 2007, were
overstated due to not recognizing the impact of interest payments that had been applied to principal for loans on nonaccrual status. The
overstated charge-offs resulted in an overstated provision for loan losses and corresponding understated pre-tax income. Annual pre-tax income
was understated $938 thousand in 2011, $639 thousand in 2010, and $321 thousand in 2009. Charge-offs were overstated $2.39 million
between 2007 and 2011. Management analyzed the error and determined that prior years were not materially misstated and correcting the error
in 2012 would not materially misstate 2012 results. We recorded a $2.39 million increase (“out-of-period adjustment”) to other income in 2012
to correct the understatement of pre-tax income.
2012 Compared to 2011 . Net income increased in 2012 due to a significant rise in loan interest income from the Peoples and Waccamaw
acquisitions, a reduced provision for loan losses, a decrease in interest expense on deposits, and an increase in other operating income resulting
from the out-of-period adjustment. These increases
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were offset by the recognition of merger expenses from the Peoples and Waccamaw acquisitions, a decrease in the net gain on sale of
securities, and an increase in salaries and employee benefits resulting from the expanded branch network.
Net Interest Income
Net interest income, our largest contributor to earnings, comprised 75.48% of total net interest and noninterest income in 2013, 71.04% in
2012, and 66.96% in 2011. For the following discussion, net interest income is presented on a tax equivalent basis to provide a comparison
among all types of interest earning assets. The tax equivalent basis adjusts for the tax-favored status of income from certain loans and
investments. Although non-GAAP, management believes this financial measure is more widely used in the financial services industry and
provides better comparability of net interest income arising from taxable and tax-exempt sources. We use this non-GAAP financial measure to
monitor net interest income performance and manage the composition of our balance sheet. The following table presents our average
consolidated balance sheets in the periods indicated:
2013
Year Ended December 31,
2012
2011
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
$ 1,699,614 $ 96,768 5.69 % $ 1,611,557 $ 96,803 6.01 % $ 1,382,097 $ 80,742 5.84 %
543,697 15,184 2.79 % 502,416 15,170 3.02 % 434,583 15,775 3.63 %
667
63,566
54 8.10 %
211 0.33 %
333 8.32 %
285 0.25 %
2,307,544 $ 112,217 4.86 % 2,194,446 $ 112,403 5.12 % 1,936,742 $ 97,135 5.01 %
354,058
$ 2,661,602
3,999
171 6.52 %
259 0.33 % 116,063
258,897
$ 2,195,639
316,485
$ 2,510,931
2,622
77,851
240 0.07 % $ 306,019 $
584 0.11 % 471,406
7,999 1.04 % 776,901
8,823 0.53 % 1,554,326
185 0.06 % $ 277,263 $
556 0.12 % 410,240
431 0.16 %
886 0.22 %
9,231 1.19 % 682,997 11,471 1.68 %
9,972 0.64 % 1,370,500 12,788 0.93 %
632
2 0.32 %
490
2 0.41 %
77 — 0.00 %
69,141
265 0.38 %
78,608
449 0.57 %
83,564
544 0.65 %
53,118
1,890 3.56 %
55,163
2,023 3.67 %
50,000 1,887 3.77 %
(Amounts in thousands)
Assets
Earning assets
(2)
Loans
Securities available for
sale
Securities held to
maturity
Interest-bearing deposits
Total earning assets
Other assets
Total assets
Liabilities
Interest-bearing deposits
Demand deposits
Savings deposits
Time deposits
$ 361,979 $
516,247
772,741
Total interest-bearing deposits 1,650,967
Borrowings
Federal funds purchased
Retail repurchase
agreements
Wholesale repurchase
agreements
FHLB advances and
other borrowings
7,154 4.08 % 168,988 6,928 4.10 %
Total borrowings
9,628 3.11 % 302,629 9,359 3.09 %
Total interest-bearing liabilities 1,942,257 17,834 0.92 % 1,863,920 19,600 1.05 % 1,673,129 22,147 1.32 %
Noninterest-bearing demand
6,854 4.07 % 175,333
9,011 3.09 % 309,594
168,399
291,290
deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and equity
Net interest income, tax
equivalent
Net interest rate spread
Net interest margin
(4)
(3)
342,919
20,815
2,305,991
355,611
$ 2,661,602
286,950
25,160
2,176,030
334,901
$ 2,510,931
223,233
4,127
1,900,489
295,150
$ 2,195,639
$ 94,383
$ 92,803
$ 74,988
3.94 %
4.09 %
39
4.07 %
4.23 %
3.69 %
3.87 %
Table of Contents
(1) Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and
investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred
industry measurement of net interest income and provides relevant comparison between taxable and nontaxable amounts.
(2) Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.
(3) Represents the difference between the yield on earning assets and cost of funds.
The following table presents the impact on tax equivalent net interest income resulting from changes in volume, the average volume times the
prior year’s average rate; rate, the average rate times the prior year’s average volume; and rate/volume, the average volume column times the
change in average rate, in the periods indicated:
(1)
:
(Amounts in thousands)
Interest earned on
Loans
Securities available for sale
Securities held to maturity
Interest-bearing deposits with other banks
Total interest-earning assets
Interest paid on
(1)
:
Demand deposits
Savings deposits
Time deposits
Federal funds purchased
Retail repurchase agreements
Wholesale repurchase agreements
FHLB advances and other Borrowings
Total interest-bearing liabilities
Year Ended
December 31, 2013 Compared to 2012
Dollar Increase (Decrease) due to
Year Ended
December 31, 2012 Compared to 2011
Dollar Increase (Decrease) due to
Volume
Rate
Rate/
Volume
Total Volume
Rate
Rate/
Volume
Total
5,292
1,246
(127 )
(47 )
6,364
(5,157 )
(1,155 )
41
—
(6,271 )
(170 )
(77 )
(31 )
(1 )
(279 )
(35 )
14
(117 )
(48 )
(186 )
13,401
2,462
(115 )
(95 )
15,653
2,349
(2,651 )
(72 )
93
(281 )
311
(416 )
25
(24 )
(104 )
16,061
(605 )
(162 )
(26 )
15,268
33
54
(50 )
—
(54 )
(75 )
(282 )
(374 )
31
(47 )
(1,165 )
—
(149 )
(61 )
(18 )
(1,409 )
(9 )
21
(17 )
—
19
3
—
17
55
28
(1,232 )
—
(184 )
(133 )
(300 )
(1,766 )
46
134
1,578
—
(32 )
195
260
2,181
(277 )
(410 )
(3,347 )
—
(67 )
(50 )
(34 )
(4,185 )
(15 )
(54 )
(471 )
2
4
(9 )
—
(542 )
(246 )
(330 )
(2,240 )
2
(95 )
136
226
(2,547 )
Change in net interest income, tax equivalent
6,738
(4,862 )
(296 )
1,580 $ 13,472 $ 3,904 $ 439 $ 17,815
(1) Fully taxable equivalent at the rate of 35%.
The following table reconciles the differences between net interest income under GAAP and net interest income on a tax equivalent basis in the
periods indicated:
(Amounts in thousands)
Net interest income, GAAP basis
Tax equivalent adjustment
Net interest income, tax equivalent
(1)
2013
$ 91,642
2,741
$ 94,383
Year Ended December 31,
2012
$ 90,056
2,747
$ 92,803
2011
$ 72,029
2,959
$ 74,988
(1) Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and
investments using the federal statutory rate of 35% for each period presented. We believe this measure is the preferred industry
measurement of net interest income and provides relevant comparison between taxable and nontaxable amounts.
40
Table of Contents
Interest and yield on loans include accretion income from the Peoples and Waccamaw acquired loan portfolios. We expect the purchase
accounting interest accretion to continue to decline in future periods due to acquired portfolio attrition. The following table presents net interest
margin and related average balance sheet information excluding the impact of purchase accounting accretion in the periods indicated:
(Amounts in thousands)
Earning assets
Loans
(2)
Accretion income
Less: cash accretion income
Non-cash accretion income
Loans, excluding non-cash accretion
Other earning assets
Total earning assets
Total interest-bearing liabilities
Net interest income, tax equivalent
Net interest rate spread
Net interest margin
(4)
(3)
, less non-cash accretion
, less non-cash accretion
2013
Year Ended December 31,
2012
2011
Interest
(1)
$ 96,768
14,726
7,023
7,703
89,065
15,449
104,514
17,834
$ 86,680
Average
Yield/
(1)
Rate
5.69 %
5.24 %
2.54 %
4.53 %
0.92 %
3.61 %
3.76 %
Interest
(1)
$ 96,803
12,871
4,158
8,713
88,090
15,600
103,690
19,600
$ 84,090
Average
Yield/
(1)
Rate
6.01 %
5.47 %
2.68 %
4.73 %
1.05 %
3.67 %
3.83 %
Interest
(1)
$ 80,742
—
—
—
80,742
16,393
97,135
22,147
$ 74,988
Average
Yield/
(1)
Rate
5.84 %
5.84 %
2.96 %
5.01 %
1.32 %
3.69 %
3.87 %
(1) Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and
investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred
industry measurement of net interest income and provides relevant comparison between taxable and nontaxable amounts.
(2) Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.
(3) Represents the difference between the yield on earning assets and cost of funds.
(4) Represents tax equivalent net interest income divided by average earning assets.
2013 Compared to 2012 . Net interest income under GAAP increased $1.59 million, or 1.76%, and tax equivalent net interest income increased
$1.58 million, or 1.70%, in 2013. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted
in a 13 basis point decrease in the net interest rate spread and a 14 basis point decrease in the net interest margin.
Loan interest accretion stemming from the Peoples and Waccamaw acquisitions totaled $14.73 million in 2013 and $12.87 million in 2012.
Interest accretion income received in cash totaled $7.02 million in 2013 and $4.16 million in 2012. Excluding non-cash accretion income, the
yield on loans decreased 23 basis points in 2013, which compares to a decrease of 31 basis points under GAAP. Excluding non-cash accretion
income, the net interest margin decreased 7 basis points in 2013, which compared to a decrease of 14 basis points under GAAP. We expect the
effect of accretion income on acquired loans to be significantly less in future periods.
Average earning assets increased $113.10 million, or 5.15%, in 2013 primarily resulting from a full year impact of the increased loan portfolio
from the Peoples and Waccamaw acquisitions and loan growth in our non-acquired portfolio. The yield on earning assets decreased 26 basis
points in 2013, which was largely due to a 32 basis point decrease in the yield on loans, due to the continued low rate environment, and a 23
basis point decrease in the yield on available-for-sale securities, due to new investment and reinvestment of sales proceeds, maturities,
prepayments, and cash in lower yielding securities. As of December 31, 2013, other earning assets
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Table of Contents
included held-to-maturity securities, that continued to decline as they were called or matured and not replaced, and interest-bearing deposits
with banks, primarily comprised of excess liquidity kept at the Federal Reserve Bank (“FRB”) of Richmond bearing overnight market rates.
As of December 31, 2013, interest-bearing liabilities included interest-bearing deposits; federal funds purchased; retail repurchase agreements,
consisting of collateralized retail deposits and commercial treasury accounts; wholesale repurchase agreements; Federal Home Loan Bank
(“FHLB”) advances; and other borrowings. Average interest-bearing liabilities increased $78.34 million, or 4.20%, in 2013 primarily resulting
from a full year impact of the increased deposit portfolio from the Peoples and Waccamaw acquisitions. The yield on interest-bearing liabilities
decreased 13 basis points in 2013, which was largely due to an 11 basis point decrease in the rate on interest-bearing deposits. Average interest-
bearing deposits increased $96.64 million, or 6.22%, in 2013. Average interest-bearing demand deposits increased $55.96 million, or 18.29%,
and savings deposits, which include money market accounts and savings accounts, increased $44.84 million, or 9.51%, in 2013 while average
time deposits decreased $4.16 million. Average borrowings decreased $18.30 million, or 5.91%, in 2013 largely due to the prepayment of
FHLB borrowings of $11.47 million and wholesale repurchase agreements of $8.15 million acquired from Waccamaw.
2012 Compared to 2011 . Net interest income under GAAP increased $18.03 million, or 25.03%, and tax equivalent net interest income
increased $17.82 million, or 23.76%, in 2012. Changes in the average balances of and yields/rates on earning assets and interest-bearing
liabilities resulted in a 38 basis points increase in the net interest rate spread and a 36 basis point increase in the net interest margin in 2012.
Loan interest accretion from the Peoples and Waccamaw acquisitions totaled $12.87 million in 2012 of which $4.16 million was received in
cash. Excluding non-cash accretion income, the yield on loans decreased 37 basis points in 2012, which compares to an increase of 17 basis
points under GAAP. Excluding non-cash accretion income, the net interest margin decreased 4 basis points in 2012, which compared to an
increase of 36 basis points under GAAP.
Average earning assets increased $257.70 million, or 13.31%, in 2012 primarily resulting from loans acquired from Peoples and Waccamaw.
The yield on earning assets increased 11 basis points in 2012, which was largely due to a 17 basis point increase in the yield on loans, due to
the effect of interest accretion on acquired loans, offset by a 61 basis point decrease in the yield on available-for-sale securities, due to new
investment and reinvestment of proceeds from sales, maturities, prepayments, and cash in lower yielding securities. As of December 31, 2012,
other earning assets included held-to-maturity securities and interest-bearing deposits with banks, comprised primarily of excess liquidity kept
at the FRB bearing overnight market rates.
Average interest-bearing liabilities increased $190.79 million, or 11.40%, in 2012 primarily resulting from liabilities assumed from Peoples and
Waccamaw. The yield on interest-bearing liabilities decreased 27 basis points in 2012, which was largely due to a 29 basis point decrease in the
rate on interest-bearing deposits, primarily time deposits, as a result of the sustained low rate environment. As of December 31, 2012, other
interest-bearing liabilities included federal funds purchased; retail repurchase agreements, consisting of collateralized retail deposits and
commercial treasury accounts; wholesale repurchase agreements; FHLB advances; and other borrowings. The decrease in the average balance
of retail repurchase agreements was primarily due to lower balances in commercial treasury accounts in the slow economy, which were slightly
offset by the Peoples and Waccamaw acquisitions.
Provision for Loan Losses
The provision for loan losses is the amount added to the allowance for loan losses after net charge-offs have been deducted in order to bring the
allowance to a level management determines necessary to absorb probable losses in the existing loan portfolio. The provision charged to
operations was increased by $2.53 million in 2013 compared to 2012 due to a significant increase in loan charge-offs, primarily attributable to
losses created by the
42
Table of Contents
sale of four problem loans totaling $2.64 million, and providing a provision for the acquired PCI portfolio. The provision attributed to PCI
loans was $755 thousand in 2013, of which $296 thousand was charged to operations and $451 thousand was recorded through the FDIC
indemnification asset to reflect the indemnified portion of the post-acquisition exposure. The provision charged to operations was reduced by
$3.37 million in 2012 compared to 2011 primarily due to a continued general downward trend in non-covered net charge-offs. No provision
was recorded for PCI loans in 2012. See “Allowance for Loan Losses” in the “Financial Condition” section below.
Noninterest Income
Noninterest income consists of all revenues not included in interest and fee income related to earning assets. Noninterest income comprised
24.52% of total net interest and noninterest income in 2013, 28.96% in 2012, and 33.04% in 2011. The following table presents the
components of, and changes in, noninterest income in the periods indicated:
(Amounts in thousands)
Wealth management
Service charges on deposit accounts
Other service charges and fees
Insurance commissions
Net impairment loss
Net gain on sale of securities
Net FDIC indemnification asset
(amortization) accretion
Other operating income
Noninterest income
2013
$ 3,412
13,558
7,151
5,933
(320 )
399
Year Ended December 31,
2012
$ 3,701
14,063
6,462
5,743
(942 )
483
2011
$ 3,510
13,238
5,722
6,197
(2,285 )
5,264
Increase
(Decrease)
$
(289 )
(505 )
689
190
622
(84 )
2013 Compared to 2012
% Change
2012 Compared to 2011
Increase
(Decrease)
$
% Change
191
825
740
(454 )
1,343
(4,781 )
5.44 %
6.23 %
12.93 %
-7.33 %
-58.77 %
-90.82 %
-7.81 %
-3.59 %
10.66 %
3.31 %
-66.03 %
-17.39 %
-
(5,597 )
5,235
$ 29,771
458
6,742
$ 36,710
—
3,888
$ 35,534
(6,055 )
(1,507 )
$ (6,939 )
1322.05 %
-22.35 %
-18.90 %
458
2,854
$ 1,176
—
73.41 %
3.31 %
2013 Compared to 2012 . Noninterest income decreased $6.94 million, or 18.90%, in 2013. Wealth management revenues, which include fees
and commissions for trust and investment advisory services, decreased as a result of the departure of certain employees at FCWM. Other
service charges and fees increased primarily from ATM fee income. We incurred OTTI charges of $320 thousand in 2013 compared to $942
thousand in 2012, related to a non-Agency mortgage-backed security (“MBS”), and realized a net gain of $399 thousand on the sale of
securities. See Note 3, “Investment Securities,” to the Consolidated Financial Statements in Item 8 of this report. We recorded net amortization
related to the FDIC indemnification asset of $5.60 million as a result of improved loss estimates in the covered Waccamaw loan portfolio.
Other operating income decreased in 2013 primarily due to the out-of-period adjustment in 2012 that positively impacted income. Excluding
the out-of-period adjustment, other operating income increased $888 thousand, or 20.43%, in 2013. Significant components of other operating
income also included a loyalty incentive from a third-party vendor of $353 thousand, increases in dividend income of $327 thousand, a net gain
on debt prepayments of $296 thousand, and a decrease in rental income of $209 thousand.
Excluding the impact from OTTI charges, the net gain on the sale of securities, the net accretion/amortization on the FDIC indemnification
asset, the net gain on debt prepayments, and the out-of-period adjustment, noninterest income increased $677 thousand, or 1.97%, to $34.99
million in 2013 compared with $34.32 million in 2012.
2012 Compared to 2011 . Noninterest income increased $1.18 million, or 3.31%, in 2012. Wealth management revenues increased due to
income from FCWM. Service charges on deposit accounts and other service charges and fees increased primarily from fees and ATM income
related to the Waccamaw acquisition. Insurance commissions decreased in 2012 due to lower profit-sharing commissions from our carriers in
the first quarter of
43
Table of Contents
2012 and higher loss experience on our customers’ policies. Further, commissions in 2012 excluded the impact from agency offices sold as part
of a strategic realignment during the third quarter of 2011. We incurred OTTI charges of $942 thousand in 2012 compared to $2.29 million in
2011, related to a non-Agency MBS, and realized a net gain of $483 thousand on the sale of securities. See Note 3, “Investment Securities,” to
the Consolidated Financial Statements in Item 8 of this report. We recorded net accretion related to the FDIC indemnification asset of $458
thousand to recognize loss estimates in the covered Waccamaw loan portfolio. Other operating income increased in 2012 primarily from the
out-of-period adjustment to correct understated pre-tax income in prior periods. Excluding the out-of-period adjustment, other operating
income increased $459 thousand, or 11.81%, in 2012. Significant components of other operating income also included gains related to
insurance agency sales of $365 thousand and net gain on the sale of certain fixed assets of $203 thousand.
Excluding the impact from OTTI charges, the net gain on the sale of securities, the net accretion on the FDIC indemnification asset, and the
out-of-period adjustment, noninterest income increased $1.76 million, or 5.41%, to $34.32 million in 2012 compared with $32.56 million in
2011.
Noninterest Expense
The following table presents the components of, and changes in, noninterest expense in the periods indicated:
(Amounts in thousands)
Salaries and employee benefits
Occupancy of bank premises
Furniture and equipment
Amortization of intangible assets
FDIC premiums and assessments
FHLB debt prepayment
Merger related expense
Goodwill impairment
Other operating expense
Total noninterest expense
Year Ended December 31,
2012
2011
2013
2013 Compared to 2012
Increase
(Decrease)
% Change
$ 41,235 $ 38,667 $ 34,126 $ 2,568
161
821
(75 )
105
—
(5,037 )
—
2,059
602
6,872
4,145
804
1,612
—
5,093
—
21,190
$ 78,985 $ 78,383 $ 68,915 $
7,033
4,966
729
1,717
—
56
—
23,249
6,280
3,490
1,020
1,984
471
—
1,239
20,305
6.64 %
2.34 %
19.81 %
-9.33 %
6.51 %
—
-98.90 %
—
9.72 %
0.77 %
% Change
2012 Compared to 2011
Increase
(Decrease)
$ 4,541
592
655
(216 )
(372 )
(471 )
5,093
(1,239 )
885
$ 9,468
13.31 %
9.43 %
18.77 %
-21.18 %
-18.75 %
-100.00 %
—
-100.00 %
4.36 %
13.74 %
2013 Compared to 2012 . Noninterest expense increased $602 thousand, or 0.77%, in 2013. Salaries and employee benefits increased largely
from a one-time charge to accrue for contractual executive severance of $1.07 million. Exclusive of the severance charge, salaries and
employee benefits increased $1.50 million, or 3.87%. Employee benefits included increases in medical expense of $735 thousand, incentive
stock compensation expense of $368 thousand, and retirement plan expense of $342 thousand. Salaries and employee benefits attributed to the
Peoples and Waccamaw acquisitions totaled $5.05 million in 2013, which represents an increase of $1.26 million compared to 2012. Full-time
equivalent employees, calculated using the number of hours worked, totaled 729 as of December 31, 2013, compared to 760 as of
December 31, 2012. Occupancy, furniture, and equipment expense increased $982 thousand, or 8.91%, in 2013, which included increased
depreciation costs in connection with the Waccamaw acquisition and core operating system of $856 thousand. We incurred merger related costs
of $56 thousand in 2013 compared to $5.09 million in 2012 in connection with the Peoples and Waccamaw acquisitions. The increase in other
operating expense included charges related to seven scheduled branch closures/consolidations of $1.52 million, slated to occur during the first
half of 2014, and a net loss on sales and expenses on OREO of $2.04 million in 2013 compared to $1.89 million in 2012. Significant
components of other operating expense also included increases in legal fees of $469 thousand, incentive stock compensation expense to
directors of $158 thousand, and communication expenses of $157 thousand.
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2012 Compared to 2011 . Noninterest expense increased $9.47 million, or 13.74% in 2012. Salaries and employee benefits increased
significantly as a result of the partial year impact from the Peoples and Waccamaw acquisitions completed during the second quarter of 2012,
which accounted for an increase in salaries and employee benefits of $3.80 million. Employee benefits included increases in incentive
compensation costs of $1.94 million and Supplemental Executive Retention Plan expense of $379 thousand, while medical insurance expenses
decreased $1.56 million, due to lower claims, and deferred $349 thousand less in direct loan origination costs, due to lower origination
volumes. Full-time equivalent employees totaled 760 as of December 31, 2012, compared to 633 as of December 31, 2011. The Peoples and
Waccamaw acquisitions added 101 full-time equivalent employees. Occupancy, furniture, and equipment expense increased $1.25 million, or
12.76%, primarily as a result of the expanded branch network associated with the Peoples and Waccamaw acquisitions. FDIC premiums and
assessments decreased as a result of modifications in the FDIC’s assessment methodology. We incurred merger related costs of $5.09 million in
2012 in connection with the Peoples and Waccamaw acquisitions. The increase in other operating expense was primarily attributed to our
expanded branch network and legal expense, consulting fees, and travel related expenses incurred in the Waccamaw acquisition. Significant
components of other operating expense also included increases in other service fees of $559 thousand, office supplies expense of $466
thousand, and legal expenses of $348 thousand, which were offset by a decrease in advertising expenses of $262 thousand. The net loss on
sales and expenses on OREO totaled $1.89 million in 2013 compared to $3.08 million in 2012.
Income Tax Expense
2013 Compared to 2012 . Income tax as a percentage of pretax income may vary significantly from statutory rates due to permanent
differences, which are items of income and expense excluded by law from the calculation of taxable income. Our most significant permanent
differences generally include interest income on municipal securities, which are exempt from federal income tax, and increases in the cash
surrender value of officers’ life insurance policies. Income tax expense decreased $3.22 million, or 22.79%, and the effective rate decreased
121 basis points to 31.88% in 2013. The decrease in the effective tax rate was largely due to a decrease in taxable revenues as a percent of net
earnings.
2012 Compared to 2011 . Income tax increased $4.56 million, or 47.63%, and the effective rate increased 74 basis points to 33.08% in 2012.
The increase in the effective tax rate was largely due to an increase in taxable revenues as a percent of net earnings and a decrease in the
relative amounts of nontaxable revenues.
Non-GAAP Financial Measures
The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information about our
operating expense control and efficiency of operations. Management also believes this ratio focuses attention on our core operating
performance over time and is highly useful in comparing period-to-period operating performance of core business operations. However, this
measure is supplemental and is not a substitute for an analysis of performance based on GAAP measures. Our efficiency may not be
comparable to efficiency ratios reported by other financial institutions.
Our efficiency ratio is computed by dividing adjusted noninterest expense by the sum of tax equivalent net interest income and adjusted
noninterest income. Adjusted noninterest expense excludes expenses and losses related to other real estate owned (“OREO”), which may vary
significantly from period to period without substantially affecting operations, and other non-core, nonrecurring items. Noninterest income
excludes securities gains and losses, which may vary significantly from period to period without substantially affecting operations; OTTI
charges; and other non-core, nonrecurring items. Our non-GAAP efficiency ratio measure is different from the GAAP-based efficiency ratio
calculation that uses noninterest expense and income from the consolidated statements of income.
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The following table presents GAAP and non-GAAP efficiency ratio components and calculations in the period indicated:
(Amounts in thousands)
GAAP-based efficiency ratio
Noninterest expense
Net interest income plus noninterest income
GAAP-based efficiency ratio
Non-GAAP efficiency ratio
Noninterest expense
Non-GAAP adjustments:
Merger related expense
FHLB debt prepayment fees
OREO expense and net loss
Goodwill impairment
Branch closure/consolidation expense
Other non-core, non-recurring expense items
Total non-GAAP adjustments
Adjusted noninterest expense
Net interest income plus noninterest income
Non-GAAP adjustments:
Tax equivalency adjustment
Net impairment losses recognized in earnings
Net gain on sale of securities
Net gain on debt prepayment
Prospective correction of prior period understatment
Other non-core, non-recurring income items
Total non-GAAP adjustments
Adjusted net interest income plus noninterest income
Non-GAAP efficiency ratio
2013
Year Ended December 31,
2012
2011
$ 78,985
121,413
65.05 %
$ 78,383
126,766
61.83 %
$ 68,915
107,563
64.07 %
$ 78,985
$ 78,383
$ 68,915
(56 )
—
(2,037 )
—
(1,520 )
(1,180 )
(4,793 )
74,192
121,413
2,741
320
(399 )
(296 )
—
—
2,366
123,779
59.94 %
(5,093 )
—
(1,893 )
—
—
—
(6,986 )
71,397
126,766
2,747
942
(483 )
—
(2,395 )
—
811
127,577
55.96 %
—
(471 )
(3,081 )
(1,239 )
—
(77 )
(4,868 )
64,047
107,563
2,959
2,285
(5,264 )
—
—
(18 )
(38 )
107,525
59.56 %
Financial Condition
Total assets were $2.60 billion as of December 31, 2013, a decrease of $126.35 million, or 4.63%, compared with $2.73 billion as of
December 31, 2012. Total liabilities were $2.27 billion as of December 31, 2013, a decrease of $98.64 million, or 4.16%, compared with $2.37
billion as of December 31, 2012. Our book value per as-converted common share was $16.79 as of December 31, 2013, an increase of $0.03,
compared to December 31, 2012.
