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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, 2015
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)
55-0694814
(I.R.S. Employer
Identification No.)
P.O. Box 989
Bluefield, Virginia 24605-0989
(Address of principal executive offices) (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. ¨
Yes x
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. ¨
Yes x
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. x
Yes ¨
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). x
Yes ¨
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. ¨
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
¨
x
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨
Yes x
No
As of June 30, 2015, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $259.62 million.
As of February 24, 2016, there were 17,820,090 shares outstanding of the registrant’s Common Stock, $1.00 par value.
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 26, 2016, are incorporated by reference in Part III of this Form
10-K.
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FIRST COMMUNITY BANCSHARES, INC.
2015 FORM 10-K
INDEX
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Business.
Risk Factors.
Unresolved Staff Comments.
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.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Item 15.
Exhibits, Financial Statement Schedules.
Signatures
PART IV
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28
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32
33
64
66
141
141
141
142
144
144
144
144
145
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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 name First Community Insurance Services (“FCIS”) 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, 2015, we
operated 58 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, 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, 2015, we had 673 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 1-800-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
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generally not for the protection of stockholders or creditors. Banking agencies have broad enforcement powers over banks and financial holding companies to
impose substantial fines and penalties for violations of laws and regulations.
The following discussion summarizes certain laws, rules, and regulations that affect our Company. These summaries are not intended to be complete and are
qualified in their entirety by reference to the applicable statute or regulation. A change in laws, rules, and regulations may have a material effect on our Company.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) of 2010 implemented far-reaching changes across the financial regulatory
landscape in the U.S, 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
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increases the authority of the Federal Reserve to examine bank holding companies, such as the Company, and their non-bank subsidiaries.
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
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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 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
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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 Volcker Rule
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.
Capital Adequacy Requirements
The current risk-based capital guidelines that apply to the Company and the Bank, parts of which are currently being phased in, are based on the December 2010
framework, known as “Basel III,” for strengthening international capital standards by the International Basel Committee on Banking Supervision (“Basel
Committee”), a committee of central banks and bank supervisors, implemented by the Federal Reserve. Prior to January 1, 2015, the risk-based capital guidelines
that applied to the Company and the Bank (the “general risk-based capital rules”) were based on the 1988 capital accord, known as “Basel I,” of the Basel
Committee.
Bank holding companies are subject to consolidated regulatory capital requirements administered by the Federal Reserve. These rules are intended to ensure that
banking organizations have adequate capital given the risk levels of assets and off-balance sheet obligations. The Federal banking agencies’ general risk-based
capital rules
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applied through December 31, 2014. Under these rules, bank holding companies and banks were required to maintain minimum ratios for Tier 1 capital and total
capital to risk-weighted assets (including certain off-balance sheet items, such as loan commitments and letters of credit). For purposes of calculating the ratios, a
banking organization’s assets and some of its specified off-balance sheet commitments and obligations were assigned to various risk categories.
The guidelines classified capital in one of two tiers, depending on type:
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Tier 1 capital: Tier 1 capital included common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in equity
accounts of consolidated subsidiaries (and, under existing standards, a limited amount of qualifying trust preferred securities and qualifying cumulative
perpetual preferred stock at the holding company level), less goodwill, most intangible assets, certain accumulated other comprehensive income items and
certain other assets.
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Tier 2 capital: Tier 2 capital included, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying
mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.
Under the general risk-based capital rules, bank holding companies were required to 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%. Bank holding companies were also required to maintain a leverage ratio of Tier 1 capital to average total consolidated assets. Certain
highly rated bank holding companies could maintain a minimum leverage ratio of 3.0%, but other bank holding companies were required to maintain a leverage
ratio of 4.0% or more, depending on their condition.
In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations and
implementing certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements that applied to bank
holding companies and depository institutions, including the Company and the Bank, compared to the general 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 replaced the existing risk-weighting approach,
which was derived from the Basel I capital accords, 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 implemented 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 became 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 to capital as compared to prior regulations.
Under the Basel III Capital Rules, the following initial minimum capital ratios became 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
4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”)
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The Basel III Capital Rules also 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) face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The
implementation of the capital conservation buffer began 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).
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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 also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage
servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments
in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories, in the
aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began 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).
Under the general risk-based capital rules, the effects of accumulated other comprehensive income (“AOCI”) items included in capital were 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 made 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.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the 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.
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Management believes that, as of December 31, 2015, 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. 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.”
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
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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.
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.
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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 other factors, such as requirements to maintain
capital above regulatory guidelines. The Virginia Bureau and the FRB 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. 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. Under the Basel III Capital Rules, the Bank must meet the following initial minimum capital ratios that became effective as of January 1, 2015:
•
•
•
•
4.5% CET1 to risk-weighted assets
6.0% Tier 1 capital to risk-weighted assets
8.0% Total capital to risk-weighted assets
4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”)
See “Capital Adequacy Requirements” in the “First Community Bancshares, Inc.” section above.
Prompt Corrective Action
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. Under the rules in effect through December 31, 2014, a well-capitalized institution had 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.
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The current capital measures, which reflect changes under the Basel III Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1
capital ratio, the Tier 1 capital ratio, and the leverage ratio. A well-capitalized institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital
ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written
directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure. An adequately capitalized institution has a total
risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0%
or higher, 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 CET1
capital ratio less than 4.5%, a Tier 1 risk-based capital ratio less than 6.0%, 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 CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0%, 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, 2015.
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.
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
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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 $139 thousand in 2015 and $147 thousand in 2014. The Bank’s FDIC deposit insurance assessments and premiums totaled $1.42 million in 2015 and $1.59
million in 2014.
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 “Prompt Corrective Action” in the
“Bank” section above.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple
layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer
credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement
indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery,
resumption, and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also
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expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the
institution or its critical service providers fall victim to this type of cyber-attack. If the Bank fails to observe the regulatory guidance, the Bank could be subject to
various regulatory sanctions, including financial penalties.
In the ordinary course of business, the Bank relies on electronic communications and information systems to conduct our operations and to store sensitive data. The
Bank employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. The Bank
employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected
advanced persistent threats. Notwithstanding the strength of the Bank’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and
increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, the Bank has not experienced a significant compromise,
significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of its customers and third-party service providers are
under constant threat and it is possible that the Bank could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are
expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of
Internet banking, mobile banking, and other technology-based products and services by the Bank and its customers. See Item 1A, “Risk Factors,” for a further
discussion of risks related to cybersecurity.
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 Mortgage Reform and Anti-Predatory
Lending Act, 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.
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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 based on the USA 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, 2015.
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.
Office of Foreign Assets Control Regulation
The Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes,
under authority of various laws, including designated foreign countries, nationals, and others. OFAC publishes lists of specially designated targets and countries.
We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial
transactions with them, and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal, financial, and
reputational consequences, including causing applicable bank regulatory authorities to not approve merger or acquisition transactions when regulatory approval is
required or to prohibit such transactions even if approval is not required.
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Item 1A. Risk Factors.
The risk factors described below discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of
operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our
future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our
common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors
and the additional information included in, or incorporated by reference to, this report before making an investment decision. There may be risks and uncertainties
that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be
an exhaustive list of all risks we face. All forward-looking statements are qualified by the risks described below.
Risks Related to Our Business
The current economic environment poses significant challenges.
The U.S. economy faced a severe economic crisis from December 2007 through June 2009 and experienced the worst economic downturn since the Great
Depression of the 1930s. Although the domestic economy continued a modest recovery in 2015, 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. In addition, oil price volatility, the
level of U.S. debt, and global economic conditions have had a destabilizing effect on financial markets. 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 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 economic 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
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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 $22.79 million as of December 31, 2015, $19.92 million as of December 31, 2014, and $27.79 million as of December 31,
2013. We incurred net charge-offs of $2.16 million in 2015, $2.89 million in 2014, and $10.35 million in 2013. Our allowance for loan losses was $20.23 million as
of December 31, 2015, $20.23 million as of December 31, 2014, and $24.08 million as of December 31, 2013. Our provision for loan losses charged to operations
was $2.19 million in 2015, $145 thousand in 2014, and $8.21 million in 2013. A provision recovery was realized for purchased credit impaired (“PCI”) loans of $4
thousand in 2015, which included a $25 thousand provision charged to operations and $29 thousand was recorded as a benefit through the FDIC indemnification
asset. A provision recovery was realized for PCI loans of $697 thousand in 2014, which included a recovery of $275 thousand in the provision charged to
operations and $422 thousand was recorded as a benefit 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. As of
December 31, 2015, the allowance attributed to non-PCI loans as a percentage of non-covered nonperforming loans was 112.61% and the allowance attributed to
non-PCI loans as a percentage of total non-covered loans was 1.24%. 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, 2015, our commercial business loans totaled $93.02 million, or 5.45% of our total loan portfolio, and our commercial real
estate loans totaled $775.40 million, or 45.44% of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $6.90 million
and largest outstanding commercial real estate loan was $11.31 million.
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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, 2015, our
commercial construction loans totaled $55.20 million, or 3.23% of our total loan portfolio. As of the same date, our largest outstanding commercial construction
loan was $6.10 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, 2015, the fair value of securities
available for sale was $366.17 million and the aggregate unrealized loss on those securities was $10.57 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 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 no other-than-temporary impairment (“OTTI”) charges in our debt securities
portfolio in 2015.
Factors we consider in our analysis of equity securities include: our intent to sell the security before recovery of the cost; the severity and duration of the decline in
fair value below cost; the financial condition and near-term prospects of the issuer; and whether the decline appears to be related to issuer conditions, general
market, or industry conditions. We recognized no OTTI charges in our equity securities portfolio in 2015.
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
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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 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 our common stock. Consequently, the inability to receive dividends
from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.
We face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to our offerings.
We primarily conduct our operations in Virginia, West Virginia, North Carolina, and Tennessee. We may be unsuccessful against current and future competitors in
regions that offer products and services similar to those we offer; therefore, increased competition may result in reduced loan originations and deposits. Our
competitors include savings associations, national banks, regional banks, and community banks. We also face competition from finance companies, brokerage
firms, insurance companies, credit unions, mortgage banks, and other financial intermediaries. In particular, our competitors include state and national banks and
major financial companies with resources that may provide a marketplace advantage by expanding and maintaining numerous banking locations and mounting
extensive promotional and advertising campaigns.
Financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have higher lending limits that enable them to
serve the credit needs of larger clients and, to the extent they are more diversified than us, may be able to offer the same products and services at more competitive
rates and prices. If we are unable to attract and retain banking clients, our loan and deposit growth, general business, financial condition, and prospects may be
negatively affected.
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Potential acquisitions may disrupt our business and dilute stockholder value.
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.
We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and
financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions
involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over
the acquired company’s book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to
realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of
operations may be adversely affected.
We may engage in FDIC-assisted transactions.
We may acquire assets and liabilities of failed financial institutions that are in FDIC receivership. FDIC-assisted acquisitions include risks inherent in acquiring
other banks, businesses, and banking branches, as well as risks specific to each transaction. FDIC-assisted acquisitions generally provide limited diligence and term
negotiation and may require additional resources, expenses, and time to service acquired loans, including PCI loans, integrate personnel and operating systems, and
establish processes to service acquired assets. Acquisitions may also require us to raise additional capital that could have a dilutive effect on existing stockholders.
If we are unable to manage these risks, FDIC-assisted acquisitions could have a material adverse effect on our business, financial condition, and results of
operations.
Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and interpretation, and
contractual term limitations.
We receive benefits under loss share agreements 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 4.87% of our
total loans held for investment as of December 31, 2015, compared to 7.24% as of December 31, 2014. We are subject to
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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 and for which 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, depend 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.
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.
Our goodwill may be determined to be impaired.
As of December 31, 2015, our carrying balance of goodwill was $100.49 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
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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 2015.
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.
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
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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.
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, includes 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
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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.
Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to
misappropriate passwords, bank account information or other personal information, or to introduce viruses or other malware through “Trojan horse” programs to
our information systems and/or our customers’ computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and
authentication technology, and customer and employee education, such cyber-attacks against us or our merchants and our third party service providers remain a
serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber-crime are complex and continue to evolve. More generally, publicized
information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of
conducting commercial transactions.
Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk
of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or
disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because
attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are
constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be
detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is
virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption of our information systems or those related to our
customers, merchants and our third party vendors, including as a result of cyber-attacks, could (1) disrupt the proper functioning of our networks and systems and
therefore our operations and/or those of certain of our customers; (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of
confidential, sensitive or otherwise valuable information of ours or our customers; (3) result in a violation of applicable privacy, data breach and other laws,
subjecting us to additional regulatory scrutiny and expose us to civil litigation, governmental fines and possible financial liability; (4) require significant
management attention and resources to remedy the damages that result; or (5) harm our reputation or cause a decrease in the number of customers who choose to do
business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, 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 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
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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.
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.
General market fluctuations; industry factors; political conditions; and general economic conditions and events, such as economic slowdowns, recessions, interest
rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger financial services
companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing
buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market
conditions, over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of
these sales, could cause our stock price to fall.
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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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is located at One Community Place, Bluefield, Virginia. The Bank, our community bank subsidiary, provides financial services through
a network of 50 branch locations throughout Virginia, West Virginia, North Carolina, and Tennessee. We have 20 branches in West Virginia, 17 branches in
Virginia, 11 branches in North Carolina, and 2 branches in Tennessee. We own 45 branches and lease the remaining 5 branches. Greenpoint’s, our insurance
subsidiary, headquarters is located in High Point, North Carolina. Greenpoint provides insurances services through a network of 9 offices throughout Virginia,
West Virginia, and North Carolina. We operate 2 insurance offices in North Carolina, 4 offices in West Virginia, and 3 offices in Virginia. We own 1 office, lease 3
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 as of December 31, 2015. A list of all branch and ATM locations can be found on our website at www.fcbinc.com. Information
contained on our website is not part of this report. See Note 8, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of
this report.
Item 3. Legal Proceedings.
We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome
of each of these matters with certainty, we are of the belief that the resolution of these actions should not have a material adverse effect on our financial position,
results of operations, or cash flows.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information, Holders and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol “FCBC”. As of February 24, 2016, there were 2,585 record holders and
17,820,090 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
Year Ended December 31,
Market Price
2015
High
$17.87
18.52
18.56
20.68
Low
$15.01
16.30
16.95
17.30
Cash Dividends per
Common Share
$
0.13
0.13
0.14
0.14
Market Price
2014
High
$17.05
16.85
16.45
16.58
Low
$15.46
13.87
13.53
14.39
$
Cash Dividends per
Common Share
0.12
0.12
0.13
0.13
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. Common stock cash dividends totaled $9.99 million in 2015, $9.20 million in 2014, and $9.48 million in 2013. Cash
dividends paid per common share totaled $0.54 in 2015, $0.50 in 2014, and $0.48 in 2013.
During the first quarter of 2015, the Company notified holders of its 6% Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) of its
intent to redeem all of the outstanding shares. Prior to redemption, holders converted 12,784 shares of Series A Preferred Stock with each share convertible into 69
shares of the Company’s common stock. The Company redeemed the remaining 2,367 shares for $2.37 million along with accrued and unpaid dividends of $9
thousand. As a result of the redemption, there were no shares of Series A Preferred Stock outstanding as of December 31, 2015, compared to 15,151 shares as of
December 31, 2014, and 15,251 shares as of December 31, 2013. Series A Preferred Stock cash dividends totaled $105 thousand in 2015, $910 thousand in 2014,
and $992 thousand in 2013.
Purchases of Equity Securities
We repurchased 1,238,299 shares of our common stock in 2015, 132,773 shares in 2014, and 1,739,601 shares in 2013. 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, 2015
November 1-30, 2015
December 1-31, 2015
Total
Total
Number of
Shares
Purchased
125,899
—
93,674
219,573
29
Average
Price Paid
per Share
$ 17.84
—
19.13
$ 18.39
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
125,899
—
93,674
219,573
1,806,243
1,807,566
1,716,362
Table of Contents
(1)
Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 5,000,000 shares. On August 25, 2015, our Board of Directors
approved changes to our stock repurchase plan to authorize the repurchase and retention of up to 5,000,000 shares of our outstanding common stock, an
increase of 2,000,000 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 3,283,638 shares in treasury as of December 31, 2015.
Stock Performance Graph
The following graph, compiled by SNL Financial LC (“SNL”), compares the cumulative total shareholder return on our common stock for the five-year period
ended December 31, 2015, 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 50 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 that $100 was originally invested on
December 31, 2010, and that all dividends are reinvested.
First Community Bancshares, Inc.
S&P 500 Index
NASDAQ Composite Index
SNL Asset & Regional Peer Group
(1)
Year Ended December 31,
2010
2011
2012
2013
2014
2015
100.00 86.24 113.84 122.72 125.08 145.91
100.00 102.11 118.45 156.82 178.28 180.75
100.00 99.21 116.82 163.75 188.03 201.40
100.00 80.12 87.98 109.61 120.43 140.14
(1)
Includes the following institutions: Access National Corporation; American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; Avenue Financial
Holdings, Inc.; Bear State Financial, Inc.; 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; Colony
Bankcorp, Inc.; Community Bankers Trust Corporation;
30
Table of Contents
CommunityOne Bancorp; Eastern Virginia Bankshares, Inc.; Fidelity Southern Corporation; First Bancorp; First Bancshares, Inc.; First Citizens Bancshares,
Inc.; First Farmers and Merchants Corporation; Hamilton State Bancshares, Inc.; Hampton Roads Bankshares, Inc.; HomeTrust Bancshares, Inc.; Live Oak
Bancshares, Inc.; Middleburg Financial Corporation; Monarch Financial Holdings, Inc.; MVB Financial Corp.; National Bankshares, Inc.; National
Commerce Corporation; NewBridge Bancorp; Paragon Commercial Corporation; Park Sterling Corporation; Peoples Bancorp of North Carolina, Inc.;
Premier Financial Bancorp, Inc.; Seacoast Banking Corporation of Florida; ServisFirst Bancshares, Inc.; SmartFinancial, Inc.; Southeastern Bank Financial
Corporation; Southern BancShares (N.C.), Inc.; Southern First Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.; State Bank Financial
Corporation; Stonegate Bank; Summit Financial Group, Inc.; 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.
31
Table of Contents
Item 6.
Selected Financial Data.
