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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, 2014
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 or organization)
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 each 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 Section 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 (§ 232.405 of this chapter) 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 (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of 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.
Large accelerated filer
Accelerated filer
(cid:1)
(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 Act). (cid:1) Yes No
As of June 30, 2014, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $200.41
million.
As of February 26, 2015, there were 18,545,619 shares outstanding of the registrant’s Common Stock, $1.00 par value.
Smaller reporting company
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 2015, are incorporated by reference in
Part III of this Form 10-K.
(cid:1)
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FIRST COMMUNITY BANCSHARES, INC.
2014 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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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We may make forward-looking statements in filings with the Securities and Exchange Commission, including this Annual Report on Form 10-
K and the accompanying Exhibits, 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. These statements are not
guarantees of future performance and involve certain risks, uncertainties, and assumptions that are 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 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 about 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 exclusive. 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 Securities and Exchange Commission.
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. These cautionary statements expressly qualify all forward-looking
statements that apply to our Company. See Item 1A, “Risk Factors,” in Part I of this report.
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Item 1.
Business.
Corporate Overview
PART I
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 commercial 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 People’s Community Bank, a Division of First Community Bank, in Tennessee. Unless the
context suggests otherwise, 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. Our operations are guided by a strategic plan focusing on organic
growth that may be supplemented by strategic acquisitions.
The Company provides insurance services through its wholly owned, full-service insurance agency subsidiary Greenpoint Insurance Group,
Inc. (“Greenpoint”). 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 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.
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 by 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. The Community Banking segment 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, 2014, we operated 63 locations in 4 states: Virginia, West Virginia, North Carolina, and Tennessee. We serve a
diverse base of individuals and businesses across a variety of industries, such as manufacturing, mining services, construction, retail,
healthcare, military, and transportation. We have no material concentrations of deposits or loans related to 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:
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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;
corporate and personal trust services;
investment management services; and
life, health, and property and casualty insurance products.
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Employees
As of December 31, 2014, we had 678 full-time equivalent employees. Our employees are not represented by collective bargaining agreements
and we consider 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. 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. 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 them to offer services we do not provide.
Competition could 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 (“Exchange Act”), we are required to file annual, quarterly, and current reports; proxy
statements; and other information with the Securities and Exchange Commission (“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
additional 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any
amendments to those reports, are available free of charge on our website, www.fcbinc.com, as soon as reasonably practicable after such reports
are filed with, or furnished to, the SEC. Investors are encouraged to access these reports and other information about our business. Information
about 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. The regulations are intended primarily for the protection of
depositors, the Deposit Insurance Fund (“DIF”) 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.
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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
(“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
(“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 (“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; and
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 (“Mortgage Reform Act”), contains new
underwriting and servicing standards for the mortgage industry, as well as restrictions on compensation for mortgage originators. 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 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 under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). 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 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. Federal Reserve policy states
that bank holding companies may pay cash dividends on common stock only from income available over the past year if prospective earnings
retention is consistent with the organization’s expected future needs and financial condition. 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 may 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 prohibit dividend payments. 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 acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or all, or
substantially all, of the assets of a 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
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unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto.
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 fails 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. 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 became
effective on April 1, 2014, but the Federal Reserve issued an order on December 18, 2014, extending the period during which institutions have
to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2016. The Federal Reserve also announced its
intention to grant an additional one-year extension of the conformance period to July 21, 2017. 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 expect 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.
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Capital Adequacy Requirements
The Federal Reserve 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. The guideline establishes a minimum ratio of 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 of total capital (Tier 1 capital plus Tier 2 capital, as
adjusted) to the aggregate dollar amount of 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 comprised of 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. Tier 2 capital, sometimes referred to as supplementary capital, is defined to
include, subject to limitation: 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. 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, 2014, the Company’s ratio of Tier 1 capital to total risk-weighted assets was 16.43% and ratio of total capital to
risk-weighted assets was 17.68%.
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 condition. As of December 31, 2014, the Company’s leverage ratio was 10.12%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios that generally apply 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
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substantially revise the risk-based capital requirements that apply 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 address risk weights
and other 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, (1) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (2) specify
that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (3) 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
(4) 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 the following
minimum ratios:
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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);
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);
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
Tier 1 capital to average assets (leverage ratio) of 4% (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 provide for a “countercyclical capital buffer” that applies to certain covered institutions; however, the buffer is not
expected to apply 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 following initial minimum capital ratios will be effective as of January 1, 2015:
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•
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 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
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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 (“AOCI”) items included in
capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain AOCI
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 to avoid significant changes 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 prevent 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 before May 19, 2010, for holding
companies of depository institutions with 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 before 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 0.625% and will be phased in over a four-year period (increasing by that amount on each subsequent January 1,
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 under 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. The following changes, among others, to current rules that influence the Company’s
determination of risk-weighted assets include:
•
•
•
•
•
•
applying a 150% risk weight (instead of a 100%) to 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 (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; and
eliminating the current 50% cap on the risk weight for OTC derivatives.
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, 2014, 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 in effect.
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Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity was 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 long-term debt as a funding source. On September 3,
2014, the federal banking agencies finalized the 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:
•
•
•
provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks,
comply with effective internal controls and risk management, and
support strong corporate governance that includes 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 that are deemed excessive, or may lead to material losses.
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The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and we expect those
policies 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 such transactions, and 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 that 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 that 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 on 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, such as
the sales 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
The Company’s primary source of operating funds is dividends paid by the Bank. Capital adequacy requirements that apply 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
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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.
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 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.
As required by the Federal Reserve’s risk-based capital requirements, state member banks must 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
stressed 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
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its most recent examination report and is not experiencing significant growth), but 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 considered 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 applying prompt corrective action regulations, and the
capital category may not constitute an accurate representation of the bank’s 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, 2014.
The Basel III Capital Rules revise the current prompt corrective action requirements effective January 1, 2015 by:
•
•
•
introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for
well-capitalized status;
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
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.
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. The FDIC uses 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 beginning April 1, 2011, ranged from 5 basis points in the lowest risk
category to 35 basis points for banks in the highest risk category.
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The Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will require 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% (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 2.00%, 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. The new rules also 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 (“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 Bank’s FICO assessments, which are set quarterly, totaled $147 thousand in 2014 and $154 thousand in 2013. The Bank’s
FDIC deposit insurance assessments and premiums totaled $1.59 million in 2014 and $1.72 million in 2013.
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 an institution fails to submit an acceptable compliance plan or fails
in any material respect to implement an acceptable compliance plan, after being so notified, 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 follow 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.
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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 follow 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 certain 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 Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Right to Financial Privacy 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 follow the applicable provisions of these consumer protection laws
and regulations as part of their ongoing customer relations.
Federal law contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its
customers, at the start 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 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 implements, examines, and
enforces 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 (“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
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Patriot Act’s anti-money laundering and Bank Secrecy Act requirements. We believe our controls and procedures complied with the USA
Patriot Act as of December 31, 2014.
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, (“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.
I tem 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 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.
From December 2007 through June 2009, the U.S. economy faced a severe economic crisis and experienced the worst economic downturn
since the Great Depression of the 1930s. Although the domestic economy continued a modest recovery in 2014, 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 nor that these conditions will not worsen.
Our financial performance is generally highly dependent upon the business environment in the markets we operate 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,
investor or business confidence; limitations on the
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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.
During recent years, the business environment has been adverse for many households and businesses in the U.S. and worldwide. Although
economic conditions have improved since the recession, there can be no assurance that this improvement will continue. Economic pressure on
consumers and uncertainty about 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 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 loan loss provisions 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, 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 about 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, and
charge-offs 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 $19.92 million as of December 31, 2014, $27.79 million as of December 31, 2013, and $35.69 million
as of December 31, 2012. We incurred net charge-offs of $2.89 million in 2014, $10.35 million in 2013, and $6.11 million in 2012. Our
allowance for loan losses was $20.23 million as of December 31, 2014, $24.08 million as of December 31, 2013, and $25.77 million as of
December 31, 2012. Our provision for loan losses charged to operations was $145 thousand in 2014, $8.21 million in 2013, and $5.68 million
in 2012. A provision recovery was realized for purchased credit impaired (“PCI”) loans of $697 thousand in 2014, which included a recovery
of $275 thousand included in the provision charged to operations and $422 thousand was recorded through the FDIC indemnification asset. The
provision attributed to 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. There was no provision before 2013 for PCI
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loans. As of December 31, 2014, the allowance attributed to non-PCI loans as a percentage of non-covered nonperforming loans was 151.85%
and the allowance attributed to non-PCI loans as a percentage of total non-covered loans was 1.29%. 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. Commercial business and real estate loans made or
acquired in recent years may not have experienced a complete business or economic cycle. As of December 31, 2014, our commercial business
loans totaled $87.40 million, or 5.17% of our total loan portfolio, and our commercial real estate loans totaled $769.61 million, or 45.55% of
our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $7.00 million and largest outstanding
commercial real estate loan was $11.32 million.
In addition to commercial business and real estate loans, 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. As of December 31, 2014, our commercial construction loans totaled $54.37 million, or 3.22% of our total loan
portfolio. As of the same date, our largest outstanding commercial construction loan was $6.70 million.
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 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.
Changes in unrealized gains and losses on available-for-sale securities, net of the related tax effect, impact stockholders’ equity through 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. As of December 31, 2014, the fair value of securities available for sale was $326.12 million and
the aggregate unrealized losses on those securities were $12.26 million.
We conduct quarterly reviews of our securities portfolio to determine if the declines are other-than-temporary. We consider the following
factors in our analysis of debt securities: 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 using
the present value of future cash flows; the severity and duration of the decline in fair value below amortized cost; the financial
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condition and near-term prospects of the issuer; whether the decline is related to issuer conditions, general market, or industry conditions; the
payment structure; the failure to make scheduled interest or principal payments; and changes to the securities’ rating 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 $705 thousand in our debt securities portfolio in 2014.
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 OTTI charges of $32 thousand in our equity securities
portfolio in 2014.
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’ 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 the 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 follow 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 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 depends on its 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. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy
the Company’s obligations, including required payments to the Trust or dividends on our Series A Noncumulative Convertible Preferred Stock
(“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.
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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, 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.
Potential acquisitions may disrupt our business and dilute stockholder value.
•
•
•
•
•
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
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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 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 7.24% of our total loans held for investment as of December 31, 2014, compared to 13.21% as of June 30, 2012.
We are subject to certain obligations under the 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 follow any
obligations could result in a specific asset, or group of assets, losing loss share coverage. Reimbursement requests are subject to FDIC review
and may be delayed or disallowed if we do not comply 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. We are subject to FDIC audits to ensure compliance with the loss share agreements. The loss share
agreements are subject to interpretation by the FDIC and us; therefore, disagreements about the coverage of losses, expenses, and contingencies
may arise.
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
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.
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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. If we fail to receive proper
regulatory approval, 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, 2014, our carrying balance of goodwill was $100.72 million. We test goodwill for impairment annually, or more often if
necessary, using quantitative and qualitative factors. When 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 effect on our earnings and financial position. We recognized no goodwill
impairment in 2014.
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 affect 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. The deterioration of banking and
economic conditions and financial institution failures deplete the FDIC’s DIF and reduce 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.
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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 adverse effect on our liquidity. Company specific factors 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 may impair our access to funding with acceptable terms adequate to finance our activities. General
factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a
decrease in business activity due to political or environmental events may impair our access to liquidity.
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 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. Losses from routine funding transactions
could have a material adverse effect on 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 actions 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.
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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 follow 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. 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 use technology-driven products
and services effectively 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 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 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 replace quickly if
there are operational failures or service interruptions.
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 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 often enter into litigation based on
allegations of patent infringement or other violations
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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 often 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 affect 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. These 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.
Risks Associated with Our Common Stock
Our common stock price can be volatile.
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•
Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. The following factors, among
others, may cause our common stock price to fluctuate significantly:
actual or expected variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of comparable companies, as deemed by investors;
news reports relating to trends, concerns, and other issues in the financial services industry;
perceptions in the marketplace about our Company 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 expected benefits from acquisitions;
changes in government regulations; and
geopolitical conditions, such as acts or threats of terrorism or military action.
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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.
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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 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. As a financial holding
company, the Company’s 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.
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.
Our Series A Preferred Stock 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 on May 20, 2016. At our option, we may redeem the Series A Preferred Stock at face value. 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. 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, 2014, 15,151 shares of Series A Preferred Stock
were outstanding.
Ite m 1B. Unresolved Staff Comments.
None.
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Item 2.
Properties.
Our corporate headquarters is located at One Community Place, Bluefield, Virginia. Our community bank subsidiary, the Bank, provides
financial services through a network of 53 branch locations throughout Virginia, West Virginia, North Carolina, and Tennessee. We have 21
branches in West Virginia, 19 branches in Virginia, 11 branches in North Carolina, and 2 branches in Tennessee. We own 46 branches and
lease the remaining 7 branches. Our insurance subsidiary’s, Greenpoint’s, headquarters is located in High Point, North Carolina. Greenpoint
provides insurances services through a network of 11 offices throughout Virginia, West Virginia, and North Carolina. We operate 4 insurance
offices in North Carolina, 4 offices in West Virginia, and 3 offices in Virginia. We own 1 office, lease 5 offices, and operate 5 offices within
our branch network. We also lease 2 loan production offices and own 1 wealth management office. 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 Proceeding s.
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
I tem 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 26, 2015, there were 2,727
record holders and 18,545,619 outstanding shares of our common stock. The following table presents our common stock’s high and low market
price and cash dividends paid per share, by quarter, during the periods indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
2014
2013
Year Ended December 31,
Market Price
Cash Dividends per
Market Price
Cash Dividends per
High
$ 17.05
16.85
16.45
16.58
Low
$ 15.46
13.87
13.53
14.39
Common Share
$
0.12
0.12
0.13
0.13
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
The Company’s ability to pay dividends on its common stock is dependent on the Bank’s ability to pay dividends to the 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 common stock dividends only if all
accrued and unpaid dividends are fully paid on our outstanding Series A Preferred Stock. Our Series A Preferred Stock outstanding totaled
15,151 shares as of December 31, 2014, and 15,251 shares as of December 31, 2013. Series A Preferred Stock cash dividends totaled $910
thousand in 2014, $992 thousand in 2013, and $1.12 million in 2012. Common stock cash dividends totaled $9.20 million in 2014, $9.48
million in 2013, and $8.16 million in 2012. Cash dividends paid per common share totaled $0.50 in 2014, $0.48 in 2013, and $0.43 in 2012.
Purchases of Equity Securities
We repurchased 132,773 shares of our common stock in 2014, 1,739,601 shares in 2013, and 67,438 shares in 2012. 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, 2014
November 1-30, 2014
December 1-31, 2014
Total
Total
Number of
Shares
Purchased
—
—
—
—
Average
Price Paid
per Share
$ —
—
—
$ —
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
—
—
—
—
903,236
903,236
906,536
(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 2,093,464 shares
in treasury as of December 31, 2014.
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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, 2014, 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 51 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)
2012
2010
2011
2009
100.00 127.63 110.07 145.30 156.63 159.64
100.00 115.06 117.49 136.30 180.44 205.14
100.00 118.15 117.22 138.02 193.47 222.16
100.00 105.70 84.67 94.36 120.88 134.53
2013
2014
(1)
Includes the following institutions: Access National Corporation; American National Bankshares Inc.; Ameris Bancorp; Bear State
Financial, Inc.; BNC Bancorp; Burke & Herbert Bank & Trust Company; C&F Financial Corporation; Capital City Bank Group, Inc.;
Cardinal Financial Corporation; Carolina Financial Corporation; Carter Bank & Trust; CenterState Banks, Inc.; City Holding Company;
CNB Corporation; CNLBancshares, Inc.; Colony Bankcorp, Inc.; Community Bankers Trust Corporation; CommunityOne Bancorp;
Eastern Virginia Bankshares, Inc.; Fidelity Southern Corporation; First Bancorp; First Bancshares, Inc.; First Citizens Bancshares, Inc.;
First Security Group, Inc.; Franklin Financial Network, Inc.; Hamilton State Bancshares, Inc.; Hampton Roads Bankshares, Inc.;
HomeTrust Bancshares, Inc.; Middleburg Financial Corporation; Monarch Financial Holdings, Inc.; MVB Financial Corp.; 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; ServisFirst Bancshares, Inc.; Simmons First National
Corporation; Southeastern Bank Financial Corporation; Southern BancShares (N.C.), Inc.; Southern First Bancshares, Inc.; Square 1
Financial, Inc.; State Bank Financial Corporation; Stonegate Bank; Summit Financial Group, Inc.; TowneBank; USAmeriBancorp, Inc.;
WashingtonFirst Bankshares, Inc.; and Wilson Bank Holding Company. 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
It em 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, 2014. 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
Net income
Dividends on preferred stock
Net income available to common shareholders
Selected Share and Per Share Data
Basic earnings per common share
Diluted earnings 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)
2014
2013
Year Ended December 31,
2012
2011
2010
$
384,065 $ 520,388 $
1,792
1,689,416
20,227
2,607,936
2,608,570
2,000,759
229,741
2,256,562
15,151
351,374
342,619
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
$
106,108 $ 109,476 $
15,290
90,818
145
30,003
82,862
12,324
25,490
910
24,580
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
$
1.34 $
1.31
18.06
0.50
18,406,363
19,483,054
1.13 $
1.11
16.79
0.48
19,792,099
20,961,800
1.44 $
1.40
16.76
0.43
19,127,065
20,419,569
1.08 $
1.07
15.96
0.40
17,877,421
18,687,521
1.23
1.23
15.11
0.40
17,802,009
17,815,106
0.94 %
7.51 %
13.13 %
37.44 %
17.68 %
16.43 %
10.12 %
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) Book value per common share is defined as stockholders’ equity divided by as-converted common shares outstanding.
(2) NM – Not meaningful
32
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Ite m 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,
accompanying notes, and 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 People’s Community Bank, a Division of First Community
Bank, in Tennessee. 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 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. The following list summarizes economic activity in the regions
we operate:
•
•
•
•
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.
