Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over
financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of June 30, 2020, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $282.85 million.
☐ Yes ☑ No
As of March 2, 2021, there were 17,641,124 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 27, 2021, are incorporated by reference in Part III of this Form 10-K.
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
2020 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 and Financial Statement Schedules.
Signatures
2
Page
4
11
17
17
17
17
18
20
21
45
46
106
106
106
107
108
108
108
108
109
111
Table of Contents
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:
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestics and
global economy, which may have an adverse effect on the Company's business;
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;
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;
technological changes;
the costs and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting
Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters.
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. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of
operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those
forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. Further, statements
about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking
statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to
factors and future developments that are uncertain, unpredictable and in many cases beyond our control. 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.
3
Table of Contents
Item 1.
Business.
General
PART I
First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and reincorporated 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 in 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 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:
●
●
●
●
●
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 and Human Capital Resources
As of December 31, 2020, we had 605 full-time employees and 30 part-time employees. The employees are not represented by a collective bargaining unit and we
consider our relationship with our employees to be good.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the
organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally
developed training programs and customized corporate training engagements.
The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee
safety while continuing successful operations. Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to
transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced
working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when
they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover
compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance
and keeping increases in the employee portion of health care premiums as small as possible and sponsoring various wellness programs.
Employee retention helps us operate efficiently and achieve one of our business objectives, which is building financial partnerships. We believe our commitment to
living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and
providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company
through participation in our current 401(k) plan and a former employee stock ownership plan, which aligns employee and stockholder interests by providing stock
ownership on a tax-deferred basis at no investment cost to our associates.
Market Area
As of December 31, 2020, we operated 50 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment,
Community Banking. Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals
and businesses across a variety of industries such as education; government and health services; 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 competitive pressures with our
relationship style of banking, competitive pricing, cost efficiencies, and disciplined approach to loan underwriting.
4
Table of Contents
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.
5
Table of Contents
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 "Basel III Capital Rules").
Since fully phased in on January 1, 2019, Basel III Capital Rules require the Company and the Bank to maintain the following:
● A minimum ratio of Common Equity Tier 1 ("CET1") to risk-weighted assets of at least 4.50%, plus a 2.50% "capital conservation buffer" that is
composed entirely of CET1 capital (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.00%);
● A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital
ratio of 8.50%);
● A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.00%, plus the capital conservation buffer (resulting
in a minimum total capital ratio of 10.50%); and
● A minimum leverage ratio of 4.00%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial
statements (known as the "leverage ratio").
Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to
constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints
depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, the greater of (i) net income for the preceding four quarters, net of
distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).
Basel III Capital Rules and the Capital Simplification 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 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that
any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the
Company and the Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.
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.
6
Table of Contents
In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to
credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period,
the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected credit losses (“CECL”) on their regulatory
capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition
option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the
end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on
regulatory capital, followed by a three-year transition period (five-year transition option).
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 November 2019, the federal
banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.
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, 2020.
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. Temporary relief
was provided to community banks under the Coronavirus Aid, Relief and Economic Security Act to set the community bank ratio to 8.00% beginning in the second
quarter of 2020 and for the remainder of 2020, and to 8.50% effective January 1, 2021, and 9.00% effective January 1, 2022. 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, 2020. 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:
●
●
●
●
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.
7
Table of Contents
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.
8
Table of Contents
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 $426 thousand in 2020, $318 thousand in 2019, and
$840 thousand in 2018. The decrease in FDIC assessments in 2019 and 2020 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 was applied when the reserve ratio was at least 1.38 percent. The Small Bank Credit was fully utilized by the second
quarter of 2020.
In addition, all FDIC-insured institutions were required to pay annual assessments to fund interest payments on bonds issued by the Financing Corporation
(“FICO”) through March 29, 2019. 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 were set quarterly, were
$6 thousand in 2019, and $66 thousand in 2018.
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 were subject to further amendment 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.
In December 2019, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that
would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where
there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change
four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and
objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the Federal Reserve
Board did not join in that proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the
revisions to its CRA rule. In September 2020, the Federal Reserve Board issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invites public
comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking
landscape and better meet the core purpose of the CRA. The ANPR seeks feedback on ways to evaluate how banks meet the needs of low- and moderate-income
communities and address inequities in credit access. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and
their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.
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.
9
Table of Contents
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 Fair Debt Collections 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. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. As a
bank with less than $10 billion in assets, the Bank is subject to these federal consumer financial laws, but continues to be examined for compliance by the Federal
Reserve, its primary federal banking regulator, not the CFPB.
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.
In October 2016, the federal banking regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are
intended to increase the operational resilience of large and interconnected entities under their supervision. If established, the enhanced cyber risk management
standards would be designed to help reduce the potential impact of a cyber-attack or other cyber-related failure on the financial system. The advance notice of
proposed rulemaking addresses five categories of cyber standards: (i) cyber risk governance; (ii) cyber risk management; (iii) internal dependency management;
(iv) external dependency management; and (v) incident response, cyber resilience, and situational awareness. In May 2019, the Federal Reserve announced that it
would revisit the Advance Notice of Proposed Rulemaking in the future. In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking
that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification
incident.” The Notice of Proposed Rulemaking also would require specific and immediate notifications by bank service providers that become aware of similar
incidents.
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.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended
to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to
anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA
compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA
whistleblower incentives and protections.
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.
10
Table of Contents
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 the Economic Environment
The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our
business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by
the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial
markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines,
cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall
economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have branches and of most other
states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or
forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other
consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel,
hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in
which we operate.
The ultimate effects of the COVID-19 pandemic on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions
described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our
interest income and, therefore, earnings, financial condition and results of operation. This may include, or exacerbate, among other consequences, the following:
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
employees contracting COVID-19;
reductions in our operating effectiveness as our employees work from home;
increased cybersecurity risk due to the continuation of the work-from-home measures;
a work stoppage, forced quarantine, or other interruption of our business;
unavailability of key personnel necessary to conduct our business activities;
effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial
reporting and internal controls;
sustained closures of our branch lobbies or the offices of our customers;
declines in demand for loans and other banking services and products;
reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic;
unprecedented volatility in United States financial markets;
volatile performance of our investment securities portfolio;
decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to
increase our allowance for loan losses;
declines in value of collateral for loans, including real estate collateral;
declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and
declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-
essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets.
These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our
business, financial condition and results of operations.
The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially
disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products
and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments
could have a material adverse effect on our business, financial condition and results of operations.
We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will
be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and
service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and
adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial
condition and results of operations.
11
Table of Contents
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.
As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the
Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP.
Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll
in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020 and on or
about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of
approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act)
enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who
received funding in the first round and first draw loans to first time borrowers. As of December 31, 2020, we have funded approximately 803 loans with original
principal balances totaling $62.74 million through the PPP program. Through December 31, 2020 $3.94 million, or 6.46%, of the Company’s Paycheck Protection
Program loan balances had been forgiven by the SBA.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing
applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both customers and non-customers who approached the Bank
regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the
Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s
reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related
litigation could have a material adverse impact on our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded,
or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws,
rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a
deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the
amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, the Bank is at the heightened risk of holding the loan at an unfavorable interest
rate as compared to loans to customers that the Bank would have otherwise extended credit. Rules providing for forgiveness have been constantly evolving,
including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.
Regulatory Risks
We operate in a highly regulated industry subject to examination, supervision, enforcement, and other legal actions by various federal and state governmental
authorities, laws, and judicial and administrative decisions.
Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these statutes, regulations, and regulatory policies,
including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial
services and products offered, or allow non-banks to offer competing financial services and products. Failure to follow laws, regulations, and policies may result in
sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results
of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future
laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further
limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of
operations.
The Bank’s ability to pay dividends is subject to regulatory limitations that may affect the Company’s ability to pay expenses and dividends to shareholders.
The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity,
and the payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity
to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank’s dividend payment is
governed by various statutes and regulations. For additional information, see “Payment of Dividends” in Item 1 of this report. The Company may not be able to
service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, including our common stock.
Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and
prospects.
12
Table of Contents
Market and Interest Rate Risk
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.
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” the
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. Subsequently, the Federal Reserve
Board announced final plans for the production of the Secured Overnight Financing Rate (SOFR), which resulted in the commencement of its published rates by
the Federal Reserve Bank of New York on April 3, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the
future of LIBOR at this time is uncertain. 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 the 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. On November 30, 2020, ICE Benchmark Administration Limited,
the administrator of LIBOR, announced that it will consult on its intention to cease the publication of the one week and two month LIBOR settings immediately
following the LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023. The
outcome of such consultation and its impact on LIBOR could materially affect the economics as well as the timing of the transition away from LIBOR.
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.
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.
Credit Risk
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.
13
Table of Contents
We are subject to credit risk associated with the financial condition of other financial institutions
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Financial institutions are interrelated
as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute
transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and
other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of
other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may
increase if the collateral we hold cannot be realized or liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the
event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding
involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty
was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our
financial condition and results of operations.
Our commercial loan portfolio may expose us to increased credit risk.
Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer
loans and repayment is usually dependent on cash flows from the borrower’s business or the property securing the loan. Our commercial business loans are
primarily made to small business and middle market customers. As of December 31, 2020, commercial business and real estate loans totaled $1.11 billion, or
50.84%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $5.72 million and largest outstanding commercial
real estate loan was $9.73 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, 2020, commercial construction loans totaled $44.65 million, or 2.04% of our total loan portfolio. As of the same date, our
largest outstanding commercial construction loan was $4.51 millio n. Losses from our commercial loan portfolio could have a material adverse effect on our
financial condition and results of operations.
Operational Risks
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.
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 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.
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.
14
Table of Contents
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.
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 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.
15
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.
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.
General Risks
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.
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.
16
Table of Contents
Potential acquisitions may disrupt our business and dilute stockholder value.
We may seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or the
potential for improved profitability through financial management, economies of scale, or expanded services. Risks inherent in acquiring other banks, businesses,
and banking branches may include the following:
● potential exposure to unknown or contingent liabilities of the target company;
● exposure to potential asset quality issues of the target company;
● difficulty, expense, and delays of integrating the operations and personnel of the target company;
● potential disruption to our business;
● potential diversion of management’s time and attention;
● loss of key employees and customers of the target company;
● difficulty in estimating the value of the target company;
● potential changes in banking or tax laws or regulations that may affect the target company;
● unexpected costs and delays;
● the target company’s performance does not meet our growth and profitability expectations;
● limited experience in new markets or product areas;
● increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and
● potential short-term decreases in profitability.
We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and
financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions
involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over
the acquired company’s book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to
realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of
operations may be adversely affected.
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 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.
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.
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, 2020, the Bank provided financial services through
a network of 50 branch locations in West Virginia (18 branches), Virginia (23 branches), North Carolina (7 branches), and Tennessee (2 branches). We own 49 of
those branches and lease the remaining branch. As of December 31, 2020, there were no mortgages or liens against any properties. We believe that our properties
A list of all branch and ATM locations is available on our website at
are suitable and adequate to serve as financial services facilities.
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.
17
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 March 02, 2021, there were 2,900 record holders and
17,641,124 outstanding shares of our common stock.
Purchases of Equity Securities
We repurchased 734,653 shares of our common stock in 2020, 487,400 shares of our common stock in 2019, and 1,060,312 shares in 2018.
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, 2020
November 1-30, 2020
December 1-31, 2020
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)
— $
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
(1)
In the first quarter of 2020, the Company exhausted its 6,600,000 shares repurchase authorization. As a result of the uncertainty associated with the
COVID-19 pandemic; the Company elected not to repurchase shares during the remainder of 2020. In February 2021, the Board of Directors approved a
new 2,400,000 shares repurchase authorization.
18
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, 2020, 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.