The following table presents our consolidated selected financial data, derived from audited financial statements, as of and for the five years ended December 31,
2015. 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
(1)
Selected Ratios
Return on average assets
Return on average common equity
Average equity to average assets
Dividend payout
Common equity Tier 1 ratio
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Leverage ratio
(2)
2015
2014
Year Ended December 31,
2013
2012
2011
$
438,714
—
1,706,541
20,233
2,462,276
2,520,934
1,873,259
219,370
2,119,259
—
343,017
348,199
$
384,065
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
$
520,388
883
1,710,721
24,077
2,602,514
2,661,602
1,950,742
300,396
2,273,908
15,251
328,606
355,611
$
535,174
6,672
1,724,653
25,770
2,728,867
2,510,931
2,030,175
313,553
2,372,544
17,421
356,323
334,901
$
485,920
5,820
1,396,067
26,205
2,164,789
2,195,639
1,543,467
295,141
1,859,060
18,921
305,729
295,150
$
$
$
96,102
11,349
84,753
2,191
29,530
76,171
11,381
24,540
105
24,435
106,108
15,290
90,818
145
30,003
82,862
12,324
25,490
910
24,580
$
$
109,476
17,834
91,642
8,208
29,771
78,985
10,908
23,312
1,024
22,288
109,656
19,600
90,056
5,678
36,710
78,383
14,128
28,577
1,058
27,519
94,176
22,147
72,029
9,047
35,534
68,915
9,573
20,028
703
19,325
$
1.32
1.31
18.95
0.54
18,531,039
18,727,464
$
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
0.97%
7.07%
13.81%
40.95%
14.54%
15.95%
14.73%
10.62%
0.94%
7.51%
13.13%
37.44%
NA
17.68%
16.43%
10.12%
0.84%
6.57%
13.36%
42.62%
NA
16.44%
15.19%
9.95%
1.10%
8.70%
13.34%
29.89%
NA
16.70%
15.44%
9.96%
0.88%
6.81%
13.44%
37.00%
NA
18.15%
16.89%
11.50%
(1)
(2)
Book value per common share is defined as stockholders’ equity divided by as-converted common shares outstanding.
The common equity Tier 1 ratio became effective on January 1, 2015.
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Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its
subsidiaries as a consolidated entity. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help the reader understand our financial condition, changes in financial condition, and results of operations. This MD&A contains forward-looking
statements and should be read in conjunction with our consolidated financial statements, 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 name First Community Insurance Services
(“FCIS”) 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.
•
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 is highly diversified with a strong commercial and service sector, light manufacturing, education and health services, and
tourism.
•
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 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.
On October 31, 2015, Greenpoint sold one insurance agency that resulted in a net loss of $8 thousand. In connection with the sale, we eliminated $324 thousand of
goodwill and $61 thousand of other intangibles on our consolidated balance sheet.
Insurance Services
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 $6.90 million in 2015, an increase of $344 thousand, or
5.25%, compared to the same period of 2014, which was primarily due to an increase in direct bill property and casualty insurance income and contingency income.
Commission revenue totaled $6.56 million in 2014, an increase of $622 thousand, or 10.48%, compared to the same period of 2013, which was also primarily due
to an increase in direct bill property and casualty insurance income and contingency 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 $742 million as of December 31, 2015, and $712 million as of December 31, 2014. 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. 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
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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
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
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Table of Contents
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 purchased credit impaired (“PCI”) loan pools. PCI loan pools are evaluated separately from non-PCI loans in the determination of the
allowance. See Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.
Business Combinations
The Company may engage in business combinations with other companies. 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 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.
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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. Certain expenses related to covered assets 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 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.
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Performance Overview
Highlights of our results of operations in 2015, and financial condition as of December 31, 2015, include the following:
•
•
Our non-covered loan portfolio increased $56.33 million, or 3.59%, compared to year-end 2014.
We prepaid long-term borrowings of $25 million in keeping with our strategic goal of reducing high cost, wholesale debt.
•
We announced our intent to redeem all outstanding shares of our convertible preferred stock during the first quarter of 2015, resulting in the conversion of
12,784 preferred shares into common stock and the redemption of 2,367 preferred shares for $2.37 million.
•
We repurchased 1,401,622 common shares during the year, including the effect of the preferred share redemption.
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
2015
$24,540
24,435
1.32
1.31
0.97%
7.08%
Year Ended December 31,
2014
$25,490
24,580
1.34
1.31
0.94%
7.51%
2013
$23,312
22,288
1.13
1.11
0.84%
6.57%
Increase
(Decrease)
(950)
$
(145)
(0.02)
—
0.03%
-0.43%
Increase
(Decrease)
2,178
$
2,292
0.21
0.20
0.10%
0.94%
-3.73%
-0.59%
-1.49%
0.00%
3.19%
-5.73%
9.34%
10.28%
18.58%
18.02%
11.90%
14.31%
2015 Compared to 2014
%
Change
2014 Compared to 2013
%
Change
2015 Compared to 2014 . Net income decreased in 2015 primarily due to a decrease in net interest income, an increase in the provision for loan losses, and an
increase in the net amortization related to the FDIC indemnification asset. These changes were offset by a net gain on the sale of securities and a decrease in
Federal Home Loan Bank (“FHLB”) debt prepayment fees.
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 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 a
decrease in net interest income.
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Net Interest Income
Net interest income, our largest contributor to earnings, comprised 74.16% of total net interest and noninterest income in 2015, 75.17% in 2014, and 75.48% in
2013. Net interest income is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. The FTE basis adjusts for the tax benefits of
income from certain tax exempt loans and investments using the federal statutory rate of 35%. We believe this measure to be the preferred industry measurement of
net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest
income performance and to manage the composition of our balance sheet. The following table presents our average consolidated balance sheets, as of the dates
indicated, and the net interest analysis, on a FTE basis, in the periods indicated:
(Amounts in thousands)
Assets
Earning assets
(2)
Loans
Securities available for sale
Securities held to maturity
Interest-bearing deposits
Total earning assets
Other assets
Total assets
Liabilities
Interest-bearing deposits
Demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Borrowings
2015
Interest
(1)
Average
Yield/
(1)
Rate
Average
Balance
Year Ended December 31,
2014
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
2013
Average
Balance
Interest
(1)
Average
Yield/
(1)
Rate
$1,680,021 $87,768
9,575
770
267
2,213,006 $98,380
363,359
70,987
98,639
5.22% $1,744,520 $ 95,707
12,400
410,136
2.64%
267
20,843
1.08%
0.27%
291
98,090
2,273,589 $108,665
4.44%
5.49% $1,699,614 $ 96,768
15,184
543,697
3.02%
54
667
1.28%
0.30%
211
63,566
2,307,544 $112,217
4.78%
5.69%
2.79%
8.10%
0.33%
4.86%
307,928
$2,520,934
334,981
$2,608,570
354,058
$2,661,602
$ 343,036 $
532,221
631,654
1,506,911
203
367
5,308
5,878
0.06% $ 366,932 $
0.07%
0.84%
0.39%
535,256
704,518
1,606,706
206
514
6,588
7,308
0.06% $ 361,979 $
0.10%
0.94%
0.45%
516,247
772,741
1,650,967
240
584
7,999
8,823
0.07%
0.11%
1.04%
0.53%
Federal funds purchased
Retail repurchase agreements
Wholesale repurchase agreements
FHLB advances and other borrowings
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and equity
Net interest income, tax equivalent
Net interest rate spread
Net interest margin
535
71,262
50,000
89,400
211,197
1,718,108
433,936
20,691
2,172,735
348,199
$2,520,934
3
97
1,878
6,004
7,982
15,290
2
68
1,878
3,523
5,471
11,349
0.37%
0.10%
3.76%
3.94%
2.59%
0.66%
892
72,917
50,000
147,504
271,313
1,878,019
367,315
20,617
2,265,951
342,619
$2,608,570
0.34%
0.13%
3.76%
4.07%
2.94%
0.81%
632
69,141
53,118
168,399
291,290
1,942,257
342,919
20,815
2,305,991
355,611
$2,661,602
2
265
1,890
6,854
9,011
17,834
0.32%
0.38%
3.56%
4.07%
3.09%
0.92%
$87,031
$ 93,375
$ 94,383
3.78%
3.93%
39
3.97%
4.11%
3.94%
4.09%
Table of Contents
(1) Fully taxable equivalent (“FTE”) basis based on the federal statutory rate of 35%.
(2) Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.
The following table presents the impact on FTE net interest income resulting from changes in volume (average volume times the prior year’s average rate), rate
(average rate times the prior year’s average volume), and rate/volume (average volume times the change in average rate), in the periods indicated:
:
(2)
(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, 2015 Compared to 2014
Dollar Increase (Decrease) due to
Year Ended
December 31, 2014 Compared to 2013
Dollar Increase (Decrease) due to
Volume
Rate
$(3,541)
(1,413)
642
2
(4,310)
$(4,710)
(1,558)
(42)
(30)
(6,340)
(14)
(3)
(685)
(1)
(2)
—
—
(161)
(705)
—
(22)
—
Rate/
Volume
$ 312
146
(97)
4
365
11
17
110
—
(5)
—
Total
Volume
Rate
Rate/
Volume
Total
$ (7,939)
(2,825)
503
(24)
(10,285)
$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)
(147)
(1,280)
(1)
(29)
—
33
54
(50)
—
(54)
(75)
31
(47)
(1,165)
—
(149)
(61)
(9)
21
(17)
—
19
3
55
28
(1,232)
—
(184)
(133)
(2,365)
(3,070)
(192)
(1,080)
76
209
(2,481)
(3,941)
(282)
(374)
(18)
(1,409)
—
17
(300)
(1,766)
Change in net interest income, tax equivalent
$(1,240)
$(5,260)
$ 156
$ (6,344)
$6,738
$ (4,862)
$ (296)
$ 1,580
(1)
(2)
FTE basis based on the federal statutory rate of 35%.
Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.
The following table reconciles net interest income, as presented in our consolidated statements of income, and net interest income on a FTE basis, in the periods
indicated:
(Amounts in thousands)
Net interest income, GAAP basis
Tax equivalent adjustment
Net interest income, tax equivalent
(1)
2015
$84,753
2,278
$87,031
Year Ended December 31,
2014
$90,818
2,557
$93,375
2013
$91,642
2,741
$94,383
(1)
The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and investments using the federal statutory rate of 35%.
40
Table of Contents
The interest earned and the average yield on loans include accretion income from acquired loan portfolios. The following table presents our average consolidated
balance sheets, as of the dates indicated, and net interest analysis, on a FTE basis excluding the impact of non-cash purchase accounting 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
(3)
(4)
Loans, normalized
Other earning assets
Total earning assets
Total interest-bearing liabilities
Net interest income, tax equivalent
Net interest rate spread
Net interest margin
(4)
2015
Average
Yield/
(1)
Rate
Interest
(1)
$87,768
11,258
4,149
7,109
—
80,659
10,612
91,271
11,349
$79,922
5.22%
4.80%
1.99%
4.12%
0.66%
3.46%
3.61%
Year Ended December 31,
2014
2013
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%
(1)
(2)
(3)
(4)
FTE basis based on the federal statutory rate of 35%.
Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.
Non-recurring discount accretion was enhanced in 2014 as a result of a positive resolution of a sizable credit.
The normalized net interest margin and the normalized yield on loans are non-GAAP financial measures that exclude non-cash loan interest accretion related
to PCI loans.
2015 Compared to 2014 . Net interest income under GAAP decreased $6.07 million, or 6.68%, and tax equivalent net interest income decreased $6.34 million, or
6.79%, in 2015. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted in a 19 basis point decrease in the net
interest rate spread and an 18 basis point decrease in the net interest margin.
PCI loan interest accretion totaled $11.26 million in 2015 and $11.47 million in 2014. Interest accretion income received in cash totaled $4.15 million in 2015 and
$4.41 million in 2014. Accretion income was enhanced in 2014 by non-recurring discount accretion of $2.59 million related to the positive resolution of a sizable
credit. The normalized yield on loans, which excludes non-cash and non-recurring discount accretion, decreased 13 basis points compared to a decrease of 27 basis
points under GAAP. The normalized net interest margin decreased 7 basis points compared to a decrease of 18 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 $60.58 million, or 2.66%, due to a decrease in the loan portfolio and securities available for sale offset by an increase in securities
held to maturity. The yield on earning assets decreased 34 basis points, which was largely due to a 38 basis point decrease in the yield on available for sale
securities and 27 basis point decrease in the yield on loans as a result of the continued low rate environment. During 2015, we continued to purchase short-term
bonds in the held-to-maturity category to provide for the funding necessary to
41
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extinguish certain wholesale borrowings as they come due. Average interest-bearing deposits experienced a slight increase of $549 thousand, or 0.56%. 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, 2015, 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 $159.91
million, or 8.51%, primarily due to the decline in average time deposits and FHLB borrowings. In 2015, we prepaid an additional $25 million of a $50 million
FHLB convertible advance with a May 2017 maturity and 4.15% interest rate. The yield on interest-bearing liabilities decreased 15 basis points due to a 6 basis
point decrease in the rate on interest-bearing deposits and a 35 basis point decrease in the rate on borrowings. Average interest-bearing deposits decreased $99.80
million, or 6.21%, which was driven by a $72.86 million, or 10.34%, decrease in average time deposits, a $23.90 million, or 6.51%, decrease in average interest-
bearing demand deposits, and a $3.04 million, or 0.57%, decrease in average savings deposits, which include money market and savings accounts. Average
borrowings decreased $60.12 million, or 22.16%, largely due to a $58.10 million, or 39.39%, decrease in FHLB and other borrowings.
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.
PCI 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. The normalized yield on loans decreased 31 basis points compared to a decrease of 20 basis points under GAAP. The normalized 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.
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.
Provision for Loan Losses
2015 Compared to 2014 . 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
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Table of Contents
probable losses in the existing loan portfolio. The provision charged to operations increased $2.05 million due to an $889 thousand increase in specific reserves on
loans identified as impaired and the absence of a significant non-recurring recovery related to the positive resolution of a sizable problem credit in 2014. A
recovery of $4 thousand was attributed to the PCI provision, which included a recovery of $29 thousand recorded through the FDIC indemnification asset to reflect
the indemnified portion of the post-acquisition exposure and a provision applied to operations of $25 thousand. See “Allowance for Loan Losses” in the “Financial
Condition” section below.
2014 Compared to 2013 . 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.
Noninterest Income
Noninterest income consists of all revenues not included in interest and fee income related to earning assets. Noninterest income comprised 25.84% of total net
interest and noninterest income in 2015, 24.83% in 2014, and 24.52% in 2013. The following table presents the components of, and changes in, noninterest income
in the periods indicated:
(Amounts in thousands)
Wealth management
Service charges on deposit accounts
Other service charges and fees
Insurance commissions
Net impairment loss
Net gain (loss) on sale of securities
Net FDIC indemnification asset amortization
Net gain on branch divestiture
Other operating income
Noninterest income
2015
$ 2,975
13,717
8,045
6,899
—
144
(6,379)
—
4,129
$29,530
Year Ended December 31,
2014
$ 3,030
13,828
7,581
6,555
(737)
(1,385)
(3,979)
755
4,355
$30,003
2013
$ 3,412
13,558
7,151
5,933
(320)
399
(5,597)
—
5,235
$29,771
2015 Compared to 2014
Increase
(Decrease)
$
% Change
2014 Compared to 2013
Increase
(Decrease)
$
% Change
(55)
(111)
464
344
737
1,529
(2,400)
(755)
(226)
(473)
$
-1.82%
-0.80%
6.12%
5.25%
100.00%
-110.40%
-60.32%
—
-5.19%
-1.58%
(382)
270
430
622
(417)
(1,784)
1,618
755
(880)
232
$
-11.20%
1.99%
6.01%
10.48%
-130.31%
-447.12%
—
—
-16.81%
0.78%
2015 Compared to 2014 . Noninterest income decreased $473 thousand, or 1.58%, in 2015. Wealth management revenues, which include fees and commissions for
trust and investment advisory services, decreased due to a decline in income from the Trust Division. Service charges on deposit accounts and other service charges
and fees increased primarily from increases in debit and credit card income offset by decreases in service charges on demand deposit accounts and nonsufficient fee
income. Insurance commissions increased largely due to an increase in property and casualty premium commissions and contingency profit-sharing revenue
income. We incurred no OTTI charges in 2015 compared to $737 thousand in 2014 related to a non-Agency mortgage-backed security (“MBS”) and certain equity
securities. We realized a net gain of $144 thousand on the sale of securities in 2015, compared to a net loss of $1.39 million 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
43
Table of Contents
Statements in Item 8 of this report. We recorded net negative amortization related to the FDIC indemnification asset of $6.38 million as a result of improved loss
estimates and payoffs in the covered Waccamaw loan portfolio. Other operating income decreased primarily due to the absence of a $536 thousand bank owned life
insurance (“BOLI”) benefit recognized in 2014, a $280 thousand decrease in recovery settlements, a $258 thousand decrease in BOLI income, and a $219 thousand
decrease in loss share recovery income. These decreases were offset by a $1.14 million after tax death benefit from the maturity of a BOLI policy.
Excluding the impact from OTTI charges, the sale of securities, the net amortization on the FDIC indemnification asset, the net gain on branch divestitures, and
non-recurring benefits from BOLI policies, noninterest income decreased $191 thousand, or 0.55%, to $34.62 million in 2015 compared with $34.62 million in
2014.
2014 Compared to 2013 . Noninterest income increased $232 thousand, or 0.78%, in 2014. Wealth management revenues 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 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 BOLI and a $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.
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,
2014
2013
2015
2015 Compared to 2014
Increase
(Decrease)
% Change
$39,625 $40,713 $41,235 $ (1,088)
(521)
247
331
(159)
(3,306)
7,033
4,966
729
1,717
—
6,338
4,952
787
1,672
5,008
5,817
5,199
1,118
1,513
1,702
-2.67%
-8.22%
4.99%
42.06%
-9.51%
-66.01%
2014 Compared to 2013
Increase
(Decrease)
$
% Change
(522)
(695)
(14)
58
(45)
5,008
-1.27%
-9.88%
-0.28%
7.96%
-2.62%
—
86
21,111
(1,064)
(1,131)
$76,171 $82,862 $78,985 $ (6,691)
57
23,248
1,150
22,242
-92.52%
-5.08%
-8.07%
1,093
(1,006)
$ 3,877
1917.54%
-4.33%
4.91%
44
Table of Contents
2015 Compared to 2014 . Noninterest expense decreased $6.69 million, or 8.07%, in 2015. Salaries and employee benefits decreased primarily due to the reduction
in full-time equivalent employees, which totaled 673 as of December 31, 2015, compared to 678 as of December 31, 2014. Occupancy, furniture, and equipment
expense decreased $274 thousand, or 2.43%, which was primarily due to branch closures between the periods. In 2015, we prepaid $25 million of a FHLB
convertible advance with a May 2017 maturity and 4.15% interest rate during the second quarter of 2015, which resulted in a prepayment penalty of $1.70 million.