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.
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
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intensified competitive pressures on core deposit generation and retention. Competitive factors that influence 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
Our consolidated financial statements reflect acquisition and divestiture activity from the transaction date; therefore, comparisons between
fiscal years are affected by varying levels of assets, liabilities, income, and expense.
On May 31, 2012, we completed the acquisition of Peoples Bank of Virginia (“Peoples”), a full service community bank headquartered in
Richmond, Virginia. At acquisition, Peoples had total assets of $275.76 million, loans of $184.84 million, and deposits of $232.75 million.
Goodwill recorded in the acquisition was $10.32 million.
On June 8, 2012, we entered into a purchase and assumption agreement with loss share arrangements with the FDIC to purchase certain assets
and assume substantially all customer deposits and certain liabilities of 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. At acquisition,
Waccamaw had total assets of $500.64 million, loans of $318.35 million, and deposits of $414.13 million. Goodwill recorded in the acquisition
was $10.62 million.
On October 24, 2014, we completed the purchase of seven branches, six in Southwestern Virginia and one in Central North Carolina, from
Bank of America, National Association. At acquisition, we assumed total deposits of $318.88 million for a deposit premium of $5.79 million.
Additionally, we purchased the real estate or assumed the leases associated with the branches. No loans were included in the transaction.
On December 12, 2014, we completed the sale of thirteen branches, ten in Southeastern North Carolina and three in South Carolina, to
CresCom Bank (“CresCom”), headquartered in Charleston, South Carolina. At closing, CresCom assumed total deposits of $215.19 million
and purchased total loans of $70.04 million. We received a deposit premium from CresCom of $6.45 million. The transaction excluded loans
covered under FDIC loss share agreements. In connection with the transaction we recorded a net gain of $755 thousand, which included a
$6.45 million goodwill allocation.
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 $6.56
million in 2014, an increase of $622 thousand, or 10.48%, compared to the same period of 2013, which is primarily due to an increase in direct
bill property and casualty insurance income and contingency income. Commission revenue totaled $5.93 million in 2013, an increase of $190
thousand, or 3.31%, compared to the same period of 2012, which was due to an increase in direct bill property and casualty insurance income.
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 $712 million as of December 31, 2014, and $706 million as of December 31, 2013. These
assets are not our assets, but are managed under various fee-based arrangements as fiduciary or agent. 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.
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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.
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, which are periodically evaluated, are based on historical experience and other factors, including
expectations of future events believed to be reasonable under the circumstances. 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, management estimates valuation
adjustments 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 quarterly for indications of OTTI. The analysis differs
depending upon the type of investment security being analyzed. The following factors, among others, are considered in determining whether a
security is other-than-temporarily impaired: our intent and ability to hold the security for a period of time sufficient to allow for any expected
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 uses its best
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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.
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 using 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 that may include 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 help management determine the 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.
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. Impaired
loans that do not meet certain 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.
Impaired credits 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.
Management uses an independent third party to assist in determining the changes in cash flows and the amount of possible impairment related
to our purchased performing loans and 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. Under 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 about 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
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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 methods require 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 about 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 customer deposits and certain liabilities of
Waccamaw. Under the loss share agreements the FDIC agreed to cover 80% of covered assets, which consist of most loan and other real estate
losses. Gains and recoveries on covered assets offset prior losses or are paid 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. Under 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
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 use the straight-line amortization 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 judgments and estimates in
applying relevant tax statutes. We operate in many state tax jurisdictions, which
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requires the appropriate allocation of income and expense to each state based on a variety of apportionment or allocation bases. 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.
We measure deferred tax assets and liabilities 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, we adjust deferred tax assets and liabilities 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 is not recoverable, we may record a
valuation allowance to reduce the carrying value of the asset. 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 2014, and financial condition as of December 31, 2014, include the following:
•
•
•
•
•
•
•
•
•
•
Our non-covered loan portfolio increased $8.14 million compared to year-end 2013.
We realized the positive resolution of a sizable, problem credit which resulted in enhanced accretion income, reduced specific reserves,
and recovery of prior-years’ charge-offs.
Our allowance for loan losses was reduced $3.85 million compared to year-end 2013. In 2014, we released $3.26 million of specific
reserves related to impaired loans and removed $682 thousand of the allowance related to the branch divestiture.
Our credit quality metrics continued to improve as non-covered nonaccrual loans decreased $8.61 million, non-covered nonperforming
loans decreased $7.19 million, and non-covered nonperforming assets decreased $7.87 million compared to year-end 2013.
Non-covered nonperforming loans as a percentage of total non-covered loans decreased 46 basis points to 0.85% and non-covered
nonperforming assets as a percentage of total non-covered assets decreased 34 basis points to 0.80% compared to year-end 2013.
Non-covered delinquent loans decreased $8.88 million compared to year-end 2013.
We prepaid long-term borrowings of $60 million in keeping with our strategic goal of reducing high cost, wholesale debt.
In October we completed the purchase of seven branches from Bank of America and assumed total deposits of $319 million in the
transaction.
In December we completed the sale of thirteen branches to CresCom with deposits of approximately $215 million and loans of
approximately $70 million. The sale resulted in a net gain of $755 thousand.
As a result of branch acquisition and divestiture activity, we consolidated and strengthened our franchise.
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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,
2013
2012
2014
$ 25,490 $ 23,312 $ 28,577 $
2014 Compared to 2013
%
Change
9.34 % $
Increase
(Decrease)
2,178
2013 Compared to 2012
%
Increase
Change
(Decrease)
-18.42 %
(5,265 )
24,580
1.34
1.31
0.94 %
7.51 %
22,288
1.13
1.11
0.84 %
6.57 %
27,519
1.44
1.40
1.10 %
8.70 %
2,292
0.21
0.20
0.10 %
0.94 %
10.28 %
18.58 %
18.02 %
11.90 %
14.31 %
(5,231 )
(0.31 )
(0.29 )
-0.26 %
-2.13 %
-19.01 %
-21.53 %
-20.71 %
-23.64 %
-24.48 %
2014 Compared to 2013 . Net income increased in 2014 primarily due to a recovery of provision for loan losses, a decrease in the net
amortization related to the FDIC indemnification asset, a decrease in other operating expenses, and a net gain on branch divestitures. These
gains and expense decreases were offset by Federal Home Loan Bank (“FHLB”) debt prepayment fees, a net loss on the sale of securities,
expenses related to acquisition and divestiture activity, a decrease in other operating income, and decrease in net interest income.
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. 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.
39
Table of Contents
Net Interest Income
Net interest income, our largest contributor to earnings, comprised 75.17% of total net interest and noninterest income in 2014, 75.48% in
2013, and 71.04% in 2012. 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:
2014
Year Ended December 31,
2013
2012
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
$ 1,744,520 $ 95,707 5.49 % $ 1,699,614 $ 96,768 5.69 % $ 1,611,557 $ 96,803 6.01 %
410,136 12,400 3.02 % 543,697 15,184 2.79 % 502,416 15,170 3.02 %
(Amounts in thousands)
Assets
Earning assets
Loans
(2)
Securities available for
sale
20,843
98,090
267 1.28 %
291 0.30 %
171 6.52 %
259 0.33 %
2,273,589 $ 108,665 4.78 % 2,307,544 $ 112,217 4.86 % 2,194,446 $ 112,403 5.12 %
334,981
$ 2,608,570
54 8.10 %
211 0.33 %
354,058
$ 2,661,602
316,485
$ 2,510,931
2,622
77,851
667
63,566
Securities held to
maturity
Interest-bearing deposits
Total earning assets
Other assets
Total assets
Liabilities
Interest-bearing deposits
Demand deposits
Savings deposits
Time deposits
$ 366,932 $
535,256
704,518
Total interest-bearing deposits 1,606,706
Borrowings
Federal funds purchased
Retail repurchase
agreements
Wholesale repurchase
agreements
FHLB advances and
other borrowings
206 0.06 % $ 361,979 $
514 0.10 % 516,247
6,588 0.94 % 772,741
7,308 0.45 % 1,650,967
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 %
556 0.12 %
9,231 1.19 %
9,972 0.64 %
892
3 0.34 %
632
2 0.32 %
490
2 0.41 %
72,917
97 0.13 %
69,141
265 0.38 %
78,608
449 0.57 %
50,000
1,878 3.76 %
53,118
1,890 3.56 %
55,163
2,023 3.67 %
7,154 4.08 %
Total borrowings
9,628 3.11 %
Total interest-bearing liabilities 1,878,019 15,290 0.81 % 1,942,257 17,834 0.92 % 1,863,920 19,600 1.05 %
Noninterest-bearing demand
6,854 4.07 % 175,333
9,011 3.09 % 309,594
6,004 4.07 % 168,399
7,982 2.94 % 291,290
147,504
271,313
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)
367,315
20,617
2,265,951
342,619
$ 2,608,570
342,919
20,815
2,305,991
355,611
$ 2,661,602
286,950
25,160
2,176,030
334,901
$ 2,510,931
$ 93,375
$ 94,383
$ 92,803
3.97 %
4.11 %
40
3.94 %
4.09 %
4.07 %
4.23 %
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.
(4) Represents tax equivalent net interest income divided by average earning assets.
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, 2014 Compared to 2013
Dollar Increase (Decrease) due to
Year Ended
December 31, 2013 Compared to 2012
Dollar Increase (Decrease) due to
Volume
Rate
Rate/
Volume
Total Volume
Rate
Rate/
Volume
Total
2,555
(3,726 )
1,634
114
577
(3,399 )
1,250
(45 )
(19 )
(2,213 )
(217 )
(308 )
(1,376 )
(15 )
(1,916 )
(1,061 )
(2,784 )
213
80
(3,552 )
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 )
3
21
(709 )
1
14
(111 )
(850 )
(1,631 )
(36 )
(52 )
(773 )
—
(173 )
107
—
(927 )
(1 )
(39 )
71
—
(9 )
(8 )
—
14
(34 )
(70 )
(1,411 )
1
(168 )
(12 )
(850 )
(2,544 )
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 )
Change in net interest income, tax equivalent
2,208
(1,286 )
(1,930 )
(1,008 ) $ 6,738 $ (4,862 ) $ (296 ) $ 1,580
(1) Fully taxable equivalent at the rate of 35%.
41
Table of Contents
The following table reconciles the difference 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)
2014
$ 90,818
2,557
$ 93,375
Year Ended December 31,
2013
$ 91,642
2,741
$ 94,383
2012
$ 90,056
2,747
$ 92,803
(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.
Interest and yield on loans include accretion income from acquired loan portfolios. In 2014, accretion income was further enhanced by discount
accretion recorded as a result of the positive resolution of a sizable credit. The following table presents net interest margin and related average
balance sheet information excluding the impact of non-cash purchase accounting accretion and sizable non-recurring discount accretion in the
periods indicated:
(Amounts in thousands)
Earning assets
Loans
(2)
Accretion income
Less: cash accretion income
Non-cash accretion income
Non-recurring discount accretion
Loans, normalized
Other earning assets
Total earning assets
Total interest-bearing liabilities
Net interest income, tax equivalent
Net interest rate spread
Net interest margin
(3)
(4)
2014
Year Ended December 31,
2013
2012
Interest
(1)
$ 95,707
11,469
4,412
7,057
2,588
86,062
12,958
99,020
15,290
$ 83,730
Average
Yield/
(1)
Rate
5.49 %
4.93 %
2.45 %
4.36 %
0.81 %
3.55 %
3.68 %
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 %
(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.
42
Table of Contents
2014 Compared to 2013 . Net interest income under GAAP decreased $824 thousand, or 0.90%, and tax equivalent net interest income
decreased $1.01 million, or 1.07%, in 2014. Changes in the average balances of and yields/rates on earning assets and interest-bearing
liabilities resulted in a 3 basis point increase in the net interest rate spread and a 2 basis point increase in the net interest margin.
Loan interest accretion totaled $11.47 million in 2014 and $14.73 million in 2013. Interest accretion income received in cash totaled $4.41
million in 2014 and $7.02 million in 2013. Accretion income was enhanced in 2014 by non-recurring discount accretion of $2.59 million
related to the positive resolution of a sizable credit. Excluding non-cash and non-recurring discount accretion income, the yield on loans
decreased 31 basis points compared to a decrease of 20 basis points under GAAP. Excluding non-cash and non-recurring discount accretion
income, the net interest margin decreased 8 basis points compared to an increase of 2 basis points under GAAP. The impact of purchase
accounting interest accretion is expected to decline in future periods due to acquired loan portfolio attrition.
Average earning assets decreased $33.96 million, or 1.47%, due to a decrease in securities available for sale offset by increases in the
noncovered loan portfolio, securities held to maturity, and deposits with other banks. The yield on earning assets decreased 8 basis points,
which was largely due to a 20 basis point decrease in the yield on loans, a result of the continued low rate environment. During 2014, we
purchased short-term bonds in the held-to-maturity category to provide for the funding necessary to extinguish certain wholesale borrowings as
they come due. Interest-bearing deposits with banks are primarily comprised of excess liquidity kept at the FRB of Richmond bearing
overnight market rates.
As of December 31, 2014, interest-bearing liabilities included interest-bearing deposits; retail repurchase agreements, consisting of
collateralized retail deposits and commercial treasury accounts; wholesale repurchase agreements; FHLB advances; and other borrowings.
Average interest-bearing liabilities decreased $64.24 million, or 3.31%, primarily due to the decline in average time deposits and FHLB
borrowings. In 2014, we prepaid $60 million of FHLB convertible advances, of which $50 million bore a 4.21% interest rate and $10 million
bore a 4.15% interest rate. The yield on interest-bearing liabilities decreased 11 basis points due to an 8 basis point decrease in the rate on
interest-bearing deposits and a 15 basis point decrease in the rate on borrowings. Average interest-bearing deposits decreased $44.26 million, or
2.68%, which was driven by a $68.22 million, or 8.83%, decrease in average time deposits, partially offset by increases in average interest-
bearing demand deposits of $4.95 million, or 1.37%, and average savings deposits, which include money market and savings accounts, of
$19.01 million, or 3.68%. Average borrowings decreased $19.98 million, or 6.86%, largely due to decreases in FHLB and other borrowings.
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 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 compared to a
decrease of 31 basis points under GAAP. Excluding non-cash accretion income, the net interest margin decreased 7 basis points compared to a
decrease of 14 basis points under GAAP.
Average earning assets increased $113.10 million, or 5.15%, 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,
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.
43
Table of Contents
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; 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,
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%. 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%, while average time deposits decreased $4.16 million. Average
borrowings decreased $18.30 million, or 5.91%, largely due to the prepayment of FHLB borrowings of $11.47 million and wholesale
repurchase agreements of $8.15 million acquired from Waccamaw.
Provision for Loan Losses
2014 Compared to 2013 . The provision for loan losses is the amount added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level management determines necessary to absorb probable losses in the existing loan portfolio. The
provision charged to operations decreased $8.06 million due to a $3.26 million decrease in specific reserves on loans identified as impaired,
lower average loss rates, lower classified asset levels, and significantly lower net charge-offs. Net charge-offs in 2014 included a $1.60 million
recovery related to the positive resolution of a sizable problem credit. In addition, activity in the allowance in 2014 included the removal of
$682 thousand of the allowance due to loans transferred in the branch divestiture. A recovery of $697 thousand was attributed to the PCI
provision largely due to better than expected performance in the Waccamaw PCI loan portfolio, of which $422 thousand was recorded through
the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and $275 thousand was applied to operations.
See “Allowance for Loan Losses” in the “Financial Condition” section below.
2013 Compared to 2012 . The provision charged to operations was increased by $2.53 million due to a significant increase in loan charge-offs,
primarily attributable to losses created by the sale of four problem loans totaling $2.64 million, and adding a provision for the acquired PCI
portfolio. The provision attributed to PCI loans was $747 thousand, of which $296 thousand was charged to operations and $451 thousand was
recorded through the FDIC indemnification asset. 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
24.83% of total net interest and noninterest income in 2014, 24.52% in 2013, and 28.96% in 2012.
44
Table of Contents
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 (loss) gain on sale of securities
Net FDIC indemnification asset (amortization)
accretion
Net gain on branch divestiture
Other operating income
Noninterest income
Year Ended December 31,
2013
2012
2014
2014 Compared to 2013
Increase
(Decrease)
% Change
2013 Compared to 2012
Increase
(Decrease)
% Change
$ 3,030 $ 3,412 $ 3,701 $
13,558
13,828
7,151
7,581
5,933
6,555
(320 )
(737 )
399
(1,385 )
14,063
6,462
5,743
(942 )
483
(382 )
270
430
622
(417 )
(1,784 )
(5,597 )
(3,979 )
—
755
4,355
5,235
$ 30,003 $ 29,771 $ 36,710 $
458
—
6,742
1,618
755
(880 )
232
-11.20 % $
1.99 %
6.01 %
10.48 %
-130.31 %
-447.12 %
(289 )
(505 )
689
190
622
(84 )
-7.81 %
-3.59 %
10.66 %
3.31 %
66.03 %
-17.39 %
28.91 %
—
-16.81 %
(6,055 )
—
(1,507 )
0.78 % $ (6,939 )
—
—
-22.35 %
-18.90 %
2014 Compared to 2013 . Noninterest income increased $232 thousand, or 0.78%, in 2014. Wealth management revenues, which include fees
and commissions for trust and investment advisory services, decreased due to a decline in FCWM income. Service charges on deposit accounts
and other service charges and fees increased primarily from increases in monthly service charges on demand deposit accounts, credit card
income, and interchange income offset by a decrease in nonsufficient fee income. Insurance commissions increased largely due to increased
levels of contingent profit-sharing commissions and a general increase in premium commissions. We incurred OTTI charges of $737 thousand
in 2014 compared to $320 thousand in 2013 related to a non-Agency mortgage-backed security (“MBS”) and certain equity securities. We
realized a net loss of $1.39 million on the sale of securities in 2014, which was driven by the sale of our only remaining non-Agency MBS at a
loss of $1.62 million. 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 $3.98 million. We realized a net gain of $755 thousand on the sale of thirteen
branches to CresCom Bank during the fourth quarter of 2014. Other operating income decreased primarily due to a $540 thousand decrease in
secondary market income, a $378 thousand decrease from a loyalty incentive received from a third-party vendor in 2013, and a $296 thousand
decrease in gains recognized from debt prepayments in 2013. These decreases in other operating income were offset by a $536 thousand benefit
related to bank owned life insurance and $400 thousand litigation settlement.