Investment Securities
Available-for-sale securities as of December 31, 2013, decreased $14.54 million, or 2.72%, compared to December 31, 2012. The market value
of securities available-for-sale as a percentage of amortized cost was 95.97% as of December 31, 2013, compared to 99.92% as of
December 31, 2012. The average life of the portfolio was 7.53 years as of December 31, 2013, compared to 7.25 years as of December 31,
2012. The duration of the portfolio was 6.40 years as of December 31, 2013, compared to 6.14 years as of December 31, 2012.
Held-to-maturity securities as of December 31, 2013, decreased $248 thousand, or 30.39%, compared to December 31, 2012. Investment
securities classified as held to maturity are comprised primarily of high grade municipal bonds. The market value of securities held to maturity
as a percentage of amortized cost was 101.94% as of December 31, 2013, compared with 101.96% as of December 31, 2012.
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Investment securities are reviewed quarterly for possible OTTI. The review includes an analysis of the facts and circumstances of each
individual investment such as the length of time the fair value has been below cost, timing and amount of contractual cash flows, the
expectation for that security’s performance, the creditworthiness of the issuer, and our intent to hold the security to recovery or maturity. If a
decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to noninterest
income is recognized. If a debt security is determined to be other-than-temporarily impaired, we determine the amount of the impairment due to
credit, recognized in earnings, and the amount due to other factors, recognized in other comprehensive income.
We recognized credit-related OTTI charges in earnings associated with debt securities beneficially owned of $320 thousand in 2013 and $942
thousand in 2012. These charges were related to a non-Agency MBS. Temporary impairment on the non-Agency MBS is primarily related to
changes in interest rates. We recognized no impairment charges on equity securities during 2013 or 2012. See Note 3, “Investment Securities,”
to the Consolidated Financial Statements in Item 8 of this report.
The following table details the amortized cost and fair value of investment securities as of the dates indicated:
(Amounts in thousands)
Available for Sale
U.S. Treasury securities
Municipal securities
Single issue trust preferred securites
Corporate securities
Corporate FDIC insured securities
Mortgage-backed securities:
Agency
Non-Agency Alt-A residential
Total mortgage-backed securities
Equity securities
Total available for sale
Held to Maturity
States and political subdivisions
Total held to maturity
Loans Held for Sale
Amortized
Cost
2013
Fair
Value
December 31,
2012
Amortized
Cost
Fair
Value
Amortized
Cost
2011
Fair
Value
$ 9,708 $ 9,013 $ — $ — $ — $ —
137,815
40,244
—
13,718
131,498
55,649
—
13,685
151,119
55,707
—
—
159,217
44,646
—
—
147,049
55,764
5,000
—
144,280
46,234
4,871
—
306,319
12,543
318,862
5,259
280,102
10,030
290,132
521
$ 541,642 $ 519,820 $ 534,810 $ 534,358 $ 491,615 $ 482,430
274,384
15,980
290,364
419
315,897
11,067
326,964
3,531
310,323
14,215
324,538
3,446
300,386
9,789
310,175
5,247
$
$
568 $
568 $
579 $
579 $
816 $
816 $
832 $ 3,490 $ 3,532
832 $ 3,490 $ 3,532
Loans held for sale as of December 31, 2013, decreased $5.79 million, or 86.77%, compared to December 31, 2012. Loans held for sale consist
of mortgage loans sold on a best efforts basis into the secondary loan market; accordingly, we do not retain the interest rate risk involved in
these long-term commitments. The gross notional amount of outstanding commitments related to secondary market mortgage loans as of
December 31, 2013, was $3.68 million for 19 loans compared to $14.84 million for 88 loans as of December 31, 2012.
Loans Held for Investment
Loans held for investment as of December 31, 2013, decreased $13.93 million, or 0.83%, compared to December 31, 2012. The decrease was
due to runoff in the Waccamaw loan portfolio covered under the FDIC loss share agreements. The non-covered loan portfolio increased $41.49
million, or 2.73%, compared to December 31, 2012. The average loan to deposit ratio was 85.24% for the year ended December 31, 2013,
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compared to 87.52% for the same period of 2012. Our loans held for investment are grouped into three segments (commercial loans, consumer
real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in
FDIC-assisted transactions that are covered by loss share agreements. There were no covered loans before 2012. The held for investment
portfolio continues to be diversified among loan types and industry segments. See Note 4, “Loans,” to the Consolidated Financial Statements in
Item 8 of this report.
The following table presents loans, net of unearned income with non-covered loans disaggregated by class, as of the periods indicated. There
were no covered loans prior to 2012.
(Amounts in thousands)
Non-covered loans held for investment
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Non-covered loans held for investment
Covered loans
Less unearned income
Total loans held for investment
Allowance for loan losses
Total loans held for investment, less allowance
Loans held for sale
2013
2012
December 31,
2011
2010
2009
$
35,255
95,455
70,197
135,559
475,911
2,324
32,614
847,315
$
57,434
88,738
65,694
135,912
448,810
1,709
34,570
832,867
$
61,768
91,939
77,050
106,743
336,005
1,374
37,161
712,040
$
83,812
94,123
67,824
104,960
351,904
1,342
36,954
740,919
$ 102,867
95,115
65,603
109,532
343,975
1,251
41,034
759,377
111,770
496,012
28,703
636,485
111,081
473,547
16,223
600,851
111,387
473,067
19,577
604,031
111,620
444,197
18,349
574,166
111,597
436,238
22,028
569,863
78,163
5,666
83,829
1,517,547
207,106
—
1,724,653
25,770
$ 1,698,883
6,672
$
67,129
12,867
79,996
1,396,067
—
—
1,396,067
26,205
$ 1,369,862
5,820
$
63,475
7,646
71,121
1,386,206
—
—
1,386,206
26,482
$ 1,359,724
4,694
$
60,090
4,601
64,691
1,393,931
—
—
1,393,931
24,277
$ 1,369,654
11,576
$
71,313
3,926
75,239
1,559,039
151,682
—
1,710,721
24,077
$ 1,686,644
883
$
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The following table presents covered loans disaggregated by class as of the periods indicated:
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total covered loans
December 31,
2013
2012
$ 15,865
3,325
1,933
7,449
34,646
164
873
64,255
69,206
16,919
1,184
87,309
118
—
118
$ 151,682
$ 26,595
6,948
2,611
11,428
48,565
144
1,091
97,382
81,445
22,961
1,644
106,050
3,674
—
3,674
$ 207,106
The following tables details the percentage of loans to total loans, by loan class, as of the periods indicated:
Commercial loans
Construction, development,and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total loans
2013
2012
December 31,
Non-covered
Covered
Total
Non-covered
Covered
Total
1 %
0 %
0 %
0 %
2 %
0 %
0 %
5 %
1 %
0 %
0 %
0 %
9 %
3 %
6 %
4 %
8 %
30 %
0 %
2 %
11 %
30 %
2 %
4 %
0 %
100 %
3 %
5 %
4 %
8 %
26 %
0 %
2 %
6 %
28 %
1 %
5 %
0 %
88 %
2 %
1 %
0 %
0 %
3 %
0 %
0 %
5 %
1 %
0 %
0 %
0 %
12 %
5 %
6 %
4 %
8 %
29 %
0 %
2 %
11 %
29 %
1 %
5 %
0 %
100 %
2 %
6 %
4 %
8 %
28 %
0 %
2 %
6 %
29 %
2 %
4 %
0 %
91 %
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Table of Contents
Commercial loans
Construction, development,and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total loans
2011
December 31,
2010
4 %
7 %
6 %
8 %
24 %
0 %
3 %
8 %
34 %
1 %
5 %
0 %
100 %
6 %
7 %
5 %
8 %
25 %
0 %
3 %
8 %
32 %
1 %
5 %
0 %
100 %
2009
7 %
7 %
5 %
8 %
25 %
0 %
3 %
8 %
31 %
2 %
4 %
0 %
100 %
We lend primarily in the five-state region in which we operate. We maintained no foreign loans and had no loan concentrations to any one
borrower that represented 10% or more of outstanding loans as of December 31, 2013 or 2012.
As of December 31, 2013, non-covered commercial loans comprised 54.35% of the non-covered loan portfolio. Commercial and industrial
loans include loans to small to mid-size industrial, commercial, and service companies that include, but are not limited to, natural gas
producers, automobile dealers, and retail and wholesale merchants. Commercial real estate projects represent a variety of sectors of the
commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators.
Commercial loan underwriting standards require that comprehensive reviews and independent evaluations be performed on credits exceeding
predefined size limits. Updates to these loan reviews are done periodically or on an annual basis depending on the size of the loan relationship.
As of December 31, 2013, consumer real estate loans comprised 40.83% of the non-covered loan portfolio. Residential real estate loans include
loans to individuals within our market footprint for home equity loans and lines of credit and for the purchase or construction of owner
occupied homes. Underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.
50
Table of Contents
The following table details the maturities and rate sensitivities of our non-covered loan portfolio as of December 31, 2013:
(Amounts in thousands)
Maturities
Commercial loans
(1)
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total non-covered loans
Rate sensitivities
Predetermined interest rate
Floating or adjustable interest rate
Total non-covered loans
Due After One
Year Through
Due After Five
One Year or Less
Five Years
Years
Total
$
$
$
$
3,799
29,439
8,015
24,503
72,244
870
6,285
145,155
9,236
10,066
7,307
26,609
17,241
170
17,411
189,175
$
24,339
61,058
39,143
75,376
247,177
1,068
16,657
464,818
38,102
41,327
659
80,088
$
7,117
4,958
23,039
35,680
156,490
386
9,672
237,342
64,432
444,619
20,737
529,788
45,733
2,155
47,888
$ 592,794
8,339
1,601
9,940
$ 777,070
$
35,255
95,455
70,197
135,559
475,911
2,324
32,614
847,315
111,770
496,012
28,703
636,485
71,313
3,926
75,239
$ 1,559,039
114,534
74,641
189,175
$ 475,254
117,540
$ 592,794
$ 373,423
403,647
$ 777,070
$ 963,211
595,828
$ 1,559,039
(1) Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and
interest payments.
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Table of Contents
The following table details the maturities and rate sensitivities of our covered loan portfolio as of December 31, 2013:
(Amounts in thousands)
Maturities
Commercial loans
(1)
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total covered loans
Rate sensitivities
Predetermined interest rate
Floating or adjustable interest rate
Total covered loans
Due After One
Year Through
Due After Five
One Year or Less
Five Years
Years
Total
$
$
$
$
4,517
765
225
1,252
11,110
—
510
18,379
104
4,981
428
5,513
5
—
5
23,897
20,275
3,622
23,897
$
$
$
$
10,074
1,762
—
3,109
16,688
19
78
31,730
3,113
5,172
756
9,041
113
—
113
40,884
28,976
11,908
40,884
$
$
$
$
1,275
798
1,708
3,087
6,848
144
286
14,146
65,989
6,766
—
72,755
—
—
—
86,901
$ 15,866
3,325
1,933
7,448
34,646
163
874
64,255
69,206
16,919
1,184
87,309
118
—
118
$ 151,682
13,425
73,476
86,901
$ 62,676
89,006
$ 151,682
(1) Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and
interest payments.
Risk Elements
Nonperforming assets consist of loans accounted for on a nonaccrual basis, accruing loans contractually past due 90 days or more, unseasoned
troubled debt restructurings (“TDRs”), and OREO. Loans acquired with credit deterioration with a discount continue to accrue interest based
on expected cash flows; therefore, PCI loans are not considered nonaccrual. See Note 5, “Credit Quality,” to the Consolidated Financial
Statements in Item 8 of this report.
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The following table summarizes the components of nonperforming assets and presents additional details for nonperforming and restructured
loans as of the periods indicated:
(1)
(Amounts in thousands)
Non-covered nonperforming
Nonaccrual loans
Accruing loans past due 90 days or more
TDRs
Total nonperforming loans
Non-covered OREO
Total nonperforming assets
Covered nonperforming
Nonaccrual loans
Accruing loans past due 90 days or more
Total nonperforming loans
Covered OREO
Total nonperforming assets
Total nonperforming
Nonaccrual loans
Accruing loans past due 90 days or more
TDRs
Total nonperforming loans
OREO
Total nonperforming assets
Additional Information
Performing TDRs
Total TDRs
Gross interest income that would have been recordedunder the
(2)
(3)
(1)
original terms of nonperforming loans
Actual interest income recorded onnonperforming loans
Non-covered ratios
Nonperforming loans to total loans
Nonperforming assets to total assets
Non-PCI allowance to nonperforming loans
Non-PCI allowance to total loans
Total ratios
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans
2013
2012
December 31,
2011
2010
2009
$ 19,161
—
1,311
20,472
7,318
$ 27,790
$ 3,353
86
3,439
7,541
$ 10,980
$ 22,514
86
1,311
23,911
14,859
$ 38,770
$ 23,931
—
6,009
29,940
5,749
$ 35,689
$ 4,323
—
4,323
3,255
$ 7,578
$ 28,254
—
6,009
34,263
9,004
$ 43,267
$ 24,487
—
600
25,087
5,914
$ 31,001
$ —
—
—
—
$ —
$ 24,487
—
600
25,087
5,914
$ 31,001
$ 19,414
—
5,325
24,739
4,910
$ 29,649
$ —
—
—
—
$ —
$ 19,414
—
5,325
24,739
4,910
$ 29,649
$ 17,527
—
1,390
18,917
4,578
$ 23,495
$ —
—
—
—
$ —
$ 17,527
—
1,390
18,917
4,578
$ 23,495
$ 10,900
12,211
$ 6,038
12,047
$ 8,854
9,454
$ 6,866
12,191
$ 2,175
3,565
1,548
511
2,955
640
1,154
411
1,341
587
698
175
1.31 %
1.14 %
113.92 %
1.50 %
1.97 %
1.42 %
86.05 %
1.70 %
1.80 %
1.43 %
103.66 %
1.86 %
1.78 %
1.32 %
107.05 %
1.91 %
1.36 %
1.03 %
128.33 %
1.74 %
1.40 %
1.49 %
100.69 %
1.41 %
1.99 %
1.59 %
75.21 %
1.49 %
1.80 %
1.43 %
104.46 %
1.88 %
1.78 %
1.32 %
107.05 %
1.91 %
1.36 %
1.03 %
128.33 %
1.74 %
(1) TDRs restructured within the past six months, excluding nonaccrual TDRs of $734 thousand, $3.04 million, $3.04 million and $108
thousand for the four years ended December 31, 2013. There were no nonaccrual TDRs as of December 31, 2009.
(2) TDRs with six months or more of satisfactory payment performance, excluding nonaccrual TDRs of $1.47 million, $792 thousand, $227
thousand, and $48 thousand for the four years ended December 31, 2013. There were no nonaccrual TDRs as of December 31, 2009.
(3) Perfoming and nonperforming TDRs, excluding nonaccrual TDRs of $2.20 million, $3.83 million, $3.27 million, and $156 thousand for
the four years ended December 31, 2013. There were no nonaccrual TDRs as of December 31, 2009.
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Non-covered nonperforming assets totaled $27.79 million as of December 31, 2013, a $7.90 million, or 22.13%, decrease from December 31,
2012. Non-covered nonperforming assets as a percentage of total non-covered assets were 1.14% as of December 31, 2013, compared to 1.42%
as of December 31, 2012.
Non-covered nonaccrual loans totaled $19.16 million as of December 31, 2013, a $4.77 million, or 19.93%, decrease from December 31, 2012.
As of December 31, 2013, non-covered nonaccrual loans were largely attributed to the following loan classes: single family owner occupied
(34.27%); commercial and industrial (27.92%); non-farm, non-residential (14.01%); and single family non-owner occupied (10.26%).
Approximately $5.43 million, or 28.35%, of non-covered nonaccrual loans were attributed to performing loans acquired in business
combinations as of December 31, 2013. Certain loans included in the nonaccrual category have been written down to estimated realizable value
or assigned specific reserves in the allowance for loan losses based upon management’s estimate of loss at ultimate resolution.
When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, and/or
amortization terms. Certain TDRs are classified as nonperforming at time of restructuring and are returned to performing status after six
months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the
obligation occurs.
Accruing TDRs totaled $12.21 million as of December 31, 2013, compared to $12.05 million as of December 31, 2012. Nonperforming
accruing TDRs totaled $1.31 million, or 10.74% of accruing TDRs, as of December 31, 2013, compared to $6.01 million, or 49.88% of
accruing TDRs, as of December 31, 2012. The allowance for loan losses attributed to TDRs totaled $1.84 million as of December 31, 2013,
compared to $1.87 million as of December 31, 2012.
Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan
restructurings, and movements into or out of the nonperforming classification as a result of changing economic conditions, borrower financial
capacity, or resolution efforts. There were $86 thousand covered accruing loans contractually past due 90 days or more as of December 31,
2013.
Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, totaled $7.32 million as of December 31, 2013, an
increase of $1.57 million, or 27.29%, compared to December 31, 2012. As of December 31, 2013, non-covered OREO consisted of 52
properties with an average holding period of 8 months. During 2013, the net loss on the sale of OREO totaled $1.52 million. Pursuant to FDIC
loss share agreements, covered OREO is presented net of the related fair value discount. The following tables detail activity within OREO for
the periods indicated:
(Amounts in thousands)
Beginning balance, January 1, 2013
Additions
Disposals
Valuation adjustments
Ending balance, December 31, 2013
(Amounts in thousands)
Beginning balance, January 1, 2012
Acquired
Additions
Disposals
Valuation adjustments
Ending balance, December 31, 2012
Non-covered
5,749
$
9,656
(6,997 )
(1,090 )
7,318
$
Non-covered
5,914
$
125
7,767
(6,933 )
(1,124 )
5,749
$
Covered
$ 3,255
8,782
(2,776 )
(1,720 )
$ 7,541
Covered
$ —
5,388
1,190
(2,565 )
(758 )
$ 3,255
Total
$ 9,004
18,438
(9,773 )
(2,810 )
$ 14,859
Total
$ 5,914
5,513
8,957
(9,498 )
(1,882 )
$ 9,004
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Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $30.86 million as of December 31,
2013, a decrease of $8.14 million, or 20.86%, compared to December 31, 2012. Non-covered delinquent loans as a percentage of total non-
covered loans measured 1.98% as of December 31, 2013, which is attributed to loans 30 to 89 days past due of 0.75% and nonaccrual loans of
1.23%. Non-covered nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned TDRs, as a percentage of
total non-covered loans were 1.31% as of December 31, 2013, compared to 1.97% as of December 31, 2012.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan
portfolio. The allowance is increased by charges to earnings in the form of provisions and recoveries of prior loan charge-offs and decreased by
loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a
systematic process of measurement that requires significant judgments and estimates.
Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The allowance for loan losses
includes specific allocations to significant individual loans and credit relationships and general reserves to the remaining loans that have been
deemed impaired. Loans not specifically identified are grouped into pools based on similar risk characteristics. Management’s general reserve
allocations are based on judgments of qualitative and quantitative factors about macro and micro economic conditions reflected in the loan
portfolio and the economy. For loans acquired in business combinations, a provision is recorded for any credit deterioration after the
acquisition. Loans identified with credit impairment at acquisition are grouped into pools and evaluated separately from the non-PCI portfolio.
The provision calculated for PCI loans is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion of the
post-acquisition exposure. See “Critical Accounting Estimates” above and Note 1, “Significant Accounting Policies,” and Note 6, “Allowance
for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.
Our allowance for loan losses as a percentage of non-covered loans declined in 2013, which was consistent with improvements in our credit
quality indicators. As a result of elevated levels of charge-offs and broader economic conditions, we deemed it appropriate to maintain a
conservative, although declining, level of qualitative factors that adjust the historical loss rates upward in the allowance model. Our qualitative
risk factors reflected the elevated risk of loan losses due to higher than normal unemployment, the effects of the recent recession, and
devaluations of various categories of collateral. Some stress remains in commercial and residential real estate markets resulting in decreases in
real estate values that adversely affect property used as collateral. As of December 31, 2013, management considered the allowance to be
adequate based upon analysis of the portfolio; however, no assurance can be made that additions to the allowance will not be required in future
periods. We incurred net charge-offs of $10.35 million in 2013, $6.11 million in 2012, and $9.32 million in 2011.
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The following table presents activity in our allowance for loan losses by loan type for the periods indicated:
(Amounts in thousands)
Beginning balance
Charge-offs:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total charge-offs
Recoveries:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other
Consumer loans
Other
Total recoveries
Net charge-offs
Provision charged to operations, excluding PCI loans
Provision charged to operations, PCI loans
Provision recorded through the
FDIC indemnification asset
Ending balance
Net charge-offs to average non-covered loans
Allowance to non-covered loans
2013
Year Ended December 31,
2011
2010
2012
$ 25,770
$ 26,205
$ 26,482
$ 24,277
2009
$ 17,782
2,738
720
17
2,618
1,613
17
20
286
113
209
2,502
643
—
61
1,908
417
2,551
1,812
1,074
—
219
2,711
2,900
697
1,665
1,666
6
—
1,541
3,263
—
550
1,076
7
50
1,873
947
295
851
1,842
9
691
1,615
195
1,089
1,594
4
395
1,349
101
491
1,178
12,527
403
585
7,504
448
530
11,460
514
756
13,602
1,043
980
10,355
510
98
16
158
119
22
8
17
93
125
109
280
1
1
817
271
68
121
148
1
—
273
169
—
76
213
—
155
63
34
37
83
12
39
144
32
31
12
52
6
107
695
2,175
10,352
7,912
296
451
$ 24,077
0.68 %
1.54 %
56
152
324
1,391
6,113
5,871
(193 )
—
$ 25,770
0.41 %
1.70 %
139
319
2,136
9,324
8,837
210
—
$ 26,205
0.67 %
1.88 %
163
439
1,050
12,552
14,757
—
—
$ 26,482
0.90 %
1.91 %
21
459
—
48
106
4
—
1
62
2
346
—
1,049
9,306
15,801
—
—
$ 24,277
0.70 %
1.74 %
Table of Contents
The following table details the allowance for loan losses, excluding PCI loans, by loan class, as of the periods indicated:
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Unallocated
Total allowance, excluding PCI loans
2013
$ 1,141
5,215
1,211
3,549
4,650
23
301
Year Ended December 31,
2011
2010
2012
$ 1,214
4,351
1,630
4,367
5,259
22
416
$ 1,892
3,515
1,889
2,960
6,933
19
343
$ 3,991
4,511
1,081
3,212
2,846
19
70
2009
$ 4,014
5,096
449
2,263
3,931
42
75
1,361
5,030
206
1,574
5,995
337
1,365
6,134
212
2,138
6,657
193
1,198
4,690
186
635
—
—
$ 23,322
597
—
—
$ 25,762
742
—
—
$ 26,004
1,764
—
—
$ 26,482
1,990
—
343
$ 24,277
The following table details the PCI allowance for loan losses, by loan pool, as of the periods indicated:
(Amounts in thousands)
Commercial loans
Waccamaw commercial
Waccamaw lines of credit
Peoples commercial
Other
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Peoples residential
Consumer and other loans
Waccamaw consumer
Total PCI allowance
Year Ended December 31,
2013
2012
2011
2010
2009
—
—
69
8
—
—
—
8
—
—
—
201
—
—
—
—
—
—
—
—
277
217
184
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 755
—
$ 8
—
$ 201
—
$ —
—
$ —
Our allowance for loan losses totaled $24.07 million as of December 31, 2013, a $1.69 million decrease compared with $25.77 million as of
December 31, 2012. Excluding PCI loans, the allowance for loan losses as a percentage of non-covered loans held for investment was 1.50% as
of December 31, 2013, compared to 1.70% as of December 31, 2012. The cash flow analysis performed for the year ended December 31, 2013,
identified four of our seven PCI loan pools as impaired with a cumulative impairment of $747 thousand. The portfolio continues to be
monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. As a result of
improving credit metrics, management deemed the reduced allowance adequate and directionally consistent.
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Deposits
Total deposits as of December 31, 2013, decreased $79.43 million, or 3.91%, compared to December 31, 2012. Noninterest-bearing deposits
decreased $3.67 million and time deposits decreased $108.00 million as of December 31, 2013, compared to December 31, 2012. Interest-
bearing deposits increased $8.50 million and savings deposits, which include money market accounts and savings accounts, increased $23.73
million as of December 31, 2013, compared to December 31, 2012.
Borrowings
Total borrowings as of December 31, 2013, decreased $13.16 million, or 4.20%, compared to December 31, 2012. We prepaid $8.15 million of
wholesale repurchase agreements and $11.47 million of FHLB borrowings in 2013 that resulted in gains of $296 thousand. Short-term
borrowings consist of federal funds purchased and retail repurchase agreements. Federal funds purchased as of December 31, 2013, totaled
$16.00 million compared to no funds purchased as of December 31, 2012. The balance of retail repurchase agreements decreased $17.81
million, or 13.08%, as of December 31, 2013, compared to December 31, 2012. Securities underlying retail repurchase agreements remain
under our control during the terms of the agreements. The following table presents balance information and the weighted average rates paid on
retail repurchase agreements as of the periods indicated:
2013
Year Ended December 31,
2012
2011
(Amounts in thousands)
Year-end balance
Average annual balance
Maximum month-end balance
Amount Rate
Amount Rate
Amount Rate
$ 84,308
69,773
84,308
0.19 % $ 77,922
79,098
0.38 %
88,908
0.52 % $ 79,208
83,641
0.57 %
96,925
0.52 %
0.65 %
Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other
obligations. The balance of wholesale repurchase agreements decreased $8.20 million, or 14.08%, and the weighted average rate increased 37
basis points to 3.71% as of December 31, 2013, compared to December 31, 2012. As of December 31, 2013, wholesale repurchase agreements
had contractual maturities between two and six years. The balance of FHLB borrowings decreased $11.56 million, or 7.15%, and the weighted
average rate increased 26 basis points to 4.12% as of December 31, 2013, compared to December 31, 2012. As of December 31, 2013, FHLB
borrowings had contractual maturities between three and eight years.