2015
2016
Year Ended December 31,
2018
2017
2019
2020
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
166.50
111.96
108.87
134.61
162.63
136.40
141.13
152.15
185.68
130.42
137.12
142.04
188.32
171.49
187.44
167.21
137.10
203.04
271.64
132.04
(1) Includes the following institutions: American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; BankFirst Capital Corporation; C&F Financial
Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carter Bankshares, Inc.; Chesapeake Financial Shares, Inc.; Citizens Holding
Company; CoastalSouth Bancshares, Inc.; Colony Bankcorp, Inc.; Community Bankers Trust Corporation; Eagle Financial Services, Inc.; F&M Bank Corp.;
FineMark Holdings, Inc.; First Community Bankshares, Inc.; First Community Corporation; First Home Bancorp, Inc.; FVCBankcorp, Inc.; GrandSouth
Bancorporation; Heritage Southeast Bancorporation, Inc.; HomeTrust Bancshares, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; Morris State
Bancshares, Inc.; Mountain Commerce Bankcorp, Inc.; MVB Financial Corp.; National Bankshares, Inc.; Old Point Financial Corporation; Peoples Bancorp of
North Carolina, Inc.; Premier Financial Bancorp, Inc.; Professional Holding Corp.; Reliant Bancorp, Inc.; Select Bancorp, Inc.; SmartFinancial, Inc.; Southern First
Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.; Summit Financial Group, Inc.; TGR Financial, Inc.
19
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,
2020. 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
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
$
$
$
$
$
2020
83,358
2,186,632
26,182
3,011,136
2,892,287
2,546,247
964
2,584,406
426,730
420,792
114,036
5,464
108,572
12,668
29,833
79,625
10,186
35,926
35,926
Year Ended December 31,
2018
2019
2017
$
$
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
$
$
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
$
2.02
2.02
1.00
—
24.08
$
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
2016
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
1.45
1.45
0.60
—
19.95
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
17,781,748
17,815,380
15,690,812
15,756,093
16,587,504
16,666,385
17,002,116
17,077,842
17,319,689
17,365,524
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
1.24%
8.54%
14.55%
49.50%
14.28%
14.28%
15.53%
10.24%
20
1.75%
11.54%
15.16%
38.82%
14.31%
14.31%
15.21%
14.02%
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%
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, 2020, the Bank
operated 50 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, 2020, the Trust
Division and FCWM managed and administered $1.18 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, 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 immediately after the transaction. 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.
Recent Developments: COVID-19 and the CARES Act
The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a broad range of industries in which the
Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared
COVID-19 to be a global pandemic and almost all public commerce and related business activities have been curtailed, to varying degrees, with the goal of
decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other
financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 has the
potential to create widespread business continuity issues for the Company.
Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid,
Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to
curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted
industry sectors through programs like the Paycheck Protection Program (“PPP”). The package also included extensive emergency funding for hospitals and
providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have
had a material impact on the Company’s operations and could continue to impact operations going forward.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While
progress has been made on the vaccine front, if the global response to contain COVID-19 is prolonged or is unsuccessful, the Company could experience further
adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact
of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it
is aware.
Financial position and results of operations
Pertaining to our December 31, 2020, financial condition and results of operations, COVID-19 had a material impact on our allowance for loan losses (“ALL”).
While we have not yet experienced any significant charge-offs related to COVID-19, our ALL calculation and resulting provision for loan losses were significantly
impacted by expectations for future losses due to governmental reactions to the pandemic. Refer to our discussion of the ALL in Note 6 of our financial statements
as well as additional discussion in MD&A. Should economic conditions worsen, we could experience further increases in our required ALL and record additional
loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
The Company’s fee income has been reduced due to COVID-19. Consumer spending behavior has proven to be very conservative during the pandemic resulting
in a decrease in overdraft behavior that generates NSF and other fee income. Should the pandemic and the global response escalate further, it is possible that the
Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the
results of operations in future periods.
21
Table of Contents
The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19
affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should
eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be
reversed. In such a scenario, interest income in future periods could be negatively impacted. As of December 31, 2020, the Company carried $3.47 million of
accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of
such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in
future periods.
Capital and liquidity
As of December 31, 2020, the Company 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, 2020. While we believe that we have sufficient capital, our reported and regulatory capital ratios could be
adversely impacted by loan losses and other negative trends initiated by the pandemic. We rely on cash on hand as well as dividends from the Bank to pay
dividends to our shareholders. If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay
dividends to our shareholders.
We maintain access to multiple sources of liquidity. Wholesale funding markets remain open to us, however, short-term funding rates have been volatile
throughout 2020. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. In addition, if an
extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of
funding.
Asset valuation
Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods.
While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not
anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
As of December 31, 2020, our goodwill was not impaired. Management performed a quantitative goodwill impairment test as of October 1, 2020. The goodwill
impairment test did not identify any goodwill impairment for our one reporting unit, nor was it at risk of failing the quantitative test. COVID-19 could cause a
decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform
a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is
impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or
regulatory capital. At December 31, 2020, we had goodwill of $129.57 million, representing approximately 30.36% of equity.
As of December 31, 2020, we did not have any impairment with respect to our intangible assets or other long-lived assets. It is possible that the lingering effects of
COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an
intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our
intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on
tangible capital or regulatory capital. At December 31, 2020 we had intangible assets of $7.07 million, representing approximately 1.66% of equity.
Our processes, controls and business continuity plan
The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters
and pandemics. Upon the WHO’s pandemic declaration, the Company’s Enterprise Risk Management team implemented its Board approved Business Continuity
Plan. The Company appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial
risks posed by COVID-19. Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team
members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts -
including customer relief efforts. The Company’s preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to
operations as a result of COVID-19. At December 31, 2020, a significant portion of our backroom operations employees continue to work remotely with no
disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material
cost in future periods.
As of December 31, 2020, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to
prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity
plans.
Lending operations and accommodations to borrowers
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act included a provision allowing banks to not apply the guidance on accounting for troubled
debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31,
2020, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30
days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act. Through December 31, 2020, we have modified 3,625
commercial and consumer loans totaling $458.17 million. Those modifications were generally short-term payment deferrals and are not considered TDR's based
on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in
that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period
has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional
modifications, payment performance and current underwriting. As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at
$26.54 million and $5.72 million, respectively. It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated
Appropriations Act of 2021 ("CAA") signed into law on December 27, 2000, that extended the ability to provide necessary loan modifications to our customers
and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best
efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss
expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.
22
Table of Contents
With the passage of the PPP, administered by the Small Business Administration (“SBA”) small businesses and other entities and individuals can apply for loans
from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is
participating as a lender in the PPP. The PPP opened on April 3, 2020, and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for
the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-
Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") enacted on December 27, 2020, in January, 2021, the SBA released applications for the
second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers. As of
December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program. Through
December 31, 2020, $3.94 million, or 6.46%, of the Company’s PPP loan balances had been forgiven by the SBA. It is the Company’s understanding that loans
funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an
allowance for credit loss through additional credit loss expense charged to earnings.
The Company is committed to assisting our customers in this time of need. Branch locations have converted to drive-thru only in order to ensure the health and
safety of our customers and team members with lobbies available on a limited appointment-only basis. In addition, we have increased our emphasis on digital
banking platforms.
The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee
safety while continuing successful operations. Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to
transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced
working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when
they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover
compensation during such absences.
It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations. Although there
is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial
position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.
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 as the accounting areas that require the most subjective or complex judgments or are the most
susceptible to change.
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 specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans
that have been segmented into loan classes with similar risk characteristics such as the type of loan and collateral. General reserve allocations are based on
management’s judgments of qualitative and quantitative factors that 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 loans classified as special mention and substandard within each loan class in the commercial
loan segment are adjusted by an additional qualitative factor. 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, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest
rate or the net realizable value of the collateral if the loan is collateral dependent. 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, 2020. For additional information, see Note 6,
“Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.
23
Table of Contents
Goodwill
Goodwill is tested for impairment annually, on October 31st, or more frequently if events or circumstances indicate there may be impairment. We have one
reporting unit, 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 determining if it is more likely than not that the fair
value of our reporting unit is less than its carrying amount. 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. We performed a
quantitative assessment for the annual test on October 31, 2020, which resulted in no goodwill impairment.
Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit
can be supported by its fair value. The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market
approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method). The Company engaged an independent
valuation specialist to assist with goodwill impairment testing utilizing both the market and DCF methods. The resulting fair values from the aforementioned
methods were appropriately weighted to determine the final fair value of our reporting unit.
Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples. The selection of the multiples
considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline
companies. Among other factors considered, are the level and expected growth in return on tangible equity relative to the guideline companies selected, implied
control premiums, recent transaction prices, as well as data in comparable macroeconomic environments.
Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate. The cash flows for
the forecasted period are estimated based on management’s most recent projections available as of the testing date, given consideration to minimum equity capital
requirements. The projections include macroeconomic variables developed at the same time. The terminal growth rate is selected based on management’s long-
term expectation for the reporting unit. The discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing
model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.
At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment of goodwill. While the inherent risk
related to uncertainty is embedded in the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and
uncertainties related to the pandemic. Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the
severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the
valuation. If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment
charges in the future. For additional information, see Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this
report.
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. 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%.
2020
Year Ended December 31,
2019
2018
$
$
108,572
647
109,219
$
$
4.27%
0.02%
4.29%
89,453
848
90,301
$
$
4.54%
0.05%
4.59%
90,845
899
91,744
4.37%
0.04%
4.41%
24
Table of Contents
Performance Overview
Highlights of our results of operations in 2020, and financial condition as of December 31, 2020, include the following:
For the full year, the Company earned $35.93 million, or $2.02 per diluted share, a decrease of $2.88 million, or 7.41% over 2019.
●
● Return on average assets remained strong at 1.24% for the twelve-month period.
● Net interest margin decreased 30 basis points to 4.29% for the full year 2020 compared to 2019. The decrease is reflective of the current historic low
interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired
loans.
The Company booked loan loss provision of $12.67 million; an increase of $9.10 million compared to the year 2019. The increase was primarily related
to the economic uncertainty caused by the coronavirus pandemic.
The Company booked $239.60 million of new residential mortgage loans during the year.
The Company processed 803 loans with original balances totaling $62.74 million through the SBA's Paycheck Protection Program to assist small
businesses during the COVID-19 pandemic. As of December 31, 2020, $3.94 million, or 6.46%, of these loan balances had been forgiven by the SBA.
Interest-free deposits grew $144.93 million during 2020, and total deposits grew $216.34 million, or 9.29% , during 2020.
●
●
●
●
● Book value per common share increased $0.75 to $24.08 compared to December 31, 2019.
●
The Company completed its stock repurchase authorization in the first quarter of 2020 with the repurchase of 734,653 shares for approximately $21.87
million. As of December 31, 2020, the Company continues to significantly exceed regulatory "well capitalized" targets, as well as all capital targets of its
capital management plan.
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)
2020
2019
2018
(Decrease)
Change
(Decrease)
Change
Year Ended December 31,
2020 Compared to 2019
Increase
%
2019 Compared to 2018
Increase
%
Net income
$
35,926
$
38,802
$
36,340
$
(2,876)
(7.41)% $
2,462
6.77%
Basic earnings per common share
Diluted earnings per common share
2.02
2.02
2.47
2.46
2.19
2.18
(0.45)
(0.44)
(18.22)%
(17.88)%
0.28
0.28
Return on average assets
Return on average common equity
1.24%
8.54%
1.75%
11.54%
1.56%
10.64%
(0.51)%
(3.00)%
(29.14)%
(26.00)%
0.19%
0.90%
12.79%
12.84%
12.18%
8.46%
2020 Compared to 2019. Pre-tax income decreased $3.68 million, or 7.40%, due to an increase in noninterest expense of $9.86 million, an increase in the provision
for loan losses of $9.10 million, and a decrease in noninterest income of $3.84 million. The decreases to income were offset by a increase in net interest income of
$19.12 million. Income tax expense decreased $808 thousand primarily as a result of the decrease in pre-tax income.