Excluding the impact from OTTI charges, the sale of securities, the net amortization on the FDIC indemnification asset, the net gain on branch
divestitures, the net gain on debt prepayments, and non-recurring insurance benefit, noninterest income decreased $180 thousand, or 0.51%, to
$34.81 million in 2014 compared with $34.99 million in 2013.
2013 Compared to 2012 . Noninterest income decreased $6.94 million, or 18.90%, in 2013. Wealth management revenues decreased due to the
departure of certain employees at FCWM. Other service charges and fees increased primarily from interchange fee income. We incurred OTTI
charges of $320 thousand in 2013 compared to $942 thousand in 2012, related to a non-Agency 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 due to 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 affected 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.
45
Table of Contents
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.
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, acquisition, and
divestiture expense
Other operating expense
Total noninterest expense
Year Ended December 31,
2013
2012
2014
2014 Compared to 2013
Increase
(Decrease)
% Change
2013 Compared to 2012
Increase
(Decrease)
% Change
(522 )
$ 40,713 $ 41,235 $ 38,667 $
(695 )
6,338 7,033 6,872
(14 )
4,952 4,966 4,145
58
804
(45 )
1,672 1,717 1,612
5,008 — — 5,008
787
729
-1.27 % $ 2,568
161
-9.88 %
821
-0.28 %
(75 )
7.96 %
105
-2.62 %
—
—
6.64 %
2.34 %
19.81 %
-9.33 %
6.51 %
—
1,150
57 5,093 1,093
22,242 23,248 21,190 (1,006 )
$ 82,862 $ 78,985 $ 78,383 $ 3,877
1917.54 %
-4.33 %
4.91 % $
(5,036 )
2,058
602
-98.88 %
9.71 %
0.77 %
2014 Compared to 2013 . Noninterest expense increased $3.88 million, or 4.91%, in 2014. Salaries and employee benefits decreased due to a
one-time charge to accrue for contractual executive severance of $1.07 million in 2013. Exclusive of the severance charge, salaries and
employee benefits increased $549 thousand, or 1.37%. Employee benefits included an increase in incentive compensation of $836 thousand.
Full-time equivalent employees totaled 678 as of December 31, 2014, compared to 729 as of December 31, 2013. The decrease was primarily
due to branch consolidation and divestiture activities offset by the Bank of America branch acquisition. Occupancy, furniture, and equipment
expense decreased $709 thousand, or 5.91%, which was primarily due to branch closures between the periods. In 2014, we prepaid a $50
million FHLB convertible advance with a May 2017 maturity and 4.21% interest rate and $10 million of a $50 million FHLB convertible
advance with a May 2017 maturity and 4.15% interest rate, which resulted in a prepayment penalty of $5.01 million. Expenses related to
branch acquisition and divestiture activities totaled $1.15 million in 2014 in connection with the acquisition of seven branches from Bank of
America and the sale of thirteen branches to CresCom compared to $57 thousand in 2013. The decrease in other operating expense included a
$684 thousand decrease in marketing expenses and a $528 thousand decrease in legal expenses offset by an increase in interchange expense of
$497 thousand. Other operating expense also included an increase in the net loss on sales and expenses related to other real estate owned
(“OREO”) of $56 thousand to $2.09 million in 2014 compared to $2.04 million in 2013.
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 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%, which included increased depreciation costs in connection with the Waccamaw acquisition and
core operating system of $856 thousand. We incurred merger related costs of $57 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
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Table of Contents
$1.52 million, which occurred in 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.
Income Tax Expense
2014 Compared to 2013 . 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 and increases in the cash surrender value of officers’ life insurance
policies, which are both exempt from federal income tax. Income tax expense increased $2.18 million, or 9.34%, and the effective rate
increased 71 basis points to 32.59% in 2014. The increase in the effective tax rate was largely due to an increase in taxable revenues as a
percentage of net earnings and a decrease in the relative amounts of nontaxable revenues.
2013 Compared to 2012 . 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 percentage of net earnings.
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.
We calculate our efficiency ratio 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 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.
47
Table of Contents
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, acquisition, and divestiture expense
FHLB debt prepayment fees
OREO expense and net loss
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 loss (gain) on sale of securities
Net gain on debt prepayment
Prospective correction of prior period understatment
Net gain on branch divestiture
Other non-core, non-recurring income items
Total non-GAAP adjustments
Adjusted net interest income plus noninterest income
Non-GAAP efficiency ratio
2014
Year Ended December 31,
2013
2012
$ 82,862
120,821
68.58 %
$ 78,985
121,413
65.05 %
$ 78,383
126,766
61.83 %
$ 82,862
$ 78,985
$ 78,383
(1,150 )
(5,008 )
(2,094 )
(1,573 )
(9,825 )
73,037
120,821
2,557
737
1,385
—
—
(755 )
(936 )
2,988
123,809
58.99 %
(57 )
—
(2,037 )
(2,700 )
(4,794 )
74,191
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 %
Financial Condition
Total assets were $2.61 billion as of December 31, 2014, an increase of $5.42 million, or 0.21%, compared with $2.60 billion as of
December 31, 2013. Total liabilities were $2.26 billion as of December 31, 2014, a decrease of $17.35 million, or 0.76%, compared with $2.27
billion as of December 31, 2013. Our book value per as-converted common share was $18.06 as of December 31, 2014, an increase of $1.27,
compared with $16.79 as of December 31, 2013.
Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2014, increased $181.09 million compared to December 31, 2013. The increase was primarily
due to branch acquisition and divestiture activity in which the Company assumed significantly more deposits than loans and other assets sold.
Investment Securities
Available-for-sale securities as of December 31, 2014, decreased $193.70 million, or 37.26%, compared to December 31, 2013. The decrease
in the available-for-sale securities portfolio was part of our strategic initiative to shift our mix of earning assets towards loans. Held-to-maturity
securities as of December 31, 2014, increased
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$57.95 million compared to $568 thousand as of December 31, 2013 due to the purchase of short-term bonds to provide funding to extinguish
certain wholesale borrowings when due. Investment securities classified as held to maturity are comprised primarily of U.S. Agency securities
and high-grade municipal bonds.
The following table presents the market value as a percentage amortized cost, the average life, and the average duration of the investment
portfolios:
Market value to fair value
Average life (in years)
Average duration (in years)
Available for
Sale
97.95 %
8.39
7.37
2014
Held to
Maturity
99.90 %
2.95
2.83
December 31,
Available for
Total
98.24 %
7.58
6.70
Sale
95.97 %
7.54
6.41
2013
Held to
Maturity
101.94 %
1.33
1.25
Total
95.98 %
7.53
6.40
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
Mortgage-backed securities:
Agency
Non-Agency Alt-A residential
Total mortgage-backed securities
Equity securities
Total available for sale
Held to Maturity
U.S. Agency securities
Municipal securities
Corporate securities
Total held to maturity
Amortized
Cost
2014
Fair
Value
December 31,
2013
Amortized
Cost
Fair
Value
Amortized
Cost
2012
Fair
Value
$ — $ — $ 9,708 $ 9,013 $ — $ —
159,217
44,646
—
151,119
55,707
—
144,280
46,234
4,871
147,049
55,764
5,000
134,784
55,822
5,000
138,915
46,137
5,109
137,110
—
137,110
226
315,897
11,067
326,964
3,531
$ 332,942 $ 326,117 $ 541,642 $ 519,820 $ 534,810 $ 534,358
310,323
14,215
324,538
3,446
306,319
12,543
318,862
5,259
300,386
9,789
310,175
5,247
135,717
—
135,717
239
$ 46,987 $ 46,955 $
568 $
579 $
816 $
379
10,582
386
10,548
—
—
—
—
—
—
$ 57,948 $ 57,889 $
568 $
579 $
816 $
832
—
—
832
Investment securities are reviewed quarterly for possible OTTI. The review includes an analysis of each individual investment’s facts and
circumstances, such as the length of time fair value has been below cost, the 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 $705 thousand in 2014, $320
thousand in 2013, and $942 thousand in 2012. These charges were related to a non-Agency MBS that was subsequently sold in November
2014. We recognized OTTI charges in earnings associated with certain equity securities of $32 thousand in 2014 and no charges in 2013 or
2012. See Note 3, “Investment Securities,” to the Consolidated Financial Statements in Item 8 of this report.
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Table of Contents
Loans Held for Sale
Loans held for sale as of December 31, 2014, increased $909 thousand to $1.79 million compared to December 31, 2013. Loans held for sale
consist of mortgage loans sold on a best efforts basis into the secondary market; thus, we do not retain the interest rate risk involved in these
long-term commitments. The gross notional amount of outstanding commitments to originate mortgage loans in the secondary market totaled
$1.39 million for 9 commitments as of December 31, 2014, and $3.68 million for 19 commitments as of December 31, 2013.
Loans Held for Investment
Loans held for investment as of December 31, 2014, decreased $21.31 million, or 1.25%, compared to December 31, 2013. 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. Our covered loan portfolio as of December 31, 2014, decreased $29.44 million, or 19.41%, compared to December 31, 2013, due
to continued runoff in the covered Waccamaw portfolio. The non-covered loan portfolio as of December 31, 2014, increased $8.14 million, or
0.52%, compared to December 31, 2013, primarily due to strong growth in commercial real estate originations in Southern West Virginia and
Central North Carolina markets, which was offset by loans sold in the branch divestiture. The average loan to deposit ratio was 88.37% as of
December 31, 2014, compared to 85.24% as of December 31, 2013. 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 before 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 held for investment
Total loans held for investment
Allowance for loan losses
Total loans held for investment, less allowance
Loans held for sale
50
2014
2013
December 31,
2012
2011
2010
$
35,255 $
95,455
70,197
57,434 $
88,738
65,694
41,271 $
83,099
97,480
83,812
94,123
67,824
135,171 135,559 135,912 106,743 104,960
473,906 475,911 448,810 336,005 351,904
1,342
36,954
862,043 847,315 832,867 712,040 740,919
61,768 $
91,939
77,050
1,599
29,517
1,709
34,570
2,324
32,614
1,374
37,161
110,957 111,770 111,081 111,387 111,620
485,475 496,012 473,547 473,067 444,197
18,349
629,231 636,485 600,851 604,031 574,166
32,799
16,223
28,703
19,577
67,129
12,867
79,996
71,313
3,926
75,239
78,163
5,666
83,829
69,347
6,555
75,902
63,475
7,646
71,121
1,567,176 1,559,039 1,517,547 1,396,067 1,386,206
122,240 151,682 207,106
—
1,689,416 1,710,721 1,724,653 1,396,067 1,386,206
26,482
$ 1,669,189 $ 1,686,644 $ 1,698,883 $ 1,369,862 $ 1,359,724
4,694
$
20,227
25,770
24,077
26,205
5,820 $
1,792 $
6,672 $
883 $
—
Table of Contents
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
Total consumer and other loans
Total covered loans held for investment
2014
December 31,
2013
2012
$ 13,100
2,662
1,584
5,918
25,317
43
716
49,340
$ 15,865
3,325
1,933
7,449
34,646
164
873
64,255
$ 26,595
6,948
2,611
11,428
48,565
144
1,091
97,382
60,391
11,968
453
72,812
69,206
16,919
1,184
87,309
81,445
22,961
1,644
106,050
88
88
$122,240
118
118
$ 151,682
3,674
3,674
$ 207,106
The following table details the percentage of loans to total loans in the non-covered portfolio, by loan class, as of the periods indicated:
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 loans
51
2014
2013
December 31,
2012
2011
2010
2.64 %
5.30 %
6.22 %
8.63 %
30.24 %
0.10 %
1.88 %
2.26 %
6.12 %
4.50 %
8.70 %
30.53 %
0.15 %
2.09 %
3.78 %
5.85 %
4.33 %
8.96 %
29.57 %
0.11 %
2.28 %
4.42 %
6.58 %
5.52 %
7.65 %
24.07 %
0.10 %
2.66 %
6.05 %
6.79 %
4.89 %
7.57 %
25.39 %
0.10 %
2.67 %
7.08 %
30.98 %
2.09 %
7.17 %
31.82 %
1.84 %
7.32 %
31.21 %
1.07 %
7.98 %
33.89 %
1.40 %
8.05 %
32.04 %
1.32 %
4.42 %
0.42 %
100.00 %
4.57 %
0.25 %
100.00 %
5.15 %
0.37 %
100.00 %
4.81 %
0.92 %
100.00 %
4.58 %
0.55 %
100.00 %
Table of Contents
The following table details the percentage of loans to total loans in the covered portfolio, by loan class, as of the periods indicated:
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 loans
2014
December 31,
2013
2012
10.72 %
2.18 %
1.30 %
4.84 %
20.71 %
0.03 %
0.59 %
10.46 %
2.19 %
1.27 %
4.91 %
22.84 %
0.11 %
0.58 %
12.84 %
3.35 %
1.26 %
5.52 %
23.45 %
0.07 %
0.53 %
49.40 %
9.79 %
0.37 %
45.63 %
11.15 %
0.78 %
39.33 %
11.09 %
0.79 %
0.07 %
0.00 %
100.00 %
0.08 %
0.00 %
100.00 %
1.77 %
0.00 %
100.00 %
We lend primarily in the four-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, 2014 or 2013.
As of December 31, 2014, non-covered commercial loans comprised 55.01% of the non-covered loan portfolio. Commercial and industrial
loans consist of 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 annually depending on the size of the loan relationship.
As of December 31, 2014, non-covered consumer real estate loans comprised 40.15% 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.
As of December 31, 2014, non-covered consumer and other loans comprised 4.84% of the non-covered loan portfolio. Consumer loans consist
of loans to individuals within our market footprint that include, but are not limited to, personal lines of credit, credit cards, and the purchase of
automobiles, boats, mobile homes, and other consumer goods. Underwriting guidelines require that borrowers meet certain credit, income, and
collateral standards at origination.
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Table of Contents
The following table details the maturities and rate sensitivities of our non-covered loan portfolio as of December 31, 2014:
(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
$
$
$
$
17,737
34,438
14,788
23,829
65,258
324
8,794
165,168
6,587
9,352
4,384
20,323
16,332
314
16,646
202,137
$
12,137
44,267
44,384
56,556
231,409
671
9,854
399,278
13,151
31,922
878
45,951
$
11,397
4,394
38,308
54,786
177,239
604
10,869
297,597
91,219
444,201
27,537
562,957
45,521
5,075
50,596
$ 495,825
7,494
1,166
8,660
$ 869,214
$
41,271
83,099
97,480
135,171
473,906
1,599
29,517
862,043
110,957
485,475
32,799
629,231
69,347
6,555
75,902
$ 1,567,176
120,601
81,536
202,137
$ 439,077
56,748
$ 495,825
$ 362,280
506,934
$ 869,214
$ 921,958
645,218
$ 1,567,176
(1) Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and
interest payments.
53
Table of Contents
The following table details the maturities and rate sensitivities of our covered loan portfolio as of December 31, 2014:
(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
$
$
$
$
6,398
830
54
847
7,493
1
134
15,757
162
1,582
6
1,750
—
—
—
17,507
13,654
3,853
17,507
$
$
$
$
5,774
1,139
174
2,518
12,910
13
309
22,837
4,754
4,367
447
9,568
88
—
88
32,493
21,487
11,006
32,493
$
$
$
$
928
693
1,356
2,553
4,914
29
273
10,746
55,475
6,019
—
61,494
—
—
—
72,240
$ 13,100
2,662
1,584
5,918
25,317
43
716
49,340
60,391
11,968
453
72,812
88
—
88
$ 122,240
10,781
61,459
72,240
$ 45,922
76,318
$ 122,240
(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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Table of Contents
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 recorded under the original
(1)
(2)
(3)
terms of restructured and non performing loans
Actual interest income recorded on restructured and nonperforming
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
2014
2013
December 31,
2012
2011
2010
$ 10,556
—
2,726
13,282
6,638
$ 19,920
$ 19,161
—
1,311
20,472
7,318
$ 27,790
$ 23,931
—
6,009
29,940
5,749
$ 35,689
$ 24,487
—
600
25,087
5,914
$ 31,001
$ 19,414
—
5,325
24,739
4,910
$ 29,649
$ 2,438
—
2,438
6,324
$ 8,762
$ 3,353
86
3,439
7,541
$ 10,980
$ 4,323
—
4,323
3,255
$ 7,578
$ —
—
—
—
$ —
$ —
—
—
—
$ —
$ 12,994
—
2,726
15,720
12,962
$ 28,682
$ 22,514
86
1,311
23,911
14,859
$ 38,770
$ 28,254
—
6,009
34,263
9,004
$ 43,267
$ 24,487
—
600
25,087
5,914
$ 31,001
$ 19,414
—
5,325
24,739
4,910
$ 29,649
$ 11,808
14,534
$ 10,900
12,211
$ 6,038
12,047
$ 8,854
9,454
$ 6,866
12,191
1,171
1,548
2,955
1,154
1,341
597
511
640
411
587
0.85 %
0.80 %
151.85 %
1.29 %
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 %
0.93 %
1.10 %
128.67 %
1.20 %
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) TDRs restructured within the past six months, excluding nonaccrual TDRs of $306 thousand, $734 thousand, $3.04 million, $3.04 million
and $108 thousand for the five years ended December 31, 2014.
(2) TDRs with six months or more of satisfactory payment performance, excluding nonaccrual TDRs of $248 thousand, $1.47 million, $792
thousand, $227 thousand, and $48 thousand for the five years ended December 31, 2014.
(3) Perfoming and nonperforming TDRs, excluding nonaccrual TDRs of $554 thousand, $2.20 million, $3.83 million, $3.27 million, and
$156 thousand for the five years ended December 31, 2014.