Included in other indebtedness is $15.46 million of junior subordinated debentures (“Debentures”) that were issued by the Company in October
2003 through FCBI Capital Trust, an unconsolidated trust subsidiary, with an interest rate of three-month LIBOR plus 2.95%. The Debentures
mature in October 2033 and are currently callable at the option of the Company.
Stockholders’ Equity
Total stockholders’ equity decreased $27.72 million, or 7.78%, from $356.32 million as of December 31, 2012, to $328.61 million as of
December 31, 2013. In 2013 we repurchased 1,739,601 shares of our common stock for approximately $28.42 million. The change in
stockholders’ equity was also impacted by net income of $23.31 million, dividends declared on our common and Series A Noncumulative
Convertible Preferred Stock (“Series A Preferred Stock”) of $10.50 million, and a decrease in accumulated other comprehensive income
(“AOCI”) of $12.92 million. AOCI was driven by unrealized losses on available-for-sale securities.
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Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to raise sufficient cash, or convert assets to cash, to meet our financial obligations. We maintain a liquidity
risk management policy and contingency funding policy (the “Liquidity Plan”) that is designed to detect potential liquidity issues in order to
protect depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a
recurring basis by our Asset/Liability Management Committee (“ALCO”) and the Board of Directors. ALCO is responsible for reviewing
liquidity risk exposure and policies related to liquidity management and ensuring that systems and internal controls are consistent with liquidity
policies and provide accurate reports regarding liquidity needs, sources, and compliance.
The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance
sheet and external liquidity available to replace outflows during a funding crisis. Several scenarios are analyzed based on varying assumptions
regarding the funding crisis’ severity and duration, such as decreases in earnings, asset quality deterioration, adverse market conditions, and
reductions in borrowing capacity and availability. A specific action plan is formulated and activated when a financial shock that affects our
normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather
than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will
be met through liquidation of balance sheet assets, including unpledged securities.
Cash on hand and deposits with other financial institutions are immediately available to satisfy deposit withdrawals, customer credit needs, and
our operations. As of December 31, 2013, unencumbered cash on hand and deposits with other financial institutions were $56.57 million. Lines
of credit extended from correspondent banks and the FHLB are immediate funding sources that we may draw upon. As of December 31, 2013,
availability on federal funds lines with correspondent banks was $105.00 million and credit available from the FRB’s discount window was
$9.09 million. As of December 31, 2013, unused borrowing capacity with the FHLB was $324.34 million; further, an additional $34.74 million
was available under the FHLB credit facility subject to the optional delivery of additional collateral. Available-for-sale securities represent a
secondary source of liquidity upon conversion to a liquid asset. As of December 31, 2013, unpledged available-for-sale securities were $235.05
million.
As a holding company, the Company does not conduct significant operations. The Company’s primary sources of liquidity are dividends
received from the Bank and borrowings. Dividends paid by the Bank are subject to certain regulatory limitations. As of December 31, 2013, the
Company’s liquid assets consisted of cash and investment securities totaling $24.21 million. The Company’s cash reserves and investments
provide adequate working capital to meet obligations and projected dividends to shareholders for the next twelve months. The Company
maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution. As of December 31, 2013, there was no
outstanding balance on the line. There are no known trends, demands, commitments, or events that are likely, or reasonably likely, to result in
any material changes to liquidity. We believe that our liquidity position continues to be adequate and readily available.
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Cash Flows
The following table presents the major components of cash flow in the periods indicated:
(Amounts in thousands)
Net cash provided by operating activities
Net cash (used in) provided by investing activities
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning balance
Cash and cash equivalents, ending balance
2013
$ 44,518
(1,167 )
(131,631 )
(88,280 )
144,847
$ 56,567
Year Ended December 31,
2012
$ 56,639
252,474
(211,560 )
97,553
47,294
$ 144,847
2011
$ 54,008
(14,190 )
(104,713 )
(64,895 )
112,189
$ 47,294
2013 Compared to 2012 . Net cash provided by operating activities decreased $12.12 million, or 21.40%, in 2013, which was primarily due to a
decrease in net income of $5.27 million. Net cash used in investing activities totaled $1.17 million compared to net cash provided of $252.47
million in 2012, which was largely the result of no acquisition activity in 2013, coupled with a $70.88 million decrease in proceeds from
securities and an $86.75 million increase in net loan originations. Net cash used in financing activities decreased $79.93 million in 2013, which
was primarily due to a decline in the annual decrease of interest-bearing deposits. The net effect of cash flow activity was an $88.28 million
decrease in cash and cash equivalents in 2013.
2012 Compared to 2011 . Net cash provided by operating activities increased $2.63 million, or 4.87%, in 2012, which was primarily due to an
increase in net income of $8.55 million. Net cash provided by investing activities increased $266.66 million in 2012, which was largely the
result of net cash acquired in acquisitions of $152.28 million and net loan collections of $75.09 million. Net cash used in financing activities
increased $106.85 million in 2012, which was primarily due to an $84.99 million decrease in deposits. The net effect of cash flow activity was
a $162.45 million increase in cash and cash equivalents in 2012.
Capital Resources
Risk-based capital requirements include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific
asset type. The following table presents our capital ratios as of the dates indicated:
Total risk-based capital ratio
First Community Bancshares, Inc.
First Community Bank
Tier 1 risk-based capital ratio
First Community Bancshares, Inc.
First Community Bank
Tier 1 leverage ratio
First Community Bancshares, Inc.
First Community Bank
2013
December 31,
2012
2011
16.44 %
14.55 %
16.70 %
15.23 %
18.15 %
16.12 %
15.19 %
13.30 %
15.44 %
13.97 %
16.89 %
14.86 %
9.95 %
8.63 %
9.96 %
8.98 %
11.50 %
10.08 %
Guidelines issued by state and federal banking agencies require a minimum risk-based capital ratio of 8%, Tier 1 risk-based capital ratio of 6%,
and Tier 1 leverage ratio of 3%. As of December 31, 2013, our Tier 1 risk-based capital and total risk-based capital ratios decreased compared
to December 31, 2012, primarily due to stock repurchase activity. As of December 31, 2013, our Tier 1 leverage ratio decreased compared to
December 31, 2012, primarily due to the decrease in Tier 1 capital resulting from the repurchase of treasury stock and increase in net
unrealized losses on investment securities. Our regulatory capital ratios declined between the periods ended December 31, 2012 and 2011,
primarily as a result of growth in risk-weighted assets, average assets, and
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capital generated from the Peoples and Waccamaw acquisitions. As of December 31, 2013, our capital ratios were well in excess of the
minimum standards and continue to be classified as well capitalized under regulatory capital adequacy standards. See Note 21, “Regulatory
Capital Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.
Contractual Obligations
We maintain certain contractual cash obligations that require future cash payments. Management believes we have adequate resources to fund
our outstanding commitments and, in a changing interest rate environment, the ability to adjust rates on certificates of deposit; attract new
deposits; and replace deposits with FHLB advances or other fund providers, if cost effective. The following table presents our contractual cash
obligations, detailed by payment date, as of December 31, 2013:
(1)
(Amounts in thousands)
Deposits without a stated maturity
Overnight security repurchase agreements
Certificates of deposit
Term security repurchase agreements
FHLB advances
(2)(3)
Trust preferred indebtedness
Leases
Total contractual cash obligations
(2)(3)
Total
$ 1,225,511
81,260
736,796
60,323
177,993
26,005
2,902
$ 2,310,790
Less Than
One Year
$ 1,225,511
81,260
429,407
4,875
6,180
626
771
$ 1,748,630
One to
Three Years
$ —
—
235,066
28,736
12,360
1,242
741
$ 278,145
Three to
Five Years
$ —
—
72,307
1,590
105,420
1,235
322
$ 180,874
More than
Five Years
$ —
—
16
25,122
54,033
22,902
1,068
$ 103,141
(1) Excludes interest
(2)
Includes interest on fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates
in effect at December 31, 2013. The interest to be paid on variable rate obligations is affected by changes in market interest rates, which
materially affect the contractual obligation amounts to be paid.
(3) Excludes carrying value adjustments such as unamortized premiums or discounts.
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Off-Balance Sheet Arrangements
We extend contractual commitment with off-balance sheet risk in the normal course of business to meet the financing needs of our customers.
See Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report. The following
table presents our off-balance sheet arrangements, detailed by commitment expiration, as of December 31, 2013:
(Amounts in thousands)
Commitments to extend credit
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total unused commitments
Letters of credit
Financial letters of credit
Performance letters of credit
Total letters of credit
Total
Less than
One Year
(1)
One to
Three Years
Three to
Five Years
$ 14,352
38,901
2,929
996
17,050
565
1,626
$ 5,051
25,881
2,629
867
10,340
565
1,242
9,151
$
12,758
300
23
4,486
—
384
$
150
67
—
14
149
—
—
110,415
319
16,107
9,464
207
14,962
13,564
48
989
19,807
8
—
12,864
55
$ 216,179
6,296
55
$ 77,559
779
—
$ 42,482
488
—
$ 20,683
More than
Five Years
$ —
195
—
92
2,075
—
—
67,580
56
156
5,301
—
$ 75,455
$
172
4,021
$ 4,193
$ —
—
$ —
$
$
162
3,927
4,089
$ —
—
$ —
$
$
10
94
104
(1) Lines of credit with no stated maturity date are included in commitments for less than one year.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of
operations and financial position in terms of historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing
power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations
is increased operating costs. In management’s opinion, interest rates have a greater impact on our financial performance than inflation. Interest
rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation
on financial institutions is generally not as significant as the effect on businesses with large investments in property, plant, and inventory. The
U.S. inflation rate continues to be relatively stable, and management believes that any changes in inflation will not be material to our financial
performance.
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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our profitability is dependent to a large extent upon net interest income, which is the difference between interest income on interest-earning
assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our Company, like
other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing
liabilities. We manage our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and
coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment.
Our primary component of operational revenue, net interest income, is subject to variation as a result of changes in interest rate environments in
conjunction with unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary
components: repricing risk, basis risk, yield curve risk and option risk. Repricing risk occurs when earning assets and paying liabilities reprice
at differing times as interest rates change. Basis risk occurs when the underlying rates on the assets and liabilities the institution holds change at
different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between
two or more rates for different maturities for the same instrument. Lastly, option risk is due to embedded options, often put or call options,
given or sold to holders of financial instruments.
To mitigate the effect of changes in the general level of interest rates, we manage repricing opportunities and thus, our interest rate sensitivity.
We seek to control our interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of
interest rates. To measure our exposure to interest rate risk, quarterly simulations of net interest income are performed using financial models
that project net interest income through a range of possible interest rate environments: rising, declining, most likely, and flat rate scenarios. We
use a simulation model that captures all earning assets, interest-bearing liabilities, and off-balance sheet financial instruments and combines the
various factors affecting rate sensitivity into an earnings outlook for a range of assumed interest rate scenarios. The results of these simulations
indicate the existence and severity of interest rate risk in each of those rate environments based upon the current balance sheet position,
assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and our estimate of yields to be
attained in those future rate environments and rates paid on various deposit instruments and borrowings. These assumptions are inherently
uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results
will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and
our strategies. However, the earnings simulation model is currently the best tool available to us and the industry for managing interest rate risk.
We have established policy limits for tolerance of interest rate risk in various interest rate scenarios. In addition, the policy addresses exposure
limits to changes in the economic value of equity according to predefined policy guidelines. The most recent simulation indicates that current
exposure to interest rate risk is within our defined policy limits.
63
Table of Contents
The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income. The
model simulates plus 300 to minus 100 basis point changes from the base case rate simulation and illustrates the prospective effects of
hypothetical interest rate changes over a twelve-month time period. This modeling technique, although useful, does not take into account all
strategies that management might undertake in response to a sudden and sustained rate shock as depicted. Also, as market conditions vary from
those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those
assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels
on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables.
As of December 31, 2013, the Federal Open Market Committee maintained a target range for federal funds of 0 to 25 basis points, rendering a
complete downward shock of 200 basis points meaningless; accordingly, downward rate scenarios are limited to minus 100 basis points. In the
downward rate shocks presented, benchmark interest rates are assumed at levels with floors near 0%.
(Amounts in thousands, except basis points)
Increase (Decrease) in Basis Points
300
200
100
(100)
Year Ended December 31,
2013
2012
Change in
Net Interest Income
2,649
$
1,517
454
497
64
Percent
Change
3.1
1.8
0.5
0.6
Change in
Net Interest Income
10,928
$
7,455
3,606
(35 )
Percent
Change
13.2
9.0
4.4
—
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS AND SUPPLEMENTORY DATA INDEX
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Management’s Assessment of Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting
Page
66
67
68
69
70
71
134
135
136
65
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
Assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits in banks
Total cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans held for sale
Loans held for investment, net of unearned income:
Covered under loss share agreements
Not covered under loss share agreements
Less allowance for loan losses
Loans held for investment, net
FDIC indemnification asset
Premises and equipment, net
Other real estate owned:
Covered under loss share agreements
Not covered under loss share agreements
Interest receivable
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Interest, taxes, and other liabilities
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings
Other borrowings
Total liabilities
Stockholders’ Equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible
Preferred Stock, $0.01 par value; 25,000 shares authorized; 15,251 shares issued at December 31, 2013,
and 17,421 shares issued at December 31, 2012
Common stock, $1 par value; 50,000,000 shares authorized; 20,493,057 shares issued and 18,514,579 shares
outstanding at December 31, 2013; 20,343,327 shares issued and 20,053,406 shares outstanding at
December 31, 2012
Additional paid-in capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
66
December 31,
2013
2012
$
43,598
1,817
11,152
56,567
519,820
568
883
151,682
1,559,039
(24,077 )
1,686,644
34,691
61,116
7,541
7,318
7,521
105,455
2,866
111,524
$ 2,602,514
$
50,405
66,509
27,933
144,847
534,358
816
6,672
207,106
1,517,547
(25,770 )
1,698,883
48,149
64,868
3,255
5,749
7,842
104,866
3,522
105,040
$ 2,728,867
$ 339,680
1,611,062
1,950,742
22,770
16,000
118,308
150,000
16,088
2,273,908
$ 343,352
1,686,823
2,030,175
28,816
—
136,118
161,558
15,877
2,372,544
15,251
17,421
20,493
215,663
125,826
(33,887 )
(14,740 )
328,606
$ 2,602,514
20,343
213,829
113,013
(6,458 )
(1,825 )
356,323
$ 2,728,867
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
Interest Income
Interest and fees on loans held for investment
Interest on securities — taxable
Interest on securities — nontaxable
Interest on deposits in banks
Total interest income
Interest Expense
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
Total interest expense
Net interest income
Provision for loan losses
Noninterest Income
Wealth management
Service charges on deposit accounts
Other service charges and fees
Insurance commissions
Impairment losses on securities
Net interest income after provision for loan losses
Portion of losses recognized in other comprehensive income
Net impairment losses recognized in earnings
Net gain on sale of securities
Net FDIC indemnification asset (amortization) accretion
Other operating income
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Occupancy expense of bank premises
Furniture and equipment
Amortization of intangible assets
FDIC premiums and assessments
FHLB debt prepayment fees
Merger related expense
Goodwill impairment
Other operating expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Dividends on preferred stock
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
See Notes to Consolidated Financial Statements.
2013
Year Ended December 31,
2012
2011
$
96,600
7,875
4,790
211
109,476
$
96,684
7,830
4,883
259
109,656
$
8,823
2,222
6,789
17,834
91,642
8,208
83,434
3,412
13,558
7,151
5,933
(320 )
—
(320 )
399
(5,597 )
5,235
29,771
41,235
7,033
4,966
729
1,717
—
56
—
23,249
78,985
34,220
10,908
23,312
1,024
22,288
1.13
1.11
0.48
$
$
9,972
2,515
7,113
19,600
90,056
5,678
84,378
3,701
14,063
6,462
5,743
(942 )
—
(942 )
483
458
6,742
36,710
38,667
6,872
4,145
804
1,612
—
5,093
—
21,190
78,383
42,705
14,128
28,577
1,058
27,519
1.44
1.40
0.43
$
$
$
$
80,580
8,117
5,194
285
94,176
12,788
2,475
6,884
22,147
72,029
9,047
62,982
3,510
13,238
5,722
6,197
(2,285 )
—
(2,285 )
5,264
—
3,888
35,534
34,126
6,280
3,490
1,020
1,984
471
—
1,239
20,305
68,915
29,601
9,573
20,028
703
19,325
1.08
1.07
0.40
19,792,099
20,961,800
19,127,065
20,419,569
17,877,421
18,687,521
67
Table of Contents
FIRST COMMUNITY BANCSHARES, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Comprehensive Income
Net income
Other comprehensive (loss) income, before tax:
Available-for-sale securities:
Unrealized (losses) gains on securities available for sale with other-than-temporary impairment
Unrealized (losses) gains on securities available for sale without other-than-temporary
impairment
Less: reclassification adjustment for gains realized in net income
Less: reclassification adjustment for credit related other-than-temporary impairments
recognized in net income
Unrealized (losses) gains on available-for-sale securities
Defined benefit plans:
Net actuarial gain (loss) on pension and other postretirement benefit plans
Net prior service cost attributed to plan amendments
Less: reclassification adjustment for amortization of prior service cost and net actuarial loss
included in net periodic benefit cost
Unrealized gains (losses) on defined benefit plans
Unrealized gains on derivative securities
Other comprehensive (loss) income, before tax
Income tax benefit (expense)
Other comprehensive (loss) income, net of tax
Total comprehensive income
See Notes to Consolidated Financial Statements.
68
Year Ended December 31,
2012
2013
2011
$ 23,312
$ 28,577
$ 20,028
(1,277 )
1,036
(1,247 )
(19,964 )
(399 )
7,280
(483 )
12,948
(5,264 )
320
(21,320 )
942
8,775
2,285
8,722
758
(380 )
(195 )
—
(1,230 )
—
327
705
—
(20,615 )
7,700
(12,915 )
$ 10,397
268
73
—
8,848
(3,345 )
5,503
$ 34,080
223
(1,007 )
30
7,745
(2,883 )
4,862
$ 24,890
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Preferred
Common
Retained
Treasury
Additional
Accumulated
Other
Comprehensive
(Amounts in thousands, except share and per share
data)
Balance January 1, 2011
Net income
Other comprehensive income
Common dividends declared — $0.40 per share
Preferred dividends declared — $37.15 per share
Issuance of preferred stock — 18,921 shares
Repurchase of common stock warrants
Equity-based compensation expense
Common stock options exercised — 2,969 shares
Contribution of treasury stock to 401(k) plan — 60,632 shares
Purchase of treasury shares — 81,510 shares at $10.88 per share
Balance December 31, 2011
Balance January 1, 2012
Net income
Other comprehensive income
Common dividends declared — $0.43 per share
Preferred dividends declared — $60.00 per share
Preferred stock converted to common stock — 103,500 shares
Equity-based compensation expense
Common stock options exercised — 5,223 shares
Restricted stock awards — 5,300 shares
Purchase of treasury shares — 67,438 shares at $15.00 per share
Acquisition of Peoples Bank of Virginia — 2,157,005 shares
Balance December 31, 2012
Balance January 1, 2013
Net income
Other comprehensive income
Common dividends declared — $0.48 per share
Preferred dividends declared — $60.00 per share
Preferred stock converted to common stock — 149,730 shares
Equity-based compensation expense
Common stock options exercised — 5,850 shares
Restricted stock awards — 40,371 shares
Purchase of treasury shares — 1,739,601 shares at $16.31 per share
Balance December 31, 2013
See Notes to Consolidated Financial Statements.
Paid-in
Capital
$ — $ 18,083 $ 189,239 $ 81,486 $ (6,740 ) $
Earnings
Stock
Stock
Stock
—
—
—
—
18,921
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(119 )
(30 )
68
(60 )
(980 )
—
20,028
—
(7,155 )
(703 )
—
—
—
—
—
—
—
—
—
—
—
—
30
92
1,801
(904 )
$ 18,921 $ 18,083 $ 188,118 $ 93,656 $ (5,721 ) $
$ 18,921 $ 18,083 $ 188,118 $ 93,656 $ (5,721 ) $
—
—
—
—
(1,500 )
—
—
—
—
—
—
—
—
—
103
—
—
—
—
2,157
—
—
—
—
1,397
115
(55 )
(59 )
—
24,313
28,577
—
(8,162 )
(1,058 )
—
—
—
—
—
—
—
—
—
—
—
17
130
128
(1,012 )
—
$ 17,421 $ 20,343 $ 213,829 $ 113,013 $ (6,458 ) $
$ 17,421 $ 20,343 $ 213,829 $ 113,013 $ (6,458 ) $
—
—
—
—
(2,170 )
—
—
—
—
—
—
—
—
150
—
—
—
—
—
—
—
—
2,020
18
(21 )
(183 )
—
23,312
—
(9,475 )
(1,024 )
—
—
—
—
—
—
—
—
—
—
—
106
886
(28,421 )
$ 15,251 $ 20,493 $ 215,663 $ 125,826 $ (33,887 ) $
69
Income (Loss)
Total
(12,190 ) $ 269,878
20,028
4,862
(7,155 )
(703 )
18,802
(30 )
98
32
821
(904 )
(7,328 ) $ 305,729
—
4,862
—
—
—
—
—
—
—
—
—
5,503
—
—
—
—
—
—
—
—
(7,328 ) $ 305,729
28,577
5,503
(8,162 )
(1,058 )
—
132
75
69
(1,012 )
26,470
(1,825 ) $ 356,323
—
(12,915 )
—
—
—
—
—
—
—
(1,825 ) $ 356,323
23,312
(12,915 )
(9,475 )
(1,024 )
—
18
85
703
(28,421 )
(14,740 ) $ 328,606
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation and amortization of property, plant, and equipment
Amortization of premiums on investments, net
Amortization (accretion) of FDIC indemnification asset, net
Amortization of intangible assets
Goodwill impairment
Gain on sale of loans
Equity-based compensation expense
(Gain) loss on sale of property, plant, and equipment
Loss on sales of other real estate
Gain on sale of securities
Net impairment losses recognized in earnings
FHLB debt prepayment fees
Deferred income tax (benefit) expense
Excess tax benefit from equity-based compensation
Proceeds from sale of mortgage loans
Origination of mortgage loans
Decrease in accrued interest receivable
Decrease (increase) in other operating activities
Net cash provided by operating activities
Proceeds from sale of securities available for sale
Proceeds from maturities, prepayments, and calls of securities available for sale
Proceeds from maturities, prepayments, and calls of securities held to maturity
Payments to acquire securities available for sale
(Originations) collections of loans, net
Proceeds from the redemption of FHLB stock, net
Net cash (paid) acquired in acquisitions
Proceeds from the FDIC
Payments to acquire property, plant, and equipment
Proceeds from sale of property, plant, and equipment
Proceeds from sale of other real estate
Investing activities
Net cash provided by (used in) investing activities
Financing activities
Net (decrease) increase in noninterest-bearing deposits
Net decrease in interest-bearing deposits
Net increase in federal funds purchased
Repayments of securities sold under agreements to repurchase
Repayments of long-term debt
Proceeds from issuance of preferred stock
Proceeds from stock options exercised
Excess tax benefit from equity-based compensation
Payments for repurchase of treasury stock
Payments for repurchase of warrants
FHLB debt prepayment fees
Payments of common dividends
Payments of preferred dividends
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental transactions — noncash items
Transfer of loans to other real estate
Loans originated to finance other real estate
Supplemental disclosure — cash flow information
Cash paid for interest
Cash paid for income taxes
Year Ended December 31,
2012
2013
2011
$ 23,312
$ 28,577
$ 20,028
8,208
4,666
884
5,597
729
—
(1,211 )
18
(158 )
2,785
(399 )
320
—
—
(9 )
75,348
(68,348 )
321
(7,545 )
44,518
105,934
87,055
250
(201,138 )
(11,662 )
470
(697 )
14,311
(2,772 )
480
6,602
(1,167 )
(3,672 )
(75,761 )
16,000
(17,810 )
(11,594 )
—
85
9
(28,421 )
—
—
(9,475 )
(992 )
(131,631 )
(88,280 )
144,847
$ 56,567
5,678
4,034
2,329
(458 )
804
—
(1,065 )
132
82
1,869
(483 )
942
—
(896 )
(6 )
67,502
(67,289 )
2,356
12,531
56,639
155,600
105,830
2,690
(245,344 )
75,091
2,101
152,283
2,974
(8,008 )
1,151
8,106
252,474
12,657
(175,132 )
—
(13,172 )
(25,769 )
—
144
6
(1,012 )
—
—
(8,162 )
(1,120 )
(211,560 )
97,553
47,294
$ 144,847
9,047
3,982
1,611
—
1,020
1,239
(713 )
98
(157 )
2,367
(5,264 )
2,285
471
2,362
(5 )
45,466
(45,879 )
1,482
14,568
54,008
192,847
49,193
1,299
(234,818 )
(28,696 )
1,417
835
—
(3,065 )
598
6,200
(14,190 )
35,117
(112,605 )
—
(11,686 )
(25,260 )
18,802
32
5
(904 )
(30 )
(471 )
(7,155 )
(558 )
(104,713 )
(64,895 )
112,189
$ 47,294
$ 18,438
3,196
$
9,083
1,405
$
9,722
151
18,146
3,000
19,656
10,388
22,857
8,500
70
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Summary of Significant Accounting Policies
Nature of Operations
Unless the context suggests otherwise, the use of the term “Company” refers to First Community Bancshares, Inc. (“the Company”) and its
subsidiaries as a consolidated entity. The Company is a financial holding company headquartered in Bluefield, Virginia that provides banking
products and services to individuals and commercial customers through its wholly-owned subsidiary, First Community Bank (the “Bank”), a
Virginia-chartered banking institution, from 71 locations. The Bank operates under the trade names First Community Bank in Virginia, West
Virginia, and North Carolina and Peoples Community Bank, a Division of First Community Bank, in South Carolina and Tennessee. The
Company offers personal and commercial insurance products and services from 9 locations through its wholly-owned subsidiary Greenpoint
Insurance Group, Inc. (“Greenpoint”), which is headquartered in High Point, North Carolina. Greenpoint operates under the Greenpoint name
and under the trade names First Community Insurance Services (“FCIS”) and Carolina Insurers Associates in North Carolina, Carr &Hyde
Insurance and FCIS in Virginia, and FCIS in West Virginia. The Bank offers wealth management services and investment advice through its
Trust Division and wholly-owned subsidiary First Community Wealth Management (“FCWM”), a registered investment advisory firm. The
Trust Division and FCWM managed $706 million in combined assets as of December 31, 2013. These assets are not assets of the Company,
but are managed under various fee-based arrangements as fiduciary or agent. The Company reported consolidated assets of $2.60 billion as of
December 31, 2013.