2019 Compared to 2018. 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 2019 to 22.08% in 2020.
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:
2020
Year Ended December 31,
2019
2018
Average
Balance Interest(1)
Average
Yield/
Rate(1)
Average
Balance Interest(1)
Average
Yield/
Rate(1)
Average
Balance Interest(1)
Average
Yield/
Rate(1)
$ 2,142,637 $ 110,619
3,259
—
805
2,544,137 $ 114,683
105,005
—
296,495
348,150
$ 2,892,287
5.16% $ 1,722,419 $
126,732
3.10%
3,045
—
0.27%
116,119
4.51% 1,968,315 $
248,926
$ 2,217,241
88,990
4,334
45
2,447
95,816
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%
3.07%
1.67%
1.89%
4.77%
(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
$ 556,279 $
711,831
456,755
1,724,865
311
902
4,247
5,460
0.06% $ 453,824 $
504,081
0.13%
0.93%
418,450
0.32% 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
1,145
—
3
—
0.28%
—
2,471
3,767
4
119
0.14%
3.17%
4,010
25,000
5
806
Retail repurchase agreements
Wholesale repurchase agreements
FHLB advances and other
borrowings
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and equity
36
1,181
1,726,046
707,623
37,826
2,471,495
420,792
$ 2,892,287
1
4
5,464
—
2.23%
0.34%
6,238
0.32% 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
Net interest income, FTE(1)
Net interest rate spread, FTE(1)
Net interest margin, FTE(1)
$ 109,219
$
90,301
$
91,744
4.19%
4.29%
4.47%
4.59%
(1) FTE basis based on the federal statutory rate of 21%.
(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 $7.99 million in 2020, $3.23 million in 2019, and $6.39 million in 2018.
26
0.05%
0.08%
0.96%
0.36%
0.12%
3.22%
4.05%
3.50%
0.49%
4.28%
4.41%
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, 2020 Compared to 2019
Dollar Increase (Decrease) due to
Year Ended
December 31, 2019 Compared to 2018
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
21,736 $
(743)
(45)
3,791
24,739
(42) $
(101)
—
(534)
(677)
(65) $
(231)
—
(4,899)
(5,195)
21,629 $
(1,075)
(45)
(1,642)
18,867
(3,729) $
(1,536)
(368)
654
(4,979)
1,077 $
619
(48)
171
1,819
(177) $
(168)
43
85
(217)
Interest paid on(1):
Demand deposits
Savings deposits
Time deposits
Retail repurchase agreements
Wholesale repurchase agreements
FHLB advances and other borrowings
Total interest-bearing liabilities
63
338
391
(2)
(119)
—
671
(7)
(46)
(97)
1
—
—
(149)
(26)
(213)
(335)
—
—
1
(573)
30
79
(41)
(1)
(119)
1
(51)
(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
(2,829)
(1,085)
(373)
910
(3,377)
35
441
(228)
(1)
(687)
(1,494)
(1,934)
Change in net interest income(1)
$
24,068 $
(528) $
(4,622) $
18,918 $
(2,284) $
2,585 $
(1,744) $
(1,443)
(1)
FTE basis based on the federal statutory rate of 21%.
2020 Compared to 2019. Net interest income comprised 78.45% of total net interest and noninterest income in 2020 compared to 72.65% in 2019. Net interest
income increased $19.12 million, or 21.37%, compared to a increase of $18.92 million, or 20.95%, on a FTE basis. The FTE net interest margin decreased 30 basis
points and the FTE net interest spread decreased 28 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the
current historically low interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of
acquired loans.
Average earning assets increased $575.82 million, or 29.25%, primarily due to an increase in average loans and average interest-bearing deposits offset by a
decrease in average debt securities. The yield on earning assets decreased 36 basis points as the yields on interest-bearing deposits and debt securities decreased
primarily due to the historically low rate environment. Average loans increased $420.22 million, or 24.40%, and the average loan to deposit ratio decreased to
88.08% from 93.35%. The increase in average loans was primarily due to the addition of Highlands. Non-cash accretion income related to PCI loans increased
$4.76 million, or 147.37%, to $7.99 million due the addition of Highlands and the fourth quarter payoff of a large acquired loan relationship. The impact of non-
cash purchase accounting accretion income on the FTE net interest margin was 31 basis points compared to 17 basis points in the prior year.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $343.45 million, or 24.84%, primarily due to an
increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 8 basis points. Average interest-bearing deposits increased
$348.51 million, or 25.32%, which was driven by the December 31, 2019, Highlands acquisition with increases of $207.75 million, or 41.21%, in average savings
deposits, $102.46 million, or 22.58%, in average interest-bearing demand deposits, and $38.31 million, or 9.15%, in average time deposits.
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.
27
Table of Contents
Provision for Loan Losses
2020 Compared to 2019. The provision charged to operations increased $9.10 million, or 254.75%. The increase was primarily related to the economic uncertainty
caused by the coronavirus pandemic.
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.
Noninterest Income
The following table presents the components of, and changes in, noninterest income for the periods indicated:
Year Ended December 31,
2019
2020
2018
2020 Compared to 2019
Increase
(Decrease) Change
%
2019 Compared to 2018
Increase
(Decrease) Change
%
(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
$
$
3,417 $
13,019
10,333
—
385
(1,690)
—
4,369
29,833 $
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 $
(6)
(1,575)
2,052
—
428
687
(6,995)
1,565
(3,844)
-0.18% $
-10.79%
24.78%
—
-995.35%
-28.90%
-100.00%
55.81%
-11.41% $
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%
2020 Compared to 2019. Noninterest income comprised 21.55% of total net interest and noninterest income in 2020 compared to 27.35% in 2019. Noninterest
income decreased $3.84 million, or 11.41%, primarily due to $7.00 million received in litigation settlements in 2019. Service charges on deposits decreased $1.58
million, or 10.79%; the decrease was primarily attributable to pandemic shutdowns throughout 2020. Other service charges and fees increased $2.05 million, or
24.78%, primarily from an increase in net interchange income for the addition of Highlands accounts. Other operating income increased $1.57 million, or 55.81%,
and was primarily driven by third party incentives associated with debit cards.
2019 Compared to 2018. Noninterest income comprised 27.35% of total net interest and noninterest income in 2020 compared to 22.55% in 2019. 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 2019.
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,
2019
2020
2018
2020 Compared to 2019
Increase
(Decrease) Change
%
2019 Compared to 2018
Increase
(Decrease) Change
%
(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
$
$
44,005 $
5,043
5,558
5,665
1,951
1,224
1,450
426
—
1,893
—
12,410
79,625 $
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 $
6,857
709
1,101
1,217
(359)
(474)
453
108
—
(231)
—
481
9,862
18.46% $
16.36%
24.70%
27.36%
-15.54%
-27.92%
45.44%
33.96%
—
-10.88%
—
4.03%
14.14% $
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%
2020 Compared to 2019. Noninterest expense increased $9.86, or 14.14%. The increase was primarily due to an increase in salaries and benefits of $6.86 million,
or 18.46%, which was largely due to the addition of Highlands employees. In addition, occupancy and furniture and equipment expense increase a combined total
of $1.81 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.
2019 Compared to 2018. Noninterest expense decreased $10 thousand, or 0.01%, which was largely due to one-time charges recognized in 2019 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 2019 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.
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.
2020 Compared to 2019. Income tax expense decreased $808 thousand, or 7.35%, and is primarily attributable to the decrease in pre-tax net income. The
effective tax rate increased to 22.09% in 2020 compared to 22.08% in 2019.
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 2019 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.
29
Table of Contents
Financial Condition
Total assets as of December 31, 2020, increased $212.29 million, or 7.58%, to $3.01 billion from $2.80 billion as of December 31, 2019. The increase is primarily
attributable to the increase in overnight funds of $247.76 million, or 167.40%. Total liabilities as of December 31, 2020, increased $214.38 million, or 9.05%, to
$2.58 billion from $2.37 billion as of December 31, 2019. The increase is primarily the result of an increase in total deposits of $216.34 million, or 9.29%. The
increase in deposits is primarily attributable to the significant increase in demand deposits due to the unprecedented level of stimulus payments from the Federal
Government in response to the pandemic.
Investment Securities
Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as
collateral where required, and to make selective investments for Community Reinvestment Act purposes. 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, 2020, decreased $86.22 million, or 50.84%, compared to December 31, 2019. The decrease was attributable to sales of $51.03
million primarily due to the liquidation of the Highlands portfolio, as well as maturities, prepayments, and calls of $44.68 million offset by purchases of $10.27
million. The market value of debt securities available for sale as a percentage of amortized cost was 101.71% as of December 31, 2020 compared to 100.65% as of
December 31, 2019. There were no held-to-maturity debt securities as of December 31, 2020 or 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
$
$
$
$
2020
December 31,
2019
2018
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
555 $
—
43,950
—
37,453
81,958 $
551
—
44,459
—
38,348
83,358
$
$
101.71%
5,038 $
—
85,992
—
77,448
168,478 $
5,034
—
86,878
—
77,662
169,574
$
$
100.65%
1,108 $
19,970
96,886
—
35,513
153,477 $
— $
—
— $
—
—
—
$
$
— $
—
— $
—
—
—
$
$
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%
The following table provides information about our investment portfolio as of the dates indicated:
(Amounts in years)
Average life
Average duration
Available for
Sale
2020
Held to
Maturity
December 31,
Total
Available for
Sale
2019
Held to
Maturity
Total
5.02
1.84
N/A
N/A
5.02
1.84
6.41
5.30
N/A
N/A
6.41
5.30
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, 2020 or 2019.
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, 2020. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
Tax
Equivalent
Purchase
Yield(1)
—
3.78%
3.24%
—
2.13%
Available-for-Sale Securities
U.S. Agency
Securities
U.S. Treasury
Securities
Municipal
Securities
Total
$
$
$
$
—
—
555
—
555
$
$
2.09%
6.05
—
—
551
—
551
$
$
— $
—
—
—
— $
—
—
— $
—
—
—
— $
$
—
24,485
19,465
—
43,950
$
3.56%
4.75
—
24,703
19,756
—
44,459
$
$
—
24,485
20,020
—
44,505
37,453
81,958
3.54%
4.77
—
24,703
20,307
—
45,010
38,348
83,358
(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%
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 2020 or 2019. 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, 2020, increased $72.17 million, or 3.41%, compared to December 31, 2019. Covered
loans decreased $3.18 million, or 24.73%, 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, 2020 or 2019. 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
2020
2019
December 31,
2018
2017
2016
$
$
$
44,649 $
173,024
115,161
187,598
734,793
9,749
19,761
1,284,735
89,432
658,678
17,720
765,830
120,373
6,014
126,387
2,176,952
9,680
2,186,632
26,182
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
2,160,450 $
2,096,035 $
1,756,817 $
1,797,908 $
1,835,000
— $
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
2020
2019
December 31,
2018
2017
2016
$
$
25 $
—
—
185
—
—
—
210
7,094
2,376
—
9,470
—
9,680 $
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
The following table presents the percentage of loans to total loans in the non-covered portfolio, by loan class, as of the dates indicated:
2020
2019
December 31,
2018
2017
2016
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
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%
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%
2.04%
7.95%
5.29%
8.62%
33.75%
0.45%
0.91%
59.01%
4.11%
30.26%
0.81%
35.18%
5.54%
0.27%
5.81%
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
2020
2019
December 31,
2018
2017
2016
0.26%
0.00%
0.00%
1.91%
0.00%
0.00%
0.00%
2.17%
73.28%
24.55%
0.00%
97.83%
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%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.14%
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, 2020:
(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
$
$
$
$
8,954 $
18,539
3,197
8,900
54,172
1,615
2,329
97,706
5,263
2,734
270
8,267
8,533 $
117,394
19,411
21,630
169,001
7,174
6,414
349,557
11,912
21,836
764
34,512
27,162 $
37,091
92,553
157,068
511,620
960
11,018
837,472
72,257
634,108
16,686
723,051
9,770
6,014
15,784
121,757 $
87,023
—
87,023
471,092 $
23,580
—
23,580
1,584,103 $
44,649
173,024
115,161
187,598
734,793
9,749
19,761
1,284,735
89,432
658,678
17,720
765,830
120,373
6,014
126,387
2,176,952
77,371 $
44,385
121,756 $
434,895 $
36,197
471,092 $
862,277 $
721,827
1,584,104 $
1,374,543
802,409
2,176,952
(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, 2020:
(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
— $
168
—
168
792
8
800
968 $
222 $
746
968 $
25 $
17
—
42
4,553
202
4,755
4,797 $
703 $
4,094
4,797 $
— $
—
—
—
1,749
2,166
3,915
3,915 $
2,192 $
1,723
3,915 $
25
185
—
210
7,094
2,376
9,470
9,680
3,117
6,563
9,680
$
$
$
$
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
$
$
$
$
$
$
$
2020
2019
December 31,
2018
2017
2016
21,706
295
187
22,188
2,083
24,271
297
297
—
297
22,003
295
187
22,485
2,083
24,568
$
$
$
$
$
$
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
$
10,061
10,248
$
5,855
6,575
$
6,266
6,427
$
7,614
7,734
12,838
12,952
—
473
1,068
277
1.02%
0.81%
118.00%
1.20%
1.03%
0.82%
116.44%
1.20%
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
1.07%
0.91%
100.83%
1.08%
1.07%
0.92%
99.05%
1.06%
1,414
424
0.89%
0.90%
112.32%
1.00%
0.89%
0.92%
108.28%
0.97%
(1)
(2)
(3)
TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.18 million, $95 thousand, $898 thousand,
$169 thousand, and $224 thousand for the five years ended December 31, 2020. They are included in nonaccrual loans.
TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $637 thousand, $2.25 million, $1.68 million,
$1.76 million, and $1.06 million for the five years ended December 31, 2020. They are included in nonaccrual loans.
Total accruing TDRs exclude nonaccrual TDRs of $1.81 million, $2.34 million, $2.58 million, $1.93 million, and $1.28 million for the five years ended
December 31, 2020. They are included in nonaccrual loans.
37
Table of Contents
Non-covered nonperforming assets as of December 31, 2020, increased $3.33 million, or 15.87%, from December 31, 2019, primarily due to an increase of
$5.59 million, or 34.71%, in non-covered nonaccrual loans offset by a $1.89 million, or 47.52% decrease in non-covered OREO, and a $533 thousand, or 74.03%,
decrease in non-covered, non-performing troubled debt restructurings. Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost,
consisted of 22 properties with an average holding period of 16 months as of December 31, 2020. The net loss on the sale of OREO was $316 thousand in 2020,
$1.25 million in 2019, and $1.33 million in 2018. 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
2020
Covered
Total
Non-covered
2019
Covered
Total
Year Ended December 31,
$
$
3,969 $
—
695
(2,139)
(442)
2,083 $
— $
—
—
—
—
— $
3,969 $
—
695
(2,139)
(442)
2,083 $
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
As of December 31, 2020, non-covered nonaccrual loans were largely attributed to single family owner occupied (36.67%) and non-farm, non-residential (29.22%)
loans. As of December 31, 2020, approximately $6.09 million, or 28.06%, 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, 2020, increased
$3.15 million, or 35.27%, to $12.06 million from December 31, 2019. Nonperforming accruing TDRs as of December 31, 2020, decreased $533 thousand, or
74.03%, to $187 thousand from December 31, 2019. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 1.82% as of December 31, 2020,
compared to 13.69% as of December 31, 2019. Specific reserves on TDRs totaled $233 thousand as of December 31, 2020, compared to $353 thousand as of
December 31, 2019. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or
amortization terms.
The Coronavirus Aid, Relief and Economic Security ("CARES") Act included a provision allowing banks to not apply the guidance on accounting for troubled
debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31,
2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30
days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.
Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million. Those modifications were generally short-term
payment deferrals and are not considered TDR's based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special
mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is
upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a
number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of December 31, 2020, current
commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.
Commercial Loans Modified Under CARES Act
The following table details the balance of commercial loans modified for short-term payment deferral under provision of the CARES Act as of the dates indicated.
(unaudited, in thousands)
December 31, 2020
September 30, 2020
June 30, 2020
Balance
Percent
Modified
Balance
Percent
Modified
Balance
Percent
Modified
$
Construction, development, and other land
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Commercial Real Estate - Hotel/Motel
Commercial Real Estate - Retail Strip Centers
Commercial Real Estate - Other
Agricultural
Farmland
Total commercial modifications
$
1,409
1,363
351
1,683
17,465
—
3,968
33
266
26,538
3.15
0.79
0.30
0.90
17.42
—
0.69
0.34
1.35
2.07
% $
%
%
%
%
%
%
%
% $
3,753
6,700
5,919
7,049
48,225
4,432
22,912
1,322
2,223
102,535
8.88
3.61
5.61
3.65
46.69
6.45
3.92
12.93
9.56
7.78
% $
%
%
%
%
%
%
%
%
% $
14,377
25,584
22,021
39,135
92,940
19,740
116,871
3,464
5,865
339,997
27.33
13.88
20.82
20.75
89.75
38.17
20.58
33.29
24.79
26.39
%
%
%
%
%
%
%
%
%
%
Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $35.72 million as of December 31, 2020, an increase of
$97 thousand, or 0.27%, compared to $35.62 million as of December 31, 2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.64%
as of December 31, 2020, which includes past due loans (0.64%) and nonaccrual loans (1.00%), compared to 1.69% as of December 31, 2019.
38
Table of Contents
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, 2020, our qualitative risk factors reflect a increased risk of possible loan losses due to the effects of the COVID-19 pandemic. 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, 2020; 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, 2020, increased $7.76, or 42.10%, from December 31, 2019, primarily due the increased potential for loan
defaults and losses related to the COVID-19 pandemic. The non-PCI allowance as a percent of non-covered loans totaled 1.20% as of December 31, 2020,
compared to 0.88% as of December 31, 2019. PCI loans were aggregated into fifteen loan pools as of December 31, 2020 and five loan pools in 2019. The
Highlands transaction added ten additional pools to the five existing pools from 2019. Effective January 1, 2020, the Company collapsed the PCI loans and
discounts for Peoples and Waccamaw acquired loans into the non-PCI loan portfolio. 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. Net charge-offs
increased $1.50 million, or 43.89% in 2020 compared to 2019.
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
2020
2019
December 31,
2018
2017
2016
$
$
18,425
12,668
$
18,267
3,571
$
19,276
2,393
$
17,948
2,783
20,233
1,296
—
—
349
856
295
442
650
160
17
145
413
—
3,296
6,623
266
177
39
37
95
11
5
262
142
—
678
1,712
4,911
26,182
$
$
—
—
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
Net charge-offs to average non-covered loans
Net charge-offs to average total loans
0.23%
0.23%
39
0.20%
0.20%
0.19%
0.19%
0.08%
0.08%
0.21%
0.20%
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
2020
2019
December 31,
2018
2017
2016
$
528 $
1,024
1,417
1,861
9,417
218
196
799
7,957
195
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
$
2,570
26,182 $
1,865
18,425 $
1,036
18,267 $
794
19,276 $
759
17,936
There was no allowance related to PCI loans as of December 31, 2020, nor for December 31, 2019, 2018, or 2017. As of December 31, 2016 there was an
allowance of $12 thousand related to PCI loans.
Deposits
Total deposits as of December 31, 2020, increased $216.34 million, or 9.29%, compared to December 31, 2019. Time deposits, which consist of certificates of
deposit and individual retirement accounts, decreased $95.00 million; savings deposits, which consist of money market accounts and savings accounts, increased
$65.73 million; interest-bearing demand deposits increased $100.68 million while noninterest-bearing demand deposits increased $144.93 million as of December
31, 2020, compared to December 31, 2019. We attribute the significant increase in demand deposits to the unprecedented level of stimulus payments from the
Federal Government in response to the pandemic. We had no material deposit concentrations to any single customer or industry that represented 10% or more of
outstanding deposits as of December 31, 2020 or 2019.
The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2020:
(Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Borrowings
$
$
22,487
24,516
32,584
74,197
153,784
Total borrowings as of December 31, 2020, decreased $637 thousand, or 39.79%, compared to December 31, 2019. Total borrowings for 2020 were comprised
entirely of short-term borrowings, which consist of retail repurchase agreements. The weighted average rate increased 18 basis points to 0.32% as of December 31,
2020, compared to December 31, 2019.
40
Table of Contents
The following table presents the balances and weighted average rates paid on short-term borrowings for the periods indicated:
2020
Amount
Rate
Year Ended December 31,
2019
Amount
Rate
2018
Amount
Rate
(Amounts in thousands)
Year-end balance
Average annual balance(1)
Maximum month-end balance(1)
$
964
1,181
2,348
0.23% $
0.32%
1,601
2,471
28,508
0.16% $
0.14%
4,370
4,010
29,305
0.13%
0.12%
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 resulted in annualized net pre-tax
savings of approximately $800 thousand.
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, 2020, the Company’s cash reserves totaled
$10.09 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, 2020. 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, 2020, our unencumbered cash totaled $456.56 million, unused borrowing
capacity from the FHLB totaled $292.92 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 $46.79 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
2020
Year Ended December 31,
2019
2018
$
$
45,844 $
17,798
175,910
239,552
217,009
456,561 $
56,655 $
171,377
(87,896)
140,136
76,873
217,009 $
49,499
49,398
(179,975)
(81,078)
157,951
76,873
2020 Compared to 2019. Cash and cash equivalents increased $239.55 million compared to a increase of $140.14 million in the prior year. The increase was
primarily due to an increase in both interest-bearing and noninterest-bearing deposits for a total of $216.34 million. The increase in deposits was largely due to the
significant inflow of unprecedented government stimulus in response to the COVID-19 pandemic and changes in consumer spending.
2019 Compared to 2018. 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 acquired loans.
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, 2020, decreased
$2.09 million, or 0.49%, to $426.73 million from $428.82 million as of December 31, 2019. The Company earned $35.93 million, which was offset by
repurchasing 734,653 shares of our common stock totaling $21.87 million and declaring dividends on our common stock of $17.88 million. Our book value per
common share increased $0.75 to $24.08 as of December 31, 2020, from $23.33 as of December 31, 2019.
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 are based on the international capital standards known as Basel III. 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
2020
December 31,
2019
2018
14.28%
14.28%
15.53%
10.24%
13.57%
13.57%
14.82%
9.73%
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%
As of December 31, 2020, 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, 2020. 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, 2020:
(Amounts in thousands)
Deposits without a stated maturity(1)
Certificates of deposit(2)(3)
Securities sold under agreements to repurchase
Operating leases
Total contractual cash obligations
Less Than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
Total
$
$
2,125,628 $
228,133
964
154
2,354,879 $
— $
134,403
—
250
134,653 $
— $
55,765
—
218
55,983 $
— $
7,898
—
362
8,260 $
2,125,628
426,199
964
984
2,553,775
(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, 2020)
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, 2020:
(Amounts in thousands)
Commitments to extend credit
Financial letters of credit
Performance letters of credit(2)
Total off-balance sheet risk
Less than
One to
One Year(1) Three Years
Three to
Five Years
More than
Five Years
Total
$
$
101,309 $
80
2,288
103,677 $
53,429 $
160
176,239
229,828 $
7,511 $
50
205
7,766 $
67,159 $
—
—
67,159 $
229,408
290
178,732
408,430
(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, 2020 and 2019. 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 2020, the Federal Open Market Committee decreased the benchmark federal funds rate 150 basis points to a range of 0 to 25 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 Fed Funds rate as of December 31, 2020, we do not reflect a decrease of more than 100 basis points from current rates
in our analysis.
Increase (Decrease) in Basis Points
(Dollars in thousands)
300
200
100
(100)
(200)
Year Ended December 31,
2020
2019
Change in Net
Interest
Income
Percent
Change
Change in Net
Interest
Income
Percent
Change
$
8,429
5,912
3,130
(4,749)
N/A
8.5% $
6.0%
3.2%
-4.8%
N/A
171
428
426
(4,631)
(8,571)
0.2%
0.4%
0.4%
-4.3%
-8.0%
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, 2020, 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, 2020, we
maintained interest rate swap agreements with notional amounts totaling $16.70 million to modify our exposure to interest rate risk caused by changes in the
LIBOR curve in relation to certain designated fixed rate loans. The 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 $1.13 million as of December 31, 2020, and a derivative liability totaling $510 thousand as of
December 31, 2019. 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, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
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
102
104
105
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
Assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits in banks
Total cash and cash equivalents
Debt securities available for sale
Loans held for sale
Loans held for investment, net of unearned income (includes covered loans of $9,680 and $12,861, respectively)
Allowance for loan losses
Loans held for investment, net
FDIC indemnification asset
Premises and equipment, net
Other real estate owned
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; 24,319,076 issued and 17,722,507 outstanding at
December 31, 2020; 24,238,907 shares issued and 18,376,991 shares outstanding at December 31, 2019.
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,
2020
2019
58,404 $
395,756
2,401
456,561
83,358
—
2,186,632
(26,182)
2,160,450
1,223
57,700
2,083
9,052
129,565
7,069
104,075
3,011,136 $
772,795 $
1,773,452
2,546,247
964
37,195
2,584,406
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
—
—
17,723
173,345
237,585
(1,923)
426,730
3,011,136 $
18,377
192,413
219,535
(1,506)
428,819
2,798,847
$
$
$
$
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 gain (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
2020
Year Ended December 31,
2019
2018
$
$
$
110,447 $
1,004
1,785
800
114,036
5,460
4
—
5,464
108,572
12,668
95,904
3,417
13,019
10,333
—
385
(1,690)
—
4,369
29,833
44,005
5,043
5,558
5,665
1,951
1,224
1,450
426
—
—
1,893
12,410
79,625
46,112
10,186
35,926 $
2.02 $
2.02
1.00
—
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
17,781,748
17,815,380
15,690,812
15,756,093
16,587,504
16,666,385
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 (gain) loss 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
Other comprehensive (loss) income, net of tax
Total comprehensive income
See Notes to Consolidated Financial Statements.
$
49
2020
Year Ended December 31,
2019
2018
$
35,926 $
38,802 $
36,340
689
(385)
304
(1,217)
—
386
(831)
(527)
110
(417)
35,509 $
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
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share and per share data)
Stock
Stock Capital
Earnings
Stock Income (Loss)
Total
Additional
Accumulated
Other
Preferred Common
Paid-in Retained Treasury Comprehensive
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
Balance January 1, 2020
Net income
Other comprehensive loss
Common dividends declared -- $1.00 per share
Equity-based compensation expense
Issuance of stock to 401(k) plan -- 22,693 shares
Repurchase of common shares -- 734,653 shares at $29.77 per share
Balance December 31, 2020
See Notes to Consolidated Financial Statements.
$
$
$
$
$
$
— $ 21,382 $ 228,750 $ 180,543 $ (79,121) $
—
—
—
36,340
—
—
—
—
—
—
—
(12,966)
—
—
—
(8,124)
623
535
—
—
468
(84)
—
—
214
138
—
—
—
—
—
(34,412)
— 112,228
(106,853)
—
— $
— $ 16,007 $ 122,486 $ 195,793 $
—
—
—
—
—
—
—
—
(5,375)
— $ 16,007 $ 122,486 $ 195,793 $
38,802
—
—
—
(15,060)
—
—
—
—
—
—
—
—
—
—
—
— $ 18,377 $ 192,413 $ 219,535 $
—
—
—
1,437
128
399
(15,875)
83,838
—
—
—
44
8
12
(487)
2,793
— $ 18,377 $ 192,413 $ 219,535 $
35,926
—
—
—
(17,876)
—
—
—
—
—
—
—
— $ 17,723 $ 173,345 $ 237,585 $
—
—
—
1,585
484
(21,137)
—
—
—
58
23
(735)
— $
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
50
—
(589)
—
—
—
—
—
—
—
(840) $ 350,714
36,340
(589)
(12,966)
(8,124)
1,158
384
352
(34,412)
—
(1,429) $ 332,857
(1,429) $ 332,857
38,802
(77)
(15,060)
1,481
136
411
(16,362)
86,631
(1,506) $ 428,819
—
(77)
—
—
—
—
—
—
—
(417)
—
—
—
—
(1,506) $ 428,819
35,926
(417)
(17,876)
1,643
507
(21,872)
(1,923) $ 426,730
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
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
(Gain) loss on sale of securities
Writedowns of property, plant & equipment
Loss on extinguishment of debt
(Increase) 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
(Originations of) proceeds from repayments loans, net
Proceeds from bank owned life insurance
(Redemption of) payments for FHLB stock, net
Cash proceeds from mergers, acquisitions, and divestitures, net
Payments to 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
Increase (decrease) 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 provided by (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 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
2020
Year Ended December 31,
2019
2018
$
35,926 $
38,802 $
12,668
4,458
1,468
1,690
1,450
—
(7,991)
1,643
507
(59)
319
(385)
812
—
(6,662)
45,844
51,027
44,676
—
(10,267)
(69,259)
—
(12)
—
(30)
2,861
(3,195)
1,997
17,798
144,927
71,408
(637)
(40)
—
(21,872)
(17,876)
175,910
239,552
217,009
456,561 $
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 $
5,500 $
9,074
5,661 $
8,057
695
266
417
—
—
—
—
—
3,160
484
77
—
556,005
506,179
49,826
86,631
$
$
36,340
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
—
—
—
—
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 reincorporated 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 in 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 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 and goodwill and other intangible asset. 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.
52
Table of Contents
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 $10.80 million as of December 31, 2020, and $8.90 million as of December 31, 2019.
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 $3.93 million as of December 31, 2020, and
$3.68 million as of December 31, 2019.
53
Table of Contents
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. Impairment is measured based upon the present value
of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. 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.
54
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 $500 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 $500 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
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 specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans
that have been segmented into loan classes with similar risk characteristics such as the type of loan and collateral. General reserve allocations are based on
management’s judgments of qualitative and quantitative factors that 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 loans classified as special mention and substandard within each loan class in the commercial
loan segment are adjusted by an additional qualitative factor. 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, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest
rate or the net realizable value of the collateral if the loan is collateral dependent. 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, 2020. For additional information, see Note 6,
“Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.
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
Table of Contents
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, on October 31st, or more frequently if events or circumstances indicate there may be impairment. We have one
reporting unit, 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 determining if it is more likely than not that the fair
value of our reporting unit is less than its carrying amount. 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. We performed a
quantitative assessment for the annual test on October 31, 2020, which resulted in no goodwill impairment.
Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit
can be supported by its fair value. The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market
approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method). The Company engaged an independent
valuation specialist to assist with goodwill impairment testing utilizing both the market and DCF methods. The resulting fair values from the aforementioned
methods were appropriately weighted to determine the final fair value of our reporting unit.
Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples. The selection of the multiples
considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline
companies. Among other factors considered, are the level and expected growth in return on tangible equity relative to the guideline companies selected, implied
control premiums, recent transaction prices, as well as data in comparable macroeconomic environments.
Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate. The cash flows for
the forecasted period are estimated based on management’s most recent projections available as of the testing date, given consideration to minimum equity capital
requirements. The projections include macroeconomic variables developed at the same time. The terminal growth rate is selected based on management’s long-
term expectation for the reporting unit. The discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing
model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.
At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment of goodwill. While the inherent risk
related to uncertainty is embedded in the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and
uncertainties related to the pandemic. Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the
severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the
valuation. If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment
charges in the future.
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.
56
Table of Contents
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
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.
Advertising Expenses
Advertising costs are generally expensed as incurred. The Company may establish accruals for expected advertising expenses in the course of a fiscal year.
Income Taxes
Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company includes interest and
penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percent of pre-tax income, may vary significantly
from statutory rates due to tax credits and permanent differences. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and
liabilities are adjusted through the provision for income taxes as changes in tax laws or rates are enacted.
57
Table of Contents
Per Share Results
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Risks and Uncertainties
Recent COVID-19 Virus Developments –
During the year of 2020, government reaction to the novel coronavirus (“COVID-19”) pandemic significantly disrupted local, national, and global economies and
adversely impacted a broad range of industries, including banking and other financial services.
Company Response to COVID-19 –
As COVID-19 events unfolded during 2020, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for
customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In
particular, the Company took the following actions, among others:
•
•
•
•
•
•
•
•
•
•
Branch lobbies remain available, but on a limited appointment-only basis
Implemented its board-approved pandemic business continuity plan
Appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed
by COVID-19
Modified branch operations:
o
o Most transactions conducted via drive-throughs
o
Increased emphasis on digital banking platforms
Implemented physical separation of critical operational workforce for Bank and non-Bank financial services subsidiaries
Expanded paid time off and health benefits for employees
Implemented work from home strategy for appropriate staff:
○ Many of the Company's non-branch, operational essential employees remain working remotely
o
o
Implemented a pay differential for employees continuing to work at branch or back office locations which ended May 31, 2020
Adopted self-monitoring and quarantining procedures
Implemented enhanced facility cleaning protocols
Redeployed staff to critical customer service operations to expedite loan payment deferral requests, Paycheck Protection Program lending efforts, and
other operations
Geographically separated work locations of Bank and Company CEO’s and most other executive management team members
Suspended non-essential work-related travel
Potential Effects of COVID-19 –
The adverse impact of COVID-19 to the economy has impaired some of the Company’s customers’ ability to fulfill their financial obligations to the Company,
reducing interest income on loans or increasing loan losses. In keeping with Interagency Statement on Loan Modifications and Reporting for Financial Institutions
Working with Customers Affected by the Coronavirus, the Company continues to work with COVID-19 affected borrowers to defer loan payments, interest, and
fees. Through December 31, 2020, the Company has modified or deferred payments on a total of 3,625 loans totaling $458.17 million in principal. As of
December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from
our peak of $436.11 million at June 30, 2020. Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting.
However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest
income in future periods. At this time, the Company is unable to project the materiality of any such impact.
The general economic slowdown caused by COVID-19 in local economies in communities served by the Company has affected loan demand and consumption of
financial services, generally, reducing interest income, service fees, and the demand for other profitable financial services provided by the Company.
58
Table of Contents
In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other
legislative and regulatory actions may materially impact the Company. The Company is participating in the Paycheck Protection Program (“PPP”), administered by
the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year term, earn interest at
1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The
Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through
December 31, 2020 the Company processed 803 loans with original principal balances totaling $62.74 million through the PPP. As of December 31, 2020, $3.94
million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA.
COVID-19 could cause a sustained decline in the Company’s stock price or the occurrence of an event that could, under certain circumstances, create the
impairment of goodwill. In the event the Company deems all or a portion of its goodwill to be impaired, the Company could record a non-cash charge to earnings
for the amount of such impairment. Such a charge would have no impact on tangible or regulatory capital.
To date, the Company has identified no material, unmitigated operational or internal control challenges or risks and anticipates no significant challenges to its
ability to maintain systems and controls as a result of the actions taken to prevent the spread of COVID-19. In addition, the Company currently faces no material
resource constraints arising due to implementation of the business continuity plan.
It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations. Although there
is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial
position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.
Recent Accounting Standards
Standards to be Adopted in 2021
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This
ASU requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss”
and record an allowance for credit losses (“ACL”) that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be
collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses for loans, investment securities portfolio, and
purchased financial assets with credit deterioration. We do not expect this standard to have a material impact on our investment securities portfolio at
implementation. This ASU also will require enhanced disclosures. The new guidance was effective for interim and annual reporting periods beginning after
December 15, 2019, including interim periods within those fiscal years. The CARES Act, as amended, allowed certain relief on the implementation of the ASU,
and the Company adopted the new standard as of January 1, 2021, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings as
of the beginning of the first reporting period in which the guidance is adopted. The Company currently estimates that our ACL under CECL will total
approximately $39.29 million and the allowance for unfunded commitments will approximate $576 thousand. The estimated decline in stockholders' equity, net of
tax, approximated $5.87 million.
This estimate is influenced by the composition, characteristics and quality of our loan portfolio, as well as the economic conditions and forecasts as of each
reporting period. These economic conditions and forecasts could be significantly different in future periods. The impact of the change in the allowance on our
results of operations in a provision for credit losses will depend on the current period net charge-offs, level of loan originations, and change in mix of the loan
portfolio.
Standards Adopted in 2020
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)". This ASU provides for the simplification of the subsequent
measurement of goodwill by eliminating Step 2 from the goodwill impairment test. After adoption, an entity should measure impairment of goodwill in a reporting
unit when the carrying amount exceeds its fair value by the difference in these amounts. This ASU was effective for fiscal years beginning after December 15,
2019. The Company adopted this ASU effective January 1, 2020. The ASU did not have any material effect on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair
Value Measurement." The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts
Statement "Conceptual Framework for Financial Reporting--Chapter 8: Notes to Financial Statements." This update is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)--Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Summary". This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR (London Inter-bank
Offered Rate) and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. With global capital markets
expected to move away from LIBOR and other inter-bank offered rates toward rates that are more observable or transaction based and less susceptible to
manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance
provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to
meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective March 12, 2020 through December 31,
2022. The Company adopted this ASU on March 12, 2020. The updates is not expected to have any material effect on the Company's financial statements when
and as changes are made to various assets and liabilities for reference rates.
59
Table of Contents
Standards Not Yet Adopted
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. 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 December 31, 2019, the Company acquired Highlands Bankshares, Inc. (“Highlands”) of Abingdon, Virginia. Under the terms of the acquisition, 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
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.
60
Table of Contents
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 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.
61
Table of Contents
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 2020
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 were 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,
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, 2018.
Merger-related costs of $1.89 million incurred by the Company for the year ended December 31, 2020, and merger-related costs incurred by both the Company and
Highlands of $7.16 million for the year ended 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. 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
62
ProForma
Year Ended
ProForma
Year Ended
December 31, 2019 December 31, 2018
145,656
$
42,470
$
150,618 $
43,463 $
Table of Contents
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
2020
Year Ended December 31,
2019
2018
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
— $
(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
Municipal securities
Mortgage-backed Agency securities
Total
Amortized Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
December 31, 2020
$
$
555 $
43,950
37,453
81,958 $
— $
509
992
1,501 $
(4) $
—
(97)
(101) $
551
44,459
38,348
83,358
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
63
Table of Contents
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, 2020. 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
Municipal
Securities
Total
— $
—
555
—
555 $
— $
—
551
—
551 $
— $
24,485
19,465
—
43,950
$
— $
24,703
19,756
—
44,459
$
—
24,485
20,020
—
44,505
37,453
81,958
—
24,703
20,307
—
45,010
38,348
83,358
$
$
$
$
64
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total
(Amounts in thousands)
U.S. Agency securities
Municipal securities
Mortgage-backed Agency securities
Total
$
$
$
$
Less than 12 Months
December 31, 2020
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
— $
—
11,018
11,018 $
— $
—
(97)
(97) $
544 $
—
—
544 $
(4) $
—
—
(4) $
544 $
—
11,018
11,562 $
(4)
—
(97)
(101)
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2019
12 Months or Longer
Fair
Value
Losses
Unrealized
Total
Fair
Value
Unrealized
Losses
975 $
—
8,020
8,995 $
(4) $
—
(48)
(52) $
— $
—
8,319
8,319 $
— $
—
(118)
(118) $
975 $
—
16,339
17,314 $
(4)
—
(166)
(170)
There were 6 individual debt securities in an unrealized loss position as of December 31, 2020, and their combined depreciation in value represented 0.12% of the
debt securities portfolio. These securities included 1 security 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 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.
65
Table of Contents
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 gain (loss) on sale of securities
2020
Year Ended December 31,
2019
2018
$
$
419 $
(34)
385 $
67 $
(110)
(43) $
—
(618)
(618)
The carrying amount of securities pledged for various purposes totaled $36.56 million as of December 31, 2020, and $27.87 million as of December 31, 2019.
66
Table of Contents
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 $1.13 million as of December 31, 2020, and $2.20 million as of December 31, 2019. Deferred loan fees were $5.58 million
as of December 31, 2020, and $4.60 million as of December 31, 2019. 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,
2020
2019
Amount
Percent
Amount
Percent
44,649
173,024
115,161
187,598
734,793
9,749
19,761
1,284,735
89,432
658,678
17,720
765,830
120,373
6,014
126,387
2,176,952
9,680
2,186,632
2.04% $
7.91%
5.27%
8.58%
33.60%
0.45%
0.90%
58.75%
4.09%
30.12%
0.81%
35.02%
5.50%
0.28%
5.78%
99.56%
0.44%
100.00% $
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%
— $
—
$
263 $
—
$
$
$
67
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Commercial and industrial loan balances grew significantly compared to December 31, 2019. The Company began participating as a Small Business
Administration (“SBA”) Paycheck Protection Program (“PPP”) lender during the second quarter of 2020. At December 31, 2020, the PPP loans had a current
balance of $57.06 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred
loan origination costs, which totaled $2.30 million at December 31, 2020, were also recorded. During 2020, the Company recorded amortization of net deferred
loan origination fees of $868 thousand on PPP loans. The remaining net deferred loan origination fees will be amortized over the expected life of the respective
loans, or until forgiven by the SBA, and will be recognized in net interest income. As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck
Protection Program loan balances had been forgiven by the SBA.
The following table presents the covered loan portfolio, by loan class, as of the dates indicated.
(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,
2020
2019
$
$
25 $
185
—
210
7,094
2,376
9,470
9,680 $
28
199
3
230
9,853
2,778
12,631
12,861
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. Effective
January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan
portfolio. The only remaining PCI pools are those loans acquired in the Highlands acquisition on December 31, 2019. 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,
2020
2019
Recorded
Investment
Unpaid
Principal
Balance
Recorded
Investment
Unpaid
Principal
Balance
— $
—
39,662
—
39,662 $
— $
—
47,514
—
47,514 $
5,071 $
2,708
53,116
352
61,247 $
6,431
14,277
64,096
378
85,182
$
$
68
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Highlands acquisition added $8.15 million in accretable yield. The total fair value of the Highlands PCI loans was $53.12 million at the time of the acquisition.
The gross contractual cash flows for the Highlands PCI loans was $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, 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
Balance January 1, 2020
Additions
Accretion
Other changes, net
Balance Balance at December 31, 2020
Peoples
Waccamaw
Highlands
Total
$
$
$
$
$
$
3,388 $
(1,263)
8
457
2,590 $
2,590 $
(950)
17
233
1,890 $
1,890 $
—
—
(1,890)
— $
19,465 $
(6,269)
1,770
(327)
14,639 $
14,639 $
(3,317)
1,440
(188)
12,574 $
12,574 $
—
—
(12,574)
— $
— $
—
—
—
— $
— $
—
—
—
— $
— $
8,152
(2,497)
—
5,655 $
22,853
(7,532)
1,778
130
17,229
17,229
(4,267)
1,457
45
14,464
14,464
8,152
(2,497)
(14,464)
5,655
(1)
Represents changes attributable to expected loss assumptions
Note 5. Credit Quality
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.
●
69
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.
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2020
(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
Consumer real estate loans
Home equity lines
Single family owner occupied
Total covered loans
Total loans
36,934 $
160,474
103,291
165,146
568,438
7,724
13,527
85,316
622,082
17,232
118,134
6,014
1,904,312
4,950 $
7,031
8,586
9,602
125,907
1,686
2,597
1,112
3,594
201
28
—
165,294
2,765 $
5,519
3,284
12,838
40,448
339
3,637
3,004
33,002
287
2,211
—
107,334
—
151
25
34
—
—
6,396
1,778
8,325
1,912,637 $
$
376
265
700
165,994 $
70
322
333
655
107,989 $
— $
—
—
12
—
—
—
—
—
—
—
—
12
—
—
—
—
—
12 $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
44,649
173,024
115,161
187,598
734,793
9,749
19,761
—
89,432
658,678
17,720
—
120,373
6,014
2,176,952
25
185
7,094
2,376
9,680
2,186,632
Table of Contents
(Amounts in thousands)
Non-covered loans
Commercial loans
Construction, development, and other
land
$
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other
land
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
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
—
199
—
7,177
2,111
9,487
1,987,243 $
$
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2019
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 $
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 $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
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
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.
71
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
Non-farm, non-residential
Consumer real estate loans
Single family owner occupied
Total impaired loans with an allowance
Total impaired loans(1)
$
December 31, 2020
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2019
Unpaid
Principal
Balance
Related
Allowance
616 $
2,341
946
4,816
8,238
218
1,228
1,604
16,778
216
818
37,819
891 $
2,392
1,593
5,785
9,467
226
1,311
1,772
19,361
216
833
43,847
— $
—
—
—
—
—
—
—
—
—
—
—
552 $
576
1,254
2,652
4,158
158
1,437
1,372
15,588
648
290
28,685
768 $
599
1,661
3,176
4,762
164
1,500
1,477
17,835
648
294
32,884
1,068
1,121
319
1,241
1,227
338
1,406
39,225 $
338
1,459
45,306 $
108
427
427 $
1,246
2,487
31,172 $
1,246
2,473
35,357 $
—
—
—
—
—
—
—
—
—
—
—
—
292
353
645
645
(1)
Total impaired loans include loans totaling $31.18 million as of December 31, 2020, and $24.64 million as of December 31, 2019, 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.
72
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:
2020
Year Ended December 31,
2019
2018
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
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
25 $
155
19
189
295
9
63
51
578
10
42
935 $
2,749
808
4,890
7,450
241
1,569
1,594
17,044
407
543
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
1,436
38,230
1,077
29,693
976
28,495
—
—
17
—
—
29
707
—
1,524
—
—
1,196
—
—
48
—
—
46
$
46
1,482 $
3,427
41,657 $
94
1,171 $
—
—
766
—
—
1,947
2,713
32,406 $
2
7
2
—
3
158
172
1,148 $
270
110
809
307
68
5,296
6,860
35,355
There were no PCI loan pools that became impaired subsequent to the acquisition of the loans as of December 31, 2020 or 2019.
73
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, 2020
Covered
Total
Non-covered
December 31, 2019
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
244 $
895
946
2,990
6,343
217
489
841
7,960
—
$
781
21,706 $
244 $
895
946
2,990
6,343
217
489
1,122
7,976
—
211 $
530
1,144
1,286
3,400
158
713
753
7,259
428
781
22,003 $
231
16,113 $
— $
—
—
—
—
—
—
220
24
—
—
244 $
211
530
1,144
1,286
3,400
158
713
973
7,283
428
231
16,357
— $
—
—
—
—
—
—
281
16
—
—
297 $
74
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 $295 thousand as of December 31, 2020,
and $144 thousand as of December 31, 2019.
(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
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, 2020
1,039 $
669
103
925
601
70
43
574
5,283
82
2,637
—
12,026
—
—
75
34
109
12,135 $
— $
230
—
488
296
189
—
380
2,265
—
746
—
4,594
—
—
—
—
—
4,594 $
75
235 $
700
946
2,144
3,368
88
457
171
3,891
—
651
—
12,651
—
—
254
—
254
12,905 $
1,274 $
1,599
1,049
3,557
4,265
347
500
1,125
11,439
82
4,034
—
29,271
43,375 $
171,425
114,112
184,041
730,528
9,402
19,261
88,307
647,239
17,638
44,649
173,024
115,161
187,598
734,793
9,749
19,761
89,432
658,678
17,720
116,339
6,014
2,147,681
120,373
6,014
2,176,952
—
—
25
185
25
185
329
34
363
29,634 $
6,765
2,342
9,317
2,156,998 $
7,094
2,376
9,680
2,186,632
Table of Contents
(Amounts in thousands)
Non-covered loans
Commercial loans
Construction, development, and other
land
$
Commercial and industrial
Multi-family residential
Single family non-owner occupied
Non-farm, non-residential
Agricultural
Farmland
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Other
Total non-covered loans
Covered loans
Commercial loans
Construction, development, and other
land
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
$
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 - 59 Days
60 - 89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due
Current
Loans
Total
Loans
December 31, 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 $
211 $
507
1,144
661
3,027
—
664
503
3,766
428
202
—
11,113
—
—
—
—
—
—
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
172
50
222
33,453 $
9,681
2,728
12,639
2,081,007 $
9,853
2,778
12,861
2,114,460
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 $500 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever
is most applicable. Restructured loans under $500 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, 2020 or 2019.
The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as
extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19
national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The
Company elected to adopt this provision of the CARES Act.
Through December 31, 2020, the Company had modified a total of 3,625 loans with principal balances totaling $458.17 million related to COVID-19 relief. Those
modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company’s policy is to downgrade
commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating.
Subsequent upgrade or downgrade will be on a case by case basis. The Company will consider upgrading these loans back to pass once the modification period
has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional
modifications, payment performance and current underwriting. As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at
$26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.
76
Table of Contents
The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual(1)
2020
Accruing
Total
Nonaccrual(1)
2019
Accruing
Total
December 31,
(Amounts in thousands)
Commercial loans
Commercial and industrial
Single family non-owner occupied
Non-farm, non-residential
Consumer real estate loans
Home equity lines
Single family owner occupied
Owner occupied construction
Consumer and other loans
Consumer loans
Total TDRs
$
$
— $
1,585
—
—
229
—
1,326 $
1,265
2,407
77
4,927
216
1,326 $
2,850
2,407
77
5,156
216
—
1,814 $
30
10,248 $
30
12,062 $
— $
552
—
—
1,790
—
—
2,342 $
Allowance for loan losses related to TDRs
$
—
(1)
Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.
The following table presents interest income recognized on TDRs for the periods indicated:
— $
595
307
115
5,305
221
32
6,575 $
$
—
1,147
307
115
7,095
221
32
8,917
353
(Amounts in thousands)
Interest income recognized
2020
Year Ended December 31,
2019
2018
$
473 $
277 $
264
The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.
(Amounts in thousands)
Below market interest rate
Single family owner occupied
Below market interest rate and extended
payment term
Single family owner occupied
Principal deferral
Construction, development, and other land
development
Non-farm, non-residential
Home equity
Single family owner occupied
Total principal deferral
Total
2020
Pre-
modification
Recorded
Investment
Year Ended December 31,
Post
modification
Recorded
Investment(1)
Total
Contracts
2019
Pre-
modification
Recorded
Investment
Post
modification
Recorded
Investment(1)
Total
Contracts
1 $
50 $
50
— $
— $
—
—
—
—
6
887
871
3
3
—
5
11
12 $
1,708
2,115
—
1,085
4,908
4,958 $
77
1,708
2,115
—
1,054
4,877
4,927
—
—
1
3
4
10 $
—
—
5
331
336
1,223 $
—
—
2
279
281
1,152
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2020
2019
Total
Contracts
Recorded
Investment
Total
Contracts
Recorded
Investment
1 $
1 $
53
53
— $
— $
—
—
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
Total OREO
Non-covered OREO secured by residential real estate
Residential real estate loans in the foreclosure process(1)
December 31, 2020 December 31, 2019
$
$
$
2,083 $
2,083 $
769 $
4,141
3,969
3,969
2,232
1,539
(1)
The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local
requirements of the applicable jurisdiction
Note 6. Allowance for Loan Losses
The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI
loans as of December 31, 2020 or 2019.
(Amounts in thousands)
Beginning balance
Provision for loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Ending balance
(Amounts in thousands)
Beginning balance
Provision for (recovery of) loan losses charged to operations
Charge-offs
Recoveries
Net charge-offs
Ending balance
Commercial
$
$
Commercial
$
10,235 $
6,583
(2,769)
612
(2,157)
14,661 $
10,499 $
1,411
(2,548)
873
(1,675)
10,235 $
Year Ended December 31, 2020
Consumer and
Other
Consumer
Real Estate
Total
Allowance
6,325 $
2,760
(558)
424
(134)
8,951 $
1,865 $
3,325
(3,296)
676
(2,620)
2,570 $
18,425
12,668
(6,623)
1,712
(4,911)
26,182
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
$
78
Table of Contents
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, 2020
Loans
Individually
Evaluated for
Impairment
Allowance for
Loans
Individually
Evaluated
Loans
Collectively
Evaluated for
Impairment
Allowance for
Loans
Collectively
Evaluated
$
$
— $
724
695
1,041
3,916
—
—
6,376
—
1,673
—
1,673
—
—
—
8,049 $
— $
—
—
—
319
—
—
319
—
108
—
108
—
—
—
427 $
43,716 $
171,486
112,852
183,283
714,160
9,728
17,540
1,252,765
95,765
647,040
17,567
760,372
119,770
6,014
125,784
2,138,921 $
528
1,024
1,417
1,861
9,097
218
196
14,341
799
7,849
195
8,843
2,570
—
2,570
25,754
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
$
$
79
Table of Contents
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the allowance for loan losses on PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated:
(Amounts in thousands)
Commercial loans
Waccamaw commercial
Peoples commercial
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, 2020
December 31, 2019
Recorded
Investment
Allowance for
Loan Pools With
Impairment
Recorded
Investment
Allowance for
Loan Pools With
Impairment
$
$
— $
—
—
958
2,242
1,614
16,717
3,459
814
—
25,804
—
—
761
12,494
603
—
13,858
39,662 $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
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 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Management believes the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020.
80
Table of Contents
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 for the periods indicated:
(Amounts in thousands)
Beginning balance
Net amortization
Payments to the FDIC
Ending balance
Covered loans
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,
2019
2020
2,883 $
(1,690)
30
1,223 $
5,108
(2,377)
152
2,883
9,680 $
12,861
December 31,
2020
2019
21,693 $
50,639
40,072
112,404
(54,704)
57,700 $
22,899
52,351
38,173
113,423
(50,599)
62,824
$
$
$
$
$
Impairment charges related to certain long-term investments in land and buildings totaled $812 thousand in 2020, $380 thousand in 2019, and $1.01 million in
2018. Depreciation and amortization expense for premises and equipment was $4.46 million in 2020, $3.45 million in 2019, and $2.91 million in 2018.
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 was terminated in the first quarter of 2020; while the other remaining Highlands’ lease will terminate in early 2022. No 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 1 – 9 years. As of December 31, 2020, the Company’s ROU asset and
lease liability were $830 thousand and $891 thousand, respectively. The weighted average discount rate was 3.22%.
81
Table of Contents
Year
(Amounts in thousands)
2021
2022
2023
2024
2025 and thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amount
154
131
119
117
463
984
(93)
891
$
$
Lease expense was $180 thousand in 2020, $203 thousand in 2019, and $318 thousand in 2018. The Company maintained no subleases as of December 31, 2020.
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 2020 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, 2018
Dispositions
Impairment Charges
Balance December 31, 2018
Balance January 1, 2019
Acquisitions
Balance December 31, 2019
Balance January 1, 2020
Acquisitions and dispositions, net
Balance December 31, 2020
82
$
$
$
$
$
$
95,779
(1,543)
(1,492)
92,744
92,744
36,821
129,565
129,565
—
129,565
Table of Contents
Other Intangible Assets
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020, the remaining lives of core deposit intangibles ranged from 4 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
Accumulated amortization
Core deposit intangibles, net
Other identifiable intangibles
Accumulated amortization
Other identifiable intangibles, net
Total other intangible assets, net
2020
December 31,
2019
2018
$
$
8,519 $
—
(1,450)
7,069
—
—
—
7,069 $
8,184 $
4,490
(4,155)
8,519
—
—
—
8,519 $
Amortization expense for other intangible assets was $1.45 million in 2020, $997 thousand in 2019, and $1.04 million in 2018.
The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2020:
(Amounts in thousands)
2021
2022
2023
2024
2025
2026 and thereafter
Total estimated amortization expense
$
$
83
8,184
—
(3,158)
5,026
535
(535)
—
5,026
1,446
1,446
878
856
648
1,795
7,069
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, 2020:
(Amounts in thousands)
2021
2022
2023
2024
2025
2026 and thereafter
Total contractual maturities
December 31,
2020
2019
$
772,795 $
627,868
598,148
258,864
495,821
293,848
126,771
1,773,452
2,546,247 $
$
$
$
497,470
235,712
453,240
372,821
142,801
1,702,044
2,329,912
225,521
86,293
45,797
24,440
30,820
7,748
420,619
Time deposits of $250 thousand or more totaled $35.93 million as of December 31, 2020, and $53.49 million as of December 31, 2019. The following schedule
presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2020:
(Amounts in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total contractual maturities
$
$
3,372
6,605
9,841
16,112
35,930
84
Table of Contents
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,
2020
2019
Balance
Weighted
Average Rate
Balance
Weighted
Average Rate
$
$
964
—
964
0.32% $
1,601
0.14%
$
—
1,601
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, 2020:
(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
$
$
— $
542
422
964 $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
—
542
422
964
The Company’s remaining wholesale repurchase agreement of $25 million matured during the first quarter of 2019. The Company repaid the borrowing with then
current liquidity.
As of December 31, 2020, unused borrowing capacity with the FHLB totaled $292.92 million, net of FHLB letters of credit of $175.83 million. The Company
pledged $840.63 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 2021. There was no outstanding balance on the line as of December 31, 2020 or 2019.
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.
85
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. Certain of 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, 2020. The remaining interest
rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period. The following table presents the
notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:
(Amounts in thousands)
Derivatives designated as hedges
Interest rate swaps
Derivatives not designated as hedges
Interest rate swaps
Total derivatives
2020
2019
December 31,
Notional or
Contractual
Amount
Derivative
Assets
Derivative
Liabilities
Notional or
Contractual
Amount
Derivative
Assets
Derivative
Liabilities
$
$
4,772 $
11,928
16,700 $
— $
-
— $
465 $
5,136 $
666
1,131 $
12,296
17,432 $
— $
-
— $
217
293
510
The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:
2020
Year Ended December 31,
2019
2018
Income Statement Location
$
$
85 $
235
320 $
12 $
-
12 $
40 Interest and fees on loans
- Interest and fees on loans
40
(Amounts in thousands)
Derivatives designated as hedges
Interest rate swaps
Derivatives not 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
Benefits paid
Ending balance
December 31,
2020
2019
$
$
11,312 $
—
310
355
1,217
(615)
12,579 $
9,265
262
320
404
1,570
(509)
11,312
86
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:
2020
Year Ended December 31,
2019
2018
Income Statement Location
(Amounts in thousands)
Service cost
Interest cost
Amortization of prior service cost
Amortization of losses
Net periodic cost
$
$
310
355
201
186
1,052
$
$
320
404
257
20
1,001
$
$
245 Salaries and employee benefits
358 Other expense
228 Other expense
57 Other expense
888
Assumed discount rate
2.53%
3.10%
4.28%
The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 2020:
(Amounts in thousands)
2021
2022
2023
2024
2025
2026 through 2030
Deferred Compensation Plan
$
664
675
675
717
707
3,694
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, 2020 or 2019. There was no deferred compensation plan expense in 2020, 2019 , or 2018.
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, 2020, stop-loss insurance coverage
generally limits the Company’s risk of loss to $200 thousand for individual claims and $6.00 million for aggregate claims. Health plan expenses were $4.17 million
in 2020, $3.97 million in 2019, and $3.72 million in 2018.