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Non-covered nonperforming assets as of December 31, 2014, decreased $7.87 million, or 28.32%, from December 31, 2013. Non-covered
nonperforming assets as a percentage of total non-covered assets were 0.80% as of December 31, 2014, compared to 1.14% as of December 31,
2013.
Non-covered nonaccrual loans as of December 31, 2014, decreased $8.61 million, or 44.91%, from December 31, 2013. As of December 31,
2014, non-covered nonaccrual loans were largely attributed to the following loan classes: single family owner occupied (60.53%); non-farm,
non-residential (22.11%); home equity lines (7.51%); and single family non-owner occupied (5.70%). Approximately $210 thousand, or
1.99%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations as of December 31, 2014.
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 $14.53 million as of December 31, 2014, compared to $12.21 million as of December 31, 2013. Nonperforming
accruing TDRs totaled $2.73 million, or 18.76% of accruing TDRs, as of December 31, 2014, compared to $1.31 million, or 10.74% of
accruing TDRs, as of December 31, 2013. The allowance for loan losses attributed to TDRs totaled $475 thousand as of December 31, 2014,
compared to $1.84 million as of December 31, 2013.
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 due to changing economic conditions, borrower financial
capacity, or resolution efforts. There were no covered accruing loans contractually past due 90 days or more as of December 31, 2014,
compared to $86 thousand as of December 31, 2013.
Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $21.98 million as of December 31,
2014, a decrease of $8.88 million, or 28.78%, compared to $ 30.86 million as of December 31, 2013. Non-covered delinquent loans as a
percentage of total non-covered loans measured 1.40% as of December 31, 2014, which is attributed to loans 30 to 89 days past due of 0.73%
and nonaccrual loans of 0.67%. Non-covered nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned
TDRs, as a percentage of total non-covered loans were 0.85% as of December 31, 2014, compared to 1.31% as of December 31, 2013.
Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $680 thousand, or 9.29%, as of
December 31, 2014, compared to December 31, 2013. Non-covered OREO consisted of 60 properties as of December 31, 2014, with an
average holding period of 7 months. The net loss on the sale of OREO totaled $1.42 million in 2014, $1.52 million in 2013, and $966 thousand
in 2012. 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
Non-covered
5,749
$
9,656
(6,997 )
(1,090 )
7,318
$
Covered
$ 3,255
8,782
(2,776 )
(1,720 )
$ 7,541
Total
$ 9,004
18,438
(9,773 )
(2,810 )
$ 14,859
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(Amounts in thousands)
Beginning balance, January 1, 2014
Additions
Disposals
Valuation adjustments
Ending balance, December 31, 2014
Allowance for Loan Losses
Non-covered
7,318
$
5,979
(5,740 )
(919 )
6,638
$
Covered
$ 7,541
6,641
(5,907 )
(1,951 )
$ 6,324
Total
$ 14,859
12,620
(11,647 )
(2,870 )
$ 12,962
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, 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 totaled $20.23 million as of December 31, 2014, a decrease of $3.85 million, or 15.99%, compared to $24.07
million as of December 31, 2013. In 2014, we released $3.26 million of specific reserves related to impaired loans and removed $682 thousand
of the allowance related to loans transferred in the branch divestiture. The allowance attributed to non-PCI loans as a percentage of non-
covered loans held for investment was 1.29% as of December 31, 2014, compared to 1.50% at December 31, 2013. The cash flow analysis
performed as of December 31, 2014, identified two of our seven PCI loan pools as impaired with a cumulative impairment of $58 thousand
compared to the analysis as of December 31, 2013, that 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.
Our qualitative risk factors continue to reflect a reduced risk of loan losses due to improvements in unemployment trends, general economic
conditions, and asset quality metrics and an increased risk of loan losses due to credit concentrations. We incurred net charge-offs of $2.89
million in 2014, $10.35 million in 2013, and $6.11 million in 2012. Net charge-offs decreased $7.46 million, or 72.07% in 2014 as compared to
2013 and increased $4.24 million, or 69.34% in 2013 as compared to 2012. Net charge-offs in 2014 included a $1.60 million recovery related
to the positive resolution of a sizable problem credit. In addition, activity in the allowance in 2014 included the removal of $682 thousand of
the allowance due to loans transferred in the branch divestiture. A recovery of $697 thousand was attributed to the PCI provision largely due to
better than expected performance in the Waccamaw PCI loan portfolio, of which $422 thousand was recorded through the FDIC
indemnification asset to reflect the indemnified portion of the post-acquisition exposure and $275 thousand was applied to operations. As of
December 31, 2014, 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.
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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
Removal of loans transferred
Provision charged to operations, non-PCI loans
(Recovery of) provision charged to operations, PCI loans
(Recovery of) provision recorded through the FDIC indemnification
asset
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
Ending balance
Net charge-offs to average non-covered loans
2014
$ 24,077
(682 )
420
(275 )
Year Ended December 31,
2012
2011
2013
$ 25,770
—
7,912
296
$ 26,205
—
5,871
(193 )
$ 26,482
—
8,846
201
2010
$ 24,277
—
14,757
—
(422 )
451
—
—
—
1,238
459
35
488
832
—
—
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
—
451
988
305
1,873
947
295
851
1,842
9
691
1,615
195
1,089
1,594
4
659
1,026
6,481
491
1,178
12,527
403
585
7,504
448
530
11,460
514
756
13,602
84
1,736
10
331
239
—
—
510
98
16
158
119
22
8
17
93
125
109
280
1
1
817
271
68
121
148
1
—
514
76
—
273
169
—
76
213
—
155
63
34
37
83
12
39
144
32
31
12
52
6
121
479
3,590
2,891
$ 20,227
0.18 %
107
695
2,175
10,352
$ 24,077
0.68 %
152
324
1,391
6,113
$ 25,770
0.41 %
139
319
2,136
9,324
$ 26,205
0.67 %
163
439
1,050
12,552
$ 26,482
0.90 %
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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
Total allowance, excluding PCI loans
Non-PCI allowance to total non-covered loans
2014
$ 1,151
689
1,917
3,228
5,805
13
206
2013
Year Ended December 31,
2012
2011
$ 1,141
5,215
1,211
3,549
4,650
23
301
$ 1,214
4,351
1,630
4,367
5,259
22
416
$ 1,892
3,515
1,889
2,960
6,933
19
343
1,330
4,935
225
1,361
5,030
206
1,574
5,995
337
1,365
6,134
212
670
—
$ 20,169
1.29 %
635
—
$ 23,322
1.50 %
597
—
$ 25,762
1.70 %
742
—
$ 26,004
1.86 %
The following table details the PCI allowance for loan losses, by loan pool, as of the periods indicated:
2010
$ 3,991
4,511
1,081
3,212
2,846
19
70
2,138
6,657
193
1,764
—
$ 26,482
1.91 %
2010
(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
Deposits
2014
Year Ended December 31,
2013
2012
2011
$ 37 $ — $ — $ — $ —
—
—
—
—
69
8
—
—
8
—
—
—
—
—
201
—
—
21
277
217
184
—
—
—
—
—
—
—
—
—
—
—
$ 58 $ 755 $ 8 $ 201 $ —
—
—
—
Total deposits as of December 31, 2014, increased $50.02 million, or 2.56%, compared to December 31, 2013. Noninterest-bearing deposits
increased $78.05 million and savings deposits, which include money market accounts and savings accounts, increased $1.47 million as of
December 31, 2014, compared to December 31, 2013. Interest-bearing deposits decreased $7.95 million and time deposits decreased $21.55
million as of December 31, 2014, compared to December 31, 2013.
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Borrowings
Total borrowings as of December 31, 2014, decreased $70.66 million, or 23.52%, compared to December 31, 2013. Short-term borrowings
consist of federal funds purchased and retail repurchase agreements. No federal funds were purchased as of December 31, 2014, compared to
$16.00 million as of December 31, 2013. The balance of retail repurchase agreements increased $3.43 million, or 5.03%, as of December 31,
2014, compared to December 31, 2013. Securities underlying retail repurchase agreements remain under our control during the terms of the
agreements. Included in other borrowings was a $2.00 million balance on a $15.00 million unsecured, committed line of credit with an
unrelated financial institution. The line of credit carried an interest rate of one-month LIBOR plus 2.00% and matures in April 2015.
The following table presents the balances and weighted average rates paid on short-term borrowings as of the periods indicated:
2014
Year Ended December 31,
2013
2012
(Amounts in thousands)
Year-end balance
Average annual balance
Maximum month-end balance
Amount Rate
Amount Rate
$ 73,742 0.17 % $ 84,308 0.19 % $ 77,922 0.52 %
79,098 0.57 %
74,165 0.14 %
88,908
117,105
69,773 0.38 %
84,308
Amount Rate
Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other
obligations. The balance and weighted average rate of wholesale repurchase agreements remained constant at $50.00 million and 3.71%,
respectively, as of December 31, 2014, compared to December 31, 2013. As of December 31, 2014, wholesale repurchase agreements had
contractual maturities between two and five years. The balance of FHLB borrowings decreased $60.00 million, or 40.00%, and the weighted
average rate decreased 5 basis points to 4.07% as of December 31, 2014, compared to December 31, 2013. As of December 31, 2014, FHLB
borrowings had contractual maturities between two and seven years. In 2014, we prepaid a $50 million FHLB convertible advance with a May
2017 maturity and 4.21% interest rate and $10 million of a $50 million FHLB convertible advance with a May 2017 maturity and 4.15%
interest rate, which resulted in a prepayment penalty of $5.01 million.
Included in other borrowings is $15.46 million of junior subordinated debentures (“Debentures”) that were issued by the Company in October
2003 through the Trust with an interest rate of three-month London InterBank Offered Rate (“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 increased $22.77 million, or 6.93%, to $351.37 million as of December 31, 2014, compared to $328.61 million as of
December 31, 2013. The change in stockholders’ equity was largely affected by net income of $25.49 million, dividends declared on our
common and Series A Preferred Stock of $10.11 million, the repurchase of 132,773 shares of our common stock totaling $2.17 million, and an
increase in accumulated other comprehensive income (“AOCI”) of $9.14 million. AOCI was driven by unrealized gains on available-for-sale
securities.
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 (“Liquidity Plan”) that is designed to detect potential liquidity issues to protect
depositors, creditors, and shareholders. The
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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 reviews liquidity risk exposure and policies related to liquidity management, ensures
that systems and internal controls are consistent with liquidity policies, and provides accurate reports about 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
about 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.
As of December 31, 2014, available liquidity included unencumbered cash on hand and deposits with other financial institutions of $237.66
million, federal funds lines with correspondent banks of $105.00 million, the Federal Reserve Bank discount window of $9.09 million, unused
borrowing capacity with the FHLB of $409.19 million, and unpledged available-for-sale securities of $57.33 million. Cash on hand and
deposits with other financial institutions, as well as lines of credit extended from correspondent banks and the FHLB, are immediately available
to satisfy deposit withdrawals, customer credit needs, and our operations. Unused borrowing capacity with the FHLB is reported net of letters
of credit held to secure public unit deposits. As of December 31, 2014, we held letters of credit with the FHLB totaling $6.18 million.
Available-for-sale securities represent a secondary source of liquidity upon conversion to a liquid asset. Our approved lines of credit with
correspondent banks are available as backup liquidity sources.
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, 2014, the
Company’s liquid assets consisted of cash and investment securities totaling $29.82 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, 2014, the
outstanding balance on the line was $2.00 million.
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 provided by (used in) investing activities
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning balance
Cash and cash equivalents, ending balance
2014
$ 41,689
280,955
(141,551 )
181,093
56,567
$ 237,660
Year Ended December 31,
2013
$ 44,518
(1,167 )
(131,631 )
(88,280 )
144,847
$ 56,567
2012
$ 56,639
252,474
(211,560 )
97,553
47,294
$ 144,847
2014 Compared to 2013 . Net cash provided by operating activities decreased $2.83 million, or 6.35%, to $41.69 million in 2014 primarily due
to decreases in the provision for loan losses and proceeds from the sale of mortgage loans offset by debt prepayment penalties, a cash decrease
in other operating activities, and a decrease in mortgage loans originated for sale. Net cash provided by investing activities increased $282.12
million in 2014
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compared to net cash used of $1.17 million in 2013, which was largely the result of acquisition and divestiture activity in 2014 and a decrease
in the purchase of available-for-sale securities. Net cash used in financing activities increased $9.92 million, or 7.54%, to $141.55 million in
2014 primarily due to a decrease in federal funds purchased and the prepayment of FHLB borrowings offset by an increase in time deposits and
repurchase agreements and repurchases of treasury stock. The net effect of cash flow activity was a $181.09 million increase in cash and cash
equivalents in 2014.
2013 Compared to 2012 . Net cash provided by operating activities decreased $12.12 million, or 21.40%, in 2013 primarily due to a decrease in
net income of $5.27 million. Net cash used in investing activities totaled $1.17 million in 2013 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.
Capital Resources
Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements
weighted by the risks inherent in the specific asset type. These guidelines require a minimum risk-based capital ratio of 8%, Tier 1 risk-based
capital ratio of 6%, and Tier 1 leverage ratio of 3%.
The following table presents our regulatory 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
2014
December 31,
2013
2012
17.68 %
15.73 %
16.44 %
14.55 %
16.70 %
15.23 %
16.43 %
14.48 %
15.19 %
13.30 %
15.44 %
13.97 %
10.12 %
8.87 %
9.95 %
8.63 %
9.96 %
8.98 %
As of December 31, 2014, our regulatory capital ratios increased primarily due to an increase in retained earnings while average assets
remained relatively stable. Our regulatory capital ratios declined between the years ended December 31, 2013 and 2012 as a result of treasury
stock repurchases and net unrealized losses on investment securities. As of December 31, 2014, our capital ratios were well in excess of the
minimum standards and 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.
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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, 2014:
(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
$ 1,297,081
69,552
716,177
57,600
105,917
27,371
5,703
$ 2,279,401
Less Than
One Year
$ 1,297,081
69,552
473,398
3,915
3,660
2,630
675
$ 1,850,911
One to
Three Years
$ —
—
150,737
27,768
46,224
1,238
1,123
$ 227,090
Three to
Five Years
$ —
—
81,440
25,917
4,000
1,192
859
$ 113,408
More than
Five Years
$ —
—
10,602
—
52,033
22,311
3,046
$ 87,992
(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, 2014. 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.
Off-Balance Sheet Arrangements
We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers.
Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the
instrument. See Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.
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The following table presents our off-balance sheet arrangements, detailed by commitment expiration, as of December 31, 2014:
(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
Less than
One Year
(1)
Total
One to
Three Years
Three to
Five Years
Five
Years
More than
$ 17,372
33,029
2,706
1,713
27,148
344
1,668
$ 7,984
29,408
2,589
1,713
13,372
324
1,347
$
9,388
3,445
25
—
12,510
20
321
$ —
9
—
—
1,135
—
—
$ —
167
92
—
131
—
—
110,285
315
16,870
11,777
237
15,200
15,659
6
1,640
17,731
—
—
65,118
72
30
23,208
1,813
$ 236,471
16,481
64
$ 100,496
911
1,749
$ 45,674
550
—
$ 19,425
5,266
—
$ 70,876
$
487
3,094
$ 3,581
$
277
2,981
$ 3,258
$
$
200
14
214
$ —
5
5
$
$
$
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 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 businesses with large investments in property, plant, and inventory is generally more significant than the effect on financial institutions. 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.
Ite m 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our profitability is largely dependent 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.
64
Table of Contents
Net interest income, our primary component of operational revenue, is subject to variation due to changes in interest rate environments and
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 underlying rates on assets and liabilities change at different levels or in varying degrees. Yield
curve risk is the risk of adverse consequences that occurs when the same instrument experiences unequal change in the spread between two or
more rates for different maturities. Lastly, option risk occurs from 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, including 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. Simulation
results show the existence and severity of interest rate risk in each rate environment based on the current balance sheet position, assumptions
about changes in the volume and mix of interest-earning assets and interest-paying liabilities, and our estimate of yields earned on assets and
rates paid on 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 the timing,
magnitude, and frequency of interest rate changes and changes in market conditions and our strategies. The earnings simulation model provides
the best tool for managing interest rate risk available to us and the industry.
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 per predefined policy guidelines. The most recent simulation indicates that current exposure
to interest rate risk is within our defined policy limits.
The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income. The
model simulates rate changes of plus 300 to minus 100 basis points from the base simulation and illustrates the prospective effects of
hypothetical interest rate changes over a twelve-month 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. As market conditions vary from those
assumed in the sensitivity analysis, actual results will 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, 2014, 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; thus, downward rate scenarios are limited to minus 100 basis points. In the
downward rate shocks presented, benchmark interest rates are assumed to have floors near 0%.
(Amounts in thousands, except basis points)
Increase (Decrease) in Basis Points
300
200
100
(100)
Year Ended December 31,
2014
2013
Change in
Net
Interest Income
$
3,619
2,183
871
290
65
Percent
Change
4.2
2.5
1.0
0.3
Change in
Net
Interest Income
$
2,649
1,517
454
497
Percent
Change
3.1
1.8
0.5
0.6
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
FINANCI AL STATEMENTS AND SUPPLEMENTORY DATA INDEX
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
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
67
68
69
70
71
72
134
135
136
66
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; 15,151 and 15,251 shares outstanding at
December 31, 2014 and 2013, respectively
Common stock, $1 par value; 50,000,000 shares authorized; 20,499,683 and 20,493,057 shares issued at
December 31, 2014 and 2013, respectively; 2,093,464 and 1,978,478 shares in treasury at December 31,
2014 and 2013, respectively
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.