The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer
banking, lending activities, wealth management, and insurance services.
Principles of Consolidation
The accounting and reporting policies of the Company conform to generally accepted accounting principles (“GAAP”) in the United States and
to predominant practices in the banking industry. The Company’s consolidated financial statements include the accounts of all wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Assets held in an agency or
fiduciary capacity are not assets of the Company and are not included in the Company’s consolidated balance sheets.
The Company has investments in certain entities that are considered variable interest entities (“VIEs”) under GAAP. These VIEs include the
Company’s trust subsidiary, FCBI Capital Trust (the “Trust”), certain tax credit limited partnerships, and limited liability companies that
provide aviation services, insurance brokerage, title insurance, and other related financial services. VIEs are legal entities in which the equity
investors do not have sufficient equity at risk for the entity to independently finance its activities or the collective holders do not have the
power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, the
obligation to absorb the expected losses of the entity, or the right to receive expected residual returns of the entity. Consolidation of a VIE is
considered appropriate if a reporting entity is the primary beneficiary, the party that has both significant influence and control over the VIE.
Management periodically performs a qualitative analysis to determine if the Company is the primary beneficiary of a VIE. This analysis
includes review of the VIEs’ capital structures, contractual terms, and primary activities, including the Company’s ability to direct the activities
of the VIEs and obligations to absorb losses, or the right to receive benefits, significant to the VIEs. Based on the Company’s analysis for the
periods presented in this report, it is not the primary beneficiary of its VIEs. Accordingly, these entities do not meet the criteria for
consolidation and, therefore, are reported in other assets in the Company’s consolidated balance sheets. The carrying value and maximum
potential loss exposure of VIEs totaled $2.89 million as of December 31, 2013, and $3.04 million as of December 31, 2012.
71
Table of Contents
Use of Estimates
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. The Company has identified the items that require the most subjective assumptions or complex judgments: investment
securities, the allowance for loan losses, the provision for income taxes, and business combination, including intangible assets.
Reclassification
Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no
effect on the Company’s results of operations, financial position, or cash flow.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, time deposits with other banks, federal funds sold, and interest-bearing balances
on deposit with the Federal Home Loan Bank (“FHLB”) that are available for immediate withdrawal.
Investment Securities
Management determines the appropriate classification of securities at the time of purchase. Debt securities that management has the intent and
ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Securities not classified as held to maturity,
including equity securities with readily determinable fair values, are classified as available-for-sale securities and carried at estimated fair
value. Securities classified as available for sale consist of securities management intends to hold for indefinite periods of time, including
securities to be used as part of the Company’s asset/liability management strategy and securities that may be sold in response to changes in
interest rates, prepayment risk, or other similar factors. Unrealized appreciation or depreciation in fair value above or below amortized cost is
included in stockholders’ equity, net of income taxes, under the category of accumulated other comprehensive income (“AOCI”). Gains or
losses on the call, maturity, or sale of investment securities are recorded based on the specific identification method. Purchase premiums and
discounts are amortized or accreted over the life of a security into interest income.
The Company performs an extensive quarterly review to determine if impairment exists in the investment portfolio. If a security is deemed
impaired, management evaluates the causes of unrealized losses to determine whether the impairment is temporary or other-than-temporary in
nature. If a security is determined to be other-than-temporarily impaired, the value of the security is reduced and a corresponding charge to
noninterest income is recognized. If the other-than-temporary impairment (“OTTI”) is related to a debt security, the Company determines the
amount of the impairment related to the credit loss, which is recognized in noninterest income, and the amount related to all other factors,
which is recognized in other comprehensive income (“OCI”).
Loans Held for Sale
Loans originated with the intent to sell in the secondary market are classified as held for sale. Loans held for sale consist primarily of one to
four family residential loans and are carried at the lower of cost or estimated fair value as determined on an aggregate basis. These long-term,
fixed rate loans are sold to investors on a best efforts basis; consequently, the Company does not absorb the interest rate risk involved in these
loans. The fair value of loans held for sale is determined by quoted market prices for loans with similar coupon rates and terms.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company enters into interest rate lock commitments (“IRLCs”) with customers on mortgage loans intended to be sold in the secondary
market and commitments to sell mortgages. These IRLCs and forward sale loan commitments are recorded at fair value in other assets and
liabilities with any changes in fair value recognized in other income. These derivative instruments do not qualify as hedges. The fair value of
IRLC derivatives is determined by quoted market prices for loans with similar coupon rates and terms. The fair value of forward sale loan
commitments is based on changes in the value of the commitment, principally because of changes in interest rates.
Loans Held for Investment
Loans originated with the intent to hold for an indefinite period of time, until maturity, or until pay-off are classified as held for investment.
Loans held for investment are carried at the principal amount outstanding, net of unearned income, less any write-downs necessary to reduce
individual loans to net realizable value. Loan origination fees, including loan commitment and underwriting fees, are reduced by direct costs
associated with loan processing, including salaries, legal review, and appraisal fees. Net deferred loan fees are deferred and amortized over the
life of the related loan or commitment period.
The Company maintains an active and robust problem credit identification system through its ongoing credit review function. When a credit is
identified as exhibiting characteristics of weakening, the Company assesses the credit for potential impairment. Loans are considered impaired
when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under
the contractual terms of the loan agreements are doubtful. The impairment allowances allocated to individual loans, including individual credit
relationships, and loan pools, grouped by similar risk characteristics, are reviewed by management on a quarterly basis. Factors considered in
determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral,
historical loss percentages, and economic conditions.
The Company’s Special Assets staff reviews loans $250 thousand and greater on a quarterly basis. Accrual of interest on loans is generally
based on the daily amount of principal outstanding. Loans are considered past due when either principal or interest payments become
contractually delinquent by 30 or more days. Consumer loans are generally charged off against the allowance for loan losses when the loans
become 120 days past due (180 days if secured by residential real estate and 90 days if unsecured). All other loans are charged off against the
allowance for loan losses after collection attempts have been exhausted, which generally is within 120 days. It is the Company’s policy to
discontinue the accrual of interest, if warranted, on loans based on the payment status, evaluation of the related collateral, and the financial
strength of the borrower. The accrual of interest income is normally discontinued when a loan becomes 90 days past due. Management may
elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued,
interest accrued and not collected in the current year is reversed from income, and interest accrued and not collected from prior years is charged
to the allowance for loan losses. Interest income realized on impaired loans is recognized upon receipt if the impaired loan is on a nonaccrual
basis. Nonaccrual loans may be returned to accrual status if the loan is brought current and follows a period of sustained performance,
including six months of regular principal and interest payments. Accrual of interest on impaired loans is generally continued unless the loan
becomes delinquent 90 days or more. Recoveries of loans previously charged off are credited to the allowance for loan losses in the period
received.
Loans are considered troubled debt restructurings (“TDRs”) when the Company grants concessions, for legal or economic reasons, to
borrowers experiencing financial difficulty that would not otherwise be considered. The Company generally makes concessions in interest
rates, loan terms, and/or amortization terms. All TDRs $250 thousand or greater are evaluated for a specific reserve based on either the
collateral or net present value method,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
whichever is most applicable. TDRs under $250 thousand are subject to the reserve calculation for classified loans based primarily on the
historical loss rate. At the date of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the
date of modification are returned to performing status after six months of satisfactory payment performance; however, these loans remain
identified as impaired until full payment or other satisfaction of the obligation occurs.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan
portfolio. The allowance is increased by charges to earnings in the form of provisions and recoveries of prior loan charge-offs and decreased by
loans charged off. The provision is calculated and charged to earnings to bring the allowance to a level that, according to a systematic process
of measurement, reflects the amount management estimates is needed to absorb probable losses in the portfolio. While management utilizes its
best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s
control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities towards
loan classifications, and other factors. While management has allocated the allowance for loan losses to specific loans and general portfolio
segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.
Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The Company’s allowance is
segmented into commercial, consumer real estate, and consumer and other loans with each segment divided into classes with similar
characteristics, such as the type of loan and collateral. The allowance for loan losses includes specific allocations to significant individual loans
and credit relationships and general reserves to the remaining loans that have been deemed impaired. Loans not specifically identified are
grouped into pools based on similar risk characteristics. A loan that becomes adversely classified or graded is moved into a group of adversely
classified or graded loans with similar risk characteristics for evaluation. Management’s general reserve allocations are based on judgments of
qualitative and quantitative factors about macro and micro economic conditions reflected in the loan portfolio and the economy.
No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision
for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Purchased credit impaired
(“PCI”) loans are grouped into pools and evaluated separately from the non-PCI portfolio. The Company estimates cash flows to be collected
on PCI loans and discounts those cash flows at a market rate of interest. If cash flows for PCI loans are expected to decline, generally a
provision for loan losses is charged to earnings, resulting in an increase to the allowance for loan losses. If cash flows for PCI loans are
expected to improve, any previously established allowance is first reversed to the extent of prior charges and then interest income is increased
using prospective yield adjustment over the remaining life of the loan, or pool of loans. Any provision established for PCI loans covered under
the Federal Deposit Insurance Corporation (“FDIC”) loss share agreements is offset by an adjustment to the FDIC indemnification asset to
reflect the indemnified portion of the post-acquisition exposure.
Other Real Estate Owned
Other real estate owned (“OREO”) and acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less
estimated selling costs. The fair value is generally based on current third-party appraisals. When a property is transferred into OREO, any
excess of the loan balance over the net realizable fair value is charged against the allowance for loan losses. Operating expenses, gains, and
losses on the sale of OREO are included in other noninterest expense in the Company’s consolidated statements of income after any fair value
write-downs are recorded as valuation adjustments.
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Business Combinations
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company may engage in business combinations with other companies. These transactions are accounted for using Topic 805 of the
Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), which requires the use of the acquisition
method of accounting. In accordance with the acquisition method of accounting, all identifiable assets acquired, including purchased loans, and
liabilities are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In
instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded.
Management makes significant estimates and judgments in accounting for business combinations. Fair values are assigned based on quoted
prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories.
Management must also make estimates for the useful or economic lives of certain acquired assets and liabilities. These lives are used in
establishing the amortization and accretion of some intangible assets and liabilities, such as core deposits obtained in the acquisition of
commercial banks. 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. The results of operations of an acquired entity are included in the Company’s
consolidated results of operations from the closing date of the merger.
Purchased loans are recorded using the fair value methodology outlined in Topic 820 of the FASB ASC, exclusive of loss share agreements
with the FDIC. The fair value estimates associated with loans include expected prepayments and the amount and timing of expected principal,
interest, and other cash flows. No allowance for loan losses is recorded at acquisition for purchased loans because the fair values of the
acquired loans incorporate assumptions regarding credit risk.
When purchased loans exhibit evidence of credit deterioration after the acquisition date, and it is probable at acquisition the Company will not
collect all contractually required principal and interest payments, the loans are referred to as PCI loans. PCI loans are accounted for using Topic
310-30 of the FASB ASC, formerly the American Institute of Certified Public Accountants’ Statement of Position 03-3, “Accounting for
Certain Loans or Debt Securities Acquired in a Transfer.” PCI loans are initially measured at fair value, which includes estimated future credit
losses expected to be incurred over the life of the loans. In accordance with the guidance, the Company aggregates PCI loans that have
common risk characteristics into loan pools. The Company has established the following loan pools related to the acquisitions of Peoples Bank
of Virginia (“Peoples”) and Waccamaw Bank (“Waccamaw”) for evaluation: Waccamaw commercial, Waccamaw lines of credit, Peoples
commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. Evidence of credit
quality deterioration at acquisition 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 identified as credit impaired. If the contractually required payments at
acquisition exceed the cash flows expected to be collected, the excess is the non-accretable difference, which is available to absorb credit losses
on those loans or pools of loans. If the cash flows expected at acquisition exceed the estimated fair values, the excess is the accretable yield,
which is recognized in interest income over the remaining lives of those loans or pools of loans when there is a reasonable expectation about
the amount and timing of such cash flows.
Purchased performing loans are accounting for using the contractual cash flow method of accounting, which results in these loans being
recorded at fair value with a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated contractual lives of
the loans. Additional information regarding the
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
accounting and valuation of the allowance for loan losses related to purchased loans, intangible assets, and receivables resulting from FDIC-
assisted transactions is found in this note of the consolidated financial statements.
Federal Deposit Insurance Corporation Indemnification Asset
The FDIC indemnification asset represents the carrying amount of the right to receive payments from the FDIC for losses incurred on specified
assets purchased from the FDIC that are covered by loss share agreements. The FDIC indemnification asset is measured separately from related
covered assets because it is not contractually embedded in the assets or transferable should the assets be disposed. In accordance with the
acquisition method of accounting, the FDIC indemnification asset was recorded at fair value using projected cash flows based on expected
reimbursements and applicable loss share percentages as outlined in the loss share agreements with the FDIC. The expected reimbursements
did not include reimbursable amounts related to future covered expenditures. The cash flows were discounted to reflect the timing and receipt
of reimbursements from the FDIC. The discount is accreted through noninterest income over future periods. The Company regularly reviews
the fair value of the FDIC indemnification asset with input from a third-party provider. Post-acquisition adjustments to the indemnification
asset are measured on the same basis as the underlying covered assets. Increases in the cash flows of covered loans reduce the FDIC
indemnification asset balance, which is recognized as amortization through noninterest income over the shorter of the remaining life of the
FDIC indemnification asset or the underlying loans. Decreases in the cash flows of covered loans increase the FDIC indemnification asset
balance, which is recognized as accretion through noninterest income. The realization of the FDIC indemnification asset ultimately depends on
the performance of the underlying covered assets, the passage of time, and claims paid by the FDIC; therefore, the amount the Company
realizes could differ materially from the carrying value.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and
equipment; 3 to 5 years for software, hardware, and data handling equipment; and 10 to 40 years for buildings and building improvements.
Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the
respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements.
The Company leases various properties within its branch network. Leases generally have initial terms of up to 20 years and most contain
options to renew with reasonable increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to
current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses
are reflected in current operations.
Goodwill and Other Intangible Assets
Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business
combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, and it is allocated to the
appropriate reporting unit when acquired. The Company maintains two reporting units, Community Banking and Insurance Services. Goodwill
is not amortized, but is tested annually in the fourth quarter using a qualitative assessment to determine if it is more likely than not that the fair
value of each reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of either
reporting unit is less than its carrying amount, the two-step quantitative goodwill impairment test is performed. Step 1 consists of calculating
and comparing the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is greater
than its book value, no
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
goodwill impairment exists. If the carrying amount of a reporting unit is greater than its calculated fair value, goodwill impairment may exist
and Step 2 is required to determine the amount of the impairment loss. The Company performed its annual impairment test of goodwill as of
October 31, 2013, and determined that qualitatively that it was more likely than not that goodwill was not impaired; therefore, the Step 1 and
Step 2 tests were not deemed necessary. Qualitative factors considered in the analysis included macroeconomic conditions, industry and market
considerations, overall financial performance, changes in stock price, and the Company’s progress towards stated objectives as compared to
prior years. An impairment charge to goodwill and other intangible assets may be required in the future if the Company’s future earnings and
cash flows decline or discount rates used in determining fair value increase. No events have occurred after the 2013 analysis to indicate
additional impairment.
Core deposit intangible assets represent the future earnings potential of acquired deposit relationships and are amortized over their estimated
remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements and are
amortized using the straight-line method.
Other Investments
As a condition of membership in the FHLB and the Federal Reserve Bank (“FRB”), the Company is required to subscribe to a minimum level
of stock in the FHLB of Atlanta (“FHLBA”) and FRB of Richmond. These securities are reported in other assets in the Company’s
consolidated balance sheets. There is no market for these securities and ownership is restricted; therefore, readily determinable fair values are
not available. The Company carries these nonmarketable securities at cost and reviews the FHLB of Atlanta stock quarterly for impairment.
The Company believes the FHLB of Atlanta ownership position provides access to relatively inexpensive wholesale and overnight funding.
During 2013 and 2012 the FHLBA repurchased excess activity-based stock and paid quarterly cash dividends. Based on publicly available
information as of December 31, 2013, the Company believed that its FHLBA stock was not impaired. The investment in FHLBA stock was
$10.72 million as of December 31, 2013, and $11.30 million as of December 31, 2012. The investment in FRB of Richmond stock was $5.58
million as of December 31, 2013, and $5.57 million as of December 31, 2012.
The Company maintains long-term investments in various entities, including the Trust, certain tax credit limited partnerships, and other limited
liability companies that provide aviation services, insurance brokerage, title insurance, and other related financial services. These entities are
reported in other assets in the Company’s consolidated balance sheets. Investments in entities that the Company has no significant influence or
control over, generally ownership interests of less than 20%, are recorded using the cost method of accounting. In accordance with the cost
method, these investments do not have readily determinable fair values and dividends received are generally recorded as income. Investments
in entities that the Company has the ability to exercise significant influence over but not control, generally ownership interests ranging from
20% to 50%, are recorded using the equity method of accounting. In accordance with the equity method, dividends received generally reduce
the carrying amount of the investment, and the investment is adjusted to recognize the Company’s share of the entity’s earnings, losses, and
changes in capital, if any. Management believes any future adjustments to equity investments will be immaterial. All long-term investments are
reviewed periodically for possible impairment. The carrying value and maximum potential loss of equity investments totaled $786 thousand as
of December 31, 2013, and $782 thousand as of December 31, 2012.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions. Securities, generally U.S.
government and federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the
secured party. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided as
appropriate.
Advertising Expenses
Advertising costs are generally expensed as incurred. The Company may establish accruals for anticipated advertising expenses in the course of
a fiscal year.
Equity-Based Compensation
The cost of employee services received in exchange for equity instruments, such as stock options and restricted stock awards, is generally
measured at fair value on the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of
the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the
required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards.
For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Income Taxes
Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company
includes interest and penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percentage
of pre-tax income, may vary significantly from statutory rates due to tax credits and permanent differences. Deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
The Company and its subsidiaries’ tax filings for the years ended December 31, 2009 through 2012 are currently open to audit under statutes of
limitation by the Internal Revenue Service and various state tax departments.
Earnings per Common Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that
could be issued by the Company. In accordance with the treasury stock method of accounting, potential common stock could be issued for
stock options, nonvested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per
common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the
number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that
have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
(Amounts in thousands, except share and per share data)
Net income
Dividends on preferred stock
Net income available to common shareholders
Weighted average number of common shares outstanding, basic
Dilutive effect of potential common shares from:
Stock options
Restricted stock
Convertible preferred stock
Contingently issuable shares
Weighted average number of common shares outstanding, diluted
Basic earnings per common share
Diluted earnings per common share
Antidilutive potential common shares:
Stock options
Restricted stock
Total potential antidilutive shares
2013
$
23,312
1,024
$
22,288
19,792,099
19,337
5,014
1,132,998
12,352
20,961,800
1.13
$
1.11
$
Year Ended December 31,
2012
$
28,577
1,058
$
27,519
19,127,065
4,549
2,107
1,285,848
—
20,419,569
1.44
$
1.40
$
2011
$
20,028
703
$
19,325
17,877,421
1,390
343
808,367
—
18,687,521
1.08
$
1.07
$
317,420
271
317,691
420,802
—
420,802
393,133
2,343
395,476
The Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carries a 6% dividend rate. Each share of
the Series A Preferred Stock is convertible into 69 shares of the Company’s common stock at any time and mandatorily converts after five
years. The Company may redeem the shares at face value after May 20, 2014. The number of Series A Preferred Stock outstanding was 15,251
as of December 31, 2013, 17,421 as of December 31, 2012, and 18,921 shares as of December 31, 2011.
Derivative Instruments
A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices,
currencies, commodity prices, or credit spreads. Derivatives include futures, forwards, swaps, option contracts, and other financial instruments
with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based
on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or to purchase or sell other financial instruments at specified
terms on a specified date (e.g., options to buy or sell securities or currencies). The Company enters into derivative transactions principally to
protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. All
derivative instruments are reported at fair value in the balance sheets.
If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. Changes in the
fair value of a derivative instrument vary depending on the intended use of the derivative and the resulting designation. The Company accounts
for fair value hedges using the regression analysis method. The hedged item is regressed with the hedging instrument and if the coefficient of
determination is at least 0.80 the hedge will be deemed effective. The change in fair value of the hedging derivative and the change in fair value
of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of
derivatives not designated as
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging
instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. As of December 31,
2013, the Company had one interest rate swap that qualified as a fair value hedging instrument. The Company’s other derivative instruments
include various IRLCs and forward sale loan commitments that do not qualify as hedging instruments.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or
most advantageous, market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly
transaction is a transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that
are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and
sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.
The fair value hierarchy is as follows:
Level 1 Inputs –
Level 2 Inputs –
Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the
asset or liability and provide a reasonable basis for fair value determination, such as interest rates, yield curves,
volatilities, prepayment speeds, default rates, and credit risks, or inputs that are principally derived from observable
market data.
Level 3 Inputs –
Unobservable inputs for determining the fair values of assets or liabilities when there is little or no market activity at the
measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that
inputs are available without undue cost and effort. These inputs and assumptions may include model-derived inputs that
are not corroborated by observable market data and an entity’s own assumptions.
These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value. In general, fair value is based
upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon third-party models that
primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among
other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation
methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While
management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting Standards Updates
In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income,” which requires an entity to provide information about the amounts reclassified out of accumulated other
comprehensive income. An entity is required to present, either on the face of the statement where net income is presented or in the notes,
significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the
amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts not
required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required
under GAAP that provide additional detail about these amounts. This update is effective prospectively for interim and annual periods beginning
on or after December 15, 2012. The Company adopted the guidance in 2013 and has included the related disclosures in Note 17, “Accumulated
Other Comprehensive Income,” to the Consolidated Financial Statements of this report.
In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset
Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB
Emerging Issues Task Force),” to address the diversity in practice about how to subsequently measure an indemnification asset recognized as a
result of a government-assisted acquisition of a financial institution. The amendments in ASU 2012-06 require a reporting entity to
subsequently account for a change in the measurement of the indemnification asset on the same basis as the change in the assets subject to
indemnification. ASU 2012-06 further requires that any amortization of changes in value be limited to the lesser of the term of the
indemnification agreement and the remaining life of the indemnified assets. The amendments in ASU 2012-06 are effective prospectively for
fiscal years beginning on or after December 15, 2012, and early adoption is permitted. The Company adopted the guidance in 2013 and has
recognized negative accretion related to the indemnification asset.
Note 2. Acquisitions and Divestitures
Peoples Bank of Virginia
On May 31, 2012, the Company completed the acquisition of Peoples, based in Richmond, Virginia. Peoples, a full service community bank,
operated 4 branches throughout the Richmond area. At acquisition, Peoples had total assets of $275.76 million, loans of $184.84 million, and
deposits of $232.75 million. The purchase price was $40.28 million, including common stock valued at $26.47 million and cash consideration
of $12.26 million. The Company issued 2,157,005 shares of common stock with an estimated fair value of $12.27 per share. Each outstanding
share of Peoples was exchanged for $6.08 in cash and 1.07 shares of the Company’s common stock. The Company recorded goodwill of
$10.32 million from the acquisition.
Waccamaw Bank
On June 8, 2012, the Company entered into a purchase and assumption agreement with loss share arrangements with the FDIC to purchase
certain assets and assume substantially all of the deposits and certain liabilities of Waccamaw, headquartered in Whiteville, North Carolina.
Waccamaw, a full service community bank, operated 16 branches throughout North Carolina and South Carolina. At acquisition, Waccamaw
had total assets of $500.64 million, loans of $318.35 million, and deposits of $414.13 million. Under the loss share agreements, the FDIC
covers 80% of most loan and foreclosed real estate losses. The Company recorded an indemnification asset of $49.76 million at acquisition
representing the present value of estimated losses on covered assets to be reimbursed by the FDIC. The Company recorded goodwill of $10.62
million from the acquisition.
81
Table of Contents
Insurance Services
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2013 the Company issued cash consideration of $150 thousand to purchase one agency. The acquisition terms call for further cash
consideration of $253 thousand if certain operating targets are met. The fair value of these payments was booked at acquisition and added $324
thousand of goodwill and other intangibles to the Company’s consolidated balance sheet as of December 31, 2013. In 2011 Greenpoint
received cash of $1.58 million from the sale of two agencies.
Acquisitions that occurred before 2009 call for issuing further cash consideration if certain operating targets are met. If those targets are met,
the value of the consideration will be added to the cost of the acquisition. Earn-out payments related to these acquisitions totaled $442 thousand
in 2013, $692 thousand in 2012, and $680 thousand in 2011.
Net Cash Paid (Acquired) in Acquisitions and Divestitures
The following table presents the components of net cash acquired, or paid, in acquisitions and divestitures, an investing activity in the
Company’s statements of cash flows, in the periods indicated:
(Amounts in thousands)
Acquisitions
Fair value of assets and liabilities acquired:
Investments
Loans
Premises and equipment
Other assets
Deposits
Other liabilities
Purchase price in excess of net assets acquired
Total purchase price
Non-cash purchase price
Cash acquired
Net cash paid (acquired) in acquisitions
Divestitures
Book value of assets sold
Book value of liabilities sold
Sales price in excess of net liabilities assumed
Total sales price
Cash sold
Amount due remaining on books
Net cash acquired in divestitures
Net cash paid (acquired) in acquisitions and divestitures
82
2013
Year Ended December 31,
2012
2011
$ —
281
—
—
—
—
663
944
247
—
697
—
—
—
—
—
—
—
$ 697
$ 62,919
419,320
7,535
255,924
(649,184 )
(60,085 )
21,810
58,239
26,469
184,053
(152,283 )
—
—
—
—
—
—
—
$ (152,283 )
$ —
—
—
—
—
—
680
680
—
—
680
(1,678 )
170
(67 )
(1,575 )
—
60
(1,515 )
$ (835 )
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 3.
Investment Securities
The following tables present the amortized cost and fair value of available-for-sale securities, including gross unrealized gains and losses, as of
the dates indicated:
(Amounts in thousands)
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Mortgage-backed securities:
Agency
Non-Agency Alt-A residential
Total mortgage-backed securities
Equity securities
Total
(Amounts in thousands)
Municipal securities
Single issue trust preferred securities
Mortgage-backed securities:
Agency
Non-Agency Alt-A residential
Total mortgage-backed securities
Equity securities
Total
Amortized
Cost
$ 9,708
147,049
55,764
5,000
306,319
12,543
318,862
5,259
$ 541,642
Amortized
Cost
$ 151,119
55,707
310,323
14,215
324,538
3,446
$ 534,810
(1) Other-than-temporary impairment in accumulated other comprehensive income
83
Unrealized
Gains
$ —
1,868
—
—
2,575
—
2,575
24
$ 4,467
Unrealized
Gains
$ 8,195
—
6,023
—
6,023
190
$ 14,408
December 31, 2013
Unrealized
Losses
(695 )
$
(4,637 )
(9,530 )
(129 )
(8,508 )
(2,754 )
(11,262 )
(36 )
$ (26,289 )
December 31, 2012
Unrealized
Losses
$
(97 )
(11,061 )
(449 )
(3,148 )
(3,597 )
(105 )
$ (14,860 )
Fair
Value
$ 9,013
144,280
46,234
4,871
300,386
9,789
310,175
5,247
$ 519,820
Fair Value
$ 159,217
44,646
315,897
11,067
326,964
3,531
$ 534,358
OTTI in
(1)
AOCI
$ —
—
—
—
—
(2,754 )
(2,754 )
—
$ (2,754 )
OTTI in
(1)
AOCI
$ —
—
—
(3,148 )
(3,148 )
—
$ (3,148 )
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the amortized cost, fair value, and weighted-average yield of available-for-sale securities, by contractual maturity,
as of December 31, 2013. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without penalties.