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 $1.51 million in 2020, $1.10 million in 2019, and $1.06 million in 2018. The KSOP
held 351,222 shares of the Company’s common stock as of December 31, 2020, 346,833 shares as of December 31, 2019, and 366,969 shares as of December 31,
2018.
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, 2020, 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.
87
Table of Contents
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
2020
Year Ended December 31,
2019
2018
$
1,643 $
—
1,481 $
—
1,158
95
The following table presents stock option activity and related information for the year ended December 31, 2020:
(Amounts in thousands, except share and per share data)
Option Shares
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value
Outstanding, January 1, 2020
Granted
Exercised
Canceled/Expired
Outstanding, December 31, 2020
Exercisable, December 31, 2020
There were no options granted in 2020 or 2019.
147,200 $
—
—
(32,921)
114,279 $
114,279 $
21.10
—
—
26.44
19.56
19.56
4.52 $
4.52 $
432
432
There was no options exercised in 2020; the intrinsic value of options was exercised was $150 thousand in 2019, and $423 thousand in 2018. As of December 31,
2020, there were no nonvested stock options or unrecognized expense. 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, 2020:
Nonvested, January 1, 2020
Granted
Vested
Canceled
Nonvested, December 31, 2020
Weighted Average
Grant-Date Fair
Value
Shares
57,653 $
89,097
(57,962)
(3,873)
84,915 $
31.93
21.20
25.28
29.92
25.31
As of December 31, 2020, unrecognized compensation cost related to nonvested restricted stock awards totaled $1.38 million with an expected weighted average
recognition period of 1.83 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and
changes in estimated forfeitures.
88
Table of Contents
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
2020
Year Ended December 31,
2019
2018
$
$
$
814 $
3,555
4,369 $
414
2,188
660
9,148
12,410 $
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)
Components of other operating income or expense that do not exceed 1% of total income
Note 15. Income Taxes
Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following table presents the
components of the income tax provision for the periods indicated:
(Amounts in thousands)
Current tax expense:
Federal
State
Total current tax expense
Deferred tax expense (benefit):
Federal
State
Total deferred tax expense (benefit)
Total income tax expense
2020
Year Ended December 31,
2019
2018
$
$
10,048 $
1,643
11,691
(1,266)
(239)
(1,505)
10,186 $
9,603 $
1,554
11,157
(152)
(11)
(163)
10,994 $
7,201
1,233
8,434
296
52
348
8,782
89
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:
2020
Amount
Percent
Year Ended December 31,
2019
Amount
Percent
2018
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
$
9,683
1,109
10,792
21.00% $
3.12%
24.12%
10,457
1,220
11,677
21.00% $
3.12%
24.12%
9,475
1,016
10,491
21.00%
2.25%
23.25%
(500)
(1.51)%
(637)
(1.28)%
(702)
(1.56)%
—
(139)
—
33
10,186
0.00%
(0.42)%
0.00%
(0.10)%
22.09% $
—
(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%
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 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,
2020
2019
6,128 $
545
2,559
1,685
217
4,048
4,093
2,401
1,816
23,492
286
2,450
1,482
257
287
4,762
18,730 $
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
$
$
The Company had no unrecognized tax benefits or accrued interest or penalties as of December 31, 2020 or 2019. The Company had no deferred tax valuation
allowance recorded as of December 31, 2020 or 2019, 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, 2017 through 2019.
90
Table of Contents
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, 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
Balance January 1, 2020
Other comprehensive income (loss) before reclassifications
Reclassified from AOCI
Other comprehensive income (loss), net
Balance December 31, 2020
Unrealized Gains
(Losses) on
Available for-Sale
Securities
Employee Benefit
Plans
Total
$
$
$
$
$
$
975 $
(1,748)
488
(1,260)
(285) $
(285) $
1,117
34
1,151
866 $
866 $
544
(304)
240
1,106 $
(1,815) $
446
225
671
(1,144) $
(1,144) $
(1,448)
220
(1,228)
(2,372) $
(2,372) $
(961)
304
(657)
(3,029) $
(840)
(1,302)
713
(589)
(1,429)
(1,429)
(331)
254
(77)
(1,506)
(1,506)
(417)
—
(417)
(1,923)
The following table presents reclassifications out of AOCI, by component, during the periods indicated:
$
(Amounts in thousands)
Available-for-sale securities
(Losses) gains 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
$
2020
Year Ended December 31,
2019
2018
Income Statement
Line Item Affected
43 $
43
(9)
34
257
21
278
(58)
220
254 $
618 Net loss on sale of securities
618 Income before income taxes
(130) Income tax expense
488 Net income
228 Other operating expense
57 Other operating expense
285 Income before income taxes
(60) Income tax expense
225 Net income
713 Net income
(385) $
(385)
81
(304)
201
185
386
(82)
304
— $
91
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.
92
Table of Contents
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, 2020
(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
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
Changes in Level 3 Fair Value Measurements
$
$
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
551 $
44,459
38,348
83,358
55
17,831
4,181
4,181
1,131
— $
—
—
—
—
—
4,181
4,181
—
551 $
44,459
38,348
83,358
55
—
—
—
1,131
—
—
—
—
—
17,831
—
—
—
December 31, 2019
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
5,034 $
86,878
77,662
169,574
55
17,942
3,990
3,990
510
— $
—
—
—
—
—
3,990
3,990
—
5,034 $
86,878
77,662
169,574
55
—
—
—
510
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, 2019
Transfer of certain loans into Level 3 (Highlands acquisition)
Changes in fair value
Changes due to principal reduction
Balance December 31, 2019
Balance January 1, 2020
Changes in fair value
Changes due to principal reduction
Balance December 31, 2020
No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2020.
93
Assets
$
$
$
$
—
—
—
—
—
17,942
—
—
—
5,412
12,295
522
(287)
17,942
17,942
621
(732)
17,831
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, 2020
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
$
$
94
979 $
2,083
— $
—
— $
—
979
2,083
December 31, 2019
Total
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
1,828 $
3,969
— $
—
— $
—
1,828
3,969
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, 2020 December 31, 2019
Impaired loans, non-covered
OREO, non-covered
Discounted appraisals(1)
Discounted appraisals(1)
Appraisal adjustments(2)
Appraisal adjustments(2)
22% to 38% (30)%
22% to 36% (26)%
8% to 77% (25)% 15% to 100% (8)%
(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, 2020
(Amounts in thousands)
Assets
Cash and cash equivalents
Debt securities available for sale
Equity securities
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
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
Carrying
Amount
Fair Value
Fair Value Measurements Using
Level 2
Level 1
Level 3
$
456,561 $
83,358
55
2,160,450
1,223
9,052
4,181
456,561 $
83,358
55
2,126,221
509
9,052
4,181
456,561 $
—
—
—
—
—
4,181
— $
83,358
55
—
—
9,052
—
—
—
—
2,126,221
509
—
—
420,619
964
582
4,181
1,131
423,120
964
582
4,181
1,131
—
—
—
4,181
—
423,120
964
582
—
1,131
—
—
—
—
—
December 31, 2019
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
95
512,134
1,601
472
3,990
510
Fair Value Measurements Using
Level 2
Level 1
Level 3
217,009 $
—
—
— $
169,574
55
—
—
—
3,990
—
—
—
3,990
—
—
—
6,677
—
512,134
1,601
472
—
510
—
—
—
263
2,068,257
1,201
—
—
—
—
—
—
—
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
2020
Year Ended December 31,
2019
2018
$
35,926 $
38,802 $
36,340
17,781,748
15,690,812
16,587,504
22,495
11,137
33,632
17,815,380
53,907
11,374
65,281
15,756,093
62,417
16,464
78,881
16,666,385
$
2.02 $
2.02
2.47 $
2.46
58,166
26,900
85,066
25
25,853
25,878
2.19
2.18
19
2,736
2,755
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,
2019
2020
$
$
20,345 $
4,821
(5,023)
23
20,166 $
22,033
3,958
(5,634)
(12)
20,345
(1)
Changes related to the composition of the Company's directors, executive officers, and related insiders
Deposits from related parties totaled $8.04 million as of December 31, 2020, and $7.29 million as of December 31, 2019. Legal fees paid to related parties totaled
$70 thousand in 2020, $150 thousand in 2019, and $67 thousand in 2018. There were no lease payments paid to related parties in 2020 2019 ,2018. Other expense
paid to related parties totaled $68 thousand in 2020, $7 thousand in 2019, and $4 thousand in 2018.
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.
96
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,
2020
2019
$
$
229,408 $
179,022
408,430
228,716
167,612
396,328
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).
97
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
(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
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, 2020
$ 292,019
292,019
317,595
292,019
14.28% $
14.28%
15.53%
10.24%
92,043
122,724
163,632
114,081
4.50% $ 143,178
214,767
6.00%
173,859
8.00%
N/A
4.00%
7.00%
8.50%
10.50%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 277,449
277,449
303,018
277,449
13.57% $
13.57%
14.82%
9.73%
92,017
122,689
163,585
114,058
4.50% $ 143,137
173,809
6.00%
214,706
8.00%
N/A
4.00%
7.00% $ 132,913
163,585
8.50%
204,482
10.50%
142,572
N/A
6.50%
8.00%
10.00%
5.00%
(1)
Based on prompt corrective action provisions
(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
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% $ 142,996
173,637
6.00%
214,493
8.00%
N/A
4.00%
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% $ 142,893
173,513
6.00%
214,339
8.00%
N/A
4.00%
7.00% $ 132,686
163,306
8.50%
204,133
10.50%
104,141
N/A
6.50%
8.00%
10.00%
5.00%
(1)
Based on prompt corrective action provisions
98
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
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,
2020
2019
$
$
$
$
10,089 $
—
412,161
5,089
427,339 $
609 $
609
17,723
173,345
237,585
(1,923)
426,730
427,339 $
23,998
184
399,294
5,888
429,364
545
545
18,377
192,413
219,535
(1,506)
428,819
429,364
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
2019
2020
2018
(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
$
$
23,710 $
3
1,446
22,267
(375)
22,642
13,284
35,926 $
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
99
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
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:
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2019
2018
2020
$
35,926 $
38,802 $
1,047
36,973
(13,284)
(13,284)
—
(21,872)
(17,876)
2,150
(37,598)
(13,909)
23,998
10,089 $
1,865
40,667
(1,002)
(1,002)
136
(16,362)
(15,060)
1,893
(29,393)
10,272
13,726
23,998 $
$
36,340
1,509
37,849
10,268
10,268
832
(34,412)
(21,090)
1,063
(53,607)
(5,490)
19,216
13,726
(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, 2020
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
29,509 $
1,827
27,682
3,500
24,182
7,164
385
21,664
10,067
2,195
7,872 $
0.44 $
0.44
0.25
27,786 $
1,447
26,339
3,831
22,508
6,913
—
18,913
10,508
2,270
8,238 $
0.47 $
0.46
0.25
27,995 $
1,161
26,834
4,703
22,131
7,638
—
19,171
10,598
2,332
8,266 $
0.47 $
0.47
0.25
28,746
1,029
27,717
634
27,083
7,733
—
19,877
14,939
3,389
11,550
0.65
0.65
0.25
17,998,994
18,050,071
17,701,853
17,728,300
17,710,283
17,732,428
17,717,356
17,751,805
$
$
$
100
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, 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
$
$
$
101
Table of Contents
- Report of Independent Registered Public Accounting Firm -
Board of Directors and the Stockholders
First Community Bankshares, Inc. and Subsidiary
Bluefield, Virginia
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 12, 2021, 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 2020 Annual Report on
Form 10-K.
/s/ DIXON HUGHES GOODMAN LLP
Asheville, North Carolina
March 12, 2021
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 12, 2021
/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 12, 2021
/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, 2020 (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 12, 2021
By:
/s/ William P. Stafford, II
By:
/s/ David D. Brown
William P. Stafford, II
Chief Executive Officer
David D. Brown
Chief Financial Officer