67
December 31,
2014
2013
$
39,450 $
196,873
1,337
237,660
326,117
57,948
1,792
43,598
1,817
11,152
56,567
519,820
568
883
122,240
1,567,176
(20,227 )
1,669,189
27,900
55,844
151,682
1,559,039
(24,077 )
1,686,644
34,691
61,116
6,324
6,638
6,315
100,722
6,421
105,066
7,541
7,318
7,521
105,455
2,866
111,524
$ 2,607,936 $ 2,602,514
$ 417,729 $ 339,680
1,611,062
1,950,742
22,770
16,000
118,308
150,000
16,088
2,273,908
1,583,030
2,000,759
26,062
—
121,742
90,000
17,999
2,256,562
15,151
15,251
20,500
215,873
141,206
(35,751 )
(5,605 )
351,374
20,493
215,663
125,826
(33,887 )
(14,740 )
328,606
$ 2,607,936 $ 2,602,514
Table of Contents
F IRST 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 (loss) gain on sale of securities
Net FDIC indemnification asset (amortization) accretion
Net gain on branch divestiture
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, acquisition, and divestiture expense
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.
68
2014
Year Ended December 31,
2013
$
95,492
5,975
4,350
291
106,108
$
96,600
7,875
4,790
211
109,476
$
2012
96,684
7,830
4,883
259
109,656
7,308
2,024
5,958
15,290
90,818
145
90,673
3,030
13,828
7,581
6,555
(737 )
—
(737 )
(1,385 )
(3,979 )
755
4,355
30,003
40,713
6,338
4,952
787
1,672
5,008
1,150
22,242
82,862
37,814
12,324
25,490
910
24,580
1.34
1.31
0.50
$
$
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
—
57
23,248
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
$
$
18,406,363
19,483,054
19,792,099
20,961,800
19,127,065
20,419,569
Table of Contents
FIRST COMMUNITY BANCSHARES, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Comprehensive Income
Net income
Other comprehensive income (loss), before tax:
Available-for-sale securities:
Unrealized (losses) gains on securities available for sale with other-than-temporary impairment
Unrealized gains (losses) on securities available for sale without other-than-temporary impairment
Less: reclassification adjustment for losses (gains) realized in net income
Less: reclassification adjustment for credit related other-than-temporary impairments recognized in
net income
Unrealized gains (losses) on available-for-sale securities
Employee benefit plans:
Net actuarial (loss) gain 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 (losses) gains on employee benefit plans
Other comprehensive income (loss), before tax
Income tax (expense) benefit
Other comprehensive income (loss), net of tax
Total comprehensive income
See Notes to Consolidated Financial Statements.
69
Year Ended December 31,
2013
2012
2014
$ 25,490 $ 23,312 $ 28,577
(1 )
12,914
1,385
(1,277 )
(19,964 )
(399 )
1,036
7,280
(483 )
737
15,035
320
(21,320 )
942
8,775
(642 )
—
758
(380 )
(195 )
—
260
(382 )
14,653
(5,518 )
9,135
268
73
8,848
(3,345 )
5,503
$ 34,625 $ 10,397 $ 34,080
327
705
(20,615 )
7,700
(12,915 )
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, 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
Balance January 1, 2014
Net income
Other comprehensive income
Common dividends declared — $0.50 per share
Preferred dividends declared — $60.00 per share
Preferred stock converted to common stock — 6,900 shares
Equity-based compensation expense
Common stock options exercised — 3,854 shares
Restricted stock awards — 13,933 shares
Purchase of treasury shares — 132,773 shares at $16.29 per share
Balance December 31, 2014
See Notes to Consolidated Financial Statements.
Paid-in
Capital
$ 18,921 $ 18,083 $ 188,118 $ 93,656 $ (5,721 ) $
Earnings
Stock
Stock
Stock
—
—
—
—
(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 ) $
$ 15,251 $ 20,493 $ 215,663 $ 125,826 $ (33,887 ) $
—
—
—
—
(100 )
—
—
—
—
—
—
—
—
7
—
—
—
—
—
—
—
—
93
332
(13 )
(202 )
—
25,490
—
(9,200 )
(910 )
—
—
—
—
—
—
—
—
—
—
—
66
238
(2,168 )
$ 15,151 $ 20,500 $ 215,873 $ 141,206 $ (35,751 ) $
70
Income (Loss)
Total
(7,328 ) $ 305,729
28,577
5,503
(8,162 )
(1,058 )
—
132
75
69
(1,012 )
26,470
(1,825 ) $ 356,323
—
5,503
—
—
—
—
—
—
—
—
—
(12,915 )
—
—
—
—
—
—
—
(1,825 ) $ 356,323
23,312
(12,915 )
(9,475 )
(1,024 )
—
18
85
703
(28,421 )
(14,740 ) $ 328,606
(14,740 ) $ 328,606
25,490
9,135
(9,200 )
(910 )
—
332
53
36
(2,168 )
(5,605 ) $ 351,374
—
9,135
—
—
—
—
—
—
—
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
Gain on acquisitions and divestitures, net
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
Loss (gain) on sale of securities
Impairment losses recognized in earnings, net
FHLB debt prepayment fees
Deferred income tax benefit
Proceeds from sale of mortgage loans
Origination of mortgage loans
Decrease in accrued interest receivable
(Increase) decrease 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 and calls of securities held to maturity
Payments to acquire securities available for sale
Payments to acquire securities held to maturity
(Originations) collections of loans, net
Proceeds from the redemption of FHLB stock, net
Cash received (paid) in acquisitions and divestitures, net
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
Increase (decrease) in noninterest-bearing deposits, net
Decrease in interest-bearing deposits, net
(Decrease) increase in federal funds purchased, net
Proceeds from (repayments of) securities sold under agreements to repurchase
Repayments of long-term debt
Proceeds from stock options exercised
Excess tax benefit from equity-based compensation
Payments for repurchase of treasury stock
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
See Notes to Consolidated Financial Statements.
71
Year Ended December 31,
2013
2014
2012
$ 25,490
$ 23,312
$ 28,577
145
4,405
961
3,979
787
(755 )
(671 )
332
(113 )
3,227
1,385
737
5,008
—
28,443
(28,681 )
1,206
(4,196 )
41,689
162,443
48,915
190
(6,047 )
(57,675 )
(64,115 )
4,349
178,604
4,770
(2,146 )
1,048
10,619
280,955
68,246
(121,912 )
(16,000 )
3,432
(63,097 )
53
5
(2,168 )
(9,200 )
(910 )
(141,551 )
181,093
56,567
$ 237,660
8,208
4,666
884
5,597
729
—
(1,211 )
18
(158 )
2,785
(399 )
320
—
—
75,348
(68,348 )
321
(7,554 )
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 )
67,502
(67,289 )
2,356
12,525
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
$ 12,620
671
$ 18,438
3,196
$
9,083
1,405
15,289
12,552
18,146
3,000
19,656
10,388
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Summary of Significant Accounting Policies
Nature of Operations
First Community Bancshares, Inc. (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. The Bank operates 53 branches in 4 states under the trade names First Community Bank in Virginia,
West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Company offers
personal and commercial insurance products and services from 11 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 $712 million in combined assets as of December 31, 2014. 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 $2.61 billion as of December 31,
2014. Unless the context suggests otherwise, the term “Company” refers to First Community Bancshares, Inc. and its subsidiaries as a
consolidated entity.
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. Since these entities do not meet the criteria for consolidation, they
are reported in other assets in the Company’s consolidated balance sheets. The carrying value and maximum potential loss exposure of VIEs
totaled $1.26 million as of December 31, 2014, and $2.89 million as of December 31, 2013.
72
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 proper 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.
Loans Held for Sale
Loans classified as held for sale are originated with the intent to sell in the secondary market. 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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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
IRLCs 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 classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. 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 uncertain. The Company’s Special Asset department reviews loans with balances of $250
thousand or greater that are deemed to be impaired quarterly. 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.
Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk
characteristics, are reviewed quarterly by management. Interest income realized on impaired loans in nonaccrual status, if any, is recognized
upon receipt. The accrual of interest, which is typically based on the daily amount of principal outstanding, on impaired loans is generally
continued unless the loan becomes delinquent 90 days or more.
The Company’s Special Assets department also monitors and manages part due loans. Loans are considered past due when either principal or
interest payments become contractually delinquent by 30 days or more. The Company’s policy is 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. Loans that are
90 days or more past due are placed on nonaccrual status. 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. Loans in nonaccrual status
may be returned to accrual status provided the loan is brought current, all principal and interest amounts contractually due (including past due
payments) are reasonably assured of repayment within a reasonable period, and there is a period of at least six months of repayment
performance (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms.
Seriously delinquent loans are evaluated for loss mitigation options, including charge-off. Closed-end retail loans are generally charged off
against the allowance for loan losses when the loans become 120 days past due. Open-end retail loans and residential real estate secured loans
are generally charged off when the loan becomes 180 days past due. Unsecured loans are generally charged off when the loan becomes 90 days
past due. All other loans are charged off against the allowance for loan losses after collection attempts have been exhausted, which generally is
within 120 days. Recoveries of loans previously charged off are credited to the allowance for loan losses in the period received.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 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, through a systematic process of
measurement, reflects the amount management estimates is needed to absorb probable losses in the portfolio. While management uses 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Business Combinations
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 acquisition method of
accounting. Under 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
about 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 credit risk assumptions.
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. Per 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 contractually required payments at acquisition
exceed 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Purchased performing loans are accounted 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. Information about the 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. Under 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 that is allocated to the appropriate
reporting unit when acquired. The Company maintains 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. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
The Company performed its annual impairment test of goodwill as of October 31, 2014. The Step 1 valuation analysis included a market
approach, using public company and transaction methods, and an income approach, using a discounted cash flow method. The Step 1 analysis
indicated that no impairment charge was necessary at either reporting unit. 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.
Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated
remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that 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 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. The FHLB of
Atlanta repurchased excess activity-based stock and paid quarterly cash dividends in each of the three years ended December 31, 2014. Based
on publicly available information as of December 31, 2014, the Company believes that its FHLB of Atlanta stock is not impaired. The
investment in FHLB of Atlanta stock was $6.37 million as of December 31, 2014, and $10.72 million as of December 31, 2013. The
investment in FRB of Richmond stock was $5.58 million as of December 31, 2014, and December 31, 2013.
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. Under 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. Under 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 $360 thousand as of December 31, 2014,
and $786 thousand as of December 31, 2013.
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.
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Advertising Expenses
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Advertising costs are generally expensed as incurred. The Company may establish accruals for expected advertising expenses in the course of a
fiscal year.
Equity-Based Compensation
The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally
measured at fair value on the grant date. A Black-Scholes model is used 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. Deferred tax assets and liabilities are adjusted through the provision for income taxes as
changes in tax laws or rates are enacted.
The Company’s tax filings for the years ended December 31, 2010 through 2013, are 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. Under the treasury stock method of accounting, potential common stock may 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
2014
$
25,490
910
$
24,580
18,406,363
18,607
461
1,046,175
11,448
19,483,054
1.34
$
1.31
$
Year Ended December 31,
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
$
2012
$
28,577
1,058
$
27,519
19,127,065
4,549
2,107
1,285,848
—
20,419,569
1.44
$
1.40
$
222,651
—
222,651
317,420
271
317,691
420,802
—
420,802
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. The Company may redeem the shares
at face value and the shares mandatorily convert on May 20, 2016. The Series A Preferred Stock outstanding totaled 15,151 shares as of
December 31, 2014, 15,251 shares as of December 31, 2013, and 17,421 shares as of December 31, 2012.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as 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, 2014, 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 must 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 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, 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)
Recent Accounting Standards
The FASB issued several Accounting Standards Updates in 2014; however, no updates impacted, or are expected to impact, the Company’s
financial condition or results of operation.
In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income.” ASU 2013-02 is intended to improve the reporting of reclassifications out of AOCI of various components.
ASU 2013-02 requires entities to disclose in a single location, either on the face of the financial statement that reports net income or in the
notes, the effects of reclassification out of accumulated other comprehensive income (AOCI). For items reclassified out of AOCI and into net
income in their entirety, such as realized gains or losses on available-for-sale securities reclassified into net income on sale, entities must
disclose the effect on the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their
entirety into net income, such as actuarial gains or losses amortized into pension cost that may be capitalized into inventory or other assets,
entities must provide a cross reference to other required U.S. GAAP disclosures. ASU 2013-02 was 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 four 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 deposits and certain liabilities of Waccamaw, headquartered in Whiteville, North Carolina.
Waccamaw, a full service community bank, operated sixteen 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
82
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Bank of America
On October 24, 2014, the Company completed the acquisition of seven branches from Bank of America, National Association. At acquisition,
the branches had total deposits of $318.88 million. The Company assumed the deposits for a premium of $5.79 million. No loans were included
in the purchase. Additionally, the Company purchased the real estate or assumed the leases associated with the branches. The acquisition
expands the Company’s presence by six branches in Southwestern Virginia and one branch in Central North Carolina.
CresCom Bank
On December 12, 2014, the Company completed the sale of thirteen branches to CresCom Bank (“CresCom”), Charleston, South Carolina. The
divestiture consisted of ten branches in the Southeastern, Coastal region of North Carolina and three branches in South Carolina, all of which
were previously acquired in the FDIC-assisted acquisition of Waccamaw. At closing, CresCom assumed total deposits of $215.19 million and
total loans of $70.04 million. The transaction excluded loans covered under FDIC loss share agreements. The Company recorded a net gain of
$755 thousand in connection with the divestiture, which included a deposit premium received from CresCom of $6.45 million and goodwill
allocation of $6.45 million.
Insurance Services
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.
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 $353 thousand
in 2014, $442 thousand in 2013, and $692 thousand in 2012.
83
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net Cash Paid (Received) 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 (received) paid 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
Net cash paid (received) in divestitures
Net cash (received) paid in acquisitions and divestitures
2014
Year Ended December 31,
2013
2012
$ —
140
4,547
4,563
(318,877 )
(76 )
1,721
(307,982 )
—
—
(307,982 )
(83,283 )
215,268
(755 )
131,230
(1,852 )
129,378
$ (178,604 )
$ —
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 )
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. Agency securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Mortgage-backed Agency securities
Equity securities
Total
December 31, 2014
Unrealized
Unrealized
Gains
$
11
4,823
—
109
470
19
$ 5,432
Losses
$ (1,017 )
(692 )
(9,685 )
—
(857 )
(6 )
$ (12,257 )
Fair
Value
$ 33,598
138,915
46,137
5,109
102,119
239
$ 326,117
OTTI in
AOCI
(1)
$ —
—
—
—
—
—
$ —
Amortized
Cost
$ 34,604
134,784
55,822
5,000
102,506
226
$ 332,942
84
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(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
Amortized
Cost
$ 9,708
147,049
55,764
5,000
306,319
12,543
318,862
5,259
$ 541,642
Unrealized
December 31, 2014
Unrealized
Gains
$ —
1,868
—
—
Losses
$
(695 )
(4,637 )
(9,530 )
(129 )
2,575
—
2,575
24
$ 4,467
(8,508 )
(2,754 )
(11,262 )
(36 )
$ (26,289 )
Fair
Value
$ 9,013
144,280
46,234
4,871
300,386
9,789
310,175
5,247
$ 519,820
OTTI in
(1)
AOCI
$ —
—
—
—
—
(2,754 )
(2,754 )
—
$ (2,754 )
(1) Other-than-temporary impairment in accumulated other comprehensive income
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, 2014. 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 years
After five years through ten years
After ten years
Fair value
Mortgage-backed securities
Equity securities
Total fair value
U.S.
Agency
Securities
$ —
3
3,156
31,445
$ 34,604
Municipal
Securities
$ 2,466
6,069
45,137
81,112
$ 134,784
1.95 %
16.76
4.67 %
9.89
$ —
3
3,099
30,496
$ 33,598
$ 2,470
6,229
47,207
83,009
$ 138,915
(1) Fully taxable equivalent at the rate of 35%.
85
Corporate Notes
Total
Tax Equivalent
(1)
Purchase Yield
4.07 %
6.04 %
4.55 %
2.94 %
1.49 %
8.20 %
$
$
$
$
—
—
5,000
55,822
60,822
1.45 %
12.55
—
—
5,109
46,137
51,246
$ 2,466
6,072
53,293
168,379
230,210
102,506
226
$ 332,942
3.40 %
11.62
$ 2,470
6,232
55,415
159,642
223,759
102,119
239
$ 326,117
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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)
U.S. Agency securities
Municipal securities
Corporate securities
Total
(Amounts in thousands)
Municipal securities
Total
Amortized
Unrealized
Unrealized
December 31, 2014
Cost
$ 46,987
379
10,582
$ 57,948
Gains
$
22
7
—
29
$
Losses
$
(54 )
—
(34 )
(88 )
$
Amortized
Unrealized
Unrealized
December 31, 2013
Cost
$
$
568
568
Gains
$
$
11
11
Losses
$ —
$ —
Fair
Value
$ 46,955
386
10,548
$ 57,889
Fair
Value
$
$
579
579
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, 2014. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without penalties.
U.S. Agency
Municipal
Securities
Securities
Corporate Notes
Total
(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
$ —
46,987
—
—
$ 46,987
1.01 %
2.83
$ —
46,955
—
—
$ 46,955
(1) Fully taxable equivalent at the rate of 35%.