(Amounts in thousands)
Amortized cost maturity:
Within one year
After one year through five
years
After five years through ten
years
After ten years
Amortized cost
Mortgage-backed securities
Equity securities
Total amortized cost
Tax equivalent purchase yield
Average contractual maturity (in
years)
Fair value maturity:
Within one year
After one year through five
After five years through ten
years
years
After ten years
Fair value
Mortgage-backed securities
Equity securities
Total fair value
(1) Fully taxable equivalent at the rate of 35%.
U.S. Treasury
Securities
Municipal
Securities
Corporate Notes
Total
Tax Equivalent
Purchase
(1)
Yield
$
—
$ 1,386
$
—
$ 1,386
—
14,227
—
14,227
9,708
—
9,708
$
131,436
—
$ 147,049
55,762
5,002
60,764
$
3.85 %
5.69 %
3.63 %
1.15 %
2.50 %
4.92 %
2.09 %
9.38
4.76 %
10.42
1.34 %
13.55
11.25
$
—
$ 1,393
$
—
$ 1,393
—
14,557
—
14,557
9,013
—
9,013
$
128,330
—
$ 144,280
47,131
3,974
51,105
$
196,906
5,002
217,521
318,862
5,259
$ 541,642
3.01 %
184,474
3,974
204,398
310,175
5,247
$ 519,820
The following tables present the amortized cost and fair value of held-to-maturity securities, including gross unrealized gains and losses, as of
the dates indicated:
(Amounts in thousands)
Municipal securities
Total
(Amounts in thousands)
Municipal securities
Total
Amortized
Cost
$
$
568
568
December 31, 2013
Unrealized
Gains
$
$
11
11
Unrealized
Losses
$ —
$ —
December 31, 2012
Amortized
Cost
$
$
816
816
Unrealized
Gains
$
$
16
16
Unrealized
Losses
$ —
$ —
Fair
Value
$ 579
$ 579
Fair
Value
$ 832
$ 832
84
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the amortized cost, fair value, and weighted-average yield of held-to-maturity securities, by contractual maturity,
as of December 31, 2013. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without penalties.
(Amounts in thousands)
Amortized cost maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Total amortized cost
Tax equivalent purchase yield
Average contractual maturity (in years)
Fair value maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Total fair value
Tax Equivalent
Purchase
(1)
Yield
8.05 %
8.17 %
—
—
Municipal
Securities
$
190
378
—
—
568
$
8.13 %
1.33
$
193
386
—
—
579
$
(1) Fully taxable equivalent at the rate of 35%.
The following table presents municipal securities, by state, for the states where the largest volume of these securities are held in the Company’s
portfolio. The table also presents the amortized cost and fair value of the municipal securities, including gross unrealized gains and losses, as of
the dates indicated.
(Amounts in thousands)
New York
Minnesota
New Jersey
Connecticut
Wisconsin
Ohio
Massachusetts
Texas
Other
Total
Percent of
Municipal Portfolio
11.34 %
8.56 %
8.18 %
7.86 %
7.83 %
7.45 %
6.85 %
6.24 %
35.68 %
100.00 %
December 31, 2013
Unrealized Gains
294
$
174
306
91
118
135
119
134
508
1,879
$
Amortized Cost
16,161
$
12,504
11,565
11,406
11,815
11,299
10,102
9,483
53,282
147,617
$
85
Unrealized Losses
(28 )
$
(279 )
(25 )
(109 )
(584 )
(637 )
(295 )
(576 )
(2,104 )
(4,637 )
$
Fair Value
$ 16,427
12,399
11,846
11,388
11,349
10,797
9,926
9,041
51,686
$ 144,859
Table of Contents
(Amounts in thousands)
New York
Wisconsin
Minnesota
New Jersey
Connecticut
Texas
Ohio
Massachusetts
Other
Total
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Percent of
Municipal Portfolio
11.04 %
8.66 %
8.61 %
8.01 %
7.72 %
7.42 %
7.31 %
6.98 %
34.25 %
100.00 %
Amortized Cost
16,552
$
13,266
12,990
11,940
11,693
11,416
11,147
10,531
52,400
151,935
$
December 31, 2013
Unrealized Gains
1,114
$
602
798
874
660
470
575
642
2,476
8,211
$
Unrealized Losses
—
$
—
(4 )
—
—
(16 )
(21 )
(3 )
(53 )
(97 )
$
Fair Value
$ 17,666
13,868
13,784
12,814
12,353
11,870
11,701
11,170
54,823
$ 160,049
The following tables present the fair values and unrealized losses for available-for-sale securities in a continuous unrealized loss position for
less than 12 months and for 12 months or longer as of the dates indicated. There were no held-to-maturity securities in a continuous unrealized
loss position as of December 31, 2013 or 2012.
(Amounts in thousands)
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Mortgage-backed securities:
Agency
Non-Agency Alt-A residential
Total mortgage-backed securities
Equity securities
Total
(Amounts in thousands)
Municipal securities
Single issue trust preferred securities
Mortgage-backed securities:
Agency
Non-Agency Alt-A residential
Total mortgage-backed securities
Equity securities
Total
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2013
12 Months or longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
(695 ) $ — $ — $ 9,012 $
$ 9,012 $
57,950
—
4,872
(4,147 )
—
(129 )
3,049
46,234
—
(490 )
(9,530 )
—
60,999
46,234
4,872
(695 )
(4,637 )
(9,530 )
(129 )
114,047
—
114,047
4,976
(8,508 )
(2,754 )
(11,262 )
(36 )
$ 190,857 $ (9,356 ) $ 114,798 $ (16,933 ) $ 305,655 $ (26,289 )
169,753
9,789
179,542
4,996
55,706
9,789
65,495
20
(4,147 )
(2,754 )
(6,901 )
(12 )
(4,361 )
—
(4,361 )
(24 )
Less than 12 Months
Unrealized
Losses
$
(97 )
—
(449 )
—
(449 )
(25 )
(571 )
$
Fair Value
$ 6,436
—
74,197
—
74,197
3,106
$ 83,739
86
December 31, 2012
12 Months or longer
Fair
Value
$ —
44,646
Unrealized
Losses
$ —
(11,061 )
Total
Fair
Value
$ 6,436
44,646
15
11,066
11,081
108
$ 55,835
—
(3,148 )
(3,148 )
(80 )
$ (14,289 )
74,212
11,066
85,278
3,214
$ 139,574
Unrealized
Losses
$
(97 )
(11,061 )
(449 )
(3,148 )
(3,597 )
(105 )
$ (14,860 )
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2013, there were 219 individual securities in an unrealized loss position, and their combined depreciation in value
represented 5.06% of the available-for-sale securities portfolio. Individual securities in an unrealized loss position as of December 31, 2013,
included 32 securities in a continuous unrealized loss position for 12 months or longer that the Company does not intend to sell, and that it has
determined is not more likely than not going to be required to sell, prior to the maturities or recoveries of the securities. As of December 31,
2012, there were 57 individual securities in an unrealized loss position, and their combined depreciation in value represented 2.78% of the
available-for-sale securities portfolio.
The following table presents the components of the Company’s net gain from the sale of securities in the periods indicated:
(Amounts in thousands)
Gross realized gains
Gross realized losses
Net gain on sale of securities
2013
$ 553
(154 )
$ 399
Year Ended December 31,
2012
$ 723
(240 )
$ 483
2011
$ 6,963
(1,699 )
$ 5,264
The carrying value of securities pledged to secure public deposits and other purposes was $284.77 million as of December 31, 2013, and
$292.88 million as of December 31, 2012.
The Company reviews its investment portfolio on a quarterly basis for indications of OTTI. Debt securities not beneficially owned by the
Company include securities issued from the U.S. Department of the Treasury (the “Treasury”), municipal securities, and single issue trust
preferred securities. For debt securities not beneficially owned, the Company analyzes factors such as the severity and duration of the
impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating
agencies, and other qualitative factors to determine if the impairment will be recovered. If the evaluation suggests that the impairment will not
be recovered, the Company calculates the present value of the security to determine the amount of OTTI. The security is then written down to
its current present value and the Company calculates and records the amount of the loss due to credit factors in earnings through noninterest
income and the amount due to other factors in stockholders’ equity through OCI. During 2013 and 2012, the Company incurred no OTTI
charges related to debt securities not beneficially owned. Temporary impairment on these securities is primarily related to changes in interest
rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors.
Debt securities beneficially owned by the Company consist of corporate FDIC securities and mortgage-backed securities (“MBS”). For debt
securities beneficially owned, the Company analyzes the cash flows for each applicable security to determine if an adverse change in cash
flows expected to be collected has occurred. If the projected value of cash flows at the current reporting date is less than the present value
previously projected, and less than the current book value, an adverse change has occurred. The Company then compares the current present
value of cash flows to the current net book value to determine the credit-related portion of the OTTI. The credit-related OTTI is recorded in
earnings through noninterest income and any remaining noncredit-related OTTI is recorded in stockholders’ equity through OCI. The Company
incurred credit-related OTTI charges related to debt securities beneficially owned of $320 thousand in 2013 and $942 thousand in 2012. These
charges were related to a non-Agency MBS.
The Company uses a discounted cash flow model for the non-Agency Alt-A residential MBS with the following assumptions: constant
voluntary prepayment rate of 2%, a customized constant default rate scenario that assumes
87
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
approximately 16% of the remaining underlying mortgages will default over the life of the security, and a customized loss severity rate scenario
that ramps the loss rate down from 55% to 10% over the course of approximately three years. The following table presents the activity for
credit-related losses recognized in earnings on debt securities where a portion of an OTTI was recognized in OCI for the periods indicated:
(1)
(Amounts in thousands)
Beginning balance
Additions for credit losses on securities not previously recognized
Additions for credit losses on securities previously recognized
Reduction for increases in cash flows
Reduction for securities management no longer intends to hold to recovery
Reduction for securities sold/realized losses
Ending balance
Year Ended December 31,
2012
$ 6,536
—
942
—
—
—
$ 7,478
2013
$ 7,478
—
320
—
—
—
$ 7,798
2011
$ 4,251
—
2,285
—
—
—
$ 6,536
(1) The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods.
For equity securities, the Company considers its intent to hold or sell the security before recovery, the severity and duration of the decline in
fair value of the security below its cost, the financial condition and near-term prospects of the issuer, and whether the decline appears to be
related to issuer, general market, or industry conditions to determine if the impairment will be recovered. If the Company deems the
impairment other-than-temporary in nature, the security is written down to its current present value and the OTTI loss is charged to earnings.
During 2013 and 2012, the Company recognized no OTTI charges related to equity securities.
88
Table of Contents
Note 4.
Loans
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s loans held for investment are grouped into three segments (commercial loans, consumer real estate loans, and consumer and
other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in FDIC-assisted transactions that are
covered by loss share agreements. Deferred loan fees were $3.16 million as of December 31, 2013, $2.36 million as of December 31, 2012, and
$1.69 million as of December 31, 2011. Customer overdrafts are reclassified as loans and totaled $1.42 million as of December 31, 2013, and
$1.55 million as of December 31, 2012. The following table presents loans, net of unearned income and disaggregated by class, as of the
periods indicated:
(Amounts in thousands)
Non-covered loans held for investment
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total non-covered loans
Total covered loans
Total loans held for investment, net of unearned income
Loans held for sale
89
December 31,
2013
2012
Amount
Percent
Amount
Percent
$ 35,255
95,455
70,197
135,559
475,911
2,324
32,614
847,315
2.06 %
5.58 %
4.10 %
7.92 %
27.82 %
0.14 %
1.91 %
49.53 %
$
57,434
88,738
65,694
135,912
448,810
1,709
34,570
832,867
3.33 %
5.15 %
3.81 %
7.88 %
26.02 %
0.10 %
2.00 %
48.29 %
111,770
496,012
28,703
636,485
6.53 %
28.99 %
1.68 %
37.20 %
111,081
473,547
16,223
600,851
6.44 %
27.46 %
0.94 %
34.84 %
71,313
3,926
75,239
1,559,039
151,682
$ 1,710,721
883
$
4.17 %
0.23 %
4.40 %
91.13 %
8.87 %
100.00 %
78,163
5,666
83,829
1,517,547
207,106
$ 1,724,653
6,672
$
4.53 %
0.33 %
4.86 %
87.99 %
12.01 %
100.00 %
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the components of the Company’s covered loan portfolio, disaggregated by class, as of the dates indicated:
(Amounts in thousands)
Covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Total covered loans
December 31,
2013
2012
$ 15,865
3,325
1,933
7,449
34,646
164
873
64,255
69,206
16,919
1,184
87,309
$ 26,595
6,948
2,611
11,428
48,565
144
1,091
97,382
81,445
22,961
1,644
106,050
118
$ 151,682
3,674
$ 207,106
For information concerning off-balance sheet financing, see Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated
Financial Statements of this report.
Purchased Credit Impaired Loans
When the fair values of purchased loans are established at acquisition, certain loans are identified as impaired. These PCI loans are aggregated
into loan pools that have common risk characteristics. The Company’s loan pools consist of Waccamaw commercial, Waccamaw lines of
credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer.
The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. The following table
presents the carrying and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:
(Amounts in thousands)
Carrying balance, January 1, 2011
Carrying balance, December 31, 2011
Unpaid principal balance, December 31, 2011
Carrying balance, January 1, 2012
Impaired loans acquired
Carrying balance, December 31, 2012
Unpaid principal balance, December 31, 2012
Carrying balance, January 1, 2013
Carrying balance, December 31, 2013
Unpaid principal balance, December 31, 2013
Peoples Waccamaw
$ —
32,603
26,907
34,644
$ 26,907
9,196
17,431
$ —
117,572
112,093
157,781
$ 112,093
70,584
105,677
Other
$ 3,221
2,886
6,824
$ 2,886
—
2,340
5,918
$ 2,340
1,931
5,390
Total
$ 3,221
2,886
6,824
$ 2,886
150,175
141,340
198,343
$ 141,340
81,711
128,498
90
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the activity in the accretable yield related to PCI loans, by acquisition, in the periods indicated:
(Amounts in thousands)
Balance, January 1, 2011
Accretion
Reclassifications from nonaccretable difference
Disposals
Balance, December 31, 2011
Balance, January 1, 2012
Additions
Accretion
Reclassifications from nonaccretable difference
Disposals
Balance, December 31, 2012
Balance, January 1, 2013
Additions
Accretion
Reclassifications from (to) nonaccretable difference
Disposals
Balance, December 31, 2013
Peoples
Waccamaw
$ —
3,400
(856 )
—
(202 )
$ 2,342
$ 2,342
148
(1,840 )
6,155
(1,511 )
$ 5,294
$ —
26,481
(3,315 )
—
(1,280 )
$ 21,886
$ 21,886
281
(6,288 )
(2,967 )
(2,574 )
$ 10,338
Other
$ 944
(174 )
149
—
$ 919
$ 919
—
(1,089 )
185
—
15
$
$
15
—
(119 )
112
—
8
$
Total
$ 944
(174 )
149
—
$ 919
$ 919
29,881
(5,260 )
185
(1,482 )
$ 24,243
$ 24,243
429
(8,247 )
3,300
(4,085 )
$ 15,640
Note 5. Credit Quality
The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal
processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and
interest amounts contractually due will not be collected, the loan is generally deemed to be impaired.
91
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of
the periods indicated:
(Amounts in thousands)
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with no related allowance
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with a related allowance
Total impaired loans
December 31, 2013
Recorded
Investment
Average Annual
Recorded Investment
Unpaid
Principal
Balance
Related
Allowance
$ —
292
—
289
5,352
—
351
257
2,006
—
—
8,547
$ —
4,897
—
375
600
—
—
215
4,844
—
—
10,931
$ 19,478
92
$
$
$
3,850
698
18
939
7,225
—
370
454
2,156
15
$ —
292
—
317
5,682
—
363
264
2,414
—
3
15,728
—
9,332
1,057
4,281
94
892
1,494
—
—
304
4,498
—
—
12,620
28,348
$ —
10,244
—
375
600
—
—
230
5,035
—
—
16,484
$ 25,816
$ —
—
—
—
—
—
—
—
—
—
—
—
$ —
3,794
—
47
114
—
—
52
735
—
—
4,742
$ 4,742
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with no related allowance
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with a related allowance
Total impaired loans
December 31, 2012
Recorded
Investment
Average Annual
Recorded Investment
Unpaid
Principal
Balance
Related
Allowance
$ 2,916
284
—
383
5,282
—
—
276
277
—
—
9,418
—
3,318
378
2,411
2,781
—
—
223
4,673
—
—
13,784
$ 23,202
93
$
$
935
320
517
1,101
2,619
—
93
370
4,441
—
$ 2,916
284
—
684
5,362
—
—
277
383
—
1
10,397
—
9,906
69
4,510
143
2,484
5,820
—
93
150
3,511
—
—
16,780
27,177
—
8,502
397
2,460
2,958
—
—
230
4,903
—
—
19,450
$ 29,356
$ —
—
—
—
—
—
—
—
—
—
—
—
—
3,192
18
996
358
—
—
223
806
—
—
5,593
$ 5,593
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents interest income recognized on impaired loans, excluding PCI loans, in the periods indicated:
(Amounts in thousands)
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with no related allowance
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with a related allowance
Total impaired loans
94
Year ended December 31,
2012
2013
2011
$ 294
17
3
99
296
—
12
$
3
17
4
56
102
—
—
25
70
5
28
113
—
$ —
4
24
39
25
—
—
15
43
3
—
821
—
323
2
155
117
18
7
3
29
—
—
1
948
3
80
317
—
—
12
54
—
1
103
—
—
240
$ 1,061
—
1,453
$ 1,776
9
21
—
107
191
—
—
—
164
—
—
492
$ 647
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2013, the Company determined that 4 of the 7 PCI loan pools were impaired. No impairment was recognized on loan pools
before 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods,
indicated:
(Amounts in thousands)
Recorded investment
Average annual recorded investment
Unpaid principal balance
Allowance for loan losses
(Amounts in thousands)
Interest income recognized
December 31,
2013
$ 52,033
35,220
69,320
747
2012
$ —
—
—
—
Year ended December 31,
2013
$ 1,966
2012
$ —
2011
$ —
As part of the ongoing monitoring of the Company’s loan portfolio, management tracks certain credit quality indicators that include: trends
related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general
economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $3.0 million on an
annual basis and at various times during the year. In addition, smaller commercial and retail loans are sampled for review during the year. Loan
risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The Company uses a risk
grading matrix to assign a risk grade to each loan in its portfolio. The general characteristics of each risk grade are as follows:
•
•
Pass – This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on
borrower characteristics that include: capital strength, earnings stability, liquidity leverage, and industry conditions.
Special Mention – This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the
characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create
potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment
may worsen.
Substandard – This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure,
possible. In order to meet repayment terms, these loans will likely be dependent on collateral liquidation, secondary repayment sources,
or events outside the normal course of business.
Doubtful – This grade is assigned to loans on nonaccrual status. These loans have the weaknesses inherent in substandard loans; however,
the weaknesses are so severe that collection or liquidation in full is extremely unlikely based on current facts, conditions, and values. Due
to certain specific pending factors, the amount of loss cannot yet be determined.
Loss – This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of
•
•
•
payments, are determined to be uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply
means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may
be realized in the future.
Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are
disclosed separately in the following credit quality discussion. PCI loan pools are disaggregated and included in their applicable loan class in
the following discussion. In addition, PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest
income under the accretion method of accounting.
95
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present loans held for investment, by internal credit risk grade, as of the periods indicated:
(Amounts in thousands)
Non-covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total covered loans
Total loans
Pass
Special
Mention Substandard Doubtful Loss
Total
December 31, 2013
$
30,719 $ 1,094 $
87,589 1,056
67,257 2,237
121,367 4,501
440,334 21,046 14,500
3,139 $ 303 $ — $
2,919 3,891 —
703 — —
35,255
95,455
70,197
9,316 375 — 135,559
31 — 475,911
2,324
32,614
10 — —
3,472 — —
8
2,306
27,421 1,721
107,411 1,355
2,789 215 — 111,770
460,166 8,170 27,507 169 — 496,012
28,703
200 — —
28,242
261
69,973
864
3,918 —
472 —
4
8 — —
1,446,703 42,313 65,035 4,984
71,313
3,926
4 1,559,039
9,722 1,378
247
2,865
1,472 —
4,362 1,519
1,552
13,077 4,630 16,901
51 —
4,714
24 —
189
461 — —
16 —
38 —
— — —
301 — —
164 —
572 —
15,865
3,325
1,933
7,449
34,646
164
873
66,797 1,138
148
10,832
198 —
1,269
2 —
5,939 — —
986 — —
69,206
16,919
1,184
118 —
— —
118
—
110,179 9,060 32,312 131 — 151,682
$ 1,556,882 $ 51,373 $ 97,347 $ 5,115 $ 4 $ 1,710,721
— — —
— — —
96
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pass
Special
Mention Substandard Doubtful Loss
Total
December 31, 2012
Table of Contents
(Amounts in thousands)
Non-covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total covered loans
Total loans
$
41,850 $ 1,497 $ 13,546 $ 541 $ — $
77,573
60,161
112,562
399,907
1,657
28,887
4,821
1,490
16,092
32,808
33
3,421
2,506
4,043
5,938
15,975
19
2,262
3,838
—
1,320
120
—
—
—
—
—
—
—
—
57,434
88,738
65,694
135,912
448,810
1,709
34,570
104,750
436,587
15,841
2,739
9,599
382
3,592
27,319
—
—
—
—
—
42
—
111,081
473,547
16,223
76,787
5,657
1,362,219
867
8
45,835
501
1
103,624
8
—
5,827
—
—
42
78,163
5,666
1,517,547
6,463
6,225
1,962
6,065
23,855
143
935
2,120
445
—
2,223
5,477
—
—
17,834
197
649
3,015
19,189
1
156
178
81
—
125
44
—
—
—
—
—
—
—
—
—
16,323
16,011
484
11,981
927
—
53,116
5,786
1,160
25
237
—
—
—
—
26,595
6,948
2,611
11,428
48,565
144
1,091
81,445
22,961
1,644
2,987
—
81,453
3,674
—
207,106
$ 1,443,672 $ 69,570 $ 204,852 $ 6,517 $ 42 $ 1,724,653
125
—
101,228
562
—
23,735
—
—
690
—
—
—
As of December 31, 2013, non-covered special mention and classified loans decreased $42.99 million, or 27.68%, compared to December 31,
2012, which was primarily due to loan workout activity across the portfolio coupled with continued credit improvement. Credit quality also
significantly improved in the covered loan portfolio with special mention and classified loans declining $84.15 million, or 66.97%, as of
December 31, 2013, compared to December 31, 2012.
97
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents nonaccrual loans, by loan class, as of the dates indicated:
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total
Purchased impaired loans
Total nonaccrual loans
2013
2012
December 31,
Non-covered Covered
Total
Non-covered Covered
Total
$
1,187 $ 761 $ 1,948 $
92
5,341
—
—
222
1,966
—
2,685
—
—
301
441
5,433
—
2,188
2,685
—
742
405 $ 1,990 $ 2,395
3,947
35
378
—
7,092
21
6,889
951
2
—
—
—
3,912
378
7,071
5,938
2
—
765
6,567
—
232
1,555
190
997
8,122
190
872
5,219
—
436
831
59
1,308
6,050
59
201
—
19,153
8
201
126
—
—
22,506
28,246
8
8
$ 19,161 $ 3,353 $ 22,514 $ 23,931 $ 4,323 $ 28,254
126
—
23,923
8
—
—
3,353
—
—
—
4,323
—
98
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are
included in the applicable delinquency category. There were no non-covered accruing loans contractually past due 90 days or more as of
December 31, 2013, or December 31, 2012. Accruing loans contractually past due 90 days or more were $86 thousand as of December 31,
2013, which was attributed to covered home equity lines. There were no accruing loans contractually past due 90 days or more as of
December 31, 2012.
(Amounts in thousands)
Non-covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total covered loans
Total loans
30 - 59 Days
60 - 89 Days
Past Due
Past Due
December 31, 2013
Total
Past Due
90+ Days
Past Due
Current
Loans
Total
Loans
532 $
660 $ 34,595 $
$
118 $
93
115
611
1,014
—
245
10 $
39
—
554
318
—
—
2,631
—
1,203
1,770
—
—
2,763
115
2,368
3,102
—
245
92,692
70,082
133,191
472,809
2,324
32,369
35,255
95,455
70,197
135,559
475,911
2,324
32,614
289
7,428
205
317
1,228
—
442
145
2,284
1,048
8,801
2,489
110,722
487,211
26,214
111,770
496,012
28,703
811
—
10,929
86
—
2,552
105
—
9,112
1,002
—
22,593
70,311
3,926
1,536,446
71,313
3,926
1,559,039
479
5
—
—
209
—
—
—
44
—
—
—
—
—
453
92
—
184
—
—
301
932
141
—
184
209
—
301
14,933
3,184
1,933
7,265
34,437
164
572
15,865
3,325
1,933
7,449
34,646
164
873
163
1,466
190
737
1,783
190
488
197
—
86
120
—
69,206
16,919
1,184
—
118
—
151,682
$ 12,307 $ 2,802 $ 11,961 $ 27,070 $ 1,683,651 $ 1,710,721
118
—
147,205
—
—
250
—
—
1,378
—
—
4,477
—
—
2,849
68,469
15,136
994
99
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Non-covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total covered loans
Total loans
December 31, 2012
60 -
89 Days
30 -
59 Days
Past Due
Past
Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
$ 344
387
624
1,841
2,702
—
216
$ —
84
—
1,348
936
—
196
188
$
1,432
—
3,715
3,621
—
—
532
$
1,903
624
6,904
7,259
—
412
$
56,902
86,835
65,070
129,008
441,551
1,709
34,158
$
57,434
88,738
65,694
135,912
448,810
1,709
34,570
315
6,564
382
93
1,176
—
495
1,644
—
903
9,384
382
110,178
464,163
15,841
111,081
473,547
16,223
715
—
14,090
73
—
3,906
47
—
11,142
835
—
29,138
77,328
5,666
1,488,409
78,163
5,666
1,517,547
252
45
—
8
501
—
6
161
—
—
—
—
—
—
1,121
—
—
21
927
—
—
1,534
45
—
29
1,428
—
6
217
413
—
112
135
—
204
475
59
533
1,023
59
25,061
6,903
2,611
11,399
47,137
144
1,085
80,912
21,938
1,585
26,595
6,948
2,611
11,428
48,565
144
1,091
81,445
22,961
1,644
—
—
1,442
$ 15,532
—
—
408
$ 4,314
—
—
2,807
$ 13,949
—
—
4,657
$ 33,795
3,674
—
202,449
$ 1,690,858
3,674
—
207,106
$ 1,724,653
The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers
experiencing financial difficulty. All restructured loans to borrowers experiencing financial difficulty in excess of $250 thousand are evaluated
for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Specific reserves in the
allowance for loan losses attributed to TDRs totaled $1.84 million as of December 31, 2013, and $1.87 million as of December 31, 2012.
