Table of Contents
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, 20 1 7
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.
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 ☑ No
☐ Yes ☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
☑ Yes ☐ 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, smaller reporting company, or an emerging
growth company. See the definitions of “ large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Accelerated filer ☑
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by c heck mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registra nt is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
As of June 30, 2017, the aggregate market value of the registrant ’s voting and non-voting common stock held by non-affiliates was $351.27 million.
As of February 28, 2018, ther e were 16,945,756 shares outstanding of the registrant’s Common Stock, $1.00 par value.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2018, are incorporated by referen ce in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
PART I
Item 1 .
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 1 1.
Item 1 2.
Item 1 3.
Item 1 4.
PART IV
Item 1 5.
FIRST COMMUNITY BANCSHARES, INC.
201 7 FORM 10-K
INDEX
Business .
Risk Factors .
Unresolved Staff Comments .
Properties .
Legal Proceedings .
Mine Safety Disclosures .
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 .
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.
Exhibits , Financial Statement Schedules.
Signatures
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4
1 1
1 8
1 8
1 8
1 8
19
2 1
2 2
4 8
49
1 07
1 07
1 07
1 07
1 09
1 09
1 09
1 10
1 10
1 12
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
F orward-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 shareholders, and other communications that represent the Company’s beliefs, plans, objectives, goals, guidelines,
expectations, anticipations, estimates, and intentions are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. 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 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;
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 the Company’s 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 Basel Committee on Banking Supervision’s “Basel III: A
Global Regulatory Framework for More Resilient Banks and Banking Systems,” which 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 noninterest, or fee, income being less than expected;
unanticipated regulatory or judicial proceedings;
changes in consumer spending and saving habits; and
the Company ’s success at managing the risks mentioned above.
T he list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, 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 file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking
information and statements. The Company does 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 the Company including the risk factors presented in Part I, Item 1A of this report.
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PART I
Item 1. Business .
General
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’s principal executive office is located at One Community Place, Bluefield, Virginia. 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 as First
Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank
provides insurance services through its wholly owned subsidiary First Community Insurance Services and offers wealth management and investment advice
through its Trust Division and wholly owned subsidiary First Community Wealth Management. 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.
We focus 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. We strive to be the bank of choice in the markets we serve by offering impeccable service and a complete line of
competitive products that include:
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demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;
commercial, consumer, and real estate mortgage loans and lines of credit;
various credit card, debit card, and automated teller machine card services;
corporate and personal trust services;
investment management services; and
life, health, and property and casualty insurance products.
Our operations are guided by a strategic plan that focuses on organic growth supplemented by strategic acquisitions of complementary financial institutions. For a
summary of our financial performance, see Item 6, “Selected Financial Data,” in Part II of this report.
Employees
As of December 31, 201 7, we had 562 full-time equivalent employees. Our employees are not represented by collective bargaining agreements and we consider
employee relations to be excellent.
Market Area
As of December 31, 201 7, we operated 44 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment,
Community Banking. Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals
and businesses across a variety of industries such as education, government, and health services; coal mining and gas extraction; retail trade; construction;
manufacturing; tourism; and transportation.
Competitio n
The financial services industry is highly competitive and constantly evolving. We encounter strong competition in attracting and retaining deposit, loan, and other
financial relationships in our market areas. We compete with other commercial banks, thrifts, savings and loan associations, credit unions, consumer finance
companies, mortgage banking firms, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies. We have positioned
ourselves 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. Factors that influence our ability to remain competitive include the
ability to develop, maintain, and build long-term customer relationships; the quality, variety, and pricing of products and services; the convenience of banking
locations and office hours; technological developments; and industry and general economic conditions. We seek to mitigate these pressures with our relationship
style of banking, competitive pricing, cost efficiencies, and disciplined approach to loan underwriting.
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Supervision and Regulation
Overview
We are subject to extensive examination, supervision, and regulation under applicable federal and state laws and various regulatory agencies. These regulations are
intended to protect consumers, depositors, borrowers, deposit insurance funds, and the stability of the financial system and are not for the protection of
stockholders or creditors.
Applicable laws and regulations restrict our permissible activities and investments and impose conditions and requirements on the products and services we offer
and the manner in which they are offered and sold. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our banking
subsidiary, and impose capital adequacy requirements on the Company and the Bank. The consequences of noncompliance with these laws and regulations can
include substantial monetary and nonmonetary sanctions.
The following discussion summarizes significant laws and regulations applicable to the Company and the Bank. These summaries are not intended to be complete
and are qualified in their entirety by reference to the applicable statute or regulation. Changes in laws and regulations may have a material effect on our business,
financial condition, or results of operations.
First
Community
Bancshares,
Inc.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (“BHC Act”) and a financial holding company
under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”). The Company elected financial holding company status in December 2006. The Company and its
subsidiaries are subject to supervision, regulation, and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve”). 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
financial holding company subsidiaries by applicable regulatory agencies. The Federal Reserve is granted the authority, in certain circumstances, to require reports
of, examine, and adopt rules applicable to any bank holding company subsidiary.
The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, (“Exchange Act”), as administered by the Securities and Exchange Commission (“SEC”). The Company’s common stock is listed on the NASDAQ
Global Select Market under the trading symbol FCBC and is subject to NASDAQ’s rules for listed companies.
First
Community
Bank
The Bank is a Virginia state-chartered bank and a member of the Federal Reserve subject to supervision, regulation, and examination by the Virginia Bureau of
Financial Institutions and the Federal Reserve Bank (“FRB”) of Richmond. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”), and its
deposits are insured by the FDIC to the extent provided by law. The regulations of these agencies govern most aspects of the Bank’s business, including
requirements concerning the allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid on deposits, the payment of
dividends, loans to affiliates, mergers and acquisitions, capital, and the establishment of branches. Various consumer and compliance laws and regulations also
affect the Bank’s operations.
A s a member bank, the Bank is required to hold stock in the FRB of Richmond in an amount equal to 6% of their capital stock and surplus (half paid to acquire the
stock with the remainder held as a cash reserve). Member banks do not have any control over the Federal Reserve as a result of owning the stock and the stock
cannot be sold or traded.
The
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) of 2010 significantly restructured the U.S. financial regulatory regime.
The Dodd-Frank Act is extensive, complicated, and comprehensive legislation that impacts practically all aspects of a banking organization, including the
following provisions:
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c entralizes 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;
r equires financial holding companies, such as the Company, to be well-capitalized and well managed (bank holding companies and banks must also be
well-capitalized and well managed to engage in interstate bank acquisitions);
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i mposes 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;
i mplements corporate governance revisions, including executive compensation and proxy access by shareholders;
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r epeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business
transaction and other accounts;
a mends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules about 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
i ncreases the authority of the Federal Reserve to examine bank holding companies, such as the Company, and their non-bank subsidiaries.
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Many of the provisions of the Dodd-Frank Act and other laws are subject to further rulemaking, guidance, and interpretation by applicable federal regulators. We
continue to evaluate the impact of any new regulations.
Permitted
Activities
under
the
BHC
Act
The BHC Act limits the activities of bank holding companies , such as the Company, to the business of banking, managing or controlling banks and other activities
the Federal Reserve determines to be closely related to banking. A bank holding company that elects treatment as a financial holding company under the GLB Act,
such as the Company, may engage in a broader range of activities that are financial in nature or complementary to a financial activity and do not pose a substantial
risk to the safety and soundness of depository institutions or the financial system. These activities include securities underwriting, dealing, and market making;
sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve
determines to be closely related to banking.
In order to maintain financial holding company status, the Company and the Bank must be well-capitalized and well-managed under applicable Federal Reserve
regulations and have received at least a satisfactory rating under the Community Reinvestment Act (“CRA”). See “Prompt Corrective Action” and “Community
Reinvestment Act” below. If we fail to meet these requirements, the Federal Reserve may impose corrective capital and managerial requirements and place
limitations or conditions on our ability to conduct activities permissible for financial holding companies. If the deficiencies persist, the Federal Reserve may
require the Company to divest the Bank or divest investments in companies engaged in activities permissible only for financial holding companies.
The 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 12 months, 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.
The BHC Act requires that bank holding companies obtain the Federal Reserve ’s approval before acquiring direct or indirect ownership or control of more than
5% of the voting shares or all, or substantially all, of the assets of a bank. The regulatory authorities are 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
when approving acquisitions. 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 the Federal Reserve determines it to be closely related to banking.
Capital
Requirements
We are subject to various regulatory capital requirements administered by the Federal Reserve. The current risk-based capital requirements applicable to the
Company and the Bank, parts of which are currently in the process of being phased in, are based on the December 2010 international capital standards of the Basel
Committee on Banking Supervision (“Basel Committee”), known as Basel III.
Prior to January 1, 2015, the risk-based capital requirements that applied to the Company and the Bank were based on the 1988 capital accord of the Basel
Committee, known as Basel I. Under Basel I, the Company was required to maintain a minimum Tier 1 capital ratio of 4.0%, a total capital ratio of 8.0%, and Tier
1 capital to average consolidated assets (“Tier 1 leverage ratio”) of 3.0%. Certain highly rated bank holding companies could maintain a minimum Tier 1 leverage
ratio of 3.0%, but other bank holding companies were required to maintain a Tier 1 leverage ratio of 4.0% or more, depending on their condition.
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On July 2, 2013, the Federal Reserve approved capital rules for U.S. banking organizations implementing Basel III (“Basel III Capital Rules”) and certain
requirements of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. Basel III Capital Rules (1) introduced a new
Common Equity Tier 1 (“CET1”) capital measure, (2) specified that Tier 1 capital consist of CET1 and additional Tier 1 capital instruments meeting specified
requirements, (3) defined 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) expanded the scope of the deductions/adjustments to capital as compared to prior regulations. The following initial minimum capital
ratios became effective, subject to a phase-in period, for the Company and the Bank under Basel III Capital Rules on January 1, 2015:
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4.5% CET1 to risk-weighted assets
6.0% Tier 1 capital (CET1 plus additional Tier 1 capital) to risk-weighted assets
8.0% Total capital (Tier 1 plus Tier 2 capital) to risk-weighted assets
4.0% Tier 1 leverage ratio
Basel III Capital Rules introduced a capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer was
implemented on January 1, 2016, at 0.625% and will be phased in over a four-year period (increasing by an additional 0.625% each year until it reaches 2.5% on
January 1, 2019). Basel III Capital Rules also provide for a countercyclical capital buffer that applies to certain covered institutions; however, the buffer does not
apply to the Company or the Bank. Banking institutions with a CET1 to risk-weighted assets ratio above the minimum but below the conservation buffer (or below
the combined capital conservation buffer and countercyclical capital buffer, if applicable) face constraints on dividends, equity repurchases, and compensation
based on the amount of the shortfall.
When fully phased in on January 1, 2019, Basel III Capital Rules will require the Company and the Bank to maintain an additional capital conservation buffer of
2.5% of CET1, effectively resulting in the following minimum ratios:
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7.0 % CET1 to risk-weighted assets
8.5 % Tier 1 capital to risk-weighted assets
10.5 % Total capital to risk-weighted assets
4.0% Tier 1 leverage ratio
Management believes that the Company and the Bank would meet all capital adequacy requirements under Basel III Capital Rules on a fully phased-in basis, if
such requirements were in effect, as of December 31, 2017.
Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax
assets 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, at 40% and
will be phased in over a four-year period (increasing an additional 20% each year until it reaches 100% on January 1, 2018).
Basel III Capital Rules 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.
Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%,
50% and 100%) to a 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.
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, or critically
undercapitalized. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if the appropriate
federal regulators determine that it is engaging in an unsafe or unsound practice or is in an unsafe or unsound condition. 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.
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The Bank was classified as well-capitalized under prompt corrective action regulation as of December 31, 201 7. In order to be considered a well-capitalized
institution under Basel III Capital Rules, an organization must not be subject to any written agreement, order, capital directive, or prompt corrective action
directive and must maintain the following minimum capital ratios:
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6.5% CET1 to risk-weighted assets
8.0% Tier 1 capital to risk-weighted assets
10.0% Total capital to risk-weighted assets
5.0% Tier 1 leverage ratio
Undercapitalized institutions are required to submit a capital restoration plan to federal banking regulators. Under the Federal Deposit Insurance Act, as amended
(“FDIA”), in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must provide appropriate
assurances of performance and guarantee that its subsidiary bank will comply with its capital restoration plan, subject to certain limitations. Agency regulations
contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, establishing branches, and engaging in new
lines of business. With certain exceptions, a depository institution is prohibited from making capital distributions, including dividends, and is prohibited from
paying management fees to its parent holding company if the institution would be undercapitalized after such distribution or payment.
A significantly undercapitalized institution is subject to various requirements and restrictions, including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets, and ending deposits from correspondent banks. The FDIC has limited discretion in dealing with a critically
undercapitalized institution and is generally required to appoint a receiver or conservator.
Safety
and
Soundness
Standards
Guidelines adopted by 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 risk s and exposures. If an institution fails to meet safety and soundness standards, the regulatory
agencies may require the institution to submit a written compliance plan describing the steps they would take to correct the situation and the time that such steps
would be taken. If an institution fails to submit or implement an acceptable compliance plan, after being notified, the agency must issue an order directing action to
correct the deficiency and may issue an order directing other actions, such as those applicable to undercapitalized institutions under the prompt corrective action
provisions of the FDIA. An institution may be subject to judicial proceedings and civil money penalties if it fails to follow such an order.
Payment
of
Dividends
The Company is a legal entity that is separate and distinct from its subsidiaries. The Company’s principal source of cash flow is derived from dividends paid by the
Bank. There are various restrictions by regulatory agencies related to dividends paid by the Bank to the Company and dividends paid by the Company to its
shareholders. The payment of dividends by the Company and the Bank may be limited by certain factors, such as requirements to maintain capital above regulatory
guideline minimums.
Prior FRB approval is required for t he Bank to declare or pay a dividend to the Company if the total of all dividends declared in any given year exceed the total of
the Bank’s net profits for that year and its retained profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred
stock. Dividends paid by the Company to shareholders are subject to oversight by the Federal Reserve. Federal Reserve policy states that bank holding companies
generally should pay 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, asset quality, and financial condition.
Regulatory agencies have the authority to limit or prohibit the Company and the Bank from paying dividends if the payments are deemed to constitute an unsafe or
unsound practice. The appropriate 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 from current operating earnings. In addition, the Bank
may not declare or pay a dividend if, after paying the dividend, the Bank would be classified as undercapitalized. In the current financial and economic
environment, the FRB has discouraged payout 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. Bank holding companies should not maintain dividend levels that undermine their ability to
be a source of strength to their banking subsidiaries.
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Source
of
Strength
Federal Reserve policy and federal law requires the Company to act as a source of financial and managerial strength to the Bank. 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. Because the Company is
a legal entity separate and distinct from its subsidiaries, any capital loans it makes to the Bank are subordinate in right of payment to depositors and to certain other
indebtedness of the Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital
of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Transactions
with
Affiliates
T he Federal Reserve Act (“FRA”) and Federal Reserve Regulation W place restrictions on “covered transactions” between the Bank and its affiliates, including
the Company. The term “covered transactions” includes making loans, purchasing assets, issuing guarantees, and other similar transactions. The Dodd-Frank Act
expanded the definition of “covered transactions” to include derivative activities, repurchase agreements, and securities lending or borrowing activities. These
restrictions limit the amount of transactions with affiliates, require certain levels of collateral for loans to affiliates, and require that all transactions with affiliates
be on terms that are consistent with safe and sound banking practices. In addition, these transactions must be on terms that are substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for similar transactions with non-affiliates.
The FRA and Federal Reserve Regulation O place restrictions on loans between the Company and the Bank and their directors, executive officers, principal
shareholders, affiliates, and interests of those directors, executive officers, and principal shareholders. These restrictions limit the amount of loans to one borrower
and require that loans are on terms that are substantially the same as, and follow underwriting procedures that are not less stringent than, those prevailing at the
time for similar loans with non-insiders. In addition, the aggregate limit of loans to all insiders, as a group, cannot exceed the Bank’s total unimpaired capital and
surplus.
Deposit
Insurance
and
Assessments
Substantially all of t he Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to quarterly deposit
insurance assessments to maintain the DIF. FDIC deposit insurance premiums are assessed using a risk-based system that places FDIC-insured institutions into one
of four risk categories based on capital, supervisory ratings and other factors. The assessment rate determined by considering such information is then applied to
the institution's average assets minus average tangible equity to determine the institution's insurance premium. The FDIC may change assessment rates or revise its
risk-based assessment system if deemed necessary to maintain an adequate reserve ratio for the DIF. The Dodd-Frank Act required that the minimum reserve ratio
for the DIF increase from 1.15% to 1.35% by September 30, 2020. Under the FDIA, the FDIC may terminate deposit insurance if it determines 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. The Bank’s FDIC deposit insurance assessments totaled $797 thousand in 2017, $1.25 million in 2016, and $1.42 million
in 2015.
In addition , all FDIC-insured institutions must pay annual assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”). The
FICO is a mixed-ownership government corporation 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 $113 thousand in 2017, $124 thousand in
2016, and $139 thousand in 2015.
The
Volcker
Rule
The Dodd-Frank Act amended the BHC Act to prohibit depository institutions and their affiliates from engaging in proprietary trading and from investing in,
sponsoring, or having certain relationships with hedge funds or private equity funds, known as the Volcker Rule. These prohibitions are subject to a number of
statutory exemptions, restrictions, and definitions. The Volcker Rule became effective on April 1, 2014, but the Federal Reserve extended the conformance period
for certain requirements to July 21, 2017. Upon application of a banking entity, the Federal Reserve may provide an additional transition period of up to 5 years to
conform investments in a limited class of legacy illiquid funds. The Volcker Rule has not had 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.
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Community
Reinvestment
Act
The CRA of 1977 , as amended, requires depository institutions to help meet the credit needs of their market areas, including low- and moderate-income
individuals and communities, consistent with safe and sound banking practices. Federal banking regulators periodically examine depository institutions and assign
ratings based on CRA compliance. A rating of less than satisfactory may restrict certain operating activities, delay or deny certain transactions, or result in an
institution losing its financial holding company status. The Bank received a rating of satisfactory in its most recent CRA examination.
Incentive
Compensation
Federal regulatory agencies have issued comprehensive guidance 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 guida nce is based on the key principles that a banking
organization’s incentive compensation arrangements should (1) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively
identify and manage risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including
active and effective oversight by the organization’s board of directors.
Federal banking regulators periodically examine the incentive compensation arrangements of banking organizations and incorporate any deficiencies in the
organization’s supervisory ratings, which can affect certain operating activities. The FRB may initiate enforcement actions if the organization’s 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. The scope and content of the U.S. banking regulators’ policies on incentive
compensation are continuing to develop. It cannot be determined at this time if or when a final rule will be adopted or if compliance with such a final rule will
adversely affect the ability of the Company and its subsidiaries to hire, retain and motivate their key employees.
Anti-Tying
Restrictions
The Bank and its affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company.
Consumer
Protection
and
Privacy
We are subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include the
Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Truth in Savings 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 law counterparts. These laws and regulations contain extensive customer privacy protection provisions that limit the ability of
financial institutions to disclose non-public information about consumers to non-affiliated third parties and require financial institutions to disclose certain policies
to consumers.
The CFPB is a federal agency with broad authority to implement, examine, and enforce compliance with federal consumer protection laws that relate to credit card,
deposit, mortgage, and other consumer financial products and services. The CFPB may enforce actions to prevent and remedy unfair, deceptive, or abusive acts and
practices related to consumer financial products and services. The agency has authority to impose new disclosure requirements for any consumer financial product
or service. The CFPB may impose a civil penalty or injunction against an entity in violation of federal consumer financial laws.
Cybersecurity
In March 2015, federal regulators issued two related statements about 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 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.
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Bank
Secrecy
Act
and
Anti-Money
Laundering
The Bank is subject to the requirements of the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act (“USA PATRIOT Act”) of 2001. The USA PATRIOT Act broadened existing anti-money laundering legislation by imposing new
compliance and due diligence obligations focused on detecting and reporting money laundering transactions. These laws and regulations require the Bank to
implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of our customers.
Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial regulatory agencies
to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.
Office
of
Foreign
Assets
Control
Regulation
The U.S. Department of the Treasury’s (“Treasury”) 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.
Sarbanes-Oxley
Act
The Sarbanes-Oxley Act (“SO X Act”) of 2002 addresses a broad range of corporate governance, auditing and accounting, executive compensation, and disclosure
requirements for public companies and their directors and officers. The SOX Act requires our Chief Executive Officer and Chief Financial Officer to certify the
accuracy of certain information included in our quarterly and annual reports. The rules require these officers to certify that they are responsible for establishing,
maintaining, and regularly evaluating the effectiveness of our financial reporting and disclosure controls and procedures; that they have made certain disclosures to
the auditors and to the Audit Committee of the Board of Directors about our controls and procedures; and that they have included information in their quarterly and
annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly
impact these controls subsequent to their evaluation. Section 404 of the SOX Act requires management to undertake an assessment of the adequacy and
effectiveness of our internal controls over financial reporting and requires our auditors to attest to and report on the effectiveness of these controls.
Available Information
We file annual, quarterly, and current reports; proxy statements; and other information with the SEC. You may read and copy any document we file with the SEC
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for 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 that issuers file
electronically with the SEC. We maintain a website at www.firstcommunitybank.com that makes available, free of charge, our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any amendments to those reports as soon as reasonably
practicable after such reports are filed with, or furnished to, the SEC. You are encouraged to access these reports and other information about our business from the
Investor Relations section of our website. The Investor Relations section contains information about our Board of Directors, executive officers, and corporate
governance policies and principles, which include the charters of the standing committees of the Board of Directors, the Insider Trading Policy, and the Standards
of Conduct governing our directors, officers, and employees. Information on our website is not incorporated by reference in this report.
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 information included, or incorporated by reference, in 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.
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Risks Related to Our Business
The
current
economic
environment
poses
significant
challenges.
Our financial performance is generally highly dependent on the business environment in the markets we operate in and of 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, and 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.
In recent years, economic growth and business activity across a wide range of industries has been slow and uneven. There are continuing concerns related to the
level of U.S. government debt, fiscal actions that may be taken to address that debt, oil price volatility, global economic conditions, and significant uncertainty with
respect to domestic and international fiscal and monetary policy. Economic pressure on consumers and uncertainty about continuing economic improvement may
result in changes in consumer and business spending, borrowing, and savings habits. There can be no assurance that these conditions will improve or that these
conditions will not worsen. 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
operate
in
a
highly
regulated
industry
subject
to
examination,
supervision,
enforcement,
and
other
legal
actions
by
various
federal
and
state
governmental
authorities,
laws,
and
judicial
and
administrative
decisions.
Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these 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. 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
that
may
affect
the
Company
’s
ability
to
pay
expenses
and
dividends
to
shareholders.
The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity,
and the 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. For additional information, see “Payment of Dividends” in Item 1 of this report. 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 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.
Our larger competitors may have substantially greater resources and lending limits, name recognition, and market presence that allow them to offer products and
services that we do not offer and to price loans and deposits more aggressively than we do. The expansion of non-bank competitors, which may have fewer
regulatory constraints and lower cost structures, over recent years has intensified competitive pressures on core deposit generation and retention. For additional
information, see “Competition” in Item 1 of this report. Our success depends, in part, on our ability to attract and retain customers by adapting our products and
services to evolving customer needs and industry and economic conditions. Failure to perform in any of these areas could weaken our competitive position, reduce
deposits and loan originations, and adversely affect our financial condition, results of operations, cash flows, and prospects.
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We
may
require
additional
capital
in
the
future
that
may
not
be
available
when
needed.
We may need to raise additional capital 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
interest
rate
risk.
Interest rate risk results principally when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different
levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any,
are exercised. Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many factors that are beyond our
control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in
monetary policy and interest rates could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings.
Further, such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates
paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income and earnings
could be adversely affected. Conversely, if interest rates received on loans and other investments fall more quickly than interest rates paid on deposits and other
borrowings, our net interest income and earnings could also be adversely affected.
Our
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 cover actual loan losses and an increase
in the loan loss provision could materially and adversely affect our operating results. Federal regulatory agencies regularly review our loans and allowance for loan
losses as an integral part of the examination process. 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. 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. For additional information, see “Fair Value Measurements” and “Allowance for Loan Losses” in the “Critical Accounting
Estimates” section in Part II, Item 7 and Note 1, “Basis of Presentation and Accounting Policies,” to the Consolidated Financial Statements in Part II, Item 8 of this
report.
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Table of Contents
Changes
in
the
fair
value
of
our
investment
securities
may
reduce
stockholders
’
equity
and
net
income.
A decline in the estimated fair value of the investment portfolio may result in a decline in stockholders’ equity, book value per common share, and tangible book
value per common share. Unrealized losses are recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit
impairment exists, the decrease is recovered at the security’s maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be
recovered over time. We conduct quarterly reviews of our securities portfolio to determine if unrealized losses are temporary or other than temporary. No
assurance can be given that we will not need to recognize other-than-temporary impairment (“OTTI”) charges in the future. Additional OTTI charges may
materially affect our financial condition and earnings. For additional information, see “Investment Securities” in the “Critical Accounting Estimates” section in
Part II, Item 7 and Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Investment Securities,” to the Consolidated Financial Statements in Part
II, Item 8 of this report.
We
are
subject
to
credit
risk
associated
with
the
financial
condition
of
other
financial
institutions.
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Financial institutions are interrelated
as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute
transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and
other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of
other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may
increase if the collateral we hold cannot be realized or liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the
event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding
involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty
was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our
financial condition and results of operations.
Our
commercial
loan
portfolio
may
expose
us
to
increased
credit
risk.
Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer
loans and repayment is usually dependent on cash flows from the borrower ’s business or the property securing the loan. Our commercial business loans are
primarily made to small business and middle market customers. As of December 31, 2017, commercial business and real estate loans totaled $1.01 billion, or
55.52%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $6.15 million and largest outstanding commercial
real estate loan was $11.01 million. Commercial construction loans generally have a higher risk of loss due to the assumptions used to estimate the value of
property at completion and the cost of the project, including interest. If the assumptions and estimates are inaccurate, the value of completed property may fall
below the related loan amount. As of December 31, 2017, commercial construction loans totaled $60.06 million, or 3.30% of our total loan portfolio. As of the
same date, our largest outstanding commercial construction loan was $5.79 million. Losses from our commercial loan portfolio 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.
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:
●
●
●
●
●
p otential exposure to unknown or contingent liabilities of the target company;
e xposure to potential asset quality issues of the target company;
d ifficulty, expense, and delays of integrating the operations and personnel of the target company;
p otential disruption to our business;
p otential diversion of management’s time and attention;
14
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●
●
●
●
●
●
●
●
l oss of key employees and customers of the target company;
d ifficulty in estimating the value of the target company;
p otential changes in banking or tax laws or regulations that may affect the target company;
u nexpected costs and delays;
the target company’s performance does not meet our growth and profitability expectations;
l imited experience in new markets or product areas;
i ncreased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and
p otential 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.
Attractive
acquisition
opportunities
may
not
be
available
in
the
future.
We expect banking and financial companies, which may have significantly greater resources, to compete for the acquisition of financial service 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.
We
may
experience
future
goodwill
impairment.
We test goodwill for impairment annually, or more often if necessary, using quantitative and qualitative factors. Impairment charges may cause an adverse effect
on our earnings and financial position. For additional information, see “Intangible Assets” in the “Critical Accounting Estimates” section in Part II, Item 7 and
Note 1, “Basis of Presentation and Accounting Policies,” and Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Part II,
Item 8 of this report.
We
are
subject
to
certain
obligations
under
FDIC
loss
share
agreements
that
specify
how
to
manage,
service,
report,
and
request
reimbursement
for
losses
incurred
on
covered
assets.
Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and interpretation, and contractual
term limitations. Our obligations under 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. The realization of benefits to be received from the FDIC ultimately depends on the performance of the underlying covered assets, the passage of time, claims
paid by the FDIC, and interpretation; therefore, the amount received could differ materially from the carrying value of expected reimbursements and have a
material effect on our financial condition and results of operations. For additional information, see “FDIC Indemnification Asset” in the “Critical Accounting
Estimates” section in Part II, Item 7 and Note 1, “Basis of Presentation and Accounting Policies,” and Note 7, “FDIC Indemnification Asset,” to the Consolidated
Financial Statements in Part II, Item 8 of this report.
We
may
be
required
to
pay
higher
FDIC
insurance
premiums
or
special
assessments.
Our deposits are insured up to applicable limits by the DIF of the FDIC and we are subject to deposit insurance assessments to maintain the DIF. For additional
information, see “Deposit Insurance and Assessments” in Item 1 of this report. 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 be required. Future assessments, increases, or required
prepayments related to FDIC insurance premiums may negatively affect our financial condition and results of operations.
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Table of Contents
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. We do not
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 offer 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.
We
may
lose
members
of
our
management
team
and
have
difficulty
attracting
skilled
personnel.
Our success depends, in part, on our ability to attract and retain key employees. 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.
Our
internal
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
and
are
subject
to
information
security
risks
associated
with
technology
.
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 rely on electronic communications and information systems, including those provided by third-party vendors, to conduct our business operations. Our security
risks increase as our reliance on technology increases; consequently, the expectation to safeguard information by monitoring systems for potential failures,
disruptions, and breakdowns has also increased. Risks associated with technology include security breaches, operational failures and service interruptions, and
reputational damages. These risks also apply to our third-party service providers. Our third-party vendors include large entities with significant market presence in
their respective fields; therefore, their services could be difficult to replace quickly if there are operational failures or service interruptions.
We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and retention of confidential
financial and client information. We may be vulnerable to security breaches, such as employee error, cyber-attacks, and viruses, beyond our control. In addition to
security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-party vendor disruptions may cause operational failures and service
interruptions to our communication and information systems. Further, our systems may be temporarily disrupted during implementation or upgrade. Security
breaches and service interruptions related to our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory
scrutiny, or expose us to civil litigation and financial liability.
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 about 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.
16
Table of Contents
While we have not experienced a significant compromise, significant data loss, or any material financial losses related to cybersecurity attacks, our systems and
those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future.
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 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
s
ubject
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 have infringed on one or more patents or other intellectual property rights, it may be required to pay substantial damages
or royalties to a third party. In certain cases, the Company may consider entering into licensing agreements for disputed intellectual property, although no
assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the
Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be
required to make payments in amounts that could have a material adverse effect on its business, financial condition, and results of operations.
Risks Related to Our Common Stock
The
market
price
of
o
ur
c
ommon
s
tock
may
be
volatile.
Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. Our common stock price may fluctuate
significantly due to a variety of factors that include the following:
●
●
●
●
●
●
a ctual or expected variations in quarterly results of operations;
r ecommendations by securities analysts;
o perating and stock price performance of comparable companies, as deemed by investors;
n ews reports relating to trends, concerns, and other issues in the financial services industry;
p erceptions in the marketplace about our Company or competitors;
n ew technology used, or services offered, by competitors;
17
Table of Contents
●
●
●
●
s ignificant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or
competitors;
f ailure to integrate acquisitions or realize expected benefits from acquisitions;
c hanges in government regulations; and
g eopolitical 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.
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 from 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 about capital adequacy and dividends. For
additional information, see “Payment of Dividends” in Item 1 of this report.
Item 1B. Unresolved Staff Comments .
None .
I tem 2. Properties .
We own o ur corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2017, the Bank provided financial services through
a network of 44 branch locations in West Virginia (18 branches), Virginia (19 branches), North Carolina (5 branches), and Tennessee (2 branches). We own 42 of
these branches and lease the remaining 2 branches. We also lease a loan production office and own a wealth management office and a call center location. As of
December 31, 2017, there were no mortgages or liens against any properties. We believe that our properties are suitable and adequate to serve as financial services
facilities. A list of all branch and ATM locations is available on our website at www.firstcommunitybank.com. Information contained on our website is not part of
this report. For additional information, see Note 8, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.
I tem 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.
I tem 4. Mine Safety Disclosures .
None .
18
Table of Contents
P ART II
Item 5 . Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .
Market Information, Holders , and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of February 28, 2018, there were 2,337 record holders and
16,945,756 outstanding shares of our common stock. The following table presents the high and low stock prices and cash dividends paid per share of our common
stock for the periods indicated:
Year Ended December 31,
2017
2016
Sale Price
High
Low
Cash Dividends per
Common Share
Sale Price
High
Low
Cash Dividends per
Common Share
First quarter
Second quarter
Third quarter
Fourth quarter
$
30.86 $
28.80
29.80
32.24
23.23 $
24.06
24.02
26.97
0.16 $
0.16
0.18
0.18
19.93 $
22.74
25.24
31.94
16.67 $
19.03
21.53
20.47
0.14
0.14
0.16
0.16
Common stock cash dividends totaled $11.56 million in 2017, $10.40 million in 2016, and $9.99 million in 2015. Cash dividends paid per common share totaled
$0.68 in 2017, $0.60 in 2016, and $0.54 in 2015. 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. For additional information, see “Payment of Dividends” in Part I, Item 1 of this
report.
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, 2017, December 31, 2016, or December
31, 2015. Series A Preferred Stock cash dividends totaled $105 thousand in 2015.
Purchases of Equity Securities
We repurchased 50,118 shares of our common stock in 2017, 1,182,294 shares in 2016, and 1,238,299 shares in 2015. The following table provides information
about 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
periods indicated:
October 1-31, 2017
November 1-30, 2017
December 1-31, 2017
Total
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as Part of a
Publicly Announced Plan
Maximum Number of
Shares
that May Yet be Purchased
Under the Plan (1)
- $
-
-
- $
-
-
-
-
-
-
-
-
613,071
613,071
616,447
(1) Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 5,000,000 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 4,383,553 shares in treasury as of December 31, 2017.
19
Table of Contents
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 years ended
December 31, 2017, 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 48 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, 2012, and that all dividends are reinvested.
2012
2013
Year Ended December 31,
2015
2014
2016
2017
First Community Bancshares, Inc.
S&P 500 Index
NASDAQ Composite Index
SNL Asset & Regional Peer Group (1)
100.00
100.00
100.00
100.00
107.80
132.39
140.12
119.35
109.87
150.51
160.78
130.28
128.17
152.59
171.97
146.71
213.40
170.84
187.22
196.01
208.43
208.14
242.71
220.52
(1) Includes the following institutions: Access National Corporation; American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; Bear State Financial,
Inc.; Burke & Herbert Bank & Trust Company; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial; Holdings, Inc.; Carolina Financial
Corporation; Carter Bank & Trust; Charter Financial Corporation; Citizens Holding Company; City Holding Company; CNB Corporation; Colony Bankcorp, Inc.;
Community Bankers Trust Corporation; Entegra Financial Corp.; Fidelity Southern Corporation; First Bancorp; First Bancorp, Inc.; First Bancshares, Inc.; First
Citizens Bancshares, Inc.; First Community Bancshares, Inc.; First Farmers and Merchants Corporation; Hamilton State Bancshares, Inc.; HomeTrust Bancshares,
Inc.; Live Oak Bancshares, Inc.; MetroCity Bankshares, Inc.; MVB Financial Corp.; National Bankshares, Inc.; National Commerce Corporation; Paragon
Commercial Corporation; Peoples Bancorp of North Carolina, Inc.; Premier Financial Bancorp, Inc.; Reliant Bancorp, Inc.; SmartFinancial, Inc.; Southern
BancShares (N.C.), Inc.; Southern First Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.; Summit Financial Group, Inc.; TGR Financial, Inc.; and
Wilson Bank Holding Co.
20
Table of Contents
I tem 6 . Selected Financial Data .
The following table presents selected consolidated financial data, derived from the audited financial statements, as of and for the five years ended December 31,
2017. This information 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
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
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
Cash dividends per common share
Book value per common share at year-end (1)
$
$
$
$
$
2017
190,729
1,817,184
19,276
2,388,460
2,370,321
1,929,891
80,086
2,037,746
-
350,714
349,701
95,308
8,090
87,218
2,771
26,248
68,582
20,628
21,485
-
21,485
Year Ended December 31,
2015
2016
2014
$
$
212,712
1,852,948
17,948
2,386,398
2,455,458
1,841,338
178,713
2,047,341
-
339,057
338,475
94,724
9,844
84,880
1,255
27,066
72,746
12,819
25,126
-
25,126
$
$
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
96,102
11,349
84,753
2,191
29,530
76,171
11,381
24,540
105
24,435
$
$
384,065
1,691,208
20,227
2,607,936
2,608,570
2,000,759
229,741
2,256,562
15,151
351,374
342,619
106,108
15,290
90,818
145
30,003
82,862
12,324
25,490
910
24,580
$
1.26
1.26
0.68
20.63
$
1.45
1.45
0.60
19.95
$
1.32
1.31
0.54
18.95
$
1.34
1.31
0.50
18.06
2013
520,388
1,711,604
24,077
2,602,514
2,661,602
1,950,742
300,396
2,273,908
15,251
328,606
355,611
109,476
17,834
91,642
8,208
29,771
78,985
10,908
23,312
1,024
22,288
1.13
1.11
0.48
16.79
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
17,002,116
17,077,842
17,319,689
17,365,524
18,531,039
18,727,464
18,406,363
19,483,054
19,792,099
20,961,800
Selected Ratios
Return on average assets
Return on average common equity
Average equity to average assets
Dividend payout
Common equity Tier 1 ratio (2)
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
0.91%
6.14%
14.75%
53.81%
13.98%
15.06%
13.98%
11.06%
1.02%
7.42%
13.78%
41.36%
13.88%
15.79%
14.74%
11.07%
0.97%
7.08%
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) Book value per common share is defined as stockholders' equity divided by as-converted common shares outstanding.
(2) The common equity Tier 1 ratio became effective on January 1, 2015.
21
Table of Contents
I tem 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations .
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. 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. 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.
Executive Overview
First Community Bancshares, Inc. ( the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and
services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of December 31, 2017, the Bank
operated 44 branches as First Community Bank in Virginia, West Virginia, and North Carolina and as People’s Community Bank, a Division of First Community
Bank, in Tennessee. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is
supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the
retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank
(“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.
The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First
Community Wealth Management (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and
individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity
of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees. As of December 31, 2017, the Trust
Division and FCWM managed $957 million in combined assets under various fee-based arrangements as fiduciary or agent.
The Bank offers insurance products and services through its wholly owned subsidiary First Community Insurance Services (“FCIS”). FCIS provides in-branch
commercial and insurance services in Virginia and West Virginia. Revenues are primarily derived from commissions paid by issuing companies on the sale of
policies.
Our acquisition and divestiture activity during the three years ended December 31, 201 7, includes the sale of Greenpoint Insurance Group, Inc. (“Greenpoint”) to
Ascension Insurance Agency, Inc. on October 31, 2016, and the simultaneous sale of six branches to and purchase of seven branches from First Bank on July 15,
2016. For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with generally accepted accounting principles (“GAAP”) in the U.S. and prevailing practices in
the banking industry. Our accounting policies, as presented in Note 1, “Basis of Presentation and Accounting Policies,” to the Consolidated Financial Statements in
Item 8 of this report are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and Supplementary Data,” of this
report. Management may be required to make significant estimates and assumptions that have a material impact on our financial condition or operating
performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s
assumptions and estimates. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates
used, we have identified fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes as
the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.
Fair
Value
Measurements
We use the fair value hierarchy to determine the fair value of certain assets and liabilities. The hierarchy consists of three levels that include valuations based on
observable quoted prices in active markets; quoted prices in inactive markets or other observable inputs, such as third-party sources; and unobservable inputs.
When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling
techniques and appraisal estimates. The assumptions and estimates used to determine fair value may be highly subjective in nature, such as cash flow estimates,
risk characteristics, credit quality measurements, and interest rates; therefore, valuations may not be precise. The amounts realized or paid on the settlement or
maturity of fair value instruments may be significantly different from estimates. While management believes our valuation methodologies are appropriate and
consistent with other market participants, different methodologies or assumptions used to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date. For additional information, see Note 17, “Fair Value,” to the Consolidated Financial Statements in Item 8 of
this report.
22
Table of Contents
I
nvestment
S
ecurities
We review our investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). We use inputs from independent third parties to
determine the fair value of investment securities, which are reviewed and corroborated by management. Unrealized losses are evaluated to determine whether the
impairment is temporary or other-than-temporary in nature. For debt securities, we consider 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 amortized cost, and the probable credit losses. Probable credit losses are evaluated
using the present value of expected future cash flows; the severity and duration of the impairment; the issuer’s financial condition and near-term prospects to
service the debt; the cause of the decline, such as adverse conditions related to the issuer, the industry, or economic environment; the payment structure of the debt;
the issuer’s failure to make scheduled interest or principal payments; and any change in the issuer’s credit rating by rating agencies. If the present value of expected
future cash flows discounted at the security's effective yield is less than the net book value, the difference is recognized as a credit-related OTTI in noninterest
income. If we do not intend to sell and if we are not likely to be required to sell the security, the OTTI is separated into an amount representing the credit loss,
which is recognized as a charge to noninterest income, and the amount representing all other factors, which is recognized in other comprehensive income (“OCI”).
For equity securities, we consider our intent and ability to hold the security to recovery; the severity and duration of the impairment; the issuer’s financial
condition, capital strength, and near-term prospects; and any change in the issuer’s credit rating by rating agencies. If the fair value of the security is less than the
net book value, the OTTI is recognized as a charge to noninterest income. For additional information, see Note 3, “Investment Securities,” to the Consolidated
Financial Statements in Item 8 of this report.
Allowance
for
Loan
Losses
We review o ur allowance for loan losses quarterly to determine if it is sufficient to absorb probable loan losses in the portfolio. This determination 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 towards loan classifications. 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.
Our allowance for loan losses consists of reserves assigned to specific loans and credit relationships and general reserves assigned to loans not separately identified
that have been segmented into groups with similar risk characteristics using our internal risk grades. General reserve allocations are based on management’s
judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. Factors
considered in this evaluation include, but are not limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in
credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals.
Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment.
Individually significant loans require additional analysis that may include the borrower’s underlying cash flow and capacity for debt repayment, specific business
conditions, and value of secondary sources of repayment; consequently, this analysis may result in the identification of weakness and a corresponding need for a
specific reserve. 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. Loans acquired in business combinations that are
deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The
estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Management believed the allowance was adequate to absorb probable
loan losses inherent in the loan portfolio as of December 31, 2017. For additional information, see Note 6, “Allowance for Loan Losses,” to the Consolidated
Financial Statements in Item 8 of this report.
Third -party collateral valuations are regularly obtained and evaluated to help management determine changes in cash flows on purchased loans acquired in
business combinations, 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.
23
Table of Contents
Goodwill
and
Other
Intangible
Assets
We test goodwill annually, or more frequently if necessary, using a qualitative assessment to determine if it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. We have one reporting unit for goodwill impairment testing purposes -- Community Banking. Prior to October 2016, we
maintained two reporting units -- Community Banking and Insurance Services. The Insurance Services reporting unit consisted of the Company’s wholly owned
subsidiary Greenpoint, which was sold in October 2016. We performed our annual assessment of goodwill as of October 31, 2017, and concluded that our carrying
value of goodwill was not impaired. Qualitative factors considered in the analysis included macroeconomic conditions, industry and market considerations, overall
financial performance, changes in stock price, and our 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.
For additional information, 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 d eferred tax assets and liabilities using the enacted tax rates applicable in the periods we expect temporary differences 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.
The Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted on December 22, 2017. Among other things, the new law establishes a new, flat corporate federal
statutory income tax rate of 21%; eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for
any taxable year; limits the deduction for net interest expense incurred by U.S. corporations; allows businesses to immediately expense the cost of new investments
in certain qualified depreciable assets for tax purposes; eliminates or reduces certain deductions related to meals and entertainment expenses; modifies the
limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee;
and limits the deductibility of deposit insurance premiums. The Tax Reform Act also significantly changes U.S. tax law related to foreign operations, however,
such changes do not currently impact us. As a result of the Tax Reform Act, we recognized income tax expense totaling $6.55 million related to the revaluation of
our deferred tax balances, which includes provisional estimates primarily related to certain purchase accounting, indemnification asset, intangible, and depreciation
items . We are still analyzing certain aspects of the Tax Reform Act and refining calculations, which could potentially affect the measurement of these balances.
Based on current projections, we expect that our effective tax rate for 2018 will be approximately 22% to 23% under the new tax law; however, there can be no
assurance to the actual amount as it is dependent upon the nature and amount of future income and expenses and transactions with discrete tax effects. For
additional information, see Note 15, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report.
Performance Overview
Highlights of our results of operations in 201 7, and financial condition as of December 31, 2017, include the following:
●
Pre-tax income increased $4.17 million, or 10.98%, to $42.11 million compared to the prior year.
24
Table of Contents
● Net income decreased $3.64 million, or 14.49%, and diluted earnings per share decreased $0.19 to $1.26 compared to the prior year. Excluding the impact
of the $6.55 million tax expense related to the Tax Reform Act, net income increased $2.91 million, or 11.59% to $28.04 million compared to the prior
year.
The GAAP efficiency ratio improved to 60.44%, from 64.98%, and the non-GAAP efficiency ratio improved to 58.07%, from 61.75%, compared to the
prior year.
●
● Net interest margin increased 22 basis points to 4.23% and normalized net interest margin increased 18 basis points to 3.97% compared to the prior year.
● Net charge-offs decreased $ 2.10 million, or 59.23%, to $1.44 million compared to the prior year.
●
Tangible book value per common share increased $0.75 to $14.64 compared to the prior year. The Company and the Bank both significantly exceed
regulatory “well capitalized” targets as of December 31, 2017.
Results
o
f
Operations
Net
Income
The following table presents the changes in net income and related information for the periods indicated:
Year Ended December 31,
2016
2017
2015
2017 Compared to 2016
Increase
(Decrease)
Change
%
2016 Compared to 2015
Increase
(Decrease)
Change
%
(Amounts
in
thousands,
except
per
share
data)
Net income
$
Net income available to common shareholders
$
21,485
21,485
$
25,126
25,126
$
24,540
24,435
(3,641)
(3,641)
-14.49% $
-14.49%
Basic earnings per common share
Diluted earnings per common share
1.26
1.26
1.45
1.45
1.32
1.31
(0.19)
(0.19)
-13.10%
-13.10%
586
691
0.13
0.14
Return on average assets
Return on average common equity
0.91%
6.14%
1.02%
7.42%
0.97%
7.08%
-0.11%
-1.28%
-10.93%
-17.24%
0.05%
0.34%
2.39%
2.83%
9.85%
10.69%
5.57%
4.80%
201
7
Compared
to
201
6
. Net income decreased in 2017 due to increases in income tax expense, driven by tax expense related to the Tax Reform Act, and the
provision for loan losses and decrease in noninterest income. These changes were offset by an increase in net interest income and a decrease in noninterest
expense.
2016
Compared
to
2015
. Net income increased in 2016 due to decreases in noninterest expense and in the provision for loan losses and an increase in net interest
income. These changes were offset by a decrease in noninterest income and increase in income tax expense.
25
Table of Contents
Net
Interest
Income
Net interest income , our largest contributor to earnings, is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. For additional
information, see “Non-GAAP Financial Measures” below. The following table presents the consolidated average balance sheets and net interest analysis on a FTE
basis for the dates indicated:
2017
Year Ended December 31,
2016
2015
Average
Balance
Interest
(1)
Average
Yield/
Rate (1)
Average
Balance
Interest
(1)
Average
Yield/
Rate (1)
Average
Balance
Interest
(1)
Average
Yield/
Rate (1)
(Amounts
in
thousands)
Assets
Earning assets
Loans (2)
Securities available for sale
Securities held to maturity
Interest-bearing deposits
Total earning assets
Other assets
Total assets
Liabilities
Interest-bearing deposits
$ 1,837,092 $
164,489
32,954
73,405
2,107,940 $
262,381
$ 2,370,321
$
Demand deposits
Savings deposits
Time deposits
401,092 $
520,430
510,411
Total interest-bearing deposits 1,431,933
Borrowings
90,032
5,695
487
1,008
97,222
4.90% $ 1,793,618 $
287,332
3.46%
71,069
1.48%
18,864
1.37%
4.61% 2,170,883 $
284,575
$ 2,455,458
87,848
8,047
757
153
96,805
4.90% $ 1,680,021 $
363,359
2.80%
70,987
1.07%
98,639
0.81%
4.46% 2,213,006 $
307,928
$ 2,520,934
87,768
9,575
770
267
98,380
5.22%
2.64%
1.08%
0.27%
4.44%
412
148
4,427
4,987
0.10% $ 342,169 $
531,050
0.03%
525,162
0.87%
0.35% 1,398,381
250
248
3,981
4,479
0.07% $ 343,036 $
532,221
0.05%
631,654
0.76%
0.32% 1,506,911
203
367
5,308
5,878
0.06%
0.07%
0.84%
0.39%
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
1
-
0.00%
4,058
26
0.64%
535
2
0.37%
47,716
32
0.07%
68,701
49
0.07%
71,262
68
0.10%
25,000
806
3.22%
49,727
1,874
3.77%
50,000
1,878
3.76%
55,502
128,219
2,265
3,103
4.08%
2.42%
116,602
239,088
3,416
5,365
2.93%
2.24%
89,400
211,197
3,523
5,471
3.94%
2.59%
1,560,152
8,090
0.52% 1,637,469
9,844
0.60% 1,718,108
11,349
0.66%
438,513
21,955
2,020,620
349,701
$ 2,370,321
456,474
23,040
2,116,983
338,475
$ 2,455,458
433,936
20,691
2,172,735
348,199
$ 2,520,934
Net interest income, FTE
Net interest rate spread, FTE
Net interest margin, FTE
$
89,132
$
86,961
$
87,031
4.09%
4.23%
3.86%
4.01%
3.78%
3.93%
(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.
26
Table of Contents
The following table presents the impact to net interest income on a FTE basis due to 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), for the periods indicated:
Year Ended
December 31, 2017 Compared to 2016
Dollar Increase (Decrease) due to
Year Ended
December 31, 2016 Compared to 2015
Dollar Increase (Decrease) due to
Volume
Rate
Rate/
Volume
Total
Volume
Rate
Rate/
Volume
Total
(Amounts
in
thousands)
Interest earned on (1) :
Loans (2)
Securities available for sale
Securities held to maturity
Interest-bearing deposits with
$
other banks
Total interest-earning assets
2,130 $
(3,440)
(408)
442
(1,276)
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
41
(5)
(112)
(26)
(15)
- $
1,896
291
106
2,293
103
(106)
578
(26)
-
54 $
(808)
(153)
307
(600)
18
11
(20)
26
(2)
2,184 $
(2,352)
(270)
5,930 $
(2,007)
1
(5,376) $
581
(7)
(474) $
(102)
(7)
855
417
(215)
3,709
533
(4,269)
(432)
(1,015)
162
(100)
446
(26)
(17)
(1)
(1)
(895)
13
(3)
34
(106)
(505)
1
(21)
14
(12)
73
10
5
80
(1,528)
(13)
(114)
(1,575)
47
(119)
(1,327)
24
(19)
(932)
(273)
137
(1,068)
(10)
5
1
(4)
(1,790)
(2,839)
1,341
1,617
(702)
(532)
(1,151)
(1,754)
1,072
175
(903)
(1,495)
(276)
(185)
(107)
(1,505)
Change in net interest income,
FTE
$
1,563 $
676 $
(68) $
2,171 $
3,534 $
(2,774) $
(830) $
(70)
(1) 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 net interest analysis on a FTE basis excluding the impact of non-cash purchase accounting accretion from acquired loan portfolios
for the periods indicated:
(Amounts
in
thousands)
Earning assets
Loans (2)
Accretion income
Less: cash accretion income
Non-cash accretion income
Loans, normalized (3)
Other earning assets
Total earning assets
Total interest-bearing liabilities
Net interest income, normalized (3)
Net interest rate spread, normalized (3)
Net interest margin, normalized (3)
2017
Average
Yield/
Rate (1)
Interest (1)
Year Ended December 31,
2016
Interest (1)
Average
Yield/
Rate (1)
2015
Average
Yield/
Rate (1)
Interest (1)
$
$
90,032
7,863
2,446
5,417
84,615
7,190
91,805
8,090
83,715
87,848
7,690
2,924
4,766
83,082
8,957
92,039
9,844
82,195
4.90% $
4.61%
2.65%
4.36%
0.52%
$
3.84%
3.97%
87,768
11,258
4,149
7,109
80,659
10,612
91,271
11,349
79,922
4.90% $
4.63%
2.37%
4.24%
0.60%
$
3.64%
3.79%
5.22%
4.80%
1.99%
4.12%
0.66%
3.46%
3.61%
(1) FTE basis based on the federal statutory rate of 35%
(2) Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.
(3) Normalized totals are non-GAAP financial measures that exclude non-cash loan interest accretion related to PCI loans.
27
Table of Contents
201
7
Compared
to
201
6
. Net interest income comprised 76.87% of total net interest and noninterest income in 2017 compared to 75.82% in 2016. Net interest
income on a GAAP basis increased $2.34 million, or 2.75%, and net interest income on a FTE basis increased $2.17 million, or 2.50%. Normalized net interest
income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans. For additional information, see “Non-GAAP
Financial Measures” below. Normalized net interest margin increased 18 basis points compared to an increase of 22 basis points on a FTE basis. Normalized net
interest spread increased 20 basis points compared to an increase of 23 basis points on a FTE basis.
Average earning assets decreased $62.94 million, or 2.90%, primarily due to decreases in investment securities offset by an increase in interest-bearing deposits
and loan growth. The normalized yield on earning assets increased 12 basis points compared to an increase of 15 basis points on a GAAP basis. Average loans
increased $43.47 million, or 2.42%, and the average loan to deposit ratio increased to 98.22% from 96.70%. The normalized yield on loans decreased 2 basis points
while remaining constant on a GAAP basis. Non-cash accretion income increased $651 thousand, or 13.66%.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $ 77.32 million, or 4.72%, primarily due to a decline in
average borrowings. The yield on interest-bearing liabilities decreased 8 basis points, largely driven by a decrease in the average balance of borrowings. Average
borrowings decreased $110.87 million, or 46.37%, largely due to a $61.10 million, or 52.40%, decrease in average FHLB advances and other borrowings, a $24.73
million, or 49.73%, decrease in average wholesale repurchase agreements, a $20.99 million, or 30.55%, decrease in average retail repurchase agreements, and a
$4.06 million, or 99.98%, decrease in average federal funds purchased. Average interest-bearing deposits increased $33.55 million, or 2.40%, which was driven by
a $58.92 million, or 17.22%, increase in average interest-bearing demand deposits offset by a $14.75 million, or 2.81%, decrease in average time deposits, and a
$10.62 million, or 2.00%, decrease in average savings deposits, which include money market and savings accounts.
2016
Compared
to
2015
. Net interest income comprised 75.82% of total net interest and noninterest income in 2016 compared to 74.16% in 2015. Net interest
income on a GAAP basis increased $127 thousand, or 0.15%, and net interest income on a FTE basis decreased $70 thousand, or 0.08%. Normalized net interest
income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans. For additional information, see “Non-GAAP
Financial Measures” below. Normalized net interest margin increased 18 basis points compared to an increase of 8 basis points on a FTE basis. The normalized
and FTE net interest spread increased 18 basis points.
Average earning assets decreased $42.12 million, or 1.90%, primarily due to decreases in securities available for sale and interest-bearing deposits offset by loan
growth. The normalized yield on earning assets increased 12 basis points compared to an increase of 2 basis points on a GAAP basis. Average loans increased
$113.60 million, or 6.76%, and the average loan to deposit ratio increased to 96.70% from 86.56%. The normalized yield on loans decreased 17 basis points
compared to a decrease of 32 basis points on a GAAP basis. Non-cash accretion income decreased $2.34 million, or 32.96%, as the effect of accretion income
continued to decline from acquired portfolio attrition.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $80.64 million, or 4.69%, primarily due to a decline in
average interest-bearing time deposit balances. The yield on interest-bearing liabilities decreased 6 basis points, which was comprised of a 7 basis point decrease in
the rate on interest-bearing deposits and a 1 basis point increase in the rate on borrowings. Average interest-bearing deposits decreased $108.53 million, or 7.20%,
which was driven by a $106.49 million, or 16.86%, decrease in average time deposits, a $1.17 million, or 0.22%, decrease in savings deposits, which include
money market and savings accounts, and an $867 thousand, or 0.25%, decrease in interest-bearing demand deposits. Average borrowings increased $27.89 million,
or 13.21%, largely due to a $27.20 million, or 30.43%, increase in average FHLB advances and other borrowings.
Provision
for
Loan
Losses
201
7
Compared
to
201
6
. The provision charged to operations increased $1.52 million to $2.77 million, which included a $1.49 million increase in the non-PCI
provision to $2.78 million and a $30 thousand increase in the PCI provision to a recovery of $12 thousand.
2016
Compared
to
2015
. The provision charged to operations decreased $936 thousand to $1.26 million, which included an $870 thousand decrease in the non-
PCI provision to $1.30 million and a $66 thousand decrease in the PCI provision to a recovery of $41 thousand. The provision charged to operations included a $1
thousand benefit attributed to the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure. The reduction in the non-PCI
provision was partially due to the reversal of loan loss reserves totaling $1.35 million attributed to loans divested in the First Bank transaction.
28
Table of Contents
Noninterest
Income
T he following table presents the components of, and changes in, noninterest income for the periods indicated:
Year Ended December 31,
2016
2015
2 017
2017 Compared to 2016
Increase
(Decrease) Change
%
2016 Compared to 2015
Increase
(Decrease)
%
Change
(Amounts
in
thousands)
Wealth management
Service charges on deposits
Other service charges and fees
Insurance commissions
Net impairment loss
Net (loss) gain on sale of securities
Net FDIC indemnification asset amortization
Net gain on divestitures
Other operating income
Total noninterest income
$
$
3,150 $
13,803
8,624
1,347
-
(661)
(3,517)
-
3,502
26,248 $
2,828 $
13,588
8,102
5,442
(4,646)
335
(5,474)
3,682
3,209
27,066 $
2,975 $
13,717
8,045
6,899
-
144
(6,379)
-
4,129
29,530 $
322
215
522
(4,095)
4,646
(996)
1,957
(3,682)
293
(818)
11.39% $
1.58%
6.44%
-75.25%
-100.00%
-297.31%
-35.75%
-100.00%
9.13%
-3.02% $
(147)
(129)
57
(1,457)
(4,646)
191
905
3,682
(920)
(2,464)
-4.94%
-0.94%
0.71%
-21.12%
-
132.64%
-14.19%
-
-22.28%
-8.34%
201
7
Compared
to
201
6
. Noninterest income comprised 23.13% of total net interest and noninterest income in 2017 compared to 24.18% in 2016. Noninterest
income decreased $818 thousand, or 3.02%, primarily due to a decrease in insurance commissions and the associated net gain related to the Greenpoint divestiture
in the fourth quarter of 2016 and divestiture of six bank branches to First Bank in the third quarter of 2016. The decrease was largely offset by the absence of net
impairment losses and the decrease in net negative amortization related to the FDIC indemnification asset as loss share coverage on commercial loans expired on
June 30, 2017. We recognized a net loss of $661 thousand on the sale of securities related primarily to certain single issue trust preferred securities. See Note 3,
“Investment Securities,” to the Consolidated Financial Statements in Item 1 of this report. Excluding the impact from impairment losses, sales of securities and
branches, net FDIC indemnification asset amortization, the net gain on divestitures, and bank owned life insurance proceeds, noninterest income decreased $2.76
million, or 8.44%, to $29.97 million in 2017, from $32.73 million in 2016. The decrease was primarily due to the $4.10 million decrease in insurance commissions
resulting from the Greenpoint divestiture offset by increases in wealth management income, service charges and fees, and other operating income.
2016
Compared
to
2015
. Noninterest income comprised 24.18% of total net interest and noninterest income in 2016 compared to 25.84% in 2015. Noninterest
income decreased $2.46 million, or 8.34%, in 2016 primarily due to net impairment losses offset by a net gain on divestitures and a decrease in insurance
commissions. We realized net impairment losses of $4.64 million on certain debt securities and $11 thousand on certain equity securities. We realized a net gain of
$3.68 million on the divestiture of Greenpoint and six bank branches. Insurance commissions decreased largely due to the Greenpoint divestiture. Other operating
income decreased primarily due to the absence of a $1.14 million net death benefit from the maturity of a life insurance policy recognized in 2015 offset by a $381
thousand gain on the sale of closed branches and $474 thousand in legal settlements. Net negative amortization related to the FDIC indemnification asset decreased
as the expiration of the loss share agreement for commercial loans approaches. We recognized a net gain of $335 thousand on the sale of securities related
primarily to certain Agency mortgage-backed securities. Excluding the impact from impairment losses, sales of securities and branches, net FDIC indemnification
asset amortization, the net gain on divestitures, and net death benefits, noninterest income decreased $1.89 million, or 5.47%, to $32.73 million in 2016 from
$34.62 million in 2015.
29
Table of Contents
Noninterest
Expense
The following table presents the components of, and changes in, noninterest expense for the periods indicated:
Year Ended December 31,
2016
2017
2015
2017 Compared to 2016
Increase
(Decrease) Change
%
2016 Compared to 2015
Increase
(Decrease)
%
Change
(Amounts
in
thousands)
Salaries and employee benefits
Occupancy expense
Furniture and equipment expense
Amortization of intangibles
FDIC premiums and assessments
FHLB debt prepayment fees
Merger, acquisition, and divestiture expense
Other operating expense
Total noninterest expense
$
$
36,317 $
4,775
4,425
1,056
910
-
-
21,099
68,582 $
39,912 $
5,297
4,341
1,136
1,383
-
730
19,947
72,746 $
39,625 $
5,817
5,199
1,118
1,513
1,702
86
21,111
76,171 $
(3,595)
(522)
84
(80)
(473)
-
(730)
1,152
(4,164)
-9.01% $
-9.85%
1.94%
-7.04%
-34.20%
-
-100.00%
5.78%
-5.72% $
287
(520)
(858)
18
(130)
(1,702)
644
(1,164)
(3,425)
0.72%
-8.94%
-16.50%
1.61%
-8.59%
-100.00%
748.84%
-5.51%
-4.50%
201
7
Compared
to
201
6
. Noninterest expense decreased $4.16 million, or 5.72%, in 2017 compared to 2016, which was largely due to a decrease in salaries and
employee benefits coupled with the absence of merger, acquisition, and divestiture expense and decreases in occupancy, furniture, and equipment expense, FDIC
premiums and assessments, and intangible amortization. Salaries and employee benefits decreased as full-time equivalent employees, calculated using the number
of hours worked, decreased to 562 as of December 31, 2017, from 580 as of December 31, 2016. The increase in other operating expense included a $759 thousand
increase in legal fees and write-downs on certain long-term investments in land and buildings totaling $552 thousand, which were offset by a $218 thousand
decrease in the net loss on sales and expenses related to other real estate owned (“OREO”) to $1.20 million from $1.42 million in 2016.
2016
Compared
to
2015
. Noninterest expense decreased $3.43 million, or 4.50%, in 2016 compared to 2015, which was largely due to the absence of FHLB
prepayment penalties and a decrease in operating expenses. The decrease in other operating expense was primarily due to a $1.02 million decrease in the net loss
on sales and expenses related to OREO to $1.42 million from $2.44 million in 2015. The decrease was offset by a $535 thousand increase in consulting fees and a
$425 thousand increase in legal fees. We incurred expenses totaling $730 thousand related to the First Bank branch exchange and divestiture of Greenpoint.
Occupancy, furniture, and equipment expense decreased $1.38 million, or 12.51%, due to branch closures and divestitures. Full-time equivalent employees
decreased to 580 as of December 31, 2016, from 673 as of December 31, 2015, primarily due to personnel restructuring as a result of the First Bank and
Greenpoint transactions.
Income
Tax
Expense
201
7
Compared
to
201
6
. Income tax expense increased $7.81 million, or 60.92%, and the effective tax rate increased to 48.98% compared to 33.78% in the prior
year. The increase was largely attributed to tax expense of $6.55 million related to the revaluation of our net deferred tax asset in accordance with the Tax Reform
Act. Excluding the impact of the revaluation, income tax expense increased $1.26 million, or 9.81%, and the effective rate decreased 36 basis points to 33.42%
largely from a decrease in taxable revenues as a percent of operating earnings. For additional information, see Note 15, “Income Taxes,” to the Consolidated
Financial Statements in Item 8 of this report.
2016
Compared
to
2015
. Income tax expense increased $1.44 million, or 12.64%, and the effective tax rate increased 210 basis points to 33.78%. The increase in
the effective tax rate was largely due to an increase in taxable revenues as a percent of operating earnings and non-deductible goodwill related to the Greenpoint
divestiture.
Non-GAAP
Financial
Measures
In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors
with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-
GAAP financial measures presented in this report include net interest income on a FTE basis and normalized net interest income on a FTE basis. While we believe
these non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important
than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions.
The reconciliations of these measures to GAAP measures are presented below.
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Table of Contents
We believe FTE basis is 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 FTE basis adjusts for
the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 35%. Normalized net interest income on a FTE basis is
a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans.
The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the
periods indicated:
(Amounts
in
thousands)
Net interest income, GAAP
FTE adjustment (1)
Net interest income, FTE
Less: non-cash accretion income (2)
Net interest income, normalized
Net interest margin, GAAP
FTE adjustment (1)
Net interest margin, FTE
Less: non-cash accretion income (2)
Net interest margin, normalized
2017
Year Ended December 31,
2016
2015
$
$
87,218
1,914
89,132
5,417
83,715
$
$
4.14%
0.09%
4.23%
0.26%
3.97%
84,880
2,081
86,961
4,766
82,195
$
$
3.91%
0.10%
4.01%
0.22%
3.79%
84,753
2,278
87,031
7,109
79,922
3.83%
0.10%
3.93%
0.32%
3.61%
(1) FTE basis based on the federal statutory rate of 35%
(2)
Includes non-cash purchase accounting accretion income from acquired loan portfolios
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We believe the efficiency ratio provides investors with important information about our operating expense control and efficiency of operations. Management also
believes this non-GAAP measure focuses attention on our core operating performance over time. The following table reconciles the GAAP-based efficiency ratio
to the non-GAAP efficiency ratio for the periods indicated:
(Amounts
in
thousands)
GAAP efficiency ratio
Noninterest expense
Net interest income
Noninterest income
Net interest income plus noninterest income
GAAP efficiency ratio
Non-GAAP efficiency ratio
Noninterest expense, GAAP
Non-GAAP adjustments
Merger, acquisition, and divestiture expense
FHLB debt prepayment fees
OREO expense and net loss
Other non-core items
Total non-GAAP adjustments
Adjusted noninterest expense
Net interest income plus noninterest income, GAAP
Non-GAAP adjustments
Tax equivalency adjustment
Net impairment losses
Net loss (gain) on sale of securities
Net gain on divestitures
Other non-core items
Total non-GAAP adjustments
Adjusted net interest income plus noninterest income
Non-GAAP efficiency ratio (1)
2017
Year Ended December 31,
2016
2015
$
$
68,582
87,218
26,248
113,466
$
72,746
84,880
27,066
111,946
60.44%
64.98%
$
68,582
$
72,746
$
-
-
(1,202)
(391)
(1,593)
66,989
(730)
-
(1,420)
(364)
(2,514)
70,232
113,466
111,946
1,914
-
661
-
(689)
1,886
115,352
58.07%
2,081
4,646
(335)
(3,682)
(918)
1,792
113,738
61.75%
76,171
84,753
29,530
114,283
66.65%
76,171
(86)
(1,702)
(2,438)
(259)
(4,485)
71,686
114,283
2,950
-
(144)
-
(1,263)
1,543
115,826
61.89%
(1)
A non-GAAP financial measure computed by dividing adjusted noninterest expense by the sum of tax equivalent net interest income and adjusted
noninterest income
F
inancial
Condition
Total assets as of December 31, 2017, increased $2.06 million, or 0.09%, to $2.39 billion from $2.39 billion as of December 31, 2016. Total liabilities as of
December 31, 2017, decreased $9.60 million, or 0.47%, to $2.04 billion from $2.05 billion as of December 31, 2016.
Investment
Securities
Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit
liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs,
interest rate expectations, asset/liability management strategies, and capital requirements.
Available-for-sale securities as of December 31, 201 7, remained relatively constant compared to December 31, 2016, with a change in composition resulting from
the purchase of U.S. Treasury securities offset by the maturity and sale of municipal, single-issue trust preferred, and mortgage-backed Agency securities. Held-to-
maturity securities as of December 31, 2017, decreased $21.98 million, or 46.64%, compared to December 31, 2016, primarily due to the maturity of U.S. Agency
securities.
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Table of Contents
T he following table presents 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 Agency securities
Equity securities
Total securities available for sale
Fair value to amortized cost
Held to Maturity
U.S. Agency securities
Municipal securities
Corporate securities
Total securities held to maturity
Fair value to amortized cost
2017
December 31,
2016
2015
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
$
$
11,289 $
19,987
101,552
9,367
-
-
22,095
55
164,345 $
17,937 $
-
7,212
25,149 $
11,296
19,971
103,648
8,884
-
-
21,726
55
165,580
$
$
100.75%
17,888
-
7,196
25,084
$
$
99.74%
1,342 $
-
111,659
22,104
-
-
31,290
55
166,450 $
36,741 $
-
10,392
47,133 $
1,345
-
113,331
19,939
-
-
30,891
73
165,579
$
$
99.48%
36,865
-
10,401
47,266
$
$
100.28%
31,414 $
-
124,880
55,882
70,571
5,000
84,576
66
372,389 $
61,863 $
190
10,488
72,541 $
30,702
-
128,678
47,832
70,333
5,000
83,556
72
366,173
98.33%
61,832
193
10,465
72,490
99.93%
The following table provides information about our investment portfolio as of the dates indicated:
(Amounts
in
years)
Average life
Average duration
Available for
Sale
2017
Held to
Maturity
December 31,
Total
Available for
Sale
2016
Held to
Maturity
Total
5.44
4.74
1.11
1.09
4.87
4.26
7.75
6.66
1.30
1.26
6.32
5.47
T here 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 as of December 31, 2017 or 2016.
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Table of Contents
The following tables present the amortized cost, fair value, and weighted-average yield of available-for-sale and held-to-maturity securities, by contractual
maturity, as of December 31, 2017. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with
or without penalties.
U.S. Agency
Securities
U.S. Treasury
Securities
Municipal
Securities
Corporate
Notes
Total
Tax Equivalent
Purchase Yield (1)
Available-for-Sale Securities
(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
$
$
10,065
-
1,224
-
11,289
$
$
19,987
-
-
-
19,987
$
$
-
7,193
90,062
4,297
101,552
$
$
Tax equivalent purchase yield (1)
Average contractual maturity (in years)
1.46%
1.37
1.13%
0.25
4.39%
7.48
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
10,055
-
1,241
-
11,296
$
$
19,971
-
-
-
19,971
$
$
-
7,308
91,886
4,454
103,648
$
$
(1) FTE basis based on the federal statutory rate of 35%
1.17%
4.57%
4.15%
4.43%
2.18%
0.00%
$
-
-
9,367
-
9,367
$
2.08%
9.08
-
-
8,884
-
8,884
$
$
30,052
7,193
100,653
4,297
142,195
22,095
55
164,345
3.55%
6.09
30,026
7,308
102,011
4,454
143,799
21,726
55
165,580
(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 (1)
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
Held-to-Maturity Securities
U.S. Agency
Securities
Corporate
Notes
Total
Tax Equivalent
Purchase Yield (1)
0.00%
1.67%
0.00%
0.00%
$
$
$
$
-
17,937
-
-
17,937
$
$
1.59%
1.14
-
17,888
-
-
17,888
$
$
-
7,212
-
-
7,212
$
$
1.84%
1.06
-
7,196
-
-
7,196
$
$
-
25,149
-
-
25,149
1.67%
1.11
-
25,084
-
-
25,084
(1) FTE basis based on the federal statutory rate of 35%
Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings
associated with debt securities in 2017 or 2015. We recognized OTTI charges in earnings associated with debt securities of $4.64 million in 2016 due to our change
in intent to hold certain trust preferred securities in our portfolio to recovery. These specific securities were sold to reduce credit concentrations with two issuers,
which increased cash reserves and reduced exposure to the financial industry. We recognized no OTTI charges in earnings associated with equity securities in 2017
or 2015. We recognized OTTI charges in earnings associated with certain equity securities of $11 thousand in 2016. For additional information, see “Investment
Securities” in the “Critical Accounting Estimates” section above and Note 3, “Investment Securities,” to the Consolidated Financial Statements in Item 8 of this
report.
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Table of Contents
Loans
Held
for
Investmen
t
Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments.
Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share
agreements (“covered loans”). The general characteristics of each loan segment are as follows:
● Commercial loans – This segment consists of loans to small and 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
guidelines 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.
● Consumer real estate loans – This segment consists of 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. Residential real estate loan underwriting guidelines require that borrowers meet certain credit,
income, and collateral standards at origination.
● Consumer and other loans – This segment consists 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. Consumer loan underwriting guidelines require that
borrowers meet certain credit, income, and collateral standards at origination.
Total loans held for investment, net of unearned income, as of December 31, 2017, decreased $35.76 million, or 1.93%, compared to December 31, 2016, primarily
due to a $29.05 million, or 50.96%, decrease in covered loans due to the expiration of the commercial loss share agreement on June 30, 2017, and continued loan
runoff in the remaining portfolio. Non-covered loans decreased $6.72 million, or 0.37%, which was driven by declines in residential real estate. We had no foreign
loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans, that represented 10% or more of
outstanding loans, as of December 31, 2017 or 2016. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this
report.
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Table of Contents
The following table presents loans, net of unearned income and by loan class, as of the dates 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
Less: allowance for loan losses
Total loans held for investment, net of unearned income and
allowance
Loans held for sale
2017
2016
December 31,
2015
2014
2013
$
$
$
60,017 $
92,188
125,202
141,670
616,633
7,035
25,649
1,068,394
103,205
502,686
39,178
645,069
70,772
5,001
75,773
1,789,236
27,948
1,817,184
19,276
56,948 $
92,204
134,228
142,965
598,674
6,003
31,729
1,062,751
106,361
500,891
44,535
651,787
77,445
3,971
81,416
1,795,954
56,994
1,852,948
17,948
48,896 $
88,903
95,026
149,351
485,460
2,911
27,540
898,087
107,367
495,209
43,505
646,081
41,271 $
83,099
97,480
135,171
473,906
1,599
29,517
862,043
110,957
485,475
32,799
629,231
72,000
7,338
79,338
1,623,506
83,035
1,706,541
20,233
69,347
6,555
75,902
1,567,176
122,240
1,689,416
20,227
35,255
95,455
70,197
135,559
475,911
2,324
32,614
847,315
111,770
496,012
28,703
636,485
71,313
3,926
75,239
1,559,039
151,682
1,710,721
24,077
1,797,908 $
1,835,000 $
1,686,308 $
1,669,189 $
1,686,644
- $
- $
- $
1,792 $
883
The following table presents covered 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
Total covered loans
2017
2016
December 31,
2015
2014
2013
$
$
39 $
-
-
284
9
-
-
332
23,720
3,896
-
27,616
-
27,948 $
36
4,570 $
895
8
962
7,512
25
397
14,369
35,817
6,729
-
42,546
79
56,994 $
6,303 $
1,170
640
2,674
14,065
34
643
25,529
48,565
8,595
262
57,422
13,100 $
2,662
1,584
5,918
25,317
43
716
49,340
60,391
11,968
453
72,812
15,865
3,325
1,933
7,449
34,646
164
873
64,255
69,206
16,919
1,184
87,309
84
83,035 $
88
122,240 $
118
151,682
Table of Contents
The following table presents the percentage of loans to total loans in the non-covered portfolio, by loan class, as of the dates indicated:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
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
2017
2016
December 31,
2015
2014
2013
3.36%
5.15%
7.00%
7.92%
34.46%
0.39%
1.43%
59.71%
5.77%
28.09%
2.19%
36.05%
3.96%
0.28%
4.24%
100.00%
3.17%
5.13%
7.47%
7.96%
33.34%
0.34%
1.77%
59.18%
5.92%
27.89%
2.48%
36.29%
4.31%
0.22%
4.53%
100.00%
3.01%
5.48%
5.85%
9.20%
29.90%
0.18%
1.70%
55.32%
6.62%
30.50%
2.68%
39.80%
4.43%
0.45%
4.88%
100.00%
2.64%
5.30%
6.22%
8.63%
30.24%
0.10%
1.88%
55.01%
7.08%
30.98%
2.09%
40.15%
4.42%
0.42%
4.84%
100.00%
2.26%
6.12%
4.50%
8.70%
30.53%
0.15%
2.09%
54.35%
7.17%
31.82%
1.84%
40.83%
4.57%
0.25%
4.82%
100.00%
The following table presents the percentage of loans to total loans in the covered portfolio, by loan class, as of the dates indicated:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
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
2017
2016
December 31,
2015
2014
2013
0.14%
0.00%
0.00%
1.02%
0.03%
0.00%
0.00%
1.19%
84.87%
13.94%
0.00%
98.81%
8.02%
1.57%
0.01%
1.69%
13.18%
0.04%
0.70%
25.21%
62.84%
11.81%
0.00%
74.65%
7.59%
1.41%
0.77%
3.22%
16.94%
0.04%
0.77%
30.74%
58.49%
10.35%
0.32%
69.16%
10.72%
2.18%
1.30%
4.84%
20.71%
0.03%
0.59%
40.37%
49.40%
9.79%
0.37%
59.56%
10.46%
2.19%
1.27%
4.91%
22.84%
0.11%
0.58%
42.36%
45.63%
11.15%
0.78%
57.56%
0.00%
100.00%
0.14%
100.00%
0.10%
100.00%
0.07%
100.00%
0.08%
100.00%
37
Table of Contents
The following table presents the maturities and rate sensitivities of the non-covered loan portfolio as of December 31, 2017:
(Amounts
in
thousands)
Commercial loans
Construction, development, and other land (1)
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
$
$
$
$
17,946 $
27,305
14,606
15,515
41,040
741
5,227
122,380
6,164
3,701
2,547
12,412
13,046
1,827
14,873
149,665 $
15,243 $
52,747
27,819
28,653
197,139
5,534
9,193
336,328
15,754
33,301
1,275
50,330
55,820
1,369
57,189
443,847 $
26,828 $
12,136
82,777
97,502
378,454
760
11,229
609,686
81,287
465,684
35,356
582,327
1,906
1,805
3,711
1,195,724 $
60,017
92,188
125,202
141,670
616,633
7,035
25,649
1,068,394
103,205
502,686
39,178
645,069
70,772
5,001
75,773
1,789,236
92,442 $
57,223
149,665 $
395,966 $
47,881
443,847 $
391,264 $
804,460
1,195,724 $
879,672
909,564
1,789,236
(1)
Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and interest payments.
38
Table of Contents
The following table presents the maturities and rate sensitivities of the covered loan portfolio as of December 31, 2017:
(Amounts
in
thousands)
Commercial loans
Construction, development, and other land
Single family non-owner occupied
Non-farm, non-residential
Total commercial loans
Consumer real estate loans
Home equity lines
Single family owner occupied
Total consumer real estate loans
Total covered loans
Rate sensitivities
Predetermined interest rate
Floating or adjustable interest rate
Total covered loans
Risk
Elements
Due in One
Year or Less
Due After One
Year Through
Five Years
Due After Five
Years
Total
$
$
$
$
1 $
-
-
1
395
18
413
414 $
6 $
408
414 $
38 $
258
9
305
11,774
754
12,528
12,833 $
- $
26
-
26
11,551
3,124
14,675
14,701 $
989 $
11,844
12,833 $
3,033 $
11,668
14,701 $
39
284
9
332
23,720
3,896
27,616
27,948
4,028
23,920
27,948
We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting 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. We track 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.
Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and
OREO. 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. 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.
For additional information, see Note 5, “Credit Quality,” to the Consolidated Financial Statements in Item 8 of this report.
39
Table of Contents
The following table presents the components of nonperforming assets and related information as of the periods indicated:
(Amounts
in
thousands)
Non-covered nonperforming
Nonaccrual loans
Accruing loans past due 90 days or more
TDRs (1)
Total non-covered nonperforming loans
Non-covered OREO
Total non-covered nonperforming assets
Covered nonperforming
Nonaccrual loans
Accruing loans past due 90 days or more
Total covered nonperforming loans
Covered OREO
Total covered nonperforming assets
Total nonperforming
Nonaccrual loans
Accruing loans past due 90 days or more
TDRs (1)
Total nonperforming loans
OREO
Total nonperforming assets
Additional Information
Performing TDRs (2)
Total TDRs (3)
Gross interest income that would have been recorded under the
original terms of restructured and nonperforming loans
Actual interest income recorded on restructured and
nonperforming loans
Non-covered ratios
Nonperforming loans to total loans
Nonperforming assets to total assets
Non-PCI allowance to nonperforming loans
Non-PCI allowance to total loans
Total ratios
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans
$
$
$
$
$
$
$
2017
2016
December 31,
2015
2014
2013
18,997
1
120
19,118
2,409
21,527
342
-
342
105
447
19,339
1
120
19,460
2,514
21,974
$
$
$
$
$
$
15,854
-
114
15,968
5,109
21,077
608
-
608
276
884
16,462
-
114
16,576
5,385
21,961
$
$
$
$
$
$
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
$
$
$
$
$
$
$
7,614
7,734
$
12,838
12,952
$
13,889
13,962
$
11,808
14,534
1,217
222
1,414
424
1,645
608
1,171
597
1.07%
0.91%
100.83%
1.08%
1.07%
0.92%
99.05%
1.06%
0.89%
0.90%
112.32%
1.00%
0.89%
0.92%
108.28%
0.97%
1.10%
0.96%
112.61%
1.24%
1.09%
1.12%
108.97%
1.19%
0.85%
0.80%
151.85%
1.29%
0.93%
1.10%
128.67%
1.20%
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
10,900
12,211
1,548
511
1.31%
1.14%
113.92%
1.50%
1.40%
1.49%
100.69%
1.41%
(1)
(2)
(3)
TDRs restructured within the past six months and nonperforming exclude nonaccrual TDRs of $169 thousand, $224 thousand, $923 thousand, $306
thousand, and $734 thousand for the five years ended December 31, 2017.
TDRs with six months or more of satisfactory payment performance exclude TDRs of $1.76 million, $1.06 million, $416 thousand, $248 thousand, and
$1.47 million for the five years ended December 31, 2017.
Total TDRs exclude nonaccrual TDRs of $1.93 million, $1.28 million, $1.34 million, $554 thousand, and $2.20 million for the five years ended December
31, 2017.
Non-covered nonperforming assets as of December 31, 2017, increased $450 thousand, or 2.14%, from December 31, 2016, primarily due to an increase in non-
covered nonaccrual loans. Non-covered nonaccrual loans as of December 31, 2017, increased $3.14 million, or 19.82%, from December 31, 2016. As of December
31, 2017, non-covered nonaccrual loans were largely attributed to single family owner occupied (69.00%) and non-farm, non-residential (12.89%) loans. As of
December 31, 2017, approximately $673 thousand, or 3.54%, of non-covered nonaccrual loans were attributed to performing loans acquired in business
combinations. 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 on management’s estimate of loss at ultimate resolution.
40
Table of Contents
Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $30.71 million as of December 31, 2017, an increase of
$5.70 million, or 22.77%, compared to $25.02 million as of December 31, 2016. Non-covered delinquent loans as a percent of total non-covered loans totaled
1.71% as of December 31, 2017, which includes past due loans (0.65%) and nonaccrual loans (1.06%).
When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.
Certain TDRs are classified as nonperforming when modified 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 as of December 31, 2017,
decreased $5.22 million, or 40.29%, to $7.73 million from December 31, 2016. Nonperforming accruing TDRs as of December 31, 2017, increased $6 thousand, or
5.26%, to $120 thousand from December 31, 2016. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 1.55% as of December 31, 2017,
compared to 0.88% as of December 31, 2016. Specific reserves on TDRs totaled $642 thousand as of December 31, 2017, compared to $670 thousand as of
December 31, 2016.
Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $2.70 million, or 52.85%, as of December 31, 2017,
compared to December 31, 2016. Non-covered OREO consisted of 16 properties with an average holding period of 12 months as of December 31, 2017. The net
loss on the sale of OREO totaled $937 thousand in 2017, $1.15 million in 2016, and $1.85 million in 2015. The following table presents the changes in OREO
during the periods indicated:
Non-covered
2017
Covered
Total
Non-covered
2016
Covered
Total
Year Ended December 31,
$
$
5,109 $
2,204
(4,165)
(739)
2,409 $
276 $
79
(218)
(32)
105 $
5,385 $
2,283
(4,383)
(771)
2,514 $
4,873 $
3,962
(2,887)
(839)
5,109 $
4,034 $
1,200
(4,405)
(553)
276 $
8,907
5,162
(7,292)
(1,392)
5,385
(Amounts
in
thousands)
Beginning balance
Additions
Disposals
Valuation adjustments
Ending balance
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 the provision for loan losses 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.
As of December 31, 2017, our qualitative risk factors reflect a stable risk of loan losses due to consistent asset quality metrics and relatively stable business and
economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase
the allowance for loan losses in future periods. Management considered the allowance adequate as of December 31, 2017; however, no assurance can be made that
additions to the allowance will not be required in future periods. For additional information, see “Allowance for Loan Losses” in the “Critical Accounting
Estimates” section above and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.
The allowance for loan losses as of December 31, 201 7, increased $1.33 million, or 7.40%, from December 31, 2016. The increase was largely attributed to a
$1.74 million increase in specific reserves on impaired loans combined with a $700 thousand increase in unallocated reserves. The non-PCI allowance as a percent
of non-covered loans totaled 1.08% as of December 31, 2017, compared to 1.00% as of December 31, 2016. PCI loans were aggregated into five loan pools as of
December 31, 2017 and 2016; Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”)
commercial, and Peoples residential. The cash flow analysis identified no impaired PCI loan pools as of December 31, 2017, compared to one impaired PCI loan
pool with a cumulative impairment of $12 thousand as of December 31, 2016. Net charge-offs decreased $2.10 million, or 59.23%, in 2017 compared to 2016,
largely due to an overall reduction in charge-offs for commercial real estate loans.
41
Table of Contents
The following table presents the changes in the allowance for loan losses, by loan class, during the periods indicated:
2017
2016
Year Ended December 31,
2015
2014
2013
(Amounts
in
thousands)
Beginning balance
Removal of loans transferred (1)
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 (2)
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
$
$
17,948
-
$
20,233
-
$
20,227
-
24,077
$
(682)
2,783
1,296
(12)
-
427
224
9
52
142
-
68
13
675
11
658
664
2,943
306
160
9
180
146
-
-
201
108
105
(41)
(1)
254
144
64
237
1,684
-
9
1,073
508
31
457
715
5,176
282
484
15
79
59
-
-
137
182
39
2,166
25
420
(275)
(29)
(422)
256
93
-
87
773
-
73
92
812
2
461
1,096
3,745
135
173
-
92
74
-
-
402
258
18
1,238
459
35
488
832
-
-
451
988
305
659
1,026
6,481
84
1,736
10
331
239
-
-
514
76
-
137
148
1,500
1,443
19,276
$
123
237
1,637
3,539
17,948
$
101
336
1,589
2,156
20,233
$
121
479
3,590
2,891
20,227
$
$
25,770
-
7,912
296
451
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
Net charge-offs to average non-covered loans
Net charge-offs to average total loans
0.08%
0.08%
0.21%
0.20%
0.14%
0.13%
0.18%
0.17%
0.68%
0.61%
(1)
(2)
Includes a $682 thousand removal in 2014 due to loans transferred in branch divestitures
Includes a $1.60 million recovery in 2014 related to the positive resolution of a sizable problem credit
42
Table of Contents
The following table presents the allowance for loan losses, 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
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total allowance, excluding PCI loans
2017
2016
December 31,
2015
2014
2013
$
830 $
762
1,094
1,976
6,597
51
362
803
5,710
297
889 $
495
1,157
2,752
6,185
43
169
895
4,364
228
1,119 $
504
1,535
3,369
6,393
22
190
1,091
4,969
297
1,151 $
689
1,917
3,228
5,805
13
206
1,330
4,935
225
1,141
5,215
1,211
3,549
4,650
23
301
1,361
5,030
206
$
794
19,276 $
759
17,936 $
690
20,179 $
670
20,169 $
635
23,322
The following table presents the PCI allowance for loan losses, by loan pool, as of the dates indicated:
(Amounts
in
thousands)
Commercial loans
Waccamaw commercial
Peoples commercial
Other
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Peoples residential
Total PCI allowance
Deposits
2017
2016
December 31,
2015
2014
2013
$
$
- $
-
-
-
-
-
- $
- $
-
-
-
-
12
12 $
- $
-
-
-
1
53
54 $
37 $
-
-
-
-
21
58 $
-
69
8
277
217
184
755
Total deposits as of December 31, 2017, increased $88.55 million, or 4.81%, compared to December 31, 2016. Noninterest-bearing deposits increased $26.44
million and interest-bearing deposits increased $87.07 million while savings deposits, which include money market accounts and savings accounts, decreased
$10.47 million; and time deposits, which include certificates of deposit and individual retirement accounts, decreased $14.49 as of December 31, 2017, compared
to December 31, 2016. We had no material deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of
December 31, 2017 or 2016.
The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 201 7:
(Amounts
in
thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
$
$
15,401
13,188
22,441
147,090
198,120
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Table of Contents
Borrowings
Total borrowings as of December 31, 2017, decreased $98.63 million, or 55.19%, compared to December 31, 2016, primarily due to moving certain cash
management accounts into interest-bearing deposit products. Short-term borrowings consisted of retail repurchase agreements, which decreased $67.92 million, or
93.03%, as of December 31, 2017, compared to December 31, 2016. The following table presents the balances and weighted average rates paid on short-term
borrowings for the periods indicated:
2017
Amount
Rate
Year Ended December 31,
2016
Amount
Rate
2015
Amount
Rate
(Amounts
in
thousands)
Year-end balance
Average annual balance (1)
Maximum month-end balance (1)
$
5,086
47,717
90,968
0.11% $
0.07%
73,005
108,620
182,554
0.07% $
0.21%
88,614
72,691
122,693
0.19%
0.10%
(1)
Average annual and month-end balances include federal funds purchased and short-term FHLB advances that were repaid prior to year end.
Long-term borrowings consisted of a wholesale repurchase agreement and a convertible FHLB advance as of December 31, 2017. The wholesale repurchase
agreement totaled $25.00 million with a weighted average rate of 3.18% as of December 31, 2017 and 2016. Long-term FHLB borrowings decreased $15.00
million, or 23.08%, to $50.00 million and the weighted average rate decreased 4 basis points to 4.00% as of December 31, 2017, compared to December 31, 2016.
The decrease was due to a $15.00 million convertible advance with a 4.15% rate that matured on May 4, 2017. The Company redeemed all of its trust preferred
securities on January 9, 2017, resulting in a decrease of $15.46 million in subordinated debt.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to convert assets to cash or raise cash to meet financial obligations. We believe that liquidity management should encompass
an overall balance sheet approach that draws together all sources and uses of liquidity. Poor or inadequate liquidity risk management may result in a funding deficit
that could have a material impact on our operations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) to detect
potential liquidity issues and protect our 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”) of 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. The liquidity model incorporates various funding crisis
scenarios and 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 a financial holding company, the Company ’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory
limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of December 31, 2017, the Company’s cash reserves totaled $19.22
million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. There was no outstanding balance
on the line of credit as of December 31, 2017. The Company’s cash reserves and investments provide adequate working capital to meet obligations, projected
dividends to shareholders, and anticipated debt repayments for the next twelve months.
In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines
of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately
available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with
correspondent banks and unpledged available-for-sale securities. As of December 31, 2017, our unencumbered cash totaled $157.95 million, unused borrowing
capacity from the FHLB totaled $411.20 million, available credit from the FRB Discount Window totaled $6.15 million, available lines from correspondent banks
totaled $90.00 million, and unpledged available-for-sale securities totaled $114.24 million.
44
Table of Contents
Cash
Flows
The following table summarizes the components of cash flow for the periods indicated:
(Amounts
in
thousands)
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning balance
Cash and cash equivalents, ending balance
2017
Year Ended December 31,
2016
2015
$
$
39,009 $
65,157
(22,522)
81,644
76,307
157,951 $
43,088 $
110,210
(128,778)
24,520
51,787
76,307 $
58,519
(70,785)
(173,607)
(185,873)
237,660
51,787
201
7
Compared
to
201
6
. Cash and cash equivalents increased $81.64 million compared to an increase of $24.52 million in the prior year. The increase was
primarily due to a $106.26 million reduction in net cash used in financing activities as we increased deposit accounts and significantly reduced FHLB and other
borrowings. Net cash provided by investing activities decreased $45.05 million largely due to a decrease in proceeds from sales and maturities of investment
securities, which were partially offset by less loan origination activity. Net cash provided by operating activities experienced a slight decrease of $4.08 million.
2016
Compared
to
2015
. Cash and cash equivalents increased $24.52 million compared to a decrease of $185.87 million in the prior year primarily due to a
$181.00 million increase in net cash provided by investing activities. The increase was largely the result of an increase in proceeds from sales and maturities of
investment securities, an increase in proceeds from acquisition and divestiture activities, and a reduction in the purchase of investment securities offset by an
increase in loan originations. Net cash used in financing activities decreased $44.83 million primarily due to a decrease in interest-bearing deposits offset by an
increase in the repayment of long-term debt. Net cash provided by operating activities decreased $15.43 million.
Capital
Resources
We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result
in actions by regulatory agencies that could have a material impact on our operations. Total stockholders ’ equity as of December 31, 2017, increased $11.66
million, or 3.44%, to $350.71 million from $339.06 million as of December 31, 2016. The change in stockholders’ equity was largely due to net income of $21.49
million offset by dividends declared on our common stock of $11.56 million. In accordance with current regulatory guidelines, accumulated other comprehensive
income/(loss) is largely excluded from stockholders' equity in the calculation of our capital ratios. Accumulated other comprehensive loss was reduced by $1.42
million, or 70.36%, to $596 thousand as of December 31, 2017, compared to December 31, 2016, primarily due to net unrealized gains on securities. We
repurchased 50,118 shares of our common stock in 2017 totaling $1.26 million. Our book value per common share increased $0.68, or 3.41%, to $20.63 as of
December 31, 2017, from $19.95 as of December 31, 2016.
Capital
Adequacy
Requirements
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. Our current risk-based capital requirements, based on the international capital standards known as Basel III, became effective on
January 1, 2015, subject to a four-year phase-in period. Basel III ’s capital conservation buffer became effective on January 1, 2016, at 0.625%, and will be phased
in over a four-year period (increasing by an additional 0.625% each year until it reaches 2.5% on January 1, 2019). A description of the Basel III capital rules is
included in Part I, Item 1 of the 2016 Form 10-K. Our current required capital ratios are as follows:
●
●
●
●
4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 5.75% including the capital conservation buffer)
6.0% Tier 1 capital to risk-weighted assets (effectively 7.25% including the capital conservation buffer)
8.0% Total capital to risk-weighted assets (effectively 9.25% including the capital conservation buffer)
4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)
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Table of Contents
The following table presents our capital ratios as of the dates indicated:
The Company
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
The Bank
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
2017
13.98%
13.98%
15.06%
11.06%
12.47%
12.47%
13.55%
9.84%
December 31,
2016
13.88%
14.74%
15.79%
11.07%
12.93%
12.93%
13.98%
9.71%
2015
14.54%
14.73%
15.95%
10.62%
13.60%
13.60%
14.82%
9.77%
As of December 31, 201 7, we continued to meet all capital adequacy requirements and were classified 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, 2017. Our risk-based capital ratios as of December 31, 2017, decreased from December 31, 2016, due to an increase in risk-weighted
assets. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 21, “Regulatory Requirements and Restrictions,” to the Consolidated
Financial Statements in Item 8 of this report.
Commitments, Contingencies , and Off-Balance Sheet Arrangements
Contractual
Obligations
We enter into certain contractual 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, by payment date, as of December 31, 2017:
(Amounts
in
thousands)
Deposits without a stated maturity (1)
Certificates of deposit (2)(3)
Securities sold under agreements to repurchase
Long-term borrowings (2)(3)
Operating leases
Total contractual cash obligations
Less Than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
Total
$
$
1,453,281 $
222,058
5,881
2,000
237
1,683,457 $
- $
191,284
25,122
4,000
208
220,614 $
- $
93,637
-
50,033
194
143,864 $
- $
1,794
-
-
694
2,488 $
1,453,281
508,773
31,003
56,033
1,333
2,050,423
(1) Excludes interest
(2)
Includes interest on fixed and variable rate obligations (changes in market interest rates may materially affect the variable rate obligation to be paid, which is
reflected using the rates in effect as of December 31, 2017)
(3) Excludes unamortized premiums and discounts
Off-Balance
Sheet
Arrangements
We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to
credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument .
46
Table of Contents
The following table presents our off-balance sheet arrangements, by commitment expiration, as of December 31, 201 7:
(Amounts
in
thousands)
Commitments to extend credit
Financial letters of credit
Performance letters of credit (2)
Total off-balance sheet risk
Less than
One Year (1)
One to
Three Years
Three to
Five Years
More than
Five Years
Total
$
$
93,513 $
240
34,360
128,113 $
32,507 $
-
96,927
129,434 $
22,142 $
-
50
22,192 $
94,985 $
10
-
94,995 $
243,147
250
131,337
374,734
(1) Lines of credit with no stated maturity date are included in the less than one year expiration category.
(2)
Includes FHLB letters of credit
The reserve for the risk inherent in unfunded lending commitments totaled $66 thousand as of December 31, 2017, and $326 thousand as of December 31, 2016.
For additional information, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.
Market Risk and Interest Rate Sensitivity
Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates
and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and
unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when
underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities,
and when embedded options, if any, are exercised. ALCO reviews 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. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and
mitigate the effect of interest rate changes.
In order to manage our exposure to interest rate risk, we periodically review third-party and internal simulation models that project net interest income at risk,
which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term
risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity
of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the
industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the
use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes;
changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate
shock.
On December 13, 2017, the Federal Open Market Committee raised the benchmark federal funds rate to a range of 125 to 150 basis points. The following table
presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the
periods indicated. Due to the current target rate, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.
Increase (Decrease) in Basis Points
(Dollars
in
thousands)
300
200
100
(100)
Year Ended December 31,
2017
2016
Change in
Net Interest Income
Percent
Change
Change in
Net Interest Income
Percent
Change
$
3,759
2,756
1,535
(4,405)
4.3% $
3.2%
1.8%
-5.1%
526
438
183
(2,616)
0.6%
0.5%
0.2%
-3.1%
We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity.
As of December 31, 2017, exposure to interest rate risk was within our defined policy limits.
47
Table of Contents
The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of December 31, 2017, we
maintained interest rate swap agreements with notional amounts totaling $5.81 million to modify our exposure to interest rate risk caused by changes in the LIBOR
curve in relation to certain designated fixed rate loans. The fair value of the swap agreements, which are accounted for as fair value hedges and recorded as
derivative liabilities, totaled $90 thousand as of December 31, 2017, and $167 thousand as of December 31, 2016. For additional information, see Note 12,
“Derivative Instruments and Hedging Activities,” to the Consolidated Financial Statements in Item 8 of this report.
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.
I tem 7
A.
Quantitative and Qualitative Disclosures a bout Market Risk.
The i nformation required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 7 of this report.
48
Table of Contents
I tem 8 . Financial Statements and Supplementary Data .
FINANCIAL STATEMENTS AND SUPPLEMENT A RY DATA
INDEX
Consolidated Balance Sheets as of December 31, 201 7 and 2016
Consolidated Statements of Income for the years ended December 31, 201 7, 2016, and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 201 7, 2016, and 2015
Consolidated Statements of Changes in Stockholders ’ Equity for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 201 7, 2016, and 2015
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
49
Page
5 0
5 1
5 2
5 3
5 4
5 5
1 04
1 05
1 06
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2017
2016
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 investment, net of unearned income
Non-covered
Covered
Allowance for loan losses
Loans held for investment, net
FDIC indemnification asset
Premises and equipment, net
Other real estate owned, non-covered
Other real estate owned, covered
Interest receivable
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase
FHLB borrowings
Other borrowings
Interest, taxes, and other liabilities
Total liabilities
Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible
Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding
Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 shares issued at December 31, 2017 and
2016; 4,383,553 and 4,387,571 shares in treasury at December 31, 2017 and 2016, respectively
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
See
Notes
to
Consolidated
Financial
Statements.
50
$
$
$
$
37,115 $
119,891
945
157,951
165,580
25,149
1,789,236
27,948
(19,276)
1,797,908
7,161
48,126
2,409
105
5,778
95,779
6,151
76,363
2,388,460 $
454,143 $
1,475,748
1,929,891
30,086
50,000
-
27,769
2,037,746
36,645
38,717
945
76,307
165,579
47,133
1,795,954
56,994
(17,948)
1,835,000
12,173
50,085
5,109
276
5,553
95,779
7,207
86,197
2,386,398
427,705
1,413,633
1,841,338
98,005
65,000
15,708
27,290
2,047,341
-
-
21,382
228,750
180,543
(79,121)
(840)
350,714
2,388,460 $
21,382
228,142
170,377
(78,833)
(2,011)
339,057
2,386,398
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts
in
thousands,
except
share
and
per
share
data)
Interest income
Interest and fees on loans
Interest on securities -- taxable
Interest on securities -- tax-exempt
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 deposits
Other service charges and fees
Insurance commissions
Impairment losses on securities
Portion of loss recognized in other comprehensive income
Net impairment losses recognized in earnings
Net (loss) gain on sale of securities
Net FDIC indemnification asset amortization
Net gain on divestitures
Other operating income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy expense
Furniture and equipment expense
Amortization of intangibles
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
Earnings per common share
Basic
Diluted
Cash dividends per common share
Weighted average shares outstanding
Basic
Diluted
See
Notes
to
Consolidated
Financial
Statements.
2017
Year Ended December 31,
2016
2015
$
$
$
89,749 $
1,522
3,029
1,008
95,308
4,987
850
2,253
8,090
87,218
2,771
84,447
3,150
13,803
8,624
1,347
-
-
-
(661)
(3,517)
-
3,502
26,248
36,317
4,775
4,425
1,056
910
-
-
21,099
68,582
42,113
20,628
21,485
-
21,485 $
1.26 $
1.26
0.68
87,718 $
3,229
3,624
153
94,724
4,479
2,101
3,264
9,844
84,880
1,255
83,625
2,828
13,588
8,102
5,442
(4,646)
-
(4,646)
335
(5,474)
3,682
3,209
27,066
39,912
5,297
4,341
1,136
1,383
-
730
19,947
72,746
37,945
12,819
25,126
-
25,126 $
1.45 $
1.45
0.60
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
17,002,116
17,077,842
17,319,689
17,365,524
18,531,039
18,727,464
51
Table of Contents
FIRST COMMUNITY BANCSHARES, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts
in
thousands)
Net income
Other comprehensive income, before tax
Available-for-sale securities
Change in net unrealized gains on securities without other-than-temporary
impairment
Reclassification adjustment for net loss (gain) recognized in net income
Reclassification adjustment for other-than-temporary impairment losses recognized
in net income
Net unrealized gains on available-for-sale securities
Employee benefit plans
Net actuarial loss
Plan change
Reclassification adjustment for amortization of prior service cost and net actuarial
loss recognized in net income
Net unrealized gains (losses) on employee benefit plans
Other comprehensive income, before tax
Income tax expense
Other comprehensive income, net of tax
Total comprehensive income
See
Notes
to
Consolidated
Financial
Statements.
$
52
2017
Year Ended December 31,
2016
2015
$
21,485 $
25,126 $
24,540
1,445
661
-
2,106
48
(258)
259
49
2,155
(740)
1,415
22,900 $
1,035
(335)
4,646
5,346
(367)
(69)
273
(163)
5,183
(1,947)
3,236
28,362 $
755
(144)
-
611
(363)
-
326
(37)
574
(216)
358
24,898
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, 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
$
$
Balance January 1, 2016
Net income
Other comprehensive income
Common dividends declared – $0.60 per share
Equity-based compensation expense
Common stock options exercised – 43,463
shares
Restricted stock awards -- 16,680 shares
Issuance of treasury stock to 401(k) plan –
18,218 shares
Purchase of treasury shares – 1,182,294 shares
at $20.06 per share
Balance December 31, 2016
$
$
Balance January 1, 2017
Net income
Other comprehensive income
Reclassification of certain tax effects
Common dividends declared – $0.68 per share
Equity-based compensation expense
Common stock options exercised – 16,185
shares
Restricted stock awards – 22,697 shares
Issuance of treasury stock to 401(k) plan –
15,254 shares
Purchase of treasury shares – 50,118 shares at
$25.16 per share
Balance December 31, 2017
$
See
Notes
to
Consolidated
Financial
Statements.
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
-
- $
Additional
Accumulated
Other
Preferred Common
Paid-in Retained Treasury Comprehensive
Stock
Stock
Capital
Earnings
Stock
Income (Loss)
Total
$
15,151 $
-
-
20,500 $
-
-
215,873 $
-
-
141,206 $
24,540
-
(35,751) $
-
-
(5,605) $
-
358
351,374
24,540
358
-
-
-
-
-
(9,994)
-
(105)
(12,784)
(2,367)
-
882
-
-
11,902
-
110
-
-
-
(11)
(191)
9
-
-
-
-
-
74
391
354
-
(9,994)
-
-
-
-
-
-
-
(105)
-
(2,367)
110
63
200
363
-
-
-
-
-
-
-
21,382 $
-
227,692 $
-
155,647 $
(21,525)
(56,457) $
-
(5,247) $
(21,525)
343,017
21,382 $
-
-
-
-
227,692 $
-
-
-
209
155,647 $
25,126
-
(10,396)
-
(56,457) $
-
-
-
-
(5,247) $
-
3,236
-
-
343,017
25,126
3,236
(10,396)
209
-
-
-
146
32
63
-
-
-
775
290
321
-
-
-
921
322
384
-
21,382 $
-
228,142 $
-
170,377 $
(23,762)
(78,833) $
-
(2,011) $
(23,762)
339,057
21,382 $
-
-
-
-
-
228,142 $
-
-
-
-
430
170,377 $
21,485
-
244
(11,563)
-
(78,833) $
-
-
-
-
-
-
-
-
86
(48)
140
-
-
-
292
408
275
(2,011) $
-
1,415
(244)
-
-
339,057
21,485
1,415
-
(11,563)
430
-
-
-
378
360
415
-
21,382 $
-
228,750 $
-
180,543 $
(1,263)
(79,121) $
-
(840) $
(1,263)
350,714
53
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
Accretion on acquired loans
Gain on divestiture, net
Gain on sale of loans, net
Equity-based compensation expense
Restricted stock awards
Issuance of treasury stock to 401(k) plan
(Gain) loss on sale of property, plant, and equipment, net
Loss on sale of other real estate
Loss (gain) on sale of securities
Net impairment losses recognized in earnings
FHLB debt prepayment fees
Proceeds from sale of mortgage loans
Originations of mortgage loans
Decrease 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
Repayments of (originations of) loans, net
Redemptions of FHLB stock, net
Cash proceeds from (paid in) mergers, acquisitions, and divestitures, net (See Note 2)
Proceeds from the FDIC
Payments to acquire property, plant, and equipment, net
Proceeds from sale of other real estate
Net cash provided by (used in) investing activities
Financing activities
Increase (decrease) in noninterest-bearing deposits, net
Increase (decrease) in interest-bearing deposits, net
(Repayments of) proceeds from securities sold under agreements to repurchase, net
Repayments of FHLB and other borrowings, net
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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure – cash flow information
Cash paid for interest
Cash paid for income taxes
Supplemental transactions – noncash items
Transfer of loans to other real estate
Loans originated to finance other real estate
Increase in accumulated other comprehensive income
2017
Year Ended December 31,
2016
2015
$
21,485 $
25,126 $
2,771
3,560
172
3,517
1,056
(5,417)
-
-
430
360
415
(1)
791
661
-
-
-
-
9,209
39,009
13,664
37,155
21,840
(49,406)
-
37,455
694
-
1,689
(2,297)
4,363
65,157
26,438
62,115
(67,919)
(30,708)
-
378
-
(1,263)
(11,563)
-
(22,522)
81,644
76,307
157,951 $
8,267 $
15,852
2,283
-
1,171
1,255
3,563
1,066
5,474
1,136
(4,766)
(3,682)
-
209
322
384
238
1,495
(335)
4,646
-
-
-
6,957
43,088
104,928
99,906
25,190
(1,174)
-
(159,243)
130
29,716
4,403
(793)
7,147
110,210
(17,482)
(37,576)
(40,609)
(48)
-
921
174
(23,762)
(10,396)
-
(128,778)
24,520
51,787
76,307 $
9,845 $
6,588
5,162
57
3,236
$
$
24,540
2,191
4,135
1,375
6,379
1,118
(7,109)
-
(501)
110
200
363
23
3,002
(144)
-
1,702
21,993
(19,700)
18,842
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
11,757
6,900
6,317
649
358
See
Notes
to
Consolidated
Financial
Statements.
54
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
Basis
of
Presentation
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”). The Bank offers insurance products
and services through First Community Insurance Services (“FCIS”) and trust and wealth management services through its Trust Division and wholly owned
subsidiary First Community Wealth Management. Unless the context suggests otherwise, the term “Company” refers to First Community Bancshares, Inc. and its
subsidiaries as a consolidated entity.
Principles
of
Consolidation
The Company ’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking
industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances
and transactions. 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.
The Company maintains investments in variable interest entities (“VIEs”). VIEs are legal entities in which equity investors do not have sufficient equity at risk for
the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct
the activities of the entity that most significantly impact its economic performance, or do not have 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 required if a reporting entity is the primary beneficiary of the VIE. The Company
periodically reviews its VIEs and has determined that it is not the primary beneficiary of any VIE; therefore, the assets and liabilities of these entities are not
consolidated into the financial statements.
Use
of
Estimates
P reparation of the consolidated financial statements in conformity with GAAP requires management 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. Actual results could
differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the
allowance for loan losses, the Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, goodwill and other intangible assets, and income taxes.
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.
Summary
of
Significant
Accounting
Policies
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 the principal or most advantageous market for the asset or
liability, in an orderly transaction between market participants. 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 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. 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; therefore, valuations may not be precise. 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.
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Cash
and
Cash
Equivalent
s
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank
(“FHLB”), the Federal Reserve Bank (“FRB”), and correspondent banks that are available for immediate withdrawal.
Investment
Securities
Management classifies debt and marketable equity securities as held-to-maturity or available-for-sale based on the intent and ability to hold the securities to
maturity. Debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost.
Debt securities not classified as held to maturity and marketable equity securities are classified as available-for-sale securities and carried at estimated fair value.
Available-for-sale securities consist of securities the Company 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 gains and losses on available-for-sale securities are included in accumulated other comprehensive income (“AOCI”), net of income taxes, in
stockholders’ equity. Gains or losses on calls, maturities, or sales of investment securities are recorded based on the specific identification method and included in
noninterest income. Premiums and discounts are amortized or accreted over the life of a security into interest income. Nonmarketable equity investments are
reported in other assets. The Company performs quarterly reviews of held-to-maturity and available-for-sale securities to determine if unrealized losses are
temporary or other than temporary. If the security is deemed to have other-than-temporary impairment (“OTTI”), the amount representing the credit loss is
recognized as a charge to noninterest income and the amount representing all other factors is recognized in other comprehensive income (“OCI”).
Nonmarketable
Equity
Investments
As a condition of membership in the FHLB and the FRB, the Company is required to hold a minimum level of stock in the FHLB of Atlanta and the FRB of
Richmond. These nonmarketable securities are carried at cost and periodically reviewed for impairment. When evaluating these investments, management
considers publicly available information about the profitability and asset quality of the issuer, dividend payment history, and redemption experience in determining
the recoverability of the investment. The total investment in FHLB and FRB stock, which is included in other assets, was $9.90 million as of December 31, 2017,
and $10.60 million as of December 31, 2016.
Other
Investments
The Company has certain long-term investments that are considered VIEs, including certain tax credit limited partnerships, and various limited liability companies
that manage real estate investments, facilitate tax credits, and provide title insurance and other related financial services. The Company uses the equity method of
accounting if it is able to exercise significant influence over the entity and records its share of the entity’s earnings or losses in noninterest income. The Company
uses the cost method of accounting if it is not able to exercise significant influence over the entity. There were no equity investments as of December 31, 2017, or
December 31, 2016. The carrying value and maximum potential loss exposure of VIEs totaled $823 thousand as of December 31, 2017, and $1.14 million as of
December 31, 2016.
Business
Combinations
The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting
Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and
liabilities assumed 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. 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. Certain financial assets and liabilities are 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, or amortization expense or accretion income. Management must make estimates for the useful or economic
lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits.
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. Acquisition and divestiture activities are included in the Company’s consolidated results of operations from the closing date of the transaction.
Acquisition and divestiture related costs are recognized in noninterest expense as incurred. For additional information, see “Purchased Credit Impaired Loans” and
“Intangible Assets” below.
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Loans
Held
for
Investment
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and any necessary write-downs to reduce individual loans to net realizable value. Interest income on
performing loans is recognized as interest income at the contractual rate of interest. 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.
Purchased
Performing
Loans
.
Purchased loans that are deemed to be performing at the acquisition date are accounted for using the contractual cash flow method
of accounting, which results in the 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. No allowance for loan losses is recorded at acquisition for purchased loans because the fair values of the acquired loans
incorporate credit risk assumptions.
P
urchased
C
redit
I
mpaired
(“PCI”)
Loans
. 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. 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 groups PCI loans that have common risk characteristics into loan pools. 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.
Impaired
Loans
and
Nonperforming
Assets
. 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 conducts quarterly reviews of loans with balances of $250 thousand or greater that are
deemed to be impaired. 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 based on the daily amount of principal outstanding, on impaired loans is
generally continued unless the loan becomes delinquent 90 days or more.
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. Nonaccrual loans may be returned to accrual status when all
principal and interest amounts contractually due, including past due payments, are brought current; the ability of the borrower to repay the obligation is reasonably
assured; and there is generally a period of at least six months of repayment performance by the borrower in accordance with the contractual terms.
Seriously delinquent loans are evaluated for loss mitigation options. 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
L oans 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.
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. 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.
Allowance
for
Loan
Losses
Management performs quarterly assessments of the allowance for loan losses. The allowance is increased by provisions charged to operations and reduced by net
charge-offs. 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. The Company’s allowance for loan losses 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 related to significant individual loans and credit relationships and general reserves related to loans not
individually evaluated. Loans not individually evaluated 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. A provision for loan losses is recorded for any
credit deterioration in purchased performing loans after the acquisition date.
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 the prospective yield adjustment over the remaining life of the loan, or pool of
loans. Any provision established for PCI loans covered under the FDIC loss share agreements is 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 is
available for use against any loan loss management deems appropriate, excluding reserves allocated to specific loans and PCI loan pools.
FDIC
Indemnification
Asset
The FDIC indemnification asset represents the carrying amount of the right to receive payments from the FDIC for losses incurred on certain loans and OREO
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 is recorded at fair value using projected cash flows based on expected reimbursements and applicable loss share percentages as outlined in the loss share
agreements. The expected reimbursements do not include reimbursable amounts related to future covered expenditures. The cash flows are discounted to reflect the
timing and receipt of reimbursements from the FDIC. The discount is accreted through noninterest income over future periods. 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. Certain expenses related to covered assets are reimbursable from the FDIC through monthly and quarterly claims. Estimated
reimbursements from the FDIC are netted against covered expenses in the consolidated statements of income.
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Premises
and
Equipment
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Premises , equipment, and capital leases are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using 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 computer 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 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.
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. 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.
Goodwill is t ested annually, or more frequently if necessary, using a qualitative assessment to determine if it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, the two -step quantitative goodwill impairment test is performed. Step 1 consists of calculating and comparing the fair value of a 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.
Securities
Sold
Under
Agreements
to
Repurchase
Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and recognized as short-term borrowings in the
Company’s consolidated balance sheets. 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.
Derivative
Instruments
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 such as interest rates,
equity security prices, currencies, commodity prices, or credit spreads. These derivative instruments may consist of interest rate swaps, floors, caps, collars,
futures, forward contracts, and written and purchased options. Derivative contracts often involve future commitments to exchange interest payment streams or
currencies based on a notional or contractual amount, such as interest rate swaps or currency forwards, or to purchase or sell other financial instruments at specified
terms on a specified date, such as options to buy or sell securities or currencies. 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.
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 varies 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. All derivative instruments are reported at fair value in the consolidated balance sheets.
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Equity-Based
Compensation
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Black-Scholes -Merton valuation model is used to estimate the fair value of stock options at the grant date while the fair value of restricted
stock awards is based on the market price of the Company’s common stock on the grant date. The Black-Scholes-Merton 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 U.S. Department of the Treasury’s (“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. 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.
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.
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 percent 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.
Per
Share
Results
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, non-vested 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.
Recent
Accounting
Standard
s
Standards
Adopted
in
2018
In February 2018, the FASB issued ASU 2018 - 02, “Income Statement – Reporting Comprehensive Income (Topic 220 ): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the
Tax Cuts and Jobs Act (“Tax Reform Act”) and requires certain new disclosures. ASU 2018 - 02 will be effective for the Company for fiscal years beginning after
December 15, 2018, with early adoption permitted. The update should be applied either in the period of adoption or retrospectively to each period in which the
effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company elected to early adopt ASU 2018 - 02 on a
retrospective basis. The effect of the adoption of the standard was a decrease in AOCI of $244 thousand with the offset to retained earnings as recorded in the
Company’s consolidated balance sheet and statement of changes in stockholders’ equity for the year ended December 31, 2017.
In May 2017, the FASB issued ASU 2017 - 09, “Compensation – Stock Compensation (Topic 718 ): Scope of Modification Accounting.” This ASU clarifies when
to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required
only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU
2017 - 09 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company adopted ASU 2017 - 09 in the first quarter of 2018.
The adoption of the standard will not have a material effect on the Company’s financial statements beginning with the Quarterly Report on Form 10 -Q for the
period ending March 31, 2018.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2017, the FASB issued ASU 2017 - 07, “Compensation – Retirement Benefits (Topic 715 ): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost.” This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs
in the income statement and to narrow the amounts eligible for capitalization in assets. ASU 2017 - 07 will be effective for the Company for fiscal years beginning
after December 15, 2017. The Company adopted ASU 2017 - 07 in the first quarter of 2018. The adoption of the standard will not have a material effect on the
Company’s financial statements beginning with the Quarterly Report on Form 10 -Q for the period ending March 31, 2018.
In November 2016, the FASB issued ASU 2016 - 18, “Statement of Cash Flows (Topic 230 ): Restricted Cash.” This ASU requires that a statement of cash flows
explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-
of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016 - 18 will be effective for the Company for fiscal years beginning after
December 15, 2017. The Company adopt ed ASU 2016 - 18 in the first quarter of 2018. The adoption of the standard will not have a material effect on the
Company’s financial statements beginning with the Quarterly Report on Form 10 -Q for the period ending March 31, 2018.
In August 2016, the FASB issued ASU 2016 - 15, “Statement of Cash Flows (Topic 230 ): Classification of Certain Cash Receipts and Cash Payments.” This ASU
makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016 - 15 will be effective
for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted. The update should be applied on a retrospective basis, if
practicable. The Company adopt ed ASU 2016 - 15 in the first quarter of 2018. The adoption of the standard will not have a material effect on the Company’s
financial statements beginning with the Quarterly Report on Form 10 -Q for the period ending March 31, 2018.
In January 2016, the FASB issued ASU 2016 - 01, “Financial Instruments – Overall (Subtopic 825 - 10 ): Recognition and Measurement of Financial Assets and
Financial Liabilities.” This ASU significantly revises how entities account and disclose financial assets and liabilities. The guidance ( 1 ) requires most equity
investments to be measured at fair value with changes in fair value recognized in net income; ( 2 ) simplifies the impairment assessment of equity investments
without a readily determinable fair value; ( 3 ) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for
financial instruments measured at amortized cost on the balance sheet; ( 4 ) requires public business entities to use exit price notion, rather than entry prices, when
measuring fair value of financial instruments for disclosure purposes; ( 5 ) requires separate presentation of financial assets and financial liabilities by measurement
category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; ( 6 ) requires separate presentation in other
comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the
organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and ( 7 ) states that a valuation
allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets. ASU 2016 - 01 will be
effective for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted for the instrument-specific credit risk provision. The
Company adopted ASU 2016 - 01 in the first quarter of 2018. The Company does not expect to recognize a cumulative effect adjustment to retained earnings at the
beginning of the year or expect the guidance to have a material effect on its financial statements.
In May 2014, the FASB issued ASU 2014 - 09, “Revenue from Contracts with Customers.” This ASU ’s core principle is that an entity 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 2015, the FASB issued ASU 2015 - 14, “Revenue from Contracts with Customers” deferring
the effective date of ASU 2014 - 09 for the Company until fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning
after December 15, 2016. The Company adopted ASU 2014 - 09, and related updates, in the first quarter of 2018 using the modified retrospective method. The
Company’s primary source of revenue is interest income, which is excluded from the scope of this guidance; however, the Company evaluated the impact on other
income; which includes fees for services, commissions on sales, and various deposit service charges; revenue contracts; and disclosures and determined that no
cumulative-effect adjustment to retained earnings was necessary. The adoption of the standard will not have a material effect on the Company’s financial
statements beginning with the Quarterly Report on Form 10 -Q for the period ending March 31, 2018.
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Standards
Adopted
in
2017
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017 - 04, “Intangibles – Goodwill and Other (Topic 350 ): Simplifying the Accounting
for Goodwill Impairment.” This ASU removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017 -
04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The update should be applied prospectively. The Company
elected to early adopt ASU 2017 - 04 in the first quarter of 2017. The adoption of the standard did not have an effect on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017 - 03, “Accounting Changes and Error Corrections (Topic 250 ) and Investments – Equity Method and Joint Ventures
(Topic 323 ): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” This ASU
requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases
where a registrant cannot reasonably estimate the impact of the adoption, additional qualitative disclosures should be considered to assist the reader in assessing the
significance of the standard's impact on its financial statements. The Company adopted ASU 2017 - 03 in the first quarter of 2017. The adoption of the standard
resulted in enhanced disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on the Company’s financial
statements and disclosures.
In March 2016, the FASB issued ASU 2016 - 09, “Compensation – Stock Compensation (Topic 718 ): Improvements to Employee Share-Based Payment
Accounting.” This ASU simplifies several aspects of the accounting for share-based payment award transactions including income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance eliminates additional paid-in capital pools for equity-based
awards and requires that the related income tax effects of awards be recognized in the income statement. The guidance also allows an employer to repurchase more
of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur.
The Company adopted ASU 2016 - 09 in the first quarter of 2017 on a prospective basis and elected to account for forfeitures of share-based awards as they occur.
Excess tax benefits on share-based awards in the statements of cash flows in prior periods have not been adjusted. The adoption of the standard did not have a
material effect on the Company’s financial statements.
Standards
Not Yet
Adopted
In August 2017, the FASB issued ASU 2017 - 12, “Derivatives and Hedging (Topic 815 ): Targeted Improvements to Accounting for Hedging Activities.” This
ASU intends to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its
financial statements and simplify the application of hedge accounting guidance. ASU 2017 - 12 will be effective for the Company for fiscal years beginning after
December 15, 2018. The Company expects to adopt ASU 2017 - 12 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not
expect the guidance to have a material effect on its financial statements.
In March 2017, the FASB issued ASU 2017 - 08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310 - 20 ): Premium Amortization on Purchased
Callable Securities.” This ASU amends the amortization period for certain purchased callable debt securities held at a premium. ASU 2017 - 08 will be effective
for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017 - 08 in the first quarter of 2019. The Company is
evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In June 2016, the FASB issued ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.”
This ASU intends to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial
institutions and other organizations. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and
judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the update amends
the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016 - 13 will be effective for the
Company for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company
expects to adopt ASU 2016 - 13 in the first quarter of 2020 and recognize a cumulative adjustment to retained earnings as of the beginning of the year of adoption.
The Company is evaluating the impact of the standard.
62
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU 2016 - 02, “Leases (Topic 842 ).” This ASU increases transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. ASU 2016 - 02 will be effective for
the Company for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt ASU 2016 - 02 in the first quarter
of 2019. The Company leases certain banking offices under lease agreements it classifies as operating leases. The Company is evaluating the impact of the standard
and expects an increase in assets and liabilities and an impact on capital; however, the Company does not expect the guidance to have a material effect on its
financial statements or resulting operations.
The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the
consolidated financial statements.
Note 2 . Acquisitions and Divestitures
The following table presents the components of net cash received in, or paid for, acquisitions and divestitures, an investing activity in the Company ’s consolidated
statements of cash flows, for the periods indicated. There was no acquisition or divestiture activity recorded in 2017.
(Amounts
in
thousands)
Acquisitions
Fair value of assets and liabilities acquired:
Loans
Premises and equipment
Other assets
Other intangible assets
Deposits
Other liabilities
Purchase price in excess of net assets acquired
Total purchase price
Non-cash purchase price
Cash acquired
Net cash paid in acquisitions
Divestitures
Book value of assets sold
Book value of liabilities sold
Sales price in excess of net liabilities assumed
Total sales price
Cash sold
Amount due remaining on books
Net cash received in divestitures
Net cash (received) paid in acquisitions and divestitures
Ascension
Insurance
Agency,
Inc.
Year Ended December 31,
2015
2016
$
$
149,122 $
4,829
448
3,842
(134,307)
(75)
2,446
26,305
-
-
26,305
(165,742)
111,198
(3,682)
(58,226)
-
2,205
(56,021)
(29,716) $
-
-
-
-
-
-
88
88
-
-
88
389
(152)
(6)
231
-
(231)
-
88
On October 1, 2016, the Company completed the sale of Greenpoint Insurance Group, Inc. (“Greenpoint”) to Ascension Insurance Agency, Inc. for $7.11 million,
including earn-out payments of $2.21 million to be received over three years if certain operating targets are met. The divestiture consisted of two North Carolina
offices operating as Greenpoint and two Virginia offices operating under the trade name Carr & Hyde Insurance. The Company recorded a net gain of $617
thousand in connection with the divestiture and eliminated $6.49 million in goodwill and other intangible assets. The Company incurred expenses related to the
divestiture of $46 thousand in 2016. The transaction did not impact the Company’s in-branch insurance offices operating as FCIS in West Virginia and Virginia.
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 $385 thousand in goodwill and other intangible assets. In addition, the Company recorded additional goodwill of $88 thousand in 2015 related to
contingent earn-out payments from acquisitions that occurred before 2009.
63
Table of Contents
First
Bank
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 15, 2016, the Company completed a branch exchange with First Bank, North Carolina, pursuant to which the Bank exchanged a portion of its North
Carolina branch network for First Bank’s Virginia branch network. Under the agreements, the Bank simultaneously sold six branches in the Winston-Salem and
Mooresville areas of North Carolina and acquired seven branches in Southwestern Virginia. The branch acquisition complements the Company’s 2014 acquisition
of seven branches from Bank of America by expanding the Company’s existing presence in Southwest Virginia and affords the opportunity to realize certain
operating cost savings.
In connection with the branch exchange, t he Company acquired total assets of $160.69 million, including total loans of $149.12 million and goodwill and other
intangibles of $6.29 million, and total liabilities of $134.38 million, including total deposits of $134.31 million. The Company did not acquire any PCI loans. The
consideration transferred included the net fair value of divested assets and a purchase premium of $3.84 million. The Company divested total assets of $162.17
million, including loans of $155.54 million and goodwill and other intangibles of $2.33 million, and total liabilities of $111.05 million, including deposits of
$111.02 million, and received a deposit premium of $4.07 million. In connection with the divestiture, the Company recorded a net gain of $3.07 million. The
Company incurred expenses related to the First Bank transaction of $684 thousand in 2016.
Note 3 . Investment Securities
The following tables present the amortized cost and fair value of available-for-sale securities, including gross unrealized gains and losses, as of the dates indicated:
(Amounts
in
thousands)
U.S. Agency securities
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Equity securities
Total securities available for sale
(Amounts
in
thousands)
U.S. Agency securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Equity securities
Total securities available for sale
December 31, 2017
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
$
11,289 $
19,987
101,552
9,367
22,095
55
164,345 $
17 $
-
2,203
-
46
-
2,266 $
(10) $
(16)
(107)
(483)
(415)
-
(1,031) $
11,296
19,971
103,648
8,884
21,726
55
165,580
December 31, 2016
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
$
1,342 $
111,659
22,104
31,290
55
166,450 $
3 $
2,258
-
66
18
2,345 $
- $
(586)
(2,165)
(465)
-
(3,216) $
1,345
113,331
19,939
30,891
73
165,579
64
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost and fair value of available-for-sale securities, by contractual maturity, as of December 31, 2017. 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
U.S. Treasury
Securities
Municipal
Securities
Corporate
Notes
Total
$
$
$
$
10,065 $
-
1,224
-
11,289 $
19,987 $
-
-
-
19,987 $
- $
7,193
90,062
4,297
101,552 $
10,055 $
-
1,241
-
11,296 $
19,971 $
-
-
-
19,971 $
- $
7,308
91,886
4,454
103,648 $
- $
-
9,367
-
9,367
$
- $
-
8,884
-
8,884
$
30,052
7,193
100,653
4,297
142,195
22,095
55
164,345
30,026
7,308
102,011
4,454
143,799
21,726
55
165,580
The following tables present the amortized cost and fair value of held-to-maturity securities, including gross unrealized gains and losses, as of the dates indicated:
(Amounts
in
thousands)
U.S. Agency securities
Corporate securities
Total securities held to maturity
(Amounts
in
thousands)
U.S. Agency securities
Corporate securities
Total securities held to maturity
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
December 31, 2017
$
$
17,937 $
7,212
25,149 $
- $
-
- $
(49) $
(16)
(65) $
17,888
7,196
25,084
Amortized
Unrealized
Cost
Gains
Unrealized
Losses
Fair
Value
December 31, 2016
36,741 $
10,392
47,133 $
124 $
11
135 $
- $
(2)
(2) $
36,865
10,401
47,266
$
$
65
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost and fair value of held-to-maturity securities, by contractual maturity, as of December 31, 2017. 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
Corporate Notes
Total
$
$
$
$
- $
17,937
-
-
17,937 $
- $
17,888
-
-
17,888 $
- $
7,212
-
-
7,212 $
- $
7,196
-
-
7,196 $
-
25,149
-
-
25,149
-
25,084
-
-
25,084
The following table s 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
Minnesota
Wisconsin
Massachusetts
Ohio
Texas
Connecticut
Iowa
New Jersey
Other
Total
(Amounts
in
thousands)
New York
Minnesota
Wisconsin
Ohio
Massachusetts
New Jersey
Connecticut
Texas
Iowa
Other
Total
Percent of
Municipal Portfolio Amortized Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
December 31, 2017
10.64% $
10.12%
8.74%
8.57%
8.36%
7.23%
6.82%
5.27%
4.67%
29.59%
100.00% $
10,804 $
10,280
8,913
8,691
8,551
7,388
6,929
5,463
4,670
29,863
101,552 $
223 $
211
147
208
123
122
142
30
167
830
2,203 $
- $
(1)
-
(14)
(13)
(21)
-
(35)
-
(23)
(107) $
11,027
10,490
9,060
8,885
8,661
7,489
7,071
5,458
4,837
30,670
103,648
Percent of
Municipal Portfolio Amortized Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
December 31, 2016
12,876 $
10,796
9,786
9,599
9,355
7,891
7,628
7,397
6,467
29,864
111,659 $
334 $
232
74
125
229
202
190
130
36
706
2,258 $
- $
(40)
(42)
(88)
(10)
-
-
(103)
(88)
(215)
(586) $
13,210
10,988
9,818
9,636
9,574
8,093
7,818
7,424
6,415
30,355
113,331
11.66% $
9.70%
8.66%
8.50%
8.45%
7.14%
6.90%
6.55%
5.66%
26.78%
100.00% $
66
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2017
12 Months or Longer
Fair
Value
Losses
Unrealized
Total
Fair
Value
Unrealized
Losses
(Amounts
in
thousands)
U.S. Agency securities
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Total
(Amounts
in
thousands)
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Total
$
$
$
$
10,054 $
19,972
8,047
-
4,276
42,349 $
(10) $
(16)
(55)
-
(25)
(106) $
- $
-
2,314
8,884
14,069
25,267 $
- $
-
(52)
(483)
(390)
(925) $
10,054 $
19,972
10,361
8,884
18,345
67,616 $
(10)
(16)
(107)
(483)
(415)
(1,031)
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2016
12 Months or Longer
Fair
Value
Losses
Unrealized
Total
Fair
Value
Unrealized
Losses
24,252 $
-
12,834
37,086 $
(527) $
-
(166)
(693) $
715 $
19,939
11,851
32,505 $
(59) $
(2,165)
(299)
(2,523) $
24,967 $
19,939
24,685
69,591 $
(586)
(2,165)
(465)
(3,216)
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 dates indicated:
(Amounts
in
thousands)
U.S. Agency securities
Corporate securities
Total
(Amounts
in
thousands)
Corporate securities
Total
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2017
12 Months or Longer
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
$
$
17,888 $
7,196
25,084 $
(49) $
(16)
(65) $
- $
-
- $
- $
-
- $
17,888 $
7,196
25,084 $
(49)
(16)
(65)
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2016
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
$
3,533 $
3,533 $
(2) $
(2) $
- $
- $
- $
- $
3,533 $
3,533 $
(2)
(2)
There were 45 individual securities in an unrealized loss position as of December 31, 2017, and their combined depreciation in value represented 0.57% of the
investment securities portfolio. These securities included 24 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. There were 82 individual securities in
an unrealized loss position as of December 31, 2016, and their combined depreciation in value represented 1.51% of the investment securities portfolio.
The Company reviews its investment portfolio quarterly for indications of OTTI. The initial indicator of OTTI for both debt and equity securities is a decline in fair
value below book value and the severity and duration of the decline. For debt securities, the credit-related OTTI is recognized as a charge to noninterest income
and the noncredit-related OTTI is recognized in OCI. The Company incurred no credit-related OTTI charges on debt securities in 2017 or 2015. In 2016 the
Company incurred credit-related OTTI charges on debt securities of $4.64 million related to the Company’s change in intent to hold certain securities to recovery.
The intent was changed to sell specific trust preferred securities in the Company’s investment portfolio primarily to reduce credit concentrations with two issuers.
Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current
economic factors. For equity securities, the OTTI is recognized as a charge to noninterest income. There were no OTTI charges recognized in 2017 or 2015. The
Company incurred OTTI charges related to equity securities of $11 thousand in 2016.
67
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in credit-related losses recognized in earnings on debt securities where a portion of the impairment was recognized in OCI
during the periods indicated:
(Amounts
in
thousands)
Beginning balance
Additions for credit losses on securities not previously recognized
Additions for credit losses on securities previously recognized
Reduction for securities sold/realized losses
Ending balance
2017
Year Ended December 31,
2016
2015
$
$
- $
-
-
-
- $
- $
4,646
-
(4,646)
- $
-
-
-
-
-
The following table presents the gross realized gains and losses from the sale of available-for-sale securities for the periods indicated:
(Amounts
in
thousands)
Gross realized gains
Gross realized losses
Net (loss) gain on sale of securities
2017
Year Ended December 31,
2016
2015
$
$
- $
(661)
(661) $
757 $
(422)
335 $
363
(219)
144
The carrying amount of securities pledged for various purposes totaled $ 51.34 million as of December 31, 2017, and $139.75 million as of December 31, 2016.
Note 4 . Loans
The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each
segment divided into various classes. Covered loans are those loans acquired in FDIC assisted transactions that are covered by loss share agreements. Customer
overdrafts reclassified as loans totaled $1.71 million as of December 31, 2017, and $1.41 million as of December 31, 2016. Deferred loan fees totaled $4.44 million
in 2017, $3.90 million in 2016, and $3.78 million in 2015. For information about off-balance sheet financing, see Note 20, “Litigation, Commitments, and
Contingencies,” to the Consolidated Financial Statements of this report.
68
Table of Contents
The following table presents loans, net of unearned income with non-covered loans and by loan class, as of the dates indicated:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
December 31,
2017
2016
Amount
Percent
Amount
Percent
$
$
60,017
92,188
125,202
141,670
616,633
7,035
25,649
1,068,394
103,205
502,686
39,178
645,069
70,772
5,001
75,773
1,789,236
27,948
1,817,184
3.30% $
5.07%
6.89%
7.80%
33.93%
0.39%
1.41%
58.79%
5.68%
27.66%
2.16%
35.50%
3.89%
0.28%
4.17%
98.46%
1.54%
100.00% $
56,948
92,204
134,228
142,965
598,674
6,003
31,729
1,062,751
106,361
500,891
44,535
651,787
77,445
3,971
81,416
1,795,954
56,994
1,852,948
3.07%
4.98%
7.24%
7.72%
32.31%
0.32%
1.71%
57.35%
5.74%
27.03%
2.41%
35.18%
4.18%
0.21%
4.39%
96.92%
3.08%
100.00%
The following table presents the covered loan portfolio, by loan class, as of the dates indicated. The commercial loss share agreement expired on June 30, 2017.
(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
Total consumer real estate loans
Consumer and other loans
Consumer loans
Total covered loans
December 31,
2017
2016
$
$
39 $
-
-
284
9
-
-
332
23,720
3,896
27,616
-
27,948 $
4,570
895
8
962
7,512
25
397
14,369
35,817
6,729
42,546
79
56,994
The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those PCI loans into loan pools with
common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest.
69
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:
(Amounts
in
thousands)
PCI Loans, by acquisition
Peoples
Waccamaw
Other acquired
Total PCI Loans
December 31,
2017
2016
Recorded
Investment
Unpaid
Principal
Balance
Recorded
Investment
Unpaid
Principal
Balance
$
$
5,278 $
12,176
986
18,440 $
8,111 $
31,335
1,012
40,458 $
5,576 $
21,758
1,095
28,429 $
9,397
45,030
1,121
55,548
The following table present s the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated:
(Amounts
in
thousands)
Balance January 1, 2015
Additions
Accretion
Reclassifications from nonaccretable difference (1)
Other changes, net
Balance December 31, 2015
Balance January 1, 2016
Accretion
Reclassifications from nonaccretable difference (1)
Other changes, net
Balance December 31, 2016
Balance January 1, 2017
Accretion
Reclassifications from nonaccretable difference (1)
Other changes, net
Balance December 31, 2017
( 1 ) Respresents changes attributable to expected loss assumptions
Note 5. Credit Quality
Peoples
Waccamaw
Total
4,745 $
-
(2,712)
1,283
273
3,589 $
3,589 $
(1,237)
287
1,753
4,392 $
4,392 $
(1,379)
825
(450)
3,388 $
19,048 $
2
(6,459)
6,564
6,954
26,109 $
26,109 $
(5,380)
1,620
(515)
21,834 $
21,834 $
(5,664)
3,378
(83)
19,465 $
23,793
2
(9,171)
7,847
7,227
29,698
29,698
(6,617)
1,907
1,238
26,226
26,226
(7,043)
4,203
(533)
22,853
$
$
$
$
$
$
The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current
information identified during the loan review process. 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. These
loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment
terms.
● Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection
or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be
determined.
70
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
●
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
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.
The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are
generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately.
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2017
(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
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Home equity lines
Single family owner occupied
Total covered loans
Total loans
57,768 $
87,181
118,509
130,689
596,616
6,639
22,875
100,833
471,382
38,947
70,448
5,001
1,706,888
1
265
-
11,338
2,996
14,600
1,721,488 $
$
882 $
1,286
1,030
3,710
7,351
102
2,564
1,754
25,824
231
311
-
45,045
-
19
9
697
489
1,214
46,259 $
1,367 $
3,721
5,663
7,271
12,493
294
210
618
5,480
-
13
-
37,130
38
-
-
11,685
411
12,134
49,264 $
71
- $
-
-
-
173
-
-
-
-
-
-
-
173
-
-
-
-
-
-
173 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
60,017
92,188
125,202
141,670
616,633
7,035
25,649
103,205
502,686
39,178
70,772
5,001
1,789,236
39
284
9
23,720
3,896
27,948
1,817,184
Table of Contents
(Amounts
in
thousands)
Non-covered loans
Commercial loans
Construction, development, and other
land
$
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other
land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Consumer and other loans
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2016
55,188 $
87,581
126,468
131,934
579,134
5,839
28,887
104,033
475,402
43,833
77,218
3,971
1,719,488
2,768
882
-
796
6,423
25
132
14,283
4,601
980 $
3,483
6,992
5,466
10,236
164
1,223
871
4,636
-
11
-
34,062
803
-
-
63
537
-
-
20,763
928
-
23,094
57,156 $
780 $
1,137
768
5,565
9,102
-
1,619
1,457
20,381
702
216
-
41,727
999
13
8
103
552
-
265
771
1,200
-
3,911
45,638 $
- $
-
-
-
202
-
-
-
472
-
-
-
674
-
-
-
-
-
-
-
-
-
- $
3
-
-
-
-
-
-
-
-
-
-
3
-
-
-
-
-
-
-
-
-
56,948
92,204
134,228
142,965
598,674
6,003
31,729
106,361
500,891
44,535
77,445
3,971
1,795,954
4,570
895
8
962
7,512
25
397
35,817
6,729
-
-
674 $
-
-
3 $
79
56,994
1,852,948
Consumer loans
Total covered loans
Total loans
79
29,989
1,749,477 $
$
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 impaired.
72
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of
the dates indicated:
(Amounts
in
thousands)
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land $
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with no allowance
Impaired loans with a related allowance
Commercial loans
Commercial and industrial
Single family non-owner occupied
Non-farm, non-residential
Farmland
Consumer real estate loans
Single family owner occupied
Total impaired loans with an allowance
Total impaired loans (1)
$
December 31, 2017
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2016
Unpaid
Principal
Balance
Related
Allowance
727 $
315
499
2,042
3,022
102
395
1,621
16,633
231
141
25,728
988 $
1,142
1,010
3,521
5,955
107
414
1,770
18,964
231
144
34,246
- $
-
-
-
-
-
-
-
-
-
-
-
33 $
346
294
3,084
3,829
-
1,161
913
11,779
573
62
22,074
35 $
383
369
3,334
4,534
-
1,188
968
12,630
589
103
24,133
343
446
262
936
343
446
263
974
5,586
7,573
33,301 $
5,606
7,632
41,878 $
270
62
15
233
1,978
2,558
2,558 $
-
351
-
430
-
351
-
430
4,118
4,899
26,973 $
4,174
4,955
29,088 $
-
-
-
-
-
-
-
-
-
-
-
-
-
31
-
18
770
819
819
( 1 )
Includes loans totaling $20.13 million as of December 31, 2017, and $16.89 million as of December 31, 2016, that do not meet the Company's evaluation
threshold for individual impairment and are therefore collectively evaluated for impairment
73
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:
(Amounts
in
thousands)
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other
land
$
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with no related
allowance
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other
land
Commercial and industrial
Single family non-owner occupied
Non-farm, non-residential
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Total impaired loans with a related
allowance
Total impaired loans
2017
Interest
Income
Recognized
Average
Recorded
Investment
Year Ended December 31,
2016
Interest
Income
Recognized
Average
Recorded
Investment
2015
Interest
Income
Recognized
Average
Recorded
Investment
56 $
14
53
106
122
5
17
50
488
8
9
455 $
556
523
3,214
4,052
124
853
1,365
15,758
234
75
22 $
16
21
178
307
-
55
30
343
9
5
344 $
646
308
3,076
8,573
-
437
1,223
12,330
497
60
5 $
-
4
88
312
-
16
36
356
10
8
481
324
269
2,140
11,677
-
195
813
12,708
359
98
928
27,209
986
27,494
835
29,064
-
103
27
15
22
-
161
-
107
1,376
479
789
442
104
4,805
-
-
-
23
215
14
-
118
-
-
-
518
3,831
108
-
4,452
87
-
-
25
65
-
-
26
1
-
-
575
4,987
-
-
3,731
178
$
328
1,256 $
8,102
35,311 $
370
1,356 $
8,996
36,490 $
117
952 $
9,471
38,535
The following tables provide information on impaired PCI loan pools as of and for the dates indicated:
(Amounts
in
thousands,
except
impaired
loan
pools)
Unpaid principal balance
Recorded investment
Allowance for loan losses related to PCI loan pools
Impaired PCI loan pools
(Amounts
in
thousands)
Interest income recognized
Average recorded investment
December 31,
2017
2016
$
- $
-
-
-
1,086
1,085
12
1
2017
Year Ended December 31,
2016
2015
$
20 $
528
142 $
1,929
364
3,309
74
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generally places a loan on nonaccrual status when it is 90 days or more past due. PCI loans are generally not classified as nonaccrual due to the
accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:
(Amounts
in
thousands)
Commercial loans
Non-covered
2017
Covered
Total
Non-covered
2016
Covered
Total
December 31,
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
$
- $
211
498
851
2,448
102
805
882
13,108
-
92
18,997 $
- $
211
498
870
2,448
102
805
1,188
13,125
-
92
19,339 $
72 $
332
294
1,242
3,295
-
1,591
705
7,924
336
63
15,854 $
32 $
13
-
24
30
-
-
400
109
-
-
608 $
104
345
294
1,266
3,325
-
1,591
1,105
8,033
336
63
16,462
- $
-
-
19
-
-
-
306
17
-
-
342 $
75
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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. Non-covered accruing loans contractually past due 90 days or more totaled $1 thousand as of December 31, 2017.
There were no non-covered accruing loans contractually past due 90 days or more as of December 31, 2016.
(Amounts
in
thousands)
Non-covered loans
Commercial loans
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 2017
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
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Home equity lines
Single family owner occupied
Total covered loans
Total loans
$
20 $
232
544
223
2,433
123
113
226
6,959
326
439
-
11,638
-
-
-
402
70
472
12,110 $
- $
142
185
331
1,536
-
692
485
8,186
-
17
-
11,574
-
-
-
173
-
173
11,747 $
385 $
414
729
856
4,352
123
805
909
17,563
405
553
-
27,094
59,632 $
91,774
124,473
140,814
612,281
6,912
24,844
102,296
485,123
38,773
60,017
92,188
125,202
141,670
616,633
7,035
25,649
103,205
502,686
39,178
70,219
5,001
1,762,142
70,772
5,001
1,789,236
-
-
-
39
284
9
39
284
9
575
70
645
27,739 $
23,145
3,826
27,303
1,789,445 $
23,720
3,896
27,948
1,817,184
365 $
40
-
302
383
-
-
198
2,418
79
97
-
3,882
-
-
-
-
-
-
3,882 $
76
Table of Contents
(Amounts
in
thousands)
Non-covered loans
Commercial loans
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 2016
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
Consumer and other loans
33 $
174
163
1,302
1,235
-
224
78
4,777
342
371
-
8,699
434
-
-
24
32
-
-
108
58
Consumer loans
Total covered loans
Total loans
-
656
9,355 $
$
5 $
30
-
159
332
5
343
136
2,408
336
90
-
3,844
-
-
-
-
-
-
-
146
-
-
146
3,990 $
17 $
149
281
835
2,169
-
565
658
3,311
-
15
-
8,000
32
-
-
-
-
-
-
62
39
55 $
353
444
2,296
3,736
5
1,132
872
10,496
678
476
-
20,543
466
-
-
24
32
-
-
316
97
56,893 $
91,851
133,784
140,669
594,938
5,998
30,597
105,489
490,395
43,857
56,948
92,204
134,228
142,965
598,674
6,003
31,729
106,361
500,891
44,535
76,969
3,971
1,775,411
77,445
3,971
1,795,954
4,104
895
8
938
7,480
25
397
35,501
6,632
4,570
895
8
962
7,512
25
397
35,817
6,729
-
133
8,133 $
-
935
21,478 $
79
56,059
1,831,470 $
79
56,994
1,852,948
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. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are
classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these
loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally not considered TDRs as long as the
loans remain in the assigned loan pool. No covered loans were recorded as TDRs as of December 31, 201 7, or December 31, 2016.
77
Table of Contents
The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in
thousands)
Commercial loans
Nonaccrual (1)
2017
Accruing
Total
Nonaccrual (1)
2016
Accruing
Total
December 31,
Single family non-owner occupied
Non-farm, non-residential
$
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total TDRs
Allowance for loan losses related to
TDRs
$
364 $
-
-
1,565
-
-
1,929 $
528 $
295
145
6,496
233
37
7,734 $
892 $
295
145
8,061
233
37
9,663 $
38 $
-
-
905
341
892 $
4,160
158
7,503
239
-
1,284 $
-
12,952 $
930
4,160
158
8,408
580
-
14,236
$
642
$
670
( 1 ) Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.
The following table presents interest income recognized on TDRs for the periods indicated:
(Amounts
in
thousands)
Interest income recognized
2017
Year Ended December 31,
2016
2015
$
222 $
424 $
608
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 following modification.
2017
2016
Year Ended December 31,
Total
Pre-Modification Post-Modification
Total
Pre-Modification Post-Modification
Contracts
Recorded
Investment
Recorded
Investment
Contracts
Recorded
Investment
Recorded
Investment
5 $
1
6 $
207 $
36
243 $
207
36
243
1 $
1 $
115 $
-
115 $
115
-
115
(Amounts
in
thousands)
Below market interest
rate and extended
payment term
Single family owner
occupied
Consumer loans
Total
The following table presents loans modified as TDRs, by loan class, that were restructured during the previous 12 months for which there was a payment default
during the periods indicated:
(Amounts
in
thousands)
Single family owner occupied
Total
Year Ended December 31,
2017
2016
Total
Contracts
Recorded
Investment
Total
Contracts
Recorded
Investment
1 $
1 $
14
14
- $
- $
-
-
78
Table of Contents
The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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,
2017
2016
$
$
$
2,409 $
105
2,514 $
2,209 $
9,921
5,109
276
5,385
1,746
2,539
( 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
Note 6. Allowance for Loan Losses
The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated:
(Amounts
in
thousands)
Allowance, excluding PCI
Beginning balance
Provision for loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Ending balance
PCI allowance
Beginning balance
Recovery of loan losses
Benefit attributable to the FDIC indemnification asset
Recovery of loan losses charged to operations
Recovery of loan losses recorded through the FDIC indemnification asset
Ending balance
Total allowance
Beginning balance
Provision for 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
Commercial
Year Ended December 31, 2017
Consumer and
Other
Consumer Real
Estate
Total
Allowance
11,690 $
103
(922)
801
(121)
11,672 $
- $
-
-
-
-
- $
11,690 $
103
-
103
-
(922)
801
(121)
11,672 $
5,487 $
1,608
(699)
414
(285)
6,810 $
12 $
(12)
-
(12)
-
- $
5,499 $
1,596
-
1,596
-
(699)
414
(285)
6,810 $
759 $
1,072
(1,322)
285
(1,037)
794 $
- $
-
-
-
-
- $
759 $
1,072
-
1,072
-
(1,322)
285
(1,037)
794 $
17,936
2,783
(2,943)
1,500
(1,443)
19,276
12
(12)
-
(12)
-
-
17,948
2,771
-
2,771
-
(2,943)
1,500
(1,443)
19,276
$
$
$
$
$
$
79
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in
thousands)
Allowance, excluding PCI
Beginning balance
Provision for loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Ending balance
PCI allowance
Beginning balance
Recovery of loan losses
Benefit attributable to the FDIC indemnification asset
Recovery of loan losses charged to operations
Recovery of loan losses recorded through the FDIC indemnification asset
Ending balance
Total allowance
Beginning balance
Provision for 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
Commercial
Year Ended December 31, 2016
Consumer and
Other
Consumer Real
Estate
Total
Allowance
13,133 $
30
(2,392)
919
(1,473)
11,690 $
- $
-
-
-
-
- $
13,133 $
30
-
30
-
(2,392)
919
(1,473)
11,690 $
6,356 $
385
(1,612)
358
(1,254)
5,487 $
54 $
(42)
1
(41)
(1)
12 $
6,410 $
343
1
344
(1)
(1,612)
358
(1,254)
5,499 $
690 $
881
(1,172)
360
(812)
759 $
- $
-
-
-
-
- $
690 $
881
-
881
-
(1,172)
360
(812)
759 $
20,179
1,296
(5,176)
1,637
(3,539)
17,936
54
(42)
1
(41)
(1)
12
20,233
1,254
1
1,255
(1)
(5,176)
1,637
(3,539)
17,948
$
$
$
$
$
$
80
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the 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, 2017
Loans Individually
Evaluated for
Impairment
Allowance for
Loans Individually
Evaluated
Loans Collectively
Evaluated for
Impairment
Allowance for
Loans Collectively
Evaluated
$
$
- $
343
-
770
1,367
-
1,219
3,699
-
9,471
-
9,471
-
-
-
13,170 $
- $
270
-
62
15
-
233
580
-
1,978
-
1,978
-
-
-
2,558 $
59,386 $
91,845
125,202
139,093
611,477
7,035
24,430
1,058,468
115,807
496,348
39,178
651,333
70,772
5,001
75,773
1,785,574 $
830
492
1,094
1,914
6,582
51
129
11,092
803
3,732
297
4,832
794
-
794
16,718
December 31, 2016
Loans Individually
Evaluated for
Impairment
Allowance for
Loans Individually
Evaluated
Loans Collectively
Evaluated for
Impairment
Allowance for
Loans Collectively
Evaluated
$
$
- $
-
281
1,910
1,454
-
981
4,626
-
5,120
336
5,456
-
-
-
10,082 $
81
- $
-
-
31
-
-
18
49
-
770
-
770
-
-
-
819 $
60,281 $
93,099
133,947
139,711
600,915
6,028
31,145
1,065,126
122,000
501,617
44,199
667,816
77,524
3,971
81,495
1,814,437 $
889
495
1,157
2,721
6,185
43
151
11,641
895
3,594
228
4,717
759
-
759
17,117
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the allowance for loan losses on PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated:
(Amounts
in
thousands)
Commercial loans
Waccamaw commercial
Peoples commercial
Other
Total commercial loans
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Peoples residential
Total consumer real estate loans
Total PCI loans
December 31, 2017
December 31, 2016
Recorded
Investment
Allowance for
Loan Pools With
Impairment
Recorded
Investment
Allowance for
Loan Pools With
Impairment
$
$
64 $
4,279
986
5,329
11,118
994
999
13,111
18,440 $
- $
-
-
-
-
-
-
-
- $
260 $
4,491
1,095
5,846
20,178
1,320
1,085
22,583
28,429 $
-
-
-
-
-
-
12
12
12
Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 201 7.
Note 7 . FDIC Indemnification Asset
In connection with the FDIC- assisted acquisition of Waccamaw in 2012, the Company entered into loss share agreements with the FDIC that covered $27.95
million of loans and $105 thousand of OREO as of December 31, 2017, compared to $56.99 million of loans and $276 thousand of OREO as of December 31,
2016. Under the loss share agreements, the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in
relation to these covered assets. Loss share coverage expired June 30, 2017, for commercial loans, with recoveries continuing until June 30, 2019. Loss share
coverage will expire June 30, 2022, for single family loans. The Company’s consolidated statements of income include the expense on covered assets net of
estimated reimbursements. The following table presents the changes in the FDIC indemnification asset during the periods indicated:
(Amounts
in
thousands)
Beginning balance
Decrease 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
82
Year Ended December 31,
2016
2017
$
$
12,173 $
-
81
112
(3,517)
(1,688)
7,161 $
20,844
(1)
1,045
162
(5,474)
(4,403)
12,173
Table of Contents
Note 8 . Premises , Equipment , and Leases
Premises
and
Equipment
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of premises and equipment as of the dates indicated:
(Amounts
in
thousands)
Land
Buildings and leasehold improvements
Equipment
Total premises and equipment
Accumulated depreciation and amortization
Total premises and equipment, net
December 31,
2017
2016
$
$
18,921 $
46,002
33,336
98,259
(50,133)
48,126 $
18,987
46,740
32,519
98,246
(48,161)
50,085
I mpairment charges related to certain long-term investments in land and buildings totaled $677 thousand in 2017, $364 thousand in 2016, and $259 thousand in
2015. Depreciation and amortization expense for premises and equipment was $3.56 million in 2017, $3.56 million in 2016, and $4.14 million in 2015.
Leases
The Company has entered into various noncancelable operating leases. The following schedule presents the 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, 2017:
(Amounts
in
thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total future minimum lease payments
$
$
237
111
97
97
97
694
1,333
Lease expense was $582 thousand in 2017, $784 thousand in 2016, and $862 thousand in 2015. The Company maintained no subleases as of December 31, 2017.
Note 9 . Goodwill and Other Intangible Assets
Goodwill
The company has one reporting unit for goodwill impairment testing purposes -- Community Banking. Prior to October 2016, the Company maintained two
reporting units -- Community Banking and Insurance Services. The Insurance Services reporting unit consisted of the Company’s wholly owned subsidiary
Greenpoint, which was sold in October 2016. The Company performed its annual assessment of goodwill as of October 31, 2017, and concluded that no
impairment charge was necessary. No events have occurred after the 2017 analysis to indicate potential impairment.
83
Table of Contents
The following table presents the changes in goodwill, by reporting unit, during the periods indicated:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in
thousands)
Balance January 1, 2015
Acquisitions and dispositions, net
Cash consideration paid
Balance December 31, 2015
Balance January 1, 2016
Acquisitions and dispositions, net
Other (1)
Balance December 31, 2016
Balance January 1, 2017
Acquisitions and dispositions, net
Balance December 31, 2017
Community
Banking
Insurance Services
Total
$
$
$
$
$
$
91,455 $
-
-
91,455 $
91,455 $
1,290
3,034
95,779 $
95,779
-
95,779
9,267 $
(324)
88
9,031 $
9,031 $
(5,997)
(3,034)
- $
$
$
100,722
(324)
88
100,486
100,486
(4,707)
-
95,779
95,779
-
95,779
( 1 ) Represents the transfer of goodwill after the sale of Greenpoint to one reporting unit
Other
Intangible
Assets
The Company ’s other intangible assets include core deposit and other identifiable intangibles. As of December 31, 2017, the remaining lives of core deposit
intangibles ranged from 5 years to 8 years and the weighted average remaining life was 6 years. Other identifiable intangibles consist primarily of the value
assigned to contractual rights arising from insurance agency acquisitions. The following table presents the components of other intangible assets 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
December 31,
2017
2016
$
$
8,184 $
(2,161)
6,023
879
(751)
128
6,151 $
11,536
(4,515)
7,021
3,508
(3,322)
186
7,207
Amortization expense for other intangible assets was $1.06 million in 2017, $1.14 million in 2016, and $1.12 million in 2015. The following schedule presents the
estimated amortization expense for intangible assets, by year, as of December 31, 2017:
(Amounts
in
thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total estimated amortization expense
84
$
$
1,044
1,029
1,029
1,015
997
1,037
6,151
Table of Contents
Note 10 . Deposits
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
T he following schedule presents the contractual maturities of time deposits, by year, as of December 31, 2017:
(Amounts
in
thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total contractual maturities
December 31,
2017
2016
$
454,143 $
427,705
465,407
170,731
342,064
374,373
123,173
1,475,748
1,929,891 $
$
$
$
378,339
196,997
326,263
382,503
129,531
1,413,633
1,841,338
219,529
89,780
95,905
44,136
48,121
75
497,546
Time deposits of $250 thousand or more totaled $48.50 million as of December 31, 2017, and $41.55 million as of December 31, 2016. The following schedule
presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2017:
(Amounts
in
thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total contractual maturities
$
$
4,274
3,786
7,517
32,924
48,501
85
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Note 1 1 . Borrowings
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of borrowings as of the dates indicated:
(Amounts
in
thousands)
Short-term borrowings
Retail repurchase agreements
Long-term borrowings
Wholesale repurchase agreements
FHLB advances
Other borrowings
Subordinated debt
Other debt
Total borrowings
December 31,
2017
Weighted
Balance
Average Rate
Balance
2016
Weighted
Average Rate
$
5,086
0.07% $
73,005
25,000
50,000
-
-
80,086
3.18%
4.00%
25,000
65,000
-
$
15,464
244
178,713
$
0.07%
3.18%
4.04%
3.65%
The following schedule presents the contractual and weighted average maturities of long-term borrowings, by year, as of December 31, 2017:
(Amounts
in
thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total
Wholesale
Repurchase
Agreements
FHLB Borrowings
Total
$
$
- $
25,000
-
-
-
-
25,000 $
- $
-
-
50,000
-
-
50,000 $
-
25,000
-
50,000
-
-
75,000
Weighted average maturity (in years)
1.15
3.02
2.40
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 pledged certain loans to secure an FHLB advance and letters of credit totaling $917.24 million as of December 31, 2017. Unused borrowing
capacity with the FHLB totaled $411.20 million, net of FHLB letters of credit of $126.58 million, as of December 31, 2017. The FHLB letters of credit provide an
attractive alternative to pledging securities for public unit deposits.
Investment securities pledged to secure repurchase agreements remain under the Company ’s control during the agreements’ terms. The counterparties may redeem
callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may
result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of
collateral pledged, as of December 31, 2017:
(Amounts
in
thousands)
Overnight and continuous
Up to 30 days
30 - 90 days
Greater than 90 days
Total
U.S. Treasury
Securities
U.S. Agency
Securities
Municipal
Securities
Mortgage-backed
Agency Securities
Total
$
$
- $
-
-
9,000
9,000 $
86
- $
-
-
4,680
4,680 $
3,371 $
-
-
-
3,371 $
1,638 $
-
-
11,397
13,035 $
5,009
-
-
25,077
30,086
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company issued $15.46 million of junior subordinated debentures (“Debentures”) to FCBI Capital Trust (the “Trust”), an unconsolidated subsidiary, in
October 2003 with an interest rate of three -month London InterBank Offered Rate (“LIBOR”) plus 2.95% and a 30 -year term ending in October 2033. The Trust
purchased the Debentures through the issuance of trust preferred securities, which had substantially identical terms as the Debentures. Net proceeds from the
offering were contributed as capital to the Bank to support further growth. During the first quarter of 2017, the Company redeemed all $15.46 million of its trust
preferred securities issued through the Trust.
In addition, the Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of one -month
LIBOR plus 2.00% that matures in April 2018. There was no outstanding balance on the line as of December 31, 2017, or December 31, 2016.
Note 1 2 . Derivative Instruments and Hedging Activities
As of December 31, 201 7, 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 fluctuations in external factors such as interest rates, market-
driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.
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, fair value changes in the derivative and hedged item attributable
to the hedged risk are recognized in earnings in the same period.
The Company ’s interest rate swap agreements include a ten -year, $1.28 million notional swap entered into in August 2017; a fourteen -year, $1.20 million
notional swap entered into in March 2015; and a fifteen -year, $4.37 million notional swap entered into in February 2014. 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,
2017. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:
(Amounts
in
thousands)
Derivatives designated as hedges
Interest rate swaps
Total derivatives
Notional or
Contractual
Amount
2017
Derivative
Assets
December 31,
Derivative
Liabilities
Notional or
Contractual
Amount
2016
Derivative
Assets
Derivative
Liabilities
$
$
5,813 $
5,813 $
- $
- $
90 $
90 $
4,835 $
4,835 $
- $
- $
167
167
The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:
2017
Year Ended December 31,
2016
2015
Income Statement Location
$
$
78 $
78 $
116 $
116 $
122 Interest and fees on loans
122
(Amounts
in
thousands)
Derivatives designated as hedges
Interest rate swaps
Total derivatives
Note 1 3 . Employee Benefit Plans
Defined
Benefit
Plans
The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-
management directors. The Company ’s unfunded Benefit Plans include the Supplemental Executive Retention Plan (“SERP”) and the Directors’ Supplemental
Retirement Plan (“Directors’ Plan”). The 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 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.
87
Table of Contents
The following table presents the changes in the aggregate actuarial benefit obligation during the periods indicated:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in
thousands)
Beginning balance
Plan change
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Ending balance
December 31,
2017
2016
$
$
9,181 $
258
231
372
(48)
(359)
9,635 $
The following table presents the components of net periodic pension cost and the assumed discount rate for the periods indicated:
(Amounts
in
thousands,
except
discount
rate)
Service cost
Interest cost
Amortization of prior service cost
Amortization of losses
Net periodic cost
2017
Year Ended December 31,
2016
2015
$
$
231
372
228
31
862
$
$
184
382
226
47
839
$
$
8,390
69
184
382
367
(211)
9,181
180
334
260
66
840
Assumed discount rate
3.85%
4.22%
4.62%
The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 201 7:
(Amounts
in
thousands)
2018
2019
2020
2021
2022
2023 through 2027
Deferred
Compensation
Plan
$
468
462
529
581
586
2,924
The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods,
commencing at retirement or death. There were no accrued benefits, which are based on the present values of expected payments and estimated life expectancies,
as of December 31, 2017, compared to $458 thousand as of December 31, 2016. Expenses related to the deferred compensation plan totaled $11 thousand in 2017,
$60 thousand in 2016, and $60 thousand in 2015.
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, 2017, stop-loss insurance coverage
generally limits the Company’s risk of loss to $150 thousand for individual claims and $4.41 million for aggregate claims. Expenses related to the health plan
totaled $3.50 million in 2017, $3.48 million in 2016, and $3.06 million in 2015.
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Table of Contents
Employee
Stock
Ownership
and
Savings
Plan
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”) that consists of a 401 (k) savings feature that covers all employees that meet
minimum eligibility requirements. The Company matches employee contributions at levels determined by the Board of Directors annually. These 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. Matching contributions to
qualified deferrals under the 401 (k) savings component of the KSOP totaled $1.18 million in 2017, $1.50 million in 2016, and $1.53 million in 2015. The KSOP
held 387,935 shares of the Company’s common stock as of December 31, 2017, 410,384 shares as of December 31, 2016, and 428,785 shares as of December 31,
2015. Substantially all plan assets are invested in the Company’s common stock.
Equity-Based
Compensation
Plans
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, 2017, 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 authorized 600,000 shares available 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. Grants issued 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 for the
periods indicated:
(Amounts
in
thousands)
Pre-tax compensation expense
Excess tax benefit
Stock
Options
2017
Year Ended December 31,
2016
2015
$
430 $
17
209 $
174
110
8
The following table presents stock option activity and related information for the year ended December 31, 2017:
(Amounts
in
thousands,
except
share
and
per
share
data)
Outstanding, January 1, 2017
Granted
Exercised
Canceled
Outstanding, December 31, 2017
Exercisable, December 31, 2017
Weighted
Average
Option
Shares
Exercise Price
Per Share
Weighted Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
200,396 $
22,849
(16,185)
(6,356)
200,704 $
145,536 $
89
19.73
24.72
23.33
15.83
20.14
19.41
5.9 $
4.9 $
1,742
1,373
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the total options granted and the weighted average assumptions used to estimate the fair value of those options during the periods
indicated :
Stock options granted
Grant-date fair value per share
Volatility
Risk-free rate
Expected dividend yield
Expected term (in years)
2017
Year Ended December 31,
2016
2015
$
22,849
5.79
$
27.86%
2.17%
2.99%
6.50
32,768
4.01
25.04%
1.56%
3.09%
6.50
-
-
-
-
-
-
The intrinsic value of options exercised totaled $84 thousand in 2017, $434 thousand in 2016, and $20 thousand in 2015. As of December 31, 2017, unrecognized
compensation cost related to nonvested stock options was $156 thousand with an expected weighted average recognition period of 1.10 years. The actual
compensation cost recognized might differ from this estimate due to various items, including new grants and changes in estimated forfeitures.
Restricted
Stock
Awards
The following table presents restricted stock activity and related information for the year ended December 31, 2017:
Nonvested, January 1, 2017
Granted
Vested
Canceled
Nonvested, December 31, 2017
Shares
Weighted Average
Grant-Date Fair Value
27,803 $
38,500
(22,697)
-
43,606 $
20.59
25.69
23.66
-
23.49
As of December 31, 201 7, unrecognized compensation cost related to nonvested restricted stock awards was $740 thousand with an expected weighted average
recognition period of 1.47 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and
changes in estimated forfeitures.
90
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 4 . Other Operating Income and Expense
The following table presents the components of other operating income and expense for the periods indicated:
(Amounts
in
thousands)
Other operating income
Bank owned life insurance
Other (1)
Total other operating income
Other operating expense
Service fees
Professional fees
Interchange
Advertising and public relations
Telephone and data communications
OREO expense and net loss
Office supplies
Other (1)
Total other operating expense
2017
Year Ended December 31,
2016
2015
1,365 $
2,137
3,502 $
3,348 $
2,567
2,210
2,206
1,554
1,202
1,171
6,841
21,099 $
955 $
2,254
3,209 $
3,641 $
1,501
2,024
1,532
1,598
1,420
1,220
7,011
19,947 $
1,971
2,158
4,129
3,401
1,272
2,407
1,309
1,595
2,438
1,228
7,461
21,111
$
$
$
$
Components of other operating income or expense that do not exceed 1% of total income
(
1
)
Note 1 5 . Income Taxes
The Tax Reform Act was enacted on December 22, 2017. Among other things, the new law establishes a new, flat corporate federal statutory income tax rate of
21%; eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year; limits the
deduction for net interest expense incurred by U.S. corporations; allows businesses to immediately expense the cost of new investments in certain qualified
depreciable assets for tax purposes; eliminates or reduces certain deductions related to meals and entertainment expenses; modifies the limitation on excessive
employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee; and limits the
deductibility of deposit insurance premiums. The Tax Reform Act also significantly changes U.S. tax law related to foreign operations, however, such changes do
not currently impact the Company. As a result of the Tax Reform Act, the Company recognized tax expense totaling $6.55 million related to the revaluation of its
deferred tax balances, which includes provisional estimates primarily related to certain purchase accounting, indemnification asset, intangible, and depreciation
items. The Company is still analyzing certain aspects of the Tax Reform Act and refining calculations, which could potentially affect the measurement of these
balances. The Company expects its analysis to be completed upon the filing of its tax returns for the year ended December 31, 2017.
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 the income tax provision for 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
2017
Year Ended December 31,
2016
2015
$
$
14,509 $
926
15,435
5,205
(12)
5,193
20,628 $
13,634 $
675
14,309
(1,480)
(10)
(1,490)
12,819 $
(254)
581
327
10,034
1,020
11,054
11,381
The Company ’s effective tax rate, income tax as a percent of 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 generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The following
table reconciles the Company’s income tax expense to the amount computed by applying the federal statutory tax rate to pre-tax income for the periods indicated:
91
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017
Amount
Percent
Year Ended December 31,
2016
Amount
Percent
2015
Amount
Percent
(Amounts
in
thousands)
Federal income tax at the statutory rate
State income tax, net of federal benefit
$
Increase (decrease) resulting from:
Tax-exempt interest income
Nondeductible goodwill
Bank owned life insurance
Deferred tax revaluation
Other items, net
Income tax at the effective tax rate
$
14,739
692
15,431
(1,228)
-
(478)
6,552
351
20,628
35.00% $
1.64%
36.64%
-2.92%
0.00%
-1.13%
15.56%
0.83%
48.98% $
13,281
598
13,879
(1,336)
340
(335)
-
271
12,819
35.00% $
1.58%
36.58%
-3.52%
0.89%
-0.88%
0.00%
0.71%
33.78% $
12,572
639
13,211
(1,463)
-
(690)
-
323
11,381
35.00%
1.78%
36.78%
-4.07%
-
-1.92%
0.00%
0.89%
31.68%
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
Deferred loan fees
Other
Total deferred tax assets
Deferred tax liabilities
FDIC indemnification asset
Fixed assets
Unrealized gains on available-for-sale securities
Odd days interest deferral
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2017
2016
4,511 $
-
722
3,418
4,131
2,616
3,617
1,221
450
20,686
8,525
1,282
259
233
819
11,118
9,568 $
6,644
326
913
5,384
6,540
4,062
4,669
1,979
825
31,342
11,927
2,042
-
1,283
347
15,599
15,743
$
$
T he Company had no unrecognized tax benefits or accrued interest or penalties as of December 31, 2017 or 2016. The Company had no deferred tax valuation
allowance recorded as of December 31, 2017 or 2016, as management believes it is more likely than not that all of the deferred tax assets will be realized against
deferred tax liabilities and projected future taxable income. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service
and various state tax departments for the years ended December 31, 2014 through 2016.
92
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 6 . Accumulated Other Comprehensive Income
The following table presents the changes in AOCI, net of tax and by component, during the periods indicated:
(Amounts
in
thousands)
Balance January 1, 2015
Other comprehensive income (loss) before reclassifications
Reclassified from AOCI
Other comprehensive income (loss), net
Balance December 31, 2015
Balance January 1, 2016
Other comprehensive income (loss) before reclassifications
Reclassified from AOCI
Other comprehensive income (loss), net
Balance December 31, 2016
Balance January 1, 2017
Other comprehensive income (loss) before reclassifications
Reclassified from AOCI
Other comprehensive income (loss), net
Reclassification of certain tax effects
Balance December 31, 2017
Unrealized Gains (Losses)
on Available-for-Sale
Securities
Employee Benefit
Plans
Total
$
$
$
$
$
$
(4,266) $
471
(90)
381
(3,885) $
(3,885) $
647
2,694
3,341
(544) $
(544) $
972
413
1,385
134
975 $
(1,339) $
(226)
203
(23)
(1,362) $
(1,362) $
(276)
171
(105)
(1,467) $
(1,467) $
(132)
162
30
(378)
(1,815) $
(5,605)
245
113
358
(5,247)
(5,247)
371
2,865
3,236
(2,011)
(2,011)
840
575
1,415
(244)
(840)
The following table presents reclassifications out of AOCI , by component, during the periods indicated:
(Amounts
in
thousands)
Available-for-sale securities
(Gains) losses recognized
OTTI recognized
Reclassified out of AOCI, before tax
Income tax (expense) benefit
Reclassified out of AOCI, net of tax
Employee benefit plans
Amortization of prior service cost
Amortization of net actuarial loss
Reclassified out of AOCI, before tax
Income tax expense
Reclassified out of AOCI, net of tax
Total reclassified out of AOCI, net of tax
$
Amortization is included in net periodic pension cost. See Note
13, "Employee Benefit Plans."
(
1
)
Year Ended December 31,
2016
2017
2015
Income Statement
Line Item Affected
$
661 $
(335) $
(144) Net gain (loss) on sale of securities
Net impairment losses recognized in
-
661
(248)
413
228
31
259
(97)
162
575 $
4,646
4,311
(1,617)
2,694
226
47
273
(102)
171
2,865 $
-
earnings
(144) Income before income taxes
54 Income tax expense
(90) Net income
260 (1)
66 (1)
326 Income before income taxes
(123) Income tax expense
203 Net income
113 Net income
93
Table of Contents
Note 1 7 . Fair Value
Financial
Instruments
Measured
at
Fair
Value
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such
instruments under the valuation hierarchy.
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 Treasury securities, single issue trust preferred securities, corporate securities, mortgage-backed securities, 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 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 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.
94
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value
hierarchy, as of the dates indicated:
December 31, 2017
(Amounts
in
thousands)
Available-for-sale securities
U.S. Agency securities
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Equity securities
Total available-for-sale securities
Fair value loans
Deferred compensation assets
Deferred compensation liabilities
Derivative liabilities
(Amounts
in
thousands)
Available-for-sale securities
U.S. Agency securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Equity securities
Total available-for-sale securities
Fair value loans
Deferred compensation assets
Deferred compensation liabilities
Derivative liabilities
$
$
Total
Fair Value
11,296 $
19,971
103,648
8,884
21,726
55
165,580
5,739
4,002
4,002
90
Total
Fair Value
1,345 $
113,331
19,939
30,891
73
165,579
4,701
3,224
3,224
167
Fair Value Measurements Using
Level 2
Level 3
Level 1
- $
-
-
-
-
55
55
-
4,002
4,002
-
11,296 $
19,971
103,648
8,884
21,726
-
165,525
5,739
-
-
90
December 31, 2016
Fair Value Measurements Using
Level 2
Level 3
Level 1
- $
-
-
-
55
55
-
3,224
3,224
-
1,345 $
113,331
19,939
30,891
18
165,524
4,701
-
-
167
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
No changes in valuation techniques or transfers into or out of Level 3 of the fair value hierarchy occurred during the years ended December 31, 2017 or 2016.
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 manages and
monitors all impaired loans. 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. The
Company typically receives a third -party valuation 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.
95
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
OREO
. 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 present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates
indicated:
December 31, 2017
(Amounts
in
thousands)
Impaired loans, non-covered
OREO, non-covered
OREO, covered
(Amounts
in
thousands)
Impaired loans, non-covered
OREO, non-covered
OREO, covered
$
$
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level
3
5,015 $
2,359
105
- $
-
-
- $
-
-
5,015
2,359
105
December 31, 2016
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
4,078 $
5,109
265
- $
-
-
- $
-
-
4,078
5,109
265
Quantitative
Information
about
Level
3 Fair
Value
Measurements
The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates
indicated:
Valuation
Technique
Unobservable
Input
Discount Range (Weighted Average)
December 31, 2017
December 31, 2016
Impaired loans, non-covered
OREO, non-covered
OREO, covered
Discounted appraisals (1)
Discounted appraisals (1)
Discounted appraisals (1)
Appraisal adjustments (2)
Appraisal adjustments (2)
Appraisal adjustments (2)
6% to 79% (34%)
8% to 47% (32%)
0% to 65% (52%)
3% to 39% (17%)
0% to 88% (30%)
0% to 44% (40%)
( 1 ) Fair value is generally based on appraisals of the underlying collateral.
( 2 ) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
Fair
Value
of
Financial
Instruments
The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of 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.
96
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 about 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.
The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the
dates indicated:
December 31, 2017
(Amounts
in
thousands)
Assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans held for investment, net of allowance
FDIC indemnification asset
Interest receivable
Deferred compensation assets
Liabilities
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Securities sold under agreements to repurchase
Interest payable
FHLB and other borrowings
Derivative financial liabilities
Deferred compensation liabilities
Carrying
Amount
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
$
157,951 $
165,580
25,149
1,797,908
7,161
5,778
4,002
157,951 $
165,580
25,084
1,760,606
3,927
5,778
4,002
157,951 $
55
-
-
-
-
4,002
454,143
465,407
512,795
497,546
30,086
1,104
50,000
90
4,002
97
454,143
465,407
512,795
490,628
30,449
1,104
52,702
90
4,002
-
-
-
-
-
-
-
-
4,002
- $
165,525
25,084
5,739
-
5,778
-
454,143
465,407
512,795
490,628
30,449
1,104
52,702
90
-
-
-
-
1,754,867
3,927
-
-
-
-
-
-
-
-
-
-
-
Table of Contents
(Amounts
in
thousands)
Assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans held for investment, net of allowance
FDIC indemnification asset
Interest receivable
Deferred compensation assets
Liabilities
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Securities sold under agreements to repurchase
Interest payable
FHLB and other borrowings
Derivative financial liabilities
Deferred compensation liabilities
Note 1 8 . Earnings per Share
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Carrying
Amount
Fair Value
$
76,307 $
165,579
47,133
1,835,000
12,173
5,553
3,224
76,307 $
165,579
47,266
1,805,999
8,112
5,553
3,224
427,705
378,339
523,260
512,034
98,005
1,280
80,708
167
3,224
427,705
378,339
523,260
507,917
98,879
1,280
83,551
167
3,224
Fair Value Measurements Using
Level 2
Level 1
Level 3
76,307 $
55
-
-
-
-
3,224
-
-
-
-
-
-
-
-
3,224
- $
165,524
47,266
4,701
-
5,553
-
427,705
378,339
523,260
507,917
98,879
1,280
83,551
167
-
-
-
-
1,801,298
8,112
-
-
-
-
-
-
-
-
-
-
-
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 common shares outstanding, basic
Dilutive effect of potential common shares
Stock options
Restricted stock
Convertible preferred stock
Total dilutive effect of potential common shares
Weighted average 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
$
$
$
2017
Year Ended December 31,
2016
2015
21,485
-
21,485
$
$
25,126
-
25,126
$
$
24,540
105
24,435
17,002,116
17,319,689
18,531,039
52,205
23,521
-
75,726
17,077,842
34,530
11,305
-
45,835
17,365,524
$
1.26
1.26
$
1.45
1.45
64,081
3,620
67,701
107,592
3,279
110,871
26,487
2,996
166,942
196,425
18,727,464
1.32
1.31
127,882
-
127,882
T he Company redeemed all outstanding shares of its 6% Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) in 2015. Before
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.
98
Table of Contents
Note 19 . Related Party Transactions
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company engages in transactions with related parties in the normal course of business. Related parties include directors, executive officers, and principal
shareholders and their immediate family members, business interests, and affiliates. All related party transactions are made on terms that are substantially the same
as those prevailing at the time for similar transactions with unrelated parties, including interest rates and collateral. The following table presents the changes in
loans with related parties during the periods indicated:
(Amounts
in
thousands)
Beginning balance
New loans and advances
Loan repayments
Reclassifications (1)
Ending balance
Year Ended December 31,
2016
2017
$
$
18,360 $
942
(1,566)
1,601
19,337 $
21,886
559
(4,418)
333
18,360
Changes related to the composition of the Company's directors, executive officers, and related insiders
(
1
)
Deposits with related parties totaled $ 7.13 million as of December 31, 2017, and $5.45 million as of December 31, 2016. Legal fees paid to related parties totaled
$44 thousand in 2017, $104 thousand in 2016, and $88 thousand in 2015. Lease expense paid to related parties totaled $49 thousand in 2017, $95 thousand in 2016,
and $95 thousand in 2015. Other expense paid to related parties totaled $63 thousand in 2017, $34 thousand in 2016, and $21 thousand in 2015. In addition, the
Company repurchased 200,000 shares of its common stock from a related party in 2016 for $4.20 million, which represented the stock’s fair market value as of the
date of the transaction.
Note 2 0 . 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 its financial condition, results of operations, or cash flows.
Commitments
and
Contingencies
The Company is a party to financial instruments with off -balance sheet risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees,
elements of credit and interest rate risk beyond the amount recognized in the consolidated 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 commitments are expected to expire without
being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is
based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and
equipment, and income producing commercial properties. 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.
99
Table of Contents
The following table presents the off-balance sheet financial instruments as of the dates indicated:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in
thousands)
Commitments to extend credit
Standby letters of credit and financial guarantees (1)
Total off-balance sheet risk
Reserve for unfunded commitments
Includes FHLB letters of credit
(
1
)
Note 2 1 . Regulatory Requirements and Restrictions
December 31,
2017
2016
$
$
243,147 $
131,587
374,734
261,801
83,900
345,701
66 $
326
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. In addition, the Company and the Bank are subject to various regulatory restrictions related to
the payment of dividends, including requirements to maintain capital at or above regulatory minimums.
The current risk-based capital requirements, based on the international capital standards known as Basel III, requires the Company and the Bank to maintain
minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to risk-weighted assets, and of Tier 1 capital to average
consolidated assets (“Tier 1 leverage ratio”), as defined in the regulations. On January 1, 2016, Basel III’s capital conservation buffer, which is intended to absorb
losses during periods of economic stress, became effective at 0.625%, and will be phased in over a four -year period (increasing by an additional 0.625% each year
until it reaches 2.5% on January 1, 2019).
The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:
Actual
Minimum Basel III
Requirement
Minimum Basel III
Requirement - Fully
Phased-In
Well Capitalized
Requirement (1)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2017
$
$
251,052
251,052
270,394
251,052
13.98% $
13.98%
15.06%
11.06%
80,816
107,754
143,672
90,822
4.50% $
6.00%
8.00%
4.00%
125,713
152,652
188,570
90,822
7.00%
8.50%
10.50%
4.00%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
222,856
222,856
242,218
222,856
12.47% $
12.47%
13.55%
9.84%
80,447
107,262
143,016
90,604
4.50% $
6.00%
8.00%
4.00%
125,139
151,955
187,709
90,604
7.00% $
8.50%
10.50%
4.00%
116,201
178,771
143,016
113,255
6.50%
8.00%
10.00%
5.00%
(Amounts
in
thousands)
The Company
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 Leverage ratio
The Bank
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 Leverage ratio
( 1 ) Based on prompt corrective action provisions
100
Table of Contents
(Amounts
in
thousands)
The Company
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 Leverage ratio
The Bank
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 Leverage ratio
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Actual
Minimum Basel III
Requirement
Minimum Basel III
Requirement - Fully
Phased-In
Well Capitalized
Requirement (1)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
241,671
256,671
274,953
256,671
13.88% $
14.74%
15.79%
11.07%
78,362
104,483
139,311
92,742
4.50% $
6.00%
8.00%
4.00%
121,897
148,018
182,846
92,742
7.00%
8.50%
10.50%
4.00%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
223,944
223,944
242,218
223,944
12.93% $
12.93%
13.98%
9.71%
77,956
103,941
138,588
92,274
4.50% $
6.00%
8.00%
4.00%
121,264
147,249
181,897
92,274
7.00% $
8.50%
10.50%
4.00%
112,603
138,588
173,235
115,343
6.50%
8.00%
10.00%
5.00%
( 1 ) Based on prompt corrective action provisions
Note 2 2 . Parent Company Financial Information
The following table s present condensed financial information for the parent company, First Community Bancshares, Inc., as of and for the dates indicated:
(Amounts
in
thousands)
Assets
Cash and due from banks
Securities available for sale
Loans to affiliates
Investment in subsidiaries
Other assets
Total assets
Liabilities
Subordinated debt
Other liabilities
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
CONDENSED BALANCE SHEETS
December 31,
2017
2016
$
$
$
$
19,216 $
-
184
322,595
9,010
351,005 $
- $
291
291
-
21,382
228,750
180,543
(79,121)
(840)
350,714
351,005 $
23,561
17
228
321,389
9,560
354,755
15,464
234
15,698
-
21,382
228,142
170,377
(78,833)
(2,011)
339,057
354,755
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Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
2016
2015
2017
(Amounts
in
thousands)
Cash dividends received from subsidiary bank
Other income (expense)
Other operating expense
Income before income taxes and equity in undistributed net income of subsidiaries
Income tax benefit
Income before equity in undistributed net income of subsidiaries
(Dividends in excess of) equity in undistributed net income of subsidiaries
Net income
Dividends on preferred stock
Net income available to common shareholders
$
$
22,720 $
352
2,044
21,028
(678)
21,706
(221)
21,485
-
21,485 $
32,000 $
(1,121)
2,097
28,782
(1,287)
30,069
(4,943)
25,126
-
25,126 $
(Amounts
in
thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2016
2015
2017
$
21,485 $
25,126 $
Equity in undistributed net income of subsidiaries
Gain on sale of securities
Net change in other operating activities
Net cash provided by operating activities
Investing activities
Proceeds from sale of securities available for sale
Proceeds from divestitures
Return of capital from subsidiaries
Dividends in excess of undistributed net income of subsidiaries
Net change in other investing activities
Net cash provided by investing activities
Financing activities
Repayments of other debt
Repayments of long-term debt
Redemption of preferred stock
Proceeds from issuance of common stock
Payments for repurchase of treasury stock
Payments of common dividends
Payments of preferred dividends
Net change in other financing activities
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
-
-
656
22,141
-
-
-
221
-
221
-
(15,464)
-
738
(1,263)
(11,563)
-
845
(26,707)
(4,345)
23,561
19,216 $
-
(65)
397
25,458
8,660
4,900
3,654
4,943
(98)
22,059
-
-
-
1,243
(23,762)
(10,396)
-
592
(32,323)
15,194
8,367
23,561 $
$
102
22,970
1,039
2,080
21,929
(616)
22,545
1,995
24,540
105
24,435
24,540
(1,995)
(38)
(626)
21,881
199
-
-
-
-
199
(2,000)
-
(2,367)
264
(21,525)
(9,994)
(219)
482
(35,359)
(13,279)
21,646
8,367
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 3 . Quarterly Financial Data (Unaudited)
The following table s present selected financial data 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
Noninterest income, excluding net loss on sale of securities
Net loss on sale of securities
Noninterest expense
Income before income taxes
Income tax expense
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividends 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 (recovery)
Noninterest income, excluding net gain (loss) on sale of securities
Net gain (loss) on sale of securities
Noninterest expense
Income before income taxes
Income tax expense
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
$
$
$
$
$
$
Year Ended December 31, 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
23,192 $
2,051
21,141
492
20,649
5,691
-
17,083
9,257
3,055
6,202 $
0.36 $
0.36
0.16
24,305 $
2,011
22,294
934
21,360
6,132
(657)
17,458
9,377
2,959
6,418 $
0.38 $
0.38
0.16
24,049 $
1,999
22,050
730
21,320
7,135
-
16,909
11,546
3,894
7,652 $
0.45 $
0.45
0.18
23,762
2,029
21,733
615
21,118
7,951
(4)
17,132
11,933
10,720
1,213
0.07
0.07
0.18
16,998,125
17,072,174
17,012,189
17,082,832
17,005,654
17,082,729
16,992,519
17,083,949
Year Ended December 31, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
23,550 $
2,439
21,111
1,187
19,924
7,902
1
18,814
9,013
2,929
6,084 $
0.34 $
0.34
0.14
24,137 $
2,446
21,691
722
20,969
7,109
(79)
18,722
9,277
3,022
6,255 $
0.36 $
0.36
0.14
23,621 $
2,500
21,121
(1,154)
22,275
5,870
25
18,557
9,613
3,230
6,383 $
0.37 $
0.37
0.16
23,416
2,459
20,957
500
20,457
5,850
388
16,653
10,042
3,638
6,404
0.38
0.38
0.16
17,859,197
17,892,531
17,414,320
17,462,845
17,031,074
17,083,526
16,981,010
17,043,869
103
Table of Contents
Board of Directors and the Stockholders
First Community Bancshares, Inc. and Subsidiary
- Report of Independent Registered Public Accounting Firm -
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and Subsidiary (the “Company) as of December 31, 2017 and
2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2017 and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their
operations and their cash flows for each of the years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in ac cordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control—Integrated
Framework
(2013)
issued by the Committee
of Sponsoring Organizations of the Treadway Commission, and our report dated March 5, 2018, expressed an unqualified opinion thereon.
Basis for Opinio n
These consolidated financial statements are the responsibility of the Co mpany’s management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error fraud.
Our audits included performing procedures to assess the risks of material misstat ement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company ’s auditor since 2006 .
/s/ Dixon Hughes Goodman LLP
Asheville , North Carolina
March 5, 2018
104
Table of Contents
- Management’s Assessment of Internal Control o ver 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 Interna
l
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, 2017.
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, 2017. 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, 2017, appears hereafter in Item 8 of this Annual Report on Form
10-K.
Dated this 5 th day of March, 2018.
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer
105
Table of Contents
- Report of Independent Registered Public Accounting Firm -
Board of Directors and the Stockholders
First Community Bancshares, Inc. and Subsidiary
Opinion
on
Internal
Control
Over
Financial
Reportin
g
We have audited First Community Bancshares, Inc. and Subsidiary (the “ Company”) internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal
Control-Integrated
Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our
opinion, First Community Bancshares, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of Decemb er
31, 2017 , 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 Account ing Oversight Board (United States), the consolidated financial statements
of First Community Bancshares, Inc. and Subsidiary as of December 31, 2017 and 2016, and our report, dated March 5, 2018 expressed an unqualified opinion on
those consolidated financial statements .
Basis
for
Opinion
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 audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB .
We conducted our audit in accordance with the standards of the PCAOB. 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, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition
and
Limitations
of
Internal
Control
Over
Financial
Reportin
g
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 finan cial 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 .
/s/ Dixon Hughes Goodman LLP
Asheville , North Carolina
March 5, 2018
106
Table of Contents
I tem 9 . Changes in and Disagreements W ith Accountants on Accounting and Financial Disclosure .
None.
I tem 9
A.
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, 2017, 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 about 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,
201 7, 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
For additional information about the Company’s internal controls, see “Management's Assessment of Internal Control over Financial Reporting,” and “Report of
Independent Registered Public Accounting Firm,” in Item 8 of this report.
Other Information .
I tem 9
B.
None .
I tem 10 .Directors, Executive Officers and Corporate Governance .
Board of Directors, First Community Bancshares, Inc.
PART III
W. C. Blankenship, Jr.
Retired Agent, State Farm Insurance
C. William Davis
Attorney at Law, Richardson & Davis , PLLC
Samuel L. Elmore
Retired Chief Credit Officer and Senior Vice President, First Community Bank;
Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and
Chief Executive Officer, Bank One; Past Vice President, Key Centurion
Bancshares; Past President and Chief Operations Officer, Beckley National
Bank; Director, Raleigh County Commission on Aging
107
Table of Contents
Richard S. Johnson
Chairman, President, and Chief Executive Officer, The Wilton Companies;
Director and Past Chairman, City of Richmond Economic Development
Authority; Trustee Emeritus, University of Richmond
M. Adam Sarver
Member/Co-Manager, Main Street Builders, LLC, Eastern Door & Glass, LLC,
and Clover Leaf Properties, LLC
I. Norris Kantor
Of Counsel, Katz, Kantor , Stonestreet & Buckner, PLLC; Board of Governors,
Bluefield State College
Gary R. Mills
President, First Community Bancshares, Inc.; Chief Executive Officer and
President, First Community Bank
Executive Officers, First Community Bancshares, Inc.
William P. Stafford, II
Chief Executive Officer
Gary R. Mills
President
Board o f Directors, First Community Bank
James H. Atkinson, Jr.
Retired Chief Executive Officer, Peoples Bank of Virginia
W. C. Blankenship, Jr.
See above
William P. Stafford, II
Chief Executive Officer, First Community Bancshares, Inc.; Attorney at Law,
Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC
David D. Brown
Chief Financial Officer and Secretary
E. Stephen Lilly
Chief Operating Officer and Executive Vice President
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
Robert L. Buzzo
Retired Vice President and Secretary, First Community Bancshares, Inc.;
Retired President Emeritus, First Community Bank
Richard S. Johnson
See above
Samuel D. Campbell
Attorney at Law
C. William Davis
See above
Samuel L. Elmore
See above
S. Michael Feola
Retired Senior Vice President – Regional President, First Community Bank
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
I. Norris Kantor
See above
Gary R. Mills
See above
M. Adam Sarver
See above
William P. Stafford, II
See above
Frank C. Tinder
President, Tinder Enterprises, Inc. and Tinco Leasing Corporation; Realtor,
Premier Realty
108
Table of Contents
Additional Information
The following information required in this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on April 24,
2018 (“2018 Annual Meeting”):
●
●
●
Information about directors and executive officers is included under the headings “Proposal 1: Election of Directors,” “Nominees for the Class of 2021,”
“Incumbent Directors,” “Non-Director Executive Officers,” and “Corporate Governance.”
Information about compliance with Section 16(a) of the Exchange Act is included under the heading “Section 16(a) Beneficial Ownership Reporting
Compliance.”
Information about the Audit Committee and the Audit Committee Financial Expert is included under the heading “Board Committees.”
Our Standards of Conduct apply to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Standards of Conduct is available on the Investor Relations section of our website at www.
firstcommunitybank.com. There have been no waivers of the Standards of Conduct for any officer.
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since the disclosure in our
Proxy Statement filed with the SEC on March 14, 2017.
I tem 11 .Executive Compensation .
The information required in this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting under the headings “Board Committees,”
“Compensation Discussion and Analysis,” “Director Compensation,” and “Pay Ratio Disclosure.”
I tem 1 2
.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
The following table provides information about compensation plans under which our equity securities are authorized for issuance as of December 31, 2017:
Plan category
Number of securities
to be issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders (2)
Total
80,903 $
119,801
200,704
18.89
20.98
386,621(3)
-
386,621
(1)
(2)
Includes the 2012 Omnibus Equity Compensation Plan and 2004 Omnibus Stock Option Plan
Includes the 2001 Directors' Option Plan, 1999 Stock Option Plan, and other plans related to past business combinations, which are expired or not available to
issue new options, warrants, or rights
(3) Shares available for future issuance are under the 2012 Omnibus Equity Compensation Plan.
Additional information required in this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting under the heading “Information on
Stock Ownership.”
I tem 1 3
.
Certain Relationships and Related Transactions, and Director Independence .
The i nformation required in this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting under the headings “Corporate
Governance” and “Related Person/Party Transactions.”
109
Table of Contents
I tem 1 4
.
Principal Accounting Fees and Services.
The i nformation required in this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting under the heading “Independent Registered
Public Accounting Firm.”
PART IV
I tem 15. Exhibits, Financial Statement Schedules.
(a) Documents Filed as Part of this Report
(1) Financial Statements
The financial statements required in this item are incorporated by reference to Item 8, “Financial Statements and Supplementary Data,” in Part II of this
report.
(2) Financial Statement Schedules
The schedules required in this item are omitted because they are not applicable or the required information is included in the consolidated financial
statements or related notes.
(3) Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
10.1.1**
10.1.2**
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9.1**
Exhibit
Articles of Incorporation of First Community Bancshares, Inc., as amended, incorporated by reference to Exhibit 3(i) of the Quarterly Report on
Form 10-Q for the period ended June 30, 2010, filed on August 16, 2010
Amended and Restated Bylaws of First Community Bancshares, Inc., incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K
dated February 23, 2016, filed on February 25, 2016
Specimen stock certificate of First Community Bancshares, Inc., incorporated by reference to Exhibit 4.1 of the Annual Report on Form 10-K for the
period ended December 31, 2002, filed on March 25, 2003
Indenture between First Community Bancshares, Inc. and Wilmington Trust Company, incorporated by reference to Exhibit 4.2 of the Quarterly
Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003
Amended and Restated Declaration of Trust of FCBI Capital Trust, incorporated by reference to Exhibit 4.3 of the Quarterly Report on Form 10-Q
for the period ended September 30, 2003, filed on November 10, 2003
Preferred Securities Guarantee Agreement, incorporated by reference to Exhibit 4.4 of the Quarterly Report on Form 10-Q for the period ended
September 30, 2003, filed on November 10, 2003
First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the
period ended December 31, 1999, filed on April 13, 2000
Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly
Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004
First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q
for the period ended June 30, 2002, filed on August 14, 2002
First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly
Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan, incorporated by reference to Annex B of the Definitive Proxy Statement on
Form DEF 14A dated April 27, 2004, filed on March 15, 2004
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the
Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004
First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy
Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012
First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K dated and filed May 28, 2013
First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5
of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form
8-K dated December 30, 2008, filed on January 5, 2009; Amendment #1, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-
K dated December 16, 2010, filed on December 17, 2010; Amendment #2, incorporated by reference to Exhibit 10.1 of the Current Report on Form
8-K dated February 21, 2013, filed on February 25, 2013; Amendment #3, incorporated by reference to Exhibit 10.1 of the Current Report on Form
8-K dated May 24, 2016, filed on May 27, 2016; and Amendment #4, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K
dated and filed on February 28, 2017
110
Table of Contents
10.9.2**
10.9.3**
10.9.4**
10.9.5**
10.10**
10.11.1**
10.11.2**
10.12.1**
10.12.2**
10.13**
10.14**
10.15**
10.16**
10.17**
11
12*
21*
23*
31.1*
31.2*
32*
101***
Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the
Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010
Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013
Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K dated and filed on February 28, 2017
Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to
Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006
First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference
to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference
to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan,
incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2
of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by
reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current
Report on Form 8-K dated and filed on April 16, 2015
Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly, incorporated by reference to Exhibit 10.5 of the Current
Report on Form 8-K dated and filed on April 16, 2015
Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current
Report on Form 8-K dated and filed on April 16, 2015
Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K dated and filed on April 16, 2015
Employment Agreement between First Community Bank and Mark R. Evans, incorporated by reference to Exhibit 2.1 of the Current Report on Form
8-K dated April 2, 2009, filed on April 3, 2009
Statement Regarding Computation of Earnings per Share, incorporated by reference to Note 18 of the Notes to Condensed Consolidated Financial
Statements in Part II, Item 8 of this report
Statement Regarding Computation of Ratios
Subsidiaries of the Registrant
Consent of Independent Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer 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, 2017 and 2016; (ii) Consolidated
Statements of Income for the years ended December 31, 2017, 2016, and 2015; (iii) Consolidated Statements of Comprehensive Income for the years
ended December 31, 2017, 2016, and 2015; (iv) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017, 2016, and
2015; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015; and (vi) Notes to Consolidated Financial
Statements
*
**
***
Filed herewith
Indicates a management contract or compensation plan or agreement
Submitted electronically herewith
111
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 5 th day of March, 2018.
First Community Bancshares, Inc.
(Registrant)
By:
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
(Principal Executive Officer)
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.
Signature
Title
/s/ William P. Stafford, II
William P. Stafford, II
/s/ David D. Brown
David D. Brown
/s/ W. C. Blankenship, Jr.
W. C. Blankenship, Jr.
/s/ Samuel L. Elmore
Samuel L. Elmore
/s/ Richard S. Johnson
Richard S. Johnson
/s/ Gary R. Mills
Gary R. Mills
/s/ M. Adam Sarver
M. Adam Sarver
Chairman and Chief Executive Officer
Chief Financial Officer
Director
Director
Director
President and Director
Director
112
Date
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
STATEMENT REGARDING COMPUTATION OF RATIOS
Exhibit 12
Cash Dividends Per Common Share
= Dividends Declared to Common Shareholders/Average Common Shares Outstanding
Book Value Per Common Share
= Total Shareholders ’ Equity/As-Converted Common Shares Outstanding
Return on Average Assets
= Net Income/Average Assets
Return on Average Common Equity
= Net Income/(Average Shareholders ’ Equity – Preferred Liquidation Preference)
Average Equity to Average Assets
= Average Shareholders ’ Equity/Average Assets
Net Interest Margin, GAAP
= Net Interest Income/Average Earning Assets
Net Interest Margin, FTE
= Tax Equivalent Net Interest Income/Average Earning Assets
Efficie ncy Ratio, GAAP
= Noninterest Expense/(Net Interest Income + Noninterest Income)
Efficiency Ratio, Non-GAAP
= Adjusted Noninterest Expense/(Tax Equivalent Net Interest Income + Adjusted Noninterest Income)
Dividend Payout
Effective Tax Rate
= Dividends Declared to Common Shareholders/Net Income Available to Common Shareholders
= Income Tax Expense/Income Before Income Taxes
Average Loan to Deposit Ratio
= Average Loans/(Average Interest-Bearing Deposits + Average Noninterest-Bearing Demand Deposits)
Nonperforming Assets to Total Assets
= (Nonaccrual Loans + Loans Past Due 90 Days or More + Unseasoned TDRs + OREO)/Total Assets
Nonperforming Loans to Total Loans
= (Nonaccrual Loans + Loans Past Due 90 Days or More + Unseasoned TDRs + OREO)/Loans Held
for Investment, Net of Unearned Income
Allowance for Loan Losses to Nonperforming
Loans
= Allowance for Loan Losses/(Nonac crual Loans + Loans Past Due 90 Days or More + Unseasoned
TDRs + OREO)
Allowance for Loan Losses to Total Loans
= Allowance for Loan Losses/Loans Held for Investment, Net of Unearned Income
Net Charge-offs to Average Total Loans
= (Charge-offs - Recoveries)/Average Loans
Common Equity Tier 1 Ratio
= (Shareholders ’ Equity - Intangible Assets - Net Unrealized Gains (Losses) on Securities Available for
Sale – Amounts Recorded in AOCI Attributed to Defined Benefit Plans)/Risk-Weighted Assets
Tier 1 Risk-Based Capital Ratio
= (Common Equity Tier 1 Capital + Additional Tier 1 Capital)/ Risk-Weighted Assets
Total Risk-Based Capital Ratio
= Tier 1 Capital + Allowance for Loan
Losses/ Risk-Weighted Assets
Tier 1 Leverage Ratio
= Tier 1 Capital/Average Assets
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
Title
First Community Bank
First Community Insurance Services, Inc.
First Community Wealth Management, Inc.
State of Incorporation
Virginia
Virginia
West Virginia
- Consent of Independent Registered Public Accounting Firm -
Exhibit 23
Board of Directors and the Stockholders
First Community Bancshares, Inc. and Subsidiary
We consent to the incorporation by reference in the registration statements pertaining to the 2012 Omnibus Equity Compensation Plan (Form S-8, No. 333-
183057); the 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 5, 2018, 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 2017 Annual Report on Form 10-K.
/s/ Dixon Hughes Goodman LLP
Asheville, North Carolina
March 5, 2018
Exhibit 31.1
I, William P. Stafford, II, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 5, 2018
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
Exhibit 31.2
I, David D. Brown, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 5, 2018
/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, 2017 (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 5, 2018
By:
/s/ William P. Stafford, II
By: /s/ David D. Brown
William P. Stafford, II
Chief Executive Officer
David D. Brown
Chief Financial Officer