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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission file number 000-19297
FIRST COMMUNITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia
(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
Trading Symbols
FCBC
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
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 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 such files).
☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
☐ Yes ☑ No
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☑
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check 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 registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of June 30, 2019, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $379.41 million.
☐ Yes ☑ No
As of February 26, 2020, there were 17,694,191 shares outstanding of the registrant’s Common Stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 28, 2020, are incorporated by reference in Part III of this Form 10-K.
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
2019 FORM 10-K
INDEX
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 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
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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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements in filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K and the accompanying Exhibits,
filings incorporated by reference, reports to 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.
The 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 Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of
Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of
Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The reincorporation was
completed on October 2, 2018. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking
products and services to individual and commercial customers 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 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 Bankshares, Inc. and its subsidiaries as a consolidated entity.
We focus on building financial partnerships and creating enduring and mutually beneficial 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; and
investment management services.
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, 2019, we had 527 full-time equivalent employees. In addition, the December 31, 2019, closing of the Highlands Bankshares, Inc. acquisition
added 135 employees. Our employees are not represented by collective bargaining agreements and we consider employee relations to be excellent.
Market Area
As of December 31, 2019, we operated 58 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment,
Community Banking. 14 of those locations were Highlands branches. 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; retail trade;
construction; manufacturing; tourism; coal mining and gas extraction; and transportation.
Competition
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 Bankshares, 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 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.
As a member bank, the Bank is required to hold stock in the FRB of Richmond in an amount equal to 6% of its 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.
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.
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In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) that, among other things, eliminated the standalone prior
approval requirement in the Basel III Capital Rules for any repurchase of common stock. 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. Any redemption or repurchase
of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
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 are based on the
December 2010 international capital standards of the Basel Committee on Banking Supervision (“Basel Committee”), known as Basel III.
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 was phased in over a four-year period (increased an additional 0.625% each year until it reached 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.
After fully phased in on January 1, 2019, Basel III Capital Rules required 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
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.
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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.
In August 2018, the Federal Reserve issued an interim final rule, which expanded the applicability of the Small Bank Holding Company Policy Statement through
an increase in the size limitation for qualifying bank holding companies from $1 billion to $3 billion in total consolidated assets. As a result, the Company qualifies
under the Small Bank Holding Company Policy Statement for exemption from the Federal Reserve’s consolidated risk-based capital requirements at the holding
company level. 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, as of December 31, 2019.
Beginning in the first quarter of 2020, a qualifying community banking organization may elect to use the community bank leverage ratio (“CBLR”) framework to
eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding
company that has less than $10 billion in average total consolidated assets; has off-balance sheet exposures of 25% or less of total consolidated assets; has trading
assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advance approaches banking organization. Qualifying community banking
organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and
leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the FDICIA. A qualifying
community banking organization may opt into and out of the CBLR framework by completing the associated reporting requirements on its call report.
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.
The Bank was classified as well-capitalized under prompt corrective action regulations as of December 31, 2019. 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.
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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 risks 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 the 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.
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
The 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.
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Deposit Insurance and Assessments
Substantially all of the 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. 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 were $318 thousand in 2019, $840 thousand in 2018, and $797
thousand in 2017. The decrease in FDIC assessments in 2019 were primarily the result of the receipt of Small Bank Assessment Credits from the FDIC. On
September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio exceeded 1.35 percent, two deposit insurance
assessment changes occurred under the FDIC regulations. Surcharges on large banks, $10 billion or more in consolidated assets, ended; and small banks, less than
$10 billion in consolidated assets, were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ration from
1.15 percent to 1.35 percent. The credit is applied when the reserve ratio is at least 1.38 percent.
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, were $6 thousand in 2019, $66 thousand in 2018,
and $113 thousand in 2017. The final collection of the FICO assessment was on the March, 29, 2019 FDIC quarterly assessment.
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. The Volcker Rule, which became effective in July
2015 and the implementing regulations of which were amended in 2019 and are subject to further amendment expected in 2020, does not significantly impact the
operations of the Company and its subsidiaries, as we do not have any engagement in the businesses prohibited by the Volcker Rule.
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 guidance 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.
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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 Consumer Financial Protection Bureau (“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 cyberattack 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 cyberattack. If the Bank fails to observe the regulatory guidance, the Bank could be subject to various regulatory
sanctions, including financial penalties.
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 (“SOX 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.
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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 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.
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, energy 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.
Additionally, the emergence of widespread health emergencies or pandemics, such as the potential spread of the coronavirus ("Covid-19"), could lead to regional
quarantines, business shutdowns, labor shortages, disruptions to supply chains, and overall economic instability. Events such as these may become more common
in the future and could cause significant damage such as disrupt power and communication services, impact the stability of our facilities and result in additional
expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing the repayment of our loans, which could result in the loss
of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our
business, operations and financial condition.
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.
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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, 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.
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.
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Uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR”) –
benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans), announced that it intends to
stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the
continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue
to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.
At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such
alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in
determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may
adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments
and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan
agreements with our borrowers, we may incur significant expenses in effecting he transition, and may be subject to disputes or litigation with customers over the
appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results of operations.
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
Policies” 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.
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 Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt
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.
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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, 2019, commercial business and real estate loans totaled $1.19 billion, or
56.28%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $6.05 million and largest outstanding commercial
real estate loan was $11.13 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, 2019, commercial construction loans totaled $49.00 million, or 2.30% of our total loan portfolio. As of the
same date, our largest outstanding commercial construction loan was $2.39 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:
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potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
difficulty, expense, and delays of integrating the operations and personnel of the target company;
potential disruption to our business;
potential diversion of management’s time and attention;
loss of key employees and customers of the target company;
difficulty in estimating the value of the target company;
potential changes in banking or tax laws or regulations that may affect the target company;
unexpected costs and delays;
the target company’s performance does not meet our growth and profitability expectations;
limited experience in new markets or product areas;
increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and
potential short-term decreases in profitability.
We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and
financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions
involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over
the acquired company’s book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to
realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of
operations may be adversely affected.
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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 frequently if events or circumstances indicate there may be impairment, using either a quantitative or
qualitative assessment. If we determine that the carrying amount of a reporting unit is greater than its fair value, a goodwill impairment charge is recognized for the
difference, but limited to the amount of goodwill allocated to that reporting unit. Unfavorable or uncertain economic and market conditions may trigger additional
impairment charges that may cause an adverse effect on our earnings and financial position. For additional information, see “Goodwill and Other Intangible
Assets” in the “Critical Accounting Policies” 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 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.
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 large 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.
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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, cyberattacks, 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 cyberattacks 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 cybercrime 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.
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 cyberattacks 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 cyberattacks, 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.
16
Table of Contents
We may be subject to claims and litigation pertaining to intellectual property.
Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services
necessary to support the Company’s day-to-day operations. Technology companies often enter into litigation based on allegations of patent infringement or other
violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of
the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such
claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions often seek
injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company
may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the Company’s operations, and distracting to
management. If the Company is found to 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 our common stock 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:
●
●
●
●
●
●
●
●
●
●
actual or expected variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of comparable companies, as deemed by investors;
news reports relating to trends, concerns, and other issues in the financial services industry;
perceptions in the marketplace about our Company or competitors;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or
competitors;
failure to integrate acquisitions or realize expected benefits from acquisitions;
changes in government regulations; and
geopolitical conditions, such as acts or threats of terrorism or military action.
General market fluctuations; industry factors; political conditions; and general economic conditions and events, such as economic slowdowns, recessions, interest
rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger financial services
companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing
buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market
conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock or the expectation of these
sales could cause our stock price to fall.
17
Table of Contents
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.
Item 2.
Properties.
We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2019, the Bank provided financial services through
a network of 58 branch locations in West Virginia (18 branches), Virginia (26 branches), North Carolina (7 branches), and Tennessee (7 branches). We own 57 of
those branches and lease the remaining branch. Our wealth management office is leased. As of December 31, 2019, 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.
Item 3.
Legal Proceedings.
We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome
of each of these matters with certainty, we are of the belief that the resolution of these actions should not have a material adverse effect on our financial position,
results of operations, or cash flows.
Item 4. Mine Safety Disclosures.
None.
18
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of February 26, 2020, there were 2,744 record holders and
17,694,191 outstanding shares of our common stock.
Purchases of Equity Securities
We repurchased 487,400 shares of our common stock in 2019, 1,060,312 shares of our common stock in 2018, and 50,118 shares in 2017.
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, 2019
November 1-30, 2019
December 1-31, 2019
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)
- $
-
-
- $
-
-
-
-
-
-
-
-
731,027
731,027
731,027
(1)
On June 27, 2018, our Board of Directors increased the number of shares authorized under the stock repurchase plan by 1,600,000 shares. Our stock
repurchase plan, as amended, authorizes the purchase of up to 6,600,000 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.
19
Table of Contents
Stock Performance Graph
The following graph, compiled by S&P Global Market Intelligence (“S&P Global”), compares the cumulative total shareholder return on our common stock for the
five years ended December 31, 2019, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and S&P Global’s Asset Size &
Regional Peer Group. The Asset Size & Regional Peer Group consists of 42 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, 2014, and that all dividends are reinvested.
2014
2015
Year Ended December 31,
2017
2016
2018
2019
First Community Bankshares, Inc.
S&P 500 Index
NASDAQ Composite Index
S&P Global Asset & Regional Peer Group(1)
100.00
100.00
100.00
100.00
116.65
101.38
106.96
110.04
194.23
113.51
116.45
150.73
189.71
138.29
150.96
172.35
216.59
132.23
146.67
161.05
219.68
173.86
200.49
190.50
(1) Includes the following institutions: American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; BankFirst Capital Corporation; Burke & Herbert
Bank & Trust Company; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carolina Financial Corporation; Carter
Bank & Trust; Citizens Holding Company; City Holding Company; CNB Corporation; Colony Bankcorp, Inc.; Community Bankers Trust Corporation; FineMark
Holdings, Inc.; First Bancorp, Inc.; First Bancshares, Inc.; First Citizens Bancshares, Inc.; First Community Bankshares, Inc.; First Community Corporation; First
Farmers and Merchants Corporation; FVCBankcorp, Inc.; Heritage Southeast Bancorporation, Inc.; HomeTrust Bancshares, Inc.; Live Oak Bancshares, Inc.;
MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; MVB Financial Corp.; National Bankshares, Inc.; Old Point Financial Corporation; Peoples Bancorp of
North Carolina, Inc.; Premier Financial Bancorp, Inc.; Reliant Bancorp, Inc.; River Financial Corporation; Select 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.; Three
Shores Bancorporation, Inc.
20
Table of Contents
Item 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,
2019. This information should be read in conjunction with Item 7, “Management 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 debt securities
Loans
Allowance for loan losses
Total assets
Average assets
Deposits
Borrowings
Total liabilities
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
Special cash dividend per common share
Book value per common share at year-end
$
$
$
$
$
2019
169,574
2,114,460
18,425
2,798,847
2,217,241
2,329,912
1,641
2,370,028
428,819
336,138
94,968
5,515
89,453
3,571
33,677
69,763
10,994
38,802
-
38,802
Year Ended December 31,
2017
2018
2016
$
$
178,129
1,775,084
18,267
2,244,374
2,330,611
1,855,750
29,370
1,911,517
332,857
341,519
98,294
7,449
90,845
2,393
26,443
69,773
8,782
36,340
-
36,340
$
$
190,674
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
24,568
66,902
20,628
21,485
-
21,485
$
$
212,639
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
25,534
71,214
12,819
25,126
-
25,126
$
2.47
2.46
0.96
-
23.33
$
2.19
2.18
0.78
0.48
20.79
$
1.26
1.26
0.68
-
20.63
$
1.45
1.45
0.60
-
19.95
2015
438,642
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
27,981
74,622
11,381
24,540
105
24,435
1.32
1.31
0.54
-
18.95
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
15,690,812
15,756,093
16,587,504
16,666,385
17,002,116
17,077,842
17,319,689
17,365,524
18,531,039
18,727,464
Selected Ratios
Return on average assets
Return on average common equity
Average equity to average assets
Dividend payout
Common equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
1.75%
11.54%
15.16%
38.82%
14.31%
14.31%
15.21%
14.02%
21
1.56%
10.64%
14.65%
57.51%
13.72%
13.72%
14.79%
10.95%
0.91%
6.14%
14.75%
53.81%
13.98%
13.98%
15.06%
11.06%
1.02%
7.42%
13.78%
41.36%
13.88%
14.74%
15.79%
11.07%
0.97%
7.08%
13.81%
40.95%
14.54%
14.73%
15.95%
10.62%
Table of Contents
Item 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 Bankshares, Inc. and its subsidiaries as a consolidated entity.
Executive Overview
First Community Bankshares, 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, 2019, the Bank
operated 58 branches in Virginia, West Virginia, North Carolina and 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, 2019, the Trust
Division and FCWM managed and administered $1.12 billion in combined assets under various fee-based arrangements as fiduciary or agent.
Our acquisition and divestiture activity during the last three years includes the December 31, 2019, close of the acquisition of Highlands Bankshares, Inc.
(“Highlands”), headquartered in Abingdon, Virginia with total assets of $563 million. The completion of the transaction resulted in total consolidated assets
increasing to $2.80 billion. Activity in prior years include the completion of our Agreement and Plan of Reincorporation and Merger changing our corporate
domicile from Nevada to Virginia on October 2, 2018, as well as the sale of our remaining insurance agency assets to Bankers Insurance, LLC on October 1, 2018.
For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.
Critical Accounting Policies
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 the allowance for loan losses, and goodwill and other intangible assets, and business combinations as the accounting areas that require the
most subjective or complex judgments or are the most susceptible to change.
22
Table of Contents
Allowance for Loan Losses
We review our 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, 2019. 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.
Goodwill and Other Intangible Assets
We test goodwill for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a qualitative or
quantitative 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,
which is consistent with our sole operating segment, Community Banking. If we elect to perform a qualitative assessment, we evaluate factors such as
macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in
assessing the fair value of our reporting unit. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a
quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying
amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our
reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference, but limited to the amount of goodwill
allocated to the reporting unit. Other identifiable intangible assets are evaluated for impairment if events or changes in circumstances indicate a possible
impairment. For additional information, see Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.
23
Table of Contents
Business Combinations
We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codifications (ASC) 805, Business
Combinations (ASC 805). We recognize the full fair value of the assets acquired and liabilities assumed and immediately expense transaction costs. There is no
separate recognition of the acquired ALLL on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the of the net
tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed,
goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a
gain (bargain purchase gain) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to
closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of
acquisition.
Non-GAAP Financial Measures
In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial
and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in
this report include certain financial measures presented on a fully taxable equivalent (“FTE”) basis. While we believe certain non-GAAP financial measures
enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in
accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are
presented below.
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. FTE basis adjusts for the
tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21% for periods after January 1, 2018, and 35%
for periods prior to January 1, 2018. 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
Net interest margin, GAAP
FTE adjustment(1)
Net interest margin, FTE
(1)
FTE basis of 21% for 2019 and 2018; and 35% for 2017
24
2019
Year Ended December 31,
2018
2017
$
$
89,453
849
90,302
$
$
4.54%
0.05%
4.59%
90,845
899
91,744
$
$
4.37%
0.04%
4.41%
87,218
1,914
89,132
4.14%
0.09%
4.23%
Table of Contents
Performance Overview
Highlights of our results of operations in 2019, and financial condition as of December 31, 2019, include the following:
● At the close of business on December 31, 2019, the Company closed the acquisition of Highlands Bankshares, Inc., headquartered in Abingdon, Virginia,
with total assets of $563 million. The completion of the transaction increased total consolidated assets to $2.80 billion.
●
For the full year, the Company earned $38.80 million, or $2.46 per diluted share, an increase of $2.46 million, or 6.77% over 2018.
● Compared to last year, return on average assets increased 0.19% to 1.75% and return on average equity increased 0.90% to 11.54%.
● Net interest margin increased 18 basis points to 4.59% compared to the year 2018.
●
●
● Book value per common share increased $2.54 to $23.33 compared to December 31, 2018.
The Company repurchased 487,400 common shares for approximately $16.36 million.
●
The Company received $7.00 million in litigation settlements for the year.
The Company incurred $2.12 million in pre-tax merger expenses related to the Highlands acquisition for the year.