100
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are
classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment
performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. The Company
recognized interest income on TDRs of $551 thousand in 2013, $640 thousand in 2012, and $411 thousand in 2011.
Loans acquired with credit deterioration, with a discount, are generally not considered a TDR as long as the loan remains in the assigned loan
pool. There were no covered loans recorded as TDRs as of December 31, 2013 or 2012. The following table presents loans modified as TDRs,
by loan class, segregated by accrual status, as of the dates indicated:
(Amounts in thousands)
Commercial loans
Construction, development, andother land
Commercial and industrial
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Home equity lines
Single family owner occupied
Total TDRs
2013
2012
December 31,
Nonaccrual
(1)
Accruing
Total
Nonaccrual
(1)
Accruing
Total
$ — $ — $ — $
—
—
5,490
1,115
375
5,618
1,115
375
128
63 $ — $
1,119
1,380
764
—
—
5,897
63
1,119
1,380
6,661
360
6,292
$ 2,200 $ 12,211 $ 14,411 $ 3,828 $ 12,047 $ 15,875
51
6,670
210
7,093
55
6,095
159
423
305
197
(1) TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.
The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the years
indicated. The post-modification recorded investment represents the loan balance immediately following modification.
(Amounts in thousands)
Below market interest rate Single family owner
occupied
Below market interest rate andextended payment
term Single family non-owner occupied
Non-farm, non-residential
Single family owner occupied
Total
Year Ended December 31,
2013
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Total
Contracts
2012
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Total
Contracts
2
$
601
$
557
—
$ —
$ —
375
511
809
2,296
328
511
757
2,153
$
2
—
3
$
—
5,822
—
6,173
—
5,822
—
6,141
$
1
1
4
8
$
101
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a
payment default during the years indicated:
(Amounts in thousands)
Single family non-owner occupied
Single family owner occupied
Total
Note 6. Allowance for Loan Losses
Year Ended December 31,
2013
2012
Total
Contracts
1
1
2
Recorded
Investment
375
$
359
734
$
Total
Contracts
—
—
—
Recorded
Investment
$ —
—
$ —
The allowance for loan losses is maintained at a level management deems adequate to absorb probable loan losses inherent in the loan
portfolio. The allowance is increased by provisions charges to operations and reduced by net charge-offs. While management utilizes its best
judgment and information available, the ultimate adequacy of the allowance is dependent on a variety of factors that may be beyond the
Company’s control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities
towards loan classifications, and other factors. These uncertainties may result in a material change to the allowance for loan losses in the near
term; however, the amount of the change cannot reasonably be estimated.
The Company’s allowance is comprised of specific reserves related to loans individually evaluated, including credit relationships, and general
reserves related to loans not individually evaluated that are segmented into groups with similar risk characteristics, based on an internal risk
grading matrix. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and
micro economic conditions reflected within the loan portfolio and the economy. For loans acquired in a business combination, loans identified
as credit impaired at the acquisition date are grouped into pools and evaluated separately from the non-PCI portfolio. The Company has
aggregated PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced
home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. Provisions calculated for PCI loans are offset by an
adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are
made to specific loans, various portfolio segments, and loan pools, the allowance for loan losses is available for use against any loan loss
management deems appropriate. As of December 31, 2013, management believed the allowance was adequate to absorb probable loan losses
inherent in the loan portfolio.
102
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the aggregate activity in the allowance for loan losses in the periods indicated:
Allowance Excluding
Allowance for
(Amounts in thousands)
Balance, January 1, 2011
Provision for loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Balance, December 31, 2011
Balance, January 1, 2012
Provision for loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Balance, December 31, 2012
Balance, January 1, 2013
Provision for loan losses
Benefit attributable to the FDIC indemnification asset
Provision for loan losses charged to operations
Provision for loan losses recorded through the FDIC
indemnification asset
Charge-offs
Recoveries
Net charge-offs
Balance, December 31, 2013
PCI Loans
26,482
8,846
(11,460 )
2,136
(9,324 )
26,004
26,004
5,871
(7,504 )
1,391
(6,113 )
25,762
25,762
7,912
—
7,912
—
(12,527 )
2,175
(10,352 )
23,322
$
$
$
$
$
$
103
$
PCI Loans
—
201
—
—
—
201
201
(193 )
—
—
—
8
8
747
(451 )
296
$
$
$
$
451
—
—
—
755
$
Total
Allowance
$ 26,482
9,047
(11,460 )
2,136
(9,324 )
$ 26,205
$ 26,205
5,678
(7,504 )
1,391
(6,113 )
$ 25,770
$ 25,770
8,659
(451 )
8,208
451
(12,527 )
2,175
(10,352 )
$ 24,077
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the components of the activity in the allowance for loan losses, excluding PCI loans, by loan segment, in the
periods indicated:
Consumer
(Amounts in thousands)
Balance, January 1, 2011
Provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Balance, December 31, 2011
Balance, January 1, 2012
Provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Balance, December 31, 2012
Balance, January 1, 2013
Provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Balance, December 31, 2013
Commercial
$ 12,300
11,806
(7,981 )
1,426
(6,555 )
$ 17,551
$ 17,551
2,896
(3,814 )
626
(3,188 )
$ 17,259
$ 17,259
5,643
(7,743 )
931
(6,812 )
$ 16,090
Consumer
Real Estate
$ 12,641
(2,681 )
(2,501 )
252
(2,249 )
$ 7,711
$ 7,711
2,608
(2,702 )
289
(2,413 )
$ 7,906
$ 7,906
1,364
(3,115 )
442
(2,673 )
$ 6,597
$
$
and Other
$ 1,541
(279 )
(978 )
458
(520 )
742
742
367
(988 )
476
(512 )
597
597
905
(1,669 )
802
(867 )
635
$
$
$
Total
$ 26,482
8,846
(11,460 )
2,136
(9,324 )
$ 26,004
$ 26,004
5,871
(7,504 )
1,391
(6,113 )
$ 25,762
$ 25,762
7,912
(12,527 )
2,175
(10,352 )
$ 23,322
The negative provision charged to operations in the consumer real estate and consumer and other segments in 2011 was due to refinement in
the allowance for loan losses methodology to segment single family real estate into non-owner (commercial) and owner occupied (consumer
real estate).
104
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the components of the activity in the allowance for loan losses for PCI loans, by loan segment, in the periods
indicated:
(Amounts in thousands)
Balance, January 1, 2011
Provision for loan losses charged to operations
Balance, December 31, 2011
Balance, January 1, 2012
Provision for loan losses charged to operations
Balance, December 31, 2012
Balance, January 1, 2013
Purchased impaired provision
Benefit attributable to FDIC indemnificaton asset
Provision for loan losses charged to operations
Provision for loan losses recorded through the FDIC indemnificaton asset
Balance, December 31, 2013
$
$
Commercial
$ —
201
201
201
(193 )
8
8
69
(55 )
14
55
77
$
$
$
Consumer
Real Estate
$ —
—
$ —
$ —
—
$ —
$ —
678
(396 )
282
396
678
$
Consumer
and Other
$ —
—
$ —
$ —
—
$ —
$ —
—
—
—
—
$ —
Total
$ —
201
$ 201
$ 201
(193 )
8
$
$
8
747
(451 )
296
451
$ 755
The following tables present the Company’s allowance for loan losses and recorded investment in loans, excluding PCI loans, by loan class, as
of the dates indicated:
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total loans, excluding PCI loans
December 31, 2013
Loans
Individually
Evaluated for
Impairment
Allowance for
Loans
Individually
Evaluated
$
$
—
5,189
—
664
5,952
—
351
12,156
472
6,850
—
7,322
—
—
—
$ 19,478
$
105
—
3,794
—
47
114
—
—
3,955
52
735
—
787
—
—
—
4,742
Loans
Collectively
Evaluated for
Impairment
$
46,404
92,612
71,669
136,567
483,126
2,488
33,136
866,002
136,896
502,229
29,090
668,215
71,389
3,926
75,315
$ 1,609,532
Allowance for
Loans
Collectively
Evaluated
$
$
1,141
1,421
1,211
3,502
4,536
23
301
12,135
1,309
4,295
206
5,810
635
—
635
18,580
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total loans, excluding PCI loans
December 31, 2012
Loans
Individually
Evaluated for
Impairment
Allowance for
Loans
Individually
Evaluated
Loans
Collectively
Evaluated for
Allowance
for Loans
Collectively
Impairment
Evaluated
$
$
2,916
3,602
378
2,794
8,063
—
—
17,753
499
4,950
—
5,449
—
—
—
$ 23,202
$
—
3,192
18
996
358
—
—
4,564
223
806
—
1,029
—
—
—
5,593
$
55,369
88,811
67,278
134,323
451,240
1,852
34,779
833,652
141,684
483,553
16,768
642,005
81,037
5,666
86,703
$ 1,562,360
$ 1,214
1,159
1,612
3,371
4,901
22
416
12,695
1,351
5,189
337
6,877
597
—
597
$ 20,169
The Company aggregates PCI loans into the following loan pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial,
Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. The following table presents the
Company’s allowance for loan losses and recorded investment in PCI loans, by loan pool, as of the dates indicated:
(Amounts in thousands)
Commercial loans
Waccamaw commercial
Waccamaw lines of credit
Peoples commercial
Other
Total commercial loans
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Peoples residential
Total consumer real estate loans
Consumer and other loans
Waccamaw consumer
Total consumer and other loans
Total loans
2013
2012
December 31,
Loan Pools With
Impairment
Allowance for
Loans Pools
With
Impairment
Loan Pools With
Impairment
Allowance for
Loans Pools
With
Impairment
$
$
19,851
2,594
7,862
1,931
32,238
43,608
4,497
1,334
49,439
34
34
81,711
106
$
$
—
69
—
8
77
277
217
184
678
—
—
755
$
40,688
10,009
23,670
2,340
76,707
52,321
8,974
3,237
64,532
101
101
141,340
$
$
$
—
—
—
8
8
—
—
—
—
—
—
8
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 7.
FDIC Indemnification Asset
The Company entered into loss share agreements with the FDIC in 2012 in connection with the FDIC-assisted acquisition of Waccamaw.
Under the loss share agreements, the FDIC agreed to cover 80% of most loan and foreclosed real estate losses. Certain expenses incurred in
relation to these covered assets are reimbursable by the FDIC. Estimated reimbursements are netted against the expense on covered assets in
the Company’s consolidated statements of income. The following table presents activity in the FDIC indemnification asset in the periods
indicated:
(Amounts in thousands)
Beginning balance
FDIC loss share receivable — Waccamaw acquisition
Increase in estimated losses on covered loans
Increase in estimated losses on covered OREO
Reimbursable expenses from the FDIC
Net (amortization) accretion
Reimbursements from the FDIC
Ending balance
Year Ended December 31,
2013
$ 48,149
—
451
4,425
1,574
(5,597 )
(14,311 )
$ 34,691
2012
$ —
49,755
—
637
273
458
(2,974 )
$ 48,149
Note 8.
Premises, Equipment, and Leases
Premises and Equipment
Depreciation and amortization expense was $4.67 million in 2013, $4.03 million in 2012, and $3.98 million in 2011. The following table
presents the components of premises and equipment as of the dates indicated:
(Amounts in thousands)
Land
Buildings and leasehold improvements
Equipment
Accumulated depreciation and amortization
Total premises and equipment, net
December 31,
2013
$ 19,884
54,292
36,983
111,159
50,043
$ 61,116
2012
$ 19,366
56,789
36,775
112,930
48,062
$ 64,868
Certain long-term investments in land and buildings were evaluated for impairment during 2013 due to the Company’s plan to close or
consolidate seven branch locations in 2014. Write-downs related to these expected closures totaled $1.52 million in 2013.
107
Table of Contents
Leases
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company enters into various noncancelable operating leases. Lease expense was $1.18 million in 2013, $1.26 million in 2012, and $1.17
million in 2011. As of December 31, 2013, the Company did not sublease any portion of its noncancelable operating leases to third parties. The
following schedule presents future minimum lease payments required under noncancelable operating leases, with initial or remaining terms in
excess of one year, by year, as of December 31, 2013:
(Amounts in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
$ 771
434
307
200
122
1,068
$ 2,902
Note 9. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is allocated to the appropriate
reporting unit when acquired, if applicable. Before 2009, the cash consideration for meeting certain operating targets, under the agreement
terms, was added to goodwill when paid. Beginning in 2009, the estimated future value of the cash consideration is recognized as goodwill at
the acquisition date. As of December 31, 2013, the total potential cash consideration remaining to be paid in connection with acquisitions that
occurred before 2009 was $353 thousand, which is allocated to the Insurance Services reporting unit. The Company analyzed the carrying
value of goodwill as of October 31, 2013, and determined that no impairment charge was necessary.
The following table presents the activity in goodwill, by reporting unit, in the periods indicated:
(Amounts in thousands)
Beginning balance, January 1, 2011
Acquisitions and dispositions, net
Cash consideration paid
Impairment Charges
Ending balance, December 31, 2011
Beginning balance, January 1, 2012
Acquisitions and dispositions, net
Cash consideration paid
Ending balance, December 31, 2012
Beginning balance, January 1, 2013
Acquisitions and dispositions, net
Cash consideration paid
Ending balance, December 31, 2013
Community
Insurance
Banking
$ 75,599
—
—
—
$ 75,599
$ 75,599
21,118
—
$ 96,717
$ 96,717
(176 )
—
$ 96,541
Services
$ 9,315
(1,299 )
680
(1,239 )
$ 7,457
$ 7,457
—
692
$ 8,149
$ 8,149
324
441
$ 8,914
Total
$ 84,914
(1,299 )
680
(1,239 )
$ 83,056
$ 83,056
21,118
692
$ 104,866
$ 104,866
148
441
$ 105,455
108
Table of Contents
Other Intangible Assets
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s intangible assets also include core deposit and other identifiable intangible assets. Core deposit intangible assets are amortized
over their estimated useful lives that range from 7 to 10 years. As of December 31, 2013, the remaining lives of core deposit intangible assets
ranged from 2 to 5 years, and the weighted average remaining life was 4 years. Other identifiable intangible assets consist primarily of the
value assigned to contractual rights arising from insurance agency acquisitions. Other identifiable intangible assets are amortized using the
straight-line method. The following table presents the components of other intangible assets, by reporting unit, as of the dates indicated:
(Amounts in thousands)
Core deposit intangibles
Accumulated amortization
Core deposit intangibles, net
Other identifiable intangibles
Accumulated amortization
Other identifiable intangibles, net
Total other intangible assets, net
Community
Insurance
Community
Insurance
2013
2012
December 31,
Banking
$ 7,940
(6,669 )
1,271
535
(410 )
125
$ 1,396
Services
$ —
—
—
3,711
(2,241 )
1,470
$ 1,470
Total
$ 7,940
(6,669 )
1,271
4,246
(2,651 )
1,595
$ 2,866
Banking
$ 7,940
(6,244 )
1,696
535
(383 )
152
$ 1,848
Services
$ —
—
—
3,638
(1,964 )
1,674
$ 1,674
Total
$ 7,940
(6,244 )
1,696
4,173
(2,347 )
1,826
$ 3,522
Amortization expense for other intangible assets was $729 thousand in 2013, $804 thousand in 2012, and $1.02 million in 2011. The following
schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2013:
(Amounts in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
Note 10. Deposits
The following table presents the components of deposits as of the dates indicated:
(Amounts in thousands)
Noninterest-bearing demand deposits
Interest-bearing deposits:
Interest-bearing demand deposits
Money market accounts
Savings deposits
Certificates of deposit
Individual retirement accounts
Total interest-bearing deposits
Total deposits
109
$ 712
712
607
381
292
—
$ 2,704
December 31,
2013
$ 339,680
2012
$ 343,352
361,821
237,845
286,165
606,178
119,053
1,611,062
$ 1,950,742
353,321
237,257
263,019
706,568
126,658
1,686,823
$ 2,030,175
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following schedule presents the contractual maturities of time deposits as of December 31, 2013:
(Amounts in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
$ 423,272
163,591
66,924
36,408
35,020
16
$ 725,231
Time deposits of $100 thousand or more were $352.84 million as of December 31, 2013, and $398.48 million as of December 31, 2012. The
following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2013:
(Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Note 11. Borrowings
The following table presents the composition of borrowings as of the dates indicated:
(Amounts in thousands)
Federal funds purchased
Securities sold under agreements to repurchase:
Retail
Wholesale
Total securities sold under agreements to repurchase
FHLB borrowings:
Fixed rate credit
Advances
Total FHLB borrowings
Subordinated debt
Other debt
Total borrowings
$ 55,836
79,561
66,321
151,120
$ 352,838
December 31,
2013
$ 16,000
2012
$ —
68,308
50,000
118,308
—
150,000
150,000
15,464
624
$ 300,396
77,922
58,196
136,118
6,275
155,283
161,558
15,464
413
$ 313,553
Short-term borrowings consist of federal funds purchased and retail repurchase agreements, which are typically collateralized with agency
MBSs. The weighted average rate of federal funds purchased was 0.36% as of December 31, 2013. The weighted average rate of retail
repurchase agreements was 0.38% as of December 31, 2013, and 0.57% as of December 31, 2012.
110
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including fixed rate credit and convertible and callable
advances; and other obligations. The weighted average contractual rate of wholesale repurchase agreements was 3.71% as of December 31,
2013, and 3.34% as of December 31, 2012. As of December 31, 2013, the weighted average contractual maturity of wholesale repurchase
agreements was 4.08 years. The weighted average contractual rate of FHLB borrowings was 4.12% as of December 31, 2013, and 3.86% as of
December 31, 2012. As of December 31, 2013, the weighted average contractual maturity of FHLB borrowings was 4.57 years. The following
schedule presents contractual maturities of FHLB borrowings, by year, as of December 31, 2013:
(Amounts in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
$ —
—
—
100,000
—
50,000
$ 150,000
FHLB callable advances may be redeemed by the FHLB at quarterly intervals after various lockout periods that could substantially shorten the
lives of the advances. If called, the advance may be paid in full or converted into another FHLB credit product. Prepayment of an advance may
result in substantial penalties based on the differential between the contractual note and current advance rate for similar maturities. FHLB
advances were secured by qualifying loans that totaled $1.13 billion as of December 31, 2013, and $998.14 million as of December 31, 2012.
Unused borrowing capacity with the FHLB was $324.34 million as of December 31, 2013. In 2013, the Company prepaid $8.15 million in
wholesale repurchase agreements and $11.47 million in FHLB borrowings resulting in a $296 thousand gain.
Subordinated debt consists of junior subordinated debentures (“Debentures”) of $15.46 million that were issued by the Company in October
2003 to the Trust. The Debentures had an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures
through the issuance of trust preferred securities, which had substantially identical terms as the Debentures. The Debentures mature on
October 8, 2033 and are currently callable. Net proceeds from the offering were contributed as capital to the Bank to support further growth.
The Company’s obligations under the Debentures and other relevant Trust agreements, in aggregate, constitute a full and unconditional
guarantee by the Company of the Trust’s obligations. The preferred securities issued by the Trust are not included in the Company’s
consolidated balance sheets; however, these securities qualify as Tier 1 capital for regulatory purposes, subject to guidelines issued by the
Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve’s quantitative limits did not prevent the
Company from including all $15.46 million in trust preferred securities outstanding in Tier 1 capital as of December 31, 2013 and 2012.
Note 12. Derivative Instruments and Hedging Activities
The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of
certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no
initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying
asset as specified in the contract. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward
contracts, and written and purchased options. Derivative instruments are subject to counterparty credit risk due to the possibility that the
Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations.
This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or
counterparties approved by the Company’s Asset/Liability Management Committee.
111
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2013, the Company’s derivative instruments consisted of IRLCs, forward sale loan commitments, and interest rate swaps.
Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk
represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as
interest rates, market-driven loan rates, prices, or other economic factors.
IRLCs and forward sale loan commitments . In the normal course of business, the Company enters into interest rate lock commitments
(“IRLCs”) with customers on mortgage loans intended to be sold in the secondary market and commitments to sell those originated mortgage
loans. The Company enters into IRLCs to provide potential borrowers an interest rate guarantee. Once a mortgage loan is closed and funded, it
is included within loans held for sale and awaits sale and delivery into the secondary market. From the date we issue the commitment through
the date of sale into the secondary market, the Company has exposure to interest rate movement resulting from the risk that interest rates will
change from the rate quoted to the borrower. Due to these interest rate fluctuations, the Company’s balance of mortgage loans held for sale is
subject to changes in fair value. Typically, the fair value of these loans declines when interest rates increase and rise when interest rates
decrease. The fair values of the Company’s IRLCs and forward sale loan commitments are recorded at fair value as a component of other assets
and other liabilities in the consolidated balance sheets. These derivatives do not qualify as hedging instruments; therefore, changes in fair value
are recorded in earnings.
Interest rate swaps . The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the
London InterBank Offered Rate (“LIBOR”) curve in relation to certain designated fixed rate loans. These instruments are used to convert these
fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe
the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for
a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed
rate. The Company’s interest rate swaps qualify as fair value hedging instruments; therefore, changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings in the same period.
In October 2013, the Company entered into a ten-year, $3.50 million notional interest rate swap agreement that was accounted for as a fair
value hedge. The swap and loan hedged by the swap are recorded at fair value. The hedge was effective as of December 31, 2013.
The following table presents the aggregate contractual or notional amounts, as well as the fair values of the Company’s derivative instruments
as of the dates indicated:
(Amounts in thousands)
Derivatives designated as hedges:
Interest rate swaps
Derivatives not designated as hedges:
IRLCs
Forward sale loan commitments
Total derivatives not designated as hedges
Total derivatives
2013
2012
December 31,
Notional or
Contractual
Derivative
Derivative
Notional or
Contractual
Derivative
Derivative
Amount
Assets
Liabilities
Amount
Assets
Liabilities
$ 3,453
$
43
$ —
$ —
$ —
$ —
3,677
4,560
8,237
$ 11,690
—
41
41
84
$
41
—
41
41
$
14,841
—
14,841
$ 14,841
144
—
144
144
$
16
—
16
16
$
112
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the effect of the Company’s derivative and hedging activity, if applicable, on the statement of income in the
periods indicated:
(Amounts in thousands)
Derivatives designated as hedges:
Interest rate swaps
Derivatives not designated as hedges:
IRLCs
Forward sale loan commitments
Total derivatives not designated as hedges
Total derivatives
Income Statement Location
Year Ended December 31,
2012
2013
2011
Other income
$ —
$ —
$ —
Other income
Other income
(169 )
41
(128 )
$ (128 )
—
—
—
$ —
160
—
160
$ 160
Note 13. Employee Benefit Plans
Employee Stock Ownership and Savings Plan
The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”). Coverage under the plan is provided to all employees
who meet minimum eligibility requirements. The KSOP held 499,075 shares of the Company’s common stock as of December 31, 2013,
561,551 shares as of December 31, 2012, and 588,656 shares as of December 31, 2011.
Employer Stock Fund
The Company made annual contributions to the stock feature within the KSOP at the discretion of the Board of Directors until December 31,
2006, when the plan was frozen to future contributions. Substantially all plan assets are invested in the Company’s common stock. All KSOP
contributions beginning in 2007 have been made to the employee savings feature of the plan.
Employee Savings Plan
The Company provides a 401(k) savings feature within the KSOP. The Company makes matching contributions to employee deferrals at levels
determined by the Board of Directors on an annual basis. The cost of the Company’s 100% matching contributions to qualified deferrals under
the 401(k) savings component of the KSOP was $1.61 million in 2013, $1.27 million in 2012, and $1.34 million in 2011. In 2013 and 2011, all
matching contributions were made in the Company’s common stock. In 2012, matching contributions were made in cash and the Company’s
common stock.
Employee Welfare Plan
The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits
to all full-time employees who elect coverage under this program. The health plan is managed by a third-party administrator. Monthly
employer and employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays
claims. Stop-loss insurance coverage limits the Company’s risk of loss to $100 thousand for individual claims and $3.98 million aggregate
claims. Expenses related to the health plan were $3.02 million in 2013, $2.25 million in 2012, and $3.49 million in 2011.
113
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred Compensation Plan
The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over
various periods, commencing at retirement or death. Accrued benefits are based on the present values of expected payments and estimated life
expectancies and totaled $455 thousand as of December 31, 2013, and $459 thousand as of December 31, 2012. Expenses related to the
deferred compensation plan were $60 thousand in each of the three years ended December 31, 2013.