Expenses related to branch acquisition and divestiture activities totaled $86 thousand in 2015 in connection with branch acquisition and divestiture activity that
occurred in the fourth quarter of 2014. The decrease in other operating expense included a $1.00 million decrease in legal expenses offset by a $510 thousand
increase in other losses. Other operating expense also included an increase in the net loss on sales and expenses related to other real estate owned (“OREO”) of
$345 thousand to $2.44 million in 2015 compared to $2.09 million in 2014.
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 OREO of $56 thousand to $2.09 million in 2014 compared to $2.04 million in 2013.
Income Tax Expense
2015 Compared to 2014 . 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 life insurance policies, which are both exempt from federal income tax. Income tax expense
decreased $943 thousand, or 7.65%, and the effective rate decreased 91 basis points to 31.68% in 2015. The decrease in the effective tax rate was largely due to a
decrease in taxable revenues as a percentage of net earnings and an increase in the relative amounts of nontaxable revenues.
2014 Compared to 2013 . 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.
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.
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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.
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 (gain) loss on sale of securities
Net gain on debt prepayment
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
2015
Year Ended December 31,
2014
2013
$ 76,171
114,283
66.65%
$ 82,862
120,821
68.58%
$ 78,985
121,413
65.05%
$ 76,171
$ 82,862
$ 78,985
(86)
(1,702)
(2,438)
(259)
(4,485)
71,686
114,283
2,950
—
(144)
—
—
(1,263)
1,543
115,826
(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
(57)
—
(2,037)
(2,700)
(4,794)
74,191
121,413
2,741
320
(399)
(296)
—
—
2,366
123,779
61.89%
58.99%
59.94%
Financial Condition
Total assets were $2.46 billion as of December 31, 2015, a decrease of $145.66 million, or 5.59%, compared with $2.61 billion as of December 31, 2014. Total
liabilities were $2.12 billion as of December 31, 2015, a decrease of $137.30 million, or 6.08%, compared with $2.26 billion as of December 31, 2014. Our book
value per common share was $18.95 as of December 31, 2015, an increase of $0.89, or 4.93%, compared with $18.06 as of December 31, 2014.
Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2015, decreased $185.87 million, or 78.21%, compared to December 31, 2014. The decrease was primarily due to
the deployment of liquidity to redeem our convertible preferred shares, repurchase common stock, purchase investment securities to provide the funding necessary
to extinguish certain borrowings as they come due, and establish a short duration investment portfolio.
46
Table of Contents
Investment Securities
Available-for-sale securities as of December 31, 2015, increased $40.06 million, or 12.28%, compared to December 31, 2014. Held-to-maturity securities as of
December 31, 2015, increased $14.59 million, or 25.18%, compared to December 31, 2014, due to the purchase of low-yield, 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 details the amortized cost and fair value of investment securities as of the dates indicated:
(Amounts in thousands)
Available for Sale
U.S. Agency securities
U.S. Treasury securities
Municipal securities
Single issue trust preferred securites
Corporate securities
Certificates of deposit
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
2015
December 31,
2014
Amortized
Amortized
Cost
Fair Value
Cost
Fair Value
2013
Amortized
Cost
Fair Value
$ 31,414 $ 30,702 $ 34,604 $ 33,598 $
568 $
—
124,880
55,882
70,571
5,000
—
128,678
47,832
70,333
5,000
—
134,784
55,822
5,000
—
—
138,915
46,137
5,109
—
9,708
147,049
55,764
5,000
—
579
9,013
144,280
46,234
4,871
—
84,576
—
84,576
66
300,386
9,789
310,175
5,247
$ 372,389 $ 366,173 $ 332,942 $ 326,117 $ 542,210 $ 520,399
306,319
12,543
318,862
5,259
102,119
—
102,119
239
102,506
—
102,506
226
83,556
—
83,556
72
$ 61,863 $ 61,832 $ 46,987 $ 46,955 $
190
10,488
193
10,465
379
10,582
386
10,548
$ 72,541 $ 72,490 $ 57,948 $ 57,889 $
568 $
—
—
568 $
579
—
—
579
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
98.33%
6.47
5.71
2015
Held to
Maturity
99.93%
1.83
1.78
December 31,
Total
98.59%
5.71
5.07
Available for
Sale
97.95%
8.39
7.37
2014
Held to
Maturity
99.90%
2.95
2.83
Total
98.24%
7.58
6.70
At December 31, 2015, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total
consolidated shareholders’ equity.
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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,
2015. 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:
One year or less
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:
One year or less
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
Tax
Equivalent
Purchase
(1)
Yield
0.63%
6.35%
4.82%
2.35%
1.91%
0.70%
Total
$ 76,671
2,569
83,879
124,628
287,747
84,576
66
$372,389
U.S. Agency
Securities
Municipal
Securities
Corporate
Notes
Certificates
of Deposit
5,000
—
—
—
5,000
$ —
2
2,997
28,415
$ 31,414
$
1,100
2,567
80,882
40,331
$124,880
$ 70,571
—
—
55,882
$126,453
2.00%
15.72
4.65%
9.20
0.92%
5.64
$ —
2
2,995
27,705
$ 30,702
$
1,123
2,602
84,322
40,631
$128,678
$ 70,333
—
—
47,832
$118,165
$
$
$
$
0.41%
0.17
2.65%
8.19
5,000
—
—
—
5,000
$ 76,456
2,604
87,317
116,168
282,545
83,556
72
$366,173
(1)
Fully taxable equivalent at the rate of 35%.
48
Table of Contents
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,
2015. 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:
One year or less
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:
One year or less
After one year through five years
After five years through ten years
After ten years
Total fair value
(1)
Fully taxable equivalent at the rate of 35%.
Tax
Equivalent
Purchase
(1)
Yield
0.66%
1.29%
—
—
U.S. Agency
Securities
Municipal
Securities
$ 25,058
36,805
—
—
$ 61,863
0.95%
1.71
$ 25,007
36,825
—
—
$ 61,832
190
$
—
—
—
190
$
8.21%
0.33
$
193
—
—
—
193
$
Corporate
Notes
$ —
10,488
—
—
$ 10,488
Total
$25,248
47,293
—
—
$72,541
1.64%
2.56
1.07%
1.83
$ —
10,465
—
—
$ 10,465
$25,200
47,290
—
—
$72,490
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 no credit-related OTTI charges in earnings associated with debt securities beneficially owned in 2015 compared to of $705 thousand in 2014 and
$320 thousand in 2013. These charges were related to a non-Agency MBS that was subsequently sold in November 2014. We recognized no OTTI charges in
earnings associated with certain equity securities in 2015 or 2013 compared to $32 thousand in 2014. See Note 3, “Investment Securities,” to the Consolidated
Financial Statements in Item 8 of this report.
Loans Held for Sale
There were no loans held for sale as of December 31, 2015, compared to $1.79 million as of December 31, 2014. Loans held for sale consist of mortgage loans sold
on a best efforts basis into the secondary loan market; accordingly, we do not retain the interest rate risk involved in these long-term commitments. There were no
outstanding commitments to originate mortgage loans in the secondary market as of December 31, 2015, compared to a gross notional amount of $1.39 million for
9 commitments as of December 31, 2014.
Loans Held for Investment
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. Loans held for
49
Table of Contents
investment as of December 31, 2015, increased $17.13 million, or 1.01%, compared to December 31, 2014. The non-covered loan portfolio increased $56.33
million, or 3.59%, compared to December 31, 2014. The increase was primarily due to increased loan demand in the real estate lending segment of the loan
portfolio during the second quarter of 2015. The covered loan portfolio as of December 31, 2015, decreased $39.21 million, or 32.07%, compared to December 31,
2014, due to continued runoff in the covered Waccamaw portfolio. The average loan to deposit ratio was 86.56% as of December 31, 2015, compared to 88.37% as
of December 31, 2014.We lend primarily in the four-state region in which we operate. In addition, 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, 2015 or 2014. 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
2015
2014
December 31,
2013
2012
2011
$
48,896 $
88,903
95,026
149,351
485,460
2,911
27,540
898,087
41,271 $
83,099
97,480
135,171
473,906
1,599
29,517
862,043
35,255 $
95,455
70,197
135,559
475,911
2,324
32,614
847,315
57,434 $
88,738
65,694
135,912
448,810
1,709
34,570
832,867
107,367
495,209
43,505
646,081
110,957
485,475
32,799
629,231
111,770
496,012
28,703
636,485
111,081
473,547
16,223
600,851
61,768
91,939
77,050
106,743
336,005
1,374
37,161
712,040
111,387
473,067
19,577
604,031
69,347
6,555
75,902
72,000
7,338
79,338
71,313
3,926
75,239
78,163
5,666
83,829
67,129
12,867
79,996
1,623,506 1,567,176 1,559,039 1,517,547 1,396,067
—
1,706,541 1,689,416 1,710,721 1,724,653 1,396,067
26,205
$ 1,686,308 $ 1,669,189 $ 1,686,644 $ 1,698,883 $ 1,369,862
5,820
$
207,106
151,682
122,240
25,770
20,227
20,233
24,077
83,035
6,672 $
1,792 $
— $
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
2015
2014
2013
2012
December 31,
$ 6,303
1,170
640
2,674
14,065
34
643
25,529
48,565
8,595
262
57,422
84
84
$83,035
$ 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
$ 15,865
3,325
1,933
7,449
34,646
164
873
64,255
69,206
16,919
1,184
87,309
118
118
$151,682
$ 26,595
6,948
2,611
11,428
48,565
144
1,091
97,382
81,445
22,961
1,644
106,050
3,674
3,674
$207,106
The following 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
2015
2014
December 31,
2013
2012
2011
3.01%
5.48%
5.85%
9.20%
29.90%
0.18%
1.70%
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%
6.62%
30.50%
2.68%
7.08%
30.98%
2.09%
7.17%
31.82%
1.84%
7.32%
31.21%
1.07%
7.98%
33.89%
1.40%
4.43%
0.45%
100.00%
4.42%
0.42%
100.00%
4.57%
0.25%
100.00%
5.15%
0.37%
100.00%
4.81%
0.92%
100.00%
51
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
2015
2014
2013
2012
December 31,
7.59%
1.41%
0.77%
3.22%
16.94%
0.04%
0.77%
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%
58.49%
10.35%
0.32%
49.40%
9.79%
0.37%
45.63%
11.15%
0.78%
39.33%
11.09%
0.79%
0.10%
0.00%
100.00%
0.07%
0.00%
100.00%
0.08%
0.00%
100.00%
1.77%
0.00%
100.00%
As of December 31, 2015, non-covered commercial loans comprised 55.32% 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, retail merchants, 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, 2015, non-covered consumer real estate loans comprised 39.80% 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, 2015, non-covered consumer and other loans comprised 4.88% 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.
52
Table of Contents
The following table details the maturities and rate sensitivities of our non-covered loan portfolio as of December 31, 2015:
(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 in
One Year
or Less
Due After One
Year Through
Five Years
Due After Five
Years
Total
$ 17,618
28,422
12,505
14,541
60,108
399
4,631
138,224
3,366
5,766
5,616
14,748
14,540
2,204
16,744
$169,716
$116,686
53,030
$169,716
$
$
$
$
21,540
52,476
31,578
49,540
186,896
1,872
11,038
354,940
13,462
22,970
161
36,593
$
9,738
8,005
50,943
85,270
238,456
640
11,871
404,923
90,539
466,473
37,728
594,740
$
48,896
88,903
95,026
149,351
485,460
2,911
27,540
898,087
107,367
495,209
43,505
646,081
49,110
3,484
52,594
444,127
8,350
1,650
10,000
$ 1,009,663
72,000
7,338
79,338
$1,623,506
387,297
56,830
444,127
$
367,157
642,506
$ 1,009,663
$ 871,140
752,366
$1,623,506
(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, 2015:
(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
Total covered loans
Rate sensitivities
Predetermined interest rate
Floating or adjustable interest rate
Total covered loans
Due in One Year
or Less
Due After One
Year Through
Five Years
Due After Five
Years
Total
$
$
$
$
1,006
137
—
1,159
3,883
7
—
6,192
245
887
262
1,394
1
7,587
5,411
2,176
7,587
$
$
$
$
4,700
579
—
528
6,303
—
386
12,496
5,879
2,453
—
8,332
83
20,911
13,649
7,262
20,911
$
$
$
$
597
454
640
987
3,879
27
257
6,841
42,441
5,255
—
47,696
—
54,537
8,710
45,827
54,537
$ 6,303
1,170
640
2,674
14,065
34
643
25,529
48,565
8,595
262
57,422
84
$83,035
$27,770
55,265
$83,035
(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 generally 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:
(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
(1)
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
(1)
Additional Information
Performing TDRs
Total TDRs
Gross interest income that would have been recorded under the original terms of
(3)
(2)
2015
2014
December 31,
2013
2012
2011
$17,847
—
73
17,920
4,873
$22,793
$
647
—
647
4,034
$ 4,681
$18,494
—
73
18,567
8,907
$27,474
$10,556
—
2,726
13,282
6,638
$19,920
$ 2,438
—
2,438
6,324
$ 8,762
$12,994
—
2,726
15,720
12,962
$28,682
$19,161
—
1,311
20,472
7,318
$27,790
$ 3,353
86
3,439
7,541
$10,980
$22,514
86
1,311
23,911
14,859
$38,770
$23,931
—
6,009
29,940
5,749
$35,689
$ 4,323
—
4,323
3,255
$ 7,578
$28,254
—
6,009
34,263
9,004
$43,267
$24,487
—
600
25,087
5,914
$31,001
$ —
—
—
—
$ —
$24,487
—
600
25,087
5,914
$31,001
$13,889
13,962
$11,808
14,534
$10,900
12,211
$ 6,038
12,047
$ 8,854
9,454
restructured and nonperforming loans
Actual interest income recorded on restructured and nonperforming loans
1,645
608
1,171
597
1,548
511
2,955
640
1,154
411
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
1.10%
0.96%
112.61%
1.24%
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%
1.09%
1.12%
108.97%
1.19%
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)
(2)
(3)
TDRs restructured within the past six months, excluding nonaccrual TDRs of $923 thousand, $306 thousand, $734 thousand, $3.04 million, and $3.04
million for the five years ended December 31, 2015.
TDRs with six months or more of satisfactory payment performance, excluding nonaccrual TDRs of $416 thousand, $248 thousand, $1.47 million, $792
thousand, and $227 thousand for the five years ended December 31, 2015.
Perfoming and nonperforming TDRs, excluding nonaccrual TDRs of $1.34 million, $554 thousand, $2.20 million, $3.83 million, and $3.27 million for the
five years ended December 31, 2015.
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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 non-covered
or covered accruing loans contractually past due 90 days or more as of December 31, 2015 or 2014.
Non-covered nonaccrual loans as of December 31, 2015, increased $7.29 million, or 69.07%, from December 31, 2014. As of December 31, 2015, non-covered
nonaccrual loans were largely attributed to the following loan classes: single family owner occupied (40.59%) and non-farm, non-residential (40.06%).
Approximately $139 thousand, or 0.78%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations as of
December 31, 2015. 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 $13.96 million as of
December 31, 2015, compared to $14.53 million as of December 31, 2014. Nonperforming accruing TDRs totaled $73 thousand, or 0.52% of accruing TDRs, as of
December 31, 2015, compared to $2.73 million, or 18.76% of accruing TDRs, as of December 31, 2014. The allowance for loan losses attributed to TDRs totaled
$590 thousand as of December 31, 2015, compared to $475 thousand as of December 31, 2014.
Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $27.88 million as of December 31, 2015, an increase of
$5.90 million, or 26.86%, compared to $ 21.98 million as of December 31, 2014. Non-covered delinquent loans as a percentage of total non-covered loans
measured 1.72% as of December 31, 2015, which is attributed to loans 30 days or more past due of 0.62% and nonaccrual loans of 1.10%. Non-covered
nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned TDRs, as a percentage of total non-covered loans were 1.10% as of
December 31, 2015, compared to 0.85% as of December 31, 2014.
Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $1.77 million, or 26.59%, as of December 31, 2015,
compared to December 31, 2014. Non-covered OREO consisted of 40 properties as of December 31, 2015, with an average holding period of 8 months. The net
loss on the sale of OREO totaled $1.85 million in 2015, $1.42 million in 2014, and $1.52 million in 2013. The following table details activity within OREO for the
periods indicated:
Year Ended December 31,
(Amounts in thousands)
Beginning balance
Additions
Disposals
Valuation adjustments
Ending balance
Non-covered
$
6,638
3,726
(4,579)
(912)
4,873
$
2015
Covered
$ 6,324
2,591
(3,879)
(1,002)
$ 4,034
Total
$12,962
6,317
(8,458)
(1,914)
$ 8,907
Non-covered
$
7,318
5,979
(5,740)
(919)
6,638
$
2014
Covered
$ 7,541
6,641
(5,907)
(1,951)
$ 6,324
Total
$ 14,859
12,620
(11,647)
(2,870)
$ 12,962
Non-covered nonperforming assets as of December 31, 2015, increased $2.87 million, or 14.42%, from December 31, 2014. Non-covered nonperforming assets as
a percentage of total non-covered assets were 0.96% as of December 31, 2015, compared to 0.80% as of December 31, 2014.
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Allowance for Loan Losses
The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is
increased by charges to earnings in the form of provisions and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan
losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant
judgments and estimates.
Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The allowance for loan losses includes specific
allocations to significant individual loans and credit relationships and general reserves to the remaining loans that have been deemed impaired. Loans not
specifically identified are grouped into pools based on similar risk characteristics. Management’s general reserve allocations are based on judgments of qualitative
and quantitative factors about macro and micro economic conditions reflected in the loan portfolio and the economy. For loans acquired in business combinations, a
provision is recorded for any credit deterioration after the acquisition. Loans identified with credit impairment at acquisition are grouped into pools and evaluated
separately from the non-PCI portfolio. The provision calculated for PCI loans is offset by an adjustment to the FDIC indemnification asset to reflect the
indemnified portion of the post-acquisition exposure. See “Critical Accounting Estimates” above, 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, 2015, and December 31, 2014. The allowance attributed to the non-PCI loan portfolio as a
percentage of non-covered loans held for investment was 1.24% as of December 31, 2015, compared to 1.29% at December 31, 2014. The cash flow analysis
performed as of December 31, 2015, identified two of our six open PCI loan pools as impaired with a cumulative impairment of $54 thousand compared to the
analysis as of December 31, 2014, that identified two of seven PCI loan pools as impaired with a cumulative impairment of $58 thousand. A recovery of $4
thousand was attributed to the PCI provision due to better than expected performance in the Waccamaw PCI loan portfolio, which included a recovery of $29
thousand recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and a provision applied to operations
of $25 thousand. As of December 31, 2015, 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.
Our qualitative risk factors continue to reflect a reduced risk of loan losses due to improvements in general economic conditions and asset quality metrics offset by
an increased risk of loan losses due to credit concentrations. Net charge-offs decreased $735 thousand, or 25.42% in 2015 as compared to 2014 and decreased $7.46
million, or 72.07% in 2014 as compared to 2013. 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. 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.
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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 for loan losses charged to operations, non-PCI loans
(Recovery of) provision for loan losses charged to operations, PCI loans
(Recovery of) provision for loan losses 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
2015
$20,227
—
2,166
25
2014
$24,077
(682)
420
(275)
Year Ended December 31,
2013
$25,770
—
7,912
296
2012
$26,205
—
5,871
(193)
2011
$26,482
—
8,846
201
(29)
(422)
451
—
—
256
93
—
87
773
—
73
92
812
2
1,238
459
35
488
832
—
—
451
988
305
461
1,096
3,745
659
1,026
6,481
135
173
—
92
74
—
—
402
258
18
101
336
1,589
2,156
$20,233
84
1,736
10
331
239
—
—
514
76
—
121
479
3,590
2,891
$20,227
2,738
720
17
2,618
1,613
17
20
1,873
947
295
491
1,178
12,527
510
98
16
158
119
22
8
273
169
—
107
695
2,175
10,352
$24,077
286
113
209
2,502
643
—
61
851
1,842
9
403
585
7,504
17
93
125
109
280
1
1
76
213
—
152
324
1,391
6,113
$25,770
1,908
417
2,551
1,812
1,074
—
219
691
1,615
195
448
530
11,460
817
271
68
121
148
1
—
155
63
34
139
319
2,136
9,324
$26,205
Net charge-offs to average non-covered loans
0.14%
0.18%
0.68%
0.41%
0.67%
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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
2015
$ 1,119
504
1,535
3,369
6,393
22
190
Year Ended December 31,
2013
2012
2014
$ 1,151
689
1,917
3,228
5,805
13
206
$ 1,141
5,215
1,211
3,549
4,650
23
301
$ 1,214
4,351
1,630
4,367
5,259
22
416
1,091
4,969
297
1,330
4,935
225
1,361
5,030
206
1,574
5,995
337
690
—
$20,179
670
—
$20,169
635
—
$23,322
597
—
$25,762
2011
$ 1,892
3,515
1,889
2,960
6,933
19
343
1,365
6,134
212
742
—
$26,004
The following table details the PCI allowance for loan losses, by loan pool, as of the periods indicated:
(Amounts in thousands)
Commercial loans
Waccamaw commercial
Waccamaw lines of credit
Peoples commercial
Other
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Peoples residential
Consumer and other loans
Waccamaw consumer
(1)
Total PCI allowance
(1)
Closed during the first quarter of 2015.
Deposits
2015
Year Ended December 31,
2014
2013
2012
2011
$— $ 37 $— $— $—
—
—
201
—
69
8
—
—
8
—
—
—
—
—
—
—
1
53
—
—
21
277
217
184
—
—
—
—
—
—
—
—
$ 54 $ 58 $755 $
—
—
—
8 $201
Total deposits as of December 31, 2015, decreased $127.50 million, or 6.37%, compared to December 31, 2014. Noninterest-bearing deposits increased $33.78
million and savings deposits, which include money market accounts and savings accounts, increased $5.11 million as of December 31, 2015, compared to
December 31, 2014. Interest-bearing deposits decreased $6.17 million and time deposits decreased $160.22 million as of December 31, 2015, compared to
December 31, 2014.
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As of December 31, 2015, time deposits totaled $543.46 million, which included certificates of deposit of $408.52 million and individual retirement accounts of
$134.94 million. Time deposits as of December 31, 2015, decreased $160.22 million, or 22.77%, compared to December 31, 2014, primarily due to our strategic
runoff of higher rate deposits. Time deposits of $100 thousand or more totaled $205.95 million as of December 31, 2015.
The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2015:
( Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Borrowings
$ 23,895
17,764
31,664
132,627
$ 205,950
Total borrowings as of December 31, 2015, decreased $10.37 million, or 4.51%, compared to December 31, 2014. Short-term borrowings consist of federal funds
purchased and retail repurchase agreements. No federal funds were purchased as of December 31, 2015, or 2014. The balance of retail repurchase agreements
increased $16.87 million, or 13.86%, as of December 31, 2015, compared to December 31, 2014. Securities underlying retail repurchase agreements remain under
our control during the terms of the agreements.
The following table presents the balances and weighted average rates paid on short-term borrowings as of the periods indicated:
(Amounts in thousands)
Year-end balance
Average annual balance
Maximum month-end balance
2015
Amount
$ 88,614
72,691
122,693
Rate
0.19%
0.10%
Year Ended December 31,
2014
Amount
$ 73,742
74,165
117,105
Rate
0.17%
0.14%
2013
Amount
$84,308
69,773
84,308
Rate
0.19%
0.38%
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, 2015,
compared to December 31, 2014. As of December 31, 2015, wholesale repurchase agreements had contractual maturities between eleven months and four years.
The balance of FHLB borrowings decreased $25.00 million, or 27.78%, and the weighted average rate decreased 4 basis points to 4.03% as of December 31, 2015,
compared to December 31, 2014. As of December 31, 2015, FHLB borrowings had contractual maturities between one and six years. In 2015, we prepaid $25
million of a FHLB convertible advance with a May 2017 maturity and 4.21% interest rate, which resulted in a prepayment penalty of $1.70 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.
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Stockholders’ Equity
Total stockholders’ equity decreased $8.36 million, or 2.38%, to $343.02 million as of December 31, 2015, compared to $351.37 million as of December 31, 2014.
The change in stockholders’ equity was largely affected by net income of $24.54 million, the repurchase of 1,238,299 shares of our common stock totaling $21.53
million, dividends declared on our common and Series A Preferred Stock of $10.10 million, and the redemption of 2,367 shares of our preferred stock totaling
$2.37 million.
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
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, 2015, we maintained liquidity in the form of unencumbered cash on hand and deposits with other financial institutions of $51.79 million,
availability on federal funds lines with correspondent banks of $105.00 million, credit available from the Federal Reserve Bank discount window of $9.09 million,
unused borrowing capacity with the FHLB of $403.10 million, and unpledged available-for-sale securities of $129.44 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, 2015, we provided letters of credit to public depositors with the FHLB totaling $22.69 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, 2015, the Company’s liquid assets consisted of cash
and investment securities totaling $16.83 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 also maintains a $15.00 million unsecured, committed line of credit with an
unrelated financial institution that carries an interest rate of one-month LIBOR plus 2.00% and matures in April 2016. As of December 31, 2015, there was no
outstanding balance on the line compared to an outstanding balance of $2.00 million as of December 31, 2014.
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Cash Flows
The following table presents the major components of cash flow in the periods indicated:
(Amounts in thousands)
Net cash provided by operating activities
Net cash (used in) provided by investing activities
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning balance
Cash and cash equivalents, ending balance
2015
$ 58,519
(70,785)
(173,607)
(185,873)
237,660
$ 51,787
Year Ended December 31,
2014
$ 41,689
280,955
(141,551)
181,093
56,567
$ 237,660
2013
$ 44,518
(1,167)
(131,631)
(88,280)
144,847
$ 56,567
2015 Compared to 2014 . Net cash provided by operating activities increased $16.83 million, or 40.37%, in 2015 compared to 2014 primarily due to a cash
decrease in other operating activities offset by a decrease in FHLB debt prepayment penalties. Net cash used in investing activities increased $351.74 million in
2015 compared to net cash provided of $280.96 million in 2014, which was largely the result of a reduction in net cash received in acquisitions and divestitures and
a decrease in the proceeds from the sale of available-for-sale securities coupled with an increase in the purchase of available-for-sale securities. Net cash used in
financing activities increased $32.06 million, or 22.65%, in 2015 compared to 2014 primarily due to a decrease in noninterest and interest-bearing deposits offset
by a reduction in the repayment of long-term debt. The net effect of cash flow activity was a $185.87 million, or 78.21%, decrease in cash and cash equivalents in
2015.
2014 Compared to 2013 . Net cash provided by operating activities decreased $2.83 million, or 6.35%, 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 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%, in 2014 compared to 2013 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.
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. Basel III Capital Rules became effective on January 1, 2015, subject to a four-year phase-in period. The Company’s required
initial minimum capital ratios under Basel III include:
•
•
•
•
4.5% Common equity Tier 1 capital to risk-weighted assets
6.0% Tier 1 capital to risk-weighted assets
8.0% Total capital to risk-weighted assets
4.0% Tier 1 leverage ratio
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Our capital ratios presented for the year ended December 31, 2015, are based on the Basel III requirements, while prior period information is based on the
requirements under Basel II. A description of the Basel III Capital Rules is included in Part I, Item 1 of the Company’s 2015 Form 10-K. The following table
presents our capital ratios as of the dates indicated:
Common equity Tier 1 ratio
(1)
First Community Bancshares, Inc.
First Community Bank
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
2015
December 31,
2014
14.54%
13.60%
NA
NA
2013
NA
NA
15.95%
14.82%
17.68%
15.73%
16.44%
14.55%
14.73%
13.60%
16.43%
14.48%
15.19%
13.30%
10.62%
9.77%
10.12%
8.87%
9.95%
8.63%
(1)
The common equity Tier 1 ratio became effective on January 1, 2015.
Our regulatory capital ratios as of December 31, 2015, decreased from the prior period primarily due to Basel III’s risk-based capital requirements. Our regulatory
capital ratios as of December 31, 2014, increased over the prior period primarily due to an increase in retained earnings while average assets remained relatively
stable. As of December 31, 2015, our capital ratios were well in excess of the minimum standards and classified as “well capitalized” under regulatory capital
adequacy standards applicable to that period. Additionally, our capital ratios were in excess of the minimum standards under the Basel III Capital Rules on a fully
phased-in basis, if such requirements were in effect, as of December 31, 2015. See Note 21, “Regulatory Capital Requirements and Restrictions,” to the
Consolidated Financial Statements in Item 8 of this report.
Contractual Obligations
We maintain certain contractual cash obligations that require future cash payments. Management believes we have adequate resources to fund our outstanding
commitments and the ability to adjust rates on certificates of deposit, in a changing interest rate environment; 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,
2015:
(1)
(2)(3)
( 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
Total
$1,329,801
86,605
556,718
55,566
75,867
24,832
3,325
$2,132,714
Less Than
One Year
$1,329,801
86,605
290,114
27,807
2,623
582
733
$1,738,265
One to
Three Years
—
$
—
146,302
2,637
19,211
1,164
1,119
$ 170,433
Three to
Five Years
$ —
—
117,951
25,122
4,000
1,164
586
$148,823
More than
Five Years
$ —
—
2,351
—
50,033
21,922
887
$ 75,193
(1)
(2)
(3)
Excludes interest
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, 2015. 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.
Excludes carrying value adjustments such as unamortized premiums or discounts.
63
Table of Contents
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. The following table presents our off-balance sheet
arrangements, detailed by commitment expiration, as of December 31, 2015:
(Amounts in thousands)
Commitments to extend credit
Financial letters of credit
Performance letters of credit
Total letters of credit
Total
$235,302
4,485
3,280
$243,067
Less
than One
(1)
Year
$74,140
475
2,772
$77,387
One to
Three
Years
$47,035
—
144
$47,179
Three to
Five
Years
$18,474
4,000
334
$22,808
More
than Five
Years
$95,653
10
30
$95,693
(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.
Item 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.
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.
64
Table of Contents
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. On December 16, 2015, the Federal Open Market Committee raised the benchmark Fed Funds rate, which changed the target rate from a range of 0 to 25
basis points to a new range of 25 to 50 basis points. This represents the first move of the target since 2009 when it was dropped to zero. As of December 31, 2015,
the Federal Open Market Committee maintained a target range for federal funds of 25 to 50 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,
2015
2014
Change in
Net
Interest Income
$
(1,162)
(694)
(409)
(1,813)
65
Percent
Change
(1.4)
(0.9)
(0.5)
(2.2)
Change in
Net
Interest Income
$
3,619
2,183
871
290
Percent
Change
4.2
2.5
1.0
0.3
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS AND SUPPLEMENTORY DATA INDEX
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013
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
66
Page
67
68
69
70
71
72
138
139
140
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
Table of Contents
(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
Securities sold under agreements to repurchase
FHLB borrowings
Other borrowings
Total Liabilities
December 31,
2015
2014
$
37,383
13,498
906
51,787
366,173
72,541
—
83,035
1,623,506
(20,233)
1,686,308
20,844
52,756
4,034
4,873
6,007
100,486
5,243
91,224
$ 2,462,276
$
39,450
196,873
1,337
237,660
326,117
57,948
1,792
122,240
1,567,176
(20,227)
1,669,189
27,900
55,844
6,324
6,638
6,315
100,722
6,421
105,066
$ 2,607,936
$ 451,511
1,421,748
1,873,259
26,630
138,614
65,000
15,756
2,119,259
$ 417,729
1,583,030
2,000,759
26,062
121,742
90,000
17,999
2,256,562
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; 0 and 15,151 shares outstanding at December 31, 2015 and 2014, respectively
—
15,151
Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 and 20,499,683 shares issued at December 31, 2015 and
2014, respectively; 3,283,638 and 2,093,464 shares in treasury at December 31, 2015 and 2014, 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
21,382
227,692
155,647
(56,457)
(5,247)
343,017
$ 2,462,276
20,500
215,873
141,206
(35,751)
(5,605)
351,374
$ 2,607,936
Table of Contents
(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
Net interest income after provision for loan losses
Noninterest Income
Wealth management
Service charges on deposit accounts
Other service charges and fees
Insurance commissions
Impairment losses on securities
Portion of losses recognized in other comprehensive income
Net impairment losses recognized in earnings
Net gain (loss) on sale of securities
Net FDIC indemnification asset amortization
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
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
2015
Year Ended December 31,
2014
$
$
$
87,632
4,225
3,978
267
96,102
5,878
1,952
3,519
11,349
84,753
2,191
82,562
2,975
13,717
8,045
6,899
—
—
—
144
(6,379)
—
4,129
29,530
39,625
5,817
5,199
1,118
1,513
1,702
86
21,111
76,171
35,921
11,381
24,540
105
24,435
1.32
1.31
0.54
$
95,492
5,975
4,350
291
106,108
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
$
$
$
2013
96,600
7,875
4,790
211
109,476
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
$
$
18,531,039
18,727,464
18,406,363
19,483,054
19,792,099
20,961,800
68
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 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 (gains) losses 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,
2014
2013
2015
$24,540
$25,490
$ 23,312
—
755
(144)
—
611
(1)
12,914
1,385
737
15,035
(1,277)
(19,964)
(399)
320
(21,320)
(363)
—
(642)
—
758
(380)
326
(37)
574
(216)
358
$24,898
260
(382)
14,653
(5,518)
9,135
$34,625
327
705
(20,615)
7,700
(12,915)
$ 10,397
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share and per share
data)
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
Balance January 1, 2015
Net income
Other comprehensive income
Common dividends declared — $0.54 per share
Preferred dividends declared — $15.00 per share
Preferred stock converted to common stock — 882,096 shares
Redemption of preferred stock — 2,367 shares
Equity-based compensation expense
Common stock options exercised — 4,323 shares
Restricted stock awards — 23,057 shares
Issuance of treasury stock to 401(k) plan — 20,745 shares
Purchase of treasury shares — 1,238,299 shares at $17.35 per share
Balance December 31, 2015
See Notes to Consolidated Financial Statements.
Common
Stock
$ 20,343
—
—
—
—
150
—
—
—
—
$ 20,493
$ 20,493
—
—
—
—
7
—
—
—
—
$ 20,500
$ 20,500
—
—
—
—
882
—
—
—
—
—
—
$ 21,382
Additional
Paid-in
Capital
$ 213,829
—
—
—
—
2,020
18
(21)
(183)
—
$ 215,663
$ 215,663
—
—
—
—
93
332
(13)
(202)
—
$ 215,873
$ 215,873
—
—
—
—
11,902
—
110
(11)
(191)
9
—
$ 227,692
Retained
Earnings
$ 113,013
23,312
—
(9,475)
(1,024)
—
—
—
—
—
$ 125,826
$ 125,826
25,490
—
(9,200)
(910)
—
—
—
—
—
$ 141,206
$ 141,206
24,540
—
(9,994)
(105)
—
—
—
—
—
—
—
$ 155,647
Treasury
Stock
$ (6,458)
—
—
—
—
—
—
106
886
(28,421)
$ (33,887)
$ (33,887)
—
—
—
—
—
—
66
238
(2,168)
$ (35,751)
$ (35,751)
—
—
—
—
—
—
—
74
391
354
(21,525)
$ (56,457)
Preferred
Stock
$ 17,421
—
—
—
—
(2,170)
—
—
—
—
$ 15,251
$ 15,251
—
—
—
—
(100)
—
—
—
—
$ 15,151
$ 15,151
—
—
—
—
(12,784)
(2,367)
—
—
—
—
—
—
$
70
Accumulated
Other
Comprehensive
Income (Loss)
(1,825)
$
—
(12,915)
—
—
—
—
—
—
—
(14,740)
(14,740)
—
9,135
—
—
—
—
—
—
—
(5,605)
$
$
$
$
$
(5,605)
—
358
—
—
—
—
—
—
—
—
—
(5,247)
Total
$356,323
23,312
(12,915)
(9,475)
(1,024)
—
18
85
703
(28,421)
$328,606
$328,606
25,490
9,135
(9,200)
(910)
—
332
53
36
(2,168)
$351,374
$351,374
24,540
358
(9,994)
(105)
—
(2,367)
110
63
200
363
(21,525)
$343,017
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 of FDIC indemnification asset, net
Amortization of intangible assets
Gain on acquisitions and divestitures, net
Gain on sale of loans
Equity-based compensation expense
Restricted stock awards
Issuance of treasury stock to 401(k) plan
Loss (gain) on sale of property, plant, and equipment, net
Loss on sales of other real estate
(Gain) loss on sale of securities
Net impairment losses recognized in earnings
FHLB debt prepayment fees
Proceeds from sale of mortgage loans
Origination of mortgage loans
Decrease in accrued interest receivable
Decrease (increase) in other operating activities
Net cash provided by operating activities
Investing 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 of loans, net
Proceeds from the redemption of FHLB stock, net
Cash (paid) received in acquisitions and divestitures, net
Proceeds from the FDIC
Payments to acquire property, plant, and equipment, net
Proceeds from sale of other real estate
Net cash (used in) provided by 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
Redemption of preferred stock
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 (decrease) increase 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,
2014
2013
2015
$ 24,540
$ 25,490
$ 23,312
2,191
4,135
1,375
6,379
1,118
—
(501)
110
200
363
23
3,002
(144)
—
1,702
21,993
(19,700)
308
11,425
58,519
10,999
29,931
190
(81,540)
(15,003)
(24,719)
1,279
(88)
2,683
(1,239)
6,722
(70,785)
33,782
(161,282)
—
16,872
(28,945)
(2,367)
63
8
(21,525)
(9,994)
(219)
(173,607)
(185,873)
237,660
$ 51,787
145
4,405
961
3,979
787
(755)
(671)
332
36
—
(113)
3,227
1,385
737
5,008
28,443
(28,681)
1,206
(4,232)
41,689
162,443
48,915
190
(6,047)
(57,675)
(64,115)
4,349
178,604
4,770
(1,098)
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
703
—
(158)
2,785
(399)
320
—
75,348
(68,348)
321
(8,257)
44,518
105,934
87,055
250
(201,138)
—
(11,662)
470
(697)
14,311
(2,292)
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
$
6,317
649
$ 12,620
671
$ 18,438
3,196
11,757
6,900
15,791
12,552
18,146
3,000
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 50 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 9
locations through its wholly owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”), which is headquartered in High Point, North Carolina. Greenpoint
operates under the Greenpoint name and under the trade name First Community Insurance Services (“FCIS”) 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 $742 million in
combined assets as of December 31, 2015. 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 $2.46 billion as of December 31, 2015. 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 $934 thousand as of December 31, 2015, and $1.26 million as of December 31,
2014.
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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”) and Federal Reserve Bank (“FRB”) 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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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company may enter 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 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 also monitors and manages past 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 loans
become 180 days past due. Unsecured loans are generally charged off when the loans become 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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FIRST COMMUNITY BANCSHARES, INC.
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”) acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The
fair value is generally based on current third-party appraisals.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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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FIRST COMMUNITY BANCSHARES, INC.
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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FIRST COMMUNITY BANCSHARES, INC.
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, 2015, and determined that qualitatively that it was more likely than not that
goodwill was not impaired; therefore, the Step 1 and Step 2 tests were not deemed necessary. Qualitative factors considered in the analysis included
macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and the Company’s progress towards stated
objectives as compared to prior years. An impairment charge to goodwill and other intangible assets may be required in the future if the Company’s future earnings
and cash flows decline or discount rates used in determining fair value increase. No events have occurred after the 2015 analysis to indicate potential impairment.
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 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,
2015. Based on publicly available information as of December 31, 2015, the Company believes that its FHLB of Atlanta stock is not impaired. The investment in
FHLB of Atlanta stock was $5.09 million as of December 31, 2015, and $6.37 million as of December 31, 2014. The investment in FRB of Richmond stock was
$5.64 million as of December 31, 2015, and $5.58 million as of December 31, 2014.
The Company maintains long-term investments in various entities, including the Trust; certain tax credit limited partnerships; and other limited liability companies
that provide 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
Company had no equity investments as of December 31, 2015. The carrying value and maximum potential loss of equity investments totaled $360 thousand as of
December 31, 2014.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions. Securities, generally U.S. government and
federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the secured party. The fair value of the
collateral provided to a third party is continually monitored and additional collateral is provided as appropriate.
Advertising Expenses
Advertising costs are generally expensed as incurred. The Company may establish accruals for 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, 2011 through 2014, are open to audit under statutes of limitation by the Internal Revenue Service and
various state tax departments.
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Earnings per Common Share
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. 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
2015
$
24,540
105
24,435
$
18,531,039
26,487
2,996
166,942
—
18,727,464
1.32
$
1.31
$
127,882
—
127,882
Year Ended December 31,
2014
$
25,490
910
24,580
$
18,406,363
18,607
461
1,046,175
11,448
19,483,054
1.34
$
1.31
$
222,651
—
222,651
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
317,420
271
317,691
During the first quarter of 2015, the Company notified holders of its 6% Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) of its
intent to redeem all of the outstanding shares. Prior to redemption, holders converted 12,784 shares of Series A Preferred Stock with each share convertible into 69
shares of the Company’s common stock. The Company redeemed the remaining 2,367 shares for $2.37 million along with accrued and unpaid dividends of $9
thousand. As a result of the redemption, there were no shares of Series A Preferred Stock outstanding as of December 31, 2015, compared to 15,151 shares as of
December 31, 2014, and 15,251 shares as of December 31, 2013.
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
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. The recognition of 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 hedges of
customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings.
Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as 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, 2015, the Company had two interest rate swaps that qualified for fair value hedge
accounting treatment.
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 –
Level 3 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.
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
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Recent Accounting Standards
In January 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of
Extraordinary Items.” ASU 2015-01 eliminated from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both unusual in
nature and infrequently occurring. The guidance will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015.
Early adoption is permitted. The Company does not expect this guidance to have a material effect on its financial statements.
In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.” ASU 2015-02 amended the consolidation requirements in ASC
810 Consolidation. The amendments change the consolidation analysis required under U.S. GAAP, and modify how variable interests held by a reporting entity’s
related parties affect its consolidation conclusions. The amendments will be effective for the Company for interim and annual reporting periods beginning after
December 15, 2015. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments.” ASU 2015-16 simplifies the accounting
for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments.
The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015. The Company does not expect this guidance to have a material
effect on its financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The new standard’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may
include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” deferring
the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The
amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance
recognized at the date of initial application. The Company is currently evaluating the provisions of ASU 2014-09 to determine the potential impact the new
standard will have to the Company’s financial statements.
82
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 2.
Acquisitions and Divestitures
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 on June 8, 2012. 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
On October 31, 2015, the Company sold one insurance agency for $372 thousand. The Company recorded a net loss of $8 thousand in connection with the sale and
eliminated $324 thousand in goodwill and $61 thousand in other intangibles on the Company’s consolidated balance sheet as of December 31, 2015. The agency
was previously purchased in 2013 for $385 thousand, which included $150 thousand in immediate cash consideration and $235 thousand in further cash
consideration if certain operating targets were met.
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 $88 thousand in 2015, $353 thousand in 2014, and
$442 thousand in 2013.
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 paid (received) in acquisitions
Divestitures
Book value of assets sold
Book value of liabilities sold
Sales price in excess of net liabilities assumed
Total sales price
Cash sold
Amount due remaining on books
Net cash paid in divestitures
Net cash paid (received) in acquisitions and divestitures
84
Year Ended December 31,
2015
2014
2013
$ —
—
—
—
—
—
88
88
—
—
88
389
(152)
(6)
231
—
(231)
—
88
$
$
—
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
Table of Contents
Note 3.
Investment Securities
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the amortized cost and aggregate 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
Certificates of deposit
Mortgage-backed Agency securities
Equity securities
Total
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Mortgage-backed Agency securities
Equity securities
Total
Amortized
Cost
$ 31,414
124,880
55,882
70,571
5,000
84,576
66
$372,389
Amortized
Cost
$ 34,604
134,784
55,822
5,000
102,506
226
$332,942
December 31, 2015
Unrealized
Gains
$
39
4,155
—
—
—
155
6
$ 4,355
Unrealized
Losses
$
(751)
(357)
(8,050)
(238)
—
(1,175)
—
$ (10,571)
December 31, 2014
Unrealized
Gains
$
11
4,823
—
109
470
19
$ 5,432
Unrealized
Losses
$ (1,017)
(692)
(9,685)
—
(857)
(6)
$ (12,257)
Fair
Value
$ 30,702
128,678
47,832
70,333
5,000
83,556
72
$366,173
Fair
Value
$ 33,598
138,915
46,137
5,109
102,119
239
$326,117
85
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the amortized cost and fair value of available-for-sale securities, by contractual maturity, as of December 31, 2015. 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:
One year or less
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
Fair value maturity:
One year or less
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
Municipal
Securities
Corporate Notes
Certificates of
Deposit
$
—
2
2,997
28,415
$ 31,414
$
1,100
2,567
80,882
40,331
$124,880
$
—
2
2,995
27,705
$ 30,702
$
1,123
2,602
84,322
40,631
$128,678
$
$
$
$
70,571
—
—
55,882
126,453
70,333
—
—
47,832
118,165
$
$
$
$
5,000
—
—
—
5,000
5,000
—
—
—
5,000
Total
$ 76,671
2,569
83,879
124,628
287,747
84,576
66
$372,389
$ 76,456
2,604
87,317
116,168
282,545
83,556
72
$366,173
The following tables present the amortized cost and aggregate 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)
U.S. Agency securities
Municipal securities
Corporate securities
Total
Amortized
Cost
$ 61,863
190
10,488
$ 72,541
Amortized
Cost
$ 46,987
379
10,582
$ 57,948
December 31, 2015
Unrealized
Gains
$
75
3
—
78
$
Unrealized
Losses
$
(106)
—
(23)
(129)
$
December 31, 2014
Unrealized
Gains
$
22
7
—
29
$
Unrealized
Losses
$
(54)
—
(34)
(88)
$
Fair
Value
$61,832
193
10,465
$72,490
Fair
Value
$46,955
386
10,548
$57,889
86
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the amortized cost and fair value of held-to-maturity securities, by contractual maturity, as of December 31, 2015. 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:
One year or less
After one year through five years
After five years through ten years
After ten years
Total amortized cost
Fair value maturity:
One year or less
After one year through five years
After five years through ten years
After ten years
Total fair value
U.S. Agency
Securities
Municipal
Securities
Corporate Notes
Total
$ 25,058
36,805
—
—
$ 61,863
$ 25,007
36,825
—
—
$ 61,832
$
190
—
—
—
190
$
$
193
—
—
—
193
$
$
$
$
$
—
10,488
—
—
10,488
—
10,465
—
—
10,465
$25,248
47,293
—
—
$72,541
$25,200
47,290
—
—
$72,490
The following tables present municipal securities, by state, for the states where the largest volume of these securities are held in the Company’s portfolio. The
tables also present 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
Ohio
Minnesota
New Jersey
Wisconsin
Massachusetts
Connecticut
Texas
Iowa
Other
Total
Percent of
Municipal Portfolio
11.38%
8.72%
8.69%
8.38%
7.76%
7.69%
7.60%
6.04%
5.03%
28.71%
100.00%
December 31, 2015
Unrealized Gains
602
$
283
420
388
217
378
315
208
75
1,272
4,158
$
Amortized Cost
14,062
$
11,011
10,797
10,416
9,786
9,554
9,479
7,651
6,471
35,843
125,070
$
87
Unrealized Losses
$
—
(64)
(14)
—
(5)
(22)
—
(75)
(60)
(117)
(357)
$
Fair Value
$ 14,664
11,230
11,203
10,804
9,998
9,910
9,794
7,784
6,486
36,998
$128,871
Table of Contents
(Amounts in thousands)
New York
Minnesota
Wisconsin
Ohio
Connecticut
New Jersey
Massachusetts
Texas
Other
Total
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Percent of
Municipal Portfolio
11.48%
9.02%
8.98%
8.79%
8.67%
8.60%
7.77%
6.87%
37.93%
108.09%
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
$
Unrealized Losses
$
—
(30)
(16)
(148)
—
—
(38)
(133)
(327)
(692)
$
Fair Value
$ 14,794
11,621
11,568
11,334
11,168
11,082
10,008
8,851
48,875
$139,301
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
Corporate securities
Mortgage-backed Agency securities
Total
(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, 2015
12 Months or longer
Fair
Value
Unrealized
Losses
$
4,441 $
8,126
—
70,333
27,050
$ 109,950 $
(5)
(48)
—
(238)
(253)
(544)
$ 23,922 $
10,393
47,832
—
37,291
(746)
(309)
(8,050)
—
(922)
$ 119,438 $ (10,027)
Total
Fair
Value
Unrealized
Losses
$ 28,363 $
18,519
47,832
70,333
64,341
(751)
(357)
(8,050)
(238)
(1,175)
$ 229,388 $ (10,571)
Less than 12 Months
Fair
Value
Unrealized
Losses
$ — $ —
(8)
—
(3)
(6)
(17)
1,112
—
2,778
150
$4,040 $
December 31, 2014
12 Months or longer
Fair
Value
Unrealized
Losses
$ 29,448 $ (1,017)
(684)
25,007
(9,685)
46,137
(854)
45,790
—
—
$146,382 $ (12,240)
Total
Fair
Value
Unrealized
Losses
$ 29,448 $ (1,017)
(692)
26,119
(9,685)
46,137
(857)
48,568
(6)
150
$ 150,422 $ (12,257)
88
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present 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.
(Amounts in thousands)
U.S. Agency securities
Corporate securities
Total
(Amounts in thousands)
U.S. Agency securities
Corporate securities
Total
Less than 12 Months
Fair
Value
$43,723
6,851
$50,574
Unrealized
Losses
$
$
(106)
(23)
(129)
December 31, 2015
12 Months or longer
Fair
Value
$—
—
$—
Unrealized
Losses
$ —
—
$ —
Total
Fair
Value
$43,723
6,851
$50,574
Unrealized
Losses
$
$
(106)
(23)
(129)
Unrealized
Losses
Less than 12 Months
Fair
Value
$28,188
10,548
$38,736
$
$
(54)
(34)
(88)
December 31, 2014
12 Months or longer
Total
Fair
Value
$—
—
$—
Unrealized
Losses
$ —
—
$ —
Fair
Value
$28,188
10,548
$38,736
Unrealized
Losses
$
$
(54)
(34)
(88)
As of December 31, 2015, there were 107 individual securities in an unrealized loss position, and their combined depreciation in value represented 2.44% of the
investment securities portfolio. Individual securities in an unrealized loss position as of December 31, 2015, included 48 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, 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.
The following table presents the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales in the periods indicated:
(Amounts in thousands)
Gross realized gains
Gross realized losses
Net gain (loss) on sale of securities
2015
$ 363
(219)
$ 144
Year Ended December 31,
2014
$ 2,257
(3,642)
$(1,385)
2013
$ 553
(154)
$ 399
The carrying amount of securities pledged for various purposes totaled $236.73 million as of December 31, 2015, and $268.78 million as of December 31, 2014.
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, single issue trust preferred securities, corporate securities, and certificates of deposit.
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
89
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. Temporary impairment on these securities is primarily related to changes in benchmark interest rates, changes in
pricing in the credit markets, destabilization in foreign markets, and other current economic factors. The Company incurred no OTTI charges related to debt
securities not beneficially owned in 2015 or 2014.
Debt securities beneficially owned by the Company consist of mortgage-backed securities (“MBS”). For debt securities beneficially owned, the Company analyzes
the cash flows for each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. If the projected value of cash
flows at the current reporting date is less than the present value previously projected, and less than the current book value, an adverse change has occurred. The
Company then compares the current present value of cash flows to the current net book value to determine the credit-related portion of the OTTI. The credit-related
OTTI is recorded in earnings through noninterest income and any remaining noncredit-related OTTI is recorded in stockholders’ equity through OCI. The
Company incurred no credit-related OTTI charges related to debt securities beneficially owned in 2015. 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,
2015
$—
—
—
$—
2014
$ 7,798
705
(8,503)
$ —
2013
$7,478
320
—
$7,798
(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 no OTTI charges related to equity securities in 2015 or 2013.
The Company incurred OTTI charges related to equity securities of $32 thousand in 2014.
90
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
December 31,
2015
2014
Amount
Percent
Amount
Percent
$
2.86%
48,896
5.21%
88,903
5.57%
95,026
149,351
8.75%
485,460 28.45%
0.17%
2,911
27,540
1.61%
898,087 52.62%
107,367
6.29%
495,209 29.02%
2.55%
43,505
646,081 37.86%
72,000
7,338
79,338
4.22%
0.43%
4.65%
1,623,506 95.13%
4.87%
$1,706,541 100.00%
$
83,035
—
$
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
122,240
$1,689,416
1,792
$
2.44%
4.92%
5.77%
8.00%
28.05%
0.09%
1.75%
51.02%
6.57%
28.74%
1.94%
37.25%
4.10%
0.39%
4.49%
92.76%
7.24%
100.00%
Customer overdrafts reclassified as loans totaled $1.24 million as of December 31, 2015, and $1.44 million as of December 31, 2014. Deferred loan fees totaled
$3.78 million in 2015, and $3.39 million in 2014. For information concerning off-balance sheet financing, see Note 20, “Litigation, Commitments and
Contingencies,” to the Consolidated Financial Statements of this report.
91
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
Purchased Credit Impaired Loans
December 31,
2015
2014
$ 6,303
1,170
640
2,674
14,065
34
643
25,529
48,565
8,595
262
57,422
84
$83,035
$ 13,100
2,662
1,584
5,918
25,317
43
716
49,340
60,391
11,968
453
72,812
88
$122,240
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, Waccamaw serviced home equity lines, Waccamaw
residential, Peoples commercial, and Peoples residential. The Company closed the Waccamaw consumer loan pool during the first quarter of 2015 due to an
insignificant remaining balance. 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)
PCI Loans, by acquisition
Peoples Bank of Virginia
Waccamaw Bank
Other acquired
Total PCI Loans
2015
2014
December 31,
Unpaid Principal
Balance
$
$
11,249
63,151
1,297
75,697
Carrying Balance
$
$
7,090
53,835
1,358
62,283
Unpaid Principal
Balance
$
$
13,669
86,641
1,401
101,711
Carrying Balance
$
$
6,681
34,707
1,254
42,642
92
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, 2015
Additions
Accretion
Reclassifications from nonaccretable difference
Other changes, net
Balance, December 31, 2015
Balance, January 1, 2014
Additions
Accretion
Reclassifications from nonaccretable difference
Other changes, net
Balance, December 31, 2014
Balance, January 1, 2013
Additions
Accretion
Reclassifications from (to) nonaccretable difference
Other changes, net
Balance, December 31, 2013
Peoples
$ 4,745
—
(2,712)
1,283
273
$ 3,589
$ 5,294
267
(2,147)
1,912
(581)
$ 4,745
$ 2,342
148
(1,840)
6,155
(1,511)
$ 5,294
Waccamaw
$ 19,048
2
(6,459)
6,564
6,954
$ 26,109
$ 10,338
26
(6,118)
16,400
(1,598)
$ 19,048
$ 21,886
281
(6,288)
(2,967)
(2,574)
$ 10,338
Other
$ —
—
—
—
—
$ —
8
$
—
(37)
29
—
$ —
$ 15
—
(119)
112
—
8
$
Total
$23,793
2
(9,171)
7,847
7,227
$29,698
$15,640
293
(8,302)
18,341
(2,179)
$23,793
$24,243
429
(8,247)
3,300
(4,085)
$15,640
93
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. If the Company determines that it is probable all principal and interest amounts contractually
due will not be collected, the loan is generally deemed to be impaired. The following tables present the recorded investment and related information for loans
considered to be impaired, excluding PCI loans, as of the periods indicated:
(Amounts in thousands)
Impaired loans with no related allowance:
Commercial loans
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Single family owner occupied
Total impaired loans with no related allowance
Impaired loans with a related allowance:
Commercial loans
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Single family owner occupied
Owner occupied construction
Total impaired loans with a related allowance
Total impaired loans
(Amounts in thousands)
Impaired loans with no related allowance:
Commercial loans
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Single family owner occupied
Total impaired loans with no related allowance
Impaired loans with a related allowance:
Commercial loans
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Single family owner occupied
Total impaired loans with a related allowance
Total impaired loans
94
December 31, 2015
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
$
782
8,427
$
783
8,427
$ —
—
1,975
11,184
2,067
11,277
—
—
619
5,667
623
5,673
124
1,568
4,899
349
11,534
$ 22,718
4,907
355
11,558
$22,835
672
7
2,371
$ 2,371
December 31, 2014
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
$
466
5,705
466
$
6,049
$ —
—
3,397
9,568
3,494
10,009
—
—
367
3,772
367
3,772
45
1,000
2,341
6,480
$ 16,048
2,512
6,651
$16,660
437
1,482
$ 1,482
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the average annual recorded investment and 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
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
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total impaired loans with a related allowance
Total impaired loans
2015
Interest
Income
Average
Recorded
Investment
Year ended December 31,
2014
Interest
Income
Average
Recorded
Investment
2013
Interest
Income
Average
Recorded
Investment
$ —
—
—
34
295
—
$ —
—
—
626
8,767
—
$ —
17
—
8
96
11
$ —
461
—
301
6,083
181
$ 294
17
3
99
296
12
$ 3,850
698
18
939
7,225
370
—
136
—
—
2,432
88
2
73
—
66
2,508
—
25
70
5
454
2,156
15
—
465
—
11,913
—
207
—
9,600
—
821
3
15,728
—
—
—
25
65
—
26
1
117
$ 582
—
—
—
575
4,987
—
3,731
178
9,471
$ 21,384
—
47
23
2
31
1
48
—
152
$ 359
—
2,199
4,190
369
3,386
57
3,897
—
14,098
$ 23,698
117
18
7
3
29
1,057
4,281
94
892
1,494
12
54
—
240
$1,061
304
4,498
—
12,620
$ 28,348
95
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company determined that two of the six open PCI loan pools were impaired as of December 31, 2015, compared to two of the seven open PCI loan pools as of
December 31, 2014, and four of the seven open PCI loan pools as of December 31, 2013. The following tables present additional information 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
(Amounts in thousands)
Interest income recognized
Average recorded investment
December 31,
2015
$2,834
3,759
54
2014
$14,607
31,169
58
2015
$ 364
3,309
Year ended December 31,
2014
$ 3,081
30,007
2013
$ 1,966
35,220
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
Total covered loans
Total loans
Pass
Special
Mention
Substandard Doubtful
Loss
Total
December 31, 2015
$
46,816 $
87,223
81,168
139,680
454,906
2,886
25,855
974 $
663
12,969
3,976
15,170
25
1,427
1,106 $ — $— $
1,017
889
5,695
15,384
—
258
—
—
—
—
—
—
—
—
—
—
—
—
104,897
468,155
42,783
1,083
6,686
—
1,387
20,368
722
—
—
—
—
—
—
48,896
88,903
95,026
149,351
485,460
2,911
27,540
107,367
495,209
43,505
71,685
7,338
1,533,392
61
—
43,034
254
—
47,080
—
—
—
—
—
—
72,000
7,338
1,623,506
3,908
1,144
460
1,808
9,192
34
364
1,261
4
—
457
2,044
—
—
1,134
22
180
409
2,829
—
279
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,893
5,102
112
29,823
1,963
51
849
1,530
99
—
—
—
—
—
—
6,303
1,170
640
2,674
14,065
34
643
48,565
8,595
262
84
40,101
—
35,603
$1,573,493 $78,637 $
97
84
—
7,331
83,035
54,411 $ — $— $1,706,541
—
—
—
—
Table of Contents
(Amounts in thousands)
Non-covered loans
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pass
Special
Mention
Substandard Doubtful
Loss
Total
December 31, 2014
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
Total covered loans
Total loans
$
38,858 $ 1,384 $
81,196
89,503
126,155
441,385
1,589
26,876
616
7,007
3,333
13,028
—
1,432
1,029 $ — $— $
1,287
970
5,683
19,493
10
1,209
—
—
—
—
—
—
—
—
—
—
—
—
107,688
454,833
32,551
1,606
8,884
—
1,663
21,758
248
—
—
—
—
—
—
41,271
83,099
97,480
135,171
473,906
1,599
29,517
110,957
485,475
32,799
68,592
6,555
1,475,781
520
—
37,810
235
—
53,585
—
—
—
—
—
—
69,347
6,555
1,567,176
7,598
2,528
1,400
2,703
12,672
43
420
3,227
82
—
2,059
4,341
—
—
2,275
52
184
1,156
8,304
—
296
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,295
7,094
84
38,296
2,040
264
800
2,834
105
—
—
—
—
—
—
13,100
2,662
1,584
5,918
25,317
43
716
60,391
11,968
453
88
55,925
—
50,309
$1,531,706 $88,119 $
98
88
—
16,006
122,240
69,591 $ — $— $1,689,416
—
—
—
—
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
Total nonaccrual loans
Non-covered
$
39
—
84
1,850
7,150
—
234
825
7,245
349
2015
Covered
$
54
16
—
29
39
—
—
413
96
—
December 31,
Total
Non-covered
$
$
93
16
84
1,879
7,189
—
234
1,238
7,341
349
—
123
245
601
2,334
4
—
792
6,389
—
2014
Covered
$
18
34
—
77
1,317
—
—
204
682
106
Total
$
18
157
245
678
3,651
4
—
996
7,071
106
71
$ 17,847
—
$ 647
71
$18,494
68
$ 10,556
—
$2,438
68
$12,994
99
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 or covered accruing loans contractually past due 90 days or more as of December 31, 2015, or
December 31, 2014.
(Amounts in thousands)
Non-covered loans
Commercial loans
30 - 59 Days
Past Due
60 - 89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 2015
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
Total covered loans
Total loans
—
281
302
748
347
—
585
668
6,122
—
278
—
9,331
96
—
—
1,422
—
—
—
489
274
—
$
—
66
76
120
676
—
11
195
1,943
—
71
—
3,158
—
—
—
—
—
—
—
37
—
—
39
$
—
84
929
4,940
—
234
$
39
347
462
1,797
5,963
—
830
468
3,191
—
1,331
11,256
—
$
48,857
88,556
94,564
147,554
479,497
2,911
26,710
106,036
483,953
43,505
$
48,896
88,903
95,026
149,351
485,460
2,911
27,540
107,367
495,209
43,505
23
—
9,908
372
—
22,397
71,628
7,338
1,601,109
72,000
7,338
1,623,506
42
16
—
—
39
—
—
138
16
—
1,422
39
—
—
225
42
—
751
316
—
6,165
1,154
640
1,252
14,026
34
643
47,814
8,279
262
6,303
1,170
640
2,674
14,065
34
643
48,565
8,595
262
—
2,281
$ 11,612
—
37
3,195
—
364
$10,272
—
2,682
$25,079
84
80,353
$1,681,462
84
83,035
$1,706,541
$
100
Table of Contents
(Amounts in thousands)
Non-covered loans
Commercial loans
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
30 - 59 Days
Past Due
60 - 89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 2014
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
Total covered loans
Total loans
39
285
81
914
1,075
—
89
492
5,436
—
544
—
8,955
120
84
—
122
124
—
3
858
134
—
$
46
6
110
513
783
—
—
103
1,931
—
84
—
3,576
17
12
—
—
140
—
—
318
34
—
$ —
103
—
425
1,984
4
—
$
85
394
191
1,852
3,842
4
89
571
4,564
—
1,166
11,931
—
$
41,186
82,705
97,289
133,319
470,064
1,595
29,428
109,791
473,544
32,799
$
41,271
83,099
97,480
135,171
473,906
1,599
29,517
110,957
485,475
32,799
26
—
7,677
654
—
20,208
68,693
6,555
1,546,968
69,347
6,555
1,567,176
—
34
—
77
1,258
—
—
137
130
—
199
1,522
—
3
168
415
—
1,344
583
—
12,963
2,532
1,584
5,719
23,795
43
713
59,047
11,385
453
13,100
2,662
1,584
5,918
25,317
43
716
60,391
11,968
453
—
1,445
$ 10,400
—
521
4,097
—
1,952
$ 9,629
—
3,918
$24,126
88
118,322
$1,665,290
88
122,240
$1,689,416
$
The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial
difficulty. Restructured loans 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 $590 thousand as of December 31, 2015, and $475 thousand as of
December 31, 2014. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are
classified as
101
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 following table presents interest income related to TDRs in the periods,
indicated:
(Amounts in thousands)
Interest income recognized
Year Ended December 31,
2015
$608
2014
$597
2013
$551
Loans acquired with credit deterioration, with a discount, are generally not considered TDRs as long as the loans remain in the assigned loan pool. There were no
covered loans recorded as TDRs as of December 31, 2015 or 2014. 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
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
Nonaccrual
(1)
2015
Accruing
Total
Nonaccrual
(1)
2014
Accruing
Total
December 31,
$
$
130
—
$
820
4,600
$
950
4,600
127
733
349
1,339
43
8,256
243
$13,962
170
8,989
592
$15,301
$
$
—
83
—
471
—
554
$ 1,088
4,743
$ 1,088
4,826
47
8,412
244
$14,534
47
8,883
244
$15,088
(1)
TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.
102
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents loans modified as TDRs, by type of concession made and loan class, that were 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
Single family owner occupied
Total
Total
2015
Pre-
Modification
Recorded
Investment
Year Ended December 31,
Post-
Modification
Recorded
Investment
Total
Contracts
2014
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
$
$
—
—
—
—
—
—
—
342
342
342
$
$
—
—
—
—
—
—
—
342
342
342
4
1
5
1
1
2
1
5
6
13
$
$
1,850
245
2,095
468
303
771
255
487
742
3,608
$
$
1,850
245
2,095
468
303
771
255
487
742
3,608
Total
Contracts
—
—
—
—
—
—
—
5
5
5
There were no payment defaults on loans modified as TDRs that were restructured within the previous 12 months as of December 31, 2015 and 2014.
OREO consists of properties acquired through foreclosure. The following table presents information related to OREO as of the dates indicated:
(Amounts in thousands)
Non-covered OREO
Covered OREO
Total OREO
Non-covered OREO secured by residential real estate
Residential real estate loans in the foreclosure process
(1)
December 31,
2015
$4,873
4,034
$8,907
$2,677
2,727
2014
$ 6,638
6,324
$12,962
$ 6,155
4,561
(1)
The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local
requirements of the applicable jurisdiction.
103
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 6.
Allowance for Loan Losses
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 aggregates PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit,
Waccamaw serviced home equity lines, Waccamaw residential, Waccamaw consumer, Peoples commercial, and Peoples residential. The Company closed the
Waccamaw consumer loan pool during the first quarter of 2015 due to an insignificant remaining balance. 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, 2015, management believed the allowance was adequate to absorb probable loan losses inherent in the loan
portfolio.
The following tables present the aggregate activity in the allowance for loan losses in the periods indicated:
(Amounts in thousands)
Beginning balance
Provision for (recovery of) loan losses
Benefit attributable to the FDIC indemnification asset
Provision for loan losses charged to operations
Recovery of loan losses recorded through the FDIC indemnification asset
Charge-offs
Recoveries
Net charge-offs
Ending balance
104
Year Ended December 31, 2015
Allowance Excluding
PCI Loans
Allowance for
PCI Loans
$
$
20,169
2,166
—
2,166
—
(3,745)
1,589
(2,156)
20,179
$
$
58
(4)
29
25
(29)
—
—
—
54
Total
Allowance
$ 20,227
2,162
29
2,191
(29)
(3,745)
1,589
(2,156)
$ 20,233
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Beginning balance
Removal of loans transferred
Provision for (recovery of) loan losses
Benefit attributable to the FDIC indemnification asset
Provision (recovery) of loan losses charged to operations
Recovery of loan losses recorded through the FDIC indemnification asset
Charge-offs
Recoveries
Net charge-offs
Ending balance
(Amounts in thousands)
Beginning balance
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
Ending balance
105
Year Ended December 31, 2014
Allowance Excluding
PCI Loans
Allowance for
PCI Loans
$
$
23,322
(682)
420
—
420
—
(6,481)
3,590
(2,891)
20,169
$
$
755
—
(697)
422
(275)
(422)
—
—
—
58
Year Ended December 31, 2013
Allowance Excluding
PCI Loans
Allowance for
PCI Loans
$
$
25,762
7,912
—
7,912
—
(12,527)
2,175
(10,352)
23,322
$
$
8
747
(451)
296
451
—
—
—
755
Total
Allowance
$ 24,077
(682)
(277)
422
145
(422)
(6,481)
3,590
(2,891)
$ 20,227
Total
Allowance
$ 25,770
8,659
(451)
8,208
451
(12,527)
2,175
(10,352)
$ 24,077
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the components of the activity in the allowance for loan losses, excluding PCI loans, by loan segment, in the periods indicated:
(Amounts in thousands)
Beginning balance
Provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Ending balance
(Amounts in thousands)
Beginning balance
Removal of loans transferred
(Recovery of) provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Ending balance
(Amounts in thousands)
Beginning balance
Provision for loan losses charged to operations
Loans charged off
Recoveries credited to allowance
Net charge-offs
Ending balance
Commercial
$ 13,010
931
(1,282)
474
(808)
$ 13,133
Commercial
$ 16,090
(418)
(1,988)
(2,928)
2,254
(674)
$ 13,010
Commercial
$ 17,259
5,643
(7,743)
931
(6,812)
$ 16,090
Year Ended December 31, 2015
Consumer
Real
Estate
$ 6,489
95
(906)
678
(228)
$ 6,356
Consumer
and Other
$
670
1,140
(1,557)
437
(1,120)
690
$
Year Ended December 31, 2014
Consumer
Real
Estate
$ 6,597
(244)
1,273
(1,873)
736
(1,137)
$ 6,489
Consumer
and Other
$
635
(20)
1,135
(1,680)
600
(1,080)
670
$
Year Ended December 31, 2013
Consumer
Real
Estate
$ 7,906
1,364
(3,115)
442
(2,673)
$ 6,597
Consumer
and Other
$
597
905
(1,669)
802
(867)
635
$
Total
$ 20,169
2,166
(3,745)
1,589
(2,156)
$ 20,179
Total
$ 23,322
(682)
420
(6,481)
3,590
(2,891)
$ 20,169
Total
$ 25,762
7,912
(12,527)
2,175
(10,352)
$ 23,322
The following tables present the components of the activity in the allowance for loan losses for PCI loans, by loan segment, in the periods indicated:
(Amounts in thousands)
Beginning balance
(Recovery of) provision for PCI loan losses
Benefit attributable to FDIC indemnification asset
(Recovery of) provision for loan losses charged to operations
Recovery of loan losses recorded through the FDIC indemnification asset
Ending balance
Commercial
$
37
(37)
29
(8)
(29)
—
$
106
Year Ended December 31, 2015
Consumer
Real
Estate
$
21
33
—
33
—
54
$
Consumer
and Other
$ —
—
—
—
—
$ —
Total
$ 58
(4)
29
25
(29)
$ 54
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2014
(Amounts in thousands)
Beginning balance
Recovery of PCI loan losses
Benefit attributable to FDIC indemnification asset
Recovery of loan losses charged to operations
Recovery of loan losses recorded through the FDIC indemnification asset
Ending balance
(Amounts in thousands)
Beginning balance
Provision for PCI loan losses
Benefit attributable to FDIC indemnification asset
Recovery of loan losses charged to operations
Provision for loan losses recorded through the FDIC indemnification asset
Ending balance
Commercial
$
77
(40)
26
(14)
(26)
37
8
69
(55)
14
55
77
$
$
Commercial
$
Consumer
Real Estate
$
678
(657)
396
(261)
(396)
21
Consumer
and Other
$ —
—
—
—
—
$ —
Year Ended December 31, 2013
Consumer
Real Estate
$ —
678
(396)
282
396
678
$
Consumer
and Other
$ —
—
—
—
—
$ —
$
107
Total
$ 755
(697)
422
(275)
(422)
$ 58
Total
8
$
747
(451)
296
451
$ 755
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 evaluated for impairment, excluding PCI loans, by loan
class, as of the dates indicated:
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total loans, excluding PCI loans
(Amounts in thousands)
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total consumer real estate loans
Consumer and other loans
Consumer loans
Other
Total consumer and other loans
Total loans, excluding PCI loans
December 31, 2015
Loans
Individually
Evaluated for
Impairment
Allowance for
Loans
Individually
Evaluated
Loans
Collectively
Evaluated for
Impairment
$
$
—
—
—
1,401
14,094
—
—
15,495
—
6,874
349
7,223
—
—
—
22,718
$
$
—
—
—
124
1,568
—
—
1,692
—
672
7
679
—
—
—
2,371
$
53,437
89,885
95,486
147,209
478,839
2,945
28,183
895,984
126,691
495,761
43,323
665,775
72,084
7,338
79,422
$1,641,181
Loans
Individually
Evaluated for
Impairment
December 31, 2014
Allowance
for Loans
Individually
Evaluated
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
$
$
—
—
—
833
9,477
—
—
10,310
—
5,738
—
5,738
—
—
—
16,048
$
$
—
—
—
45
1,000
—
—
1,045
—
437
—
437
—
—
—
1,482
108
69,429
6,555
75,984
$1,611,085
670
—
670
$ 18,687
Allowance
for Loans
Collectively
Evaluated
$
1,119
504
1,535
3,245
4,825
22
190
11,440
1,091
4,297
290
5,678
690
—
690
$ 17,808
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
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the Company’s allowance for loan losses related to PCI loans and recorded investment in PCI loans, by loan pool, as of the dates
indicated:
(Amounts in thousands)
Commercial loans
Waccamaw commercial
Waccamaw lines of credit
Peoples commercial
Other
Total commercial loans
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Peoples residential
Total consumer real estate loans
Consumer and other loans
Waccamaw consumer
(1)
Total loans
(1)
Closed during the first quarter of 2015.
Note 7.
FDIC Indemnification Asset
2015
2014
December 31,
Loan Pools
With
Impairment
$
3,788
—
5,525
1,254
10,567
29,241
1,678
1,156
32,075
—
$ 42,642
Allowance
for Loans
Pools With
Impairment
$
$
—
—
—
—
—
—
1
53
54
—
54
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
The Company entered into loss share agreements with the FDIC in 2012 in connection with the FDIC-assisted acquisition of Waccamaw. Under the loss share
agreements, the FDIC agreed to cover 80% of most loan and foreclosed real estate losses. Certain expenses incurred in relation to these covered assets are
reimbursable by the FDIC. Estimated reimbursements are netted against the expense on covered assets in the Company’s consolidated statements of income. The
following table presents activity in the FDIC indemnification asset in the periods indicated:
(Amounts in thousands)
Beginning balance
(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
109
Year Ended December 31,
2015
$ 27,900
(28)
1,489
545
(6,379)
(2,683)
$ 20,844
2014
$ 34,691
(422)
1,851
527
(3,979)
(4,768)
$ 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,
2015
$ 19,155
50,776
36,709
106,640
53,884
$ 52,756
2014
$ 19,166
50,729
38,103
107,998
52,154
$ 55,844
Certain long-term investments in land and buildings were evaluated for impairment resulting in write-downs totaling $259 thousand in 2015 and $935 thousand in
2014. Depreciation and amortization expense was $4.14 million in 2015, $4.41 million in 2014, and $4.67 million in 2013.
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, 2015:
(Amounts in thousands)
2016
2017
2018
2019
2020
2021 and thereafter
$ 733
591
528
376
210
887
$3,325
Lease expense was $862 thousand in 2015, $1.06 million in 2014, and $1.18 million in 2013. Certain portions of the Company’s leases have been sublet to third
parties for properties not currently being used by the Company. Future minimum lease payments to be received under noncancelable subleases totaled $5 thousand
as of December 31, 2015.
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. The estimated future value of the cash consideration is recognized as goodwill at the acquisition date. The Company analyzed the carrying
value of goodwill as of October 31, 2015, and determined that no impairment charge was necessary.
110
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the activity in goodwill, by reporting unit, in the periods indicated:
(Amounts in thousands)
Beginning balance, January 1, 2015
Acquisitions and dispositions, net
Cash consideration paid
Ending balance, December 31, 2015
Beginning balance, January 1, 2014
Acquisitions and dispositions, net
Cash consideration paid
Ending balance, December 31, 2014
Beginning balance, January 1, 2013
Acquisitions and dispositions, net
Cash consideration paid
Ending balance, December 31, 2013
Community
Banking
$ 91,455
—
—
$ 91,455
$ 96,541
(6,454)
1,368
$ 91,455
$ 96,717
(176)
—
$ 96,541
Insurance
Services
$ 9,267
(324)
88
$ 9,031
$ 8,914
—
353
$ 9,267
$ 8,149
324
441
$ 8,914
Total
$100,722
(324)
88
$100,486
$105,455
(6,454)
1,721
$100,722
$104,866
148
441
$105,455
Other Intangible Assets
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, 2015, the remaining lives of core deposit intangible assets ranged from 8 months to 10 years, and the
weighted average remaining life was 9 years. Other identifiable intangible assets are amortized using the straight-line method and consist primarily of the value
assigned to contractual rights arising from insurance agency acquisitions. 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
2015
Insurance
Services
$ —
—
—
3,711
(2,863)
848
848
$
December 31,
Total
$12,282
(7,958)
4,324
4,246
(3,327)
919
$ 5,243
Community
Banking
$ 12,282
(7,148)
5,134
535
(437)
98
5,232
$
2014
Insurance
Services
$ —
—
—
3,711
(2,522)
1,189
$ 1,189
Total
$12,282
(7,148)
5,134
4,246
(2,959)
1,287
$ 6,421
Community
Banking
$ 12,282
(7,958)
4,324
535
(464)
71
4,395
$
111
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Amortization expense for other intangible assets was $1.12 million in 2015, $787 thousand in 2014, and $729 thousand in 2013. The following schedule presents
the estimated amortization expense for intangible assets, by year, as of December 31, 2015:
(Amounts in thousands)
2016
2017
2018
2019
2020
2021 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
The following schedule presents the contractual maturities of time deposits as of December 31, 2015:
(Amounts in thousands)
2016
2017
2018
2019
2020
2021 and thereafter
112
$1,034
821
624
438
438
1,845
$5,200
December 31,
2015
451,511
$
2014
417,729
$
347,705
213,982
316,603
408,519
134,939
1,421,748
$ 1,873,259
353,874
225,196
300,282
557,352
146,326
1,583,030
$ 2,000,759
$ 286,687
77,117
61,662
45,874
69,796
2,322
$ 543,458
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Time deposits of $250 thousand or more totaled $41.35 million as of December 31, 2015, and $60.27 million as of December 31, 2014. The following schedule
presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2015:
(Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
$ 6,813
4,700
7,401
22,433
$41,347
Note 11.
Borrowings
Short-term borrowings generally consist of federal funds purchased and retail repurchase agreements, which are typically collateralized with agency MBS. Long-
term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other obligations. The following
table presents the composition of borrowings as of the dates indicated:
(Amounts in thousands)
Federal funds purchased
Securities sold under agreements to repurchase:
Retail
Wholesale
Total securities sold under agreements to repurchase
FHLB borrowings
Subordinated debt
Other debt
Total borrowings
Balance
$ —
88,614
50,000
138,614
65,000
15,464
292
$219,370
(1) Weighted average contractual rate
December 31,
2015
Weighted
Average Rate
(1)
—
0.10%
3.71%
4.03%
Balance
$ —
71,742
50,000
121,742
90,000
15,464
2,535
$229,741
2014
Weighted
Average Rate
(1)
—
0.13%
3.71%
4.07%
The following schedule presents the remaining contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 2015:
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total
Overnight and
Continuous
$
$
71,588
—
15,016
86,604
113
Up to 30
Days
$ —
—
202
202
$
30-90 Days
$ —
—
—
$ —
Greater Than
90 Days
$
$
—
1,047
50,761
51,808
Total
$ 71,588
1,047
65,979
$138,614
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following schedule presents the contractual maturities of wholesale repurchase agreements and FHLB borrowings, by year, as of December 31, 2015:
(Amounts in thousands)
2016
2017
2018
2019
2020
2021 and thereafter
Weighted average maturity (in years)
Wholesale Repurchase
Agreements
$
$
25,000
—
—
25,000
—
—
50,000
2.08
FHLB
Borrowings
$ —
15,000
—
—
—
50,000
$ 65,000
4.17
Total
$ 25,000
15,000
—
25,000
—
50,000
$115,000
3.26
The counterparties to the repurchase agreements may call those borrowings, which could substantially shorten the lives of the borrowings. Prepayment, or unwind,
of a repurchase agreement may result in substantial penalties based on market conditions.
The FHLB may redeem callable advances at quarterly intervals, 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. The Company prepaid $25 million of a FHLB convertible advance bearing an interest rate of 4.15% that was
scheduled to mature in 2017 during the second quarter of 2015. The prepayment penalty associated with the $25 million FHLB debt repayment totaled $1.70
million.
The Company is required to pledge qualifying collateral to secure FHLB advances and letters of credit. As of December 31, 2015, the Company provided for FHLB
letters of credit to collateralize public unit deposits totaling $22.69 million. FHLB borrowings were secured by qualifying loans that totaled $874.68 million as of
December 31, 2015. Unused borrowing capacity with the FHLB, net of FHLB letters of credit, totaled $403.10 million as of December 31, 2015.
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
currently 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, 2015, and
December 31, 2014.
The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution that carries an interest rate of one-month
LIBOR plus 2.00% and matures in April 2016. As of December 31, 2015, there was no outstanding balance on the line compared to an outstanding balance of
$2.00 million as of December 31, 2014.
114
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, 2015, the Company’s derivative instruments consisted of 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.
Interest rate lock commitments (“IRLCs”) and forward sale loan commitments . In the normal course of business, the Company may enter 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 fourteen-year, $1.20 million notional interest rate swap agreement in March 2015, 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 loan hedged by the October 2013 swap
paid off in 2014 and the swap was terminated. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are
recorded at fair value. The fair value hedges were effective as of December 31, 2015.
115
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the aggregate contractual or notional amounts and 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
Notional or
Contractual
Amount
2015
Derivative
Assets
December 31,
Derivative
Liabilities
Notional or
Contractual
Amount
2014
Derivative
Assets
Derivative
Liabilities
$
5,335
$ —
$
251
$
4,363
$ —
$
209
—
—
—
5,335
$
—
—
—
$ —
—
—
—
251
$
1,391
3,183
4,574
8,937
$
5
—
5
5
$
—
5
5
214
$
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
Note 13.
Employee Benefit Plans
Employee Stock Ownership and Savings Plan
Income Statement Location
2015
2014
2013
Year Ended December 31,
Other income
$—
$—
$ —
Other income
Other income
—
—
—
$—
—
—
—
$—
(169)
41
(128)
$(128)
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 428,785 shares of the Company’s common stock as of December 31, 2015, 457,765 shares as of December 31, 2014, and
499,075 shares as of December 31, 2013.
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.
116
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 matching contributions to qualified deferrals under the 401(k) savings
component of the KSOP was $1.53 million in 2015, $1.58 million in 2014, and $1.61 million in 2013. Matching contributions for 2015 were made in cash and the
Company’s common stock and matching contributions for 2014 and 2013 were made in cash.
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, 2015, stop-loss insurance coverage
generally limited the Company’s risk of loss to $125 thousand for individual claims and $4.08 million aggregate claims. Expenses related to the health plan were
$3.06 million in 2015, $2.88 million in 2014, and $3.02 million in 2013.
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 $458 thousand as of December 31, 2015, and $451 thousand as of December 31, 2014, 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, 2015.
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
117
Year Ended December 31,
2015
$133
281
7
187
$608
2014
$106
290
—
187
$583
2013
$135
246
49
187
$617
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The actuarial benefit plan obligation was $7.08 million as of December 31, 2015, and $6.63 million as of December 31, 2014. The obligation as of December 31,
2015, included a $111 thousand actuarial loss. The assumed discount rate was increased to 4.62% as of December 31, 2015, compared to 4.41% as of December 31,
2014. The following schedule presents the projected benefit payments to be paid under the SERP, by year, as of December 31, 2015:
(Amounts in thousands)
2016
2017
2018
2019
2020
2021 through 2025
$ 249
352
352
350
374
2,118
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 losses
Amortization of prior service cost
Net periodic cost
Year Ended December 31,
2015
$ 47
53
60
72
$232
2014
$ 22
46
—
73
$141
2013
$ 26
41
1
90
$158
The actuarial benefit plan obligation was $1.31 million as of December 31, 2015, and $997 thousand as of December 31, 2014. The assumed discount rate
increased to 4.62% as of December 31, 2015, compared to 4.41% as of December 31, 2014. The following schedule presents the projected benefit payments to be
paid under the Directors’ Plan, by year, as of December 31, 2015:
(Amounts in thousands)
2016
2017
2018
2019
2020
2021 through 2025
118
$ 84
110
108
106
149
702
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, 2015, 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 a total of 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
2015
$ 93
8
2013
$ 574
9
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 2015, 2014, or 2013.
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, 2015
Granted
Exercised
Canceled
Outstanding, December 31, 2015
Exercisable, December 31, 2015
Weighted
Average
Exercise
Price
Per Share
$ 20.54
—
12.64
21.98
$ 20.17
$ 20.17
Option
Shares
326,022
—
4,323
85,295
236,404
236,404
119
Weighted Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
5.5
5.5
$
$
707
707
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The aggregate intrinsic value of options exercised was $20 thousand in 2015, $13 thousand in 2014, and $22 thousand in 2013. As of December 31, 2015, 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. 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, 2015
Granted
Vested
Canceled
Nonvested, December 31, 2015
Shares
900
9,654
(5,227)
—
5,327
Weighted Average
Grant-Date
Fair Value
$
$
16.24
16.90
16.84
—
16.85
As of December 31, 2015, unrecognized compensation cost related to nonvested restricted stock awards was $54 thousand with an expected weighted average
recognition period of 0.56 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, 2015
Granted
Vested
Canceled
Nonvested, December 31, 2015
Shares
22,902
—
(12,906)
(148)
9,848
Weighted Average
Grant-Date
Fair Value
$
$
15.79
—
15.77
15.56
15.83
As of December 31, 2015, there was no unrecognized compensation cost related to nonvested performance stock awards. 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.
120
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 and expense in the periods indicated:
(Amounts in thousands)
Other operating income
Increase in cash value of bank owned life insurance
Other
(1)
Total other operating income
Other operating expense
Service fees
OREO expense and net loss
ATM processing expenses
Telephone and data communications
Advertising and public relations
Professional fees
Office supplies
Premises and equipment write-downs
Other
(1)
Total other operating expense
2015
Year Ended December 31,
2014
2013
$ 1,690
2,439
$ 4,129
$ 3,401
2,438
2,407
1,595
1,309
1,272
1,228
259
7,202
$21,111
$ 1,304
3,051
$ 4,355
$ 3,856
2,094
2,102
1,715
1,001
1,436
1,514
935
7,589
$22,242
$ 1,162
4,073
$ 5,235
$ 3,157
2,037
1,605
1,707
1,686
2,564
1,472
1,520
7,500
$23,248
(1)
Other components of other operating income or expense 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 (benefit):
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,
2014
2013
2015
$ (254)
581
327
10,034
1,020
11,054
$11,381
$ 7,234
1,325
8,559
2,971
794
3,765
$12,324
$12,819
1,743
14,562
(3,136)
(518)
(3,654)
$10,908
121
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
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,
2015
2014
$ 7,741
2,331
1,511
5,014
6,551
4,082
4,529
2,578
34,337
13,162
2,658
1,975
347
18,142
$16,195
$ 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
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) increase resulting from:
Tax-exempt interest
State income taxes, net of federal benefit
Bank owned life insurance
Other, net
Effective tax rate
122
Year Ended December 31,
2014
35.00%
2015
35.00%
2013
35.00%
(4.07)
1.78
(1.92)
0.89
31.68%
(4.35)
2.66
(1.47)
0.75
32.59%
(5.14)
2.35
(1.48)
1.15
31.88%
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, 2015
Other comprehensive gain before reclassifications
Reclassified from AOCI
Net comprehensive gain (loss)
Ending balance, December 31, 2015
Beginning balance, January 1, 2014
Other comprehensive gain (loss) before reclassifications
Reclassified from AOCI
Net comprehensive gain (loss)
Ending balance, December 31, 2014
Beginning balance, January 1, 2013
Other comprehensive (loss) gain before reclassifications
Reclassified from AOCI
Net comprehensive (loss) gain
Ending balance, December 31, 2013
Unrealized Gains (Losses)
on Available-for-Sale
Securities
$
$
$
$
$
$
(4,266)
291
90
381
(3,885)
(13,640)
10,697
(1,323)
9,374
(4,266)
(283)
(13,406)
49
(13,357)
(13,640)
Employee
Benefit Plan
$ (1,339)
180
(203)
(23)
$ (1,362)
$ (1,100)
(77)
(162)
(239)
$ (1,339)
$ (1,542)
647
(205)
442
$ (1,100)
Total
$ (5,605)
471
(113)
358
$ (5,247)
$ (14,740)
10,620
(1,485)
9,135
$ (5,605)
$ (1,825)
(12,759)
(156)
(12,915)
$ (14,740)
The following table presents reclassifications out of AOCI by component in the periods indicated:
(Amounts in thousands)
Available-for-sale securities
Gains (losses) realized in net income
Credit-related OTTI recognized in net income
Income tax effect
Employee benefit plans
Amortization of prior service cost
Amortization of losses
Income tax effect
Reclassified from AOCI, net of tax
Year Ended December 31,
2014
2015
2013
Income Statement
Line Item Affected
(737) (320) Net impairment losses recognized in earnings
$ 144 $(1,385) $ 399 Net gain (loss) on sale of securities
—
144 (2,122)
54
(799)
90 (1,323)
79 Income before taxes
30 Income tax expense (benefit)
49 Net income
(260)
(66) —
(260) (277) (1)
(50) (1)
(260) (327) Income before taxes
(326)
(98) (122) Income tax expense (benefit)
(123)
(203)
(162) (205) Net income
$(113) $(1,485) $(156) Net income
(1)
Amortization is included in net periodic pension cost. See Note 13, “Employee Benefit Plans.”
123
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
124
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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:
(Amounts in thousands)
Available-for-sale securities:
U.S. Agency securities
Municipal securities
Single issue trust preferred securities
Corporate securities
Certificates of deposit
Agency MBS
Equity securities
Total available-for-sale securities
Fair value loans
Deferred compensation assets
Deferred compensation liabilities
Derivative liabilities
Interest rate swaps
Total derivative liabilities
December 31, 2015
Total
Fair Value
Fair Value Measurements Using
Level 1
Level 2
Level 3
$ 30,702
128,678
47,832
70,333
5,000
83,556
72
$366,173
4,886
$
3,464
3,464
$
$
$ —
—
—
—
—
—
54
54
$
$ —
$3,464
$3,464
$ 30,702
128,678
47,832
70,333
5,000
83,556
18
$366,119
$
4,886
$ —
$ —
$ —
—
—
—
—
—
—
$ —
$ —
$ —
$ —
$
$
251
251
$ —
$ —
$
$
251
251
$ —
$ —
125
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(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
December 31, 2014
Total
Fair Value
Fair Value Measurements Using
Level 1
Level 2
Level 3
$ 33,598
138,915
46,137
5,109
102,119
239
$326,117
3,406
$
3,380
$
$ —
—
—
—
—
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
$ —
—
—
—
—
—
$ —
$ —
$ —
$ —
$ —
$ —
$ —
—
$ —
There were no changes in valuation techniques during the years ended December 31, 2015 or 2014. If the Company determines that a valuation technique change is
necessary, the change is assumed to have occurred at the end of the respective reporting period. In addition, there were no transfers into or out of Level 3 of the fair
value hierarchy during the years ended December 31, 2015 or 2014.
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.
126
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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
$9,164
4,819
4,034
Total
Fair
Value
$4,999
5,462
5,247
December 31, 2015
Fair Value Measurements Using
Level 1
—
—
—
Level 2
—
—
—
Level 3
$ 9,164
4,819
4,034
December 31, 2014
Fair Value Measurements Using
Level 1
—
—
—
Level 2
—
—
—
Level 3
$ 4,999
5,462
5,247
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
(2)
(2)
(2)
December 31, 2015
1% to 39% (21%)
1% to 100% (33%)
21% to 65% (46%)
December 31, 2014
1% to 33% (22%)
10% to 47% (26%)
10% to 52% (44%)
Range (Weighted Average)
(1)
(2)
Fair value is generally based on appraisals of the underlying collateral.
Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
127
Table of Contents
Fair Value of Financial Instruments
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
128
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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
December 31, 2015
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
$
51,787
366,173
72,490
—
1,685,061
10,753
6,007
—
3,464
$ 451,511
347,705
530,585
541,059
140,880
1,260
85,774
251
3,464
$ 51,787
54
—
—
—
—
—
—
3,464
$ —
—
—
—
—
—
—
—
3,464
$ —
366,119
72,490
—
5,137
—
6,007
—
—
$451,511
347,705
530,585
541,059
140,880
1,260
85,774
251
—
$
—
—
—
—
1,679,924
10,753
—
—
—
$
—
—
—
—
—
—
—
—
—
December 31, 2014
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
$ 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
—
—
—
$
—
—
—
—
—
—
—
—
—
Carrying
Amount
$
51,787
366,173
72,541
—
1,686,308
20,844
6,007
—
3,464
$ 451,511
347,705
530,585
543,458
138,614
1,260
80,756
251
3,464
Carrying
Amount
$ 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
129
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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, 2015
Increase in accounts, including new accounts
Decrease in accounts, including closed accounts
Net change
Ending balance, December 31, 2015
Beginning balance, January 1, 2014
Increase in accounts, including new accounts
Decrease in accounts, including closed accounts
Net change
Ending balance, December 31, 2014
Beginning balance, January 1, 2013
Increase in accounts, including new accounts
Decrease in accounts, including closed accounts
Net change
Ending balance, December 31, 2013
Deposits
$ 3,820
4,084
(1,356)
2,728
$ 6,548
$ 2,922
1,321
(423)
898
$ 3,820
$ 2,589
907
(574)
333
$ 2,922
Loans
$22,826
1,066
(2,006)
(940)
$21,886
$17,181
6,123
(478)
5,645
$22,826
$16,617
2,037
(1,473)
564
$17,181
Changes in the composition of the Company’s subsidiary board members and executive officers resulted in a net decrease in deposits of $420 thousand in 2015
compared to a net increase of $481 thousand in 2014 and $103 thousand in 2013. Changes in the composition of the Company’s subsidiary board members and
executive officers resulted in no change to loans in 2015 compared to a net increase of $5.47 million in 2014 and a net decrease in loans of $613 thousand in 2013.
The Company’s other operating expense includes certain expenses associated with related parties. Legal fees paid to related parties totaled $88 thousand in 2015,
$27 thousand in 2014, and $57 thousand in 2013. Lease expense paid to related parties totaled $95 thousand in 2015, $92 thousand in 2014, and $134 thousand in
2013. Other expense paid to related parties totaled $21 thousand in 2015.
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.
130
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Commitments and Contingencies
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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,
2015
$ 235,302
—
7,765
$ 243,067
326
$
2014
$ 236,471
1,391
3,581
$ 241,443
$
326
The Company provided for letters of credit with the FHLB totaling $22.69 million as of December 31, 2015, and $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.
131
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 balance sheet assets and 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.
Basel III Capital Rules became effective on January 1, 2015, subject to a four-year phase-in period. Quantitative measures established by the Basel III Capital
Rules to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total capital, and
Tier 1 capital, as defined in the regulations, to risk-weighted assets, as defined, and of Tier 1 capital to adjusted quarterly average assets, as defined.
The following table presents actual and required capital ratios as of December 31, 2015, under the Basel III Capital Rules. The minimum required capital amounts
presented include the minimum capital levels as of December 31, 2015, based on the phase-in provisions of the Basel III Capital Rules and the minimum required
capital levels as of January 1, 2019, when the Basel III Capital Rules are fully phased in. A detailed description of the Basel III Capital Rules is included in Item 1,
“Capital Adequacy Requirements” in Part I of this report.
(Amounts in thousands)
Common Equity Tier 1 Ratio
First Community Bancshares, Inc.
First Community Bank
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, 2015
Minimum Capital
Required-Basel III
Phase-In Schedule
Amount
Ratio
Minimum Capital
Required-Basel III
Fully Phased-In
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
$246,237
228,669
14.54% $ 76,196
75,682
13.60%
4.50% $118,527
117,728
4.50%
7.00%
7.00%
NA
109,319
NA
6.50%
269,998
249,228
15.95%
14.82%
135,459
134,546
8.00%
8.00%
177,791
176,592
10.50%
10.50%
NA
168,183
NA
10.00%
249,436
228,669
14.73%
13.60%
101,595
100,910
6.00%
6.00%
143,926
142,955
8.50%
8.50%
NA
134,546
NA
8.00%
249,436
228,669
10.62%
9.77%
93,935
93,616
4.00%
4.00%
93,935
93,616
4.00%
4.00%
NA
117,020
NA
5.00%
132
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the Company’s and the Bank’s actual and required capital ratios as of December 31, 2014, under the regulatory capital rules then in
effect.
(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
December 31, 2014
For Capital
Adequacy
Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$284,999
251,256
17.68%
15.73%
$128,962
127,761
8.00%
8.00%
N/A
$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%
As of December 31, 2015, the Company and the Bank continued to meet all capital adequacy requirements. As of December 31, 2015, 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. Additionally, our capital ratios were in excess of the minimum
standards under the Basel III Capital Rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2015.
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.
133
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 22.
Parent Company Financial Information
The following tables present 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
(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
134
CONDENSED BALANCE SHEETS
December 31,
2015
2014
$
$
$
$
8,367
8,459
336,311
5,489
358,626
145
15,464
15,609
—
21,382
227,692
154,550
(56,457)
(4,150)
343,017
358,626
$
$
$
$
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
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
2014
$ 14,148
515
(1,793)
511
12,109
25,490
910
$ 24,580
2015
$ 22,970
1,039
(2,080)
616
1,995
24,540
105
$ 24,435
2013
43,900
$
726
(1,647)
368
(20,035)
23,312
1,024
22,288
$
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Amounts in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2014
2013
2015
$
24,540
$
25,490
$
23,312
Equity in undistributed earnings of subsidiary
(Gain) loss on sale of securities
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Decrease (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
(Repayments of) proceeds from other borrowings
Redemption of preferred stock
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 (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(1,995)
(38)
1,104
(1,773)
43
21,881
199
—
—
199
(2,000)
(2,367)
264
(21,525)
(9,994)
(219)
482
(35,359)
(13,279)
21,646
8,367
(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
$
$
135
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 23.
Quarterly Financial Data (Unaudited)
The following tables present selected financial data by quarter for the periods indicated:
(Amounts in thousands, except share and per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income, excluding net (loss) gain on sale of securities
Net (loss) gain on sale of securities
Total noninterest expense
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 (recovery of) loan losses
Net interest income after provision for loan losses
Other income, excluding net gain (loss) on sale of securities
Net gain (loss) on sale of securities
Total noninterest expense
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, 2015
Third
Quarter
Second
Quarter
Fourth
Quarter
$
24,098
3,259
20,839
1,100
19,739
6,859
(23)
17,780
8,795
2,837
5,958
105
5,853
0.31
0.31
0.13
18,633,574
19,344,443
$
$
$
23,979
2,909
21,070
276
20,794
7,924
213
20,289
8,642
2,467
6,175
—
6,175
0.33
0.33
0.13
18,831,742
18,860,119
$
$
$
24,348
2,679
21,669
381
21,288
7,113
(39)
19,019
9,343
3,084
6,259
—
6,259
0.34
0.34
0.14
18,470,348
18,500,975
$
$
First
Quarter
Year Ended December 31, 2014
Third
Quarter
Second
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
$
$
136
$
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
$
$
$
$
23,677
2,502
21,175
434
20,741
7,490
(7)
19,083
9,141
2,993
6,148
—
6,148
$
0.34
0.34
0.14
18,193,824
18,226,719
Fourth
Quarter
$
$
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
Table of Contents
Note 24.
Subsequent Events
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On March 4, 2016, the Company announced that it had entered into agreements with First Bank, North Carolina, pursuant to which the Bank is swapping a portion
of its North Carolina branch network for First Bank’s Virginia branch network. Under the agreements, the Bank will acquire seven branches in southwestern
Virginia with deposits totaling approximately $150 million and sell six branches in the Winston-Salem and Mooresville areas of North Carolina with deposits
totaling approximately $130 million. Additionally, the swap will include up to $175 million of loans. The branch exchange is intended to complement the Bank’s
2014 acquisition of seven branches from Bank of America. Subject to regulatory approval and the satisfaction of customary closing conditions, the transaction is
expected to close in the third quarter of 2016.
137
Table of Contents
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, 2015
and 2014, 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2015 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, 2015, based on criteria established in Internal Control-Integrated Framework ( 2013 ) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2016 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 4, 2016
138
Table of Contents
- Management’s Assessment of Internal Control over Financial Reporting -
First Community Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements
included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in
conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and
judgments.
We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce
reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to
the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has
inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial statement preparation.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in the Internal
Control-Integrated Framework (2013) 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, 2015.
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, 2015. 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, 2015, appears hereafter in Item 8 of this Annual Report on Form
10-K.
Dated this 4 day of March, 2016.
th
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer
139
Table of Contents
Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
- Report of Independent Registered Public Accounting Firm -
We have audited First Community Bancshares, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2015, based on
criteria established in Internal Control-Integrated Framework (2013) 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, 2015,
based on criteria established in Internal Control-Integrated Framework (2013) 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, 2015, and our report, dated March 4, 2016 expressed an unqualified opinion on
those consolidated financial statements.
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 4, 2016
140
Table of Contents
Item 9.
None.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon
that evaluation, the CEO and CFO concluded that, as of December 31, 2015, 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,
2015, 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, 2015, 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, 2015, is included in Item 8, “Report of Independent Registered Public Accounting Firm,” of this report.
Item 9B.
Other Information.
None.
141
Table of Contents
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required in Item 10 of this report is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on
April 26, 2016 (“2016 Annual Meeting”). The Proxy Statement will be filed with the SEC prior to the 2016 Annual Meeting. The following list provides the
heading under which the required information is incorporated by reference in our Proxy Statement for the 2016 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 17, 2015, for the Annual Meeting of Stockholders held in 2015, 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.
W. C. Blankenship, Jr.
Retired Agent, State Farm Insurance
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
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
142
I. Norris Kantor
Of Counsel, Katz, Kantor, Stonestreet & Buckner, Attorneys at Law; Board
of Governors, Bluefield State College
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
Table of Contents
EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
William P. Stafford, II
Chief Executive Officer
Gary R. Mills
President
David D. Brown
Chief Financial Officer
Robert L. Schumacher
General Counsel
E. Stephen Lilly
Chief Operating Officer
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
Retired Vice President and Secretary, First Community Bancshares, Inc.;
Retired 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
Richard H. Jarrell
Chick-fil-A Franchise Owner; Director, Raleigh General Hospital Board of
Trustees; Director, Beckley-Raleigh County Chamber of Commerce;
Director, United Way of Southwest Virginia; Director, Raleigh County
Board of Education
143
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
Table of Contents
Item 11.
Executive Compensation.
Information regarding executive compensation is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting under the headings “Board
Committees,” “Compensation Discussion and Analysis,” and “Director Compensation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table presents information regarding compensation plans under which our equity securities are authorized for issuance as of December 31, 2015:
Plan category
Equity compensation plans approved
by security holders
(1)
Equity compensation plans not
approved by security holders
(2)
Total
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)
44,442
$
17.76
191,962
236,404
20.72
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
513,504
(3)
—
513,504
(1)
(2)
(3)
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.
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 2016
Annual Meeting under the heading “Information on Stock Ownership.”
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions and director independence is incorporated by reference to our Proxy Statement for the 2016
Annual Meeting under the headings “Corporate Governance” and “Related Person Transactions.”
Item 14.
Principal Accounting Fees and Services.
Information regarding principal accounting fees and services is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting under the heading
“Independent Registered Public Accounting Firm.”
144
Table of Contents
Item 15.
Exhibits, Financial Statement Schedules.
(a)
Documents Filed as a Part of this Report
PART IV
(1)
The following financial statements are incorporated by reference from Item 8 of this Report:
Consolidated Balance Sheets as of December 31, 2015 and 2014.
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015, 2014, and 2013.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014, and 2013.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements.
(2)
All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the
required information is included in the consolidated financial statements or related notes thereto.
(b)
Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
10.1**
10.1.1**
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.9**
10.10**
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)
Exhibit
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)
First Community Bancshares, Inc. 1999 Stock Option Agreement (7) and Plan. (8)
First Community Bancshares, Inc. 1999 Stock Option Plan, Amendment One. (9)
First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Plan. (10)
Employment Agreement between First Community Bancshares, Inc. and John M. Mendez dated December 16, 2008, as amended and restated
(20) and Waiver Agreement. (27)
First Community Bancshares, Inc. and Affiliates Executive Retention Plan (11), Amendment #1 (12), and Amendment #2. (30)
First Community Bancshares, Inc. Split Dollar Plan and Agreement. (13)
First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated. (14)
First Community Bancshares, Inc. Nonqualified Supplemental Cash or Deferred Retirement Plan, as amended and restated. (15)
Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors, and Certain Executive Officers. (16)
Form of Indemnification Agreement between First Community Bank, its Directors, and Certain Executive Officers. (16)
145
Table of Contents
Exhibit
No.
10.11**
10.12**
10.13**
10.14**
10.16**
10.17**
10.18**
10.19**
10.20**
10.21**
10.22**
10.23**
11
12*
21*
23.1*
31.1*
31.2*
32*
101***
Exhibit
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (17) and Stock Award Agreement. (18)
First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan. (29)
First Community Bancshares, Inc. Directors Deferred Compensation Plan, as amended and restated. (19)
Employment Agreement between First Community Bancshares, Inc. and David D. Brown dated April 16, 2015. (21)
Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly dated April 16, 2015. (22)
Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills dated April 16, 2015. (23)
Employment Agreement between First Community Bancshares, Inc. and Martyn A. Pell dated April 16, 2015. (24)
Employment Agreement between First Community Bank and Robert L. Schumacher dated April 16, 2015. (25)
Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II dated April 16, 2015. (33)
Employment Agreement between First Community Bank and Mark R. Evans dated July 31, 2009. (26)
Form of Restricted Stock Grant Agreement under First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan. (31)
Separation Agreement and Release between First Community Bancshares, Inc. and John M. Mendez dated August 28, 2013. (32)
Statement Regarding Computation of Earnings per Share. (28)
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.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2015, and 2014; (ii)
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013; (iii) Consolidated Statements of Comprehensive
Income for the years ended December 31, 2015, 2014, and 2013; (iv) Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2015, 2014, and 2013; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013; and
(vi) Notes to Consolidated Financial Statements.
*
**
***
Incorporated herewith.
Indicates a management contract or compensation plan.
Submitted electronically herewith.
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(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
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 February 23, 2016, filed on February 25, 2016.
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 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.
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.
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.
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.
Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
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.
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.
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.
Incorporated by reference from Annex B to the 2004 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 15, 2004.
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.
Incorporated by reference from Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on December 16, 2008.
Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015.
Incorporated by reference from Exhibit 10.5 of the Current Report on Form 8-K dated and filed on April 16, 2015.
Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015.
Incorporated by reference from Exhibit 10.4 of the Current Report on Form 8-K dated and filed on April 16, 2015.
Incorporated by reference from the Current Report on Form 8-K dated and filed on April 16, 2015.
Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009.
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(30)
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Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
Incorporated by reference from Note 1 of the Notes to Condensed Consolidated Financial Statements included herein.
Incorporated by reference from the 2012 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 7, 2012.
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013.
Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013.
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.
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 4 day of March, 2016.
th
By: /s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
(Principal Executive Officer)
First Community Bancshares, Inc.
(Registrant)
By: /s/ David D. Brown
David D. Brown
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ William P. Stafford, II
William P. Stafford, II
/s/ David D. Brown
David D. Brown
/s/ W.C. Blankenship, Jr.
W.C. Blankenship, Jr.
/s/ C. William Davis
C. William Davis
/s/ Samuel L. Elmore
Samuel L. Elmore
/s/ Richard S. Johnson
Richard S. Johnson
/s/ M. Adam Sarver
M. Adam Sarver
/s/ William P. Stafford
William P. Stafford
Signature
Title
Date
Chairman and Chief Executive Officer
March 4, 2016
Chief Financial Officer
March 4, 2016
Director
Director
Director
Director
Director
Director
149
March 4, 2016
March 4, 2016
March 4, 2016
March 4, 2016
March 4, 2016
March 4, 2016
STATEMENT REGARDING COMPUTATION OF RATIOS
Exhibit 12
Cash Dividends Per Share
Book Value Per Share
Return on Average Assets
=
Dividends Paid to Common Shareholders/Average Common Shares
Outstanding
= Total Shareholders’ Equity/As-Converted Common Shares Outstanding
= 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
Common Equity Tier 1 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
=
(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 to Total Loans
= Allowance for Loan Losses/(Gross Loans Net of Unearned Interest)
Allowance for Loan Losses to Nonperforming Assets
=
Allowance for Loan Losses/(Nonaccrual Loans, Loans Past Due 90 Days or
Greater, Unseasoned Restructured Loans, Plus OREO)
Allowance for Loan Losses to Nonperforming Loans
= 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
- Consent of Independent Registered Public Accounting Firm -
Exhibit 23.1
Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
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 4, 2016, 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 2015 Annual Report on Form
10-K.
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
March 4, 2016
Exhibit 31.1
I, William P. Stafford, II, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
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;
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;
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)
b)
c)
d)
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;
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;
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
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)
b)
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
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 4, 2016
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
Exhibit 31.2
I, David D. Brown, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
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;
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;
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)
b)
c)
d)
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;
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;
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
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)
b)
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
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 4, 2016
/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, 2015 (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 4, 2016
By:
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
By:
/s/ David D. Brown
David D. Brown
Chief Financial Officer