Results of Operations
Net Income
The following table presents the changes in net income and related information for the periods indicated:
(Amounts in thousands, except per share
data)
Net income
Net income available to common
shareholders
Year Ended December 31,
2019 Compared to 2018
Increase
%
2018 Compared to 2017
Increase
%
2019
2018
2017
(Decrease)
Change
(Decrease)
Change
$
38,802
$
36,340
$
21,485
$
2,462
6.77% $
14,855
69.14%
38,802
36,340
21,485
2,462
6.77%
14,855
69.14%
Basic earnings per common share
Diluted earnings per common share
2.47
2.46
2.19
2.18
1.26
1.26
0.28
0.28
Return on average assets
Return on average common equity
1.75%
11.54%
1.56%
10.64%
0.91%
6.14%
0.19%
0.90%
12.79%
12.84%
12.18%
8.46%
0.93
0.92
0.65%
4.50%
73.81%
73.02%
71.43%
73.29%
2019 Compared to 201 8. Pre-tax income increased $4.67 million, or 10.36%, due to an increase in noninterest income of $7.23 million partially offset by a
decrease in net interest income of $1.39 million and an increase in the provision for loan losses of $1.18 million. Income tax expense increased $2.21 million due
to an increase in the effective rate from 19.46% in 2018 to 22.08% in 2019.
2018 Compared to 2017. Net income increased in 2018 due to a decrease in income tax expense, driven by a lower federal statutory rate and the deferred tax asset
revaluation charge taken in 2017, in accordance with the Tax Reform Act. Pre-tax income increased $3.01 million, or 7.15%, due to increases in net interest and
noninterest income and a decrease in the provision for loan losses. These changes were offset by an increase in noninterest 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” above. The following table presents the consolidated average balance sheets and net interest analysis on a FTE
basis for the dates indicated:
2019
Year Ended December 31,
2018
2017
Average
Balance Interest(1)
Average
Yield/
Rate(1)
Average
Balance Interest(1)
Average
Yield/
Rate(1)
Average
Balance Interest(1)
Average
Yield/
Rate(1)
88,990
4,334
45
2,447
95,816
$ 1,722,419 $
126,732
3,045
116,119
1,968,315 $
248,926
$ 2,217,241
5.17% $ 1,795,391 $
176,766
3.42%
25,081
1.48%
2.10%
81,520
4.87% 2,078,758 $
251,853
$ 2,330,611
91,819
5,419
418
1,537
99,193
5.11% $ 1,837,092 $
164,489
3.07%
32,954
1.67%
1.89%
73,405
4.77% 2,107,940 $
262,381
$ 2,370,321
90,032
5,695
487
1,008
97,222
4.90%
3.46%
1.48%
1.37%
4.61%
(Amounts in thousands)
Assets
Earning assets
Loans(2)(3)
Securities available for sale
Securities held to maturity
Interest-bearing deposits
Total earning assets
Other assets
Total assets
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Borrowings
$ 453,824 $
504,081
418,450
1,376,355
281
823
4,288
5,392
0.06% $ 466,403 $
508,353
0.16%
1.02%
471,335
0.39% 1,446,091
246
382
4,516
5,144
0.05% $ 401,092 $
520,430
0.08%
0.96%
510,411
0.36% 1,431,933
Federal funds purchased
Retail repurchase agreements
Wholesale repurchase agreements
FHLB advances and other
-
2,471
3,767
-
4
119
-
0.14%
3.17%
-
4,010
25,000
-
5
806
-
0.12%
3.22%
1
47,716
25,000
borrowings
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and equity
-
6,238
1,382,593
468,774
29,736
1,881,103
336,138
$ 2,217,241
-
123
5,515
36,849
-
1.96%
65,859
0.40% 1,511,950
448,903
28,239
1,989,092
341,519
$ 2,330,611
1,494
2,305
7,449
55,502
4.05%
3.50%
128,219
0.49% 1,560,152
438,513
21,955
2,020,620
349,701
$ 2,370,321
224
336
4,427
4,987
-
32
806
2,265
3,103
8,090
Net interest income, FTE(1)
Net interest rate spread, FTE(1)
Net interest margin, FTE(1)
$
90,301
$
91,744
$
89,132
4.47%
4.59%
4.28%
4.41%
(1) FTE basis based on the federal statutory rate of 21% for periods after January 1, 2018, and 35% for periods prior to January 1, 2018
(2) Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.
(3)
Interest on loans include non-cash purchase accounting accretion of $3.23 million in 2019, $6.39 million in 2018, and $5.42 million in 2017.
26
0.06%
0.06%
0.87%
0.35%
0.00%
0.07%
3.22%
4.08%
2.42%
0.52%
4.09%
4.23%
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, 2019 Compared to 2018
Dollar Increase (Decrease) due to
Year Ended
December 31, 2018 Compared to 2017
Dollar Increase (Decrease) due to
Volume
Rate
Rate/
Volume
Total
Volume
Rate
Rate/
Volume
Total
(Amounts in thousands)
Interest earned on(1):
Loans
Securities available for sale
Securities held to maturity
Interest-bearing deposits with other banks
$
Total interest-earning assets
(3,729) $
(1,536)
(368)
654
(4,979)
1,077 $
619
(48)
171
1,819
(177) $
(168)
43
85
(217)
(2,829) $
(1,085)
(373)
910
(3,377)
(2,043) $
425
(117)
111
(1,624)
3,858 $
(642)
63
382
3,661
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
(6)
(3)
(508)
-
(2)
(684)
(1,492)
(2,695)
47
407
283
-
1
(12)
(1,492)
(766)
(6)
37
(3)
-
-
9
1,490
1,527
35
441
(228)
-
(1)
(687)
(1,494)
(1,934)
39
(7)
(340)
-
(31)
-
(761)
(1,100)
(40)
104
459
-
24
-
(17)
530
(28) $
(59)
(15)
36
(66)
23
(51)
(30)
-
(20)
-
7
(71)
1,787
(276)
(69)
529
1,971
22
46
89
-
(27)
-
(771)
(641)
Change in net interest income(1)
$
(2,284) $
2,585 $
(1,744) $
(1,443) $
(524) $
3,131 $
5 $
2,612
(1)
FTE basis based on the federal statutory rate of 21% for periods after January 1, 2018, and 35% for periods prior to January 1, 2018
2019 Compared to 2018. Net interest income comprised 72.65% of total net interest and noninterest income in 2019 compared to 77.45% in 2018. Net interest
income decreased $1.39 million, or 1.53%, compared to a decrease of $1.44 million, or 1.57%, on a FTE basis. The FTE net interest margin increased 18 basis
points and the FTE net interest spread increased 19 basis points.
Average earning assets decreased $110.44 million, or 5.31%, primarily due to a decrease in average loans and debt securities offset by an increase in interest-
bearing deposits. The yield on earning assets increased 10 basis points as the yields on debt securities, and interest-bearing deposits increased. Average loans
decreased $72.97 million, or 4.06%, and the average loan to deposit ratio decreased to 93.35% from 94.74%. Non-cash accretion income related to PCI loans
decreased $3.16 million, or 49.46%, to $3.23 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting accretion income
on the FTE net interest margin was 17 basis points compared to 30 basis points in the prior year.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $129.36 million, or 8.56%, primarily due to a decline in
average interest-bearing deposits and average borrowings. The yield on interest-bearing liabilities decreased 9 basis points. Average borrowings decreased $59.62
million, or 90.53%, largely due to a $22.77 million, or 78.50%, decrease in average retail and wholesale repurchase agreements and a $36.85 million, or 100.00%,
decrease in average FHLB advances. Average interest-bearing deposits decreased $69.74 million, or 4.82%, which was driven by a $52.89 million, or 11.22%,
decrease in average time deposits, and a $12.58 million, or 2.70%, decrease in average interest-bearing demand deposits.
2018 Compared to 2017. Net interest income comprised 77.45% of total net interest and noninterest income in 2018 compared to 78.02% in 2017. Net interest
income increased $3.63 million, or 4.16%, compared to an increase of $3.54 million, or 3.97%, on a FTE basis. The FTE net interest margin increased 18 basis
points and the FTE net interest spread increased 19 basis points.
Average earning assets decreased $29.18 million, or 1.38%, primarily due to a decrease in average loans offset by an increase in available-for-sale securities and
interest-bearing deposits. The yield on earning assets increased 16 basis points as the yields on loans, debt securities, and interest-bearing deposits increased.
Average loans decreased $41.70 million, or 2.27%, and the average loan to deposit ratio decreased to 94.74% from 98.22%. Non-cash accretion income related to
PCI loans increased $974 thousand, or 17.98%, to $6.39 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting
accretion income on the FTE net interest margin was 30 basis points compared to 26 basis points in the prior year.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $48.20 million, or 3.09%, primarily due to a decline in
average borrowings. The yield on interest-bearing liabilities decreased 3 basis points. Average borrowings decreased $62.36 million, or 48.64%, largely due to a
$43.71 million, or 91.60%, decrease in average retail repurchase agreements and an $18.65 million, or 33.61%, decrease in average FHLB advances. Average
interest-bearing deposits increased $14.16 million, or 0.99%, which was driven by a $65.31 million, or 16.28%, increase in average interest-bearing demand
deposits offset by a $39.08 million, or 7.66%, decrease in average time deposits, and a $12.08 million, or 2.32%, decrease in average savings deposits, which
include money market and savings accounts.
27
Table of Contents
Provision for Loan Losses
2019 Compared to 2018. The provision charged to operations increased $1.18 million, or 49.23%, to $3.57 million, as we effectively covered net charge-offs for
the year.
2018 Compared to 2017. The provision charged to operations decreased $378 thousand, or 13.64%, to $2.39 million, which was largely attributed to a decrease in
the loan portfolio and continued good credit quality.
Noninterest Income
The following table presents the components of, and changes in, noninterest income for the periods indicated:
Year Ended December 31,
2018
2019
2017
2019 Compared to 2018
%
(Decrease) Change
Increase
2018 Compared to 2017
%
(Decrease) Change
Increase
(Amounts in thousands)
Wealth management
Service charges on deposits
Other service charges and fees
Insurance commissions
Net (loss) gain on sale of securities
Net FDIC indemnification asset amortization
Litigation income
Other operating income
Total noninterest income
$
$
3,423 $
14,594
8,281
-
(43)
(2,377)
6,995
2,804
33,677 $
3,262 $
14,733
7,733
966
(618)
(2,181)
-
2,548
26,443 $
3,150 $
13,803
6,944
1,347
(661)
(3,517)
-
3,502
24,568 $
161
(139)
548
(966)
575
(196)
6,995
256
7,234
4.94% $
-0.94%
7.09%
-100.00%
-93.04%
8.99%
-
10.05%
27.36% $
112
930
789
(381)
43
1,336
-
(954)
1,875
3.56%
6.74%
11.36%
-28.29%
-6.51%
-37.99%
-
-27.24%
7.63%
2019 Compared to 2018. Noninterest income comprised 27.35% of total net interest and noninterest income in 2019 compared to 22.55% in 2018. Noninterest
income increased $7.23 million, or 27.36%, primarily due to the receipt of $7.00 million received in litigation settlements. Other service charges and fees increased
$548 thousand, or 7.09%, primarily from an increase in net interchange income. Net securities losses decreased $575 thousand, or 93.04%. Other operating income
increases were offset by a $966 thousand decrease in insurance commissions due to the divestiture of the Company’s remaining insurance agency assets in 2018.
2018 Compared to 2017. Noninterest income comprised 22.55% of total net interest and noninterest income in 2018 compared to 21.98% in 2017. Noninterest
income increased $1.88 million, or 7.63%, primarily due to the decrease in net negative amortization related to the FDIC indemnification asset as loss share
coverage expired June 30, 2017, for commercial loans. Service charges on deposits and other service charges and fees increased $1.72 million, or 8.29%, primarily
from increases in checking account fees and net interchange income. Other operating income decreased primarily due to a $678 thousand decrease in death
proceeds from bank owned life insurance.
28
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,
2018
2017
2019
2019 Compared to 2018
%
(Decrease) Change
Increase
2018 Compared to 2017
%
(Decrease) Change
Increase
(Amounts in thousands)
Salaries and employee benefits
Occupancy expense
Furniture and equipment expense
Service fees
Advertising and public relations
Professional fees
Amortization of intangibles
FDIC premiums and assessments
Loss on extinguishment of debt
Merger, acquisition, and divestiture expense
Goodwill impairment
Other operating expense
Total noninterest expense
$
$
37,148 $
4,334
4,457
4,448
2,310
1,698
997
318
-
2,124
-
11,929
69,763 $
36,690 $
4,542
3,980
3,860
2,011
1,430
1,039
906
1,096
-
1,492
12,727
69,773 $
35,774 $
4,775
4,425
3,348
2,206
2,567
1,056
910
-
-
-
11,841
66,902 $
458
(208)
477
588
299
268
(42)
(588)
(1,096)
2,124
(1,492)
(798)
(10)
1.25% $
-4.58%
11.98%
15.23%
14.87%
18.74%
-4.04%
-64.90%
-
-
-
-6.27%
-0.01% $
916
(233)
(445)
512
(195)
(1,137)
(17)
(4)
1,096
-
1,492
886
2,871
2.56%
-4.88%
-10.06%
15.29%
-8.84%
-44.29%
-1.61%
-0.44%
-
-
-
7.48%
4.29%
2019 Compared to 201 8. Noninterest expense decreased $10 thousand, or 0.01%, which was largely due to one-time charges recognized in 2018 for goodwill
impairment related to the divestiture of the Company’s remaining insurance agency assets of $1.49 million and the loss on extinguishment of the Company’s
remaining FHLB debt of $1.10 million. In addition, other operating expense decreased $798 thousand due to property write-downs that occurred in 2018 and FDIC
premiums decreased $588 thousand due to small bank assessment credits received from the FDIC. These decreases were offset by an increase in merger expenses
of $2.12 million related to the Highlands acquisition as well as increases in service fees, furniture and equipment expense, and an increase in salaries and employee
benefits totaling $1.52 million.
2018 Compared to 2017. Noninterest expense increased $2.87 million, or 4.29%, which was largely due to a one-time goodwill impairment charge related to the
divestiture of the Company’s remaining insurance agency assets, the loss on extinguishment of the Company’s remaining FHLB debt, and an increase in salaries
and employee benefits. These increases were offset by a decrease in professional fees, which were largely due to a reduction in legal fees. The increase in other
operating expense included a $330 thousand increase in property write-downs and a $347 thousand increase in the net loss on sales and expenses related to other
real estate owned (“OREO”) to $1.55 million in 2018 from $1.20 million in 2017.
Income Tax Expense
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 Tax
Reform Act enacted on December 22, 2017, reduced our federal statutory income tax rate from 35% to 21% beginning January 1, 2018.
2019 Compared to 2018. Income tax expense increased $2.21 million, or 25.19%, and the effective tax rate increased to 22.08% in 2019 compared to 19.46% in
2018. The lower effective rate in 2018 was primarily due to the enactment of the Tax Reform Act and the completion of the deferred tax asset revaluation, which
resulted in a $1.67 million reduction in tax expense.
2018 Compared to 2017. Income tax expense decreased $11.85 million, or 57.43%, and the effective tax rate decreased to 19.46% in 2018 compared to 48.98% in
2017 primarily due to the decreased tax rate and deferred tax asset revaluation charge taken in 2017 as a result of the enactment of the Tax Reform Act.
29
Table of Contents
Financial Condition
Total assets as of December 31, 2019, increased $554.47 million, or 24.71%, to $2.80 billion from $2.24 billion as of December 31, 2018. The increase is primarily
attributable to the December 31, 2019 acquisition of Highlands with total assets of $563 million. Total liabilities as of December 31, 2019, increased $458.51
million, or 23.99%, to $2.37 billion from $1.91 billion as of December 31, 2018. The increase is primarily attributable to the December 31, 2019 acquisition of
Highlands as noted earlier.
Investment Securities
Our investment securities are used to generate interest income through the deployment 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 debt securities as of December 31, 2019, increased
$16.46 million, or 10.75%, compared to December 31, 2018, and includes $53.7 million in investments securities acquired in the Highlands transaction. The
market value of debt securities available for sale as a percentage of amortized cost was 100.65% as of December 31, 2019 compared to 99.76% as of December 31,
2018. There were no held-to-maturity debt securities as of December 31, 2019. The remaining debt securities in the held-to-maturity category in 2018 matured
during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table
presents the amortized cost and fair value of debt 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
Mortgage-backed Agency securities
Total securities available for sale
Fair value to amortized cost
Held to Maturity
U.S. Agency securities
Corporate securities
Total securities held to maturity
Fair value to amortized cost
2019
December 31,
2018
2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
$
$
5,038 $
-
85,992
-
77,448
168,478 $
1,108 $
19,970
96,886
-
35,513
153,477 $
5,034
-
86,878
-
77,662
169,574
$
$
100.65%
- $
-
- $
-
-
-
$
$
17,887 $
7,126
25,013 $
1,113
19,960
97,289
-
34,754
153,116
$
$
99.76%
17,867
7,123
24,990
$
$
99.91%
11,289 $
19,987
101,552
9,367
22,095
164,290 $
17,937 $
7,212
25,149 $
11,296
19,971
103,648
8,884
21,726
165,525
100.75%
17,888
7,196
25,084
99.74%
The following table provides information about our investment portfolio as of the dates indicated:
(Amounts in years)
Average life
Average duration
Available for
Sale
2019
Held to
Maturity
December 31,
Total
Available for
Sale
2018
Held to
Maturity
Total
6.41
5.30
N/A
N/A
6.41
5.30
6.61
5.37
0.11
0.11
5.70
4.64
There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’
equity as of December 31, 2019 or 2018.
30
Table of Contents
The following table presents the amortized cost, fair value, and weighted-average yield of available-for-sale debt securities by contractual maturity, as of December
31, 2019. 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
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
Fair value
Mortgage-backed securities
Total fair value
(1)
FTE basis of 21%
Available-for-Sale Securities
U.S. Agency
Securities
U.S. Treasury
Securities
Municipal
Securities
Total
Tax Equivalent
Purchase
Yield(1)
$
$
$
$
-
-
1,941
3,097
5,038
$
$
2.92%
10.34
-
-
1,937
3,097
5,034
$
$
-
3.80%
3.56%
3.12%
2.71%
- $
-
-
-
- $
-
-
- $
-
-
-
- $
$
-
28,739
48,941
8,312
85,992
$
3.62%
6.14
-
29,049
49,517
8,312
86,878
$
$
-
28,739
50,882
11,409
91,030
77,448
168,478
3.58%
6.37
-
29,049
51,454
11,409
91,912
77,662
169,574
Investment securities are reviewed quarterly for indications of other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings
associated with debt securities in 2019 or 2018. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt
Securities,” to the Consolidated Financial Statements in Item 8 of this report.
Loans Held for Investment
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, 2019, increased $339.38 million, or 19.12%, compared to December 31, 2018,
primarily due to a $345.33 million, or 19.66%, increase in non-covered loans, which was driven by the acquisition of Highlands. Covered loans decreased $5.95
million, or 31.64%, as the Waccamaw Bank (“Waccamaw”) covered loan portfolio continues to pay down. 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, 2019
or 2018. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.
31
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
2019
2018
December 31,
2017
2016
2016
$
$
$
48,659 $
142,962
121,840
163,181
727,261
11,756
23,155
1,238,814
110,078
620,697
17,241
748,016
110,027
4,742
114,769
2,101,599
12,861
2,114,460
18,425
63,508 $
104,863
107,012
140,097
613,877
8,545
18,905
1,056,807
93,466
510,963
18,171
622,600
71,552
5,310
76,862
1,756,269
18,815
1,775,084
18,267
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
72,000
7,338
79,338
1,623,506
83,035
1,706,541
20,233
2,096,035 $
1,756,817 $
1,797,908 $
1,835,000 $
1,686,308
263 $
- $
- $
- $
-
32
Table of Contents
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
2019
2018
December 31,
2017
2016
2015
$
$
28 $
-
-
199
3
-
-
230
9,853
2,778
-
12,631
-
12,861 $
35 $
-
-
238
6
-
-
279
15,284
3,252
-
18,536
-
18,815 $
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 $
6,303
1,170
640
2,674
14,065
34
643
25,529
48,565
8,595
262
57,422
84
83,035
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
2019
2018
December 31,
2017
2016
2015
3.61%
5.97%
6.09%
7.98%
34.95%
0.49%
1.08%
60.17%
5.32%
29.09%
1.04%
35.45%
4.08%
0.30%
4.38%
100.00%
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%
2.31%
6.80%
5.80%
7.76%
34.62%
0.56%
1.10%
58.95%
5.24%
29.52%
0.83%
35.59%
5.25%
0.21%
5.46%
100.00%
33
Table of Contents
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
2019
2018
December 31,
2017
2016
2015
0.22%
0.00%
0.00%
1.55%
0.02%
0.00%
0.00%
1.79%
76.61%
21.60%
0.00%
98.21%
0.19%
0.00%
0.00%
1.26%
0.03%
0.00%
0.00%
1.48%
81.23%
17.29%
0.00%
98.52%
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%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.14%
100.00%
0.10%
100.00%
34
Table of Contents
The following table presents the maturities and rate sensitivities of the non-covered loan portfolio as of December 31, 2019:
(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
$
$
$
$
10,791 $
37,115
9,422
8,817
57,600
2,159
3,056
128,960
7,359
11,872
1,122
20,353
14,903
1,562
16,465
165,778 $
11,576 $
70,052
31,751
35,408
216,262
7,756
8,732
381,537
10,482
1,096
805
12,383
26,292 $
35,795
80,667
118,956
453,399
1,841
11,367
728,317
92,237
607,729
15,314
715,280
48,659
142,962
121,840
163,181
727,261
11,756
23,155
1,238,814
110,078
620,697
17,241
748,016
74,178
1,236
75,414
469,334 $
20,946
1,944
22,890
1,466,487 $
110,027
4,742
114,769
2,101,599
99,178 $
54,582
153,760 $
437,569 $
43,783
481,352 $
611,166 $
855,321
1,466,487 $
1,147,913
953,686
2,101,599
(1)
Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and interest payments.
The following table presents the maturities and rate sensitivities of the covered loan portfolio as of December 31, 2019:
(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
Due in One
Year or Less
Due After One
Year Through
Five Years
Due After Five
Years
Total
- $
1
-
1
740
48
788
789 $
18 $
765
783 $
28 $
178
3
209
5,737
268
6,005
6,214 $
466 $
5,779
6,245 $
- $
20
-
20
3,376
2,462
5,838
5,858 $
2,551 $
3,282
5,833 $
28
199
3
230
9,853
2,778
12,631
12,861
3,035
9,826
12,861
$
$
$
$
35
Table of Contents
Risk Elements
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 $4.00 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.
36
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
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
$
$
$
$
$
$
$
2019
2018
December 31,
2017
2016
2015
16,113
144
720
16,977
3,969
20,946
244
244
-
244
16,357
144
720
17,221
3,969
21,190
$
$
$
$
$
$
19,583
58
161
19,802
3,806
23,608
322
322
32
354
19,905
58
161
20,124
3,838
23,962
$
$
$
$
$
$
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
$
$
$
$
$
$
$
5,855
6,575
$
6,266
6,427
$
7,614
7,734
$
12,838
12,952
1,068
277
0.81%
0.75%
108.53%
0.88%
0.81%
0.76%
106.99%
0.87%
1,175
264
1.13%
1.06%
92.25%
1.04%
1.13%
1.07%
90.77%
1.03%
1,217
222
1,414
424
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%
17,847
-
73
17,920
4,873
22,793
647
647
4,034
4,681
18,494
-
73
18,567
8,907
27,474
13,889
13,962
1,645
608
1.10%
0.96%
112.61%
1.24%
1.09%
1.12%
108.97%
1.19%
(1)
(2)
(3)
TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $95 thousand, $898 thousand, $169 thousand, $224
thousand, and $923 thousand for the five years ended December 31, 2019.
TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $2.25 million, $1.68 million, $1.76 million, $1.06 million,
and $416 thousand for the five years ended December 31, 2019.
Total accruing TDRs exclude nonaccrual TDRs of $2.34 million, $2.58 million, $1.93 million, $1.28 million, and $1.34 million for the five years ended
December 31, 2019.
37
Table of Contents
Non-covered nonperforming assets as of December 31, 2019, decreased $2.66 million, or 11.28%, from December 31, 2018, primarily due to a $3.47 million, or
17.72%, decrease in non-covered nonaccrual loans offset by a $559 thousand, or 347.20%, increase in non-covered, non-performing troubled debt restructurings.
Non-covered OREO increased $163 thousand, or 4.28%, of which $1.96 million was acquired in the Highlands acquisition. Excluding the Highlands transaction
OREO decreased $1.80 million. Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 30 properties with an
average holding period of 7 months as of December 31, 2019. The net loss on the sale of OREO was $1.25 million in 2019, $1.33 million in 2018, and $937
thousand in 2017. The following table presents the changes in OREO during the periods indicated:
(Amounts in thousands)
Beginning balance
Acquired
Additions
Disposals
Valuation adjustments
Ending balance
Non-covered
2019
Covered
Total
Non-covered
2018
Covered
Total
Year Ended December 31,
$
$
3,806 $
1,962
3,030
(3,837)
(992)
3,969 $
32 $
-
131
(152)
(11)
- $
3,838 $
1,962
3,161
(3,989)
(1,003)
3,969 $
2,409 $
-
5,686
(3,506)
(783)
3,806 $
105 $
-
-
(69)
(4)
32 $
2,514
-
5,686
(3,575)
(787)
3,838
As of December 31, 2019, non-covered nonaccrual loans were largely attributed to single family owner occupied (45.05%) and non-farm, non-residential (21.10%)
loans. As of December 31, 2019, approximately $921 thousand, or 5.72%, 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.
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. Total TDRs as of December 31, 2019,
decreased $91 thousand, or 1.01%, to $8.92 million from December 31, 2018. Nonperforming accruing TDRs as of December 31, 2019, increased $559 thousand,
or 347.20%, to $720 thousand from December 31, 2018. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 13.69% as of December 31,
2019, compared to 2.51% as of December 31, 2018. Specific reserves on TDRs totaled $353 thousand as of December 31, 2019, compared to $568 thousand as of
December 31, 2018. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or
amortization terms.
Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $35.62 million as of December 31, 2019, an increase of
$5.74 million, or 19.19%, compared to $29.89 million as of December 31, 2018. Delinquencies associated with the acquired Highlands loan portfolio accounted for
$8.73 million at December 31, 2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.69% as of December 31, 2019, which includes
past due loans (0.93%) and nonaccrual loans (0.76%), compared to 1.69% as of December 31, 2018.
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, 2019, 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, 2019; 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 Policies”
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, 2019, increased $158 thousand, or 0.86%, from December 31, 2018, due to an $807 thousand decrease in
specific reserves on impaired loans combined with a $965 thousand increase in general reserves. The non-PCI allowance as a percent of non-covered loans totaled
0.88% as of December 31, 2019, compared to 1.04% as of December 31, 2018. PCI loans were aggregated into fifteen loan pools as of December 31, 2019 and five
loan pools in 2018. The Highlands transaction added ten additional pools to the five existing pools from 2018. The existing pools from 2018 included: Waccamaw
commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial, and Peoples residential. The
Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and Home Equity Lines,
Commercial Land and Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner
Occupied, Commercial and Industrial, and Consumer. The cash flow analysis identified no impaired PCI loan pools as of December 31, 2019 or 2018. Net charge-
offs increased $11 thousand, or 0.32% in 2019 compared to 2018.
38
Table of Contents
The following table presents the changes in the allowance for loan losses, by loan class, during the periods indicated:
(Amounts in thousands)
Beginning balance
Provision for loan losses charged to operations, non-PCI
loans
(Recovery of) provision for loan losses charged to
operations, PCI loans
Recovery of 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
Total charge-offs
Recoveries
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other
Consumer loans
Total recoveries
Net charge-offs
Ending balance
2019
2018
Year Ended December 31,
2017
2016
2015
$
18,267
$
19,276
$
17,948
$
20,233
$
20,227
3,571
2,393
2,783
1,296
2,166
-
-
353
549
310
64
1,015
52
205
474
1,316
-
1,923
6,261
146
99
3
12
546
1
66
401
1,045
42
487
2,848
3,413
18,425
$
$
-
-
100
566
16
88
119
68
279
285
1,720
-
1,666
4,907
210
200
17
98
191
7
-
216
238
-
(12)
-
427
224
9
52
142
-
68
13
675
11
1,322
2,943
306
160
9
180
146
-
-
201
108
105
(41)
(1)
254
144
64
237
1,684
-
9
1,073
508
31
1,172
5,176
282
484
15
79
59
-
-
137
182
39
328
1,505
3,402
18,267
$
285
1,500
1,443
19,276
$
360
1,637
3,539
17,948
$
25
(29)
256
93
-
87
773
-
73
92
812
2
1,557
3,745
135
173
-
92
74
-
-
402
258
18
437
1,589
2,156
20,233
Net charge-offs to average non-covered loans
Net charge-offs to average total loans
0.20%
0.20%
0.19%
0.19%
0.08%
0.08%
0.21%
0.20%
0.14%
0.13%
39
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
2019
2018
December 31,
2017
2016
2015
$
245 $
699
969
1,323
6,653
145
201
673
5,528
124
417 $
663
1,192
1,442
6,530
85
170
748
5,853
131
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
$
1,865
18,425 $
1,036
18,267 $
794
19,276 $
759
17,936 $
690
20,179
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
Consumer real estate loans
Waccamaw residential
Peoples residential
Total PCI allowance
Deposits
2019
2018
December 31,
2017
2016
2015
$
$
- $
-
-
- $
- $
-
-
- $
- $
-
-
- $
- $
-
12
12 $
-
1
53
54
Total deposits as of December 31, 2019, increased $474.16 million, or 25.55%, compared to December 31, 2018. Time deposits, which consist of certificates of
deposit and individual retirement accounts, increased $69.96 million; savings deposits, which consist of money market accounts and savings accounts, increased
$190.13 million; interest-bearing demand deposits increased $45.75 million while noninterest-bearing demand deposits increased $168.32 million as of December
31, 2019, compared to December 31, 2018. The acquisition of Highlands added $501.74 million in deposits; $155.71 in non-interest bearing demand, $36.82
million in interest-bearing demand, $173.97 million in savings, and $135.24 million in time deposits. We had no material deposit concentrations to any single
customer or industry that represented 10% or more of outstanding deposits as of December 31, 2019 or 2018.
The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2019:
(Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Borrowings
$
$
39,735
29,339
44,369
90,243
203,686
Total borrowings as of December 31, 2019, decreased $27.73 million, or 94.41%, compared to December 31, 2018, primarily due to the maturity of the Company’s
remaining wholesale repurchase agreement of $25.00 million in the first quarter of 2019. Short-term borrowings, which consist of retail repurchase agreements,
decreased $2.77 million, or 63.36%, and the weighted average rate increased 2 basis points to 0.14% as of December 31, 2019, compared to December 31, 2018.
40
Table of Contents
The following table presents the balances and weighted average rates paid on short-term borrowings for the periods indicated:
2019
Amount
Rate
Year Ended December 31,
2018
Amount
Rate
2017
Amount
Rate
(Amounts in thousands)
Year-end balance
Average annual balance(1)
Maximum month-end balance(1)
$
1,601
2,471
28,508
0.16% $
0.14%
4,370
4,010
29,305
0.13% $
0.12%
5,086
47,717
90,968
0.11%
0.07%
(1) 2017 Includes federal funds purchased and short-term FHLB advances that were repaid prior to year end
Long-term borrowings consisted of a $40 thousand amortizing advance with the FHLB of Atlanta that was assumed in the Highlands transaction. That small
borrowing was repaid early in 2020. In the first quarter of 2019, the Company’s remaining wholesale repurchase agreement of $25.00 million with a weighted
average rate of 3.18% matured. During 2018, the prepayment of the FHLB advance resulted in a prepayment penalty of $1.10 million. The prepayment was funded
with cash and equivalents on hand, as well as proceeds from the sale of single issue trust preferred investment securities, and is anticipated to result in annualized
net pre-tax savings of approximately $800 thousand. On January 9, 2017, the Company redeemed all of its trust preferred securities resulting in a decrease in
subordinated debt of $15.46 million.
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, 2019, the Company’s cash reserves totaled $24.00
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, 2019. 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, 2019, our unencumbered cash totaled $217.01 million, unused borrowing
capacity from the FHLB totaled $261.50 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks
totaled $85.00 million, and unpledged available-for-sale securities totaled $141.70 million.
41
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 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
2019
Year Ended December 31,
2018
2017
$
$
56,655 $
171,377
(87,896)
140,136
76,873
217,009 $
49,499 $
49,398
(179,975)
(81,078)
157,951
76,873 $
36,370
67,796
(22,522)
81,644
76,307
157,951
2019 Compared to 201 8. Cash and cash equivalents increased $140.14 million compared to a decrease of $81.08 million in the prior year. The increase was
primarily due to a $121.98 million increase in net cash used in investing activities due to a net decrease in funds used to purchase investment securities and an
increase in loan proceeds received. Net cash provided by financing activities increased $92.08 million largely due to a reduction in the net decrease in deposits year
over year, and a net decrease in the repayment of borrowings. Net cash provided by operating activities increased $7.16 million primarily due to an increase in net
income and a decrease in accretion income on aquired loans.
2018 Compared to 2017. Cash and cash equivalents decreased $81.08 million compared to an increase of $81.64 million in the prior year. The decrease was
primarily due to a $157.45 million increase in net cash used in financing activities due to a net decrease in deposit accounts, the repayment of FHLB borrowings,
an increase in cash dividends, and an increase in the repurchase of treasury stock. Net cash provided by investing activities decreased $18.40 million largely due to
the purchase of available for sale securities. Net cash provided by operating activities increased $13.13 million primarily due to an increase in net income.
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, 2019, increased $95.96
million, or 28.83%, to $428.82 million from $332.86 million as of December 31, 2018. The change in stockholders’ equity was largely due to the acquisition of
Highlands which added a combined total of $86.63 million in common stock and additional paid-in capital. Under the terms of the agreement and plan of merger,
each share of Highlands’ common and preferred stock outstanding was converted into the right to receive 0.2703 shares of First Community common stock. The
Company earned $38.80 million, which was offset by repurchasing 487,400 shares of our common stock totaling $16.36 million and declaring dividends on our
common stock of $15.06 million. Our book value per common share increased $2.54 to $23.33 as of December 31, 2019, from $20.79 as of December 31, 2018.
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 was phased in
over a four-year period (increased an additional 0.625% each year until it reached 2.5% on January 1, 2019). Our current required capital ratios are as follows:
●
●
●
●
4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)
6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)
8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)
4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)
42
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
2019
December 31,
2018
2017
14.31%
14.31%
15.21%
14.01%
12.87%
12.87%
13.78%
12.61%
13.72%
13.72%
14.79%
10.95%
12.55%
12.55%
13.62%
9.98%
13.98%
13.98%
15.06%
11.06%
12.47%
12.47%
13.55%
9.84%
As of December 31, 2019, 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, 2019. 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 in the normal course of business 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, 2019:
(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
$
$
1,814,290 $
286,689
1,601
40
154
2,102,774 $
- $
172,996
-
-
285
173,281 $
- $
58,147
-
-
220
58,367 $
- $
6,992
-
-
479
7,471 $
1,814,290
524,824
1,601
40
1,138
2,341,893
(1)
(2)
(3)
Excludes interest
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, 2019)
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.
43
Table of Contents
The following table presents our off-balance sheet arrangements, by commitment expiration, as of December 31, 2019:
(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
$
$
98,254 $
2,430
87,656
188,340 $
54,975 $
60
77,466
132,501 $
11,698 $
-
-
11,698 $
63,789 $
-
-
63,789 $
228,716
2,490
165,122
396,328
(1)
(2)
Lines of credit with no stated maturity date are included in the less than one year expiration category.
Includes FHLB letters of credit
The reserve for the risk inherent in unfunded lending commitments totaled $66 thousand as of December 31, 2019 and 2018. 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 internal and third-party 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.
During 2019, the Federal Open Market Committee decreased the benchmark federal funds rate 75 basis points to a range of 150 to 175 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 200 basis points from current rates in our analysis.
Increase (Decrease) in Basis Points
(Dollars in thousands)
300
200
100
(100)
(200)
Year Ended December 31,
2019
2018
Change in
Net Interest
Income
Percent
Change
Change in
Net Interest
Income
Percent
Change
171
428
426
(4,631)
(8,571)
0.2% $
0.4%
0.4%
-4.3%
-8.0%
(1,215)
(545)
(135)
(3,322)
(3,322)
-1.3%
-0.6%
-0.1%
-3.7%
-3.7%
$
44
Table of Contents
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, 2019, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.
The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of December 31, 2019, we
maintained interest rate swap agreements with notional amounts totaling $17.43 million to modify our exposure to interest rate risk caused by changes in the
LIBOR curve in relation to certain designated fixed rate loans. We acquired 5 swap agreements in the Highlands transaction with a notional amount of $12.30
million. The fair value liability for the acquired swaps was $292 thousand. The total of the fair value of the swap agreements on the balance sheet, which are
accounted for as fair value hedges, was recorded as a derivative liability totaling $510 thousand as of December 31, 2019, and a derivative asset totaling $12
thousand as of December 31, 2018. 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 7 of this report.
45
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
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
46
Page
47
48
49
50
51
52
101
102
103
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
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
$
Debt securities available for sale
Debt securities held to maturity
Loans held for sale
Loans held for investment, net of unearned income (includes covered loans of $12,861 and $18,815, respectively)
Allowance for loan losses
Loans held for investment, net
FDIC indemnification asset
Premises and equipment, net
Other real estate owned (includes covered OREO of $0 and $32, respectively)
Interest receivable
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Securities sold under agreements to repurchase
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;
24,238,907 issued and 18,376,991 outstanding at December 31, 2019; 21,381,779 shares issued and 16,007,263
shares outstanding at December 31, 2018.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
47
$
$
$
December 31,
2019
2018
66,818 $
148,000
2,191
217,009
169,574
-
263
2,114,460
(18,425)
2,096,035
2,883
62,824
3,969
6,677
129,565
8,519
101,529
2,798,847 $
627,868 $
1,702,044
2,329,912
1,601
38,515
2,370,028
40,421
35,457
995
76,873
153,116
25,013
-
1,775,084
(18,267)
1,756,817
5,108
45,785
3,838
5,481
92,744
5,026
74,573
2,244,374
459,550
1,396,200
1,855,750
29,370
26,397
1,911,517
-
-
18,377
192,413
219,535
(1,506)
428,819
2,798,847 $
16,007
122,486
195,793
(1,429)
332,857
2,244,374
Table of Contents
FIRST COMMUNITY BANKSHARES, 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
Net loss on sale of securities
Net FDIC indemnification asset amortization
Litigation settlements
Other operating income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy expense
Furniture and equipment expense
Service fees
Advertising and public relations
Professional fees
Amortization of intangibles
FDIC premiums and assessments
Loss on extinguishment of debt
Goodwill impairment
Merger expense
Other operating expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share
Basic
Diluted
Cash dividends per common share
Special cash divided per common share
Weighted average shares outstanding
Basic
Diluted
See Notes to Consolidated Financial Statements.
48
2019
Year Ended December 31,
2018
2017
$
$
$
88,805 $
1,219
2,497
2,447
94,968
5,392
123
-
5,515
89,453
3,571
85,882
3,423
14,594
8,281
-
(43)
(2,377)
6,995
2,804
33,677
37,148
4,334
4,457
4,448
2,310
1,698
997
318
-
-
2,124
11,929
69,763
49,796
10,994
38,802 $
2.47 $
2.46
0.96
-
91,671 $
2,258
2,828
1,537
98,294
5,144
811
1,494
7,449
90,845
2,393
88,452
3,262
14,733
7,733
966
(618)
(2,181)
-
2,548
26,443
36,690
4,542
3,980
3,860
2,011
1,430
1,039
906
1,096
1,492
-
12,727
69,773
45,122
8,782
36,340 $
2.19 $
2.18
0.78
0.48
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
6,944
1,347
(661)
(3,517)
-
3,502
24,568
35,774
4,775
4,425
3,348
2,206
2,567
1,056
910
-
-
-
11,841
66,902
42,113
20,628
21,485
1.26
1.26
0.68
-
15,690,812
15,756,093
16,587,504
16,666,385
17,002,116
17,077,842
Table of Contents
FIRST COMMUNITY BANKSHARES, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
Other comprehensive income, before tax
Available-for-sale debt securities:
Change in net unrealized gains (losses) on securities without other-than-
temporary impairment
Reclassification adjustment for net loss (gain) recognized in net income
Net unrealized gains (losses) on available-for-sale debt securities
Employee benefit plans:
Net actuarial (loss) gain
Plan change
Reclassification adjustment for amortization of prior service cost and net
actuarial loss recognized in net income
Net unrealized (losses) gains on employee benefit plans
Other comprehensive (loss) income, before tax
Income tax expense (benefit)
Other comprehensive (loss) income, net of tax
Total comprehensive income
See Notes to Consolidated Financial Statements.
2019
Year Ended December 31,
2018
2017
$
38,802 $
36,340 $
21,485
1,414
43
1,457
(1,570)
(262)
278
(1,554)
(97)
20
(77)
38,725 $
(2,213)
618
(1,595)
565
-
285
850
(745)
156
(589)
35,751 $
1,445
661
2,106
48
(258)
259
49
2,155
(740)
1,415
22,900
$
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Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share and per share
data)
Balance January 1, 2017
Net income
Reclassification of certain tax effects
Other comprehensive income
Common dividends declared -- $0.68 per share
Equity-based compensation expense
Common stock options exercised -- 16,185 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
Balance January 1, 2018
Net income
Other comprehensive income
Common dividends declared -- $0.78 per share
Special common dividend declared -- $0.48 per
share
Equity-based compensation expense
Common stock options exercised -- 24,186 shares
Issuance of treasury stock to 401(k) plan -- 11,331
shares
Purchase of treasury shares -- 1,060,312 shares at
$32.45 per share
Reclassification of treasury stock
Balance December 31, 2018
Balance January 1, 2019
Net income
Other comprehensive loss
Common dividends declared -- $0.96 per share
Equity-based compensation expense
Common stock options exercised -- 8,459 shares
Issuance of stock to 401(k) plan -- 12,407 shares
Repurchase of common shares -- 487,400 shares at
$33.57 per share
Highlands Bankshares, Inc. acquisition
Balance December 31, 2019
See Notes to Consolidated Financial Statements.
$
$
$
$
$
$
Additional
Accumulated
Other
Preferred Common Paid-in Retained Treasury Comprehensive
Stock
Stock Capital
Earnings
Stock Income (Loss)
Total
- $
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
- $
21,382 $ 228,142 $ 170,377 $ (78,833) $
-
-
-
-
408
292
21,485
244
-
(11,563)
-
-
-
-
-
-
382
86
-
-
-
-
-
-
(2,011) $ 339,057
21,485
-
1,415
(11,563)
790
378
-
(244)
1,415
-
-
-
-
140
-
275
-
415
-
(1,263)
21,382 $ 228,750 $ 180,543 $ (79,121) $
-
-
21,382 $ 228,750 $ 180,543 $ (79,121) $
-
-
-
36,340
-
(12,966)
-
-
-
-
-
-
-
-
-
-
-
535
(84)
(8,124)
-
-
-
623
468
138
-
214
-
(1,263)
(840) $ 350,714
(840) $ 350,714
36,340
(589)
(12,966)
-
(589)
-
-
-
-
-
(8,124)
1,158
384
352
-
-
-
-
(106,853)
(5,375)
16,007 $ 122,486 $ 195,793 $
(34,412)
112,228
- $
-
-
(34,412)
-
(1,429) $ 332,857
16,007 $ 122,486 $ 195,793 $
38,802
-
(15,060)
-
-
-
-
-
-
1,437
128
399
-
-
-
44
8
12
-
(15,875)
(487)
2,793
-
83,838
18,377 $ 192,413 $ 219,535 $
50
- $
-
-
-
-
-
-
-
-
- $
(1,429) $ 332,857
38,802
(77)
(15,060)
1,481
136
411
-
(77)
-
-
-
-
-
-
(16,362)
86,631
(1,506) $ 428,819
Table of Contents
FIRST COMMUNITY BANKSHARES, 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
2019
Year Ended December 31,
2018
2017
$
38,802 $
36,340 $
Provision for loan losses
Depreciation and amortization of premises and equipment
Amortization of premiums on investments, net
Amortization of FDIC indemnification asset, net
Amortization of intangible assets
Goodwill impairment
Accretion on acquired loans
Equity-based compensation expense
Issuance of common stock to 401(k) plan
Gain on sale of premises and equipment, net
Provision expense and loss on sale of other real estate owned
Loss on sale of securities
Writedowns of property, plant & equipment
Loss on extinguishment of debt
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
Proceeds from repayments loans, net
Proceeds from bank owned life insurance
Payments for (redemption of) FHLB stock, net
Cash proceeds from mergers, acquisitions, and divestitures, net
(Payments to) proceeds from the FDIC
Proceeds from sale of premises and equipment
Payments to acquire premises and equipment
Proceeds from sale of other real estate owned
Net cash provided by investing activities
Financing activities
Increase in noninterest-bearing deposits, net
(Decrease) increase in interest-bearing deposits, net
Repayments of securities sold under agreements to repurchase, net
Repayments of FHLB and other borrowings, net
Proceeds from stock options exercised
Payments for repurchase of common stock
Payments of common stock 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 -- non-cash items
Transfer of loans to other real estate
Loans originated to finance other real estate
Increase (decrease) in accumulated other comprehensive loss
Non-cash sales price related to divestitures
Acquisitions:
Fair value of assets acquired
Fair value of liabilities assumed
Net assets acquired
Common stock issued in acquisition
$
$
3,571
3,448
195
2,377
997
-
(3,231)
1,481
411
(75)
1,253
43
380
-
7,003
56,655
13,898
32,863
25,000
(8,255)
85,233
-
129
25,863
(152)
1,955
(8,411)
3,254
171,377
12,604
(41,445)
(27,769)
-
136
(16,362)
(15,060)
(87,896)
140,136
76,873
217,009 $
5,661 $
8,057
3,160
484
77
-
556,005
506,179
49,826
86,631
2,393
2,912
40
2,181
1,039
1,492
(6,391)
1,158
352
(25)
1,313
618
1,007
1,096
3,974
49,499
8,937
68,765
-
(67,355)
39,512
458
(2,122)
10
(151)
955
(2,551)
2,940
49,398
5,407
(79,548)
(716)
(50,000)
384
(34,412)
(21,090)
(179,975)
(81,078)
157,951
76,873 $
7,935 $
7,610
5,686
164
589
1,603
-
-
-
-
21,485
2,771
3,560
172
3,517
1,056
-
(5,417)
790
415
(1)
791
661
677
-
5,893
36,370
13,664
37,155
21,840
(49,406)
37,455
2,639
694
-
1,689
57
(2,354)
4,363
67,796
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)
-
-
-
-
-
See Notes to Consolidated Financial Statements.
51
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of
Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of
Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal
executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial
customers 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 offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management
(“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, 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, and wealth management.
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.
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 net cash flow.
Use of Estimates
Preparation 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, the allowance for loan
losses, goodwill and other intangible assets, and income taxes. For additional information, see “Critical Accounting Policies” in Part II, Item 7 of this report.
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.
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Cash and Cash Equivalents
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 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 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.
The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”) using 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, management considers its intent to sell the securities, the evidence available to
determine if it is more likely than not that the securities will have to be sold 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 management does 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”).
Other 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 securities are carried at cost and periodically reviewed for impairment. The total investment in FHLB and FRB stock, which is included in other
assets, was $8.90 million as of December 31, 2019, and $7.78 million as of December 31, 2018.
The Company owns certain long-term equity investments without readily determinable fair values, 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. These
investments are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment. The total carrying value in these investments, which is included other assets, totaled $3.68 million as of December 31, 2019, and
$2.20 million as of December 31, 2018.
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Business Combinations
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Loans Held for Investment
Loans classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. Loans held for investment are carried at
the principal amount outstanding, net of unearned income 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.
Purchased Credit Impaired (“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 $500 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.
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Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Loans are considered troubled debt restructurings (“TDRs”) when the Company grants concessions, for legal or economic reasons, to borrowers experiencing
financial difficulty that would not otherwise be considered. The Company generally makes concessions in interest rates, loan terms, and/or amortization terms. All
TDRs $250 thousand or greater are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs
under $250 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the date of modification, nonaccrual
loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification are returned to performing status after six months of
satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.
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.
55
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Premises and Equipment
FIRST COMMUNITY BANKSHARES, 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 7 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 10 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 tested for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a qualitative or
quantitative 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 elects to
perform a qualitative assessment, it evaluates economic, industry, and company-specific factors in assessing the fair value of its reporting unit. 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, a quantitative test is performed; otherwise, no further
resting is required. The quantitative test consists of 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 fair value, a goodwill
impairment charge is recognized for the difference, but limited to the amount of goodwill allocated to that reporting unit. Other identifiable intangible assets are
evaluated for impairment if events or changes in circumstances indicate a possible impairment.
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.
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Equity-Based Compensation
The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value
on the grant date. 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.
Revenue Recognition
Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,” establishes principles for reporting information about the
nature, amount, timing and uncertainty of revenue and cash flows arising from the Company's contracts to provide goods or services to customers. The core
principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects
to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The great majority of the Company’s revenue-
generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and derivatives and
investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of the Company’s revenue-generating
activities that are within the scope of ASC 606, which are discussed below, are presented in the Company’s consolidated statements of income as components of
noninterest income.
Wealth management. Wealth management income represents monthly fees due from wealth management customers in consideration for managing and
administrating the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust
services and similar fiduciary activities. Revenue is recognized when the performance obligation is completed each month, which is generally the time that
payment is received. Income also includes fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers
that are referred to the third party. These fees are paid to the Company by the third party on a quarterly basis and recognized ratably throughout the quarter as the
performance obligation is satisfied.
Service charges on deposits and other service charges and fees. Service charges on deposits and other service charges and fees represent general service fees for
account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or
some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account
maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance
obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees.
Other operating income. Other operating income consists primarily of third-party incentive payments, income on life insurance contracts, and dividends received,
which are not subject to the requirements of ASC 606.
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Advertising Expenses
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Standards
Standards to be Adopted in 2020
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 is adopting ASU 2016-
13 as of January 1, 2020, and will recognize a cumulative adjustment to retained earnings in connection with the adoption. The Company’s working group, along
with its third-party vendor, are finalizing implementation of the new accounting standard. The Company has selected loss estimation methodologies for its
allowance for credit losses, performed testing on the chosen methodologies, and determined a qualitative adjustment methodology that aligns with the requirements
of the new standard. The Company is in the process of model validation and documenting procedures and internal controls surrounding the new processes.
Standards Adopted in 2019
In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU makes changes to a variety of topics to clarify, correct errors in, or make
minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 became effective for the Company for fiscal
years beginning after December 15, 2018. The Company adopted ASU 2018-09 in the first quarter of 2019. The adoption of the standard had no material effect on
its financial statements.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The 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 became effective for the Company for fiscal years beginning after December
15, 2018. The Company adopted ASU 2017-12 in the first quarter of 2019. The adoption of the standard had no material effect on its financial statements.
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FIRST COMMUNITY BANKSHARES, 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. In January 2018, the FASB issued ASU 2018-
01, which allows entities the option to apply the provisions of the new guidance at the effective date without adjusting the comparative periods presented. In July
2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which updates narrow aspects of the guidance issued in ASU 2016-02,
as well as issuing ASU 2018-11, which allows entities to choose an additional transition method in which an entity is allowed to apply the standard at adoption date
and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this method, the entity shall recognize
and measure the leases that exist at the adoption date and the prior comparative periods are not adjusted. The Company adopted ASU 2016-02 January 1, 2019,
electing to recognize and measure existing leases at the adoption date with no adjustments to prior periods. In addition, the Company elected the practical
expedients of not re-assessing the classifications of existing leases, not re-assessing if existing leases have initial direct costs, or examining expired or existing
contracts to determine if a lease exists. All of the current leases are classified as operating leases. The adoption of the standard resulted in a right-of-use asset of
$915 thousand and a lease liability of $915 thousand which are included in other assets and other liabilities, respectively, in the condensed consolidated balance
sheets. The adoption did not have a material impact on the financial position or results of operations of the Company.
Standards Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. Among other aspects, this ASU
simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income
taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements
have not yet been issued. The update is not expected to have any material effect on the Company’s financial statements.
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 are business combinations and divestitures which have occurred over the past three years:
Highlands Bankshares, Inc.
On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands” )of Abingdon, Virginia.
Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to
receive 0.2703 shares of the Company’s stock. The transaction was consummated the close of business December 31, 2019. The transaction combined two
traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the
transaction was $86.65 million.
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration
exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date
of the acquisition.
(Amounts in thousands, except share data)
Assets
Cash and cash equivalents
Securities available for sale
Loans held for sale
Loans held for investment, net of allowance and mark
Premises and equipment
Other real estate
Other assets
Intangible assets
Total assets
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Long term debt
Other liabilities
Total liabilities
Net identifiable assets acquired over (under) liabilities assumed
Goodwill
Net assets acquired over liabilities assumed
Consideration:
First Community Bankshares, Inc. common
Purchase price per share of the Company's common stock
Fair Value of Company common stock issued
Cash paid for fractional shares
Fair Value of total consideration transferred
As recorded by
Highlands
Fair Value
Adjustments
As recorded by
the Company
$
$
$
$
25,879 $
53,732
263
438,896
16,722
1,963
25,556
-
563,011 $
155,714 $
346,028
501,742
40
2,938
504,720
58,291
-
58,291 $
-
-
-
(11,429) ( a )
(2,317) ( b )
-
2,250 ( c )
4,490 ( d )
(7,006)
-
1,261 ( e )
1,261
-
198 ( f )
1,459
(8,465)
36,821
28,356
$
$
$
$
$
$
$
25,879
53,732
263
427,467
14,405
1,963
27,806
4,490
556,005
155,714
347,289
503,003
40
3,136
506,179
49,826
36,821
86,647
2,792,729
31.02
86,631
16
86,647
Explanation of fair value adjustments:
( a ) - Adjustment reflects the fair value adjustments of $(14.70) million based on the Company's evaluation of the acquired loan portfolio and excludes the
allowance for loan losses ("ALLL") and deferred loan fees of $3.27 million recorded by Highlands.
( b ) - Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.
( c ) - Adjustment to record the deferred tax asset related to the fair value adjustments.
( d ) - Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.
( e ) - Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.
( f ) - Adjustment reflects the fair value adjustment for death benefits payable of $320 thousand, the fair value adjustment for lease liability of $(37) thousand
and the fair value adjustment to the reserve for unfunded commitments of $(85) thousand.
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The following table presents the carrying amount of acquired loans at December 31, 2019, which consist of loans with no credit deterioration, or performing loans,
and loans with credit deterioration, or impaired 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
Loans acquired at fair value
Purchased
Performing
December 31, 2019
Purchased
Impaired
Total
$
$
15,763 $
44,474
21,032
29,357
107,489
2,298
3,287
223,700
23,654
116,413
1,097
141,164
9,487
374,351 $
1,956 $
2,829
1,663
4,564
21,710
-
3,722
36,444
2,157
13,174
-
15,331
1,341
53,116 $
17,719
47,303
22,695
33,921
129,199
2,298
7,009
260,144
25,811
129,587
1,097
156,495
10,828
427,467
Comparative and Pro Forma Financial Information for Acquisitions in 2019
As the merger date was the close of business, December 31, 2019, Highlands had no earnings contribution to the 2019 consolidated statement of income for the
Company. Merger-related expenses of $2.12 million are recorded in the consolidated statement of income and include incremental costs related to the closing of
the acquisition, including legal, investment banker costs, and other costs.
The following table discloses the impact of the merger. The table also presents certain pro forma information as if Highlands had been acquired on January 1,
2019 and January, 1 2018. These results combine the historical results of Highlands in the Company’s consolidated statement of income and, while certain
adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have
occurred had the acquisition taken place on January 1, 2019 or January 1, 2018.
Merger-related costs of $7.16 million incurred by both the Company and Highlands during the year ended December 31, 2019, have been excluded from the
proforma information below. No adjustments have been made to the pro formas to eliminate the provision for loan losses for the years ended December 31, 2019
and 2018 of Highlands in the amount of $738,000 and $1.84 million, respectively. Additional expenses related to systems conversions and other costs of
integration are expected to be recorded during 2020. The Company expects to achieve further operating cost savings and other business synergies as a result of the
acquisitions which are not reflected in the pro forma amounts below:
(Dollars in thousands)
Total revenues (net interest income plus noninterest income)
Net adjusted income available to the common shareholder
61
ProForma
Year Ended
ProForma
Year Ended
December 31, 2019 December 31, 2018
145,656
$
42,470
$
150,618 $
43,463 $
Bankers Insurance, LLC
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 1, 2018, the Company completed the sale of its remaining insurance agency assets to Bankers Insurance, LLC (“BI”) of Glen Allen, Virginia, in
exchange for an equity interest in BI. The sale strategically allows the Company to continue offering insurance products to its customers through a larger, more
diversified insurance agency. In connection with the divestiture, the Company recognized a one-time goodwill impairment charge of $1.49 million during the third
quarter of 2018. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment.
(Amounts in thousands)
Divestitures
Book value of assets sold
Book value of liabilities sold
Sales price in excess of net liabilities assumed
Total sales price
Cash sold
Non-cash sales price
Amount due remaining on books
Net cash received in divestitures
Net cash received in acquisitions and divestitures
Note 3. Debt Securities
2019
Year Ended December 31,
2018
2017
-
-
-
-
-
-
-
-
- $
(1,685)
37
-
(1,648)
35
1,603
-
(10)
- $
-
-
-
-
-
-
-
-
-
$
The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates
indicated:
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total
(Amounts in thousands)
U.S. Agency securities
U.S. Treasury securities
Municipal securities
Single issue trust preferred securities
Mortgage-backed Agency securities
Total
Amortized Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
December 31, 2019
$
$
5,038 $
85,992
77,448
168,478 $
- $
886
380
1,266 $
(4) $
-
(166)
(170) $
5,034
86,878
77,662
169,574
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
December 31, 2018
$
$
1,108 $
19,970
96,886
-
35,513
153,477 $
5 $
-
912
-
14
931 $
- $
(10)
(509)
-
(773)
(1,292) $
1,113
19,960
97,289
-
34,754
153,116
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost and fair value of available-for-sale debt securities, by contractual maturity, as of December 31, 2019. 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
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
Total fair value
U.S. Agency
Securities
U.S. Treasury
Securities
Municipal
Securities
Total
$
$
$
$
- $
-
1,941
3,097
5,038 $
- $
-
1,937
3,097
5,034 $
- $
-
-
-
- $
- $
-
-
-
- $
- $
28,739
48,941
8,312
85,992
$
- $
29,049
49,517
8,312
86,878
$
-
28,739
50,882
11,409
91,030
77,448
168,478
-
29,049
51,454
11,409
91,912
77,662
169,574
The debt securities held in the held-to-maturity portfolio at December 31, 2018, matured during the first quarter of 2019. The funds were used to repay the
Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of held-to-maturity debt
securities, including gross unrealized gains and losses, at December 31, 2018:
(Amounts in thousands)
U.S. Agency securities
Corporate securities
Total
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
December 31, 2018
17,887 $
7,126
25,013 $
- $
-
- $
(20) $
(3)
(23) $
17,867
7,123
24,990
$
$
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost and fair value of held-to-maturity debt securities, by contractual maturity, as of December 31, 2018.
(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
$
$
$
$
17,887 $
-
-
-
17,887 $
17,867 $
-
-
-
17,867 $
7,126 $
-
-
-
7,126 $
7,123 $
-
-
-
7,123 $
25,013
-
-
-
25,013
24,990
-
-
-
24,990
The following tables present the fair values and unrealized losses for available-for-sale debt 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, 2019
12 Months or Longer
Fair
Value
Losses
Unrealized
Total
Fair
Value
Unrealized
Losses
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total
$
$
975 $
-
8,020
8,995 $
(4) $
-
(48)
(52) $
- $
-
8,319
8,319 $
- $
-
(118)
(118) $
975 $
-
16,339
17,314 $
(4)
-
(166)
(170)
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2018
12 Months or Longer
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
(Amounts in thousands)
U.S. Treasury securities
Municipal securities
Mortgage-backed Agency securities
Total
19,960
7,116
15,762
42,838 $
$
(10)
(62)
(99)
(171) $
-
18,081
15,344
33,425 $
-
(447)
(674)
(1,121) $
19,960
25,197
31,106
76,263 $
(10)
(509)
(773)
(1,292)
The following tables present the fair values and unrealized losses for held-to-maturity debt 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
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2018
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
$
- $
-
- $
- $
-
- $
17,867 $
7,123
24,990 $
(20) $
(3)
(23) $
17,867 $
7,123
24,990 $
(20)
(3)
(23)
There were 17 individual debt securities in an unrealized loss position as of December 31, 2019, and their combined depreciation in value represented 0.10% of the
debt securities portfolio. These securities included 10 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 90 individual debt securities in
an unrealized loss position as of December 31, 2018, and their combined depreciation in value represented 0.74% of the debt securities portfolio.
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews its investment portfolio quarterly for indications of OTTI. The initial indicator of OTTI for debt securities is a decline in fair value below
book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is
recognized in OCI. 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.
The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated:
(Amounts in thousands)
Gross realized gains
Gross realized losses
Net loss on sale of securities
2019
Year Ended December 31,
2018
2017
$
$
67 $
(110)
(43) $
- $
(618)
(618) $
-
(661)
(661)
The carrying amount of securities pledged for various purposes totaled $27.87 million as of December 31, 2019, and $38.25 million as of December 31, 2018.
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Note 4. Loans
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2.20 million as of December 31, 2019, and $1.79 million as of December 31, 2018. Deferred loan fees were $4.60 million
as of December 31, 2019, and $4.60 million as of December 31, 2018. For information about off-balance sheet financing, see Note 20, “Litigation, Commitments,
and Contingencies,” to the Consolidated Financial Statements of this report.
The following table presents loans, net of unearned income with non-covered loans 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
Loans held for Sale
December 31,
2019
2018
Amount
Percent
Amount
Percent
48,659
142,962
121,840
163,181
727,261
11,756
23,155
1,238,814
110,078
620,697
17,241
748,016
110,027
4,742
114,769
2,101,599
12,861
2,114,460
2.30% $
6.76%
5.76%
7.72%
34.39%
0.56%
1.10%
58.59%
5.21%
29.35%
0.82%
35.38%
5.20%
0.22%
5.42%
99.39%
0.61%
100.00% $
63,508
104,863
107,012
140,097
613,877
8,545
18,905
1,056,807
93,466
510,963
18,171
622,600
71,552
5,310
76,862
1,756,269
18,815
1,775,084
3.58%
5.91%
6.03%
7.89%
34.58%
0.48%
1.07%
59.54%
5.27%
28.78%
1.02%
35.07%
4.03%
0.30%
4.33%
98.94%
1.06%
100.00%
263 $
-
$
- $
-
$
$
$
66
Table of Contents
The following table presents the covered loan portfolio, by loan class, as of the dates indicated.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Covered loans
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
December 31,
2019
2018
$
$
28 $
199
3
230
9,853
2,778
12,631
12,861 $
35
238
6
279
15,284
3,252
18,536
18,815
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. 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
Highlands
Other acquired
Total PCI Loans
December 31,
2019
2018
Recorded
Investment
Unpaid
Principal
Balance
Recorded
Investment
Unpaid
Principal
Balance
$
$
5,071 $
2,708
53,116
352
61,247 $
6,431 $
14,277
64,096
378
85,182 $
5,330 $
5,805
-
868
12,003 $
7,272
19,602
-
894
27,768
The Highlands acquisition added $8.15 million in accretable yield and not included in the table below. The total fair value of the Highlands PCI loans is $53.12
million. The gross contractual cash flows for the Highlands PCI loans is $76.45 million. The following table presents the changes in the accretable yield on PCI
loans, by acquisition, during the periods indicated:
(Amounts in thousands)
Balance January 1, 2017
Accretion
Reclassifications from nonaccretable difference(1)
Other changes, net
Balance December 31, 2017
Balance January 1, 2018
Accretion
Reclassifications from nonaccretable difference(1)
Other changes, net
Balance December 31, 2018
Balance January 1, 2019
Accretion
Reclassifications from nonaccretable difference(1)
Other changes, net
Balance December 31, 2019
(1)
Respresents changes attributable to expected loss assumptions
67
Peoples
Waccamaw
Total
4,392 $
(1,379)
825
(450)
3,388 $
3,388 $
(1,263)
8
457
2,590 $
2,590 $
(950)
17
233
1,890 $
21,834 $
(5,664)
3,378
(83)
19,465 $
19,465 $
(6,269)
1,770
(327)
14,639 $
14,639 $
(3,317)
1,440
(188)
12,574 $
26,226
(7,043)
4,203
(533)
22,853
22,853
(7,532)
1,778
130
17,229
17,229
(4,267)
1,457
45
14,464
$
$
$
$
$
$
Table of Contents
Note 5. Credit Quality
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
68
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Special
December 31, 2019
Pass
Mention Substandard
Doubtful
Loss
Total
(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
45,781 $
135,651
118,045
149,916
683,481
11,299
17,609
106,246
580,580
16,341
108,065
4,742
1,977,756
Construction, development, and other land
Single family non-owner occupied
Non-farm, non-residential
-
199
-
Consumer real estate loans
Home equity lines
Single family owner occupied
Total covered loans
Total loans
7,177
2,111
9,487
1,987,243 $
$
799 $
2,984
1,327
5,776
16,620
335
1,439
1,818
23,116
721
621
-
55,556
-
-
3
349
392
744
56,300 $
2,079 $
4,327
2,468
7,489
27,160
122
4,107
2,014
17,001
179
1,341
-
68,287
28
-
-
2,327
275
2,630
70,917 $
69
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
48,659
142,962
121,840
163,181
727,261
11,756
23,155
110,078
620,697
17,241
110,027
4,742
2,101,599
28
199
3
9,853
2,778
12,861
2,114,460
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2018
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
61,877 $
102,044
104,183
131,443
595,659
8,328
16,898
91,194
482,794
17,872
661 $
2,166
1,087
4,395
8,166
131
538
649
4,355
-
71,240
5,310
1,688,842
4
-
22,152
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
-
223
-
9,511
2,507
12,241
1,701,083 $
$
35
-
-
5,244
355
5,634
27,786 $
970 $
653
1,742
4,259
9,906
86
1,469
1,623
23,814
299
308
-
45,129
-
15
6
529
390
940
46,069 $
- $
-
-
-
146
-
-
-
-
-
-
-
146
-
-
-
-
-
-
146 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
63,508
104,863
107,012
140,097
613,877
8,545
18,905
93,466
510,963
18,171
71,552
5,310
1,756,269
35
238
6
15,284
3,252
18,815
1,775,084
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.
70
Table of Contents
FIRST COMMUNITY BANKSHARES, 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
Multi-family residential
Non-farm, non-residential
Consumer real estate loans
Home equity lines
Single family owner occupied
Total impaired loans with an allowance
Total impaired loans(1)
$
December 31, 2019
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2018
Unpaid
Principal
Balance
Related
Allowance
552 $
576
1,254
2,652
4,158
158
1,437
1,372
15,588
648
290
28,685
-
1,241
-
1,246
2,487
31,172 $
768 $
599
1,661
3,176
4,762
164
1,500
1,477
17,835
648
294
32,884
-
1,227
-
1,246
2,473
35,357 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
292
-
353
645
645 $
824 $
386
1,127
2,761
4,154
86
1,464
1,315
15,451
225
145
27,938
534
840
65
3,631
5,070
33,008 $
840 $
416
1,274
3,095
4,494
96
1,547
1,451
18,390
225
156
31,984
536
842
68
3,683
5,129
37,113 $
-
-
-
-
-
-
-
-
-
-
-
-
230
235
65
922
1,452
1,452
(1)
Total impaired loans include loans totaling $24.64 million as of December 31, 2019, and $25.27 million as of December 31, 2018, that do not meet the
Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment. During the first quarter of 2018, the
Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from $250 thousand to $500 thousand or greater.
71
Table of Contents
FIRST COMMUNITY BANKSHARES, 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:
2019
Year Ended December 31,
2018
2017
Interest Income
Recognized
Average
Recorded
Investment
Interest Income
Recognized
Average
Recorded
Investment
Interest Income
Recognized
Average
Recorded
Investment
(Amounts in thousands)
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land $
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total impaired loans with no related
allowance
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Total impaired loans with a related
allowance
Total impaired loans
22 $
34
24
123
123
9
55
46
599
29
13
704 $
363
1,356
2,979
4,683
121
1,469
1,439
16,058
308
26 $
19
47
123
133
-
64
44
503
8
921 $
383
910
2,652
4,828
164
1,172
1,637
15,423
244
213
9
161
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
1,077
29,693
976
28,495
928
27,209
-
-
-
-
48
-
-
46
-
-
-
-
766
-
-
1,947
-
-
2
7
2
-
-
-
270
110
809
307
3
158
68
5,296
-
103
-
27
15
22
-
161
107
1,376
-
479
789
442
104
4,805
$
94
1,171 $
2,713
32,406 $
172
1,148 $
6,860
35,355 $
328
1,256 $
8,102
35,311
There were no PCI loan pools that became impaired subsequent to the acquisition of the loans as of December 31, 2019 or 2018. The following tables provide
information on impaired PCI loan pools for the dates indicated:
(Amounts in thousands)
Interest income recognized
Average recorded investment
2019
Year Ended December 31,
2018
2017
- $
-
- $
-
20
528
$
72
Table of Contents
FIRST COMMUNITY BANKSHARES, 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
December 31, 2019
Covered
Total
Non-covered
December 31, 2018
Covered
Total
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 $
530
1,144
1,286
3,400
158
713
753
7,259
428
$
231
16,113 $
211 $
530
1,144
1,286
3,400
158
713
973
7,283
428
413 $
428
1,395
1,696
4,020
86
711
614
10,141
-
231
16,357 $
79
19,583 $
- $
-
-
15
-
-
-
271
36
-
-
322 $
413
428
1,395
1,711
4,020
86
711
885
10,177
-
79
19,905
- $
-
-
-
-
-
-
220
24
-
-
244 $
73
Table of Contents
FIRST COMMUNITY BANKSHARES, 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 $144 thousand as of December 31, 2019,
and $58 thousand as of December 31, 2018.
(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
$
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 2019
63 $
1,913
375
754
917
86
856
1,436
7,728
207
1,735
22
16,092
-
-
-
144
-
144
16,236 $
65 $
238
-
267
1,949
164
349
165
2,390
-
439
-
6,026
-
-
-
28
50
78
6,104 $
74
211 $
507
1,144
661
3,027
-
664
503
3,766
428
202
-
11,113
339 $
2,658
1,519
1,682
5,893
250
1,869
2,104
13,884
635
2,376
22
33,231
48,320 $
140,304
120,321
161,499
721,368
11,506
21,286
107,974
606,813
16,606
48,659
142,962
121,840
163,181
727,261
11,756
23,155
110,078
620,697
17,241
107,651
4,720
2,068,368
110,027
4,742
2,101,599
-
-
-
-
-
-
28
199
3
28
199
3
-
-
-
11,113 $
172
50
222
33,453 $
9,681
2,728
12,639
2,081,007 $
9,853
2,778
12,861
2,114,460
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
$
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 2018
111 $
306
113
514
1,332
109
640
408
5,006
-
507
-
9,046
-
15
-
176
166
357
9,403 $
- $
-
-
1,115
540
-
-
209
3,495
-
200
-
5,559
-
-
-
38
-
38
5,597 $
407 $
262
1,274
992
2,398
-
392
334
4,445
-
59
-
10,563
-
-
-
91
-
91
10,654 $
518 $
568
1,387
2,621
4,270
109
1,032
951
12,946
-
766
-
25,168
62,990 $
104,295
105,625
137,476
609,607
8,436
17,873
92,515
498,017
18,171
63,508
104,863
107,012
140,097
613,877
8,545
18,905
93,466
510,963
18,171
70,786
5,310
1,731,101
71,552
5,310
1,756,269
-
15
-
35
223
6
35
238
6
305
166
486
25,654 $
14,979
3,086
18,329
1,749,430 $
15,284
3,252
18,815
1,775,084
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, 2019 or 2018. The following table presents loans modified as
TDRs, by loan class and accrual status, as of the dates indicated:
(Amounts in thousands)
Commercial loans
Nonaccrual(1)
2019
Accruing
Total
Nonaccrual(1)
2018
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
$
552 $
-
-
1,790
-
-
2,342 $
595 $
307
115
5,305
221
32
6,575 $
1,147 $
307
115
7,095
221
32
8,917 $
640 $
-
-
1,941
-
-
2,581 $
Allowance for loan losses related to TDRs
$
353
309 $
314
127
5,417
225
35
6,427 $
$
949
314
127
7,358
225
35
9,008
568
(1)
Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.
75
Table of Contents
The following table presents interest income recognized on TDRs for the periods indicated:
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Interest income recognized
2019
Year Ended December 31,
2018
2017
$
277 $
264 $
222
The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.
Year Ended December 31,
2019
Pre-
modification
Recorded
Investment
Post-
modification
Recorded
Investment(1)
Total
Contracts
2018
Total
Contracts
Pre-modification
Recorded
Investment
Post-modification
Recorded
Investment(1)
(Amounts in thousands)
Below market interest rate
Single family owner occupied
- $
- $
-
1 $
11 $
Below market interest rate and
extended payment term
Single family owner occupied
Principal deferral
Home equity
Single family owner occupied
Total principal deferral
Total
6
1
3
4
10 $
887
871
5
331
336
1,223 $
2
279
281
1,152
1
-
-
2 $
41
-
-
52 $
11
41
-
-
52
The following table presents loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a payment default
during the periods indicated:
(Amounts in thousands)
Single family owner occupied
Total
Year Ended December 31,
2019
2018
Total
Contracts
Recorded
Investment
Total
Contracts
Recorded
Investment
- $
- $
-
-
1 $
1 $
521
521
The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:
(Amounts in thousands)
Non-covered OREO
Covered OREO
Total OREO
Non-covered OREO secured by residential real estate
Residential real estate loans in the foreclosure process(1)
December 31, 2019 December 31, 2018
$
$
$
3,969 $
-
3,969 $
2,232 $
1,539
3,806
32
3,838
2,303
6,349
(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
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Note 6. Allowance for Loan Losses
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI
loans as of December 31, 2019 or 2018.
(Amounts in thousands)
Beginning balance
Provision for (Recovery of) loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Ending balance
(Amounts in thousands)
Beginning balance
(Recovery of) provision for loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Ending balance
Commercial
$
$
Commercial
$
10,499 $
1,411
(2,548)
873
(1,675)
10,235 $
11,672 $
(660)
(1,236)
723
(513)
10,499 $
Year Ended December 31, 2019
Consumer and
Other
Consumer
Real Estate
Total
Allowance
6,732 $
(105)
(1,790)
1,488
(302)
6,325 $
1,036 $
2,265
(1,923)
487
(1,436)
1,865 $
18,267
3,571
(6,261)
2,848
(3,413)
18,425
Year Ended December 31, 2018
Consumer and
Other
Consumer
Real Estate
Total
Allowance
6,810 $
1,473
(2,005)
454
(1,551)
6,732 $
794 $
1,580
(1,666)
328
(1,338)
1,036 $
19,276
2,393
(4,907)
1,505
(3,402)
18,267
$
77
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FIRST COMMUNITY BANKSHARES, 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, 2019
Loans
Individually
Evaluated for
Impairment
Allowance for
Loans
Individually
Evaluated
Loans
Collectively
Evaluated for
Impairment
Allowance for
Loans
Collectively
Evaluated
$
$
- $
-
944
-
2,575
-
3,519
-
3,016
-
3,016
-
-
-
6,535 $
- $
-
-
-
292
-
-
292
-
353
-
353
-
-
-
645 $
30,334 $
95,659
98,201
128,520
591,520
9,458
16,146
969,838
91,999
490,712
16,144
598,855
99,199
4,742
103,941
1,672,634 $
245
699
969
1,323
6,361
145
201
9,943
673
5,175
124
5,972
1,865
-
1,865
17,780
December 31, 2018
Loans
Individually
Evaluated for
Impairment
Allowance for
Loans
Individually
Evaluated
Loans
Collectively
Evaluated for
Impairment
Allowance for
Loans
Collectively
Evaluated
- $
-
534
-
1,403
-
513
2,450
65
3,631
1,596
5,292
-
-
-
7,742 $
- $
-
230
-
235
-
-
465
65
922
-
987
63,039 $
104,863
106,478
138,451
608,537
8,545
18,392
1,048,305
103,668
509,929
16,575
630,172
-
-
-
1,452 $
71,552
5,310
76,862
1,755,339 $
417
663
962
1,442
6,295
85
170
10,034
683
4,931
131
5,745
1,036
-
1,036
16,815
$
$
78
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The year ended December 31, 2018, includes a reclassification of $2.67 million of loans individually evaluated for impairment that were inadvertently reported in
loans collectively evaluated for impairment. Segments affected were as follows: $563 thousand dollars in Non-farm, non-residential, $513 thousand in Farmland,
and $1.60 million in Owner occupied construction.
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
Highlands:
1-4 family, senior-commercial
Construction & land development
Farmland and other agricultural
Multifamily
Commercial real estate-owner occupied
Commercial real estate- non-owner occupied
Commercial and industrial
Other
Total commercial loans
Consumer real estate loans
Waccamaw serviced home equity lines
Waccamaw residential
Highlands:
1-4 family, junior and HELOCS
1-4 family, senior-consumer
Consumer
Peoples residential
Total consumer real estate loans
Total PCI loans
December 31, 2019
December 31, 2018
Recorded
Investment
Allowance for Loan
Pools With
Impairment
Recorded
Investment
Allowance for Loan
Pools With
Impairment
$
$
- $
4,371
4,564
1,956
3,722
1,663
13,024
8,686
2,829
352
41,167
2,121
587
-
2,157
13,174
1,341
700
20,080
61,247 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
- $
4,405
-
-
-
-
-
-
-
868
5,273
5,017
788
-
-
-
-
925
6,730
12,003 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2019.
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Note 7. FDIC Indemnification Asset
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the FDIC-assisted acquisition of Waccamaw Bank in 2012, the Company entered into loss share agreements with the FDIC in which the FDIC
agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to those covered assets. Loss share coverage
on commercial loans expired June 30, 2017, with recoveries continuing until June 30, 2020. Loss share coverage on single family loans will expire June 30, 2022.
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 and total covered loans and OREO for the periods indicated:
(Amounts in thousands)
Beginning balance
Reimbursable expenses to the FDIC
Net amortization
Payments to the FDIC
Ending balance
Covered loans
Covered OREO
Note 8. Premises, Equipment, and Leases
Premises and Equipment
The following table presents the components of premises and equipment as of the dates indicated:
(Amounts in thousands)
Land
Buildings and leasehold improvements
Equipment
Total premises and equipment
Accumulated depreciation and amortization
Total premises and equipment, net
Year Ended December 31,
2018
2019
5,108 $
-
(2,377)
152
2,883 $
12,861 $
-
7,161
(23)
(2,181)
151
5,108
18,815
32
December 31,
2019
2018
22,899 $
52,351
38,173
113,423
(50,599)
62,824 $
18,090
45,079
33,551
96,720
(50,935)
45,785
$
$
$
$
$
Impairment charges related to certain long-term investments in land and buildings totaled $380 thousand in 2019, $1.01 million in 2018, and $677 thousand in
2017. Depreciation and amortization expense for premises and equipment was $3.45 million in 2019, $2.91 million in 2018, and $3.56 million in 2017.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”; the standard was adopted prospectively. The Company currently has two
operating leases that are recorded as a right of use (“ROU”) asset and operating lease liability. The right of use asset is recorded in other assets on the consolidated
balance sheet, while the lease liability is recorded in other liabilities. The ROU asset represents the right to use an underlying asset during the lease term and the
lease liability represents the obligation to make lease payments arising from the lease. The current ROU asset and lease liability were recognized at the adoption
date of January 1, 2019, based on the present value of the remaining lease payments using a discount rate that represented our incremental borrowing rate at the
time of adoption. The lease expense which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized
on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income.
The Company’s current operating leases relate primarily to bank branches. Two operating leases were acquired in the Highlands transaction; neither of which were
for bank branches. One of the leases will terminate in the first quarter of 2020; while the other remaining Highlands’ lease will terminate in early 2022. No right
ROU was recorded in the transaction due to the ROU asset related to the lease that terminates in 2022 being impaired as of the acquisition date; a lease liability
was recorded for $82 thousand. The Company’s total operating leases have remaining terms of 2 – 10 years. As of December 31, 2019, the Company’s ROU asset
and lease liability were $917 thousand and $1.01 million, respectively. The weighted average discount rate was 3.22%.
80
Table of Contents
Year
(Amounts in thousands)
2020
2021
2022
2023
2024 and thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amount
154
154
131
119
580
1,138
(129)
1,009
$
$
Lease expense was $203 thousand in 2019, $318 thousand in 2018, and $582 thousand in 2017. The Company maintained no subleases as of December 31, 2019.
Note 9. Goodwill and Other Intangible Assets
Goodwill
The Company has one reporting unit for goodwill impairment testing purposes, Community Banking. In October 2018, the Company sold its remaining insurance
agency assets to BI in exchange for an equity interest in BI. In connection with the divestiture, the Company recognized a one-time goodwill impairment charge of
$1.49 million. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment. The Company performed its
annual assessment of goodwill during the fourth quarter of 2019 and concluded that the carrying value of goodwill was not impaired. No events have occurred after
the analysis to indicate potential impairment.
The following table presents the changes in goodwill, by reporting unit, during the periods indicated:
(Amounts in thousands)
Balance January 1, 2017
Acquisitions and dispositions, net
Balance December 31, 2017
Balance January 1, 2018
Acquisitions and dispositions, net
Impairment charges
Balance December 31, 2018
Balance January 1, 2019
Acquisitions and dispositions, net
Balance December 31, 2019
$
$
$
$
$
$
95,779
-
95,779
95,779
(1,543)
(1,492)
92,744
92,744
36,821
129,565
81
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Other Intangible Assets
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, the remaining lives of core deposit intangibles ranged from 3 years to 10 years with a weighted average remaining life of 7 years. Other
identifiable intangibles currently consist primarily of the value assigned to contractual rights arising from FCWM. The following table presents the components of
other intangible assets as of the dates indicated:
(Amounts in thousands)
Core deposit intangibles
Acquisitions and dispositions, net
Accumulated amortization
Core deposit intangibles, net
Other identifiable intangibles
Accumulated amortization
Other identifiable intangibles, net
Total other intangible assets, net
2019
December 31,
2018
2017
$
$
8,184 $
4,490
(4,155)
8,519
-
-
-
8,519 $
8,184 $
-
(3,158)
5,026
535
(535)
-
5,026 $
Amortization expense for other intangible assets was $997 thousand in 2019, $1.04 million in 2018, and $1.06 million in 2017.
The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2019:
(Amounts in thousands)
2020
2021
2022
2023
2024
2025 and thereafter
Total estimated amortization expense
82
$
$
8,184
-
(2,161)
6,023
879
(751)
128
6,151
1,446
1,446
1,446
880
856
2,445
8,519
Table of Contents
Note 10. Deposits
FIRST COMMUNITY BANKSHARES, 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
The following schedule presents the contractual maturities of time deposits, by year, as of December 31, 2019:
(Amounts in thousands)
2020
2021
2022
2023
2024
2025 and thereafter
Total contractual maturities
December 31,
2019
2018
$
627,868 $
459,550
497,470
235,712
453,240
372,821
142,801
1,702,044
2,329,912 $
$
$
$
451,721
153,483
345,335
330,757
114,904
1,396,200
1,855,750
282,220
106,927
62,436
33,579
23,622
6,838
515,622
Time deposits of $250 thousand or more totaled $53.49 million as of December 31, 2019, and $43.84 million as of December 31, 2018. The following schedule
presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2019:
(Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total contractual maturities
$
$
13,832
7,867
11,764
20,031
53,494
83
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Note 11. Borrowings
FIRST COMMUNITY BANKSHARES, 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
Total borrowings
December 31,
2019
2018
Balance
Weighted
Average Rate
Balance
Weighted
Average Rate
$
$
1,601
0.14% $
4,370
-
1,601
$
25,000
29,370
0.12%
3.18%
Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements. 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, 2019:
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total
Overnight and
Continuous
Up to 30 Days
30 - 90 Days
Greater than 90
Days
Total
$
$
- $
871
730
1,601 $
- $
-
-
- $
- $
-
-
- $
- $
-
-
- $
-
871
730
1,601
The Company’s remaining wholesale repurchase agreement of $25 million matured during the first quarter of 2019. The Company repaid the borrowing with
current liquidity.
As of December 31, 2019, unused borrowing capacity with the FHLB totaled $261.50 million, net of FHLB letters of credit of $161.07 million. The Company
pledged $742.86 million in qualifying loans to secure the FHLB letters of credit, which provide an attractive alternative to pledging securities for public unit
deposits.
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 2020. There was no outstanding balance on the line as of December 31, 2019 or 2018.
Note 12. Derivative Instruments and Hedging Activities
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.
84
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fair value hedges were effective as of December 31, 2019. The following table presents the
notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:
2019
2018
December 31,
Notional or
Contractual
Amount
Derivative Assets
Derivative
Liabilities
Notional or
Contractual
Amount
Derivative Assets
Derivative
Liabilities
17,432 $
17,432 $
- $
- $
510 $
510 $
5,483 $
5,483 $
12 $
12 $
-
-
(Amounts in thousands)
Derivatives designated as hedges
$
$
Interest rate swaps
Total derivatives
The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:
2019
Year Ended December 31,
2018
2017
Income Statement Location
$
$
12 $
12 $
40 $
40 $
78 Interest and fees on loans
78
(Amounts in thousands)
Derivatives designated as hedges
Interest rate swaps
Total derivative expense
Note 13. 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. The following table presents the changes in the aggregate actuarial benefit obligation during the periods indicated:
(Amounts in thousands)
Beginning balance
Plan change
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Ending balance
December 31,
2019
2018
$
$
9,265 $
262
320
404
1,570
(509)
11,312 $
9,635
-
245
358
(565)
(408)
9,265
85
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of net periodic pension cost, the effect on the consolidated statements of income, and the assumed discount rate for
the periods indicated:
(Amounts in thousands)
Service cost
Interest cost
Amortization of prior service cost
Amortization of losses
Net periodic cost
2019
Year Ended December 31,
2018
2017
Income Statement Location
$
$
320
404
257
20
1,001
$
$
245
358
228
57
888
$
$
231 Salaries and employee benefits
372 Other expense
228 Other expense
31 Other expense
862
Assumed discount rate
3.10%
4.28%
3.85%
The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 2019:
(Amounts in thousands)
2020
2021
2022
2023
2024
2025 through 2029
Deferred Compensation Plan
$
590
648
652
651
679
3,520
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, 2019 or 2018. There was no deferred compensation plan expense in 2019, compared to none in 2018 and $11 thousand in 2017.
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, 2019, stop-loss insurance coverage
generally limits the Company’s risk of loss to $175 thousand for individual claims and $4.60 million for aggregate claims. Health plan expenses were $3.97 million
in 2019, $3.72 million in 2018, and $3.50 million in 2017.
Employee Stock Ownership and Savings Plan
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 $1.10 million in 2019, $1.06 million in 2018, and $1.18 million in 2017. The KSOP
held 346,833 shares of the Company’s common stock as of December 31, 2019, 366,969 shares as of December 31, 2018, and 387,935 shares as of December 31,
2017.
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, 2019, 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.
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2019
Year Ended December 31,
2018
2017
$
1,481 $
-
1,158 $
95
790
17
The following table presents stock option activity and related information for the year ended December 31, 2019:
Weighted
Average
(Amounts in thousands, except share and per share data)
Option
Shares
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding, January 1, 2019
Granted
Exercised
Canceled
Outstanding, December 31, 2019
Exercisable, December 31, 2019
There were no options granted in 2019 or 2018.
156,255 $
-
(8,459)
(596)
147,200 $
126,699 $
20.85
-
16.14
24.72
21.10
20.52
4.6 $
4.2 $
1,460
1,331
The intrinsic value of options exercised was $150 thousand in 2019, $423 thousand in 2018, and $84 thousand in 2017. As of December 31, 2019, unrecognized
compensation cost related to nonvested stock options totaled $10 thousand with an expected weighted average recognition period of 0.27 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, 2019:
Nonvested, January 1, 2019
Granted
Vested
Canceled
Nonvested, December 31, 2019
Weighted Average
Grant-Date Fair
Value
Shares
51,113 $
50,521
(43,784)
(197)
57,653 $
27.37
34.22
29.26
32.76
31.93
As of December 31, 2019, unrecognized compensation cost related to nonvested restricted stock awards totaled $1.23 million with an expected weighted average
recognition period of 1.90 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and
changes in estimated forfeitures.
87
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. 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
OREO expense and net loss
Telephone and data communications
Office supplies
Other(1)
Total other operating expense
2019
Year Ended December 31,
2018
2017
$
$
$
916 $
1,888
2,804 $
1,494
1,404
647
8,384
11,929 $
687 $
1,861
2,548 $
1,549
1,333
1,045
8,800
12,727 $
1,365
2,137
3,502
1,202
1,554
1,171
7,914
11,841
(1)
Components of other operating income or expense that do not exceed 1% of total income
Note 15. 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 additional tax expense totaling $6.55 million during the fourth
quarter of 2017 related to the revaluation of our deferred tax balances, which included provisional estimates primarily related to certain purchase accounting,
indemnification asset, intangible, and depreciation items. During the third quarter of 2018, the Company completed the deferred tax asset revaluation and recorded
a $1.67 million reduction in tax expense.
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
2019
Year Ended December 31,
2018
2017
$
$
9,603 $
1,554
11,157
(152)
(11)
(163)
10,994 $
7,201 $
1,233
8,434
296
52
348
8,782 $
14,509
926
15,435
5,205
(12)
5,193
20,628
88
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
2019
Amount
Percent
Year Ended December 31,
2018
Amount
Percent
2017
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 impairment and
disposition
Bank owned life insurance
Deferred tax revaluation
Other items, net
Income tax at the effective tax rate
$
10,457
1,220
11,677
21.00% $
3.12%
24.12%
9,475
1,016
10,491
21.00% $
2.25%
23.25%
14,739
692
15,431
35.00%
1.64%
36.64%
(637)
(1.28)%
(702)
-1.56%
(1,228)
-2.92%
-
(249)
(98)
301
10,994
0.00%
(0.50)%
(0.20)%
0.10%
22.24% $
569
(144)
(1,669)
237
8,782
1.26%
-0.32%
-3.70%
0.53%
19.46% $
-
(478)
6,552
351
20,628
0.00%
-1.13%
15.56%
0.83%
48.98%
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
Federal net operating loss carryforward
Deferred loan fees
Other
Total deferred tax assets
Deferred tax liabilities
FDIC indemnification asset
Fixed assets
Odd days interest deferral
Unrealized gains on available for sale securities
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2019
2018
$
$
4,312 $
-
540
3,689
1,597
745
4,079
4,279
1,247
1,746
22,234
675
1,080
1,912
230
399
4,296
17,938 $
4,275
87
730
24
1,510
2,430
3,468
-
1,201
491
14,216
1,195
1,381
1,614
-
460
4,650
9,566
The Company had no unrecognized tax benefits or accrued interest or penalties as of December 31, 2019 or 2018. The Company had no deferred tax valuation
allowance recorded as of December 31, 2019 or 2018, 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, 2016 through 2018.
89
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FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. 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, 2017
Other comprehensive income (loss) before reclassifications
Reclassified from AOCI
Other comprehensive income, net
Reclassification of certain tax effects
Balance December 31, 2017
Balance January 1, 2018
Other comprehensive (loss) income before reclassifications
Reclassified from AOCI
Other comprehensive (loss) income, net
Balance December 31, 2018
Balance January 1, 2019
Other comprehensive income (loss) before reclassifications
Reclassified from AOCI
Other comprehensive income (loss), net
Balance December 31, 2019
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
Employee Benefit
Plans
Total
$
$
$
$
$
$
(544) $
972
413
1,385
134
975 $
975 $
(1,748)
488
(1,260)
(285) $
(285) $
1,117
34
1,151
866 $
(1,467) $
(132)
162
30
(378)
(1,815) $
(1,815) $
446
225
671
(1,144) $
(1,144) $
(1,448)
220
(1,228)
(2,372) $
(2,011)
840
575
1,415
(244)
(840)
(840)
(1,302)
713
(589)
(1,429)
(1,429)
(331)
254
(77)
(1,506)
The following table presents reclassifications out of AOCI, by component, during the periods indicated:
$
(Amounts in thousands)
Available-for-sale securities
Losses recognized
Reclassified out of AOCI, before tax
Income tax 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
$
2019
Year Ended December 31,
2018
2017
Income Statement
Line Item Affected
43 $
43
(9)
34
257
21
278
(58)
220
254 $
90
618 $
618
(130)
488
228
57
285
(60)
225
713 $
661 Net loss on sale of securities
661 Income before income taxes
(248) Income tax expense
413 Net income
228 Other operating expense
31 Other operating expense
259 Income before income taxes
(97) Income tax expense
162 Net income
575 Net income
Table of Contents
Note 17. Fair Value
Financial Instruments Measured at Fair Value
FIRST COMMUNITY BANKSHARES, 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 Debt Securities. Debt 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. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques
of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair
value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and
bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities.
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.
Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company
uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.
Loans Held for Investment. Loans held for investment are reported at fair value using the exit price notion, which is derived from third-party models. 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.
91
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FIRST COMMUNITY BANKSHARES, 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, 2019
(Amounts in thousands)
Available-for-sale debt securities
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total available-for-sale debt securities
Equity securities
Fair value loans
Deferred compensation assets
Deferred compensation liabilities
Derivative liabilities
(Amounts in thousands)
Available-for-sale debt securities
U.S. Agency securities
U.S. Treasury securities
Municipal securities
Mortgage-backed Agency securities
Total available-for-sale debt securities
Equity securities
Fair value loans
Deferred compensation assets
Derivative assets
Deferred compensation liabilities
$
$
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 3
Level 1
5,034 $
86,878
77,662
169,574
55
10,358
3,990
3,990
510
- $
-
-
-
55
-
3,990
3,990
-
5,034 $
86,878
77,662
169,574
-
-
-
-
510
-
-
-
-
-
10,358
-
-
-
December 31, 2018
Fair Value Measurements Using
Level 2
Level 3
Level 1
Total
Fair Value
1,113 $
19,960
97,289
34,754
153,116
55
5,412
3,527
12
3,527
- $
-
-
-
-
55
-
3,527
-
3,527
1,113 $
19,960
97,289
34,754
153,116
-
-
-
12
-
Changes in Level 3 Fair Value Measurements
The following table presents the changes in Level 3 assets recorded at fair value on a recurring basis during the period indicated:
(Amounts in thousands)
Balance January 1, 2018
Transfer of certain loans into Level 3
Changes in fair value
Changes due to principal reduction
Balance December 31, 2018
Balance January 1, 2019
Transfer of certain loans into Level 3 (Highlands acquisition)
Changes in fair value
Changes due to principal reduction
Balance December 31, 2019
Assets
$
$
$
$
-
-
-
-
-
-
5,412
-
-
-
-
5,739
1
(328)
5,412
5,412
5,439
(230)
(263)
10,358
In according with the adoption of ASU 2016-01, the Company began measuring the fair value of loans held for investment using an exit price notion in 2018. Prior
to 2018, loans held for investment were reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and
borrower credit quality. As a result of using the exit price, certain loans were transferred from Level 2 into Level 3 of the fair value hierarchy during the year ended
December 31, 2018. No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2018.
92
Table of Contents
Assets Measured at Fair Value on a Nonrecurring Basis
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2019
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
(Amounts in thousands)
Impaired loans, non-covered
OREO, non-covered
(Amounts in thousands)
Impaired loans, non-covered
OREO, non-covered
OREO, covered
$
$
93
1,828 $
3,969
- $
-
- $
-
1,828
3,969
December 31, 2018
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
3,618 $
3,806
32
- $
-
-
- $
-
-
3,618
3,806
32
Table of Contents
Quantitative Information about Level 3 Fair Value Measurements
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019
December 31, 2018
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)
22% to
15% to
N/A
36% (26%)
100% (8%)
15% to
1% to
49% to
100% (29%)
81% (31%)
49% (49%)
(1)
(2)
Fair value is generally based on appraisals of the underlying collateral.
Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
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, 2019
$
$
(Amounts in thousands)
Assets
Cash and cash equivalents
Debt securities available for sale
Equity securities
Loans held for sale
Loans held for investment, net of allowance
FDIC indemnification asset
Interest receivable
Deferred compensation assets
Liabilities
Time deposits
Securities sold under agreements to repurchase
Interest payable
Deferred compensation liabilities
Derivative liabilities
(Amounts in thousands)
Assets
Cash and cash equivalents
Debt securities available for sale
Debt securities held to maturity
Equity securities
Loans held for investment, net of allowance
FDIC indemnification asset
Interest receivable
Derivative financial assets
Deferred compensation assets
Liabilities
Time deposits
Securities sold under agreements to repurchase
Interest payable
Deferred compensation liabilities
Carrying
Amount
Fair Value
217,009 $
169,574
55
263
2,096,035
2,883
6,677
3,990
217,009 $
169,574
55
263
2,068,257
1,201
6,677
3,990
515,622
1,601
472
3,990
510
512,134
1,601
472
3,990
510
Fair Value Measurements Using
Level 2
Level 1
Level 3
217,009 $
-
55
- $
169,574
-
-
-
-
3,990
-
-
-
3,990
-
-
-
6,677
-
512,134
1,601
472
-
510
-
-
-
263
2,068,257
1,201
-
-
-
-
-
-
-
December 31, 2018
Carrying
Amount
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
76,873 $
153,116
25,013
55
1,756,817
5,108
5,481
12
3,527
76,873 $
153,116
24,990
55
1,720,114
2,565
5,481
12
3,527
76,873 $
-
-
55
-
-
-
-
3,527
- $
153,116
24,990
-
-
-
5,481
12
-
-
-
-
-
1,720,114
2,565
-
-
-
445,661
29,370
618
3,527
94
436,018
29,389
618
3,527
-
-
-
3,527
436,018
29,389
618
-
-
-
-
-
Table of Contents
Note 18. Earnings per Share
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Weighted average common shares outstanding, basic
Dilutive effect of potential common shares
Stock options
Restricted 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
Note 19. Related Party Transactions
2019
Year Ended December 31,
2018
2017
$
38,802 $
36,340 $
21,485
$
15,690,812
16,587,504
17,002,116
53,907
11,374
65,281
15,756,093
62,417
16,464
78,881
16,666,385
52,205
23,521
75,726
17,077,842
2.47 $
2.46
25
25,853
25,878
2.19 $
2.18
19
2,736
2,755
1.26
1.26
64,081
3,620
67,701
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,
2018
2019
$
$
22,033 $
3,958
(5,634)
(12)
20,345 $
19,337
7,142
(4,676)
230
22,033
(1)
Changes related to the composition of the Company's directors, executive officers, and related insiders
Deposits from related parties totaled $7.29 million as of December 31, 2019, and $7.30 million as of December 31, 2018. Legal fees paid to related parties totaled
$150 thousand in 2019, $67 thousand in 2018, and $44 thousand in 2017. There were no lease payments paid to related parties in 2019 and in 2018; $49 thousand
was paid in 2017. Other expense paid to related parties totaled $7 thousand in 2019, $4 thousand in 2018, and $63 thousand in 2017.
Note 20. Litigation, Commitments, and Contingencies
Litigation
In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to
assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not
have a material adverse effect on its financial condition, results of operations, or cash flows.
95
Table of Contents
Commitments and Contingencies
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table presents the off-balance sheet financial instruments as of the dates indicated:
(Amounts in thousands)
Commitments to extend credit
Standby letters of credit and financial guarantees(1)
Total off-balance sheet risk
Reserve for unfunded commitments
(1)
Includes FHLB letters of credit
Note 21. Regulatory Requirements and Restrictions
December 31,
2019
2018
$
$
228,716 $
167,612
396,328
215,239
149,494
364,733
66 $
66
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 (“CCB”), which is intended
to absorb losses during periods of economic stress, became effective at 0.625%, and was phased in over a four-year period (increased an additional 0.625% each
year until it reached 2.5% on January 1, 2019).
96
Table of Contents
The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual
Minimum Basel III
Requirement
Minimum Basel III
Requirement - with
CCB
Well Capitalized
Requirement(1)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2019
$
$
292,241
292,241
310,732
292,241
14.31% $
14.31%
15.21%
14.01%
91,926
122,568
163,423
83,408
4.50% $
6.00%
8.00%
4.00%
142,996
173,637
214,493
N/A
7.00%
8.50%
10.50%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
262,716
262,716
281,207
262,716
12.87% $
12.87%
13.78%
12.61%
91,860
122,480
163,306
83,313
4.50% $
6.00%
8.00%
4.00%
142,893
173,513
214,339
N/A
7.00% $
8.50%
10.50%
N/A
132,686
163,306
204,133
104,141
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
Actual
Minimum Basel III
Requirement
Minimum Basel III
Requirement - with
CCB
Well Capitalized
Requirement(1)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2018
$
$
236,544
236,544
254,877
236,544
13.72% $
13.72%
14.79%
10.95%
77,570
103,427
137,902
86,439
4.50% $
6.00%
8.00%
4.00%
120,664
146,521
180,997
N/A
6.375%
7.875%
9.875%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
215,424
215,424
233,757
215,424
12.55% $
12.55%
13.62%
9.98%
77,223
102,964
137,285
86,376
4.50% $
6.00%
8.00%
4.00%
120,124
145,865
180,186
N/A
6.375% $
7.875%
9.875%
N/A
111,544
137,285
171,606
107,970
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
97
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Parent Company Financial Information
The following tables present condensed financial information for the parent company, First Community Bankshares, Inc., as of and for the dates indicated:
(Amounts in thousands)
Assets
Cash and due from banks
Loans to affiliates
Investment in subsidiaries
Other assets
Total assets
Liabilities
Other liabilities
Total liabilities
Stockholders' equity
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
CONDENSED BALANCE SHEETS
December 31,
2019
2018
$
$
$
$
23,998 $
184
399,294
5,888
429,364 $
545 $
545
-
18,377
192,413
219,535
(1,506)
428,819
429,364 $
13,726
184
311,736
7,717
333,363
506
506
-
16,007
122,486
195,793
(1,429)
332,857
333,363
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
2018
2019
2017
(Amounts in thousands)
Cash dividends received from subsidiary bank
Other income
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
Equity in (dividends in excess) of undistributed net income of subsidiaries
Net income
$
$
38,500 $
444
1,420
37,524
(276)
37,800
1,002
38,802 $
48,000 $
306
2,293
46,013
(595)
46,608
(10,268)
36,340 $
22,720
352
2,044
21,028
(678)
21,706
(221)
21,485
98
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Net change in other operating activities
Net cash provided by operating activities
Investing activities
Dividends in excess of undistributed net income of subsidiaries
Net cash provided by investing activities
Financing activities
Repayments of long-term debt
Proceeds from issuance of common stock
Payments for repurchase of common stock
Payments of common dividends
Net change in other financing activities
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
Note 23. Quarterly Financial Data (Unaudited)
The following tables 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
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2018
2017
2019
$
38,802 $
36,340 $
1,865
40,667
(1,002)
(1,002)
-
136
(16,362)
(15,060)
1,893
(29,393)
10,272
13,726
23,998 $
1,509
37,849
10,268
10,268
-
832
(34,412)
(21,090)
1,063
(53,607)
(5,490)
19,216
13,726 $
$
21,485
656
22,141
221
221
(15,464)
738
(1,263)
(11,563)
845
(26,707)
(4,345)
23,561
19,216
Year Ended December 31, 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
23,611 $
1,425
22,186
1,220
20,966
8,080
-
16,785
12,261
2,630
9,631 $
0.61 $
0.60
0.21
24,382 $
1,393
22,989
1,585
21,404
8,692
(43)
16,651
13,402
2,951
10,451 $
0.67 $
0.66
0.25
23,605 $
1,384
22,221
675
21,546
7,634
-
17,444
11,736
2,580
9,156 $
0.59 $
0.58
0.25
23,370
1,313
22,057
91
21,966
9,314
-
18,883
12,397
2,833
9,564
0.61
0.61
0.25
15,839,424
15,920,950
15,712,204
15,775,320
15,603,992
15,664,587
15,611,093
15,670,047
$
$
$
99
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
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, 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
24,330 $
1,951
22,379
495
21,884
6,668
-
17,116
11,436
2,568
8,868 $
0.52 $
0.52
0.66
24,297 $
2,035
22,262
495
21,767
6,959
-
17,160
11,566
2,500
9,066 $
0.54 $
0.54
0.18
24,286 $
1,961
22,325
495
21,830
7,137
(618)
18,131
10,218
1,118
9,100 $
0.55 $
0.55
0.21
25,381
1,502
23,879
908
22,971
6,297
-
17,366
11,902
2,596
9,306
0.58
0.57
0.21
16,955,758
17,047,638
16,689,398
16,788,615
16,512,823
16,612,416
16,201,148
16,280,404
$
$
$
100
Table of Contents
Board of Directors and the Stockholders
First Community Bankshares, 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 Bankshares, Inc. and Subsidiary (the “Company”) as of December 31, 2019
and 2018, 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, 2019, 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, 2019 and 2018, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2019, 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 13, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’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 or fraud.
Our audits included performing procedures to assess the risks of material misstatement 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.
/s/ DIXON HUGHES GOODMAN LLP
We have served as the Company’s auditor since 2006.
Asheville, North Carolina
March 13, 2020
101
Table of Contents
- Management’s Assessment of Internal Control over Financial Reporting -
First Community Bankshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements
included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in
conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and
judgments.
We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce
reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates
to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has
inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial statement preparation.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management concluded that its system of internal control over financial reporting was effective as of December 31, 2019.
On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. “Highlands” of Abingdon, Virginia. The
transaction was consummated the close of business December 31, 2019. The internal control structure and procedures for financial reporting at Highlands were
excluded from management’s assessment of internal controls over financial reporting for the period ending December 31, 2019. Highlands represents 19.8% of
total consolidated assets as of the transaction date. The acquisition had no impact on 2019 revenues since it was completed as of the close of business on
December 31, 2019. There were no material changes to First Community Bankshares’ internal control over financial reporting as a result of this acquisition.
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, 2019. 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, 2019, appears hereafter in Item 8 of this Annual Report on Form
10-K.
Dated this 13th day of March, 2020.
/s/ William P. Stafford, II
William P. Stafford, II
Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer
102
Table of Contents
- Report of Independent Registered Public Accounting Firm -
Board of Directors and Stockholders
First Community Bankshares, Inc. and Subsidiary
Bluefield, Virginia
Opinion on Internal Control Over Financial Reporting
We have audited First Community Bankshares, Inc. and Subsidiary (the “Company”) internal control over financial reporting as of December 31, 2019, 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 Bankshares, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
financial statements of First Community Bankshares, Inc. and Subsidiary as of December 31, 2019 and 2018 and for each of the three years in the period ended
December 31, 2019, and our report dated March 13, 2020, 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 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.
As described in Management’s Report on Internal Control over Financial Reporting, the scope of management’s assessment of internal control over financial
reporting as of December 31, 2019 has excluded Highlands Bankshares, Inc. (“Highlands”) acquired at the close of business on December 31, 2019. We have also
excluded Highlands from the scope of our audit of internal control over financial reporting. The acquisition of Highlands had no impact on consolidated revenues
(total interest income and total noninterest income) for the year ended December 31, 2019, and represented 19.8 percent of consolidated total assets as of
December 31, 2019.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ DIXON HUGHES GOODMAN LLP
Asheville, North Carolina
March 13, 2020
103
Table of Contents
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon
that evaluation, the CEO and CFO concluded that, as of December 31, 2019, 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,
2019, 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.
Item 9B. Other Information.
None.
104
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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
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
Executive Officers, First Community Bankshares, Inc
Gary R. Mills
President, First Community Bankshares, Inc.; Chief Executive Officer and
President, First Community Bank
M. Adam Sarver
Member/Co-Manager, Main Street Builders, LLC, Eastern Door & Glass, LLC,
Longview Properties LLC, and Clover Leaf Properties, LLC
William P. Stafford, II
Chief Executive Officer, First Community Bankshares, Inc.; Attorney at Law,
Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC
William P. Stafford, II
Chief Executive Officer
Gary R. Mills
President
David D. Brown
Chief Financial Officer
E. Stephen Lilly
Chief Operating Officer and Executive Vice President
Board of Directors, First Community Bank
James H. Atkinson, Jr.
Retired Chief Executive Officer, Peoples Bank of Virginia
Robert L. Buzzo
Retired Vice President and Secretary, First Community Bankshares, Inc.;
Retired President Emeritus, First Community Bank
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
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
Richard S. Johnson
(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
105
Table of Contents
Additional Information
Additional information required in this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on April 28,
2020 (“2020 Annual Meeting”) under the headings “Proposal 1: Election of Directors, 2021,” “Nominees for the Class of 2023,” “Incumbent Directors,” “Non-
Director Named Executive Officers,” “Corporate Governance,” and “Delinquent Section 16(a) Reports.”
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 April 11, 2019.
Item 11. Executive Compensation.
The information required in this item is incorporated by reference to our Proxy Statement for the 2020 Annual Meeting under the headings “Board Committees,”
“Compensation Discussion and Analysis,” and “Director Compensation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information about compensation plans under which our equity securities are authorized for issuance as of December 31, 2019:
Plan category
Equity compensation plans approved by security holders(1)
Equity compensation plans not approved by security holders(2)
Total
Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))(3)
(c)
63,371 $
83,829
147,200
19.78
22.10
297,557
-
297,557
(1) Includes the 2012 Omnibus Equity Compensation Plan and 2004 Omnibus Stock Option Plan
(2) Includes the 2001 Directors' Option Plan and 1999 Stock Option Plan
(3) Shares are available for future issuance under the 2012 Omnibus Equity Compensation Plan.
Additional information required in this item is incorporated by reference to our Proxy Statement for the 2020 Annual Meeting under the heading “Information on
Stock Ownership.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required in this item is incorporated by reference to our Proxy Statement for the 2020 Annual Meeting under the headings “Corporate
Governance” and “Related Person/Party Transactions.”
Item 14. Principal Accounting Fees and Services.
The information required in this item is incorporated by reference to our Proxy Statement for the 2020 Annual Meeting under the heading “Independent Registered
Public Accounting Firm.”
106
Table of Contents
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents Filed as Part of this Report
(1) Financial Statements
PART IV
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.
2.1
2.2
3.1
3.2
4.1
4.2
10.1.1**
10.1.2**
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9.1**
10.9.2**
10.9.3**
10.9.4**
10.9.5**
Exhibit
Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated
by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1
of the Current Report on Form 8-K dated and filed September 11, 2019
Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form
DEF 14A dated April 24, 2018, filed on March 13, 2018
Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2,
2018
Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated
and filed October 2, 2018
Form of First Community Bankshares, Inc. Common Stock Certificate
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 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
107
Table of Contents
10.10**
10.11.1**
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
10.11.2** Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan,
10.12.1**
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
10.12.2** Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference
10.13**
10.14**
10.15**
10.16**
10.17**
21*
23*
31.1*
31.2*
32*
101***
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
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, 2019 and 2018; (ii) Consolidated
Statements of Income for the years ended December 31, 2019, 2018, and 2017; (iii) Consolidated Statements of Comprehensive Income for the years
ended December 31, 2019, 2018, and 2017; (iv) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019, 2018, and
2017; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017; and (vi) Notes to Consolidated Financial
Statements
*
**
***
Filed herewith
Indicates a management contract or compensation plan or agreement. These contracts, plans, or agreements were assumed by First Community
Bankshares, Inc. in October 2018 in connection with First Community Bancshares, Inc., a Nevada corporation, merging with and into its wholly-
owned subsidiary, First Community Bankshares, Inc., a Virginia corporation, pursuant to an Agreement and Plan of Reincorporation and Merger with
First Community Bankshares, Inc. continuing as the surviving corporation.
Submitted electronically herewith
108
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 13th day of March, 2020.
First Community Bankshares, Inc.
(Registrant)
By:
/s/ William P. Stafford, II
By:
/s/ David D. Brown
William P. Stafford, II
Chief Executive Officer
(Principal Executive Officer)
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/ C. William Davis
C. William Davis
/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
President and Director
Director
109
Date
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
Title
First Community Bank
State of Incorporation
Virginia
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
- Consent of Independent Registered Public Accounting Firm -
Exhibit 23
Board of Directors and Stockholders
First Community Bankshares, Inc. and Subsidiary
Bluefield, Virginia
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,
as amended) and the Employee Stock Ownership and Savings Plan (Form S-8, No. 333-63865, as amended) of First Community Bankshares, Inc. and Subsidiary
of our reports dated March 13, 2020, with respect to the consolidated financial statements of First Community Bankshares, Inc. and Subsidiary and the
effectiveness of internal control over financial reporting, which reports appear in First Community Bankshares, Inc. and Subsidiary’s 2019 Annual Report on
Form 10-K.
/s/ DIXON HUGHES GOODMAN LLP
Asheville, North Carolina
March 13, 2020
Exhibit 31.1
I, William P. Stafford, II, certify that:
1.
I have reviewed this Annual Report on Form 10-K of First Community Bankshares, 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 13, 2020
/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 Bankshares, 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 13, 2020
/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 Bankshares, Inc. (the “Company”) for the period ended December 31, 2019 (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 13, 2020
By:
/s/ William P. Stafford, II
By:
/s/ David D. Brown
William P. Stafford, II
Chief Executive Officer
David D. Brown
Chief Financial Officer