Supplemental Executive Retention Plan
The Company maintains the Supplemental Executive Retention Plan (the “SERP”) for key members of senior management. The domestic
noncontributory, nonqualified SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant’s projected
final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The
SERP is an unfunded plan; accordingly, there are no plan assets. The following table presents the components of the SERP’s net periodic
pension cost in the periods indicated:
(Amounts in thousands)
Service cost
Interest cost
Amortization of losses (gains)
Amortization of prior service cost
Net periodic cost
Year Ended December 31,
2013
$ 135
246
49
187
$ 617
2012
$ 153
203
45
134
$ 535
2011
$ 161
224
—
134
$ 519
The actuarial benefit plan obligation was $5.62 million as of December 31, 2013, and December 31, 2012. The obligation as of December 31,
2013, included a $380 thousand increase as a result of an amendment in January 2013 to revise the amount of normal retirement benefit. The
increase was offset by a $725 thousand actuarial gain. The assumed discount rate was increased to 5.25% as of December 31, 2013, compared
to 4.20% as of December 31, 2012. The following schedule presents the projected benefit payments to be paid under the SERP, by year, as of
December 31, 2013:
(Amounts in thousands)
2014
2015
2016
2017
2018
2019 through 2023
114
$ 246
246
246
377
377
2,171
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Directors’ Supplemental Retirement Plan
The Company maintains the Directors’ Supplemental Retirement Plan (the “Directors’ Plan”) for non-management directors. The domestic
noncontributory, nonqualified Directors’ Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant’s highest
consecutive three-year average compensation. Benefits under the Directors’ Plan generally become payable at age 70. The Directors’ Plan is an
unfunded plan; accordingly, there are no plan assets. The following table presents the components of the Directors’ Plan’s net periodic pension
cost in the periods indicated:
(Amounts in thousands)
Service cost
Interest cost
Amortization of gains (losses)
Amortization of prior service cost
Net periodic cost
Year Ended December 31,
2013
$ 26
41
1
90
$ 158
2012
$ 27
39
—
90
$ 156
2011
$ 29
43
—
90
$ 162
The actuarial benefit plan obligation was $975 thousand as of December 31, 2013, and $981 thousand as of December 31, 2012. The assumed
discount rate was increased to 5.25% as of December 31, 2013, compared to 4.20% as of December 31, 2012. The following schedule presents
the projected benefit payments to be paid under the Directors’ Plan, by year, as of December 31, 2013:
(Amounts in thousands)
2014
2015
2016
2017
2018
2019 through 2023
$ 83
81
79
109
107
552
Note 14. Equity-Based Compensation
The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers,
employees, directors, and other individuals performing services for the Company to focus on critical long-range objectives. The Company’s
equity-based compensation plans include the 2012 Omnibus Equity Compensation Plan (“2012 Plan”), 2004 Omnibus Stock Option Plan, 2001
Director’s Option Plan, 1999 Stock Option Plan, and various other option plans. As of December 31, 2013, the 2012 Plan was the only plan
available for the issuance of future grants. All plans before the 2012 Plan are frozen and no new grants may be issued; however, any options or
awards unexercised and outstanding under those plans remain in effect in accordance with their respective terms.
The 2012 Plan made available up to 600,000 shares for potential grants of incentive stock options, nonqualified stock options, performance
awards, restricted stock, restricted stock units, stock appreciation rights, bonus stock, and stock awards. Options granted pursuant to the 2012
Plan shall state the period of time the grant may be exercised, not to exceed more than ten years from the date granted. The Company’s
Compensation and Retirement Committee shall determine the vesting period for each grant; however, if no vesting period is specified the
vesting shall occur in 25% increments on the first four anniversaries of the grant date.
115
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation
plans in the periods indicated:
(Amounts in thousands)
Pre-tax compensation expense
Excess tax benefit
Stock Options
Year Ended December 31,
2013
$ 574
9
2012
$ 206
6
2011
$ 98
5
The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton valuation model with the following
assumptions: expected volatility is based on the weekly historical volatility of the Company’s common stock price over the expected term of
the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the Treasury yield curve
on the grant date with a term comparable to the grant; and the dividend yield is based on the Company’s dividend yield using the most recent
dividend rate paid per share and trading price of the Company’s common stock.
The following table presents the assumptions used to estimate the fair values of stock options at the date of grant in the periods indicated. No
stock options were granted in 2013 or 2012.
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
Weighted average fair value of options granted (per share)
2011
Year Ended December 31,
2012
—
—
—
—
—
2013
—
—
—
—
$ —
27.96 %
6.18
1.50 %
3.24 %
$ 2.56
The following table presents stock option activity under the equity-based compensation plans in the period indicated:
(Amounts in thousands,
except share and per share data)
Outstanding, January 1, 2013
Granted
Exercised
Canceled
Outstanding, December 31, 2013
Exercisable, December 31, 2013
Option
Shares
471,880
—
5,850
91,201
374,829
301,369
Weighted Average
Exercise Price
Per Share
Weighted Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
$
$
$
20.87
—
13.01
22.98
20.48
22.53
5.4
4.8
$
$
529
191
The aggregate intrinsic value of options exercised was $22 thousand as of December 31, 2013, $16 thousand as of December 31, 2012, and $13
thousand as of December 31, 2011.
As of December 31, 2013, unrecognized compensation expense related to nonvested stock options was $61 thousand, which is expected to be
recognized over a weighted average period of 0.44 years. The actual compensation cost recognized will differ from this estimate due to a
number of items, including new grants and changes in estimated forfeitures.
116
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Restricted Stock Awards
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted stock awards represent shares issued upon grant that are restricted and generally use a three-year vesting schedule from the grant
date. The fair value of restricted stock awards is calculated using the Company’s common stock price on the grant date. The following table
presents restricted stock activity under the equity-based compensation plans in the period indicated:
Nonvested, January 1, 2013
Granted
Vested
Canceled
Nonvested, December 31, 2013
Weighted Average
Grant-Date
Fair Value
$
$
12.67
16.24
13.23
12.68
15.09
Shares
18,950
2,700
6,050
13,000
2,600
As of December 31, 2013, unrecognized compensation cost related to nonvested restricted stock awards was $23 thousand, which is expected
to be recognized over a weighted average period of 0.87 years. The actual compensation cost recognized will differ from this estimate due to a
number of items, including new awards granted and changes in estimated forfeitures.
Performance Stock Awards
Performance stock awards represent shares potentially issuable in the future. In 2013, the Company awarded 80,872 shares with a three-year
performance period. Approximately 48% of each award vested on the grant date and the remaining shares vest in three equal installments,
subject to the annual performance requirement and the recipient’s continued employment on the applicable vesting date. The performance
requirement is based on an annual three-year average minimum growth rate in earnings per share. The fair value of performance stock awards
is calculated using the Company’s stock price on the grant date. The following table presents performance stock activity under the 2012 Plan in
the period indicated:
Nonvested, January 1, 2013
Granted
Vested
Canceled
Nonvested, December 31, 2013
Weighted Average
Grant-Date
Fair Value
$
$
—
15.75
15.75
15.56
15.78
Shares
—
80,872
39,084
4,854
36,934
As of December 31, 2013, unrecognized compensation cost related to nonvested performance stock awards was $216 thousand, which is
expected to be recognized over a weighted average period of 1.08 years. The actual compensation cost recognized will differ from this estimate
due to a number of items, including new awards granted and changes in estimated forfeitures.
117
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 15. Other Operating Income and Expense
The following table presents the components of other operating income in the periods indicated:
(Amounts in thousands)
Miscellaneous income
Other
Total other operating income
(1)
2013
2012
2011
$ 411
4,824
$ 5,235
$ 2,459
4,283
$ 6,742
$ 236
3,652
$ 3,888
(1) Other components of other operating income do not exceed 1% of total income.
Miscellaneous income in 2012 included the $2.39 million out-of-period adjustment to correct the understatement of pre-tax income from 2007
to 2011.
The following table presents the components of other operating expense in the periods indicated:
(Amounts in thousands)
Service fees
Professional fees
Telephone and data communications
Advertising and public relations
ATM processing expenses
Premises and equipment write-downs
Office supplies
Other
(1)
Total other operating expense
Year Ended December 31,
2012
2011
2013
$ 3,157
2,564
1,707
1,686
1,605
1,520
1,472
9,538
$ 23,249
$ 3,736
1,912
1,548
1,421
1,483
—
1,688
9,402
$ 21,190
$ 2,941
1,554
1,616
1,683
1,515
131
1,222
9,643
$ 20,305
(1) Other components of other operating income do not exceed 1% of total income.
Premises and equipment write-downs in 2013 consisted entirely of expenses related to branch closures and consolidations expected to occur in
2014.
Note 16.
Income Taxes
Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following
table presents the components of income tax expense in the periods indicated:
(Amounts in thousands)
Current tax expense:
Federal
State
Total current tax expense
Deferred tax (benefit) expense:
Federal
State
Total deferred tax (benefit) expense
Total income tax expense
Year Ended December 31,
2012
2013
2011
$ 12,819
1,743
14,562
(3,136 )
(518 )
(3,654 )
$ 10,908
$ 13,733
1,291
15,024
(1,501 )
605
(896 )
$ 14,128
$ 7,101
110
7,211
1,650
712
2,362
$ 9,573
118
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the
net deferred tax asset as of the dates indicated:
(Amounts in thousands)
Deferred tax assets:
Allowance for loan losses
Unrealized losses on available-for-sale securities
Unrealized asset losses
Purchase accounting
FDIC assisted transactions
Intangible assets
Deferred compensation assets
Alternative minimum tax credit
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
FDIC indemnification asset
Fixed assets
Odd days interest deferral
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2013
2012
$ 9,209
8,184
8,018
6,796
6,753
6,384
4,224
1,849
2,670
54,087
12,155
2,199
1,958
1,066
17,378
$ 36,709
$ 9,857
169
8,023
6,191
6,753
7,582
4,235
1,849
2,763
47,422
18,388
2,158
2,028
1,054
23,628
$ 23,794
The Company’s effective tax rate, defined as income tax expense divided by pre-tax income, may vary significantly from the statutory rate due
to permanent differences and the use of available tax credits. The Company’s most significant permanent differences, income and expense
items excluded by law in the calculation of taxable income, include income on municipal securities, which are exempt from federal income tax,
income on bank-owned life insurance, and tax credits generated by investments in low income housing and rehabilitation of historic structures.
The following table reconciles the federal statutory tax rate to the Company’s effective tax rate from continuing operations in the periods
indicated:
(Amounts in thousands)
Federal statutory tax rate
(Reduction) increase resulting from:
Tax-exempt interest
State income taxes, net of federal benefit
Other, net
Effective tax rate
119
Year Ended December 31,
2012
2013
2011
35.00 %
35.00 %
35.00 %
(5.14 )
2.35
(0.33 )
31.88 %
(4.16 )
2.35
(0.11 )
33.08 %
(6.40 )
2.78
0.96
32.34 %
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 17. Accumulated Other Comprehensive Income
The following table presents the activity in accumulated other comprehensive income (“AOCI”), net of tax, by component for the periods
indicated:
Unrealized Gains (Losses)
Gains (Losses) on
Cash Flow Hedges
on Available-for-Sale
Securities
Employee
Benefit Plan
Total
(Amounts in thousands)
Beginning balance, January 1, 2011
Other comprehensive gain (loss) before
reclassifications
Reclassified from AOCI
Net other comprehensive gain (loss)
Ending balance, December 31, 2011
Beginning balance, January 1, 2012
Other comprehensive gain (loss) before
reclassifications
Reclassified from AOCI
Net other comprehensive gain
Ending balance, December 31, 2012
Beginning balance, January 1, 2013
Other comprehensive (loss) gain before
reclassifications
Reclassified from AOCI
Net comprehensive (loss) gain
Ending balance, December 31, 2013
$
$
$
$
$
$
$
$
$
$
$
$
(20 )
20
—
20
—
—
—
—
—
—
—
—
—
—
—
120
(11,213 )
$
(957 )
$ (12,190 )
7,341
(1,869 )
5,472
(5,741 )
(5,741 )
5,173
285
5,458
(283 )
(283 )
(13,307 )
(50 )
(13,357 )
(13,640 )
(770 )
140
(630 )
$ (1,587 )
$ (1,587 )
(122 )
167
45
$ (1,542 )
$ (1,542 )
237
205
442
$ (1,100 )
6,591
(1,729 )
4,862
$ (7,328 )
$ (7,328 )
5,051
452
5,503
$ (1,825 )
$ (1,825 )
(13,070 )
155
(12,915 )
$ (14,740 )
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents reclassifications out of AOCI by component in the periods indicated:
Year Ended December 31,
2012
2013
2011
Income Statement
Line Item Affected
(Amounts in thousands)
Available-for-sale securities
Gains realized in net income
Credit-related OTTI recognized in net income 320
(79 )
(29 )
(50 )
Income tax effect
$ (399 ) $ (483 ) $ (5,264 ) Net gain on sale of securities
942
459
174
285
2,285 Net impairment losses recognized in earnings
(2,979 ) Income before taxes
(1,110 ) Income tax expense (benefit)
(1,869 ) Net income
Employee benefit plans
Amortization of prior service cost
Amortization of gains
Income tax effect
Reclassified from AOCI, net of tax
223 (1)
— (1)
277
50
223 Income before taxes
327
83 Income tax expense (benefit)
122
140 Net income
205
$ 155 $ 452 $ (1,729 ) Net income
223
45
268
101
167
(1) Amortization is included in net periodic pension cost. See Note 13, “Employee Benefit Plans.”
Note 18. Fair Value
Financial Instruments Measured at Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy, is presented in the following discussion. The fair value hierarchy prioritizes the inputs
used in measuring fair value as follows:
•
•
•
Level 1 – Observable, unadjusted quoted prices in active markets
Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability
Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions
The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. Additionally,
the Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of
impairment. Methodologies used to determine fair value may be highly subjective and judgmental in nature, such as cash flow estimates, risk
characteristics, credit quality measurements, and interest rates; therefore, valuations may not be precise. Since fair values are estimated as of a
specific date, the amounts actually realized or paid on the settlement or maturity of these instruments may be significantly different from
estimates. See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements of this report.
121
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assets and Liabilities Reported at Fair Value on a Recurring Basis
Available-for-Sale Securities . Securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is
based on quoted market prices in active markets, if available. The Company also uses Level 1 inputs to value equity securities that are traded in
active markets. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or
similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities
use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Treasury
securities, single issue trust preferred securities, corporate securities, MBS, and certain equity securities that are not actively traded. Securities
are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or
corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is
available.
Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations
are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to
determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair value of Level 3
securities are determined by applying appropriate market observable discount rates to the cash flow derived from third-party models. Discount
rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are
based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with
increased uncertainty regarding the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium
based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing
observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of
the specific markets and the general economic indicators.
Deferred Compensation Assets and Liabilities . Securities held for trading purposes are recorded at fair value on a recurring basis and included
in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are
generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans are carried at the fair value of
the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivative Assets and Liabilities . Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2
inputs, based on observable data to value derivatives.
122
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, segregated by the level of valuation
inputs in the fair value hierarchy, as of the dates indicated:
(Amounts in thousands)
Available-for-sale securities:
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Agency MBS
Non-Agency Alt-A residential MBS
Equity securities
Total available-for-sale securities
Deferred compensation assets
Derivatives
Interest rate swaps
Forward sale loan commitments
Total derivative assets
Deferred compensation liabilities
Derivative liabilities
IRLCs
(Amounts in thousands)
Available-for-sale securities:
Municipal securities
Single issue trust preferred securities
Agency MBS
Non-Agency Alt-A residential MBS
Equity securities
Total available-for-sale securities
Deferred compensation assets
Derivatives
IRLCs
Deferred compensation liabilities
Derivative liabilities
IRLCs
December 31, 2013
Fair Value Measurements Using
Level 2
Level 1
Level 3
Total
Fair Value
$ 9,013
144,280
46,234
4,871
300,386
9,789
5,247
$ 519,820
$ 4,200
$ —
—
—
—
—
—
251
$ 251
$ 4,200
$ 9,013
144,280
46,234
4,871
300,386
9,789
4,996
$ 519,569
$ —
$
43
41
$
84
$ 4,200
$ —
—
$ —
$ 4,200
$
43
41
$
84
$ —
$ —
—
—
—
—
—
—
$ —
$ —
$ —
—
$ —
$ —
$
41
$ —
$
41
$ —
Total
Fair Value
$ 159,217
44,646
315,897
11,067
3,531
$ 534,358
$ 3,625
December 31, 2012
Fair Value Measurements Using
Level 2
Level 1
Level 3
$ —
—
—
—
3,511
$ 3,511
$ 3,625
$ 159,217
44,646
315,897
11,067
20
$ 530,847
$ —
$ —
—
—
—
—
$ —
$ —
$
144
$ 3,625
$ —
$ 3,625
$
144
$ —
$ —
$ —
$
16
$ —
$
16
$ —
123
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
There were no changes in valuation techniques during the years ended December 31, 2013 or 2012. If the Company determines that a valuation
technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. In addition, there were no
transfers in to or out of Level 3 of the fair value hierarchy during the years ended December 31, 2013 or 2012.
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired Loans . Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the
loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.
The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party
collateral valuations to assist management in identifying potential credit impairment and determining the amount of impairment to record. The
Company’s Special Assets staff assumes the management and monitoring of all loans determined to be impaired. Internal collateral valuations
are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original
appraisal to current local real estate market conditions and considers experience and expected liquidation costs. A third-party valuation is
typically received within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed
for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our
historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is
compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.
Specific reserves are generally recorded for impaired loans while third-party valuations are in process and for impaired loans that continue to
make some form of payment. While waiting to receive the third-party appraisal, the Company regularly reviews the relationship to identify any
potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not
limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower, if appropriate. Generally, the only
difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any
downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property and a deflator for the
devaluation of property when banks are the sellers. Impaired loans that do not meet the aforementioned criteria and do not have a specific
reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely
returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process
towards ultimate resolution except in cases involving bankruptcy and various state judicial processes, which may extend the time for ultimate
resolution.
Other Real Estate Owned . OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value
of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary
qualitative adjustments that are deemed necessary.
Goodwill . Goodwill is recorded at fair value on a nonrecurring basis when impairment has occurred. The fair value of the Company’s reporting
units use Level 3 inputs based on discounted cash flow and market multiple models.
124
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize assets measured at fair value on a nonrecurring basis, segregated by the level of valuation inputs in the fair
value hierarchy, in the periods indicated:
(Amounts in thousands)
Impaired loans not covered by loss share agreements
OREO, not covered by loss share agreements
OREO, covered by loss share agreements
(Amounts in thousands)
Impaired loans not covered by loss share agreements
OREO, not covered by loss share agreements
OREO, covered by loss share agreements
Quantitative Information about Level 3 Fair Value Measurements
Total
Fair
Value
$ 8,935
7,180
6,433
Total
Fair
Value
December 31, 2013
Fair Value Measurements Using
Level 1
—
—
—
Level 2
—
—
—
Level 3
$ 8,935
7,180
6,433
December 31, 2012
Fair Value Measurements Using
Level 1
Level 2
Level 3
$ 8,192
5,704
3,255
—
—
—
—
—
—
$ 8,192
5,704
3,255
The following table presents quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as
of December 31, 2013:
Impaired loans
OREO, not covered by loss share
agreements
OREO, covered by loss share
agreements
Valuation Technique
Discounted appraisals
(1)
Discounted appraisals
(1)
Discounted appraisals
(1)
Unobservable Input
Appraisal adjustments
(2)
Appraisal adjustments
(2)
Appraisal adjustments
(2)
Range
(Weighted Average)
6% to 100% (47%)
0% to 65% (34%)
4% to 70% (41%)
(1) Fair value is generally based on appraisals of the underlying collateral.
(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative
adjustments.
Fair Value of Financial Instruments
The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of the
valuation methodologies used for instruments not previously discussed is as follows:
Cash and Cash Equivalents . Cash and cash equivalents are reported at their carrying amount, which is considered a reasonable estimate due to
the short-term nature of these instruments.
Held-to-Maturity Securities . Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.
Loans Held for Sale . Loans held for sale are reported at the lower of cost or estimated fair value. Estimated fair value is based on the market
price of similar loans.
125
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loans Held for Investment . Loans held for investment are reported at fair value using discounted future cash flows that apply current interest
rates for loans with similar terms and borrower credit quality.
FDIC Indemnification Asset . The FDIC indemnification asset is reported at fair value using discounted future cash flows that apply current
discount rates.
Accrued Interest Receivable/Payable . Accrued interest receivable/payable is reported at their carrying amount, which is considered a
reasonable estimate due to the short-term nature of these instruments.
Deposits and Securities Sold Under Agreements to Repurchase . Deposits without a stated maturity, such as demand, interest-bearing demand,
and savings, are reported at their carrying amount, the amount payable on demand as of the reporting date, which is considered a reasonable
estimate of fair value. Deposits and repurchase agreements with fixed maturities and rates are reported at fair value using discounted future
cash flows that apply interest rates currently available in the market for instruments with similar characteristics and maturities.
FHLB and Other Indebtedness . FHLB and other indebtedness is reported at fair value using discounted future cash flows that apply interest
rates currently available to the Company for borrowings with similar characteristics and maturities. Trust preferred obligations are reported at
fair value using current credit spreads in the market for similar issues.
Off-Balance Sheet Instruments . The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and
financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. Due to the
uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these
instruments, and the diversity in fee structures, the Company believes it is not feasible or practicable to accurately disclose the fair values of
off-balance sheet instruments. For additional information regarding the unfunded, contractual value of off-balance sheet financial instruments
see Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated Financial Statements of this report.
126
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the carrying amount and fair value of the Company’s financial instruments, segregated by the level of valuation
inputs in the fair value hierarchy, as of the dates indicated:
(Amounts in thousands)
Assets
Cash and cash equivalents
Available-for-sale securities
Held-to-maturity securities
Loans held for sale
Loans held for investment less allowance
FDIC indemnification asset
Accrued interest receivable
Derivative financial assets
Deferred compensation assets
Liabilities
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Securities sold under agreements to repurchase
Accrued interest payable
FHLB and other indebtedness
Derivative financial liabilities
Deferred compensation liabilities
(Amounts in thousands)
Assets
Cash and cash equivalents
Available-for-sale securities
Held-to-maturity securities
Loans held for sale
Loans held for investment less allowance
FDIC indemnification asset
Accrued interest receivable
Derivative financial assets
Deferred compensation assets
Liabilities
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Securities sold under agreements to repurchase
Accrued interest payable
FHLB and other indebtedness
Derivative financial liabilities
Deferred compensation liabilities
Carrying
Amount
56,567
$
519,820
568
883
1,686,644
34,691
7,521
84
4,200
$ 339,680
361,821
524,010
725,231
118,308
2,169
166,088
41
4,200
December 31, 2013
Fair Value
Level 1
Level 2
Level 3
Fair Value Measurements Using
56,567
$
519,820
579
883
1,655,430
34,691
7,521
84
4,200
$ 339,680
361,821
524,010
728,999
121,320
2,169
178,031
41
4,200
$ 56,567
251
—
—
—
—
—
—
4,200
$ —
—
—
—
—
—
—
—
4,200
$ —
519,569
579
883
—
—
7,521
84
—
$ 339,680
361,821
524,010
728,999
121,320
2,169
178,031
41
—
$
—
—
—
—
1,655,430
34,691
—
—
—
$
—
—
—
—
—
—
—
—
—
Carrying
Amount
Fair Value
Level 1
Fair Value Measurements Using
Level 2
Level 3
December 31, 2012
$ 144,847
534,358
816
6,672
1,698,883
48,149
7,842
144
3,625
$ 343,352
353,321
500,276
833,226
136,118
2,481
177,435
16
3,625
127
$ 144,847
534,358
832
6,774
1,702,128
48,149
7,842
144
3,625
$ 343,352
353,321
500,276
842,331
142,417
2,481
200,418
16
3,625
$ 144,847
3,511
—
—
—
—
—
—
3,625
$ —
—
—
—
—
—
—
—
3,625
$ —
530,847
832
6,774
—
—
7,842
144
—
$ 343,352
353,321
500,276
842,331
142,417
2,481
200,418
16
—
$
—
—
—
—
1,702,128
48,149
—
—
—
$
—
—
—
—
—
—
—
—
—
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 19. Related Party Transactions
The Company and its subsidiaries are involved in certain transactions with directors and executive officers, their immediate families, their
business interests, or affiliates of such directors and officers (collectively referred to as “related parties”) in the normal course of business. The
following table summarizes deposit transactions with related parties in the periods indicated:
(Amounts in thousands)
Beginning balance
Increase in deposits, including new accounts
Decrease in deposits, including closed accounts
Ending balance
2013
$ 2,589
907
(574 )
$ 2,922
December 31,
2012
$ 3,837
311
(1,559 )
$ 2,589
2011
$ 17,114
1,294
(14,571 )
$ 3,837
Changes in the composition of the Company’s subsidiary board members and executive officers resulted in a net increase in deposits of $103
thousand in 2013, $166 thousand in 2012, and $14.07 million in 2011.
All loans and commitments with related parties have been made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated parties. The following table summarizes loan transactions with related parties
in the periods indicated:
(Amounts in thousands)
Beginning balance
Increase in existing loans, including new loans
Decrease in existing loans, including loans paid off
Ending balance
2013
$ 16,617
2,037
(1,473 )
$ 17,181
December 31,
2012
$ 18,406
2,580
(4,369 )
$ 16,617
2011
$ 12,459
10,079
(4,132 )
$ 18,406
Changes in the composition of the Company’s subsidiary board members and executive officers resulted in a net decrease in loans of $613
thousand in 2013 and $2.79 million in 2012. Changes in loans during 2011 were not attributed to the change in composition of the Company’s
directors and executive officers.
The Company’s other operating expense includes legal fees and lease expense associated with related parties. Legal fees paid to related parties
totaled $57 thousand in 2013, $63 thousand in 2012, and $80 thousand in 2011. Lease expense paid to related parties totaled $134 thousand in
2013, $171 thousand in 2012, and $164 thousand in 2011.
Note 20. Litigation, Commitments and Contingencies
Litigation
In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal
counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions,
singly or in the aggregate, should not have a material adverse effect on the financial condition, results of operations or cash flows of the
Company.
128
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the balance sheets. The
contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the
other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the
instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management’s credit evaluation of the customer. Collateral may include accounts receivable, inventory, property, plant
and equipment, and income producing commercial properties. Commitments to extend credit also include outstanding commitments related to
mortgage loans that are sold on a best efforts basis into the secondary loan market. The Company maintains a reserve for the risk inherent in
unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.
Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to
customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based
on management’s credit evaluation of the customer.
The following table presents the Company’s off-balance sheet financial instruments as of the dates indicated:
(Amounts in thousands)
Commitments to extend credit
Commitments related to secondary market mortgage loans
Standby letters of credit and financial guarantees
Total off-balance sheet risk
Reserve for unfunded commitments
December 31,
2013
2012
$ 216,179
3,677
4,193
$ 224,049
326
$
$ 215,770
14,840
6,810
$ 237,420
326
$
The Company issued $15.46 million of trust preferred securities in a private placement through the Trust. In connection with the issuance, the
Company has committed to irrevocably and unconditionally guarantee the following payments or distributions, with respect to the trust
preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions and has the funds therefore:
(i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the Trust, the lesser of the
liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution.
129
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 21. Regulatory Capital Requirements and Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the capital adequacy guidelines and
the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that
involve quantitative measures of the entity’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios for total and Tier 1 capital, as defined in the regulations, to risk-weighted assets, as defined, and of Tier
1 capital, as defined, to average assets, as defined.
To be categorized as well capitalized, the Bank must maintain minimum total capital to risk-weighted assets, Tier 1 capital to risk-weighted
assets, and Tier 1 capital to average assets (leverage) ratios established by banking regulators. As of December 31, 2013, the Company and the
Bank continued to meet all capital adequacy requirements. As of December 31, 2013, the most recent notifications from regulators continued to
categorize the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes there have been no
conditions or events since those notifications that would change the Bank’s classification. The following table presents the Company’s and the
Bank’s capital ratios as of the dates indicated:
(Amounts in thousands)
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.