$
$
$
$
—
10,582
—
—
10,582
1.64 %
3.56
—
10,548
—
—
10,548
$
190
57,758
—
—
$ 57,948
1.17 %
2.95
$
193
57,696
—
—
$ 57,889
$
190
189
—
—
379
$
8.17 %
0.83
$
193
193
—
—
386
$
86
Tax Equivalent
(1)
Purchase Yield
8.13 %
1.15 %
—
—
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
Wisconsin
Ohio
Connecticut
New Jersey
Massachusetts
Texas
Other
Total
(Amounts in thousands)
New York
Minnesota
New Jersey
Connecticut
Wisconsin
Ohio
Massachusetts
Texas
Other
Total
Percent of
Municipal Portfolio
10.62 %
8.34 %
8.30 %
8.14 %
8.02 %
7.96 %
7.18 %
6.35 %
35.09 %
100.00 %
Percent of
Municipal Portfolio
11.34 %
8.56 %
8.18 %
7.86 %
7.83 %
7.45 %
6.85 %
6.24 %
35.68 %
100.00 %
Amortized Cost
14,064
$
11,188
11,340
11,145
10,775
10,567
9,653
8,770
47,661
135,163
$
December 31, 2014
Unrealized Gains
730
$
463
244
337
393
515
393
214
1,541
4,830
$
Amortized Cost
16,161
$
12,504
11,565
11,406
11,815
11,299
10,102
9,483
53,282
147,617
$
December 31, 2013
Unrealized Gains
294
$
174
306
91
118
135
119
134
508
1,879
$
Unrealized Losses
—
$
(30 )
(16 )
(148 )
—
—
(38 )
(133 )
(327 )
(692 )
$
Unrealized Losses
(28 )
$
(279 )
(25 )
(109 )
(584 )
(637 )
(295 )
(576 )
(2,104 )
(4,637 )
$
Fair Value
$ 14,794
11,621
11,568
11,334
11,168
11,082
10,008
8,851
48,875
$ 139,301
Fair Value
$ 16,427
12,399
11,846
11,388
11,349
10,797
9,926
9,041
51,686
$ 144,859
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:
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Equity securities
Total
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2014
12 Months or longer
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
$ — $ — $ 29,448 $ (1,017 ) $ 29,448 $ (1,017 )
(692 )
26,119
(8 )
1,112
46,137 (9,685 )
— —
(857 )
48,568
(3 )
2,778
(6 )
(6 )
150
150
(17 ) $ 146,382 $ (12,240 ) $ 150,422 $ (12,257 )
$ 4,040 $
(684 )
25,007
46,137 (9,685 )
45,790
(854 )
— —
87
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(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
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 ) $ — $ — $ 9,013 $
$ 9,013 $
57,950
—
4,871
(4,147 )
—
(129 )
3,049
46,234
—
(490 )
(9,530 )
—
60,999
46,234
4,871
(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 )
The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less
than 12 months and for 12 months or longer as of the date 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. Agency securities
Corporate securities
Total
Less than 12 Months
Fair
Value
Unrealized
Losses
$ 28,188 $
10,548
$ 38,736 $
December 31, 2014
12 Months or longer
Fair
Value
Unrealized
Losses
(54 ) $ — $ — $ 28,188 $
(34 )
(88 ) $ — $ — $ 38,736 $
—
10,548
—
Fair
Value
Total
Unrealized
Losses
(54 )
(34 )
(88 )
As of December 31, 2014, there were 97 individual securities in an unrealized loss position, and their combined depreciation in value
represented 3.21% of the investment securities portfolio. Individual securities in an unrealized loss position as of December 31, 2014, included
82 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 maturity or recovery. 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.
The following table presents the components of the Company’s net loss or gain from the sale of securities in the periods indicated:
(Amounts in thousands)
Gross realized gains
Gross realized losses
Net (loss) gain on sale of securities
Year Ended December 31,
2014
$ 2,257
(3,642 )
$ (1,385 )
2013
$ 553
(154 )
$ 399
2012
$ 723
(240 )
$ 483
The carrying value of available-for-sale securities pledged to secure public deposits and other purposes was $268.78 million as of
December 31, 2014, and $284.77 million as of December 31, 2013.
88
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company reviews its investment portfolio quarterly for indications of OTTI. Debt securities not beneficially owned by the Company
include securities issued from the U.S. Department of the Treasury (“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. The Company incurred no OTTI charges related to debt securities not
beneficially owned in 2014 or 2013. 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 securities and mortgage-backed securities (“MBSs”). 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 $705 thousand in 2014 and $320 thousand in 2013. These
charges were associated with a non-Agency MBS that was sold in November 2014.
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 previously recognized
Reduction for securities sold/realized losses
Ending balance
Year Ended December 31,
2013
$ 7,478
320
—
$ 7,798
2014
$ 7,798
705
(8,503 )
$ —
2012
$ 6,536
942
—
$ 7,478
(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.
The Company incurred OTTI charges related to equity securities of $32 thousand in 2014. The Company incurred no OTTI charges related to
equity securities in 2013.
89
Table of Contents
Note 4.
Loans
Loan Portfolio
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. 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
90
December 31,
2014
2013
Amount
Percent
Amount
Percent
$ 41,271
83,099
97,480
135,171
473,906
1,599
29,517
862,043
2.44 % $
4.92 %
5.77 %
8.00 %
28.05 %
0.09 %
1.75 %
51.02 %
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 %
110,957
485,475
32,799
629,231
6.57 %
28.74 %
1.94 %
37.25 %
111,770
496,012
28,703
636,485
6.53 %
28.99 %
1.68 %
37.20 %
69,347
6,555
75,902
1,567,176
122,240
$ 1,689,416
1,792
$
71,313
4.10 %
3,926
0.39 %
75,239
4.49 %
1,559,039
92.76 %
7.24 %
151,682
100.00 % $ 1,710,721
883
$
4.17 %
0.23 %
4.40 %
91.13 %
8.87 %
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,
2014
2013
$ 13,100
2,662
1,584
5,918
25,317
43
716
49,340
60,391
11,968
453
72,812
$ 15,865
3,325
1,933
7,449
34,646
164
873
64,255
69,206
16,919
1,184
87,309
88
$ 122,240
118
$ 151,682
Customer overdrafts reclassified as loans totaled $1.44 million as of December 31, 2014, and $1.42 million as of December 31, 2013. Deferred
loan fees totaled $3.39 million in 2014, $3.16 million in 2013, and $2.36 million in 2012. 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
Certain purchased loans are identified as impaired when fair values are established at acquisition. 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, 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
Carrying balance, January 1, 2014
Carrying balance, December 31, 2014
Unpaid principal balance, December 31, 2014
Peoples Waccamaw
$ —
$ —
117,572
32,603
112,093
26,907
157,781
34,644
$ 112,093
$ 26,907
70,584
9,196
105,677
17,431
$ 70,584
$ 9,196
53,835
7,090
86,641
13,669
Other
$ 2,886
—
2,340
5,918
$ 2,340
1,931
5,390
$ 1,931
1,358
1,401
Total
$ 2,886
150,175
141,340
198,343
$ 141,340
81,711
128,498
$ 81,711
62,283
101,711
91
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, 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
Balance, January 1, 2014
Additions
Accretion
Reclassifications from nonaccretable difference
Disposals
Balance, December 31, 2014
Peoples
$ —
3,400
(856 )
—
(202 )
$ 2,342
$ 2,342
148
(1,840 )
6,155
(1,511 )
$ 5,294
$ 5,294
267
(2,147 )
1,912
(581 )
$ 4,745
Waccamaw
$ —
26,481
(3,315 )
—
(1,280 )
$ 21,886
$ 21,886
281
(6,288 )
(2,967 )
(2,574 )
$ 10,338
$ 10,338
26
(6,118 )
16,400
(1,598 )
$ 19,048
Other
$ 919
—
(1,089 )
185
—
15
$
$
15
—
(119 )
112
—
8
$
8
$
—
(37 )
29
—
$ —
Total
$ 919
29,881
(5,260 )
185
(1,482 )
$ 24,243
$ 24,243
429
(8,247 )
3,300
(4,085 )
$ 15,640
$ 15,640
293
(8,302 )
18,341
(2,179 )
$ 23,793
92
Table of Contents
Note 5. Credit Quality
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. The Company generally deems loans impaired when it is
probable the Company will be unable to collect all principal and interest amounts contractually due. The following tables present the recorded
investment and related information for impaired loans, 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
93
December 31, 2014
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average Annual
Recorded Investment
$ —
—
—
466
5,705
—
—
—
3,397
—
$ —
—
—
466
6,049
—
—
—
3,494
—
$ —
—
—
—
—
—
—
—
—
—
—
9,568
—
10,009
—
—
$ —
—
—
367
3,772
—
—
—
2,341
—
—
6,480
$ 16,048
$ —
—
—
367
3,772
—
—
—
2,512
—
—
6,651
$ 16,660
$ —
—
—
45
1,000
—
—
—
437
—
—
1,482
$ 1,482
$
$
$
—
461
—
301
6,083
—
181
66
2,508
—
—
9,600
—
2,199
4,190
369
3,386
—
—
57
3,897
—
—
14,098
23,698
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
94
December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average Annual
Recorded Investment
$ —
292
—
289
5,352
—
351
257
2,006
—
$ —
292
—
317
5,682
—
363
264
2,414
—
$ —
—
—
—
—
—
—
—
—
—
—
8,547
—
9,332
—
—
$ —
4,897
—
375
600
—
—
215
4,844
—
—
10,931
$ 19,478
$ —
10,244
—
375
600
—
—
230
5,035
—
—
16,484
$ 25,816
$ —
3,794
—
47
114
—
—
52
735
—
—
4,742
$ 4,742
$
$
$
3,850
698
18
939
7,225
—
370
454
2,156
15
3
15,728
1,057
4,281
94
892
1,494
—
—
304
4,498
—
—
12,620
28,348
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
Year ended December 31,
2014
2013
2012
$ —
17
—
8
96
—
11
2
73
—
$ 294
17
3
99
296
—
12
$
3
17
4
56
102
—
—
25
70
5
28
113
—
—
207
—
821
—
323
—
47
23
2
31
—
—
117
18
7
3
29
—
—
1
948
3
80
317
—
—
1
48
—
12
54
—
1
103
—
—
152
$ 359
—
240
$ 1,061
—
1,453
$ 1,776
The Company determined that two of the seven PCI loan pools were impaired as of December 31, 2014, compared to four impaired pools as of
December 31, 2013. 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
Unpaid principal balance
Allowance for loan losses
95
December 31,
2014
$ 14,607
31,169
58
2013
$ 52,033
69,320
747
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Interest income recognized
Average recorded investment
Year ended December 31,
2014
$ 3,081
30,007
2013
$ 1,966
35,220
2012
$ —
—
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 $4.0 million
annually and at various times during the year. 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. PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest income under the
accretion method of accounting.
96
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, 2014
$
41,271
38,858 $ 1,384 $
83,099
81,196
616
97,480
89,503 7,007
126,155 3,333
5,683 — — 135,171
441,385 13,028 19,493 — — 473,906
1,599
29,517
1,029 $ — $ — $
1,287 — —
970 — —
10 — —
1,209 — —
1,589 —
26,876 1,432
107,688 1,606
1,663 — — 110,957
454,833 8,884 21,758 — — 485,475
32,799
248 — —
32,551 —
68,592
520
6,555 —
69,347
6,555
1,475,781 37,810 53,585 — — 1,567,176
235 — —
— — —
7,598 3,227
82
2,528
1,400 —
2,703 2,059
12,672 4,341
43 —
420 —
2,275 — —
52 — —
184 — —
1,156 — —
8,304 — —
— — —
296 — —
13,100
2,662
1,584
5,918
25,317
43
716
21,295 38,296
7,094 2,040
264
84
800 — —
2,834 — —
105 — —
60,391
11,968
453
88 —
— —
88
—
55,925 50,309 16,006 — — 122,240
$ 1,531,706 $ 88,119 $ 69,591 $ — $ — $ 1,689,416
— — —
— — —
97
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pass
Special
Mention Substandard Doubtful Loss
Total
December 31, 2013
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
$
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 — —
2,306
8
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
2,865
247
1,472 —
1,552
4,362 1,519
13,077 4,630 16,901
51 —
4,714
189
24 —
461 — —
16 —
38 —
— — —
301 — —
164 —
572 —
15,865
3,325
1,933
7,449
34,646
164
873
23,189 44,746
148
10,832
198 —
2 —
1,269
5,939 — —
986 — —
69,206
16,919
1,184
118 —
— —
118
—
66,571 52,668 32,312 131 — 151,682
$ 1,513,274 $ 94,981 $ 97,347 $ 5,115 $ 4 $ 1,710,721
— — —
— — —
98
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
99
2014
Non-
December 31,
2013
Non-
covered Covered
Total
covered Covered
Total
$ — $
123
245
601
2,334
4
—
18 $
34
—
77
1,317
—
—
18 $ 1,187 $ 761 $ 1,948
5,433
157
—
245
2,188
678
2,685
3,651
—
4
742
—
5,341
—
1,966
2,685
—
441
92
—
222
—
—
301
792
6,389
—
204
682
106
996
7,071
106
765
6,567
—
232
1,555
190
997
8,122
190
68
—
10,556
—
201
—
22,506
8
$ 10,556 $ 2,438 $ 12,994 $ 19,161 $ 3,353 $ 22,514
201
—
19,153
8
68
—
12,994
—
—
—
2,438
—
—
—
3,353
—
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, 2014, or December 31, 2013. There were no covered accruing loans contractually past due 90 days or more as of December 31,
2014. 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.
(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, 2014
30 -
59 Days
Past Due
60 -
89 Days
Past
Due
90+ Days
Past Due
Past Due
Total
Current
Loans
Total
Loans
$
39
285
81
914
1,075
—
89
$
46
6
110
513
783
—
—
$ —
103
—
425
1,984
4
—
$
85
394
191
1,852
3,842
4
89
$
41,186
82,705
97,289
133,319
470,064
1,595
29,428
$
41,271
83,099
97,480
135,171
473,906
1,599
29,517
492
5,436
—
103
1,931
—
571
4,564
—
1,166
11,931
—
109,791
473,544
32,799
110,957
485,475
32,799
544
—
8,955
84
—
3,576
26
—
7,677
654
—
20,208
68,693
6,555
1,546,968
69,347
6,555
1,567,176
120
84
—
122
124
—
3
17
12
—
—
140
—
—
—
34
—
77
1,258
—
—
137
130
—
199
1,522
—
3
858
134
—
318
34
—
168
415
—
1,344
583
—
12,963
2,532
1,584
5,719
23,795
43
713
59,047
11,385
453
—
—
1,445
$ 10,400
—
—
521
$ 4,097
—
—
1,952
$ 9,629
—
—
3,918
$ 24,126
88
—
118,322
$ 1,665,290
13,100
2,662
1,584
5,918
25,317
43
716
60,391
11,968
453
—
88
—
122,240
$ 1,689,416
100
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, 2013
60 -
89 Days
30 -
59 Days
Past Due
Past
Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
$ 118
93
115
611
1,014
—
245
$
10
39
—
554
318
—
—
532
$
2,631
—
1,203
1,770
—
—
660
$
2,763
115
2,368
3,102
—
245
$
34,595
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
488
197
—
86
120
—
163
1,466
190
737
1,783
190
14,933
3,184
1,933
7,265
34,437
164
572
68,469
15,136
994
—
—
1,378
$ 12,307
—
—
250
$ 2,802
—
—
2,849
$ 11,961
—
—
4,477
$ 27,070
118
—
147,205
$ 1,683,651
15,865
3,325
1,933
7,449
34,646
164
873
69,206
16,919
1,184
—
118
—
151,682
$ 1,710,721
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 $475 thousand as of December 31, 2014, and $1.84 million as of December 31, 2013.
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 $597 thousand in 2014, $551 thousand in 2013, and $640 thousand in 2012.
101
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2014 or 2013. 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
Commercial and industrial
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total TDRs
2014
2013
December 31,
Nonaccrual
(1)
Accruing
Total
Nonaccrual
(1)
Accruing
Total
$ —
—
83
$ —
1,088
4,743
$ —
1,088
4,826
$ 1,115
375
128
$ —
—
5,490
$ 1,115
375
5,618
—
471
—
554
$
47
8,412
244
$ 14,534
47
8,883
244
$ 15,088
159
423
—
$ 2,200
51
6,670
—
$ 12,211
210
7,093
—
$ 14,411
(1) TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.
The following table presents TDRs, by type of concession made and loan class, restructured during the periods indicated. The post-
modification recorded investment represents the loan balance immediately after modification.
(Amounts in thousands)
Below market interest rate
Single family owner occupied
Owner occupied construction
Total
Extended payment term
Single family non-owner occupied
Non-farm, non-residential
Total
Below market interest rate and extended
payment term
Single family non-owner occupied
Non-farm, non-residential
Single family owner occupied
Total
Total
Year Ended December 31,
2014
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Total
Contracts
2013
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Total
Contracts
4
1
5
1
1
2
$
1,850
245
2,095
$
1,850
245
2,095
2
$
2
468
303
771
—
—
$
601
—
601
—
—
—
557
—
557
—
—
—
1
—
5
6
13
$
255
—
487
742
3,608
$
1
1
4
6
8
375
511
809
1,695
2,296
328
511
757
1,596
2,153
$
$
468
303
771
255
—
487
742
3,608
102
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents TDRs, by loan class, 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,
2014
2013
Total
Contracts
—
—
—
Recorded
Investment
$ —
—
$ —
Total
Contracts
1
1
2
Recorded
Investment
375
$
359
734
$
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 charged to operations and reduced by net charge-offs. While management uses 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 various portfolio segments, the allowance for loan losses, excluding reserves allocated to specific loans and PCI loan pools, is
available for use against any loan loss management deems appropriate. As of December 31, 2014, management believed the allowance was
adequate to absorb probable loan losses inherent in the loan portfolio.
103
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, 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
Balance, January 1, 2014
Removal of loans transferred
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, 2014
PCI Loans
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
23,322
(682 )
420
—
420
—
(6,481 )
3,590
(2,891 )
20,169
$
$
$
$
$
$
104
$
$
$
PCI Loans
201
(193 )
—
—
—
8
8
747
(451 )
296
451
—
—
—
755
755
—
(697 )
422
(275 )
(422 )
—
—
—
58
$
$
$
Total
Allowance
$ 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
$ 24,077
(682 )
(277 )
422
145
(422 )
(6,481 )
3,590
(2,891 )
$ 20,227
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, 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
Balance, January 1, 2014
Removal of loans transferred
(Recovery of) provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Balance, December 31, 2014
Commercial
$ 17,551
2,896
(3,814 )
626
(3,188 )
$ 17,259
$ 17,259
5,643
(7,743 )
931
(6,812 )
$ 16,090
$ 16,090
(418 )
(1,988 )
(2,928 )
2,254
(674 )
$ 13,010
Consumer
Real Estate
$ 7,711
2,608
(2,702 )
289
(2,413 )
$ 7,906
$ 7,906
1,364
(3,115 )
442
(2,673 )
$ 6,597
$ 6,597
(244 )
1,273
(1,873 )
736
(1,137 )
$ 6,489
$
$
and Other
742
$
367
(988 )
476
(512 )
597
597
905
(1,669 )
802
(867 )
635
635
(20 )
1,135
(1,680 )
600
(1,080 )
670
$
$
$
Total
$ 26,004
5,871
(7,504 )
1,391
(6,113 )
$ 25,762
$ 25,762
7,912
(12,527 )
2,175
(10,352 )
$ 23,322
$ 23,322
(682 )
420
(6,481 )
3,590
(2,891 )
$ 20,169
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, 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
Balance, January 1, 2014
Purchased impaired provision
Benefit attributable to FDIC indemnificaton asset
Recovery of loan losses charged to operations
Recovery of loan losses recorded through the FDIC
indemnificaton asset
Balance, December 31, 2014
$
$
Commercial
201
$
(193 )
8
8
69
(55 )
14
55
77
77
(40 )
26
(14 )
(26 )
37
$
$
$
Consumer
Real Estate
$ —
—
$ —
$ —
678
(396 )
282
$
$
396
678
678
(657 )
396
(261 )
(396 )
21
$
Consumer
and Other
$ —
—
$ —
$ —
—
—
—
—
$ —
$ —
—
—
—
—
$ —
Total
$ 201
(193 )
8
$
$
8
747
(451 )
296
451
$ 755
$ 755
(697 )
422
(275 )
(422 )
$ 58
105
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
December 31, 2014
(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
(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
Loans
Individually
Evaluated for
Impairment
$
—
—
—
833
9,477
—
—
10,310
—
5,738
—
5,738
—
—
—
$ 16,048
Loans
Individually
Evaluated for
Impairment
$
—
5,189
—
664
5,952
—
351
12,156
472
6,850
—
7,322
Allowance for
Loans
Individually
Evaluated
$
$
—
—
—
45
1,000
—
—
1,045
—
437
—
437
—
—
—
1,482
Allowance for
Loans
Individually
Evaluated
$
—
3,794
—
47
114
—
—
3,955
52
735
—
787
—
—
—
4,742
Loans
Collectively
Evaluated for
Impairment
$
51,608
85,353
98,880
135,223
475,353
1,642
30,233
878,292
134,006
489,820
32,983
656,809
69,429
6,555
75,984
$ 1,611,085
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
December 31, 2013
Allowance for
Loans
Collectively
Evaluated
$
$
1,151
690
1,917
3,183
4,805
13
206
11,965
1,330
4,498
224
6,052
670
—
670
18,687
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
—
—
—
$ 19,478
$
106
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
2014
2013
December 31,
Loan Pools With
Impairment
$
$
13,392
461
5,875
1,358
21,086
37,342
2,638
1,215
41,195
2
62,283
Allowance for
Loans Pools
With
Impairment
$
$
37
—
—
—
37
—
—
21
21
—
58
Loan Pools
With
Impairment
$ 19,851
2,594
7,862
1,931
32,238
43,608
4,497
1,334
49,439
34
$ 81,711
Allowance for
Loans Pools
With
Impairment
$
$
—
69
—
8
77
277
217
184
678
—
755
(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 loans
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. The
FDIC agreed to cover 80% of most loan and foreclosed real estate losses under the loss share agreements. 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
(Decrease) increase in estimated losses on covered loans
Increase in estimated losses on covered OREO
Reimbursable expenses from the FDIC
Net amortization
Reimbursements from the FDIC
Ending balance
107
Year Ended December 31,
2013
2014
$ 48,149
$ 34,691
(422 )
451
4,425
1,851
1,574
527
(5,597 )
(3,979 )
(14,311 )
(4,768 )
$ 34,691
$ 27,900
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 8.
Premises, Equipment, and Leases
Premises and Equipment
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,
2014
$ 19,166
50,729
38,103
107,998
52,154
$ 55,844
2013
$ 19,884
54,292
36,983
111,159
50,043
$ 61,116
Certain long-term investments in land and buildings were evaluated for impairment resulting in write-downs totaling $935 thousand in 2014
and $1.52 million in 2013. Depreciation and amortization expense was $4.41 million in 2014, $4.67 million in 2013, and $4.03 million in 2012.
Leases
The Company enters into various noncancelable operating leases. 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, 2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 and thereafter
$ 675
556
567
511
348
3,046
$ 5,703
Lease expense was $1.06 million in 2014, $1.18 million in 2013, and $1.26 million in 2012. Certain portions of the Company’s leases have
been sublet to third parties for properties not currently being used by the Company. The following schedule presents future minimum lease
payments to be received under noncancelable subleases, with initial or remaining terms in excess of one year, by year, as of December 31,
2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 and thereafter
108
$ 17
—
—
—
—
—
$ 17
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2014, there was no remaining potential cash consideration to be paid in connection with acquisitions
that occurred before 2009.
The Company analyzed the carrying value of goodwill as of October 31, 2014, and determined that no impairment charge was necessary.
Additionally, the Company evaluated the impact of the sale of branches to CresCom and concluded that no impairment charge was necessary.
The analysis performed for 2014 indicated no goodwill impairment at either reporting unit.
The following table presents the activity in goodwill, by reporting unit, in the periods indicated:
(Amounts in thousands)
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
Beginning balance, January 1, 2014
Acquisitions and dispositions, net
Cash consideration paid
Ending balance, December 31, 2014
Community
Insurance
Banking
$ 75,599
21,118
—
$ 96,717
$ 96,717
(176 )
—
$ 96,541
$ 96,541
(6,454 )
1,368
$ 91,455
Services
$ 7,457
—
692
$ 8,149
$ 8,149
324
441
$ 8,914
$ 8,914
—
353
$ 9,267
Total
$ 83,056
21,118
692
$ 104,866
$ 104,866
148
441
$ 105,455
$ 105,455
(6,454 )
1,721
$ 100,722
109
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 11 years. As of December 31, 2014, the remaining lives of core deposit intangible assets
ranged from 1 to 11 years, and the weighted average remaining life was 9 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
2014
Insurance
Community
2013
Insurance
December 31,
Banking
Services
Total
Banking
Services
Total
$ 12,282 $ — $ 12,282 $ 7,940 $ — $ 7,940
(6,669 )
1,271
4,246
(2,651 )
1,595
$ 5,232 $ 1,189 $ 6,421 $ 1,396 $ 1,470 $ 2,866
(7,148 )
5,134
4,246
(2,959 )
1,287
—
—
3,711
(2,522 )
1,189
—
—
3,711
(2,241 )
1,470
(7,148 )
5,134
535
(437 )
98
(6,669 )
1,271
535
(410 )
125
Amortization expense for other intangible assets was $787 thousand in 2014, $729 thousand in 2013, and $804 thousand in 2012. The
following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 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
110
$ 1,119
1,040
828
631
444
2,115
$ 6,177
December 31,
2014
$ 417,729
2013
$ 339,680
353,874
225,196
300,282
557,352
146,326
1,583,030
$ 2,000,759
361,821
237,845
286,165
606,178
119,053
1,611,062
$ 1,950,742
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, 2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 and thereafter
$ 467,766
96,657
49,642
35,086
44,109
10,418
$ 703,678
Time deposits of $250 thousand or more totaled $60.27 million as of December 31, 2014, and $40.82 million as of December 31, 2013. The
following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2014:
(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 advances
Subordinated debt
Other debt
Total borrowings
$ 11,278
14,774
19,344
14,872
$ 60,268
December 31,
2014
$ —
2013
$ 16,000
71,742
50,000
121,742
90,000
15,464
2,535
$ 229,741
68,308
50,000
118,308
150,000
15,464
624
$ 300,396
Short-term borrowings consist of federal funds purchased and retail repurchase agreements, which are typically collateralized with agency
MBSs. There were no federal funds purchased outstanding as of December 31, 2014. 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 0.13% as of December 31, 2014, and 0.38% as
of December 31, 2013. Included in other borrowings is an outstanding balance of $2.00 million on a $15.00 million unsecured, committed line
of credit with an unrelated financial institution. The line of credit carried an interest rate of one-month LIBOR plus 2.00% and matures in April
2015.
111
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other
obligations. The weighted average contractual rate of wholesale repurchase agreements was 3.71% as of December 31, 2014, and
December 31, 2013. The weighted average contractual rate of FHLB borrowings was 4.07% as of December 31, 2014, and 4.12% as of
December 31, 2013. The following schedule presents the contractual maturities of wholesale repurchase agreements and FHLB borrowings, by
year, as of December 31, 2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 and thereafter
Weighted average maturity (in years)
Wholesale
Repurchase
Agreements
$ —
25,000
—
—
25,000
—
$ 50,000
3.08
FHLB
Borrowings
$ —
—
40,000
—
—
50,000
$ 90,000
4.39
Total
$ —
25,000
40,000
—
25,000
50,000
$ 140,000
—
The FHLB may redeem callable advances at quarterly intervals after various lockout periods, which 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. In 2014, the
Company prepaid a $50 million FHLB convertible advance bearing an interest rate of 4.21% that was scheduled to mature in 2017 and prepaid
$10 million of a $50 million FHLB convertible advance bearing an interest rate of 4.15% that is scheduled to mature in 2017. Prepayment
penalties associated with the $60 million in FHLB debt repayments in 2014 totaled $5.01 million. In 2013, the Company prepaid $8.15 million
in wholesale repurchase agreements and $11.47 million in FHLB borrowings, both of which were assumed in the Waccamaw acquisition,
resulting in a $296 thousand gain.
The Company is required to pledge qualifying collateral to secure FHLB advances and letters of credit. As of December 31, 2014, the
Company held two FHLB letters of credit to collateralize public unit deposits totaling $6.18 million. FHLB borrowings were secured by
qualifying loans that totaled $981 thousand as of December 31, 2014, and $1.13 billion as of December 31, 2013. Unused borrowing capacity
with the FHLB, net of FHLB letters of credit, totaled $409.19 million as of December 31, 2014.
Subordinated debt consists of Company-issued junior subordinated debentures (“Debentures”). The Company-issued Debentures totaling
$15.46 million to the Trust in October 2003 with an interest rate of three-month London InterBank Offered Rate (“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 callable quarterly. 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 (“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, 2014,
and December 31, 2013.
112
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. Derivative contracts may be executed only with exchanges or
counterparties approved by the Company’s Asset/Liability Management Committee.
As of December 31, 2014, 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 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 rise and increase when interest rates decline. 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 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.
The Company entered into a fifteen-year, $4.37 million notional interest rate swap agreement in February 2014 and a ten-year, $3.50 million
notional interest rate swap agreement in October 2013. The swap agreements, which are accounted for as fair value hedges, and the loans
hedged by the agreements are recorded at fair value. The loan hedged by the October 2013 swap paid off in 2014. The remaining fair value
hedge was effective as of December 31, 2014.
113
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
2014
2013
December 31,
Notional or
Contractual
Derivative
Derivative
Notional or
Contractual
Derivative
Derivative
Amount
Assets
Liabilities
Amount
Assets
Liabilities
$ 4,363
$ —
$
209
$ 3,453
$
43
$ —
1,391
3,183
4,574
$ 8,937
5
—
5
5
$
—
5
5
214
$
3,677
4,560
8,237
$ 11,690
—
41
41
84
$
41
—
41
41
$
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
2014
2013
2012
Year Ended December 31,
Other income
$ —
$ —
$ —
Other income
Other income
—
—
—
$ —
(169 )
41
(128 )
$ (128 )
—
—
—
$ —
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 457,765 shares of the Company’s common stock as of December 31, 2014,
499,075 shares as of December 31, 2013, and 561,551 shares as of December 31, 2012.
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.
114
Table of Contents
Employee Savings Plan
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 annually. Matching contributions are made in the first quarter following each plan year, and employees
must be employed on the last day of the plan year to be eligible to receive the matching contribution. The cost of the Company’s 100%
matching contributions to qualified deferrals under the 401(k) savings component of the KSOP was $1.58 million in 2014, $1.61 million in
2013, and $1.27 million in 2012. Matching contributions for the 2014 and 2013 plans were made in cash, and matching contributions for the
2012 plan was made in a combination of 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. A third-party administrator manages the health plan. Monthly employer and
employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays claims. As of
December 31, 2014, stop-loss insurance coverage limited the Company’s risk of loss to $125 thousand for individual claims and $4.06 million
aggregate claims. Expenses related to the health plan were $2.88 million in 2014, $3.02 million in 2013, and $2.25 million in 2012.
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 totaled $451 thousand as of December 31, 2014, and $455 thousand as of
December 31, 2013, which are based on the present values of expected payments and estimated life expectancies. Expenses related to the
deferred compensation plan were $60 thousand in each of the three years ended December 31, 2014.
Supplemental Executive Retention Plan
The Company maintains the Supplemental Executive Retention Plan (“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; thus, 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
Amortization of prior service cost
Net periodic cost
115
Year Ended December 31,
2014
$ 106
290
—
187
$ 583
2013
$ 135
246
49
187
$ 617
2012
$ 153
203
45
134
$ 535
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The actuarial benefit plan obligation was $6.63 million as of December 31, 2014, and $5.62 million as of December 31, 2013. The obligation as
of December 31, 2014, included a $651 thousand actuarial loss. The assumed discount rate was decreased to 4.41% as of December 31, 2014,
compared to 5.25% as of December 31, 2013. The following schedule presents the projected benefit payments to be paid under the SERP, by
year, as of December 31, 2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 through 2024
$ 247
247
351
351
348
2,135
Directors’ Supplemental Retirement Plan
The Company maintains the Directors’ Supplemental Retirement Plan (“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; thus, 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,
2014
$ 22
46
—
73
$ 141
2013
$ 26
41
1
90
$ 158
2012
$ 27
39
—
90
$ 156
The actuarial benefit plan obligation was $997 thousand as of December 31, 2014, and $975 thousand as of December 31, 2013. The assumed
discount rate decreased to 4.41% as of December 31, 2014, compared to 5.25% as of December 31, 2013. The following schedule presents the
projected benefit payments to be paid under the Directors’ Plan, by year, as of December 31, 2014:
(Amounts in thousands)
2015
2016
2017
2018
2019
2020 through 2024
116
$ 84
82
113
111
109
579
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 plans obtained through acquisitions. As of December 31, 2014, the 2012
Plan was the only plan available for the issuance of future grants. All plans issued or obtained 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 per 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 under the 2012 Plan
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 determines the vesting period for each grant; however, if no vesting period is specified the vesting occurs in 25%
increments on the first four anniversaries of the grant date.
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,
2014
$ 349
5
2013
$ 574
9
2012
$ 206
6
The Company uses the Black-Scholes valuation model to estimate the fair value of stock options at the grant date. The model incorporates the
following assumptions: the 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. There were no stock options granted in
2014, 2013, or 2012.
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, 2014
Granted
Exercised
Canceled
Outstanding, December 31, 2014
Exercisable, December 31, 2014
Option
Shares
374,829
—
3,854
44,953
326,022
326,022
Weighted Average
Exercise Price
Per Share
Weighted Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
20.48
—
12.19
20.77
20.54
20.54
$
$
$
117
4.6
4.6
$
$
425
425
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The aggregate intrinsic value of options exercised was $13 thousand as of December 31, 2014, $22 thousand as of December 31, 2013, and $16
thousand as of December 31, 2012.
As of December 31, 2014, there was no unrecognized compensation expense related to nonvested stock options. The actual compensation cost
recognized will differ from this estimate due to various items, including new grants and changes in estimated forfeitures.
Restricted Stock Awards
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, 2014
Granted
Vested
Canceled
Nonvested, December 31, 2014
Weighted
Average
Grant-
Date
Fair Value
$ 15.09
—
14.47
—
$ 16.24
Shares
2,600
—
1,700
—
900
As of December 31, 2014, unrecognized compensation cost related to nonvested restricted stock awards was $6 thousand with an expected
weighted average recognition period of 0.35 years. The actual compensation cost recognized will differ from this estimate due to various items,
including new awards granted and changes in estimated forfeitures.
Performance Stock Awards
Performance stock awards represent shares potentially issuable in the future. The fair values of performance stock awards are 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, 2014
Granted
Vested
Canceled
Nonvested, December 31, 2014
Weighted
Average
Grant-
Date
Fair Value
$ 15.78
—
15.78
14.87
$ 15.79
Shares
36,934
—
12,304
1,728
22,902
As of December 31, 2014, unrecognized compensation cost related to nonvested performance stock awards was $40 thousand with an expected
weighted average recognition period of 0.20 years. The actual compensation cost recognized will differ from this estimate due to various items,
including new awards granted, changes in estimated forfeitures, and resolution of performance contingencies.
118
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)
Year Ended December 31,
2013
2014
2012
$ 429
3,926
$ 4,355
$ 411
4,824
$ 5,235
$ 2,459
4,283
$ 6,742
(1) Other components of other operating income that do not exceed 1% of total income.
Miscellaneous income in 2012 included a $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
ATM processing expenses
OREO expense and net loss
Telephone and data communications
Office supplies
Professional fees
Advertising and public relations
Premises and equipment write-downs
Other
Total other operating expense
(1)
Year Ended December 31,
2013
2012
2014
$ 3,856
2,102
2,094
1,715
1,514
1,436
1,001
935
7,589
$ 22,242
$ 3,157
1,605
2,037
1,707
1,472
2,564
1,686
1,520
7,500
$ 23,248
$ 3,736
1,483
1,893
1,548
1,688
1,912
1,421
—
7,509
$ 21,190
(1) Other components of other operating income that do not exceed 1% of total income.
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 expense (benefit):
Federal
State
Total deferred tax expense (benefit)
Total income tax expense
Year Ended December 31,
2013
2012
2014
$ 7,234
1,325
8,559
2,971
794
3,765
$ 12,324
$ 12,819
1,743
14,562
$ 13,733
1,291
15,024
(3,136 )
(518 )
(3,654 )
$ 10,908
(1,501 )
605
(896 )
$ 14,128
119
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,
2014
2013
$ 7,519
2,560
4,477
5,343
6,582
7,584
4,421
—
6,427
44,913
12,548
2,453
2,007
442
17,450
$ 27,463
$ 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
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 available tax credits. Permanent differences are income and expense items excluded by law in the calculation of
taxable income. The Company’s most significant permanent differences 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 resulting from:
Tax-exempt interest
State income taxes, net of federal benefit
Other, net
Effective tax rate
120
Year Ended December 31,
2013
2014
2012
35.00 %
35.00 %
35.00 %
(4.35 )
2.66
(0.72 )
(5.14 )
2.35
(0.33 )
(4.16 )
2.35
(0.11 )
32.59 %
31.88 %
33.08 %
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 AOCI, net of tax, by component for the periods indicated:
(Amounts in thousands)
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
Beginning balance, January 1, 2014
Other comprehensive gain (loss) before reclassifications
Reclassified from AOCI
Net comprehensive gain (loss)
Ending balance, December 31, 2014
Unrealized Gains (Losses)
on Available-for-Sale
Securities
$
$
$
$
$
$
(5,741 )
5,743
(285 )
5,458
(283 )
(283 )
(13,406 )
49
(13,357 )
(13,640 )
(13,640 )
10,697
(1,323 )
9,374
(4,266 )
Employee
Benefit Plan
$ (1,587 )
212
(167 )
45
$ (1,542 )
$ (1,542 )
647
(205 )
442
$ (1,100 )
$ (1,100 )
(77 )
(162 )
(239 )
$ (1,339 )
Total
$ (7,328 )
5,955
(452 )
5,503
$ (1,825 )
$ (1,825 )
(12,759 )
(156 )
(12,915 )
$ (14,740 )
$ (14,740 )
10,620
(1,485 )
9,135
$ (5,605 )
The following table presents reclassifications out of AOCI by component in the periods indicated:
(Amounts in thousands)
Available-for-sale securities
(Losses) gains realized in net income
Credit-related OTTI recognized in net
income
Income tax effect
Employee benefit plans
Amortization of prior service cost
Amortization of gains
Income tax effect
Reclassified from AOCI, net of tax
Year Ended December 31,
2014
2013
2012
Income Statement
Line Item Affected
$ (1,385 ) $ 399 $ 483 Net (loss) gain on sale of securities
(737 )
(2,122 )
(799 )
(1,323 )
(320 )
79
30
49
(942 ) Net impairment losses recognized in earnings
(459 ) Income before taxes
(174 ) Income tax expense (benefit)
(285 ) Net income
(260 )
—
(260 )
(98 )
(162 )
(223 ) (1)
(45 ) (1)
(268 ) Income before taxes
(101 ) Income tax expense (benefit)
(167 ) Net income
$ (1,485 ) $ (156 ) $ (452 ) Net income
(277 )
(50 )
(327 )
(122 )
(205 )
(1) Amortization is included in net periodic pension cost. See Note 13, “Employee Benefit Plans.”
121
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 under the valuation hierarchy, is presented in the following discussion. The fair value hierarchy ranks 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 might 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.
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 values of Level 3
securities are determined by applying proper 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 about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on
122
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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. Loans related to fair value hedges are recorded at fair value on a recurring basis.
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 is 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.
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:
December 31, 2014
(Amounts in thousands)
Available-for-sale securities:
U.S. Agency securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Agency MBS
Equity securities
Total available-for-sale securities
Fair value loans
Deferred compensation assets
Derivative assets
Forward sale loan commitments
Total derivative assets
Deferred compensation liabilities
Derivative liabilities
Interest rate swaps
IRLCs
Total derivative liabilities
Total
Fair Value
$ 33,598
138,915
46,137
5,109
102,119
239
$ 326,117
$ 3,406
$ 3,380
Fair Value Measurements Using
Level 2
Level 1
Level 3
$ —
—
—
—
—
221
$ 221
$ —
$ 3,380
$ 33,598
138,915
46,137
5,109
102,119
18
$ 325,896
$ 3,406
$ —
$ —
—
—
—
—
—
$ —
$ —
$ —
5
$
$
5
$ 3,380
$ —
$ —
$ 3,380
5
$
$
5
$ —
$ —
$ —
$ —
$
$
209
5
214
$ —
—
$ —
$
$
209
5
214
$ —
—
$ —
123
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(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
Fair value loans
Deferred compensation assets
Derivatives assets
Interest rate swaps
Forward sale loan commitments
Total derivative assets
Deferred compensation liabilities
Derivative liabilities
IRLCs
Total derivative liabilities
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
$ 4,404
$ 4,200
$ —
—
—
—
—
—
251
$ 251
$ —
$ 4,200
$ 9,013
144,280
46,234
4,871
300,386
9,789
4,996
$ 519,569
$ 4,404
$ —
$
43
41
$
84
$ 4,200
$ —
—
$ —
$ 4,200
$
43
41
$
84
$ —
$ —
—
—
—
—
—
—
$ —
$ —
$ —
$ —
—
$ —
$ —
$
$
41
41
$ —
$ —
$
$
41
41
$ —
$ —
There were no changes in valuation techniques during the years ended December 31, 2014 or 2013. 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. There were no transfers
into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2014 or 2013.
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 help management identify potential credit impairment and determine 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.
124
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. 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. Impaired loans that do not meet
certain 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 that 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.
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
$ 6,480
5,462
5,247
Total
Fair
Value
$ 8,935
7,180
6,433
December 31, 2014
Fair Value Measurements Using
Level 1
—
—
—
Level 2
—
—
—
Level 3
$ 6,480
5,462
5,247
December 31, 2013
Fair Value Measurements Using
Level 1
—
—
—
Level 2
—
—
—
Level 3
$ 8,935
7,180
6,433
The following table presents quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs in
the periods indicated:
Impaired loans
OREO, not covered
OREO, covered
Valuation Technique
Discounted appraisals
Discounted appraisals
Discounted appraisals
(1)
(1)
(1)
Unobservable Input
Appraisal adjustments
Appraisal adjustments
Appraisal adjustments
Range (Weighted Average)
December 31, 2014
December 31, 2013
(2)
(2)
(2)
1% to 33% (22%) 6% to 100% (47%)
10% to 47% (26%) 0% to 65% (34%)
10% to 52% (44%) 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.
125
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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 available in the market for instruments with similar characteristics and maturities.
FHLB and Other Borrowings . FHLB and other borrowings are reported at fair value using discounted future cash flows that apply interest
rates 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. The Company
believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments 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. 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
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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 borrowings
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 borrowings
Derivative financial liabilities
Deferred compensation liabilities
Carrying
Amount
Fair Value
Level 1
Fair Value Measurements Using
Level 2
Level 3
December 31, 2014
$ 237,660
326,117
57,948
1,792
1,669,189
27,900
6,315
5
3,380
$ 417,729
353,874
525,478
703,678
121,742
1,668
107,999
214
3,380
$ 237,660
326,117
57,889
1,790
1,738,553
18,040
6,315
5
3,380
$ 417,729
353,874
525,478
704,590
123,114
1,668
116,599
214
3,380
$ 237,660
221
—
—
—
—
—
—
3,380
$ —
—
—
—
—
—
—
—
3,380
$ —
325,896
57,889
1,790
3,406
—
6,315
5
—
$ 417,729
353,874
525,478
704,590
123,114
1,668
116,599
214
—
$
—
—
—
—
1,735,147
18,040
—
—
—
$
—
—
—
—
—
—
—
—
—
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
4,404
—
7,521
84
—
$ 339,680
361,821
524,010
728,999
121,320
2,169
178,031
41
—
$
—
—
—
—
1,651,026
34,691
—
—
—
$
—
—
—
—
—
—
—
—
—
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
127
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 19. Related Party Transactions
The Company is involved in certain transactions with related parties in the normal course of business. Related parties include directors and
executive officers and the immediate family members, business interests, and affiliates of such directors and officers. 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 deposit and loan activity with related parties in the
periods indicated:
(Amounts in thousands)
Beginning balance, January 1, 2012
Increase in accounts, including new accounts
Decrease in accounts, including closed accounts
Net change
Ending balance, December 31, 2012
Beginning balance, January 1, 2013
Increase in accounts, including new accounts
Decrease in accounts, including closed accounts
Net change
Ending balance, December 31, 2013
Beginning balance, January 1, 2014
Increase in accounts, including new accounts
Decrease in accounts, including closed accounts
Net change
Ending balance, December 31, 2014
Deposits
Loans
$ 3,837
311
(1,559 )
(1,248 )
$ 2,589
$ 2,589
907
(574 )
333
$ 2,922
$ 2,922
1,321
(423 )
898
$ 3,820
$ 18,406
2,580
(4,369 )
(1,789 )
$ 16,617
$ 16,617
2,037
(1,473 )
564
$ 17,181
$ 17,181
6,123
(478 )
5,645
$ 22,826
Changes in the composition of the Company’s subsidiary board members and executive officers resulted in a net increase in deposits of $481
thousand in 2014, $103 thousand in 2013, and $166 thousand in 2012. Changes in the composition of the Company’s subsidiary board
members and executive officers resulted in a net increase in loans of $5.47 million in 2014 and decrease in loans of $613 thousand in 2013 and
$2.79 million in 2012.
The Company’s other operating expense includes certain expense associated with related parties. Legal fees paid to related parties totaled $27
thousand in 2014, $57 thousand in 2013, and $63 thousand in 2012. Lease expense paid to related parties totaled $92 thousand in 2014, $134
thousand in 2013, and $171 thousand in 2012.
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
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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,
2014
2013
$ 236,471
1,391
3,581
$ 241,443
326
$
$ 216,179
3,677
4,193
$ 224,049
326
$
The Company held letters of credit with the FHLB totaling $6.18 million as of December 31, 2014. The FHLB letters of credit provide an
attractive alternative to pledging securities for public unit deposits.
The Company issued $15.46 million of trust preferred securities in a private placement through the Trust. The Company has committed to
irrevocably and unconditionally guarantee the following payments or distributions to holders of the trust preferred securities to the extent the
Trust has not made such payments or distributions and the Company has the funds available: accrued and unpaid distributions, the redemption
price, and, 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, 2014, the Company and the
Bank continued to meet all capital adequacy requirements. As of December 31, 2014, 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, 2014
For Capital
Adequacy
Purposes
Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
$ 284,999
251,256
17.68 % $ 128,962
127,761
15.73 %
N/A
8.00 %
8.00 % $ 159,701
N/A
10.00 %
264,838
231,286
16.43 %
14.48 %
64,481
63,881
4.00 %
4.00 %
N/A
95,821
N/A
6.00 %
264,838
231,286
10.12 %
8.87 %
104,679
104,330
4.00 %
4.00 %
N/A
130,412
N/A
5.00 %
Actual
Amount Ratio
December 31, 2013
For Capital
Adequacy
Purposes
Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
$ 270,636
236,699
16.44 % $ 131,694
130,141
14.55 %
8.00 %
N/A
8.00 % $ 162,676
N/A
10.00 %
250,012
216,314
15.19 %
13.30 %
65,847
65,070
4.00 %
4.00 %
N/A
97,606
N/A
6.00 %
250,012
216,314
9.95 %
8.63 %
100,489
100,219
4.00 %
4.00 %
N/A
125,274
N/A
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 $200.00
million as of December 31, 2014, and $201.92 million as of December 31, 2013, 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,
2014
2013
$
21,646
8,172
334,155
5,100
$ 369,073
$
2,235
15,464
17,699
15,151
20,500
215,873
140,014
(35,751 )
(4,413 )
351,374
$ 369,073
$
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
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,
2014
$ 14,148
515
(1,793 )
511
12,109
25,490
910
$ 24,580
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
(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
Loss (gain) on sale of securities
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Increase in other operating activities
Net cash provided by operating activities
Investing activities
Proceeds from sales of securities available-for-sale
Payments to acquire securities available-for-sale
Investment in subsidiary
Net cash provided by (used in) investing activities
Financing activities
Proceeds from other borrowings
Proceeds from stock options exercised
Payments for repurchase of treasury stock
Payments of common dividends
Payments of preferred dividends
Proceeds from other financing activities
Net cash used in financing activities
Net increase (decrease) 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,
2013
2014
2012
$ 25,490
$ 23,312
$ 28,577
(12,109 )
2
4,624
(347 )
(65 )
17,595
5,030
—
(2,000 )
3,030
2,000
89
(2,168 )
(9,200 )
(910 )
338
(9,851 )
10,774
10,872
$ 21,646
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
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 (recovery of) 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, 2014
Third
Second
Quarter
Quarter
Fourth
Quarter
$
26,083
4,058
22,025
1,793
20,232
7,189
45
19,180
8,286
2,561
5,725
228
5,497
0.30
0.29
0.12
18,423,123
19,506,647
$
$
$
26,093
4,025
22,068
1,279
20,789
7,663
(59 )
18,163
10,230
3,223
7,007
227
6,780
0.37
0.36
0.12
18,395,996
19,457,237
$
$
$
25,751
3,736
22,015
(2,439 )
24,454
7,347
320
21,469
10,652
3,609
7,043
228
6,815
0.37
0.36
0.13
18,402,764
19,466,126
$
$
$
28,181
3,471
24,710
(488 )
25,198
9,189
(1,691 )
24,050
8,646
2,931
5,715
227
5,488
0.30
0.29
0.13
18,403,959
19,482,000
$
$
First
Quarter
Year Ended December 31, 2013
Third
Quarter
Second
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
$
$
133
$
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
$
$
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 the accompanying consolidated balance sheets of First Community Bancshares, Inc. and Subsidiaries (the “Company”) as of
December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity
and cash flows for each of the years in the three-year period ended December 31, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2014 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, 2014, 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 3, 2015
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 3, 2015
134
Table of Contents
- Ma nagement’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,
2014.
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, 2014. 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,
2014, appears hereafter in Item 8 of this Annual Report on Form 10-K.
Dated this 3 day of March, 2015.
rd
/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 o f 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, 2014, 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, 2014, 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, 2014, and our report, dated March 3, 2015
expressed an unqualified opinion on those consolidated financial statements.
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 3, 2015
136
Table of Contents
Ite m 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Ite m 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 under the
Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2014, 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
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, 2014, 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, 2014, 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, 2014, is included in Item 8, “Report of Independent Registered
Public Accounting Firm,” of this report.
It em 9B.
Other Information.
None.
137
Table of Contents
PART III
I tem 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 28, 2015 (“2015 Annual Meeting”). The Proxy Statement will be filed with the SEC prior to the 2015 Annual Meeting. The
following list provides the heading under which the required information is incorporated by reference in our Proxy Statement for the 2015
Annual Meeting:
•
•
•
Information regarding directors and executive officers is included in “Proposal 1: Election of Directors,” “Nominees for the Class of
2018,” “Continuing Incumbent Directors,” “Non-Director Executive Officers,” 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 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 officers.
Since the disclosure presented in our Proxy Statement filed with the SEC on March 14, 2014, for the Annual Meeting of Stockholders held in
2014, 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
Robert L. Buzzo
Vice President and Secretary, First Community Bancshares, Inc.;
President Emeritus, First Community Bank
Samuel D. Campbell
Attorney at Law
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
Richard H. Jarrell
Businessman
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
Gary R. Mills
President, First Community Bancshares, Inc.; Chief Executive
Officer, First Community Bank
Martyn A. Pell
President, First Community Bank
M. Adam Sarver
Member/Co-Manager, Main Street Builders, LLC, Clover Leaf
Properties, LLC, and Eastern Door & Glass, LLC; Principal,
Melrose Enterprises, LTD
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
139
Table of Contents
It em 11.
Executive Compensation.
Information regarding executive compensation is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting under the
headings “Board Committees,” “Compensation Discussion and Analysis,” and “Director Compensation.”
It em 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, 2014:
Number of securities
to be issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
48,035
$
20.54
523,010
(3)
277,987
326,022
20.54
—
523,010
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 are 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 2015 Annual Meeting under the heading “Information on Stock Ownership.”
Ite m 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 2015 Annual Meeting under the headings “Corporate Governance” and “Related Person Transactions.”
It em 14.
Principal Accounting Fees and Services.
Information regarding principal accounting fees and services is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting
under the heading “Independent Registered Public Accounting Firm.”
140
Table of Contents
Ite m 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, 2014 and 2013.
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014, 2013, and 2012.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012.
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.
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Purchase and Assumption Agreement between First Community Bank and CresCom Bank dated August 6, 2014. (35)
Purchase and Assumption Agreement between Bank of America, National Association and First Community Bank dated June
9, 2014. (36)
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**
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)
10.5**
First Community Bancshares, Inc. Split Dollar Plan and Agreement. (14)
141
Table of Contents
Exhibit
No.
10.6**
10.7**
10.9**
10.10**
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*
Exhibit
First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated. (15)
First Community Bancshares, Inc. Nonqualified Supplemental Cash or Deferred Retirement Plan, as amended and restated.
(16)
Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors, and Certain Executive
Officers. (17)
Form of Indemnification Agreement between First Community Bank, its Directors, and Certain Executive Officers. (17)
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.
142
Table of Contents
Exhibit
No.
Exhibit
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 #
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.
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Table of Contents
(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.
(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.
(35) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 6, 2014, filed on August 7, 2014.
(36) Incorporated by reference from Exhibit 99.3 of the Current Report on Form 8-K/A dated June 9, 2014, filed on June 10, 2014.
144
Table of Contents
SI GNATURES
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 3 day of March, 2015.
rd
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
/s/ William P. Stafford
William P. Stafford
Signature
Title
Date
Chairman and Chief Executive Officer
March 3, 2015
Chief Financial Officer
March 3, 2015
Director
Director
Director
Director
Director
145
March 3, 2015
March 3, 2015
March 3, 2015
March 3, 2015
March 3, 2015
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 3, 2015, 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 2014 Annual Report on Form 10-K.
Exhibit 23.1
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 3, 2015
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 3, 2015
/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 3, 2015
/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
The undersigned certify, to their 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:
1. The Annual Report on Form 10-K of First Community Bancshares, Inc. (the “Company”) for the period ended December 31, 2014 (the
“Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 3, 2015
By: /s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
By: /s/ David D. Brown
David D. Brown
Chief Financial Officer