First Community Bank
(Amounts in thousands)
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.
First Community Bank
Actual
Amount Ratio
December 31, 2013
For Capital
Adequacy
Purposes
Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
N/A N/A
$ 270,636 16.44 % $ 131,694 8.00 %
236,699 14.55 %
130,141 8.00 % $ 162,676 10.00 %
250,012 15.19 %
216,314 13.30 %
65,847 4.00 %
65,070 4.00 %
N/A N/A
97,606 6.00 %
250,012 9.95 %
216,314 8.63 %
100,489 4.00 %
100,219 4.00 %
N/A N/A
125,274 5.00 %
Actual
Amount Ratio
December 31, 2012
For Capital
Adequacy
Purposes
Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
N/A N/A
$ 282,729 16.70 % $ 135,441 8.00 %
255,219 15.23 %
134,087 8.00 % $ 167,609 10.00 %
261,467 15.44 %
234,226 13.97 %
67,720 4.00 %
67,043 4.00 %
N/A N/A
100,565 6.00 %
261,467 9.96 %
234,226 8.98 %
104,974 4.00 %
104,304 4.00 %
N/A N/A
130,381 5.00 %
130
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The primary source of funds for dividends paid by the Company to shareholders is dividends received from the Bank, which are subject to
banking regulation restrictions. Approval by regulatory authorities is required to declare dividends if the dividends are to be paid in something
other than cash, if the cumulative dividend payment exceeds the net retained income of the current year to date plus the retained net income of
the preceding two years, or if payment of the dividend would cause the Bank to become undercapitalized.
The Bank issues mortgages insured by the U.S. Department of Housing and Urban Development (“HUD”) as a HUD-approved Title II
Supervised Mortgagee. A Title II Supervised Mortgagee must maintain an adjusted minimum net worth of $1 million. Not complying with this
minimum net worth requirement may result in penalties, such as the revocation of the Bank’s license to issue HUD insured mortgages, which
may have a material adverse effect on the Company’s financial condition and results of operations. The Bank’s adjusted net worth was $201.92
million as of December 31, 2013, and $205.54 million as of December 31, 2012, which significantly exceeds minimum net worth requirements.
Note 22. Parent Company Financial Information
The following table presents condensed financial information for the parent company as of the dates and in the periods indicated:
(Amounts in thousands)
Assets
Cash and due from banks
Securities available for sale
Investment in subsidiary
Other assets
Total assets
Liabilities
Other borrowings
Subordinated debt
Total liabilities
Stockholders’ Equity
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
131
CONDENSED BALANCE SHEETS
December 31,
2013
2012
$
10,872
13,335
310,748
9,697
$ 344,652
$
582
15,464
16,046
15,251
20,493
215,663
124,535
(33,887 )
(13,449 )
328,606
$ 344,652
$
12,476
11,053
343,911
4,541
$ 371,981
$
194
15,464
15,658
17,421
20,343
213,829
111,627
(6,458 )
(439 )
356,323
$ 371,981
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Cash dividends received from subsidiary bank
Other income
Operating expense
Income tax expense
Equity in undistributed earnings of subsidiary
Net income
Dividends on preferred stock
Net income available to common shareholders
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
2013
$ 43,900
726
(1,647 )
368
(20,035 )
23,312
1,024
$ 22,288
2012
$ 8,105
445
(1,318 )
(55 )
21,400
28,577
1,058
$ 27,519
2011
$ —
2,227
(1,796 )
(150 )
19,747
20,028
703
$ 19,325
(Amounts in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary
Gain on sale of securities
(Increase) decrease in other assets
Increase (decrease) in other liabilities
(Increase) decrease in other operating activities
Net cash provided by (used in) operating activities
Investing activities
Proceeds from sales of securities available-for-sale
Payments to acquire securities available-for-sale
Investment in subsidiary
Net cash (used in) provided by investing activities
Financing activities
Proceeds from issuance of preferred stock
Proceeds from stock options exercised
Payments for repurchase of treasury stock
Payments for repurchase of warrants
Payments of common dividends
Payments of preferred dividends
Proceeds from other financing activities
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
132
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2011
2012
2013
$ 23,312
$ 28,577
$ 20,028
20,035
(193 )
(5,293 )
333
(106 )
38,088
3,380
(5,000 )
—
(1,620 )
—
789
(28,421 )
—
(9,476 )
(992 )
28
(38,072 )
(1,604 )
12,476
$ 10,872
(21,400 )
(49 )
123
588
(58 )
7,781
2,151
(5,137 )
—
(2,986 )
—
144
(1,012 )
—
(8,162 )
(1,120 )
137
(10,013 )
(5,218 )
17,694
$ 12,476
(19,747 )
(139 )
(1,529 )
(5,748 )
776
(6,359 )
2,636
(6 )
(570 )
2,060
18,802
32
(904 )
(30 )
(7,155 )
(558 )
100
10,287
5,988
11,706
$ 17,694
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 23. Quarterly Financial Data (Unaudited)
The following table presents selected financial data by quarter for the periods indicated:
(Amounts in thousands, except share and per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Net gain (loss) on sale of securities
Other expenses
Income before income taxes
Income tax
Net income
Dividends on preferred stock
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividend per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
(Amounts in thousands, except share and per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Net gain (loss) on sale of securities
Other expenses
Income before income taxes
Income tax
Net income
Dividends on preferred stock
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividend per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
First
Quarter
Year Ended December 31, 2013
Third
Second
Quarter
Quarter
Fourth
Quarter
$
28,004
4,642
23,362
1,142
22,220
7,744
117
19,544
10,537
3,396
7,141
258
6,883
0.34
0.34
0.12
20,032,694
21,258,490
$
$
$
27,412
4,550
22,862
3,205
19,657
6,735
113
18,533
7,972
2,537
5,435
253
5,182
0.26
0.26
0.12
19,997,991
21,205,078
$
$
$
26,696
4,370
22,326
2,333
19,993
8,150
(39 )
20,153
7,951
2,539
5,412
261
5,151
0.26
0.26
0.12
20,008,861
21,123,788
$
$
$
27,364
4,272
23,092
1,528
21,564
6,743
208
20,755
7,760
2,436
5,324
252
5,072
0.27
0.26
0.12
19,136,317
20,233,737
$
$
First
Quarter
Year Ended December 31, 2012
Third
Second
Quarter
Quarter
Fourth
Quarter
$
22,682
4,705
17,977
922
17,055
7,940
51
16,193
8,853
2,852
6,001
283
5,718
0.32
0.31
0.10
17,849,376
19,158,179
$
$
133
$
24,182
4,698
19,484
1,620
17,864
8,352
(9 )
20,132
6,075
1,997
4,078
283
3,795
0.20
0.21
0.11
18,561,714
19,872,106
$
$
$
31,536
5,077
26,459
1,916
24,543
10,935
228
20,325
15,381
5,322
10,059
220
9,839
0.49
0.47
0.11
20,013,264
21,329,612
$
$
$
31,256
5,120
26,136
1,220
24,916
9,000
213
21,733
12,396
3,957
8,439
272
8,167
0.41
0.40
0.11
20,063,873
21,314,023
$
$
Table of Contents
- Report of Independent Registered Public Accounting Firm -
We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and Subsidiaries (the “Company”) as of
December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity
and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First
Community Bancshares, Inc. and its Subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2014
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 11, 2014
134
Table of Contents
- Management’s Assessment of Internal Control over Financial Reporting -
First Community Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated
financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual
Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some
amounts that are based on management’s best estimates and judgments.
We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is
designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal
control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be
circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions,
internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable
assurance with respect to financial statement preparation.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework
in the Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31,
2013.
Dixon Hughes Goodman LLP, independent registered public accounting firm, has issued an attestation report on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2013. The Report of Independent Registered Public Accounting Firm,
which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31,
2013, appears hereafter in Item 8 of this Annual Report on Form 10-K.
Dated this 11 day of March, 2014.
th
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer
135
Table of Contents
To the Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
- Report of Independent Registered Public Accounting Firm -
We have audited First Community Bancshares, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December
31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Community Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements of First Community Bancshares, Inc. as of and for the year ended December 31, 2013, and our report, dated March 11,
2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 11, 2014
136
Table of Contents
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures pursuant
to the Securities Exchange Act of 1934 (the “Exchange Act”) Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as
of December 31, 2013, our disclosure controls and procedures were effective.
Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are
required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and
communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities
that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.
Changes in Internal Control over Financial Reporting
We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control
assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2013, that materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Management’s Report on Internal Controls over Financial Reporting
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013, is included in Item 8,
“Management’s Assessment of Internal Control over Financial Reporting,” of this report. Our independent auditors’ report on management’s
assessment of internal controls over financial reporting as of December 31, 2013, is included in Item 8, “Report of Independent Registered
Public Accounting Firm,” of this report.
Item 9B.
Other Information.
None.
137
Table of Contents
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required in Item 10 of this report is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders
to be held on April 29, 2014 (“2014 Annual Meeting”). The Proxy Statement will be filed with the SEC prior to the 2014 Annual Meeting. The
following list provides the heading under which the required information is incorporated by reference in our Proxy Statement for the 2014
Annual Meeting:
•
•
•
Information regarding directors and executive officers is included in “Proposal 1: Election of Directors,” “Continuing Incumbent
Directors,” “Non-Director Executive Officers,” “Nominees for the Class of 2017,” and “Corporate Governance.”
Information regarding compliance with Section 16(a) of the Exchange Act is included in “Section 16(a) Beneficial Ownership Reporting
Compliance.”
Information regarding the Audit Committee and the Audit Committee Financial Expert is included in “Board Committees.”
We adopted a Standards of Conduct that applies to all of our directors and employees, including our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our Standards of Conduct is
available on our website, www.fcbinc.com. There have been no waivers of the Standards of Conduct related to any of the above officers.
Since the disclosure presented in our Proxy Statement filed with the SEC on March 13, 2013, for the Annual Meeting of Stockholders held in
2013, no material changes have been made to the procedures by which stockholders may recommend nominees to our Company’s Board of
Directors.
BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
I. Norris Kantor
Of Counsel, Katz, Kantor, Stonestreet & Buckner, Attorneys at
Law; Board of Governors, Bluefield State College
William P. Stafford
President, Princeton Machinery Service, Inc.
William P. Stafford, II
Chief Executive Officer, First Community Bancshares, Inc.;
Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore,
Kersey & Stafford, PLLC
W. C. Blankenship, Jr.
Retired Agent, State Farm Insurance
Samuel L. Elmore
Retired Senior Vice President – Commercial Lending for Raleigh
County, W. Va. Market, and Past Chief Credit Officer, First
Community Bank; Past Executive Vice President, Citizens
Southern Bank, Inc.; Past President and Chief Operations Officer,
Beckley National Bank; Past Vice President, Key Centurion
Bancshares; Director, Raleigh County Commission on Aging
Franklin P. Hall
Businessman; Chairman, Hall & Hall Family Law Firm; Former
Commissioner, Virginia Department of Alcoholic Beverage
Control; Former Chairman, The CommonWealth Bank; Former
Minority Leader, Virginia House of Delegates; Commissioner,
Richmond Redevelopment & Housing Authority
Richard S. Johnson
Chairman, President, and CEO, The Wilton Companies; Director
and Past Chairman, Economic Development Authority of the City
of Richmond; Trustee Emeritus, University of Richmond
138
Table of Contents
EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
William P. Stafford, II
Chief Executive Officer
Gary R. Mills
President
Robert L. Schumacher
General Counsel
E. Stephen Lilly
Chief Operating Officer
David D. Brown
Chief Financial Officer
Robert L. Buzzo
Vice President and Secretary
BOARD OF DIRECTORS, FIRST COMMUNITY BANK
James H. Atkinson, Jr.
Retired Chief Executive Officer, Peoples Bank of Virginia
W. C. Blankenship, Jr.
Retired Agent, State Farm Insurance
Juanita G. Bryan
Homemaker
Richard S. Johnson
Chairman, President, and CEO, The Wilton Companies; Director
and Past Chairman, Economic Development Authority of the City
of Richmond; Trustee Emeritus, University of Richmond
I. Norris Kantor
Of Counsel, Katz, Kantor, Stonestreet & Buckner, Attorneys at
Law; Board of Governors, Bluefield State College
Robert L. Buzzo
Vice President and Secretary, First Community Bancshares, Inc.;
President Emeritus, First Community Bank
Gary R. Mills
President, First Community Bancshares, Inc.; Chief Executive
Officer, First Community Bank
Martyn A. Pell
President, First Community Bank
William P. Stafford
President, Princeton Machinery Service, Inc.
William P. Stafford, II
Chief Executive Officer, First Community Bancshares, Inc.;
Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore,
Kersey & Stafford, PLLC
Frank C. Tinder
President, Tinder Enterprises, Inc. and Tinco Leasing Corporation;
Realtor, Premier Realty
C. William Davis
Attorney at Law, Richardson & Davis
Samuel L. Elmore
Retired Senior Vice President – Commercial Lending for Raleigh
County, W.Va. Market, and Past Chief Credit Officer, First
Community Bank; Past Executive Vice President, Citizens
Southern Bank, Inc.; Past President and Chief Operations Officer,
Beckley National Bank; Past Vice President, Key Centurion
Bancshares; Director, Raleigh County Commission on Aging
T. Vernon Foster
President of J. La’Verne Print Communications; Past Director,
TriStone Community Bank; Executive Director: MBA Programs,
Career Management & Public Relations, University of Louisville,
College of Business
Franklin P. Hall
Businessman; Chairman, Hall & Hall Family Law Firm; Former
Commissioner, Virginia Department of Alcoholic Beverage
Control; Former Chairman, The CommonWealth Bank; Former
Minority Leader, Virginia House of Delegates; Commissioner,
Richmond Redevelopment & Housing Authority
139
Table of Contents
Item 11.
Executive Compensation.
Information regarding executive compensation is incorporated by reference to our Proxy Statement for the 2014 Annual Meeting under the
headings “Compensation Discussion and Analysis” and “Board Committees.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table presents information regarding compensation plans under which our equity securities are authorized for issuance as of
December 31, 2013:
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and rights
(a)
68,496
306,333
374,829
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
$
$
21.21
20.32
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
521,282
(3)
—
521,282
Plan category
Equity compensation plans
approved by security holders
(1)
Equity compensation plans not
approved by security holders
(2)
Total
(1)
(2)
Includes the 2012 Omnibus Equity Compensation Plan and 2004 Omnibus Stock Option Plan.
Includes the 2001 Directors’ Option Plan, 1999 Stock Option Plan, and other plans related to past business combinations. These plans are
generally expired or not available to issue new options, warrants, or rights.
(3) Shares available for future issuance were under the 2012 Omnibus Equity Compensation Plan.
Additional information regarding security ownership of certain beneficial owners and management is incorporated by reference to our Proxy
Statement for the 2014 Annual Meeting under the heading “Information on Stock Ownership.”
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions and director independence is incorporated by reference to our Proxy
Statement for the 2014 Annual Meeting under the headings “Related Person Transactions” and “Corporate Governance.”
Item 14.
Principal Accounting Fees and Services.
Information regarding principal accounting fees and services is incorporated by reference to our Proxy Statement for the 2014 Annual Meeting
under the heading “Independent Registered Public Accounting Firm.”
140
Table of Contents
Item 15.
Exhibits, Financial Statement Schedules.
(a) Documents Filed as a Part of this Report
PART IV
(1) The following financial statements are incorporated by reference from Item 8 of this Report:
Consolidated Balance Sheets as of December 31, 2013 and 2012.
Consolidated Statements of Income for the Years Ended December 31, 2013, 2012 and 2011.
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011.
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2013, 2012, and 2011.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012, and 2011.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not
applicable or the required information is included in the consolidated financial statements or related notes thereto.
(b) Exhibits
Exhibit
No.
3(i)
3(ii)
4.1
4.2
4.3
4.4
4.5
Exhibit
Articles of Incorporation of First Community Bancshares, Inc., as amended (1)
Amended and Restated Bylaws of First Community Bancshares, Inc. (2)
Specimen stock certificate of First Community Bancshares, Inc. (3)
Indenture Agreement dated September 25, 2003. (4)
Declaration of Trust of FCBI Capital Trust dated September 25, 2003, as amended and restated. (5)
Preferred Securities Guarantee Agreement dated September 25, 2003. (6)
Certificate of Designation of 6.00% Series A Noncumulative Convertible Preferred Stock. (7)
10.1**
First Community Bancshares, Inc. 1999 Stock Option Agreement (8) and Plan. (9)
10.1.1**
First Community Bancshares, Inc. 1999 Stock Option Plan, Amendment One. (10)
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.9**
First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Plan. (11)
Employment Agreement between First Community Bancshares, Inc. and John M. Mendez dated December 16, 2008, as
amended and restated (21) and Waiver Agreement. (29)
First Community Bancshares, Inc. and Affiliates Executive Retention Plan (12), Amendment #1 (13), and Amendment #2. (32)
First Community Bancshares, Inc. Split Dollar Plan and Agreement. (14)
First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated. (15)
First Community Bancshares, Inc. Wrap Plan, as amended and restated. (16)
Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors, and Certain Executive Officers.
(17)
10.10**
Form of Indemnification Agreement between First Community Bank, its Directors, and Certain Executive Officers. (17)
141
Table of Contents
Exhibit
No.
Exhibit
10.11**
10.12**
10.13**
10.14**
10.15**
10.16**
10.17**
10.18**
10.19**
10.21**
10.22**
10.23**
11
12*
21*
23.1*
31.1*
31.2*
32*
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (18) and Stock Award Agreement. (19)
First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan (31)
First Community Bancshares, Inc. Directors Deferred Compensation Plan, as amended and restated. (20)
Employment Agreement between First Community Bancshares, Inc. and David D. Brown dated December 16, 2008. (22)
Employment Agreement between First Community Bancshares, Inc. and Robert L. Buzzo dated December 16, 2008, as
amended and restated. (23)
Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly dated December 16, 2008, as
amended and restated. (24)
Employment Agreement between First Community Bank and Gary R. Mills dated December 16, 2008. (25)
Employment Agreement between First Community Bank and Martyn A. Pell dated December 16, 2008. (26)
Employment Agreement between First Community Bank and Robert L. Schumacher dated December 16, 2008. (27)
Employment Agreement between First Community Bank and Mark R. Evans dated July 31, 2009. (28)
Form of Restricted Stock Grant Agreement under First Community Bancshares, Inc. 2012 Omnibus Equity Compensation
Plan. (33)
Separation Agreement and Release between First Community Bancshares, Inc. and John M. Mendez dated August 28,
2013. (34)
Statement Regarding Computation of Earnings per Share. (30)
Statement Regarding Computation of Ratios.
Subsidiaries of the Registrant
Consent of Independent Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***
XBRL Instance Document #
101.SCH***
XBRL Taxonomy Extension Schema Document #
101.CAL***
XBRL Taxonomy Extension Calculation Linkbase Document #
101.LAB***
XBRL Taxonomy Extension Label Linkbase Document #
101.PRE***
XBRL Taxonomy Extension Presentation Linkbase Document #
101.DEF***
XBRL Taxonomy Extension Definition Linkbase Document #
142
Table of Contents
Incorporated herewith.
Indicates a management contract or compensation plan.
*
**
*** Submitted electronically herewith.
#
Attached as Exhibit 101 to the Annual Report on Form 10-K for the year ended December 31, 2013, of First Community Bancshares, Inc.
are the following documents formatted in XBRL (eXtensive Business Reporting Language): (i) Consolidated Balance Sheets as of
December 31, 2013, and 2012; (ii) Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011;
(iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011; (iv) Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011; (v) Consolidated Statements of Cash Flows
for the years ended December 31, 2013, 2012, and 2011; and (vi) Notes to Consolidated Financial Statements.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on
August 16, 2010.
Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated September 24, 2013, filed on September 26, 2013.
Incorporated by reference from Exhibit 4.1 of the Annual Report on Form 10-K for the period ended December 31, 2002, filed on
March 25, 2003, amended on March 31, 2003.
Incorporated by reference from Exhibit 4.2 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on
November 10, 2003.
Incorporated by reference from Exhibit 4.3 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on
November 10, 2003.
Incorporated by reference from Exhibit 4.4 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on
November 10, 2003.
Incorporated by reference from Exhibit 4.1 of the Current Report on Form 8-K dated May 20, 2011, filed on May 23, 2011.
Incorporated by reference from Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on
August 14, 2002.
Incorporated by reference from Exhibit 10.1 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed on
March 30, 2000, amended on April 13, 2000.
(10) Incorporated by reference from Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on
May 7, 2004.
(11) Incorporated by reference from Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on
August 14, 2002.
(12) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.
(13) Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
(14) Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed on
March 30, 2000, amended on April 13, 2000.
(15) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
(16) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.
(17) Incorporated by reference from Exhibit 10.1 and Exhibit 10.2 of the Current Report on Form 8-K dated February 25, 2014, filed on
March 3, 2014.
(18) Incorporated by reference from Annex B to the 2004 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 15,
2004.
143
Table of Contents
(19) Incorporated by reference from Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on
August 6, 2004.
(20) Incorporated by reference from Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.
(21) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on December 16, 2008.
(22) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on December 16, 2008.
(23) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on July 6, 2009.
(24) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on July 6, 2009.
(25) Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated and filed on July 6, 2009.
(26) Incorporated by reference from Exhibit 10.4 of the Current Report on Form 8-K dated and filed on July 6, 2009.
(27) Incorporated by reference from Exhibit 10.5 of the Current Report on Form 8-K dated and filed on July 6, 2009.
(28) Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009.
(29) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
(30) Incorporated by reference from Note 1 of the Notes to Condensed Consolidated Financial Statements included herein.
(31) Incorporated by reference from the 2012 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 7, 2012.
(32) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013.
(33) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013.
(34) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K/A dated August 12, 2013, filed on September 3, 2013.
144
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on the 11 day of March, 2014.
th
By: /s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
(Principal Executive Officer)
First Community Bancshares, Inc.
(Registrant)
By: /s/ David D. Brown
David D. Brown
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ William P. Stafford, II
William P. Stafford, II
/s/ David D. Brown
David D. Brown
/s/ W.C. Blankenship, Jr.
W.C. Blankenship, Jr.
/s/ Samuel L. Elmore
Samuel L. Elmore
/s/ Franklin P. Hall
Franklin P. Hall
/s/ Richard S. Johnson
Richard S. Johnson
Signature
Title
Date
Director and Chief Executive Officer
March 11, 2014
Chief Financial Officer
March 11, 2014
Director
Director
Director
Director
145
March 11, 2014
March 11, 2014
March 11, 2014
March 11, 2014
STATEMENT REGARDING COMPUTATION OF RATIOS
Exhibit 12
Cash Dividends Per Share
Book Value Per Share
=
=
Dividends Paid to Common Shareholders/Average Common
Shares Outstanding
Total Shareholders’ Equity/As-Converted Common Shares
Outstanding
Return on Average Assets
= Net Income/Average Assets
Return on Average Shareholders’ Equity
= Net Income/Average Shareholders’ Equity
Efficiency Ratio (GAAP)
Efficiency Ratio (Non-GAAP)
Loans to Deposits
Dividend Payout
=
=
Noninterest Expense/(Net Interest Income Plus Noninterest
Income)
See schedule under Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations
= Average Net Loans/Average Deposits Outstanding
=
Dividends Declared to Common Shareholders/Net Income
Available to Common Shareholders
Average Shareholders’ Equity to Average Assets
= Average Shareholders’ Equity/Average Assets
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
Leverage Ratio
Net Charge-offs to Average Loans
Nonperforming Loans to Total Loans
Nonperforming Assets to Total Loans and OREO
Allowance for Loan Losses to Total Loans
Allowance for Loan Losses to Nonperforming Assets
Allowance for Loan Losses to Nonperforming Loans
=
(Shareholders’ Equity Plus Qualifying Subordinated Debt) –
Intangible Assets –Securities Market-to-market Capital Reserve
(Tier 1 Capital)/ Risk Adjusted Assets
=
Tier 1 Capital Plus Allowance for Loan Losses/Risk Adjusted
Assets
= Tier 1 Capital/Average Assets
= (Gross Charge-offs Less Recoveries)/Average Net Loans
=
=
=
=
(Nonaccrual Loans, Loans Past Due 90 Days or Greater, Plus
Unseasoned Restructured Loans)/Gross Loans Net of Unearned
Interest
(Nonaccrual Loans, Loans Past Due 90 Days or Greater,
Unseasoned Restructured Loans, Plus OREO)/Gross Loans Net
of Unearned Interest plus OREO
Allowance for Loan Losses/(Gross Loans Net of Unearned
Interest)
Allowance for Loan Losses/(Nonaccrual Loans, Loans Past Due
90 Days or Greater, Unseasoned Restructured Loans, Plus
OREO)
=
Allowance for Loan Losses/(Nonaccrual Loans plus
Nonperforming Loans)
Net Interest Margin
= Tax Equivalent Net Interest Income/Average Earning Assets
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
Title
First Community Bank
Greenpoint Insurance Group, Inc.
First Community Wealth Management, Inc.
State of Incorporation
Virginia
North Carolina
West Virginia
To the Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
-Consent of Independent Registered Public Accounting Firm-
We consent to the incorporation by reference in the registration statements pertaining to the 2013 Shelf Registration (Form S-3, No. 333-
187818); 2012 Omnibus Equity Compensation Plan (Form S-8, No. 333-183057); 2011 Convertible Preferred Shares (Form S-3, No. 333-
175262); the 2004 Omnibus Stock Option Plan (Form S-8, No. 333-120376); the 2001 Directors Stock Option Plan (Form S-8, No. 333-
75222); the 1999 Stock Option Plan (Form S-8, 333-31338); the Employee Stock Ownership and Savings Plan (Form S-8, No. 333-63865); and
the TriStone Community Bank Employee and Director Stock Option Plans (Form S-8, No. 333-161473) of First Community Bancshares, Inc.
and Subsidiaries (the “Company”) of our reports dated March 11, 2014, with respect to the consolidated financial statements of the Company
and the effectiveness of internal control over financial reporting, which reports appear in the Company’s 2013 Annual Report on Form 10-K.
Exhibit 23.1
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 11, 2014
Exhibit 31.1
I, William P. Stafford, II, certify that:
1.
I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 11, 2014
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
Exhibit 31.2
I, David D. Brown, certify that:
1.
I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 11, 2014
/s/ David D. Brown
David D. Brown
Chief Financial Officer
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of First Community Bancshares, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify, to
the officers’ best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(a) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated this 11 day of March, 2014.
th
First Community Bancshares, Inc.
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer