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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, 2015

Commission file number 000-19297

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   55-0694814

(State or other jurisdiction of

incorporation or organization)

 

(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

 

Name of each exchange on which registered

Common Stock, $1.00 par value   NASDAQ Global Select

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

As of June 30, 2015, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $259.62 million.

As of February 24, 2016, there were 17,820,090 shares outstanding of the registrant’s Common Stock, $1.00 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 26, 2016, are incorporated by reference in Part III of this Form 10-K.


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

2015 FORM 10-K

INDEX

 

          Page  
   PART I   

Item 1.

  

Business.

     4   

Item 1A.

  

Risk Factors.

     18   

Item 1B.

  

Unresolved Staff Comments.

     28   

Item 2.

  

Properties.

     28   

Item 3.

  

Legal Proceedings.

     28   

Item 4.

  

Mine Safety Disclosures.

     28   
   PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     29   

Item 6.

  

Selected Financial Data.

     32   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     33   

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk.

     64   

Item 8.

  

Financial Statements and Supplementary Data.

     66   

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

     141   

Item 9A.

  

Controls and Procedures.

     141   

Item 9B.

  

Other Information.

     141   
   PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance.

     142   

Item 11.

  

Executive Compensation.

     144   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     144   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence.

     144   

Item 14.

  

Principal Accounting Fees and Services.

     144   
   PART IV   

Item 15.

  

Exhibits, Financial Statement Schedules.

     145   
  

Signatures

     149   

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

We may make forward-looking statements in filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K and the accompanying Exhibits, filings incorporated by reference, reports to our shareholders, and other communications that we make in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and other similar expressions identify forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

 

   

the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

 

   

the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

 

   

inflation, interest rate, market and monetary fluctuations;

 

   

our timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

 

   

the willingness of customers to substitute competitors’ products and services for our products and services and vice versa;

 

   

the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

 

   

the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system;

 

   

further, future and proposed rules, including those that are part of the process outlined in the International Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” which are expected to require banking institutions to increase levels of capital;

 

   

technological changes;

 

   

the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

 

   

the growth and profitability of our noninterest, or fee, income being less than expected;

 

   

unanticipated regulatory or judicial proceedings;

 

   

changes in consumer spending and saving habits; and

 

   

our success at managing the risks involved in the foregoing.

We caution that the foregoing list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Annual Report on Form 10-K and other reports we filed with the Securities and Exchange Commission. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to our Company. See Item 1A, “Risk Factors,” in Part I of this report.

 

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PART I

 

Item 1. Business.

Corporate Overview

First Community Bancshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of Nevada in 1997. The Company provides commercial banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates under the trade names First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity. Our operations are guided by a strategic plan focusing on organic growth that may be supplemented by strategic acquisitions.

The Company provides insurance services through its wholly owned, full-service insurance agency subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”). Greenpoint operates under the Greenpoint name and under the trade name First Community Insurance Services (“FCIS”) in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia.

The Bank offers wealth management and investment advice through its wholly owned subsidiary First Community Wealth Management and the Bank’s Trust Division. The Company is the common stockholder of FCBI Capital Trust (the “Trust”), which was created in October 2003 to issue trust preferred securities to raise capital for the Company.

The Company is a legal entity that is separate and distinct from its affiliates. As a financial holding company, the Company is required to act as a source of financial strength for its subsidiary bank. The Company’s principal source of revenue is derived from dividends paid by the Bank, which are subject to certain restrictions by regulatory agencies and determined in relation to earnings, asset growth, and capital position. For additional information see “Regulation and Supervision” below.

Operations

We operate in one business segment: Community Banking. The Community Banking segment consists of commercial and consumer banking, lending activities, wealth management, and insurance services. Our principal executive office is located at One Community Place, Bluefield, Virginia. As of December 31, 2015, we operated 58 locations in 4 states: Virginia, West Virginia, North Carolina, and Tennessee. We serve a diverse base of individuals and businesses across a variety of industries, such as manufacturing, construction, retail, healthcare, military, and transportation. We have no material concentrations of deposits or loans related to any single customer or industry. See Item 6, “Selected Financial Data,” in Part II of this report for a summary of our financial performance.

We offer a wide range of services and products to our customers:

 

   

demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;

 

   

commercial, consumer, and real estate mortgage loans, and lines of credit;

 

   

various credit card, debit card, and automated teller machine card services;

 

   

corporate and personal trust services;

 

   

investment management services; and

 

   

life, health, and property and casualty insurance products.

 

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Employees

As of December 31, 2015, we had 673 full-time equivalent employees. Our employees are not represented by collective bargaining agreements and we consider employee relations to be excellent.

Competition

The financial services industry is highly competitive and there is substantial competition in attracting deposit and loan relationships in our market areas. The ability of non-bank financial entities to provide services previously reserved for commercial banks has intensified competition. We compete with other commercial banks and financial service providers, including thrifts, savings and loan associations, credit unions, consumer finance companies, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies. Competition for deposits generally comes from other commercial banks, savings institutions, credit unions, mutual funds, and other investment alternatives. Factors that influence our ability to attract and retain deposits include interest rates, personalized services, quality and variety of financial offerings, convenience of office locations, automated services, and office hours. Competition for commercial and business loans generally comes from other commercial banks and commercial finance and leasing companies, while competition for mortgage loans primarily comes from other commercial banks, savings institutions, mortgage banking firms, mortgage brokers, and insurance companies. Factors that influence our ability to originate loans include interest rates, loan origination fees, quality and variety of lending offerings, and personalized services. Our competitors may have greater resources and higher lending limits that allow them to offer services we do not provide. Competition could intensify in the future as a result of general and local economic conditions, industry consolidation, bank failures, technological developments, and banking regulatory reform. See “Competition” in the “Executive Overview” section in Part II, Item 7 of this report.

Available Information

Under the Securities Exchange Act of 1934, as amended (“Exchange Act”), we are required to file annual, quarterly, and current reports; proxy statements; and other information with the Securities and Exchange Commission (“SEC”). Any document we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for additional information about the public reference room. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any amendments to those reports, are available free of charge on our website, www.fcbinc.com, as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. Investors are encouraged to access these reports and other information about our business. Information about our Board of Directors, executive officers, and corporate governance policies and principles is included on our website and includes the Standards of Conduct governing the Company’s directors, officers, and employees; the charters of the standing committees of the Company’s Board of Directors; and the Company’s Insider Trading and Disclosure Policy. Additional information found on our website is not part of this report.

Regulation and Supervision

Banks and financial holding companies operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation under applicable federal and state laws and various regulatory agencies. The regulations are intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”), and the banking system as a whole and are

 

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generally not for the protection of stockholders or creditors. Banking agencies have broad enforcement powers over banks and financial holding companies to impose substantial fines and penalties for violations of laws and regulations.

The following discussion summarizes certain laws, rules, and regulations that affect our Company. These summaries are not intended to be complete and are qualified in their entirety by reference to the applicable statute or regulation. A change in laws, rules, and regulations may have a material effect on our Company.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) of 2010 implemented far-reaching changes across the financial regulatory landscape in the U.S, including the following provisions:

 

   

centralizes responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), responsible for implementing, examining and enforcing compliance with federal consumer financial laws;

 

   

requires financial holding companies, such as the Company, to be well capitalized and well managed as of July 21, 2011 (bank holding companies and banks must also be well capitalized and well managed to engage in interstate bank acquisitions);

 

   

imposes comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institutions themselves;

 

   

implements corporate governance revisions, including executive compensation and proxy access by shareholders;

 

   

makes permanent the $250 thousand limit for federal deposit insurance;

 

   

repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

 

   

amends the Electronic Fund Transfer Act to, among other things, give the Board of Governors of the Federal Reserve System (“Federal Reserve”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and enforces a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer; and

 

   

increases the authority of the Federal Reserve to examine bank holding companies, such as the Company, and their non-bank subsidiaries.

First Community Bancshares, Inc.

The Company is a financial holding company organized under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company is subject to supervision, regulation, and examination by the Federal Reserve. The GLB Act, BHC Act, and other federal laws subject financial and bank holding companies to particular restrictions on the types of activities they may engage in and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The BHC Act generally provides for umbrella regulation of financial holding companies, such as the Company, by the Federal Reserve, as well as functional regulation of banking activities by bank regulators, securities activities by securities regulators, and insurance activities by insurance regulators.

The Company is also under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Exchange Act as administered by the SEC. The

 

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Company’s common stock is listed on the NASDAQ Global Select Market under the trading symbol “FCBC” and is subject to the rules of NASDAQ for listed companies.

Regulatory Restrictions on Dividends: Source of Strength

The Federal Reserve’s policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, even when it may not be in a financial position to provide such resources. Federal Reserve policy states that bank holding companies may pay cash dividends on common stock only from income available over the past year if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. Bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. A bank holding company may be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary in certain situations.

In addition, the Company and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority may determine that the payment of dividends would be an unsafe or unsound practice, under certain circumstances regarding the financial condition of a bank holding company or a bank, and prohibit dividend payments. The appropriate federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In the current financial and economic environment, the Federal Reserve has discouraged payment ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that bank holding companies should carefully review their dividend policy.

Scope of Permissible Activities

Under the BHC Act, bank holding companies are limited to banking, managing or controlling banks, furnishing services to or performing services for their subsidiaries, or other activities that the Federal Reserve has determined to be closely related to banking or managing and controlling banks as to be a proper incident thereto. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or all, or substantially all, of the assets of a bank. When approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank holding company and the target bank, the convenience and needs of the communities to be served, and various competitive factors. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto.

Notwithstanding the foregoing, the GLB Act eliminated the barriers to affiliations among banks, securities firms, insurance companies, and other financial service providers and permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. Regulatory approval is not generally required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature, or incidental to activities that are financial in nature, as determined by the Federal Reserve.

Under the GLB Act, a bank holding company may become a financial holding company by filing a declaration with the Federal Reserve if each of its subsidiary banks is well capitalized under the FDIC Improvement Act

 

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prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act. The Company elected financial holding company status in December 2006. Since July 2011, the Company’s status is dependent on maintaining a well-capitalized and well-managed status under applicable Federal Reserve regulations. If a financial holding company fails to meet these requirements, the Federal Reserve may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. The Federal Reserve may require divestiture of the holding company’s depository institutions if the deficiencies persist.

The Volcker Rule

The Dodd-Frank Act amended the BHC Act to require federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule.” The Federal Reserve adopted final rules implementing the Volcker Rule on December 10, 2013. The Volcker Rule became effective on July 21, 2012, and the final rules became effective on April 1, 2014, but the Federal Reserve issued an order on December 18, 2014, extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2016. The Federal Reserve also announced its intention to grant an additional one-year extension of the conformance period to July 21, 2017. On January 14, 2014, the banking agencies approved an interim rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the prohibitions under the Volcker Rule. Although we continue to evaluate the impact of the Volcker Rule and the final rules adopted, we do not expect that the Volcker Rule will have a material effect on the operations of the Company and subsidiaries, as the Company does not engage in the businesses prohibited by the Volcker Rule. The Company may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not expected to be material.

Anti-Tying Restrictions

Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

Stock Repurchases

A bank holding company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, subject to certain exemptions, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation.

Capital Adequacy Requirements

The current risk-based capital guidelines that apply to the Company and the Bank, parts of which are currently being phased in, are based on the December 2010 framework, known as “Basel III,” for strengthening international capital standards by the International Basel Committee on Banking Supervision (“Basel Committee”), a committee of central banks and bank supervisors, implemented by the Federal Reserve. Prior to January 1, 2015, the risk-based capital guidelines that applied to the Company and the Bank (the “general risk-based capital rules”) were based on the 1988 capital accord, known as “Basel I,” of the Basel Committee.

Bank holding companies are subject to consolidated regulatory capital requirements administered by the Federal Reserve. These rules are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet obligations. The Federal banking agencies’ general risk-based capital rules

 

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applied through December 31, 2014. Under these rules, bank holding companies and banks were required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as loan commitments and letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations were assigned to various risk categories.

The guidelines classified capital in one of two tiers, depending on type:

 

   

Tier 1 capital: Tier 1 capital included common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries (and, under existing standards, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level), less goodwill, most intangible assets, certain accumulated other comprehensive income items and certain other assets.

 

   

Tier 2 capital: Tier 2 capital included, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.

Under the general risk-based capital rules, bank holding companies were required to maintain a Tier 1 risk-based capital ratio of at least 4.0% and a total risk-based capital ratio of at least 8.0%. Bank holding companies were also required to maintain a leverage ratio of Tier 1 capital to average total consolidated assets. Certain highly rated bank holding companies could maintain a minimum leverage ratio of 3.0%, but other bank holding companies were required to maintain a leverage ratio of 4.0% or more, depending on their condition.

In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations and implementing certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements that applied to bank holding companies and depository institutions, including the Company and the Bank, compared to the general risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replaced the existing risk-weighting approach, which was derived from the Basel I capital accords, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implemented the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules became effective for the Company and the Bank, subject to a phase-in period, on January 1, 2015.

The Basel III Capital Rules, among other things, (1) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (2) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (3) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (4) expand the scope of the deductions/adjustments to capital as compared to prior regulations.

Under the Basel III Capital Rules, the following initial minimum capital ratios became effective as of January 1, 2015:

 

   

4.5% CET1 to risk-weighted assets

 

   

6.0% Tier 1 capital to risk-weighted assets

 

   

8.0% Total capital to risk-weighted assets

 

   

4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”)

 

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The Basel III Capital Rules also provide for a “countercyclical capital buffer” that applies to certain covered institutions; however, the buffer is not expected to apply to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016, at 0.625% and will be phased in over a four-year period (increasing by that amount on each subsequent January 1st, until it reaches 2.5% on January 1, 2019).

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain the following minimum ratios:

 

   

CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation);

 

   

Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);

 

   

Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and

 

   

Tier 1 capital to average assets (“leverage ratio”) of 4% (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).

The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, and will be phased in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year thereafter).

Under the general risk-based capital rules, the effects of accumulated other comprehensive income (“AOCI”) items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and the Bank made this election to avoid significant changes in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio. The Basel III Capital Rules also prevent certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The rules do not require a phase-out of trust preferred securities issued before May 19, 2010, for holding companies of depository institutions with less than $15 billion in consolidated total assets, as of December 1, 2009, which includes the Company. Therefore, the Company’s trust preferred securities that were issued before May 19, 2010, are permanently grandfathered in as Tier 1 or Tier 2 capital instruments.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

 

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Management believes that, as of December 31, 2015, the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were in effect. With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations under Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”

Liquidity Requirements

Historically, the regulation and monitoring of bank and bank holding company liquidity was addressed as a supervisory matter, without required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the “Liquidity Coverage Ratio” (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the “Net Stable Funding Ratio” (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase long-term debt as a funding source. On September 3, 2014, the federal banking agencies finalized the rules implementing the LCR for advanced approaches banking organizations and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approaches banking organizations, neither of which would apply to the Company or the Bank. The federal banking agencies have not yet proposed rules to implement the NSFR.

Incentive Compensation

In June 2010, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), and the FDIC issued their final guidance on policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk taking.

The final guidance, which covers all employees who have the ability to materially affect the risk profile of an organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should:

 

   

provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks,

 

   

comply with effective internal controls and risk management, and

 

   

support strong corporate governance that includes active and effective oversight by the organization’s board of directors.

The Federal Reserve indicated that all banking organizations are to evaluate their incentive compensation arrangements and related risk management, controls, and corporate governance processes and immediately address deficiencies in these arrangements or processes that are inconsistent with safety and soundness.

The Federal Reserve reviews, as part of their regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as ours, that are not large, complex banking organizations. These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the

 

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organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In February 2011, the Federal Reserve, the OCC, and the FDIC approved a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and that are deemed excessive, or may lead to material losses.

The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and we expect those policies to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to attract, hire, retain, and motivate key employees.

First Community Bank

The Bank is a Virginia state-chartered bank supervised and regulated by the Virginia Bureau of Financial Institutions (“Virginia Bureau”). As a member of the Federal Reserve, the Bank’s primary federal regulator is the Federal Reserve Bank (“FRB”) of Richmond. The Virginia Bureau and FRB of Richmond are based in the Company’s home state of Virginia. The regulations of these agencies govern most aspects of the Bank’s business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends, and location and number of branch offices.

Restrictions on Transactions with Affiliates and Insiders

Transactions between the Bank and its non-banking subsidiaries or affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act the (“FRA”). In general, Section 23A imposes limits on the amount of such transactions, and requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties that are collateralized by the securities or obligations of the Company.

Affiliate transactions are also subject to Section 23B of the FRA that generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other non-affiliated persons. The Federal Reserve has issued Regulation W that codifies prior regulations under Sections 23A and 23B of the FRA and interpretive guidance with respect to affiliate transactions.

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the FRA, including an expanded definition of covered transactions and increased amount of time for which collateral requirements on covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements, and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, such as the sales on market terms and, in certain circumstances, approved by the institution’s board of directors.

The restrictions on loans to directors, executive officers, principal shareholders, and their related interests contained in the FRA and Regulation O apply to all insured institutions, their subsidiaries, and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to such persons. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate.

 

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Restrictions on Distribution of Subsidiary Bank Dividends and Assets

The Company’s primary source of operating funds is dividends paid by the Bank. Capital adequacy requirements that apply to insured depository institutions serve to limit the amount of dividends that may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, it will be classified as undercapitalized. Further, prior approval of the FRB is required if cash dividends declared in any given year exceed the total of the Bank’s net profits for such year, plus its retained profits for the preceding two years. Virginia law also imposes restrictions on the ability of Virginia-chartered banks to pay dividends if such dividends would impair a bank’s paid-in capital. The payment of dividends by the Bank may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines. The Virginia Bureau and the FRB have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice.

Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of liquidation or other resolution of an insured depository institution, such as the Bank, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company or any shareholder or creditor thereof.

Examinations

Under the FDIC Improvement Act, all insured institutions must undergo regular on-site examination by their appropriate banking agency and such agency may assess the institution for its costs of conducting the examination. As a state-chartered Federal Reserve member bank, the Bank is subject to examination by the Virginia Bureau and FRB. These examinations review areas such as capital adequacy, reserves, loan portfolio quality, investments, information systems, disaster recovery, contingency planning, management practices, and other compliance issues.

Capital Adequacy Requirements

The various federal bank regulatory agencies have adopted risk-based capital requirements for assessing the capital adequacy of banks and bank holding companies. Under the Basel III Capital Rules, the Bank must meet the following initial minimum capital ratios that became effective as of January 1, 2015:

 

   

4.5% CET1 to risk-weighted assets

 

   

6.0% Tier 1 capital to risk-weighted assets

 

   

8.0% Total capital to risk-weighted assets

 

   

4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”)

See “Capital Adequacy Requirements” in the “First Community Bancshares, Inc.” section above.

Prompt Corrective Action

The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the rules in effect through December 31, 2014, a well-capitalized institution had a total risk-based capital ratio of 10.0% or higher, a Tier 1 risk-based capital ratio of 6.0% or higher, a leverage ratio of 5.0% or higher, and is not subject to any written agreement, order, or directive requiring it to maintain a specific capital level for any capital measure.

 

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The current capital measures, which reflect changes under the Basel III Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio, and the leverage ratio. A well-capitalized institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure. An adequately capitalized institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or higher, but does not meet the criteria for a well-capitalized bank. An undercapitalized institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio less than 6.0%, or a leverage ratio of less than 4.0%. A significantly undercapitalized institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 3.0%. A critically undercapitalized institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is considered to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s financial condition or prospects for other purposes. The Bank was classified as well capitalized for purposes of the FDIC’s prompt corrective action regulation as of December 31, 2015.

In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, branch establishment, and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institution’s capital decreases, the federal regulators’ enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator. Banks with risk-based capital and leverage ratios below the required minimums may be subject to certain administrative actions, including termination of deposit insurance upon notice and hearing or temporary suspension of insurance without a hearing if the institution has no tangible capital.

Deposit Insurance Assessments

The Bank’s deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC uses a risk-based assessment system to evaluate the risk of each financial institution based on three primary sources of information: its supervisory rating, its financial ratios, and its long-term debt issuer rating, if the institution has one. The FDIC’s initial base assessment schedule can be adjusted up or down, and premiums in effect beginning April 1, 2011, ranged from 5 basis points in the lowest risk category to 35 basis points for banks in the highest risk category.

The Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will require increased deposit insurance premiums that are to be borne primarily by institutions with assets of greater than $10 billion. In October 2010, the FDIC addressed plans to bolster the DIF by increasing the required reserve ratio for the industry to 1.35% (ratio of reserves to insured deposits) by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed to raise its industry target ratio of reserves to insured deposits to 2.00%, 65 basis points above the statutory minimum.

In February 2011, the FDIC adopted new rules that amend its current deposit insurance assessment regulations. The new rules implement a provision in the Dodd-Frank Act that changed the assessment base for deposit

 

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insurance premiums from one based on domestic deposits to one based on average consolidated total assets minus average tangible equity. The rules also changed the assessment rate schedules for insured depository institutions so that approximately the same amount of revenue would be collected using the new assessment base as would be collected using the current rate schedule and the schedules previously proposed by the FDIC in October 2010. The new rules also revised the risk-based assessment system for large insured depository institutions, which generally include institutions with at least $10 billion in total assets and highly complex institutions, by requiring the FDIC to use a scorecard method to calculate assessment rates for all such institutions. The Bank is not considered a highly complex institution for these purposes.

Under the Federal Deposit Insurance Act, as amended (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

In addition to deposit insurance assessments by the DIF, all FDIC-insured depository institutions must pay an annual assessment to provide funds for the repayment of debt obligations of the Financing Corporation (“FICO”). The FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The Bank’s FICO assessments, which are set quarterly, totaled $139 thousand in 2015 and $147 thousand in 2014. The Bank’s FDIC deposit insurance assessments and premiums totaled $1.42 million in 2015 and $1.59 million in 2014.

Safety and Soundness Standards

The FDIA requires that the federal bank regulatory agencies prescribe standards, by regulations or guidelines, relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and other operational and managerial standards the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. The agencies adopted regulations that authorize them to order an institution that has been given notice by an agency not satisfying any of such safety and soundness standards to submit a compliance plan. If an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, after being so notified, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the prompt corrective action provisions of the FDIA. If an institution fails to follow such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. See “Prompt Corrective Action” in the “Bank” section above.

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also

 

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expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If the Bank fails to observe the regulatory guidance, the Bank could be subject to various regulatory sanctions, including financial penalties.

In the ordinary course of business, the Bank relies on electronic communications and information systems to conduct our operations and to store sensitive data. The Bank employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. The Bank employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of the Bank’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, the Bank has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of its customers and third-party service providers are under constant threat and it is possible that the Bank could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking, and other technology-based products and services by the Bank and its customers. See Item 1A, “Risk Factors,” for a further discussion of risks related to cybersecurity.

Enforcement Powers

The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to follow applicable laws, regulations, and supervisory agreements could subject us, including officers, directors, and other institution-affiliated parties, to administrative sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if certain circumstances exist, including, without limitation, the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan.

Consumer Laws and Regulations

In addition to the laws and regulations discussed in this report, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth is not exhaustive, these laws and regulations include the Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, the Fair Housing Act, and various state counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must follow the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.

Federal law contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the start of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may provide such personal information to unaffiliated third parties only if the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure.

 

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The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, which implements, examines, and enforces compliance with federal consumer protection laws. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans, and credit cards. The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions, and enforcing rules related to consumer financial products and services. Banks with less than $10 billion in assets, such as the Bank, will be subject to these federal consumer financial laws and will continue to be examined for compliance with these laws by their primary federal banking agency.

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) was enacted in October 2001. The USA Patriot Act has broadened existing anti-money laundering legislation while imposing new compliance and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money laundering transactions involving domestic or international customers. The U.S. Department of the Treasury (“Treasury”) has issued and will continue to issue regulations clarifying the USA Patriot Act’s requirements. The USA Patriot Act requires all financial institutions, as defined, to establish certain anti-money laundering compliance and due diligence programs. Recently, the regulatory agencies have intensified their examination procedures based on the USA Patriot Act’s anti-money laundering and Bank Secrecy Act requirements. We believe our controls and procedures complied with the USA Patriot Act as of December 31, 2015.

Interstate Banking and Branching

Federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended, (“Riegle-Neal Act”) or by adopting a law after the date of enactment of the Riegle-Neal Act and before June 1, 1997, that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.

Before the enactment of the Dodd-Frank Act, national and state-chartered banks were generally permitted to branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. However, interstate branching is now permitted for all national and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch, thus effectively giving out-of-state banks parity with in-state banks with respect to de novo branching.

Office of Foreign Assets Control Regulation

The Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals, and others. OFAC publishes lists of specially designated targets and countries. We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them, and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences, including causing applicable bank regulatory authorities to not approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

 

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Item 1A. Risk Factors.

The risk factors described below discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and the additional information included in, or incorporated by reference to, this report before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be an exhaustive list of all risks we face. All forward-looking statements are qualified by the risks described below.

Risks Related to Our Business

The current economic environment poses significant challenges.

The U.S. economy faced a severe economic crisis from December 2007 through June 2009 and experienced the worst economic downturn since the Great Depression of the 1930s. Although the domestic economy continued a modest recovery in 2015, business activity across a wide range of industries and regions in the U.S. continues to remain reduced and local governments and many businesses continue to experience financial difficulty. In addition, oil price volatility, the level of U.S. debt, and global economic conditions have had a destabilizing effect on financial markets. There can be no assurance that these conditions will continue to improve nor that these conditions will not worsen.

Our financial performance is generally highly dependent upon the business environment in the markets we operate and the U.S. as a whole, which includes the ability of borrowers to pay interest, repay principal on outstanding loans, the value of collateral securing those loans, and demand for loans and other products and services we offer. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, investor or business confidence; limitations on the availability, or increases, in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.

During recent years, the economic environment has been adverse for many households and businesses in the U.S. and worldwide. Although economic conditions have improved since the recession, there can be no assurance that this improvement will continue. Economic pressure on consumers and uncertainty about continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of the Bank’s loans and the Company’s business, financial condition, and results of operations.

We are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in monetary policy and interest rates could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings. Further, such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income and earnings

 

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could be adversely affected. Conversely, if interest rates received on loans and other investments fall more quickly than interest rates paid on deposits and other borrowings, our net interest income and earnings could also be adversely affected.

Our estimated allowance for loan losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses to provide for probable loan losses. Our allowance may not be adequate to cover actual loan losses, and future loan loss provisions could materially and adversely affect our operating results. The appropriate level of the allowance is determined by management and inherently involves a high degree of subjectivity and significant estimates of current credit risks and future trends, which may undergo material changes. Our allowance is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, changes in the size and composition of the loan portfolio, and industry information. Management’s estimates also include considerations about the impact of economic events, which are uncertain. Future losses are susceptible to changes in economic, operating, and other conditions, including changes in interest rates, which may be beyond our control, and charge-offs may exceed our current estimates. Federal regulatory agencies regularly review our loans and allowance for loan losses as an integral part of the examination process. We believe our allowance for loan losses is adequate to provide for probable losses. There is no assurance that we will not, or that regulators will not require us to, increase our allowance in future periods, which could materially and adversely affect our earnings and profitability.

Non-covered nonperforming assets were $22.79 million as of December 31, 2015, $19.92 million as of December 31, 2014, and $27.79 million as of December 31, 2013. We incurred net charge-offs of $2.16 million in 2015, $2.89 million in 2014, and $10.35 million in 2013. Our allowance for loan losses was $20.23 million as of December 31, 2015, $20.23 million as of December 31, 2014, and $24.08 million as of December 31, 2013. Our provision for loan losses charged to operations was $2.19 million in 2015, $145 thousand in 2014, and $8.21 million in 2013. A provision recovery was realized for purchased credit impaired (“PCI”) loans of $4 thousand in 2015, which included a $25 thousand provision charged to operations and $29 thousand was recorded as a benefit through the FDIC indemnification asset. A provision recovery was realized for PCI loans of $697 thousand in 2014, which included a recovery of $275 thousand in the provision charged to operations and $422 thousand was recorded as a benefit through the FDIC indemnification asset. The provision attributed to PCI loans was $747 thousand in 2013, of which $296 thousand was included in the provision charged to operations and $451 thousand was recorded through the FDIC indemnification asset. As of December 31, 2015, the allowance attributed to non-PCI loans as a percentage of non-covered nonperforming loans was 112.61% and the allowance attributed to non-PCI loans as a percentage of total non-covered loans was 1.24%. If nonperforming assets or net charge-offs increase in future periods, we may be required to increase our allowance for loan losses, which could have an adverse effect on our future results of operations.

Our level of credit risk may increase due to our focus on commercial, small business, and middle market customers who may have significant vulnerability to economic conditions.

Commercial business and real estate loans are generally considered riskier than single family residential loans because larger balances are extended to single borrowers or groups of related borrowers. Commercial business and real estate loans involve risks because the borrowers’ ability to repay the loans typically depends on the success of the business’ operations or the properties securing the loans. The majority of our commercial business loans are made to small business or middle market customers. Commercial business and real estate loans made or acquired in recent years may not have experienced a complete business or economic cycle. As of December 31, 2015, our commercial business loans totaled $93.02 million, or 5.45% of our total loan portfolio, and our commercial real estate loans totaled $775.40 million, or 45.44% of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $6.90 million and largest outstanding commercial real estate loan was $11.31 million.

 

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In addition to commercial business and real estate loans, we hold a portfolio of commercial construction loans. Construction loans generally have a higher risk of loss primarily due to the critical nature of certain assumptions and estimates used to value the initial property value upon completion of construction compared to the estimated costs, including interest. If estimates prove inaccurate, final property values may fall below related loan amounts. As of December 31, 2015, our commercial construction loans totaled $55.20 million, or 3.23% of our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $6.10 million.

We may suffer losses in our loan portfolio despite our underwriting practices.

We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. These practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses.

Changes in the fair value of our investment securities may reduce stockholders’ equity and net income.

Changes in unrealized gains and losses on available-for-sale securities, net of the related tax effect, impact stockholders’ equity through AOCI. The unrealized gain or loss represents the difference between the estimated fair value and the amortized cost of the securities. A decline in the estimated fair value of the portfolio results in a decline in stockholders’ equity, book value per common share, and tangible book value per common share. The decrease is recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security’s maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time. As of December 31, 2015, the fair value of securities available for sale was $366.17 million and the aggregate unrealized loss on those securities was $10.57 million.

We conduct quarterly reviews of our securities portfolio to determine if the declines are other-than-temporary. We consider the following factors in our analysis of debt securities: our intent to sell the securities, the evidence available to determine if it is more likely than not that we will have to sell the securities before recovery of the amortized cost, and the probable credit losses. Probable credit losses are evaluated using the present value of future cash flows; the severity and duration of the decline in fair value below amortized cost; the financial condition and near-term prospects of the issuer; whether the decline is related to issuer conditions, general market, or industry conditions; the payment structure; the failure to make scheduled interest or principal payments; and changes to the securities’ rating by rating agencies. Decreases in the fair value of debt securities caused by changes in interest rates are generally considered temporary, which is consistent with our experience. If we determine that fair value decreases are other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of noninterest income. We recognized no other-than-temporary impairment (“OTTI”) charges in our debt securities portfolio in 2015.

Factors we consider in our analysis of equity securities include: our intent to sell the security before recovery of the cost; the severity and duration of the decline in fair value below cost; the financial condition and near-term prospects of the issuer; and whether the decline appears to be related to issuer conditions, general market, or industry conditions. We recognized no OTTI charges in our equity securities portfolio in 2015.

We continue to monitor the fair value of our securities portfolio as part of our ongoing OTTI evaluation process. No assurance can be given that we will not need to recognize OTTI charges in the future. Additional OTTI charges may materially affect our financial condition and earnings.

We are subject to extensive regulation, possible enforcement, and other legal action.

We operate in a highly regulated industry subject to examination, supervision, and comprehensive regulation by various federal and state governmental authorities, laws, and judicial and administrative decisions that impose

 

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requirements and restrictions on our operations. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not stockholders. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, and regulatory policies, including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial services and products offered, or allow non-banks to offer competing financial services and products. The Dodd-Frank Act, enacted in July 2010, instituted major changes to banking and financial institutions regulatory regimes. Failure to follow laws, regulations, and policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of operations.

The Bank’s ability to pay dividends is subject to regulatory limitations, to the extent such dividends are required, that may affect the Company’s ability to pay expenses and dividends to shareholders.

The Company is a separate legal entity from the Bank. The Company depends on its other subsidiaries’ and the Bank’s cash, liquidity, and payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank’s dividend payment is governed by various statutes and regulations. Depending on factors such as the Bank’s financial condition, the FRB or the Virginia Bureau, the Bank’s primary regulators, may deem dividends or other payments an unsafe or unsound practice. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, including required payments to the Trust or our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.

We face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to our offerings.

We primarily conduct our operations in Virginia, West Virginia, North Carolina, and Tennessee. We may be unsuccessful against current and future competitors in regions that offer products and services similar to those we offer; therefore, increased competition may result in reduced loan originations and deposits. Our competitors include savings associations, national banks, regional banks, and community banks. We also face competition from finance companies, brokerage firms, insurance companies, credit unions, mortgage banks, and other financial intermediaries. In particular, our competitors include state and national banks and major financial companies with resources that may provide a marketplace advantage by expanding and maintaining numerous banking locations and mounting extensive promotional and advertising campaigns.

Financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have higher lending limits that enable them to serve the credit needs of larger clients and, to the extent they are more diversified than us, may be able to offer the same products and services at more competitive rates and prices. If we are unable to attract and retain banking clients, our loan and deposit growth, general business, financial condition, and prospects may be negatively affected.

 

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Potential acquisitions may disrupt our business and dilute stockholder value.

We may seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or the potential for improved profitability through financial management, economies of scale, or expanded services. Risks inherent in acquiring other banks, businesses, and banking branches may include the following:

 

   

potential exposure to unknown or contingent liabilities of the target company;

 

   

exposure to potential asset quality issues of the target company;

 

   

difficulty, expense, and delays of integrating the operations and personnel of the target company;

 

   

potential disruption to our business;

 

   

potential diversion of management’s time and attention;

 

   

loss of key employees and customers of the target company;

 

   

difficulty in estimating the value of the target company;

 

   

potential changes in banking or tax laws or regulations that may affect the target company;

 

   

unexpected costs and delays;

 

   

the target company’s performance does not meet our growth and profitability expectations;

 

   

limited experience in new markets or product areas;

 

   

increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and

 

   

potential short-term decreases in profitability.

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over the acquired company’s book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of operations may be adversely affected.

We may engage in FDIC-assisted transactions.

We may acquire assets and liabilities of failed financial institutions that are in FDIC receivership. FDIC-assisted acquisitions include risks inherent in acquiring other banks, businesses, and banking branches, as well as risks specific to each transaction. FDIC-assisted acquisitions generally provide limited diligence and term negotiation and may require additional resources, expenses, and time to service acquired loans, including PCI loans, integrate personnel and operating systems, and establish processes to service acquired assets. Acquisitions may also require us to raise additional capital that could have a dilutive effect on existing stockholders. If we are unable to manage these risks, FDIC-assisted acquisitions could have a material adverse effect on our business, financial condition, and results of operations.

Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and interpretation, and contractual term limitations.

We receive benefits under loss share agreements in connection with the FDIC-assisted acquisition of Waccamaw Bank (“Waccamaw”) in June 2012. Under these loss share agreements, the FDIC agreed to cover 80% of most loans and foreclosed real estate losses. Loans covered under the agreements represented 4.87% of our total loans held for investment as of December 31, 2015, compared to 7.24% as of December 31, 2014. We are subject to

 

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certain obligations under the agreements that prescribe and specify how to manage, service, report, and request reimbursement for losses incurred on covered assets. Our obligations under the loss share agreements are extensive, and failure to follow any obligations could result in a specific asset, or group of assets, losing loss share coverage. Reimbursement requests are subject to FDIC review and may be delayed or disallowed if we do not comply with our obligations. Losses projected to occur during the loss share term may not be realized until after the expiration of the applicable agreement; consequently, those losses may have a material adverse impact on our results of operations. Our current loss estimates only include those projected to occur during the loss share period and for which we expect reimbursement from the FDIC at the applicable reimbursement rate. We are subject to FDIC audits to ensure compliance with the loss share agreements. The loss share agreements are subject to interpretation by the FDIC and us; therefore, disagreements about the coverage of losses, expenses, and contingencies may arise.

Our accounting estimates and risk management processes rely on analytical and forecasting models.

The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset – liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon the sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition, and results of operations.

The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act beginning on July 21, 2011. As a result, some financial institutions have commenced offering interest on demand deposits to compete for customers. We do not yet know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and net interest margin will decrease if we begin offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of operations.

Attractive acquisition opportunities may not be available in the future.

We expect banking and financial companies, many with significantly greater resources, to compete for the acquisition of financial services businesses. This competition could increase the price of potential acquisitions that we believe are attractive. If we fail to receive proper regulatory approval, we will not be able to consummate an acquisition. Our regulators consider our capital, liquidity, profitability, regulatory compliance, level of goodwill and intangible assets, and other factors when considering acquisition and expansion proposals. Future acquisitions may be dilutive to our earnings and equity per share of our common stock.

Our goodwill may be determined to be impaired.

As of December 31, 2015, our carrying balance of goodwill was $100.49 million. We test goodwill for impairment annually, or more often if necessary, using quantitative and qualitative factors. When available, quoted market prices in active markets are the best evidence of fair value and are used as the basis for measuring impairment. Other acceptable valuation methods include present value measurements based on multiples of

 

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earnings, revenues, or similar performance measures. If the carrying amount of goodwill exceeds its implied fair value, goodwill is determined to be impaired. Impairment charges may cause an adverse effect on our earnings and financial position. We recognized no goodwill impairment in 2015.

We may lose members of our management team and have difficulty attracting skilled personnel.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense. The unexpected loss of key personnel could have a material adverse impact on our business due to the loss of certain skills, market knowledge, and industry experience and the difficulty of promptly finding qualified replacement personnel. Certain existing and proposed regulatory guidance on compensation may also negatively affect our ability to retain and attract skilled personnel.

We may be required to pay higher FDIC insurance premiums or special assessments.

Our deposits are insured up to applicable limits by the FDIC’s DIF and we are subject to deposit insurance premiums and assessments to maintain deposit insurance. We are unable to predict future insurance assessment rates; however, deterioration in our risk-based capital ratios or adjustments to base assessment rates may result in higher insurance premiums or special assessments. The deterioration of banking and economic conditions and financial institution failures deplete the FDIC’s DIF and reduce the ratio of reserves to insured deposits. If the DIF is unable to meet funding requirements, increases in deposit insurance premium rates or special assessments may also be required. Future assessments, increases, or required prepayments related to FDIC insurance premiums may negatively affect our financial condition and results of operations.

We may require additional capital in the future that may not be available when needed.

We may need to raise additional capital in the future to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB’s discount window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital will be available, on acceptable terms or at all, in the future.

Liquidity risk could impair our ability to fund operations.

Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity. Company specific factors such as a decline in our credit rating, an increase in the cost of capital from financial capital markets, a decrease in business activity due to adverse regulatory action or other company specific event, or a decrease in depositor or investor confidence may impair our access to funding with acceptable terms adequate to finance our activities. General factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a decrease in business activity due to political or environmental events may impair our access to liquidity.

We are subject to credit risk associated with the financial condition of other financial institutions.

Financial institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may increase if the collateral we hold cannot be realized or liquidated at prices

 

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sufficient to recover the full amount of the loan or derivative exposure due to us. In the event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. In the ordinary course of business, we foreclose on and take title to properties that secure certain loans. Hazardous or toxic substances could be found on properties we own. If substances are present, we may be liable for remediation costs, personal injury claims, and property damage and our ability to use or sell the property would be limited. We have policies and procedures in place that require environmental reviews before initiating foreclosure actions on real property; however, these reviews may not detect all potential environmental hazards. Environmental laws that require us to incur substantial remediation costs, which could materially reduce the affected property’s value, and other liabilities associated with environmental hazards could have a material adverse effect on our financial condition and results of operations.

Our controls and procedures may fail or be circumvented.

We review our internal controls over financial reporting quarterly and enhance controls in response to these assessments, internal and external audit, and regulatory recommendations. A control system, no matter how well conceived and operated, includes certain assumptions and can only provide reasonable assurance that the objectives of the control system are met. These controls may be circumvented by individual acts, collusion, or management override. Any failure or circumvention related to our controls and procedures or failure to follow regulations related to controls and procedures could have a material adverse effect on our business, reputation, results of operations, and financial condition.

We continue to encounter technological change.

The financial services industry continues to experience rapid technological change with the introduction of new, and increasingly complex, technology-driven products and services. The effective use of technology increases operational efficiency that enables financial service institutions to reduce costs. Our future success depends, in part, on our ability to provide products and services that satisfactorily meet the financial needs of our customers, as well as to realize additional efficiencies in our operations. We may fail to use technology-driven products and services effectively to better serve our customers and increase operational efficiency or sufficiently invest in technology solutions and upgrades to ensure systems are operating properly. Further, many of our competitors have substantially greater resources to invest in technology, which may adversely affect our ability to compete.

We are subject to information security risks associated with technology.

We rely on communication and information systems, including those provided by third-party vendors, to conduct our business operations. Our security risks increase as our reliance on technology increases; consequently, the expectation to safeguard information by monitoring systems for potential failures, disruptions, and breakdowns has also increased. Risks associated with technology include security breaches, operational failures and service interruptions, and reputational damages. These risks also apply to our third-party service providers. Our third-party vendors include large entities with significant market presence in their respective fields; therefore, their services could be difficult to replace quickly if there are operational failures or service interruptions.

We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and retention of confidential financial and client information. We may be vulnerable to security breaches, such as employee error, cyber-attacks, and viruses, beyond our control. In addition to security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-party vendor disruptions

 

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may cause operational failures and service interruptions to our communication and information systems. Further, our systems may be temporarily disrupted during implementation or upgrade. Security breaches and service interruptions related to our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.

Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information, or to introduce viruses or other malware through “Trojan horse” programs to our information systems and/or our customers’ computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology, and customer and employee education, such cyber-attacks against us or our merchants and our third party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber-crime are complex and continue to evolve. More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.

Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber-attacks, could (1) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (3) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose us to civil litigation, governmental fines and possible financial liability; (4) require significant management attention and resources to remedy the damages that result; or (5) harm our reputation or cause a decrease in the number of customers who choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to claims and litigation pertaining to intellectual property.

Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support the Company’s day-to-day operations. Technology companies often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions often seek injunctions and substantial damages.

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the Company’s operations, and distracting to management. If the Company is found to infringe upon one or more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third party. In certain cases, the Company may consider entering into

 

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licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial condition, and results of operations.

Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly affect our business.

Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. These events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in a loss of revenue, and/or cause us to incur additional expenses. Any such events could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Risks Associated with Our Common Stock

Our common stock price can be volatile.

Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. The following factors, among others, may cause our common stock price to fluctuate significantly:

 

   

actual or expected variations in quarterly results of operations;

 

   

recommendations by securities analysts;

 

   

operating and stock price performance of comparable companies, as deemed by investors;

 

   

news reports relating to trends, concerns, and other issues in the financial services industry;

 

   

perceptions in the marketplace about our Company or competitors;

 

   

new technology used, or services offered, by competitors;

 

   

significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or competitors;

 

   

failure to integrate acquisitions or realize expected benefits from acquisitions;

 

   

changes in government regulations; and

 

   

geopolitical conditions, such as acts or threats of terrorism or military action.

General market fluctuations; industry factors; political conditions; and general economic conditions and events, such as economic slowdowns, recessions, interest rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.

The trading volume in our common stock is less than that of other larger financial services companies.

Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions, over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

 

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We may not continue to pay dividends on our common stock in the future.

Our common stockholders are only entitled to receive dividends when declared by our Board of Directors out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so, and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. As a financial holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock could lose some, or all, of their investment.

Certain banking laws may have an anti-takeover effect.

Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult to be acquired by a third party, even if perceived to be beneficial to our shareholders. These provisions effectively inhibit a non-negotiated merger or other business combination, which could adversely affect the market price of our common stock.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters is located at One Community Place, Bluefield, Virginia. The Bank, our community bank subsidiary, provides financial services through a network of 50 branch locations throughout Virginia, West Virginia, North Carolina, and Tennessee. We have 20 branches in West Virginia, 17 branches in Virginia, 11 branches in North Carolina, and 2 branches in Tennessee. We own 45 branches and lease the remaining 5 branches. Greenpoint’s, our insurance subsidiary, headquarters is located in High Point, North Carolina. Greenpoint provides insurances services through a network of 9 offices throughout Virginia, West Virginia, and North Carolina. We operate 2 insurance offices in North Carolina, 4 offices in West Virginia, and 3 offices in Virginia. We own 1 office, lease 3 offices, and operate 5 offices within our branch network. We also lease 2 loan production offices and own 1 wealth management office. There were no mortgages or liens against any properties as of December 31, 2015. A list of all branch and ATM locations can be found on our website at www.fcbinc.com. Information contained on our website is not part of this report. See Note 8, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

Item 3. Legal Proceedings.

We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome of each of these matters with certainty, we are of the belief that the resolution of these actions should not have a material adverse effect on our financial position, results of operations, or cash flows.

Item 4. Mine Safety Disclosures.

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information, Holders and Dividends

Our common stock is traded on the NASDAQ Global Select Market under the symbol “FCBC”. As of February 24, 2016, there were 2,585 record holders and 17,820,090 outstanding shares of our common stock. The following table presents our common stock’s high and low market price and cash dividends paid per share, by quarter, during the periods indicated:

 

     Year Ended December 31,  
     2015      2014  
     Market Price      Cash Dividends per
Common Share
     Market Price      Cash Dividends per
Common Share
 
     High      Low         High      Low     

First quarter

   $ 17.87       $ 15.01       $ 0.13       $ 17.05       $ 15.46       $ 0.12   

Second quarter

     18.52         16.30         0.13         16.85         13.87         0.12   

Third quarter

     18.56         16.95         0.14         16.45         13.53         0.13   

Fourth quarter

     20.68         17.30         0.14         16.58         14.39         0.13   

The Company’s ability to pay dividends on its common stock is dependent on the Bank’s ability to pay dividends to the Company, which is subject to various regulatory restrictions and limitations. See “Regulatory Restrictions on Dividends; Source of Strength” in the “Regulation and Supervision – First Community Bancshares, Inc.” section and “Restrictions on Distribution of Subsidiary Bank Dividends and Assets” in the “Regulation and Supervision – First Community Bank” section in Part I, Item 1 of this report. Common stock cash dividends totaled $9.99 million in 2015, $9.20 million in 2014, and $9.48 million in 2013. Cash dividends paid per common share totaled $0.54 in 2015, $0.50 in 2014, and $0.48 in 2013.

During the first quarter of 2015, the Company notified holders of its 6% Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) of its intent to redeem all of the outstanding shares. Prior to redemption, holders converted 12,784 shares of Series A Preferred Stock with each share convertible into 69 shares of the Company’s common stock. The Company redeemed the remaining 2,367 shares for $2.37 million along with accrued and unpaid dividends of $9 thousand. As a result of the redemption, there were no shares of Series A Preferred Stock outstanding as of December 31, 2015, compared to 15,151 shares as of December 31, 2014, and 15,251 shares as of December 31, 2013. Series A Preferred Stock cash dividends totaled $105 thousand in 2015, $910 thousand in 2014, and $992 thousand in 2013.

Purchases of Equity Securities

We repurchased 1,238,299 shares of our common stock in 2015, 132,773 shares in 2014, and 1,739,601 shares in 2013. The following table provides information regarding purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the dates indicated:

 

     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)
 

October 1-31, 2015

     125,899       $ 17.84         125,899         1,806,243   

November 1-30, 2015

     —           —           —           1,807,566   

December 1-31, 2015

     93,674         19.13         93,674         1,716,362   
  

 

 

    

 

 

    

 

 

    

Total

     219,573       $ 18.39         219,573      
  

 

 

    

 

 

    

 

 

    

 

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(1) Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 5,000,000 shares. On August 25, 2015, our Board of Directors approved changes to our stock repurchase plan to authorize the repurchase and retention of up to 5,000,000 shares of our outstanding common stock, an increase of 2,000,000 shares. The plan has no expiration date and is currently in effect. No determination has been made to terminate the plan or to cease making purchases. We held 3,283,638 shares in treasury as of December 31, 2015.

Stock Performance Graph

The following graph, compiled by SNL Financial LC (“SNL”), compares the cumulative total shareholder return on our common stock for the five-year period ended December 31, 2015, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and SNL’s Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 50 bank holding companies with total assets between $1 billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink sheets. The cumulative returns assume that $100 was originally invested on December 31, 2010, and that all dividends are reinvested.

 

LOGO

 

     Year Ended December 31,  
      2010      2011      2012      2013      2014      2015  

First Community Bancshares, Inc.

     100.00         86.24         113.84         122.72         125.08         145.91   

S&P 500 Index

     100.00         102.11         118.45         156.82         178.28         180.75   

NASDAQ Composite Index

     100.00         99.21         116.82         163.75         188.03         201.40   

SNL Asset & Regional Peer Group(1)

     100.00         80.12         87.98         109.61         120.43         140.14   

 

(1)

Includes the following institutions: Access National Corporation; American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; Avenue Financial Holdings, Inc.; Bear State Financial, Inc.; Burke & Herbert Bank & Trust Company; C&F Financial Corporation; Capital City Bank Group, Inc.; Cardinal Financial Corporation; Carolina Financial Corporation; Carter Bank & Trust; CenterState Banks, Inc.; City Holding Company; CNB Corporation; Colony Bankcorp, Inc.; Community Bankers Trust Corporation;

 

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  CommunityOne Bancorp; Eastern Virginia Bankshares, Inc.; Fidelity Southern Corporation; First Bancorp; First Bancshares, Inc.; First Citizens Bancshares, Inc.; First Farmers and Merchants Corporation; Hamilton State Bancshares, Inc.; Hampton Roads Bankshares, Inc.; HomeTrust Bancshares, Inc.; Live Oak Bancshares, Inc.; Middleburg Financial Corporation; Monarch Financial Holdings, Inc.; MVB Financial Corp.; National Bankshares, Inc.; National Commerce Corporation; NewBridge Bancorp; Paragon Commercial Corporation; Park Sterling Corporation; Peoples Bancorp of North Carolina, Inc.; Premier Financial Bancorp, Inc.; Seacoast Banking Corporation of Florida; ServisFirst Bancshares, Inc.; SmartFinancial, Inc.; Southeastern Bank Financial Corporation; Southern BancShares (N.C.), Inc.; Southern First Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.; State Bank Financial Corporation; Stonegate Bank; Summit Financial Group, Inc.; USAmeriBancorp, Inc.; WashingtonFirst Bankshares, Inc.; and Wilson Bank Holding Company. The returns of each of the foregoing institutions have been weighted according to their respective stock market capitalization at the beginning of each period for which a return is indicated.

 

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Item 6. Selected Financial Data.

The following table presents our consolidated selected financial data, derived from audited financial statements, as of and for the five years ended December 31, 2015. The table should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.

 

    Year Ended December 31,  
(Amounts in thousands, except share and per share data)   2015     2014     2013     2012     2011  

Selected Balance Sheet Data

         

Investment securities

  $ 438,714      $ 384,065      $ 520,388      $ 535,174      $ 485,920   

Loans held for sale

    —          1,792        883        6,672        5,820   

Loans held for investment, net of unearned income

    1,706,541        1,689,416        1,710,721        1,724,653        1,396,067   

Allowance for loan losses

    20,233        20,227        24,077        25,770        26,205   

Total assets

    2,462,276        2,607,936        2,602,514        2,728,867        2,164,789   

Average assets

    2,520,934        2,608,570        2,661,602        2,510,931        2,195,639   

Deposits

    1,873,259        2,000,759        1,950,742        2,030,175        1,543,467   

Borrowings

    219,370        229,741        300,396        313,553        295,141   

Total liabilities

    2,119,259        2,256,562        2,273,908        2,372,544        1,859,060   

Preferred stock

    —          15,151        15,251        17,421        18,921   

Total stockholders’ equity

    343,017        351,374        328,606        356,323        305,729   

Average stockholders’ equity

    348,199        342,619        355,611        334,901        295,150   

Summary of Operations

         

Interest income

  $ 96,102      $ 106,108      $ 109,476      $ 109,656      $ 94,176   

Interest expense

    11,349        15,290        17,834        19,600        22,147   

Net interest income

    84,753        90,818        91,642        90,056        72,029   

Provision for loan losses charged to operations

    2,191        145        8,208        5,678        9,047   

Noninterest income

    29,530        30,003        29,771        36,710        35,534   

Noninterest expense

    76,171        82,862        78,985        78,383        68,915   

Income tax expense

    11,381        12,324        10,908        14,128        9,573   

Net income

    24,540        25,490        23,312        28,577        20,028   

Dividends on preferred stock

    105        910        1,024        1,058        703   

Net income available to common shareholders

    24,435        24,580        22,288        27,519        19,325   

Selected Share and Per Share Data

         

Basic earnings per common share

  $ 1.32      $ 1.34      $ 1.13      $ 1.44      $ 1.08   

Diluted earnings per common share

    1.31        1.31        1.11        1.40        1.07   

Book value per common share at year-end (1)

    18.95        18.06        16.79        16.76        15.96   

Cash dividends per common share

    0.54        0.50        0.48        0.43        0.40   

Weighted average basic shares outstanding

    18,531,039        18,406,363        19,792,099        19,127,065        17,877,421   

Weighted average diluted shares outstanding

    18,727,464        19,483,054        20,961,800        20,419,569        18,687,521   

Selected Ratios

         

Return on average assets

    0.97     0.94     0.84     1.10     0.88

Return on average common equity

    7.07     7.51     6.57     8.70     6.81

Average equity to average assets

    13.81     13.13     13.36     13.34     13.44

Dividend payout

    40.95     37.44     42.62     29.89     37.00

Common equity Tier 1 ratio (2)

    14.54     NA        NA        NA        NA   

Total risk-based capital ratio

    15.95     17.68     16.44     16.70     18.15

Tier 1 risk-based capital ratio

    14.73     16.43     15.19     15.44     16.89

Leverage ratio

    10.62     10.12     9.95     9.96     11.50

 

(1) Book value per common share is defined as stockholders’ equity divided by as-converted common shares outstanding.
(2) The common equity Tier 1 ratio became effective on January 1, 2015.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. This MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report.

Executive Overview

First Community Bancshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides commercial banking services through its wholly-owned subsidiary First Community Bank (the “Bank”). The Bank operates under the trade names First Community Bank in West Virginia, Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank has positioned itself as a regional community bank that provides an alternative to larger banks, which often place less emphasis on personal relationships, and smaller community banks, which lack the capital and resources to efficiently serve customer needs. The Company provides insurance services through its wholly-owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”), which operates under the Greenpoint name and under the trade name First Community Insurance Services (“FCIS”) in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia. The Bank offers wealth management and investment advice through its wholly-owned subsidiary First Community Wealth Management (“FCWM”) and the Bank’s Trust Division.

Our efforts are focused on building financial partnerships and creating enduring and complete relationships with businesses and individuals through a personal and local approach to banking and financial services. Our operations are guided by a strategic plan focusing on organic growth that may be supplemented by strategic acquisitions. While our mission remains that of a community bank, management believes that entry into new markets may accelerate our growth rate by diversifying the demographics of our customer base and by generally increasing our sales and service network.

Economy

The regional economies we operate in have shown positive and stable aspects. The following list summarizes economic activity in the regions we operate:

 

   

West Virginia and Southwest Virginia – These economies have significant exposure to extractive industries, such as coal, timber, and natural gas.

 

   

Central North Carolina – This economy has suffered in recent years due to foreign competition in the furniture and textile industries and consolidation in the financial services industry. Despite these detractions, these economies continue to benefit from large regional and national companies operating in the Triad and Central Piedmont regions.

 

   

Central Virginia – This economy is highly diversified with a strong commercial and service sector, light manufacturing, education and health services, and tourism.

 

   

Eastern Tennessee – This economy continues to benefit from the stability of higher education, healthcare services, and tourism.

Competition

We continue to encounter strong competition for growth in loans and deposits and increased market share. Many of the markets we target are being entered into by other banks located in nearby and distant markets. The expansion of banks, credit unions, and other non-depository financial institutions over recent years has

 

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intensified competitive pressures on core deposit generation and retention. Competitive factors that influence our Company include pressure on interest yields, product fees, loan structure, and loan terms; however, we have countered these pressures with our relationship style of banking, competitive pricing, cost efficiencies, and disciplined approach to loan underwriting.

Recent Acquisition and Divestiture Activity

Our consolidated financial statements reflect acquisition and divestiture activity from the transaction date; therefore, comparisons between fiscal years are affected by varying levels of assets, liabilities, income, and expense.

On October 24, 2014, we completed the purchase of seven branches, six in Southwestern Virginia and one in Central North Carolina, from Bank of America, National Association. At acquisition, we assumed total deposits of $318.88 million for a deposit premium of $5.79 million. Additionally, we purchased the real estate or assumed the leases associated with the branches. No loans were included in the transaction.

On December 12, 2014, we completed the sale of thirteen branches, ten in Southeastern North Carolina and three in South Carolina, to CresCom Bank (“CresCom”), headquartered in Charleston, South Carolina. At closing, CresCom assumed total deposits of $215.19 million and purchased total loans of $70.04 million. We received a deposit premium from CresCom of $6.45 million. The transaction excluded loans covered under FDIC loss share agreements. In connection with the transaction we recorded a net gain of $755 thousand, which included a $6.45 million goodwill allocation.

On October 31, 2015, Greenpoint sold one insurance agency that resulted in a net loss of $8 thousand. In connection with the sale, we eliminated $324 thousand of goodwill and $61 thousand of other intangibles on our consolidated balance sheet.

Insurance Services

We offer insurance services through Greenpoint, a full-service insurance agency that provides commercial and personal lines of insurance. Revenues are primarily derived from commissions paid by issuing companies on the sale of policies. Commission revenue totaled $6.90 million in 2015, an increase of $344 thousand, or 5.25%, compared to the same period of 2014, which was primarily due to an increase in direct bill property and casualty insurance income and contingency income. Commission revenue totaled $6.56 million in 2014, an increase of $622 thousand, or 10.48%, compared to the same period of 2013, which was also primarily due to an increase in direct bill property and casualty insurance income and contingency income.

Wealth Management Services

We offer trust management, estate administration, and investment advisory services through FCWM and the Bank’s Trust Division, which reported combined assets under management of $742 million as of December 31, 2015, and $712 million as of December 31, 2014. These assets are not our assets, but are managed under various fee-based arrangements as fiduciary or agent. The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States and conform to general practices within the banking industry. Our financial position and results of operations require management to make judgments and estimates to develop the amounts

 

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reflected and disclosed in the consolidated financial statements. Different assumptions in the application of these estimates could result in material changes to our consolidated financial position and consolidated results of operations. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed to be reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or establishment of a valuation reserve, or an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or, when available, are provided by third-party sources. When third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and Supplementary Data,” of this report. See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report. These policies may involve significant estimates and assumptions that have a material impact on our financial condition or operating performance due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, we have identified the establishment and determination of investment securities, the allowance for loan losses, business combinations, intangible assets, and income taxes as the accounting areas that require the most subjective or complex judgments.

Investment Securities

Independent third parties are used to determine the fair values of our investment securities. Inputs provided by third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. We review our investment portfolio quarterly for indications of OTTI. The analysis differs depending upon the type of investment security being analyzed. The following factors, among others, are considered in determining whether a security is other-than-temporarily impaired: our intent and ability to hold the security for a period of time sufficient to allow for any expected recovery in fair value or whether it is more likely than not we will be required to sell the security before recovering its fair value; the severity of the loss and the length of time fair value has been below amortized cost; the expectation of the security’s future performance; and the creditworthiness of the security’s issuer. If the impairment is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. See Note 3, “Investment Securities,” to the Consolidated Financial Statements in Item 8 of this report.

Allowance for Loan Losses

Our quarterly review of the allowance methodology and relevant factors serves as the primary means management evaluates the adequacy of the allowance for loan losses. The determination of our allowance for loan losses requires management to make significant estimates and assumptions. While management uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities. These uncertainties may result in material changes to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

The Company’s allowance for loan losses consists of reserves assigned to specific loans and credit relationships and general reserves assigned to loans not separately identified that have been segmented into groups with similar risk characteristics using our internal risk grades. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the

 

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loan portfolio and the economy. Factors considered in this evaluation include, but are not limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. Individually significant loans require additional analysis that may include the borrower’s underlying cash flow and capacity for debt repayment, specific business conditions, and value of secondary sources of repayment; consequently, this analysis may result in the identification of weakness and a corresponding need for a specific reserve.

Third-party collateral valuations are regularly obtained and evaluated to help management determine the potential credit impairment and the amount of impairment to record. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal evaluation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. When a third-party evaluation is received, it is reviewed for reasonableness. Once the evaluation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve. Specific reserves are generally recorded for impaired loans while third-party evaluations are in process and for impaired loans that continue to make some form of payment. While waiting for receipt of the third-party appraisal, we regularly review the relationship to identify any potential adverse developments and begin the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower.

Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to appraised value that we determine appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Impaired credits move quickly through the process towards ultimate resolution except in cases involving bankruptcy and various state judicial processes, which may extend the time for ultimate resolution.

Management uses an independent third party to assist in determining the changes in cash flows and the amount of possible impairment related to our purchased performing loans and purchased credit impaired (“PCI”) loan pools. PCI loan pools are evaluated separately from non-PCI loans in the determination of the allowance. See Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

Business Combinations

The Company may engage in business combinations with other companies. Under the acquisition method of accounting, all identifiable acquired assets, including purchased loans, and liabilities are recorded at fair value. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Management makes significant estimates and exercises significant judgment in accounting for business combinations. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. If the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Financial assets and liabilities are typically valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill, or bargain purchase gains, and in some cases amortization expense or accretion income. Management must also make estimates for the useful or economic lives of certain acquired assets and liabilities. We review the purchased loan portfolio quarterly for changes in cash flows and possible impairment using input provided from an independent third party. Management’s assumptions about purchased loans and intangible assets may significantly influence the allowance for loan losses. See Note 2, “Acquisitions, Divestitures, and Branching Activity,” and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

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The Company may also engage in FDIC-assisted business combinations. In 2012, we entered into a purchase and assumption agreement with loss share arrangements with the FDIC to purchase certain assets and assume substantially all customer deposits and certain liabilities of Waccamaw. Under the loss share agreements the FDIC agreed to cover 80% of covered assets, which consist of most loan and other real estate losses. Gains and recoveries on covered assets offset prior losses or are paid to the FDIC at the loss share percentage at the time of recovery. The loss share agreement for single family covered assets provides FDIC loss sharing and recovery reimbursement to the FDIC for ten years. The loss share agreement for commercial covered assets provides for FDIC loss sharing for five years and recovery reimbursement to the FDIC for eight years. Under the acquisition method of accounting, the FDIC indemnification asset was recorded at fair value using projected cash flows based on expected reimbursements and the applicable loss share percentages. Certain expenses related to covered assets are reimbursable from the FDIC through monthly and quarterly claims we submit. Estimated reimbursements from the FDIC are netted against covered expenses in the statements of income. We regularly review the fair value of the FDIC indemnification asset with input from a third-party provider. Post-acquisition adjustments to the indemnification asset are measured on the same basis as the underlying covered assets. See Note 7, “FDIC Indemnification Asset,” to the Consolidated Financial Statements in Item 8 of this report.

Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is allocated to the appropriate reporting unit when acquired. We maintain two reporting units, Community Banking and Insurance Services. Goodwill is tested annually in the fourth quarter using a qualitative assessment to determine if it is more likely than not that the fair value of each reporting unit is less than its carrying amount. Qualitative factors may include macroeconomic conditions, industry and market considerations, our financial performance, and changes in our stock price. If we conclude that it is more likely than not that the fair value of either reporting unit is less than its carrying amount, we perform a two-step quantitative goodwill impairment test. Step 1 consists of calculating and comparing the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of a reporting unit is greater than its calculated fair value, goodwill impairment may exist and Step 2 is required to determine the amount of the impairment loss.

Core deposit intangible assets represent the future earnings potential of acquired deposit relationships. These deposits are amortized over their estimated remaining useful lives, as determined by management. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements and use the straight-line amortization method. See Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.

Income Taxes

The establishment of provisions for federal and state income taxes is a complex area of accounting that involves judgments and estimates in applying relevant tax statutes. We operate in many state tax jurisdictions, which requires the appropriate allocation of income and expense to each state based on a variety of apportionment or allocation bases. Audits by federal and state tax authorities may reveal liabilities that differ from our estimates and provisions. We continually evaluate our exposure to possible tax assessments arising from audits and record an estimate of possible exposure based on current facts and circumstances.

We measure deferred tax assets and liabilities using enacted income tax rates applicable to the period temporary differences are expected to be realized or settled. As changes in tax laws and rates are enacted, we adjust deferred tax assets and liabilities through the provision for income taxes. When evidence indicates that it is more likely than not that some, or all, of the deferred tax asset is not recoverable, we may record a valuation allowance to reduce the carrying value of the asset. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes. See Note 16, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report.

 

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Performance Overview

Highlights of our results of operations in 2015, and financial condition as of December 31, 2015, include the following:

 

   

Our non-covered loan portfolio increased $56.33 million, or 3.59%, compared to year-end 2014.

 

   

We prepaid long-term borrowings of $25 million in keeping with our strategic goal of reducing high cost, wholesale debt.

 

   

We announced our intent to redeem all outstanding shares of our convertible preferred stock during the first quarter of 2015, resulting in the conversion of 12,784 preferred shares into common stock and the redemption of 2,367 preferred shares for $2.37 million.

 

   

We repurchased 1,401,622 common shares during the year, including the effect of the preferred share redemption.

Results of Operations

Net Income

The following table presents our net income and related information in the periods indicated:

 

                      2015 Compared to 2014     2014 Compared to 2013  
    Year Ended December 31,     Increase
  (Decrease)  
    %
  Change  
    Increase
  (Decrease)  
    %
  Change  
 
(Amounts in thousands, except per share data)   2015     2014     2013          

Net income

  $ 24,540      $ 25,490      $ 23,312      $ (950     -3.73   $ 2,178        9.34

Net income available to common shareholders

    24,435        24,580        22,288        (145     -0.59     2,292        10.28

Basic earnings per common share

    1.32        1.34        1.13        (0.02     -1.49     0.21        18.58

Diluted earings per common share

    1.31        1.31        1.11        —          0.00     0.20        18.02

Return on average assets

    0.97     0.94     0.84     0.03     3.19     0.10     11.90

Return on average common equity

    7.08     7.51     6.57     -0.43     -5.73     0.94     14.31

2015 Compared to 2014. Net income decreased in 2015 primarily due to a decrease in net interest income, an increase in the provision for loan losses, and an increase in the net amortization related to the FDIC indemnification asset. These changes were offset by a net gain on the sale of securities and a decrease in Federal Home Loan Bank (“FHLB”) debt prepayment fees.

2014 Compared to 2013. Net income increased in 2014 primarily due to a recovery of provision for loan losses, a decrease in the net amortization related to the FDIC indemnification asset, a decrease in other operating expenses, and a net gain on branch divestitures. These gains and expense decreases were offset by FHLB debt prepayment fees, a net loss on the sale of securities, expenses related to acquisition and divestiture activity, a decrease in other operating income, and a decrease in net interest income.

 

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Net Interest Income

Net interest income, our largest contributor to earnings, comprised 74.16% of total net interest and noninterest income in 2015, 75.17% in 2014, and 75.48% in 2013. Net interest income is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 35%. We believe this measure to be the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The following table presents our average consolidated balance sheets, as of the dates indicated, and the net interest analysis, on a FTE basis, in the periods indicated:

 

    Year Ended December 31,  
    2015     2014     2013  
(Amounts in thousands)   Average
Balance
    Interest (1)     Average
Yield/
Rate (1)
    Average
Balance
    Interest (1)     Average
Yield/
Rate (1)
    Average
Balance
    Interest (1)     Average
Yield/
Rate (1)
 

Assets

                 

Earning assets

                 

Loans(2)

  $ 1,680,021      $ 87,768        5.22   $ 1,744,520      $ 95,707        5.49   $ 1,699,614      $ 96,768        5.69

Securities available for sale

    363,359        9,575        2.64     410,136        12,400        3.02     543,697        15,184        2.79

Securities held to maturity

    70,987        770        1.08     20,843        267        1.28     667        54        8.10

Interest-bearing deposits

    98,639        267        0.27     98,090        291        0.30     63,566        211        0.33
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total earning assets

    2,213,006      $ 98,380        4.44     2,273,589      $ 108,665        4.78     2,307,544      $ 112,217        4.86

Other assets

    307,928            334,981            354,058       
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 2,520,934          $ 2,608,570          $ 2,661,602       
 

 

 

       

 

 

       

 

 

     

Liabilities

                 

Interest-bearing deposits

                 

Demand deposits

  $ 343,036      $ 203        0.06   $ 366,932      $ 206        0.06   $ 361,979      $ 240        0.07

Savings deposits

    532,221        367        0.07     535,256        514        0.10     516,247        584        0.11

Time deposits

    631,654        5,308        0.84     704,518        6,588        0.94     772,741        7,999        1.04
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    1,506,911        5,878        0.39     1,606,706        7,308        0.45     1,650,967        8,823        0.53

Borrowings

                 

Federal funds purchased

    535        2        0.37     892        3        0.34     632        2        0.32

Retail repurchase agreements

    71,262        68        0.10     72,917        97        0.13     69,141        265        0.38

Wholesale repurchase agreements

    50,000        1,878        3.76     50,000        1,878        3.76     53,118        1,890        3.56

FHLB advances and other borrowings

    89,400        3,523        3.94     147,504        6,004        4.07     168,399        6,854        4.07
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total borrowings

    211,197        5,471        2.59     271,313        7,982        2.94     291,290        9,011        3.09
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,718,108        11,349        0.66     1,878,019        15,290        0.81     1,942,257        17,834        0.92
   

 

 

       

 

 

       

 

 

   

Noninterest-bearing demand deposits

    433,936            367,315            342,919       

Other liabilities

    20,691            20,617            20,815       
 

 

 

       

 

 

       

 

 

     

Total liabilities

    2,172,735            2,265,951            2,305,991       

Stockholders’ equity

    348,199            342,619            355,611       
 

 

 

       

 

 

       

 

 

     

Total liabilities and equity

  $ 2,520,934          $ 2,608,570          $ 2,661,602       
 

 

 

       

 

 

       

 

 

     

Net interest income, tax equivalent

    $ 87,031          $ 93,375          $ 94,383     
   

 

 

       

 

 

       

 

 

   

Net interest rate spread

        3.78         3.97         3.94
     

 

 

       

 

 

       

 

 

 

Net interest margin

        3.93         4.11         4.09
     

 

 

       

 

 

       

 

 

 

 

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(1) Fully taxable equivalent (“FTE”) basis based on the federal statutory rate of 35%.
(2) Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.

The following table presents the impact on FTE net interest income resulting from changes in volume (average volume times the prior year’s average rate), rate (average rate times the prior year’s average volume), and rate/volume (average volume times the change in average rate), in the periods indicated:

 

     Year Ended
December 31, 2015 Compared to 2014
Dollar Increase (Decrease) due to
    Year Ended
December 31, 2014 Compared to 2013
Dollar Increase (Decrease) due to
 
(Amounts in thousands)    Volume     Rate     Rate/
Volume
    Total     Volume     Rate     Rate/
Volume
    Total  

Interest earned on (1):

                

Loans (2)

   $ (3,541   $ (4,710   $ 312      $ (7,939   $ 5,292      $ (5,157   $ (170   $ (35

Securities available for sale

     (1,413     (1,558     146        (2,825     1,246        (1,155     (77     14   

Securities held to maturity

     642        (42     (97     503        (127     41        (31     (117

Interest-bearing deposits with other banks

     2        (30     4        (24     (47     —          (1     (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (4,310     (6,340     365        (10,285     6,364        (6,271     (279     (186

Interest paid on (1):

                

Demand deposits

     (14     —          11        (3     33        31        (9     55   

Savings deposits

     (3     (161     17        (147     54        (47     21        28   

Time deposits

     (685     (705     110        (1,280     (50     (1,165     (17     (1,232

Federal funds purchased

     (1     —          —          (1     —          —          —          —     

Retail repurchase agreements

     (2     (22     (5     (29     (54     (149     19        (184

Wholesale repurchase agreements

     —          —          —          —          (75     (61     3        (133

FHLB advances and other

                

Borrowings

     (2,365     (192     76        (2,481     (282     (18     —          (300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (3,070     (1,080     209        (3,941     (374     (1,409     17        (1,766
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income, tax equivalent

   $ (1,240   $ (5,260   $ 156      $ (6,344   $ 6,738      $ (4,862   $ (296   $ 1,580   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) FTE basis based on the federal statutory rate of 35%.
(2) Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.

The following table reconciles net interest income, as presented in our consolidated statements of income, and net interest income on a FTE basis, in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Net interest income, GAAP basis

   $ 84,753       $ 90,818       $ 91,642   

Tax equivalent adjustment (1)

     2,278         2,557         2,741   
  

 

 

    

 

 

    

 

 

 

Net interest income, tax equivalent

   $ 87,031       $ 93,375       $ 94,383   
  

 

 

    

 

 

    

 

 

 

 

(1) The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and investments using the federal statutory rate of 35%.

 

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The interest earned and the average yield on loans include accretion income from acquired loan portfolios. The following table presents our average consolidated balance sheets, as of the dates indicated, and net interest analysis, on a FTE basis excluding the impact of non-cash purchase accounting accretion, in the periods indicated:

 

     Year Ended December 31,  
     2015     2014     2013  
(Amounts in thousands)    Interest (1)      Average
Yield/
Rate (1)
    Interest (1)      Average
Yield/
Rate (1)
    Interest (1)      Average
Yield/
Rate (1)
 

Earning assets

               

Loans (2)

   $ 87,768         5.22   $ 95,707         5.49   $ 96,768         5.69

Accretion income

     11,258           11,469           14,726      

Less: cash accretion income

     4,149           4,412           7,023      
  

 

 

      

 

 

      

 

 

    

Non-cash accretion income

     7,109           7,057           7,703      

Non-recurring discount accretion (3)

     —             2,588           —        
  

 

 

      

 

 

      

 

 

    

Loans, normalized (4)

     80,659         4.80     86,062         4.93     89,065         5.24

Other earning assets

     10,612         1.99     12,958         2.45     15,449         2.54
  

 

 

      

 

 

      

 

 

    

Total earning assets

     91,271         4.12     99,020         4.36     104,514         4.53

Total interest-bearing liabilities

     11,349         0.66     15,290         0.81     17,834         0.92
  

 

 

      

 

 

      

 

 

    

Net interest income, tax equivalent

   $ 79,922         $ 83,730         $ 86,680      
  

 

 

      

 

 

      

 

 

    

Net interest rate spread

        3.46        3.55        3.61
     

 

 

      

 

 

      

 

 

 

Net interest margin (4)

        3.61        3.68        3.76
     

 

 

      

 

 

      

 

 

 

 

(1) FTE basis based on the federal statutory rate of 35%.
(2) Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.
(3) Non-recurring discount accretion was enhanced in 2014 as a result of a positive resolution of a sizable credit.
(4) The normalized net interest margin and the normalized yield on loans are non-GAAP financial measures that exclude non-cash loan interest accretion related to PCI loans.

2015 Compared to 2014. Net interest income under GAAP decreased $6.07 million, or 6.68%, and tax equivalent net interest income decreased $6.34 million, or 6.79%, in 2015. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted in a 19 basis point decrease in the net interest rate spread and an 18 basis point decrease in the net interest margin.

PCI loan interest accretion totaled $11.26 million in 2015 and $11.47 million in 2014. Interest accretion income received in cash totaled $4.15 million in 2015 and $4.41 million in 2014. Accretion income was enhanced in 2014 by non-recurring discount accretion of $2.59 million related to the positive resolution of a sizable credit. The normalized yield on loans, which excludes non-cash and non-recurring discount accretion, decreased 13 basis points compared to a decrease of 27 basis points under GAAP. The normalized net interest margin decreased 7 basis points compared to a decrease of 18 basis points under GAAP. The impact of purchase accounting interest accretion is expected to decline in future periods due to acquired loan portfolio attrition.

Average earning assets decreased $60.58 million, or 2.66%, due to a decrease in the loan portfolio and securities available for sale offset by an increase in securities held to maturity. The yield on earning assets decreased 34 basis points, which was largely due to a 38 basis point decrease in the yield on available for sale securities and 27 basis point decrease in the yield on loans as a result of the continued low rate environment. During 2015, we continued to purchase short-term bonds in the held-to-maturity category to provide for the funding necessary to

 

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extinguish certain wholesale borrowings as they come due. Average interest-bearing deposits experienced a slight increase of $549 thousand, or 0.56%. Interest-bearing deposits with banks are primarily comprised of excess liquidity kept at the FRB of Richmond bearing overnight market rates.

As of December 31, 2015, interest-bearing liabilities included interest-bearing deposits; retail repurchase agreements, consisting of collateralized retail deposits and commercial treasury accounts; wholesale repurchase agreements; FHLB advances; and other borrowings. Average interest-bearing liabilities decreased $159.91 million, or 8.51%, primarily due to the decline in average time deposits and FHLB borrowings. In 2015, we prepaid an additional $25 million of a $50 million FHLB convertible advance with a May 2017 maturity and 4.15% interest rate. The yield on interest-bearing liabilities decreased 15 basis points due to a 6 basis point decrease in the rate on interest-bearing deposits and a 35 basis point decrease in the rate on borrowings. Average interest-bearing deposits decreased $99.80 million, or 6.21%, which was driven by a $72.86 million, or 10.34%, decrease in average time deposits, a $23.90 million, or 6.51%, decrease in average interest-bearing demand deposits, and a $3.04 million, or 0.57%, decrease in average savings deposits, which include money market and savings accounts. Average borrowings decreased $60.12 million, or 22.16%, largely due to a $58.10 million, or 39.39%, decrease in FHLB and other borrowings.

2014 Compared to 2013. Net interest income under GAAP decreased $824 thousand, or 0.90%, and tax equivalent net interest income decreased $1.01 million, or 1.07%, in 2014. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted in a 3 basis point increase in the net interest rate spread and a 2 basis point increase in the net interest margin.

PCI loan interest accretion totaled $11.47 million in 2014 and $14.73 million in 2013. Interest accretion income received in cash totaled $4.41 million in 2014 and $7.02 million in 2013. Accretion income was enhanced in 2014 by non-recurring discount accretion of $2.59 million related to the positive resolution of a sizable credit. The normalized yield on loans decreased 31 basis points compared to a decrease of 20 basis points under GAAP. The normalized net interest margin decreased 8 basis points compared to an increase of 2 basis points under GAAP. The impact of purchase accounting interest accretion is expected to decline in future periods due to acquired loan portfolio attrition.

Average earning assets decreased $33.96 million, or 1.47%, due to a decrease in securities available for sale offset by increases in the noncovered loan portfolio, securities held to maturity, and deposits with other banks. The yield on earning assets decreased 8 basis points, which was largely due to a 20 basis point decrease in the yield on loans, a result of the continued low rate environment. During 2014, we purchased short-term bonds in the held-to-maturity category to provide for the funding necessary to extinguish certain wholesale borrowings as they come due.

As of December 31, 2014, interest-bearing liabilities included interest-bearing deposits; retail repurchase agreements, consisting of collateralized retail deposits and commercial treasury accounts; wholesale repurchase agreements; FHLB advances; and other borrowings. Average interest-bearing liabilities decreased $64.24 million, or 3.31%, primarily due to the decline in average time deposits and FHLB borrowings. In 2014, we prepaid $60 million of FHLB convertible advances, of which $50 million bore a 4.21% interest rate and $10 million bore a 4.15% interest rate. The yield on interest-bearing liabilities decreased 11 basis points due to an 8 basis point decrease in the rate on interest-bearing deposits and a 15 basis point decrease in the rate on borrowings. Average interest-bearing deposits decreased $44.26 million, or 2.68%, which was driven by a $68.22 million, or 8.83%, decrease in average time deposits, partially offset by increases in average interest-bearing demand deposits of $4.95 million, or 1.37%, and average savings deposits, which include money market and savings accounts, of $19.01 million, or 3.68%. Average borrowings decreased $19.98 million, or 6.86%, largely due to decreases in FHLB and other borrowings.

Provision for Loan Losses

2015 Compared to 2014. The provision for loan losses is the amount added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level management determines necessary to absorb

 

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probable losses in the existing loan portfolio. The provision charged to operations increased $2.05 million due to an $889 thousand increase in specific reserves on loans identified as impaired and the absence of a significant non-recurring recovery related to the positive resolution of a sizable problem credit in 2014. A recovery of $4 thousand was attributed to the PCI provision, which included a recovery of $29 thousand recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and a provision applied to operations of $25 thousand. See “Allowance for Loan Losses” in the “Financial Condition” section below.

2014 Compared to 2013. The provision charged to operations decreased $8.06 million due to a $3.26 million decrease in specific reserves on loans identified as impaired, lower average loss rates, lower classified asset levels, and significantly lower net charge-offs. Net charge-offs in 2014 included a $1.60 million recovery related to the positive resolution of a sizable problem credit. In addition, activity in the allowance in 2014 included the removal of $682 thousand of the allowance due to loans transferred in the branch divestiture. A recovery of $697 thousand was attributed to the PCI provision largely due to better than expected performance in the Waccamaw PCI loan portfolio, of which $422 thousand was recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and $275 thousand was applied to operations. See “Allowance for Loan Losses” in the “Financial Condition” section below.

Noninterest Income

Noninterest income consists of all revenues not included in interest and fee income related to earning assets. Noninterest income comprised 25.84% of total net interest and noninterest income in 2015, 24.83% in 2014, and 24.52% in 2013. The following table presents the components of, and changes in, noninterest income in the periods indicated:

 

                       2015 Compared to 2014     2014 Compared to 2013  
     Year Ended December 31,     Increase
(Decrease)
          Increase
(Decrease)
       
(Amounts in thousands)    2015     2014     2013       % Change       % Change  

Wealth management

   $ 2,975      $ 3,030      $ 3,412      $ (55     -1.82   $ (382     -11.20

Service charges on deposit accounts

     13,717        13,828        13,558        (111     -0.80     270        1.99

Other service charges and fees

     8,045        7,581        7,151        464        6.12     430        6.01

Insurance commissions

     6,899        6,555        5,933        344        5.25     622        10.48

Net impairment loss

     —          (737     (320     737        100.00     (417     -130.31

Net gain (loss) on sale of securities

     144        (1,385     399        1,529        -110.40     (1,784     -447.12

Net FDIC indemnification asset amortization

     (6,379     (3,979     (5,597     (2,400     -60.32     1,618        —     

Net gain on branch divestiture

     —          755        —          (755     —          755        —     

Other operating income

     4,129        4,355        5,235        (226     -5.19     (880     -16.81
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Noninterest income

   $ 29,530      $ 30,003      $ 29,771      $ (473     -1.58   $ 232        0.78
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

2015 Compared to 2014. Noninterest income decreased $473 thousand, or 1.58%, in 2015. Wealth management revenues, which include fees and commissions for trust and investment advisory services, decreased due to a decline in income from the Trust Division. Service charges on deposit accounts and other service charges and fees increased primarily from increases in debit and credit card income offset by decreases in service charges on demand deposit accounts and nonsufficient fee income. Insurance commissions increased largely due to an increase in property and casualty premium commissions and contingency profit-sharing revenue income. We incurred no OTTI charges in 2015 compared to $737 thousand in 2014 related to a non-Agency mortgage-backed security (“MBS”) and certain equity securities. We realized a net gain of $144 thousand on the sale of securities in 2015, compared to a net loss of $1.39 million in 2014, which was driven by the sale of our only remaining non-Agency MBS at a loss of $1.62 million. See Note 3, “Investment Securities,” to the Consolidated Financial

 

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Statements in Item 8 of this report. We recorded net negative amortization related to the FDIC indemnification asset of $6.38 million as a result of improved loss estimates and payoffs in the covered Waccamaw loan portfolio. Other operating income decreased primarily due to the absence of a $536 thousand bank owned life insurance (“BOLI”) benefit recognized in 2014, a $280 thousand decrease in recovery settlements, a $258 thousand decrease in BOLI income, and a $219 thousand decrease in loss share recovery income. These decreases were offset by a $1.14 million after tax death benefit from the maturity of a BOLI policy.

Excluding the impact from OTTI charges, the sale of securities, the net amortization on the FDIC indemnification asset, the net gain on branch divestitures, and non-recurring benefits from BOLI policies, noninterest income decreased $191 thousand, or 0.55%, to $34.62 million in 2015 compared with $34.62 million in 2014.

2014 Compared to 2013. Noninterest income increased $232 thousand, or 0.78%, in 2014. Wealth management revenues decreased due to a decline in FCWM income. Service charges on deposit accounts and other service charges and fees increased primarily from increases in monthly service charges on demand deposit accounts, credit card income, and interchange income offset by a decrease in nonsufficient fee income. Insurance commissions increased largely due to increased levels of contingent profit-sharing commissions and a general increase in premium commissions. We incurred OTTI charges of $737 thousand in 2014 compared to $320 thousand in 2013 related to a non-Agency MBS and certain equity securities. We realized a net loss of $1.39 million on the sale of securities in 2014, which was driven by the sale of our only remaining non-Agency MBS at a loss of $1.62 million. See Note 3, “Investment Securities,” to the Consolidated Financial Statements in Item 8 of this report. We recorded net amortization related to the FDIC indemnification asset of $3.98 million. We realized a net gain of $755 thousand on the sale of thirteen branches to CresCom Bank during the fourth quarter of 2014. Other operating income decreased primarily due to a $540 thousand decrease in secondary market income, a $378 thousand decrease from a loyalty incentive received from a third-party vendor in 2013, and a $296 thousand decrease in gains recognized from debt prepayments in 2013. These decreases in other operating income were offset by a $536 thousand benefit related to BOLI and a $400 thousand litigation settlement.

Excluding the impact from OTTI charges, the sale of securities, the net amortization on the FDIC indemnification asset, the net gain on branch divestitures, the net gain on debt prepayments, and non-recurring insurance benefit, noninterest income decreased $180 thousand, or 0.51%, to $34.81 million in 2014 compared with $34.99 million in 2013.

Noninterest Expense

The following table presents the components of, and changes in, noninterest expense in the periods indicated:

 

                          2015 Compared to 2014     2014 Compared to 2013  
     Year Ended December 31,      Increase
(Decrease)
          Increase
(Decrease)
       
(Amounts in thousands)    2015      2014      2013        % Change       % Change  

Salaries and employee benefits

   $ 39,625       $ 40,713       $ 41,235       $ (1,088     -2.67   $ (522     -1.27

Occupancy of bank premises

     5,817         6,338         7,033         (521     -8.22     (695     -9.88

Furniture and equipment

     5,199         4,952         4,966         247        4.99     (14     -0.28

Amortization of intangible assets

     1,118         787         729         331        42.06     58        7.96

FDIC premiums and assessments

     1,513         1,672         1,717         (159     -9.51     (45     -2.62

FHLB debt prepayment

     1,702         5,008         —           (3,306     -66.01     5,008        —     

Merger, acquisition, and
divestiture expense

     86         1,150         57         (1,064     -92.52     1,093        1917.54

Other operating expense

     21,111         22,242         23,248         (1,131     -5.08     (1,006     -4.33
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

Total noninterest expense

   $ 76,171       $ 82,862       $ 78,985       $ (6,691     -8.07   $ 3,877        4.91
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

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2015 Compared to 2014. Noninterest expense decreased $6.69 million, or 8.07%, in 2015. Salaries and employee benefits decreased primarily due to the reduction in full-time equivalent employees, which totaled 673 as of December 31, 2015, compared to 678 as of December 31, 2014. Occupancy, furniture, and equipment expense decreased $274 thousand, or 2.43%, which was primarily due to branch closures between the periods. In 2015, we prepaid $25 million of a FHLB convertible advance with a May 2017 maturity and 4.15% interest rate during the second quarter of 2015, which resulted in a prepayment penalty of $1.70 million. Expenses related to branch acquisition and divestiture activities totaled $86 thousand in 2015 in connection with branch acquisition and divestiture activity that occurred in the fourth quarter of 2014. The decrease in other operating expense included a $1.00 million decrease in legal expenses offset by a $510 thousand increase in other losses. Other operating expense also included an increase in the net loss on sales and expenses related to other real estate owned (“OREO”) of $345 thousand to $2.44 million in 2015 compared to $2.09 million in 2014.

2014 Compared to 2013. Noninterest expense increased $3.88 million, or 4.91%, in 2014. Salaries and employee benefits decreased due to a one-time charge to accrue for contractual executive severance of $1.07 million in 2013. Exclusive of the severance charge, salaries and employee benefits increased $549 thousand, or 1.37%. Employee benefits included an increase in incentive compensation of $836 thousand. Full-time equivalent employees totaled 678 as of December 31, 2014, compared to 729 as of December 31, 2013. The decrease was primarily due to branch consolidation and divestiture activities offset by the Bank of America branch acquisition. Occupancy, furniture, and equipment expense decreased $709 thousand, or 5.91%, which was primarily due to branch closures between the periods. In 2014, we prepaid a $50 million FHLB convertible advance with a May 2017 maturity and 4.21% interest rate and $10 million of a $50 million FHLB convertible advance with a May 2017 maturity and 4.15% interest rate, which resulted in a prepayment penalty of $5.01 million. Expenses related to branch acquisition and divestiture activities totaled $1.15 million in 2014 in connection with the acquisition of seven branches from Bank of America and the sale of thirteen branches to CresCom compared to $57 thousand in 2013. The decrease in other operating expense included a $684 thousand decrease in marketing expenses and a $528 thousand decrease in legal expenses offset by an increase in interchange expense of $497 thousand. Other operating expense also included an increase in the net loss on sales and expenses related to OREO of $56 thousand to $2.09 million in 2014 compared to $2.04 million in 2013.

Income Tax Expense

2015 Compared to 2014. Income tax as a percentage of pretax income may vary significantly from statutory rates due to permanent differences, which are items of income and expense excluded by law from the calculation of taxable income. Our most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies, which are both exempt from federal income tax. Income tax expense decreased $943 thousand, or 7.65%, and the effective rate decreased 91 basis points to 31.68% in 2015. The decrease in the effective tax rate was largely due to a decrease in taxable revenues as a percentage of net earnings and an increase in the relative amounts of nontaxable revenues.

2014 Compared to 2013. Income tax expense increased $2.18 million, or 9.34%, and the effective rate increased 71 basis points to 32.59% in 2014. The increase in the effective tax rate was largely due to an increase in taxable revenues as a percentage of net earnings and a decrease in the relative amounts of nontaxable revenues.

Non-GAAP Financial Measures

The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information about our operating expense control and efficiency of operations. Management also believes this ratio focuses attention on our core operating performance over time and is highly useful in comparing period-to-period operating performance of core business operations. However, this measure is supplemental and is not a substitute for an analysis of performance based on GAAP measures. Our efficiency may not be comparable to efficiency ratios reported by other financial institutions.

 

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We calculate our efficiency ratio by dividing adjusted noninterest expense by the sum of tax equivalent net interest income and adjusted noninterest income. Adjusted noninterest expense excludes expenses and losses related to OREO, which may vary significantly from period to period without substantially affecting operations, and other non-core, nonrecurring items. Noninterest income excludes securities gains and losses, which may vary significantly from period to period without substantially affecting operations; OTTI charges; and other non-core, nonrecurring items. Our non-GAAP efficiency ratio measure is different from the GAAP-based efficiency ratio calculation that uses noninterest expense and income from the consolidated statements of income.

The following table presents GAAP and non-GAAP efficiency ratio components and calculations in the period indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015     2014     2013  

GAAP-based efficiency ratio

      

Noninterest expense

   $ 76,171      $ 82,862      $ 78,985   

Net interest income plus noninterest income

     114,283        120,821        121,413   

GAAP-based efficiency ratio

     66.65     68.58     65.05

Non-GAAP efficiency ratio

      

Noninterest expense

   $ 76,171      $ 82,862      $ 78,985   

Non-GAAP adjustments:

      

Merger, acquisition, and divestiture expense

     (86     (1,150     (57

FHLB debt prepayment fees

     (1,702     (5,008     —     

OREO expense and net loss

     (2,438     (2,094     (2,037

Other non-core, non-recurring expense items

     (259     (1,573     (2,700
  

 

 

   

 

 

   

 

 

 

Total non-GAAP adjustments

     (4,485     (9,825     (4,794
  

 

 

   

 

 

   

 

 

 

Adjusted noninterest expense

     71,686        73,037        74,191   

Net interest income plus noninterest income

     114,283        120,821        121,413   

Non-GAAP adjustments:

      

Tax equivalency adjustment

     2,950        2,557        2,741   

Net impairment losses recognized in earnings

     —          737        320   

Net (gain) loss on sale of securities

     (144     1,385        (399

Net gain on debt prepayment

     —          —          (296

Net gain on branch divestiture

     —          (755     —     

Other non-core, non-recurring income items

     (1,263     (936     —     
  

 

 

   

 

 

   

 

 

 

Total non-GAAP adjustments

     1,543        2,988        2,366   
  

 

 

   

 

 

   

 

 

 

Adjusted net interest income plus noninterest income

     115,826        123,809        123,779   

Non-GAAP efficiency ratio

     61.89     58.99     59.94

Financial Condition

Total assets were $2.46 billion as of December 31, 2015, a decrease of $145.66 million, or 5.59%, compared with $2.61 billion as of December 31, 2014. Total liabilities were $2.12 billion as of December 31, 2015, a decrease of $137.30 million, or 6.08%, compared with $2.26 billion as of December 31, 2014. Our book value per common share was $18.95 as of December 31, 2015, an increase of $0.89, or 4.93%, compared with $18.06 as of December 31, 2014.

Cash and Cash Equivalents

Cash and cash equivalents as of December 31, 2015, decreased $185.87 million, or 78.21%, compared to December 31, 2014. The decrease was primarily due to the deployment of liquidity to redeem our convertible preferred shares, repurchase common stock, purchase investment securities to provide the funding necessary to extinguish certain borrowings as they come due, and establish a short duration investment portfolio.

 

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Investment Securities

Available-for-sale securities as of December 31, 2015, increased $40.06 million, or 12.28%, compared to December 31, 2014. Held-to-maturity securities as of December 31, 2015, increased $14.59 million, or 25.18%, compared to December 31, 2014, due to the purchase of low-yield, short-term bonds to provide funding to extinguish certain wholesale borrowings when due. Investment securities classified as held to maturity are comprised primarily of U.S. Agency securities and high grade municipal bonds. The following table details the amortized cost and fair value of investment securities as of the dates indicated:

 

     December 31,  
     2015      2014      2013  
(Amounts in thousands)    Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  
                 

Available for Sale

                 

U.S. Agency securities

   $ 31,414       $ 30,702       $ 34,604       $ 33,598       $ 568       $ 579   

U.S. Treasury securities

     —           —           —           —           9,708         9,013   

Municipal securities

     124,880         128,678         134,784         138,915         147,049         144,280   

Single issue trust preferred securites

     55,882         47,832         55,822         46,137         55,764         46,234   

Corporate securities

     70,571         70,333         5,000         5,109         5,000         4,871   

Certificates of deposit

     5,000         5,000         —           —           —           —     

Mortgage-backed securities:

                 

Agency

     84,576         83,556         102,506         102,119         306,319         300,386   

Non-Agency Alt-A residential

     —           —           —           —           12,543         9,789   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     84,576         83,556         102,506         102,119         318,862         310,175   

Equity securities

     66         72         226         239         5,259         5,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 372,389       $ 366,173       $ 332,942       $ 326,117       $ 542,210       $ 520,399   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Held to Maturity

                 

U.S. Agency securities

   $ 61,863       $ 61,832       $ 46,987       $ 46,955       $ 568       $ 579   

Municipal securities

     190         193         379         386         —           —     

Corporate securities

     10,488         10,465         10,582         10,548         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity

   $ 72,541       $ 72,490       $ 57,948       $ 57,889       $ 568       $ 579   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the market value as a percentage amortized cost, the average life, and the average duration of the investment portfolios:

 

     December 31,  
     2015     2014  
     Available for
Sale
    Held to
Maturity
    Total     Available for
Sale
    Held to
Maturity
    Total  

Market value to fair value

     98.33     99.93     98.59     97.95     99.90     98.24

Average life (in years)

     6.47        1.83        5.71        8.39        2.95        7.58   

Average duration (in years)

     5.71        1.78        5.07        7.37        2.83        6.70   

At December 31, 2015, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity.

 

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The following table presents the amortized cost, fair value, and weighted-average yield of available-for-sale securities, by contractual maturity, as of December 31, 2015. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)    U.S. Agency
Securities
    Municipal
Securities
    Corporate
Notes
    Certificates
of Deposit
    Total     Tax  Equivalent
Purchase
Yield (1)
 

Amortized cost maturity:

            

One year or less

   $ —        $ 1,100      $ 70,571      $ 5,000      $ 76,671        0.63

After one year through five years

     2        2,567        —          —          2,569        6.35

After five years through ten years

     2,997        80,882        —          —          83,879        4.82

After ten years

     28,415        40,331        55,882        —          124,628        2.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Amortized cost

   $ 31,414      $ 124,880      $ 126,453      $ 5,000        287,747     
  

 

 

   

 

 

   

 

 

   

 

 

     

Mortgage-backed securities

             84,576        1.91

Equity securities

             66        0.70
          

 

 

   

Total amortized cost

           $ 372,389     
          

 

 

   

Tax equivalent purchase yield

     2.00     4.65     0.92     0.41     2.65  

Average contractual maturity (in years)

     15.72        9.20        5.64        0.17        8.19     

Fair value maturity:

            

One year or less

   $ —        $ 1,123      $ 70,333      $ 5,000      $ 76,456     

After one year through five years

     2        2,602        —          —          2,604     

After five years through ten years

     2,995        84,322        —          —          87,317     

After ten years

     27,705        40,631        47,832        —          116,168     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Fair value

   $ 30,702      $ 128,678      $ 118,165      $ 5,000        282,545     
  

 

 

   

 

 

   

 

 

   

 

 

     

Mortgage-backed securities

             83,556     

Equity securities

             72     
          

 

 

   

Total fair value

           $ 366,173     
          

 

 

   

 

(1) Fully taxable equivalent at the rate of 35%.

 

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The following table presents the amortized cost, fair value, and weighted-average yield of held-to-maturity securities, by contractual maturity, as of December 31, 2015. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)    U.S. Agency
Securities
    Municipal
Securities
    Corporate
Notes
    Total     Tax  Equivalent
Purchase
Yield (1)
 

Amortized cost maturity:

          

One year or less

   $ 25,058      $ 190      $ —        $ 25,248        0.66

After one year through five years

     36,805        —          10,488        47,293        1.29

After five years through ten years

     —          —          —          —          —     

After ten years

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

Total amortized cost

   $ 61,863      $ 190      $ 10,488      $ 72,541     
  

 

 

   

 

 

   

 

 

   

 

 

   

Tax equivalent purchase yield

     0.95     8.21     1.64     1.07  

Average contractual maturity (in years)

     1.71        0.33        2.56        1.83     

Fair value maturity:

          

One year or less

   $ 25,007      $ 193      $ —        $ 25,200     

After one year through five years

     36,825        —          10,465        47,290     

After five years through ten years

     —          —          —          —       

After ten years

     —          —          —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

Total fair value

   $ 61,832      $ 193      $ 10,465      $ 72,490     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) Fully taxable equivalent at the rate of 35%.

Investment securities are reviewed quarterly for possible OTTI. The review includes an analysis of each individual investment’s facts and circumstances, such as the length of time fair value has been below cost, the timing and amount of contractual cash flows, the expectation for that security’s performance, the creditworthiness of the issuer, and our intent to hold the security to recovery or maturity. If a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to noninterest income is recognized. If a debt security is determined to be other-than-temporarily impaired, we determine the amount of the impairment due to credit, recognized in earnings, and the amount due to other factors, recognized in other comprehensive income.

We recognized no credit-related OTTI charges in earnings associated with debt securities beneficially owned in 2015 compared to of $705 thousand in 2014 and $320 thousand in 2013. These charges were related to a non-Agency MBS that was subsequently sold in November 2014. We recognized no OTTI charges in earnings associated with certain equity securities in 2015 or 2013 compared to $32 thousand in 2014. See Note 3, “Investment Securities,” to the Consolidated Financial Statements in Item 8 of this report.

Loans Held for Sale

There were no loans held for sale as of December 31, 2015, compared to $1.79 million as of December 31, 2014. Loans held for sale consist of mortgage loans sold on a best efforts basis into the secondary loan market; accordingly, we do not retain the interest rate risk involved in these long-term commitments. There were no outstanding commitments to originate mortgage loans in the secondary market as of December 31, 2015, compared to a gross notional amount of $1.39 million for 9 commitments as of December 31, 2014.

Loans Held for Investment

Our loans held for investment are grouped into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in FDIC-assisted transactions that are covered by loss share agreements. Loans held for

 

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investment as of December 31, 2015, increased $17.13 million, or 1.01%, compared to December 31, 2014. The non-covered loan portfolio increased $56.33 million, or 3.59%, compared to December 31, 2014. The increase was primarily due to increased loan demand in the real estate lending segment of the loan portfolio during the second quarter of 2015. The covered loan portfolio as of December 31, 2015, decreased $39.21 million, or 32.07%, compared to December 31, 2014, due to continued runoff in the covered Waccamaw portfolio. The average loan to deposit ratio was 86.56% as of December 31, 2015, compared to 88.37% as of December 31, 2014.We lend primarily in the four-state region in which we operate. In addition, we maintained no foreign loans and had no loan concentrations to any one borrower that represented 10% or more of outstanding loans as of December 31, 2015 or 2014. See Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.

The following table presents loans, net of unearned income with non-covered loans disaggregated by class, as of the periods indicated. There were no covered loans before 2012.

 

    December 31,  
(Amounts in thousands)   2015     2014     2013     2012     2011  

Non-covered loans held for investment

         

Commercial loans

         

Construction, development, and other land

  $ 48,896      $ 41,271      $ 35,255      $ 57,434      $ 61,768   

Commercial and industrial

    88,903        83,099        95,455        88,738        91,939   

Multi-family residential

    95,026        97,480        70,197        65,694        77,050   

Single family non-owner occupied

    149,351        135,171        135,559        135,912        106,743   

Non-farm, non-residential

    485,460        473,906        475,911        448,810        336,005   

Agricultural

    2,911        1,599        2,324        1,709        1,374   

Farmland

    27,540        29,517        32,614        34,570        37,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

    898,087        862,043        847,315        832,867        712,040   

Consumer real estate loans

         

Home equity lines

    107,367        110,957        111,770        111,081        111,387   

Single family owner occupied

    495,209        485,475        496,012        473,547        473,067   

Owner occupied construction

    43,505        32,799        28,703        16,223        19,577   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer real estate loans

    646,081        629,231        636,485        600,851        604,031   

Consumer and other loans

         

Consumer loans

    72,000        69,347        71,313        78,163        67,129   

Other

    7,338        6,555        3,926        5,666        12,867   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer and other loans

    79,338        75,902        75,239        83,829        79,996   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-covered loans held for investment

    1,623,506        1,567,176        1,559,039        1,517,547        1,396,067   

Covered loans held for investment

    83,035        122,240        151,682        207,106        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment

    1,706,541        1,689,416        1,710,721        1,724,653        1,396,067   

Allowance for loan losses

    20,233        20,227        24,077        25,770        26,205   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment, less allowance

  $ 1,686,308      $ 1,669,189      $ 1,686,644      $ 1,698,883      $ 1,369,862   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held for sale

  $ —        $ 1,792      $ 883      $ 6,672      $ 5,820   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents covered loans disaggregated by class as of the periods indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014      2013      2012  

Commercial loans

           

Construction, development, and other land

   $ 6,303       $ 13,100       $ 15,865       $ 26,595   

Commercial and industrial

     1,170         2,662         3,325         6,948   

Multi-family residential

     640         1,584         1,933         2,611   

Single family non-owner occupied

     2,674         5,918         7,449         11,428   

Non-farm, non-residential

     14,065         25,317         34,646         48,565   

Agricultural

     34         43         164         144   

Farmland

     643         716         873         1,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     25,529         49,340         64,255         97,382   

Consumer real estate loans

           

Home equity lines

     48,565         60,391         69,206         81,445   

Single family owner occupied

     8,595         11,968         16,919         22,961   

Owner occupied construction

     262         453         1,184         1,644   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     57,422         72,812         87,309         106,050   

Consumer and other loans

           

Consumer loans

     84         88         118         3,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer and other loans

     84         88         118         3,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans held for investment

   $ 83,035       $ 122,240       $ 151,682       $ 207,106   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table details the percentage of loans to total loans in the non-covered portfolio, by loan class, as of the periods indicated:

 

     December 31,  
     2015     2014     2013     2012     2011  

Non-covered loans

          

Commercial loans

          

Construction, development, and other land

     3.01     2.64     2.26     3.78     4.42

Commercial and industrial

     5.48     5.30     6.12     5.85     6.58

Multi-family residential

     5.85     6.22     4.50     4.33     5.52

Single family non-owner occupied

     9.20     8.63     8.70     8.96     7.65

Non-farm, non-residential

     29.90     30.24     30.53     29.57     24.07

Agricultural

     0.18     0.10     0.15     0.11     0.10

Farmland

     1.70     1.88     2.09     2.28     2.66

Consumer real estate loans

          

Home equity lines

     6.62     7.08     7.17     7.32     7.98

Single family owner occupied

     30.50     30.98     31.82     31.21     33.89

Owner occupied construction

     2.68     2.09     1.84     1.07     1.40

Consumer and other loans

          

Consumer loans

     4.43     4.42     4.57     5.15     4.81

Other

     0.45     0.42     0.25     0.37     0.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     100.00     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table details the percentage of loans to total loans in the covered portfolio, by loan class, as of the periods indicated:

 

     December 31,  
     2015     2014     2013     2012  

Covered loans

        

Commercial loans

        

Construction, development, and other land

     7.59     10.72     10.46     12.84

Commercial and industrial

     1.41     2.18     2.19     3.35

Multi-family residential

     0.77     1.30     1.27     1.26

Single family non-owner occupied

     3.22     4.84     4.91     5.52

Non-farm, non-residential

     16.94     20.71     22.84     23.45

Agricultural

     0.04     0.03     0.11     0.07

Farmland

     0.77     0.59     0.58     0.53

Consumer real estate loans

        

Home equity lines

     58.49     49.40     45.63     39.33

Single family owner occupied

     10.35     9.79     11.15     11.09

Owner occupied construction

     0.32     0.37     0.78     0.79

Consumer and other loans

        

Consumer loans

     0.10     0.07     0.08     1.77

Other

     0.00     0.00     0.00     0.00
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2015, non-covered commercial loans comprised 55.32% of the non-covered loan portfolio. Commercial and industrial loans consist of loans to small to mid-size industrial, commercial, and service companies that include, but are not limited to, natural gas producers, retail merchants, and wholesale merchants. Commercial real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators. Commercial loan underwriting standards require that comprehensive reviews and independent evaluations be performed on credits exceeding predefined size limits. Updates to these loan reviews are done periodically or annually depending on the size of the loan relationship.

As of December 31, 2015, non-covered consumer real estate loans comprised 39.80% of the non-covered loan portfolio. Residential real estate loans include loans to individuals within our market footprint for home equity loans and lines of credit and for the purchase or construction of owner occupied homes. Underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

As of December 31, 2015, non-covered consumer and other loans comprised 4.88% of the non-covered loan portfolio. Consumer loans consist of loans to individuals within our market footprint that include, but are not limited to, personal lines of credit, credit cards, and the purchase of automobiles, boats, mobile homes, and other consumer goods. Underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

 

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The following table details the maturities and rate sensitivities of our non-covered loan portfolio as of December 31, 2015:

 

(Amounts in thousands)    Due in
One Year
or Less
     Due After One
Year Through
Five Years
     Due After Five
Years
     Total  

Maturities

           

Commercial loans

           

Construction, development, and other land (1)

   $ 17,618       $ 21,540       $ 9,738       $ 48,896   

Commercial and industrial

     28,422         52,476         8,005         88,903   

Multi-family residential

     12,505         31,578         50,943         95,026   

Single family non-owner occupied

     14,541         49,540         85,270         149,351   

Non-farm, non-residential

     60,108         186,896         238,456         485,460   

Agricultural

     399         1,872         640         2,911   

Farmland

     4,631         11,038         11,871         27,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     138,224         354,940         404,923         898,087   

Consumer real estate loans

           

Home equity lines

     3,366         13,462         90,539         107,367   

Single family owner occupied

     5,766         22,970         466,473         495,209   

Owner occupied construction

     5,616         161         37,728         43,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     14,748         36,593         594,740         646,081   

Consumer and other loans

           

Consumer loans

     14,540         49,110         8,350         72,000   

Other

     2,204         3,484         1,650         7,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer and other loans

     16,744         52,594         10,000         79,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

   $ 169,716       $ 444,127       $ 1,009,663       $ 1,623,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Rate sensitivities

           

Predetermined interest rate

   $ 116,686       $ 387,297       $ 367,157       $ 871,140   

Floating or adjustable interest rate

     53,030         56,830         642,506         752,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

   $ 169,716       $ 444,127       $ 1,009,663       $ 1,623,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and interest payments.

 

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The following table details the maturities and rate sensitivities of our covered loan portfolio as of December 31, 2015:

 

(Amounts in thousands)    Due in One Year
or Less
     Due After One
Year Through
Five Years
     Due After Five
Years
     Total  

Maturities

           

Commercial loans

           

Construction, development, and other land (1)

   $ 1,006       $ 4,700       $ 597       $ 6,303   

Commercial and industrial

     137         579         454         1,170   

Multi-family residential

     —           —           640         640   

Single family non-owner occupied

     1,159         528         987         2,674   

Non-farm, non-residential

     3,883         6,303         3,879         14,065   

Agricultural

     7         —           27         34   

Farmland

     —           386         257         643   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     6,192         12,496         6,841         25,529   

Consumer real estate loans

           

Home equity lines

     245         5,879         42,441         48,565   

Single family owner occupied

     887         2,453         5,255         8,595   

Owner occupied construction

     262         —           —           262   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     1,394         8,332         47,696         57,422   

Consumer and other loans

           

Consumer loans

     1         83         —           84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 7,587       $ 20,911       $ 54,537       $ 83,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

Rate sensitivities

           

Predetermined interest rate

   $ 5,411       $ 13,649       $ 8,710       $ 27,770   

Floating or adjustable interest rate

     2,176         7,262         45,827         55,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 7,587       $ 20,911       $ 54,537       $ 83,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and interest payments.

Risk Elements

Nonperforming assets consist of loans accounted for on a nonaccrual basis, accruing loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. See Note 5, “Credit Quality,” to the Consolidated Financial Statements in Item 8 of this report.

 

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The following table summarizes the components of nonperforming assets and presents additional details for nonperforming and restructured loans as of the periods indicated:

 

     December 31,  
(Amounts in thousands)    2015     2014     2013     2012     2011  

Non-covered nonperforming

          

Nonaccrual loans

   $ 17,847      $ 10,556      $ 19,161      $ 23,931      $ 24,487   

Accruing loans past due 90 days or more

     —          —          —          —          —     

TDRs (1)

     73        2,726        1,311        6,009        600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     17,920        13,282        20,472        29,940        25,087   

Non-covered OREO

     4,873        6,638        7,318        5,749        5,914   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 22,793      $ 19,920      $ 27,790      $ 35,689      $ 31,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Covered nonperforming

          

Nonaccrual loans

   $ 647      $ 2,438      $ 3,353      $ 4,323      $ —     

Accruing loans past due 90 days or more

     —          —          86        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     647        2,438        3,439        4,323        —     

Covered OREO

     4,034        6,324        7,541        3,255        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 4,681      $ 8,762      $ 10,980      $ 7,578      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming

          

Nonaccrual loans

   $ 18,494      $ 12,994      $ 22,514      $ 28,254      $ 24,487   

Accruing loans past due 90 days or more

     —          —          86        —          —     

TDRs (1)

     73        2,726        1,311        6,009        600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     18,567        15,720        23,911        34,263        25,087   

OREO

     8,907        12,962        14,859        9,004        5,914   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 27,474      $ 28,682      $ 38,770      $ 43,267      $ 31,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additional Information

          

Performing TDRs (2)

   $ 13,889      $ 11,808      $ 10,900      $ 6,038      $ 8,854   

Total TDRs (3)

     13,962        14,534        12,211        12,047        9,454   

Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans

     1,645        1,171        1,548        2,955        1,154   

Actual interest income recorded on restructured and nonperforming loans

     608        597        511        640        411   

Non-covered ratios

          

Nonperforming loans to total loans

     1.10     0.85     1.31     1.97     1.80

Nonperforming assets to total assets

     0.96     0.80     1.14     1.42     1.43

Non-PCI allowance to nonperforming loans

     112.61     151.85     113.92     86.05     103.66

Non-PCI allowance to total loans

     1.24     1.29     1.50     1.70     1.86

Total ratios

          

Nonperforming loans to total loans

     1.09     0.93     1.40     1.99     1.80

Nonperforming assets to total assets

     1.12     1.10     1.49     1.59     1.43

Allowance for loan losses to nonperforming loans

     108.97     128.67     100.69     75.21     104.46

Allowance for loan losses to total loans

     1.19     1.20     1.41     1.49     1.88

 

(1) TDRs restructured within the past six months, excluding nonaccrual TDRs of $923 thousand, $306 thousand, $734 thousand, $3.04 million, and $3.04 million for the five years ended December 31, 2015.
(2) TDRs with six months or more of satisfactory payment performance, excluding nonaccrual TDRs of $416 thousand, $248 thousand, $1.47 million, $792 thousand, and $227 thousand for the five years ended December 31, 2015.
(3) Perfoming and nonperforming TDRs, excluding nonaccrual TDRs of $1.34 million, $554 thousand, $2.20 million, $3.83 million, and $3.27 million for the five years ended December 31, 2015.

 

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Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. There were no non-covered or covered accruing loans contractually past due 90 days or more as of December 31, 2015 or 2014.

Non-covered nonaccrual loans as of December 31, 2015, increased $7.29 million, or 69.07%, from December 31, 2014. As of December 31, 2015, non-covered nonaccrual loans were largely attributed to the following loan classes: single family owner occupied (40.59%) and non-farm, non-residential (40.06%). Approximately $139 thousand, or 0.78%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations as of December 31, 2015. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based upon management’s estimate of loss at ultimate resolution.

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, and/or amortization terms. Certain TDRs are classified as nonperforming at time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs totaled $13.96 million as of December 31, 2015, compared to $14.53 million as of December 31, 2014. Nonperforming accruing TDRs totaled $73 thousand, or 0.52% of accruing TDRs, as of December 31, 2015, compared to $2.73 million, or 18.76% of accruing TDRs, as of December 31, 2014. The allowance for loan losses attributed to TDRs totaled $590 thousand as of December 31, 2015, compared to $475 thousand as of December 31, 2014.

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $27.88 million as of December 31, 2015, an increase of $5.90 million, or 26.86%, compared to $ 21.98 million as of December 31, 2014. Non-covered delinquent loans as a percentage of total non-covered loans measured 1.72% as of December 31, 2015, which is attributed to loans 30 days or more past due of 0.62% and nonaccrual loans of 1.10%. Non-covered nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned TDRs, as a percentage of total non-covered loans were 1.10% as of December 31, 2015, compared to 0.85% as of December 31, 2014.

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $1.77 million, or 26.59%, as of December 31, 2015, compared to December 31, 2014. Non-covered OREO consisted of 40 properties as of December 31, 2015, with an average holding period of 8 months. The net loss on the sale of OREO totaled $1.85 million in 2015, $1.42 million in 2014, and $1.52 million in 2013. The following table details activity within OREO for the periods indicated:

 

     Year Ended December 31,  
     2015     2014  
(Amounts in thousands)    Non-covered     Covered     Total     Non-covered     Covered     Total  

Beginning balance

   $ 6,638      $ 6,324      $ 12,962      $ 7,318      $ 7,541      $ 14,859   

Additions

     3,726        2,591        6,317        5,979        6,641        12,620   

Disposals

     (4,579     (3,879     (8,458     (5,740     (5,907     (11,647

Valuation adjustments

     (912     (1,002     (1,914     (919     (1,951     (2,870
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,873      $ 4,034      $ 8,907      $ 6,638      $ 6,324      $ 12,962   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-covered nonperforming assets as of December 31, 2015, increased $2.87 million, or 14.42%, from December 31, 2014. Non-covered nonperforming assets as a percentage of total non-covered assets were 0.96% as of December 31, 2015, compared to 0.80% as of December 31, 2014.

 

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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 charges to earnings in the form of provisions and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates.

Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The allowance for loan losses includes specific allocations to significant individual loans and credit relationships and general reserves to the remaining loans that have been deemed impaired. Loans not specifically identified are grouped into pools based on similar risk characteristics. Management’s general reserve allocations are based on judgments of qualitative and quantitative factors about macro and micro economic conditions reflected in the loan portfolio and the economy. For loans acquired in business combinations, a provision is recorded for any credit deterioration after the acquisition. Loans identified with credit impairment at acquisition are grouped into pools and evaluated separately from the non-PCI portfolio. The provision calculated for PCI loans is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure. See “Critical Accounting Estimates” above, Note 1, “Significant Accounting Policies,” and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

Our allowance for loan losses totaled $20.23 million as of December 31, 2015, and December 31, 2014. The allowance attributed to the non-PCI loan portfolio as a percentage of non-covered loans held for investment was 1.24% as of December 31, 2015, compared to 1.29% at December 31, 2014. The cash flow analysis performed as of December 31, 2015, identified two of our six open PCI loan pools as impaired with a cumulative impairment of $54 thousand compared to the analysis as of December 31, 2014, that identified two of seven PCI loan pools as impaired with a cumulative impairment of $58 thousand. A recovery of $4 thousand was attributed to the PCI provision due to better than expected performance in the Waccamaw PCI loan portfolio, which included a recovery of $29 thousand recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and a provision applied to operations of $25 thousand. As of December 31, 2015, management considered the allowance to be adequate based upon analysis of the portfolio; however, no assurance can be made that additions to the allowance will not be required in future periods.

Our qualitative risk factors continue to reflect a reduced risk of loan losses due to improvements in general economic conditions and asset quality metrics offset by an increased risk of loan losses due to credit concentrations. Net charge-offs decreased $735 thousand, or 25.42% in 2015 as compared to 2014 and decreased $7.46 million, or 72.07% in 2014 as compared to 2013. Net charge-offs in 2014 included a $1.60 million recovery related to the positive resolution of a sizable problem credit. In addition, activity in the allowance in 2014 included the removal of $682 thousand of the allowance due to loans transferred in the branch divestiture. The portfolio continues to be monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods.

 

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The following table presents activity in our allowance for loan losses by loan type for the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015     2014     2013     2012     2011  

Beginning balance

   $ 20,227      $ 24,077      $ 25,770      $ 26,205      $ 26,482   

Removal of loans transferred

     —          (682     —          —          —     

Provision for loan losses charged to operations, non-PCI loans

     2,166        420        7,912        5,871        8,846   

(Recovery of) provision for loan losses charged to operations, PCI loans

     25        (275     296        (193     201   

(Recovery of) provision for loan losses recorded through the FDIC indemnification asset

     (29     (422     451        —          —     

Charge-offs:

          

Commercial loans

          

Construction, development, and other land

     256        1,238        2,738        286        1,908   

Commercial and industrial

     93        459        720        113        417   

Multi-family residential

     —          35        17        209        2,551   

Single family non-owner occupied

     87        488        2,618        2,502        1,812   

Non-farm, non-residential

     773        832        1,613        643        1,074   

Agricultural

     —          —          17        —          —     

Farmland

     73        —          20        61        219   

Consumer real estate loans

          

Home equity lines

     92        451        1,873        851        691   

Single family owner occupied

     812        988        947        1,842        1,615   

Owner occupied construction

     2        305        295        9        195   

Consumer and other loans

          

Consumer loans

     461        659        491        403        448   

Other

     1,096        1,026        1,178        585        530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     3,745        6,481        12,527        7,504        11,460   

Recoveries:

          

Commercial loans

          

Construction, development, and other land

     135        84        510        17        817   

Commercial and industrial

     173        1,736        98        93        271   

Multi-family residential

     —          10        16        125        68   

Single family non-owner occupied

     92        331        158        109        121   

Non-farm, non-residential

     74        239        119        280        148   

Agricultural

     —          —          22        1        1   

Farmland

     —          —          8        1        —     

Consumer real estate loans

          

Home equity lines

     402        514        273        76        155   

Single family owner occupied

     258        76        169        213        63   

Owner occupied construction

     18        —          —          —          34   

Consumer and other

          

Consumer loans

     101        121        107        152        139   

Other

     336        479        695        324        319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     1,589        3,590        2,175        1,391        2,136   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     2,156        2,891        10,352        6,113        9,324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 20,233      $ 20,227      $ 24,077      $ 25,770      $ 26,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs to average non-covered loans

     0.14     0.18     0.68     0.41     0.67

 

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The following table details the allowance for loan losses, excluding PCI loans, by loan class, as of the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013      2012      2011  

Commercial loans

              

Construction, development, and other land

   $ 1,119       $ 1,151       $ 1,141       $ 1,214       $ 1,892   

Commercial and industrial

     504         689         5,215         4,351         3,515   

Multi-family residential

     1,535         1,917         1,211         1,630         1,889   

Single family non-owner occupied

     3,369         3,228         3,549         4,367         2,960   

Non-farm, non-residential

     6,393         5,805         4,650         5,259         6,933   

Agricultural

     22         13         23         22         19   

Farmland

     190         206         301         416         343   

Consumer real estate loans

              

Home equity lines

     1,091         1,330         1,361         1,574         1,365   

Single family owner occupied

     4,969         4,935         5,030         5,995         6,134   

Owner occupied construction

     297         225         206         337         212   

Consumer and other loans

              

Consumer loans

     690         670         635         597         742   

Other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance, excluding PCI loans

   $ 20,179       $ 20,169       $ 23,322       $ 25,762       $ 26,004   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table details the PCI allowance for loan losses, by loan pool, as of the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013      2012      2011  

Commercial loans

              

Waccamaw commercial

   $ —         $ 37       $ —         $ —         $ —     

Waccamaw lines of credit

     —           —           —           —           —     

Peoples commercial

     —           —           69         —           —     

Other

     —           —           8         8         201   

Consumer real estate loans

              

Waccamaw serviced home equity lines

     —           —           277         —           —     

Waccamaw residential

     1         —           217         —           —     

Peoples residential

     53         21         184         —           —     

Consumer and other loans

              

Waccamaw consumer (1)

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI allowance

   $ 54       $ 58       $ 755       $ 8       $ 201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Closed during the first quarter of 2015.

Deposits

Total deposits as of December 31, 2015, decreased $127.50 million, or 6.37%, compared to December 31, 2014. Noninterest-bearing deposits increased $33.78 million and savings deposits, which include money market accounts and savings accounts, increased $5.11 million as of December 31, 2015, compared to December 31, 2014. Interest-bearing deposits decreased $6.17 million and time deposits decreased $160.22 million as of December 31, 2015, compared to December 31, 2014.

 

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As of December 31, 2015, time deposits totaled $543.46 million, which included certificates of deposit of $408.52 million and individual retirement accounts of $134.94 million. Time deposits as of December 31, 2015, decreased $160.22 million, or 22.77%, compared to December 31, 2014, primarily due to our strategic runoff of higher rate deposits. Time deposits of $100 thousand or more totaled $205.95 million as of December 31, 2015.

The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2015:

 

(Amounts in thousands)       

Three months or less

   $ 23,895   

Over three through six months

     17,764   

Over six through twelve months

     31,664   

Over twelve months

     132,627   
  

 

 

 
   $ 205,950   
  

 

 

 

Borrowings

Total borrowings as of December 31, 2015, decreased $10.37 million, or 4.51%, compared to December 31, 2014. Short-term borrowings consist of federal funds purchased and retail repurchase agreements. No federal funds were purchased as of December 31, 2015, or 2014. The balance of retail repurchase agreements increased $16.87 million, or 13.86%, as of December 31, 2015, compared to December 31, 2014. Securities underlying retail repurchase agreements remain under our control during the terms of the agreements.

The following table presents the balances and weighted average rates paid on short-term borrowings as of the periods indicated:

 

     Year Ended December 31,  
     2015     2014     2013  
(Amounts in thousands)    Amount      Rate     Amount      Rate     Amount      Rate  

Year-end balance

   $ 88,614         0.19   $ 73,742         0.17   $ 84,308         0.19

Average annual balance

     72,691         0.10     74,165         0.14     69,773         0.38

Maximum month-end balance

     122,693           117,105           84,308      

Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other obligations. The balance and weighted average rate of wholesale repurchase agreements remained constant at $50.00 million and 3.71%, respectively, as of December 31, 2015, compared to December 31, 2014. As of December 31, 2015, wholesale repurchase agreements had contractual maturities between eleven months and four years. The balance of FHLB borrowings decreased $25.00 million, or 27.78%, and the weighted average rate decreased 4 basis points to 4.03% as of December 31, 2015, compared to December 31, 2014. As of December 31, 2015, FHLB borrowings had contractual maturities between one and six years. In 2015, we prepaid $25 million of a FHLB convertible advance with a May 2017 maturity and 4.21% interest rate, which resulted in a prepayment penalty of $1.70 million.

Included in other borrowings is $15.46 million of junior subordinated debentures (“Debentures”) that were issued by the Company in October 2003 through the Trust with an interest rate of three-month London InterBank Offered Rate (“LIBOR”) plus 2.95%. The Debentures mature in October 2033 and are currently callable at the option of the Company.

 

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Stockholders’ Equity

Total stockholders’ equity decreased $8.36 million, or 2.38%, to $343.02 million as of December 31, 2015, compared to $351.37 million as of December 31, 2014. The change in stockholders’ equity was largely affected by net income of $24.54 million, the repurchase of 1,238,299 shares of our common stock totaling $21.53 million, dividends declared on our common and Series A Preferred Stock of $10.10 million, and the redemption of 2,367 shares of our preferred stock totaling $2.37 million.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to raise sufficient cash, or convert assets to cash, to meet our financial obligations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) that is designed to detect potential liquidity issues to protect depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee (“ALCO”) and the Board of Directors. ALCO reviews liquidity risk exposure and policies related to liquidity management, ensures that systems and internal controls are consistent with liquidity policies, and provides accurate reports about liquidity needs, sources, and compliance.

The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows during a funding crisis. Several scenarios are analyzed based on varying assumptions about the funding crisis’ severity and duration, such as decreases in earnings, asset quality deterioration, adverse market conditions, and reductions in borrowing capacity and availability. A specific action plan is formulated and activated when a financial shock that affects our normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will be met through liquidation of balance sheet assets, including unpledged securities.

As of December 31, 2015, we maintained liquidity in the form of unencumbered cash on hand and deposits with other financial institutions of $51.79 million, availability on federal funds lines with correspondent banks of $105.00 million, credit available from the Federal Reserve Bank discount window of $9.09 million, unused borrowing capacity with the FHLB of $403.10 million, and unpledged available-for-sale securities of $129.44 million. Cash on hand and deposits with other financial institutions, as well as lines of credit extended from correspondent banks and the FHLB, are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Unused borrowing capacity with the FHLB is reported net of letters of credit held to secure public unit deposits. As of December 31, 2015, we provided letters of credit to public depositors with the FHLB totaling $22.69 million. Available-for-sale securities represent a secondary source of liquidity upon conversion to a liquid asset. Our approved lines of credit with correspondent banks are available as backup liquidity sources.

As a holding company, the Company does not conduct significant operations. The Company’s primary sources of liquidity are dividends received from the Bank and borrowings. Dividends paid by the Bank are subject to certain regulatory limitations. As of December 31, 2015, the Company’s liquid assets consisted of cash and investment securities totaling $16.83 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders for the next twelve months. The Company also maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution that carries an interest rate of one-month LIBOR plus 2.00% and matures in April 2016. As of December 31, 2015, there was no outstanding balance on the line compared to an outstanding balance of $2.00 million as of December 31, 2014.

 

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Cash Flows

The following table presents the major components of cash flow in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Net cash provided by operating activities

   $ 58,519       $ 41,689       $ 44,518   

Net cash (used in) provided by investing activities

     (70,785      280,955         (1,167

Net cash used in financing activities

     (173,607      (141,551      (131,631
  

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (185,873      181,093         (88,280

Cash and cash equivalents, beginning balance

     237,660         56,567         144,847   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, ending balance

   $ 51,787       $ 237,660       $ 56,567   
  

 

 

    

 

 

    

 

 

 

2015 Compared to 2014. Net cash provided by operating activities increased $16.83 million, or 40.37%, in 2015 compared to 2014 primarily due to a cash decrease in other operating activities offset by a decrease in FHLB debt prepayment penalties. Net cash used in investing activities increased $351.74 million in 2015 compared to net cash provided of $280.96 million in 2014, which was largely the result of a reduction in net cash received in acquisitions and divestitures and a decrease in the proceeds from the sale of available-for-sale securities coupled with an increase in the purchase of available-for-sale securities. Net cash used in financing activities increased $32.06 million, or 22.65%, in 2015 compared to 2014 primarily due to a decrease in noninterest and interest-bearing deposits offset by a reduction in the repayment of long-term debt. The net effect of cash flow activity was a $185.87 million, or 78.21%, decrease in cash and cash equivalents in 2015.

2014 Compared to 2013. Net cash provided by operating activities decreased $2.83 million, or 6.35%, in 2014 primarily due to decreases in the provision for loan losses and proceeds from the sale of mortgage loans offset by debt prepayment penalties, a cash decrease in other operating activities, and a decrease in mortgage loans originated for sale. Net cash provided by investing activities increased $282.12 million in 2014 compared to net cash used of $1.17 million in 2013, which was largely the result of acquisition and divestiture activity in 2014 and a decrease in the purchase of available-for-sale securities. Net cash used in financing activities increased $9.92 million, or 7.54%, in 2014 compared to 2013 primarily due to a decrease in federal funds purchased and the prepayment of FHLB borrowings offset by an increase in time deposits and repurchase agreements and repurchases of treasury stock. The net effect of cash flow activity was a $181.09 million increase in cash and cash equivalents in 2014.

Capital Resources

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Basel III Capital Rules became effective on January 1, 2015, subject to a four-year phase-in period. The Company’s required initial minimum capital ratios under Basel III include:

 

   

4.5% Common equity Tier 1 capital to risk-weighted assets

 

   

6.0% Tier 1 capital to risk-weighted assets

 

   

8.0% Total capital to risk-weighted assets

 

   

4.0% Tier 1 leverage ratio

 

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Our capital ratios presented for the year ended December 31, 2015, are based on the Basel III requirements, while prior period information is based on the requirements under Basel II. A description of the Basel III Capital Rules is included in Part I, Item 1 of the Company’s 2015 Form 10-K. The following table presents our capital ratios as of the dates indicated:

 

     December 31,  
     2015     2014     2013  

Common equity Tier 1 ratio (1)

      

First Community Bancshares, Inc.

     14.54     NA        NA   

First Community Bank

     13.60     NA        NA   

Total risk-based capital ratio

      

First Community Bancshares, Inc.

     15.95     17.68     16.44

First Community Bank

     14.82     15.73     14.55

Tier 1 risk-based capital ratio

      

First Community Bancshares, Inc.

     14.73     16.43     15.19

First Community Bank

     13.60     14.48     13.30

Tier 1 leverage ratio

      

First Community Bancshares, Inc.

     10.62     10.12     9.95

First Community Bank

     9.77     8.87     8.63

 

(1) The common equity Tier 1 ratio became effective on January 1, 2015.

Our regulatory capital ratios as of December 31, 2015, decreased from the prior period primarily due to Basel III’s risk-based capital requirements. Our regulatory capital ratios as of December 31, 2014, increased over the prior period primarily due to an increase in retained earnings while average assets remained relatively stable. As of December 31, 2015, our capital ratios were well in excess of the minimum standards and classified as “well capitalized” under regulatory capital adequacy standards applicable to that period. Additionally, our capital ratios were in excess of the minimum standards under the Basel III Capital Rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2015. See Note 21, “Regulatory Capital Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.

Contractual Obligations

We maintain certain contractual cash obligations that require future cash payments. Management believes we have adequate resources to fund our outstanding commitments and the ability to adjust rates on certificates of deposit, in a changing interest rate environment; attract new deposits; and replace deposits with FHLB advances or other fund providers, if cost effective. The following table presents our contractual cash obligations, detailed by payment date, as of December 31, 2015:

 

(Amounts in thousands)    Total      Less Than
One Year
     One to
Three Years
     Three to
Five Years
     More than
Five Years
 

Deposits without a stated maturity (1)

   $ 1,329,801       $ 1,329,801       $ —         $ —         $ —     

Overnight security repurchase agreements

     86,605         86,605         —           —           —     

Certificates of deposit (2)(3)

     556,718         290,114         146,302         117,951         2,351   

Term security repurchase agreements

     55,566         27,807         2,637         25,122         —     

FHLB advances (2)(3)

     75,867         2,623         19,211         4,000         50,033   

Trust preferred indebtedness

     24,832         582         1,164         1,164         21,922   

Leases

     3,325         733         1,119         586         887   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 2,132,714       $ 1,738,265       $ 170,433       $ 148,823       $ 75,193   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes interest
(2) Includes interest on fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at December 31, 2015. The interest to be paid on variable rate obligations is affected by changes in market interest rates, which materially affect the contractual obligation amounts to be paid.
(3) Excludes carrying value adjustments such as unamortized premiums or discounts.

 

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Off-Balance Sheet Arrangements

We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument. See Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report. The following table presents our off-balance sheet arrangements, detailed by commitment expiration, as of December 31, 2015:

 

(Amounts in thousands)    Total      Less
than One
Year (1)
     One to
Three
Years
     Three to
Five
Years
     More
than Five
Years
 

Commitments to extend credit

   $ 235,302       $ 74,140       $ 47,035       $ 18,474       $ 95,653   

Financial letters of credit

     4,485         475         —           4,000         10   

Performance letters of credit

     3,280         2,772         144         334         30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total letters of credit

   $ 243,067       $ 77,387       $ 47,179       $ 22,808       $ 95,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Lines of credit with no stated maturity date are included in commitments for less than one year.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of operations and financial position in historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations is increased operating costs. In management’s opinion, interest rates have a greater impact on our financial performance than inflation. Interest rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation on businesses with large investments in property, plant, and inventory is generally more significant than the effect on financial institutions. The U.S. inflation rate continues to be relatively stable, and management believes that any changes in inflation will not be material to our financial performance.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Our profitability is largely dependent upon net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our Company, like other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing liabilities. We manage our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment.

Net interest income, our primary component of operational revenue, is subject to variation due to changes in interest rate environments and unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components: repricing risk, basis risk, yield curve risk, and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs when underlying rates on assets and liabilities change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences that occurs when the same instrument experiences unequal change in the spread between two or more rates for different maturities. Lastly, option risk occurs from embedded options, often put or call options, given or sold to holders of financial instruments.

 

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To mitigate the effect of changes in the general level of interest rates, we manage repricing opportunities and thus, our interest rate sensitivity. We seek to control our interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of interest rates. To measure our exposure to interest rate risk, quarterly simulations of net interest income are performed using financial models that project net interest income through a range of possible interest rate environments, including rising, declining, most likely, and flat rate scenarios. We use a simulation model that captures all earning assets, interest-bearing liabilities, and off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook for a range of assumed interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each rate environment based on the current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-paying liabilities, and our estimate of yields earned on assets and rates paid on deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies. The earnings simulation model provides the best tool for managing interest rate risk available to us and the industry.

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios. In addition, the policy addresses exposure limits to changes in the economic value of equity per predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within our defined policy limits.

The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income. The model simulates rate changes of plus 300 to minus 100 basis points from the base simulation and illustrates the prospective effects of hypothetical interest rate changes over a twelve-month period. This modeling technique, although useful, does not take into account all strategies that management might undertake in response to a sudden and sustained rate shock as depicted. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. On December 16, 2015, the Federal Open Market Committee raised the benchmark Fed Funds rate, which changed the target rate from a range of 0 to 25 basis points to a new range of 25 to 50 basis points. This represents the first move of the target since 2009 when it was dropped to zero. As of December 31, 2015, the Federal Open Market Committee maintained a target range for federal funds of 25 to 50 basis points, rendering a complete downward shock of 200 basis points meaningless; thus, downward rate scenarios are limited to minus 100 basis points. In the downward rate shocks presented, benchmark interest rates are assumed to have floors near 0%.

 

     Year Ended December 31,  
      2015      2014  

(Amounts in thousands, except basis points)

Increase (Decrease) in Basis Points

   Change in
Net  Interest Income
     Percent
Change
     Change in
Net  Interest Income
     Percent
Change
 
           

300

   $ (1,162      (1.4    $ 3,619         4.2   

200

     (694      (0.9      2,183         2.5   

100

     (409      (0.5      871         1.0   

(100)

     (1,813      (2.2      290         0.3   

 

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Item 8. Financial Statements and Supplementary Data.

FINANCIAL STATEMENTS AND SUPPLEMENTORY DATA INDEX

 

     Page  

Consolidated Balance Sheets as of December 31, 2015 and 2014

     67   

Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013

     68   

Consolidated Statements of Comprehensive Income (Loss) for the years ended December  31, 2015, 2014, and 2013

     69   

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December  31, 2015, 2014, and 2013

     70   

Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013

     71   

Notes to Consolidated Financial Statements

     72   

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

     138   

Management’s Assessment of Internal Control Over Financial Reporting

     139   

Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting

     140   

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

 

    December 31,  
(Amounts in thousands, except share and per share data)   2015     2014  

Assets

   

Cash and due from banks

  $ 37,383      $ 39,450   

Federal funds sold

    13,498        196,873   

Interest-bearing deposits in banks

    906        1,337   
 

 

 

   

 

 

 

Total cash and cash equivalents

    51,787        237,660   

Securities available for sale

    366,173        326,117   

Securities held to maturity

    72,541        57,948   

Loans held for sale

    —          1,792   

Loans held for investment, net of unearned income:

   

Covered under loss share agreements

    83,035        122,240   

Not covered under loss share agreements

    1,623,506        1,567,176   

Less allowance for loan losses

    (20,233     (20,227
 

 

 

   

 

 

 

Loans held for investment, net

    1,686,308        1,669,189   

FDIC indemnification asset

    20,844        27,900   

Premises and equipment, net

    52,756        55,844   

Other real estate owned:

   

Covered under loss share agreements

    4,034        6,324   

Not covered under loss share agreements

    4,873        6,638   

Interest receivable

    6,007        6,315   

Goodwill

    100,486        100,722   

Other intangible assets

    5,243        6,421   

Other assets

    91,224        105,066   
 

 

 

   

 

 

 

Total assets

  $ 2,462,276      $ 2,607,936   
 

 

 

   

 

 

 

Liabilities

   

Deposits:

   

Noninterest-bearing

  $ 451,511      $ 417,729   

Interest-bearing

    1,421,748        1,583,030   
 

 

 

   

 

 

 

Total deposits

    1,873,259        2,000,759   

Interest, taxes, and other liabilities

    26,630        26,062   

Securities sold under agreements to repurchase

    138,614        121,742   

FHLB borrowings

    65,000        90,000   

Other borrowings

    15,756        17,999   
 

 

 

   

 

 

 

Total Liabilities

    2,119,259        2,256,562   

Stockholders’ equity

   

Preferred stock, undesignated par value; 1,000,000 shares authorized: Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; 0 and 15,151 shares outstanding at December 31, 2015 and 2014, respectively

    —          15,151   

Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 and 20,499,683 shares issued at December 31, 2015 and 2014, respectively; 3,283,638 and 2,093,464 shares in treasury at December 31, 2015 and 2014, respectively

    21,382        20,500   

Additional paid-in capital

    227,692        215,873   

Retained earnings

    155,647        141,206   

Treasury stock, at cost

    (56,457     (35,751

Accumulated other comprehensive loss

    (5,247     (5,605
 

 

 

   

 

 

 

Total stockholders’ equity

    343,017        351,374   
 

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 2,462,276      $ 2,607,936   
 

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended December 31,  
(Amounts in thousands, except share and per share data)    2015     2014     2013  

Interest Income

      

Interest and fees on loans held for investment

   $ 87,632      $ 95,492      $ 96,600   

Interest on securities — taxable

     4,225        5,975        7,875   

Interest on securities — nontaxable

     3,978        4,350        4,790   

Interest on deposits in banks

     267        291        211   
  

 

 

   

 

 

   

 

 

 

Total interest income

     96,102        106,108        109,476   

Interest Expense

      

Interest on deposits

     5,878        7,308        8,823   

Interest on short-term borrowings

     1,952        2,024        2,222   

Interest on long-term debt

     3,519        5,958        6,789   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     11,349        15,290        17,834   
  

 

 

   

 

 

   

 

 

 

Net interest income

     84,753        90,818        91,642   

Provision for loan losses

     2,191        145        8,208   
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     82,562        90,673        83,434   

Noninterest Income

      

Wealth management

     2,975        3,030        3,412   

Service charges on deposit accounts

     13,717        13,828        13,558   

Other service charges and fees

     8,045        7,581        7,151   

Insurance commissions

     6,899        6,555        5,933   

Impairment losses on securities

     —          (737 )      (320

Portion of losses recognized in other comprehensive income

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

     —          (737 )      (320

Net gain (loss) on sale of securities

     144        (1,385 )      399   

Net FDIC indemnification asset amortization

     (6,379 )      (3,979 )      (5,597

Net gain on branch divestiture

     —          755        —     

Other operating income

     4,129        4,355        5,235   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     29,530        30,003        29,771   

Noninterest Expense

      

Salaries and employee benefits

     39,625        40,713        41,235   

Occupancy expense of bank premises

     5,817        6,338        7,033   

Furniture and equipment

     5,199        4,952        4,966   

Amortization of intangible assets

     1,118        787        729   

FDIC premiums and assessments

     1,513        1,672        1,717   

FHLB debt prepayment fees

     1,702        5,008        —     

Merger, acquisition, and divestiture expense

     86        1,150        57   

Other operating expense

     21,111        22,242        23,248   
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     76,171        82,862        78,985   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     35,921        37,814        34,220   

Income tax expense

     11,381        12,324        10,908   
  

 

 

   

 

 

   

 

 

 

Net income

     24,540        25,490        23,312   

Dividends on preferred stock

     105        910        1,024   
  

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 24,435      $ 24,580      $ 22,288   
  

 

 

   

 

 

   

 

 

 
      

Basic earnings per common share

   $ 1.32      $ 1.34      $ 1.13   

Diluted earnings per common share

     1.31        1.31        1.11   

Cash dividends per common share

     0.54        0.50        0.48   

Weighted average basic shares outstanding

     18,531,039        18,406,363        19,792,099   

Weighted average diluted shares outstanding

     18,727,464        19,483,054        20,961,800   

 

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FIRST COMMUNITY BANCSHARES, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

     Year Ended December 31,  
(Amounts in thousands)    2015     2014     2013  

Comprehensive Income

      

Net income

   $ 24,540      $ 25,490      $ 23,312   

Other comprehensive income (loss), before tax:

      

Available-for-sale securities:

      

Unrealized losses on securities available for sale with other-than-temporary impairment

     —          (1     (1,277

Unrealized gains (losses) on securities available for sale without other-than-temporary impairment

     755        12,914        (19,964

Less: reclassification adjustment for (gains) losses realized in net income

     (144     1,385        (399

Less: reclassification adjustment for credit related other-than-temporary impairments recognized in net income

     —          737        320   
  

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     611        15,035        (21,320

Employee benefit plans:

      

Net actuarial (loss) gain on pension and other postretirement benefit plans

     (363     (642     758   

Net prior service cost attributed to plan amendments

     —          —          (380

Less: reclassification adjustment for amortization of prior service cost and net actuarial loss included in net periodic benefit cost

     326        260        327   
  

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains on employee benefit plans

     (37     (382     705   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     574        14,653        (20,615

Income tax (expense) benefit

     (216     (5,518     7,700   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     358        9,135        (12,915
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 24,898      $ 34,625      $ 10,397   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

(Amounts in thousands, except share and per share
data)
  Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance January 1, 2013

  $ 17,421      $ 20,343      $ 213,829      $ 113,013      $ (6,458   $ (1,825   $ 356,323   

Net income

    —          —          —          23,312        —          —          23,312   

Other comprehensive income

    —          —          —          —          —          (12,915     (12,915

Common dividends declared — $0.48 per share

    —          —          —          (9,475     —          —          (9,475

Preferred dividends declared — $60.00 per share

    —          —          —          (1,024     —          —          (1,024

Preferred stock converted to common stock — 149,730 shares

    (2,170     150        2,020        —          —          —          —     

Equity-based compensation expense

    —          —          18        —          —          —          18   

Common stock options exercised — 5,850 shares

    —          —          (21     —          106        —          85   

Restricted stock awards — 40,371 shares

    —          —          (183     —          886        —          703   

Purchase of treasury shares — 1,739,601 shares at $16.31 per share

    —          —          —          —          (28,421     —          (28,421
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2013

  $ 15,251      $ 20,493      $ 215,663      $ 125,826      $ (33,887   $ (14,740   $ 328,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2014

  $ 15,251      $ 20,493      $ 215,663      $ 125,826      $ (33,887   $ (14,740   $ 328,606   

Net income

    —          —          —          25,490        —          —          25,490   

Other comprehensive income

    —          —          —          —          —          9,135        9,135   

Common dividends declared — $0.50 per share

    —          —          —          (9,200     —          —          (9,200

Preferred dividends declared — $60.00 per share

    —          —          —          (910     —          —          (910

Preferred stock converted to common stock — 6,900 shares

    (100     7        93        —          —          —          —     

Equity-based compensation expense

    —          —          332        —          —          —          332   

Common stock options exercised — 3,854 shares

    —          —          (13     —          66        —          53   

Restricted stock awards — 13,933 shares

    —          —          (202     —          238        —          36   

Purchase of treasury shares — 132,773 shares at $16.29 per share

    —          —          —          —          (2,168     —          (2,168
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2014

  $ 15,151      $ 20,500      $ 215,873      $ 141,206      $ (35,751   $ (5,605   $ 351,374   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2015

  $ 15,151      $ 20,500      $ 215,873      $ 141,206      $ (35,751   $ (5,605   $ 351,374   

Net income

    —          —          —          24,540        —          —          24,540   

Other comprehensive income

    —          —          —          —          —          358        358   

Common dividends declared — $0.54 per share

    —          —          —          (9,994     —          —          (9,994

Preferred dividends declared — $15.00 per share

    —          —          —          (105     —          —          (105

Preferred stock converted to common stock — 882,096 shares

    (12,784     882        11,902        —          —          —          —     

Redemption of preferred stock — 2,367 shares

    (2,367     —          —          —          —          —          (2,367

Equity-based compensation expense

    —          —          110        —          —          —          110   

Common stock options exercised — 4,323 shares

    —          —          (11     —          74        —          63   

Restricted stock awards — 23,057 shares

    —          —          (191     —          391        —          200   

Issuance of treasury stock to 401(k) plan — 20,745 shares

    —          —          9        —          354        —          363   

Purchase of treasury shares — 1,238,299 shares at $17.35 per share

    —          —          —          —          (21,525     —          (21,525
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2015

  $ —        $ 21,382      $ 227,692      $ 155,647      $ (56,457   $ (5,247   $ 343,017   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
(Amounts in thousands)    2015     2014     2013  

Operating activities

      

Net income

   $ 24,540      $ 25,490      $ 23,312   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Provision for loan losses

     2,191        145        8,208   

Depreciation and amortization of property, plant, and equipment

     4,135        4,405        4,666   

Amortization of premiums on investments, net

     1,375        961        884   

Amortization of FDIC indemnification asset, net

     6,379        3,979        5,597   

Amortization of intangible assets

     1,118        787        729   

Gain on acquisitions and divestitures, net

     —          (755     —     

Gain on sale of loans

     (501     (671     (1,211

Equity-based compensation expense

     110        332        18   

Restricted stock awards

     200        36        703   

Issuance of treasury stock to 401(k) plan

     363        —          —     

Loss (gain) on sale of property, plant, and equipment, net

     23        (113     (158

Loss on sales of other real estate

     3,002        3,227        2,785   

(Gain) loss on sale of securities

     (144     1,385        (399

Net impairment losses recognized in earnings

     —          737        320   

FHLB debt prepayment fees

     1,702        5,008        —     

Proceeds from sale of mortgage loans

     21,993        28,443        75,348   

Origination of mortgage loans

     (19,700     (28,681     (68,348

Decrease in accrued interest receivable

     308        1,206        321   

Decrease (increase) in other operating activities

     11,425        (4,232     (8,257
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     58,519        41,689        44,518   

Investing activities

      

Proceeds from sale of securities available for sale

     10,999        162,443        105,934   

Proceeds from maturities, prepayments, and calls of securities available for sale

     29,931        48,915        87,055   

Proceeds from maturities and calls of securities held to maturity

     190        190        250   

Payments to acquire securities available for sale

     (81,540     (6,047     (201,138

Payments to acquire securities held to maturity

     (15,003     (57,675     —     

Originations of loans, net

     (24,719     (64,115     (11,662

Proceeds from the redemption of FHLB stock, net

     1,279        4,349        470   

Cash (paid) received in acquisitions and divestitures, net

     (88     178,604        (697

Proceeds from the FDIC

     2,683        4,770        14,311   

Payments to acquire property, plant, and equipment, net

     (1,239     (1,098     (2,292

Proceeds from sale of other real estate

     6,722        10,619        6,602   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (70,785     280,955        (1,167

Financing activities

      

Increase (decrease) in noninterest-bearing deposits, net

     33,782        68,246        (3,672

Decrease in interest-bearing deposits, net

     (161,282     (121,912     (75,761

(Decrease) increase in federal funds purchased, net

     —          (16,000     16,000   

Proceeds from (repayments of) securities sold under agreements to repurchase

     16,872        3,432        (17,810

Repayments of long-term debt

     (28,945     (63,097     (11,594

Redemption of preferred stock

     (2,367     —          —     

Proceeds from stock options exercised

     63        53        85   

Excess tax benefit from equity-based compensation

     8        5        9   

Payments for repurchase of treasury stock

     (21,525     (2,168     (28,421

Payments of common dividends

     (9,994     (9,200     (9,475

Payments of preferred dividends

     (219     (910     (992
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (173,607     (141,551     (131,631
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (185,873     181,093        (88,280

Cash and cash equivalents at beginning of period

     237,660        56,567        144,847   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 51,787      $ 237,660      $ 56,567   
  

 

 

   

 

 

   

 

 

 

Supplemental transactions — noncash items

      

Transfer of loans to other real estate

   $ 6,317      $ 12,620      $ 18,438   

Loans originated to finance other real estate

     649        671        3,196   

Supplemental disclosure — cash flow information

      

Cash paid for interest

     11,757        15,791        18,146   

Cash paid for income taxes

     6,900        12,552        3,000   

See Notes to Consolidated Financial Statements.

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Summary of Significant Accounting Policies

Nature of Operations

First Community Bancshares, Inc. (the “Company”) is a financial holding company headquartered in Bluefield, Virginia that provides banking products and services to individuals and commercial customers through its wholly-owned subsidiary, First Community Bank (the “Bank”), a Virginia-chartered banking institution. The Bank operates 50 branches in 4 states under the trade names First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Company offers personal and commercial insurance products and services from 9 locations through its wholly owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”), which is headquartered in High Point, North Carolina. Greenpoint operates under the Greenpoint name and under the trade name First Community Insurance Services (“FCIS”) in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia. The Bank offers wealth management services and investment advice through its Trust Division and wholly-owned subsidiary First Community Wealth Management (“FCWM”), a registered investment advisory firm. The Trust Division and FCWM managed $742 million in combined assets as of December 31, 2015. These assets are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or agent. The Company reported consolidated assets of $2.46 billion as of December 31, 2015. Unless the context suggests otherwise, the term “Company” refers to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity.

The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, wealth management, and insurance services.

Principles of Consolidation

The accounting and reporting policies of the Company conform to generally accepted accounting principles (“GAAP”) in the United States and to predominant practices in the banking industry. The Company’s consolidated financial statements include the accounts of all wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Assets held in an agency or fiduciary capacity are not assets of the Company and are not included in the Company’s consolidated balance sheets.

The Company has investments in certain entities that are considered variable interest entities (“VIEs”) under GAAP. These VIEs include the Company’s trust subsidiary, FCBI Capital Trust (the “Trust”); certain tax credit limited partnerships; and limited liability companies that provide aviation services, insurance brokerage, title insurance, and other related financial services. VIEs are legal entities in which the equity investors do not have sufficient equity at risk for the entity to independently finance its activities or the collective holders do not have the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the expected losses of the entity, or the right to receive expected residual returns of the entity. Consolidation of a VIE is considered appropriate if a reporting entity is the primary beneficiary, the party that has both significant influence and control over the VIE. Management periodically performs a qualitative analysis to determine if the Company is the primary beneficiary of a VIE. This analysis includes review of the VIEs’ capital structures, contractual terms, and primary activities, including the Company’s ability to direct the activities of the VIEs and obligations to absorb losses, or the right to receive benefits, significant to the VIEs. Based on the Company’s analysis for the periods presented in this report, it is not the primary beneficiary of its VIEs. Since these entities do not meet the criteria for consolidation, they are reported in other assets in the Company’s consolidated balance sheets. The carrying value and maximum potential loss exposure of VIEs totaled $934 thousand as of December 31, 2015, and $1.26 million as of December 31, 2014.

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Use of Estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. The Company has identified the items that require the most subjective assumptions or complex judgments: investment securities, the allowance for loan losses, the provision for income taxes, and business combination, including intangible assets.

Reclassification

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or cash flow.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, time deposits with other banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) that are available for immediate withdrawal.

Investment Securities

Management determines the proper classification of securities at the time of purchase. Debt securities that management has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as available-for-sale securities and carried at estimated fair value. Securities classified as available for sale consist of securities management intends to hold for indefinite periods of time, including securities to be used as part of the Company’s asset/liability management strategy and securities that may be sold in response to changes in interest rates, prepayment risk, or other similar factors. Unrealized appreciation or depreciation in fair value above or below amortized cost is included in stockholders’ equity, net of income taxes, under the category of accumulated other comprehensive income (“AOCI”). Gains or losses on the call, maturity, or sale of investment securities are recorded based on the specific identification method. Purchase premiums and discounts are amortized or accreted over the life of a security into interest income.

The Company performs an extensive quarterly review to determine if impairment exists in the investment portfolio. If a security is deemed impaired, management evaluates the causes of unrealized losses to determine whether the impairment is temporary or other-than-temporary in nature. If a security is determined to be other-than-temporarily impaired, the value of the security is reduced and a corresponding charge to noninterest income is recognized. If the other-than-temporary impairment (“OTTI”) is related to a debt security, the Company determines the amount of the impairment related to the credit loss, which is recognized in noninterest income, and the amount related to all other factors, which is recognized in other comprehensive income.

Loans Held for Sale

Loans classified as held for sale are originated with the intent to sell in the secondary market. Loans held for sale consist primarily of one to four family residential loans and are carried at the lower of cost or estimated fair value as determined on an aggregate basis. These long-term, fixed rate loans are sold to investors on a best efforts basis; consequently, the Company does not absorb the interest rate risk involved in these loans. The fair value of loans held for sale is determined by quoted market prices for loans with similar coupon rates and terms.

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company may enter into interest rate lock commitments (“IRLCs”) with customers on mortgage loans intended to be sold in the secondary market and commitments to sell mortgages. These IRLCs and forward sale loan commitments are recorded at fair value in other assets and liabilities with any changes in fair value recognized in other income. These derivative instruments do not qualify as hedges. The fair value of IRLCs is determined by quoted market prices for loans with similar coupon rates and terms. The fair value of forward sale loan commitments is based on changes in the value of the commitment, principally because of changes in interest rates.

Loans Held for Investment

Loans classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. Loans held for investment are carried at the principal amount outstanding, net of unearned income, less any write-downs necessary to reduce individual loans to net realizable value. Loan origination fees, including loan commitment and underwriting fees, are reduced by direct costs associated with loan processing, including salaries, legal review, and appraisal fees. Net deferred loan fees are deferred and amortized over the life of the related loan or commitment period.

The Company maintains an active and robust problem credit identification system through its ongoing credit review function. When a credit is identified as exhibiting characteristics of weakening, the Company assesses the credit for potential impairment. Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company reviews loans with balances of $250 thousand or greater that are deemed to be impaired quarterly. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management. Interest income realized on impaired loans in nonaccrual status, if any, is recognized upon receipt. The accrual of interest, which is typically based on the daily amount of principal outstanding, on impaired loans is generally continued unless the loan becomes delinquent 90 days or more.

The Company also monitors and manages past due loans. Loans are considered past due when either principal or interest payments become contractually delinquent by 30 days or more. The Company’s policy is to discontinue the accrual of interest, if warranted, on loans based on the payment status, evaluation of the related collateral, and the financial strength of the borrower. Loans that are 90 days or more past due are placed on nonaccrual status. Management may elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, interest accrued and not collected in the current year is reversed from income, and interest accrued and not collected from prior years is charged to the allowance for loan losses. Loans in nonaccrual status may be returned to accrual status provided the loan is brought current, all principal and interest amounts contractually due (including past due payments) are reasonably assured of repayment within a reasonable period, and there is a period of at least six months of repayment performance (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms.

Seriously delinquent loans are evaluated for loss mitigation options, including charge-off. Closed-end retail loans are generally charged off against the allowance for loan losses when the loans become 120 days past due. Open-end retail loans and residential real estate secured loans are generally charged off when the loans become 180 days past due. Unsecured loans are generally charged off when the loans become 90 days past due. All other loans are charged off against the allowance for loan losses after collection attempts have been exhausted, which generally is within 120 days. Recoveries of loans previously charged off are credited to the allowance for loan losses in the period received.

 

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Loans are considered troubled debt restructurings (“TDRs”) when the Company grants concessions, for legal or economic reasons, to borrowers experiencing financial difficulty that would not otherwise be considered. The Company generally makes concessions in interest rates, loan terms, and/or amortization terms. All TDRs $250 thousand or greater are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs under $250 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the date of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provisions and recoveries of prior loan charge-offs and decreased by loans charged off. The provision is calculated and charged to earnings to bring the allowance to a level that, through a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses in the portfolio. While management uses its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities towards loan classifications, and other factors. While management has allocated the allowance for loan losses to specific loans and general portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The Company’s allowance is segmented into commercial, consumer real estate, and consumer and other loans with each segment divided into classes with similar characteristics, such as the type of loan and collateral. The allowance for loan losses includes specific allocations to significant individual loans and credit relationships and general reserves to the remaining loans that have been deemed impaired. Loans not specifically identified are grouped into pools based on similar risk characteristics. A loan that becomes adversely classified or graded is moved into a group of adversely classified or graded loans with similar risk characteristics for evaluation. Management’s general reserve allocations are based on judgments of qualitative and quantitative factors about macro and micro economic conditions reflected in the loan portfolio and the economy.

No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Purchased credit impaired (“PCI”) loans are grouped into pools and evaluated separately from the non-PCI portfolio. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. If cash flows for PCI loans are expected to decline, generally a provision for loan losses is charged to earnings, resulting in an increase to the allowance for loan losses. If cash flows for PCI loans are expected to improve, any previously established allowance is first reversed to the extent of prior charges and then interest income is increased using prospective yield adjustment over the remaining life of the loan, or pool of loans. Any provision established for PCI loans covered under the Federal Deposit Insurance Corporation (“FDIC”) loss share agreements is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure.

Other Real Estate Owned

Other real estate owned (“OREO”) acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The fair value is generally based on current third-party appraisals.

 

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When a property is transferred into OREO, any excess of the loan balance over the net realizable fair value is charged against the allowance for loan losses. Operating expenses, gains, and losses on the sale of OREO are included in other noninterest expense in the Company’s consolidated statements of income after any fair value write-downs are recorded as valuation adjustments.

Business Combinations

The Company may engage in business combinations with other companies. These transactions are accounted for using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), which requires the acquisition method of accounting. Under the acquisition method of accounting, all identifiable assets acquired, including purchased loans, and liabilities are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded.

Management makes significant estimates and judgments in accounting for business combinations. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Management must also make estimates for the useful or economic lives of certain acquired assets and liabilities. These lives are used in establishing the amortization and accretion of some intangible assets and liabilities, such as core deposits obtained in the acquisition of commercial banks. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. The results of operations of an acquired entity are included in the Company’s consolidated results of operations from the closing date of the merger.

Purchased loans are recorded using the fair value methodology outlined in Topic 820 of the FASB ASC, exclusive of loss share agreements with the FDIC. The fair value estimates associated with loans include expected prepayments and the amount and timing of expected principal, interest, and other cash flows. No allowance for loan losses is recorded at acquisition for purchased loans because the fair values of the acquired loans incorporate credit risk assumptions.

When purchased loans exhibit evidence of credit deterioration after the acquisition date, and it is probable at acquisition the Company will not collect all contractually required principal and interest payments, the loans are referred to as PCI loans. PCI loans are accounted for using Topic 310-30 of the FASB ASC, formerly the American Institute of Certified Public Accountants’ Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Per the guidance, the Company aggregates PCI loans that have common risk characteristics into loan pools. The Company has established the following loan pools related to the acquisitions of Peoples Bank of Virginia (“Peoples”) and Waccamaw Bank (“Waccamaw’) for evaluation: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. Evidence of credit quality deterioration at acquisition may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans identified as credit impaired. If contractually required payments at acquisition exceed cash flows expected to be collected, the excess is the non-accretable difference, which is available to absorb credit losses on those loans or pools of loans. If the cash flows expected at acquisition exceed the estimated fair values, the excess is the accretable yield, which is recognized in interest income over the remaining lives of those loans or pools of loans when there is a reasonable expectation about the amount and timing of such cash flows.

 

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Purchased performing loans are accounted for using the contractual cash flow method of accounting, which results in these loans being recorded at fair value with a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated contractual lives of the loans. Information about the accounting and valuation of the allowance for loan losses related to purchased loans, intangible assets, and receivables resulting from FDIC-assisted transactions is found in this note of the consolidated financial statements.

Federal Deposit Insurance Corporation Indemnification Asset

The FDIC indemnification asset represents the carrying amount of the right to receive payments from the FDIC for losses incurred on specified assets purchased from the FDIC that are covered by loss share agreements. The FDIC indemnification asset is measured separately from related covered assets because it is not contractually embedded in the assets or transferable should the assets be disposed. Under the acquisition method of accounting, the FDIC indemnification asset was recorded at fair value using projected cash flows based on expected reimbursements and applicable loss share percentages as outlined in the loss share agreements with the FDIC. The expected reimbursements did not include reimbursable amounts related to future covered expenditures. The cash flows were discounted to reflect the timing and receipt of reimbursements from the FDIC. The discount is accreted through noninterest income over future periods. The Company regularly reviews the fair value of the FDIC indemnification asset with input from a third-party provider. Post-acquisition adjustments to the indemnification asset are measured on the same basis as the underlying covered assets. Increases in the cash flows of covered loans reduce the FDIC indemnification asset balance, which is recognized as amortization through noninterest income over the shorter of the remaining life of the FDIC indemnification asset or the underlying loans. Decreases in the cash flows of covered loans increase the FDIC indemnification asset balance, which is recognized as accretion through noninterest income. The realization of the FDIC indemnification asset ultimately depends on the performance of the underlying covered assets, the passage of time, and claims paid by the FDIC; therefore, the amount the Company realizes could differ materially from the carrying value.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and equipment; 3 to 5 years for software, hardware, and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 20 years and most contain options to renew with reasonable increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

Goodwill and Other Intangible Assets

Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired that is allocated to the appropriate reporting unit when acquired. The Company maintains two reporting units, Community Banking and Insurance Services. Goodwill is tested annually in the fourth quarter using a qualitative assessment to determine if it is more likely than not that the fair value of each reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of either reporting unit is less than its carrying amount, the two-step quantitative goodwill impairment test is performed.

 

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Step 1 consists of calculating and comparing the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of a reporting unit is greater than its calculated fair value, goodwill impairment may exist and Step 2 is required to determine the amount of the impairment loss.

The Company performed its annual impairment test of goodwill as of October 31, 2015, and determined that qualitatively that it was more likely than not that goodwill was not impaired; therefore, the Step 1 and Step 2 tests were not deemed necessary. Qualitative factors considered in the analysis included macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and the Company’s progress towards stated objectives as compared to prior years. An impairment charge to goodwill and other intangible assets may be required in the future if the Company’s future earnings and cash flows decline or discount rates used in determining fair value increase. No events have occurred after the 2015 analysis to indicate potential impairment.

Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that are amortized using the straight-line method.

Other Investments

As a condition of membership in the FHLB and the FRB, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta and FRB of Richmond. These securities are reported in other assets in the Company’s consolidated balance sheets. There is no market for these securities and ownership is restricted; therefore, readily determinable fair values are not available. The Company carries these nonmarketable securities at cost and reviews the FHLB of Atlanta stock quarterly for impairment. The Company believes the FHLB of Atlanta ownership position provides access to relatively inexpensive wholesale and overnight funding. The FHLB of Atlanta repurchased excess activity-based stock and paid quarterly cash dividends in each of the three years ended December 31, 2015. Based on publicly available information as of December 31, 2015, the Company believes that its FHLB of Atlanta stock is not impaired. The investment in FHLB of Atlanta stock was $5.09 million as of December 31, 2015, and $6.37 million as of December 31, 2014. The investment in FRB of Richmond stock was $5.64 million as of December 31, 2015, and $5.58 million as of December 31, 2014.

The Company maintains long-term investments in various entities, including the Trust; certain tax credit limited partnerships; and other limited liability companies that provide insurance brokerage, title insurance, and other related financial services. These entities are reported in other assets in the Company’s consolidated balance sheets. Investments in entities that the Company has no significant influence or control over, generally ownership interests of less than 20%, are recorded using the cost method of accounting. Under the cost method, these investments do not have readily determinable fair values and dividends received are generally recorded as income. Investments in entities that the Company has the ability to exercise significant influence over but not control, generally ownership interests ranging from 20% to 50%, are recorded using the equity method of accounting. Under the equity method, dividends received generally reduce the carrying amount of the investment, and the investment is adjusted to recognize the Company’s share of the entity’s earnings, losses, and changes in capital, if any. Management believes any future adjustments to equity investments will be immaterial. All long-term investments are reviewed periodically for possible impairment. The Company had no equity investments as of December 31, 2015. The carrying value and maximum potential loss of equity investments totaled $360 thousand as of December 31, 2014.

 

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Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions. Securities, generally U.S. government and federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the secured party. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided as appropriate.

Advertising Expenses

Advertising costs are generally expensed as incurred. The Company may establish accruals for expected advertising expenses in the course of a fiscal year.

Equity-Based Compensation

The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Income Taxes

Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company includes interest and penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percentage of pre-tax income, may vary significantly from statutory rates due to tax credits and permanent differences. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are adjusted through the provision for income taxes as changes in tax laws or rates are enacted.

The Company’s tax filings for the years ended December 31, 2011 through 2014, are open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.

 

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Earnings per Common Share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. Under the treasury stock method of accounting, potential common stock may be issued for stock options, nonvested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive. The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands, except share and per share data)    2015      2014      2013  

Net income

   $ 24,540       $ 25,490       $ 23,312   

Dividends on preferred stock

     105         910         1,024   
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 24,435       $ 24,580       $ 22,288   
  

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding, basic

     18,531,039         18,406,363         19,792,099   

Dilutive effect of potential common shares from:

        

Stock options

     26,487         18,607         19,337   

Restricted stock

     2,996         461         5,014   

Convertible preferred stock

     166,942         1,046,175         1,132,998   

Contingently issuable shares

     —           11,448         12,352   
  

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding, diluted

     18,727,464         19,483,054         20,961,800   
  

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 1.32       $ 1.34       $ 1.13   

Diluted earnings per common share

   $ 1.31       $ 1.31       $ 1.11   

Antidilutive potential common shares:

        

Stock options

     127,882         222,651         317,420   

Restricted stock

     —           —           271   
  

 

 

    

 

 

    

 

 

 

Total potential antidilutive shares

     127,882         222,651         317,691   
  

 

 

    

 

 

    

 

 

 

During the first quarter of 2015, the Company notified holders of its 6% Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) of its intent to redeem all of the outstanding shares. Prior to redemption, holders converted 12,784 shares of Series A Preferred Stock with each share convertible into 69 shares of the Company’s common stock. The Company redeemed the remaining 2,367 shares for $2.37 million along with accrued and unpaid dividends of $9 thousand. As a result of the redemption, there were no shares of Series A Preferred Stock outstanding as of December 31, 2015, compared to 15,151 shares as of December 31, 2014, and 15,251 shares as of December 31, 2013.

Derivative Instruments

A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices, currencies, commodity prices, or credit spreads. Derivatives include futures, forwards, swaps, option contracts, and other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or to purchase or sell other

 

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financial instruments at specified terms on a specified date (e.g., options to buy or sell securities or currencies). The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. All derivative instruments are reported at fair value in the balance sheets.

If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. The recognition of changes in the fair value of a derivative instrument vary depending on the intended use of the derivative and the resulting designation. The Company accounts for hedges of customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. As of December 31, 2015, the Company had two interest rate swaps that qualified for fair value hedge accounting treatment.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous, market used to measure the fair value of the asset or liability must not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

The fair value hierarchy is as follows:

 

Level 1 Inputs –   Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs –   Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and provide a reasonable basis for fair value determination, such as interest rates, yield curves, volatilities, prepayment speeds, default rates, and credit risks, or inputs that are principally derived from observable market data.
Level 3 Inputs –   Unobservable inputs for determining the fair values of assets or liabilities when there is little or no market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. These inputs and assumptions may include model-derived inputs that are not corroborated by observable market data and an entity’s own assumptions.

These valuation methodologies were applied to all the Company’s assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not

 

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available, fair value is based upon third-party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Recent Accounting Standards

In January 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminated from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both unusual in nature and infrequently occurring. The guidance will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect this guidance to have a material effect on its financial statements.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.” ASU 2015-02 amended the consolidation requirements in ASC 810 Consolidation. The amendments change the consolidation analysis required under U.S. GAAP, and modify how variable interests held by a reporting entity’s related parties affect its consolidation conclusions. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments.” ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015. The Company does not expect this guidance to have a material effect on its financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” deferring the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company is currently evaluating the provisions of ASU 2014-09 to determine the potential impact the new standard will have to the Company’s financial statements.

 

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Note 2. Acquisitions and Divestitures

Bank of America

On October 24, 2014, the Company completed the acquisition of seven branches from Bank of America, National Association. At acquisition, the branches had total deposits of $318.88 million. The Company assumed the deposits for a premium of $5.79 million. No loans were included in the purchase. Additionally, the Company purchased the real estate or assumed the leases associated with the branches. The acquisition expands the Company’s presence by six branches in Southwestern Virginia and one branch in Central North Carolina.

CresCom Bank

On December 12, 2014, the Company completed the sale of thirteen branches to CresCom Bank (“CresCom”), Charleston, South Carolina. The divestiture consisted of ten branches in the Southeastern, Coastal region of North Carolina and three branches in South Carolina, all of which were previously acquired in the FDIC-assisted acquisition of Waccamaw on June 8, 2012. At closing, CresCom assumed total deposits of $215.19 million and total loans of $70.04 million. The transaction excluded loans covered under FDIC loss share agreements. The Company recorded a net gain of $755 thousand in connection with the divestiture, which included a deposit premium received from CresCom of $6.45 million and goodwill allocation of $6.45 million.

Insurance Services

On October 31, 2015, the Company sold one insurance agency for $372 thousand. The Company recorded a net loss of $8 thousand in connection with the sale and eliminated $324 thousand in goodwill and $61 thousand in other intangibles on the Company’s consolidated balance sheet as of December 31, 2015. The agency was previously purchased in 2013 for $385 thousand, which included $150 thousand in immediate cash consideration and $235 thousand in further cash consideration if certain operating targets were met.

Acquisitions that occurred before 2009 call for issuing further cash consideration if certain operating targets are met. If those targets are met, the value of the consideration will be added to the cost of the acquisition. Earn-out payments related to these acquisitions totaled $88 thousand in 2015, $353 thousand in 2014, and $442 thousand in 2013.

 

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Net Cash Paid (Received) in Acquisitions and Divestitures

The following table presents the components of net cash acquired, or paid, in acquisitions and divestitures, an investing activity in the Company’s statements of cash flows, in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)        2015          2014      2013  

Acquisitions

        

Fair value of assets and liabilities acquired:

        

Investments

   $ —         $ —         $ —     

Loans

     —           140         281   

Premises and equipment

     —           4,547         —     

Other assets

     —           4,563         —     

Deposits

     —           (318,877      —     

Other liabilities

     —           (76      —     

Purchase price in excess of net assets acquired

     88         1,721         663   
  

 

 

    

 

 

    

 

 

 

Total purchase price

     88         (307,982      944   

Non-cash purchase price

     —           —           247   

Cash acquired

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Net cash paid (received) in acquisitions

     88         (307,982      697   

Divestitures

        

Book value of assets sold

     389         (83,283      —     

Book value of liabilities sold

     (152      215,268         —     

Sales price in excess of net liabilities assumed

     (6      (755      —     
  

 

 

    

 

 

    

 

 

 

Total sales price

     231         131,230         —     

Cash sold

     —           (1,852      —     

Amount due remaining on books

     (231      —           —     
  

 

 

    

 

 

    

 

 

 

Net cash paid in divestitures

     —           129,378         —     
  

 

 

    

 

 

    

 

 

 

Net cash paid (received) in acquisitions and divestitures

   $ 88       $ (178,604    $ 697   
  

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 3. Investment Securities

The following tables present the amortized cost and aggregate fair value of available-for-sale securities, including gross unrealized gains and losses, as of the dates indicated:

 

     December 31, 2015  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

U.S. Agency securities

   $ 31,414       $ 39       $ (751   $ 30,702   

Municipal securities

     124,880         4,155         (357     128,678   

Single issue trust preferred securities

     55,882         —           (8,050     47,832   

Corporate securities

     70,571         —           (238     70,333   

Certificates of deposit

     5,000         —           —          5,000   

Mortgage-backed Agency securities

     84,576         155         (1,175     83,556   

Equity securities

     66         6         —          72   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 372,389       $ 4,355       $ (10,571   $ 366,173   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2014  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

U.S. Agency securities

   $ 34,604       $ 11       $ (1,017   $ 33,598   

Municipal securities

     134,784         4,823         (692     138,915   

Single issue trust preferred securities

     55,822         —           (9,685     46,137   

Corporate securities

     5,000         109         —          5,109   

Mortgage-backed Agency securities

     102,506         470         (857     102,119   

Equity securities

     226         19         (6     239   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 332,942       $ 5,432       $ (12,257   $ 326,117   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

85


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the amortized cost and fair value of available-for-sale securities, by contractual maturity, as of December 31, 2015. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)    U.S. Agency
Securities
     Municipal
Securities
     Corporate Notes      Certificates of
Deposit
     Total  

Amortized cost maturity:

              

One year or less

   $ —         $ 1,100       $ 70,571       $ 5,000       $ 76,671   

After one year through five years

     2         2,567         —           —           2,569   

After five years through ten years

     2,997         80,882         —           —           83,879   

After ten years

     28,415         40,331         55,882         —           124,628   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amortized cost

   $ 31,414       $ 124,880       $ 126,453       $ 5,000         287,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

Mortgage-backed securities

                 84,576   

Equity securities

                 66   
              

 

 

 

Total amortized cost

               $ 372,389   
              

 

 

 

Fair value maturity:

              

One year or less

   $ —         $ 1,123       $ 70,333       $ 5,000       $ 76,456   

After one year through five years

     2         2,602         —           —           2,604   

After five years through ten years

     2,995         84,322         —           —           87,317   

After ten years

     27,705         40,631         47,832         —           116,168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair value

   $ 30,702       $ 128,678       $ 118,165       $ 5,000         282,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

Mortgage-backed securities

                 83,556   

Equity securities

                 72   
              

 

 

 

Total fair value

               $ 366,173   
              

 

 

 

The following tables present the amortized cost and aggregate fair value of held-to-maturity securities, including gross unrealized gains and losses, as of the dates indicated:

 

     December 31, 2015  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

U.S. Agency securities

   $ 61,863       $ 75       $ (106   $ 61,832   

Municipal securities

     190         3         —          193   

Corporate securities

     10,488         —           (23     10,465   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 72,541       $ 78       $ (129   $ 72,490   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2014  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

U.S. Agency securities

   $ 46,987       $ 22       $ (54   $ 46,955   

Municipal securities

     379         7         —          386   

Corporate securities

     10,582         —           (34     10,548   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 57,948       $ 29       $ (88   $ 57,889   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

86


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the amortized cost and fair value of held-to-maturity securities, by contractual maturity, as of December 31, 2015. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)    U.S. Agency
Securities
     Municipal
Securities
     Corporate Notes      Total  

Amortized cost maturity:

           

One year or less

   $ 25,058       $ 190       $ —         $ 25,248   

After one year through five years

     36,805         —           10,488         47,293   

After five years through ten years

     —           —           —           —     

After ten years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total amortized cost

   $ 61,863       $ 190       $ 10,488       $ 72,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value maturity:

           

One year or less

   $ 25,007       $ 193       $ —         $ 25,200   

After one year through five years

     36,825         —           10,465         47,290   

After five years through ten years

     —           —           —           —     

After ten years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value

   $ 61,832       $ 193       $ 10,465       $ 72,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present municipal securities, by state, for the states where the largest volume of these securities are held in the Company’s portfolio. The tables also present the amortized cost and fair value of the municipal securities, including gross unrealized gains and losses, as of the dates indicated.

 

     December 31, 2015  
(Amounts in thousands)    Percent of
Municipal Portfolio
    Amortized Cost      Unrealized Gains      Unrealized Losses     Fair Value  

New York

     11.38   $ 14,062       $ 602       $ —        $ 14,664   

Ohio

     8.72     11,011         283         (64     11,230   

Minnesota

     8.69     10,797         420         (14     11,203   

New Jersey

     8.38     10,416         388         —          10,804   

Wisconsin

     7.76     9,786         217         (5     9,998   

Massachusetts

     7.69     9,554         378         (22     9,910   

Connecticut

     7.60     9,479         315         —          9,794   

Texas

     6.04     7,651         208         (75     7,784   

Iowa

     5.03     6,471         75         (60     6,486   

Other

     28.71     35,843         1,272         (117     36,998   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

     100.00   $ 125,070       $ 4,158       $ (357   $ 128,871   
    

 

 

    

 

 

    

 

 

   

 

 

 

 

87


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     December 31, 2014  
(Amounts in thousands)    Percent of
Municipal Portfolio
    Amortized Cost      Unrealized Gains      Unrealized Losses     Fair Value  

New York

     11.48   $ 14,064       $ 730       $ —        $ 14,794   

Minnesota

     9.02     11,188         463         (30     11,621   

Wisconsin

     8.98     11,340         244         (16     11,568   

Ohio

     8.79     11,145         337         (148     11,334   

Connecticut

     8.67     10,775         393         —          11,168   

New Jersey

     8.60     10,567         515         —          11,082   

Massachusetts

     7.77     9,653         393         (38     10,008   

Texas

     6.87     8,770         214         (133     8,851   

Other

     37.93     47,661         1,541         (327     48,875   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

     108.09   $ 135,163       $ 4,830       $ (692   $ 139,301   
    

 

 

    

 

 

    

 

 

   

 

 

 

The following tables present the fair values and unrealized losses for available-for-sale securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated:

 

     December 31, 2015  
     Less than 12 Months     12 Months or longer     Total  
(Amounts in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Agency securities

   $ 4,441       $ (5   $ 23,922       $ (746   $ 28,363       $ (751

Municipal securities

     8,126         (48     10,393         (309     18,519         (357

Single issue trust preferred securities

     —           —          47,832         (8,050     47,832         (8,050

Corporate securities

     70,333         (238     —           —          70,333         (238

Mortgage-backed Agency securities

     27,050         (253     37,291         (922     64,341         (1,175
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 109,950       $ (544   $ 119,438       $ (10,027   $ 229,388       $ (10,571
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2014  
     Less than 12 Months     12 Months or longer     Total  
(Amounts in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Agency securities

   $ —         $ —        $ 29,448       $ (1,017   $ 29,448       $ (1,017

Municipal securities

     1,112         (8     25,007         (684     26,119         (692

Single issue trust preferred securities

     —           —          46,137         (9,685     46,137         (9,685

Mortgage-backed Agency securities

     2,778         (3     45,790         (854     48,568         (857

Equity securities

     150         (6     —           —          150         (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,040       $ (17   $ 146,382       $ (12,240   $ 150,422       $ (12,257
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

88


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the date indicated.

 

     December 31, 2015  
     Less than 12 Months     12 Months or longer      Total  
(Amounts in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

U.S. Agency securities

   $ 43,723       $ (106   $ —         $ —         $ 43,723       $ (106

Corporate securities

     6,851         (23     —           —           6,851         (23
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 50,574       $ (129   $ —         $ —         $ 50,574       $ (129
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Less than 12 Months     12 Months or longer      Total  
(Amounts in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

U.S. Agency securities

   $ 28,188       $ (54   $ —         $ —         $ 28,188       $ (54

Corporate securities

     10,548         (34     —           —           10,548         (34
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 38,736       $ (88   $ —         $ —         $ 38,736       $ (88
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2015, there were 107 individual securities in an unrealized loss position, and their combined depreciation in value represented 2.44% of the investment securities portfolio. Individual securities in an unrealized loss position as of December 31, 2015, included 48 securities in a continuous unrealized loss position for 12 months or longer that the Company does not intend to sell, and that it has determined is not more likely than not going to be required to sell, prior to maturity or recovery. As of December 31, 2014, there were 97 individual securities in an unrealized loss position, and their combined depreciation in value represented 3.21% of the investment securities portfolio.

The following table presents the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Gross realized gains

   $ 363       $ 2,257       $ 553   

Gross realized losses

     (219      (3,642      (154
  

 

 

    

 

 

    

 

 

 

Net gain (loss) on sale of securities

   $ 144       $ (1,385    $ 399   
  

 

 

    

 

 

    

 

 

 

The carrying amount of securities pledged for various purposes totaled $236.73 million as of December 31, 2015, and $268.78 million as of December 31, 2014.

The Company reviews its investment portfolio quarterly for indications of OTTI. Debt securities not beneficially owned by the Company include securities issued from the U.S. Department of the Treasury (“Treasury”), municipal securities, single issue trust preferred securities, corporate securities, and certificates of deposit. For debt securities not beneficially owned, the Company analyzes factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies, and other qualitative factors to determine if the impairment will be recovered. If the evaluation suggests that the impairment will not be recovered, the Company calculates the present value of the security to determine the amount of OTTI. The security is then written down to its current

 

89


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

present value and the Company calculates and records the amount of the loss due to credit factors in earnings through noninterest income and the amount due to other factors in stockholders’ equity through OCI. Temporary impairment on these securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, destabilization in foreign markets, and other current economic factors. The Company incurred no OTTI charges related to debt securities not beneficially owned in 2015 or 2014.

Debt securities beneficially owned by the Company consist of mortgage-backed securities (“MBS”). For debt securities beneficially owned, the Company analyzes the cash flows for each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. If the projected value of cash flows at the current reporting date is less than the present value previously projected, and less than the current book value, an adverse change has occurred. The Company then compares the current present value of cash flows to the current net book value to determine the credit-related portion of the OTTI. The credit-related OTTI is recorded in earnings through noninterest income and any remaining noncredit-related OTTI is recorded in stockholders’ equity through OCI. The Company incurred no credit-related OTTI charges related to debt securities beneficially owned in 2015. The Company incurred credit-related OTTI charges related to debt securities beneficially owned of $705 thousand in 2014 and $320 thousand in 2013. These charges were associated with a non-Agency MBS that was sold in November 2014.

The following table presents the activity for credit-related losses recognized in earnings on debt securities where a portion of an OTTI was recognized in OCI for the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014     2013  

Beginning balance (1)

   $ —         $ 7,798      $ 7,478   

Additions for credit losses on securities previously recognized

     —           705        320   

Reduction for securities sold/realized losses

     —           (8,503     —     
  

 

 

    

 

 

   

 

 

 

Ending balance

   $ —         $ —        $ 7,798   
  

 

 

    

 

 

   

 

 

 

 

(1) The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods.

For equity securities, the Company considers its intent to hold or sell the security before recovery, the severity and duration of the decline in fair value of the security below its cost, the financial condition and near-term prospects of the issuer, and whether the decline appears to be related to issuer, general market, or industry conditions to determine if the impairment will be recovered. If the Company deems the impairment other-than-temporary in nature, the security is written down to its current present value and the OTTI loss is charged to earnings. The Company incurred no OTTI charges related to equity securities in 2015 or 2013. The Company incurred OTTI charges related to equity securities of $32 thousand in 2014.

 

90


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 4. Loans

Loan Portfolio

The Company’s loans held for investment are grouped into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in FDIC-assisted transactions that are covered by loss share agreements. The following table presents loans, net of unearned income and disaggregated by class, as of the periods indicated:

 

     December 31,  
     2015     2014  
(Amounts in thousands)    Amount      Percent     Amount      Percent  

Non-covered loans held for investment

          

Commercial loans

          

Construction, development, and other land

   $ 48,896         2.86   $ 41,271         2.44

Commercial and industrial

     88,903         5.21     83,099         4.92

Multi-family residential

     95,026         5.57     97,480         5.77

Single family non-owner occupied

     149,351         8.75     135,171         8.00

Non-farm, non-residential

     485,460         28.45     473,906         28.05

Agricultural

     2,911         0.17     1,599         0.09

Farmland

     27,540         1.61     29,517         1.75
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     898,087         52.62     862,043         51.02

Consumer real estate loans

          

Home equity lines

     107,367         6.29     110,957         6.57

Single family owner occupied

     495,209         29.02     485,475         28.74

Owner occupied construction

     43,505         2.55     32,799         1.94
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer real estate loans

     646,081         37.86     629,231         37.25

Consumer and other loans

          

Consumer loans

     72,000         4.22     69,347         4.10

Other

     7,338         0.43     6,555         0.39
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer and other loans

     79,338         4.65     75,902         4.49
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-covered loans

     1,623,506         95.13     1,567,176         92.76

Total covered loans

     83,035         4.87     122,240         7.24
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held for investment, net of unearned income

   $ 1,706,541         100.00   $ 1,689,416         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Loans held for sale

   $ —           $ 1,792      
  

 

 

      

 

 

    

Customer overdrafts reclassified as loans totaled $1.24 million as of December 31, 2015, and $1.44 million as of December 31, 2014. Deferred loan fees totaled $3.78 million in 2015, and $3.39 million in 2014. For information concerning off-balance sheet financing, see Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated Financial Statements of this report.

 

91


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the components of the Company’s covered loan portfolio, disaggregated by class, as of the dates indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Covered loans

     

Commercial loans

     

Construction, development, and other land

   $ 6,303       $ 13,100   

Commercial and industrial

     1,170         2,662   

Multi-family residential

     640         1,584   

Single family non-owner occupied

     2,674         5,918   

Non-farm, non-residential

     14,065         25,317   

Agricultural

     34         43   

Farmland

     643         716   
  

 

 

    

 

 

 

Total commercial loans

     25,529         49,340   

Consumer real estate loans

     

Home equity lines

     48,565         60,391   

Single family owner occupied

     8,595         11,968   

Owner occupied construction

     262         453   
  

 

 

    

 

 

 

Total consumer real estate loans

     57,422         72,812   

Consumer and other loans

     

Consumer loans

     84         88   
  

 

 

    

 

 

 

Total covered loans

   $ 83,035       $ 122,240   
  

 

 

    

 

 

 

Purchased Credit Impaired Loans

Certain purchased loans are identified as impaired when fair values are established at acquisition. These PCI loans are aggregated into loan pools that have common risk characteristics. The Company’s loan pools consist of Waccamaw commercial, Waccamaw lines of credit, Waccamaw serviced home equity lines, Waccamaw residential, Peoples commercial, and Peoples residential. The Company closed the Waccamaw consumer loan pool during the first quarter of 2015 due to an insignificant remaining balance. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. The following table presents the carrying and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:

 

     December 31,  
     2015      2014  
(Amounts in thousands)    Carrying Balance      Unpaid Principal
Balance
     Carrying Balance      Unpaid Principal
Balance
 

PCI Loans, by acquisition

           

Peoples Bank of Virginia

   $ 6,681       $ 11,249       $ 7,090       $ 13,669   

Waccamaw Bank

     34,707         63,151         53,835         86,641   

Other acquired

     1,254         1,297         1,358         1,401   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI Loans

   $ 42,642       $ 75,697       $ 62,283       $ 101,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the activity in the accretable yield related to PCI loans, by acquisition, in the periods indicated:

 

(Amounts in thousands)    Peoples     Waccamaw     Other     Total  

Balance, January 1, 2015

   $ 4,745      $ 19,048      $ —        $ 23,793   

Additions

     —          2        —          2   

Accretion

     (2,712     (6,459     —          (9,171

Reclassifications from nonaccretable difference

     1,283        6,564        —          7,847   

Other changes, net

     273        6,954        —          7,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

   $ 3,589      $ 26,109      $ —        $ 29,698   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 5,294      $ 10,338      $ 8      $ 15,640   

Additions

     267        26        —          293   

Accretion

     (2,147     (6,118     (37     (8,302

Reclassifications from nonaccretable difference

     1,912        16,400        29        18,341   

Other changes, net

     (581     (1,598     —          (2,179
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

   $ 4,745      $ 19,048      $ —        $ 23,793   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2013

   $ 2,342      $ 21,886      $ 15      $ 24,243   

Additions

     148        281        —          429   

Accretion

     (1,840     (6,288     (119     (8,247

Reclassifications from (to) nonaccretable difference

     6,155        (2,967     112        3,300   

Other changes, net

     (1,511     (2,574     —          (4,085
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

   $ 5,294      $ 10,338      $ 8      $ 15,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 5. Credit Quality

The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed to be impaired. The following tables present the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated:

 

     December 31, 2015  
(Amounts in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Impaired loans with no related allowance:

        

Commercial loans

        

Single family non-owner occupied

   $ 782       $ 783       $ —     

Non-farm, non-residential

     8,427         8,427         —     

Consumer real estate loans

        

Single family owner occupied

     1,975         2,067         —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

     11,184         11,277         —     

Impaired loans with a related allowance:

        

Commercial loans

        

Single family non-owner occupied

     619         623         124   

Non-farm, non-residential

     5,667         5,673         1,568   

Consumer real estate loans

        

Single family owner occupied

     4,899         4,907         672   

Owner occupied construction

     349         355         7   
  

 

 

    

 

 

    

 

 

 

Total impaired loans with a related allowance

     11,534         11,558         2,371   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 22,718       $ 22,835       $ 2,371   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
(Amounts in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Impaired loans with no related allowance:

        

Commercial loans

        

Single family non-owner occupied

   $ 466       $ 466       $ —     

Non-farm, non-residential

     5,705         6,049         —     

Consumer real estate loans

        

Single family owner occupied

     3,397         3,494         —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

     9,568         10,009         —     

Impaired loans with a related allowance:

        

Commercial loans

        

Single family non-owner occupied

     367         367         45   

Non-farm, non-residential

     3,772         3,772         1,000   

Consumer real estate loans

        

Single family owner occupied

     2,341         2,512         437   
  

 

 

    

 

 

    

 

 

 

Total impaired loans with a related allowance

     6,480         6,651         1,482   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 16,048       $ 16,660       $ 1,482   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the average annual recorded investment and interest income recognized on impaired loans, excluding PCI loans, in the periods indicated:

 

    Year ended December 31,  
    2015     2014     2013  
(Amounts in thousands)   Interest
Income
    Average
Recorded
Investment
    Interest
Income
    Average
Recorded
Investment
    Interest
Income
    Average
Recorded
Investment
 

Impaired loans with no related allowance:

           

Commercial loans

           

Construction, development, and other land

  $ —        $ —        $ —        $ —        $ 294      $ 3,850   

Commercial and industrial

    —          —          17        461        17        698   

Multi-family residential

    —          —          —          —          3        18   

Single family non-owner occupied

    34        626        8        301        99        939   

Non-farm, non-residential

    295        8,767        96        6,083        296        7,225   

Farmland

    —          —          11        181        12        370   

Consumer real estate loans

           

Home equity lines

    —          —          2        66        25        454   

Single family owner occupied

    136        2,432        73        2,508        70        2,156   

Owner occupied construction

    —          88        —          —          5        15   

Consumer and other loans

           

Consumer loans

    —          —          —          —          —          3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans with no related allowance

    465        11,913        207        9,600        821        15,728   

Impaired loans with a related allowance:

           

Commercial loans

           

Construction, development, and other land

    —          —          —          —          117        1,057   

Commercial and industrial

    —          —          47        2,199        18        4,281   

Multi-family residential

    —          —          23        4,190        7        94   

Single family non-owner occupied

    25        575        2        369        3        892   

Non-farm, non-residential

    65        4,987        31        3,386        29        1,494   

Consumer real estate loans

           

Home equity lines

    —          —          1        57        12        304   

Single family owner occupied

    26        3,731        48        3,897        54        4,498   

Owner occupied construction

    1        178        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans with a related allowance

    117        9,471        152        14,098        240        12,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 582      $ 21,384      $ 359      $ 23,698      $ 1,061      $ 28,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company determined that two of the six open PCI loan pools were impaired as of December 31, 2015, compared to two of the seven open PCI loan pools as of December 31, 2014, and four of the seven open PCI loan pools as of December 31, 2013. The following tables present additional information related to the impaired loan pools as of the dates, and in the periods, indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Recorded investment

   $ 2,834       $ 14,607   

Unpaid principal balance

     3,759         31,169   

Allowance for loan losses

     54         58   

 

     Year ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Interest income recognized

   $ 364       $ 3,081       $ 1,966   

Average recorded investment

     3,309         30,007         35,220   

As part of the ongoing monitoring of the Company’s loan portfolio, management tracks certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.0 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process.

The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. The general characteristics of each risk grade are as follows:

 

   

Pass – This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity leverage, and industry conditions.

 

   

Special Mention – This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.

 

   

Substandard – This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. In order to meet repayment terms, these loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business.

 

   

Doubtful – This grade is assigned to loans on nonaccrual status. These loans have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is extremely unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

 

   

Loss – This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are determined to be uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.

Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately in the following credit quality discussion. PCI loan pools are disaggregated and included in their applicable loan class in the following discussion. PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest income under the accretion method of accounting.

 

96


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present loans held for investment, by internal credit risk grade, as of the periods indicated:

 

     December 31, 2015  
(Amounts in thousands)    Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  
                 

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 46,816       $ 974       $ 1,106       $ —         $ —         $ 48,896   

Commercial and industrial

     87,223         663         1,017         —           —           88,903   

Multi-family residential

     81,168         12,969         889         —           —           95,026   

Single family non-owner occupied

     139,680         3,976         5,695         —           —           149,351   

Non-farm, non-residential

     454,906         15,170         15,384         —           —           485,460   

Agricultural

     2,886         25         —           —           —           2,911   

Farmland

     25,855         1,427         258         —           —           27,540   

Consumer real estate loans

                 

Home equity lines

     104,897         1,083         1,387         —           —           107,367   

Single family owner occupied

     468,155         6,686         20,368         —           —           495,209   

Owner occupied construction

     42,783         —           722         —           —           43,505   

Consumer and other loans

                 

Consumer loans

     71,685         61         254         —           —           72,000   

Other

     7,338         —           —           —           —           7,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,533,392         43,034         47,080         —           —           1,623,506   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     3,908         1,261         1,134         —           —           6,303   

Commercial and industrial

     1,144         4         22         —           —           1,170   

Multi-family residential

     460         —           180         —           —           640   

Single family non-owner occupied

     1,808         457         409         —           —           2,674   

Non-farm, non-residential

     9,192         2,044         2,829         —           —           14,065   

Agricultural

     34         —           —           —           —           34   

Farmland

     364         —           279         —           —           643   

Consumer real estate loans

                 

Home equity lines

     17,893         29,823         849         —           —           48,565   

Single family owner occupied

     5,102         1,963         1,530         —           —           8,595   

Owner occupied construction

     112         51         99         —           —           262   

Consumer and other loans

                 

Consumer loans

     84         —           —           —           —           84   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     40,101         35,603         7,331         —           —           83,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,573,493       $ 78,637       $ 54,411       $ —         $ —         $ 1,706,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

97


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     December 31, 2014  
(Amounts in thousands)    Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 38,858       $ 1,384       $ 1,029       $ —         $ —         $ 41,271   

Commercial and industrial

     81,196         616         1,287         —           —           83,099   

Multi-family residential

     89,503         7,007         970         —           —           97,480   

Single family non-owner occupied

     126,155         3,333         5,683         —           —           135,171   

Non-farm, non-residential

     441,385         13,028         19,493         —           —           473,906   

Agricultural

     1,589         —           10         —           —           1,599   

Farmland

     26,876         1,432         1,209         —           —           29,517   

Consumer real estate loans

                 

Home equity lines

     107,688         1,606         1,663         —           —           110,957   

Single family owner occupied

     454,833         8,884         21,758         —           —           485,475   

Owner occupied construction

     32,551         —           248         —           —           32,799   

Consumer and other loans

                 

Consumer loans

     68,592         520         235         —           —           69,347   

Other

     6,555         —           —           —           —           6,555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,475,781         37,810         53,585         —           —           1,567,176   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     7,598         3,227         2,275         —           —           13,100   

Commercial and industrial

     2,528         82         52         —           —           2,662   

Multi-family residential

     1,400         —           184         —           —           1,584   

Single family non-owner occupied

     2,703         2,059         1,156         —           —           5,918   

Non-farm, non-residential

     12,672         4,341         8,304         —           —           25,317   

Agricultural

     43         —           —           —           —           43   

Farmland

     420         —           296         —           —           716   

Consumer real estate loans

                 

Home equity lines

     21,295         38,296         800         —           —           60,391   

Single family owner occupied

     7,094         2,040         2,834         —           —           11,968   

Owner occupied construction

     84         264         105         —           —           453   

Consumer and other loans

                 

Consumer loans

     88         —           —           —           —           88   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     55,925         50,309         16,006         —           —           122,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,531,706       $ 88,119       $ 69,591       $ —         $ —         $ 1,689,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

98


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents nonaccrual loans, by loan class, as of the dates indicated:

 

     December 31,  
     2015      2014  
(Amounts in thousands)    Non-covered      Covered      Total      Non-covered      Covered      Total  

Commercial loans

                 

Construction, development, and other land

   $ 39       $ 54       $ 93       $ —         $ 18       $ 18   

Commercial and industrial

     —           16         16         123         34         157   

Multi-family residential

     84         —           84         245         —           245   

Single family non-owner occupied

     1,850         29         1,879         601         77         678   

Non-farm, non-residential

     7,150         39         7,189         2,334         1,317         3,651   

Agricultural

     —           —           —           4         —           4   

Farmland

     234         —           234         —           —           —     

Consumer real estate loans

                 

Home equity lines

     825         413         1,238         792         204         996   

Single family owner occupied

     7,245         96         7,341         6,389         682         7,071   

Owner occupied construction

     349         —           349         —           106         106   

Consumer and other loans

                 

Consumer loans

     71         —           71         68         —           68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans

   $ 17,847       $ 647       $ 18,494       $ 10,556       $ 2,438       $ 12,994   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. There were no non-covered or covered accruing loans contractually past due 90 days or more as of December 31, 2015, or December 31, 2014.

 

     December 31, 2015  
(Amounts in thousands)    30 - 59 Days
Past Due
     60 - 89 Days
Past Due
     90+ Days
Past Due
     Total
Past Due
     Current
Loans
     Total
Loans
 

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ —         $ —         $ 39       $ 39       $ 48,857       $ 48,896   

Commercial and industrial

     281         66         —           347         88,556         88,903   

Multi-family residential

     302         76         84         462         94,564         95,026   

Single family non-owner occupied

     748         120         929         1,797         147,554         149,351   

Non-farm, non-residential

     347         676         4,940         5,963         479,497         485,460   

Agricultural

     —           —           —           —           2,911         2,911   

Farmland

     585         11         234         830         26,710         27,540   

Consumer real estate loans

                 

Home equity lines

     668         195         468         1,331         106,036         107,367   

Single family owner occupied

     6,122         1,943         3,191         11,256         483,953         495,209   

Owner occupied construction

     —           —           —           —           43,505         43,505   

Consumer and other loans

                 

Consumer loans

     278         71         23         372         71,628         72,000   

Other

     —           —           —           —           7,338         7,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     9,331         3,158         9,908         22,397         1,601,109         1,623,506   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     96         —           42         138         6,165         6,303   

Commercial and industrial

     —           —           16         16         1,154         1,170   

Multi-family residential

     —           —           —           —           640         640   

Single family non-owner occupied

     1,422         —           —           1,422         1,252         2,674   

Non-farm, non-residential

     —           —           39         39         14,026         14,065   

Agricultural

     —           —           —           —           34         34   

Farmland

     —           —           —           —           643         643   

Consumer real estate loans

                 

Home equity lines

     489         37         225         751         47,814         48,565   

Single family owner occupied

     274         —           42         316         8,279         8,595   

Owner occupied construction

     —           —           —           —           262         262   

Consumer and other loans

                 

Consumer loans

     —           —           —           —           84         84   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     2,281         37         364         2,682         80,353         83,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 11,612       $ 3,195       $ 10,272       $ 25,079       $ 1,681,462       $ 1,706,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     December 31, 2014  
(Amounts in thousands)    30 - 59 Days
Past Due
     60 - 89 Days
Past Due
     90+ Days
Past Due
     Total
Past Due
     Current
Loans
     Total
Loans
 

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 39       $ 46       $ —         $ 85       $ 41,186       $ 41,271   

Commercial and industrial

     285         6         103         394         82,705         83,099   

Multi-family residential

     81         110         —           191         97,289         97,480   

Single family non-owner occupied

     914         513         425         1,852         133,319         135,171   

Non-farm, non-residential

     1,075         783         1,984         3,842         470,064         473,906   

Agricultural

     —           —           4         4         1,595         1,599   

Farmland

     89         —           —           89         29,428         29,517   

Consumer real estate loans

                 

Home equity lines

     492         103         571         1,166         109,791         110,957   

Single family owner occupied

     5,436         1,931         4,564         11,931         473,544         485,475   

Owner occupied construction

     —           —           —           —           32,799         32,799   

Consumer and other loans

                 

Consumer loans

     544         84         26         654         68,693         69,347   

Other

     —           —           —           —           6,555         6,555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     8,955         3,576         7,677         20,208         1,546,968         1,567,176   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     120         17         —           137         12,963         13,100   

Commercial and industrial

     84         12         34         130         2,532         2,662   

Multi-family residential

     —           —           —           —           1,584         1,584   

Single family non-owner occupied

     122         —           77         199         5,719         5,918   

Non-farm, non-residential

     124         140         1,258         1,522         23,795         25,317   

Agricultural

     —           —           —           —           43         43   

Farmland

     3         —           —           3         713         716   

Consumer real estate loans

                 

Home equity lines

     858         318         168         1,344         59,047         60,391   

Single family owner occupied

     134         34         415         583         11,385         11,968   

Owner occupied construction

     —           —           —           —           453         453   

Consumer and other loans

                 

Consumer loans

     —           —           —           —           88         88   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     1,445         521         1,952         3,918         118,322         122,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 10,400       $ 4,097       $ 9,629       $ 24,126       $ 1,665,290       $ 1,689,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of $250 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Specific reserves in the allowance for loan losses attributed to TDRs totaled $590 thousand as of December 31, 2015, and $475 thousand as of December 31, 2014. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. The following table presents interest income related to TDRs in the periods, indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Interest income recognized

   $ 608       $ 597       $ 551   

Loans acquired with credit deterioration, with a discount, are generally not considered TDRs as long as the loans remain in the assigned loan pool. There were no covered loans recorded as TDRs as of December 31, 2015 or 2014. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:

 

     December 31,  
     2015      2014  
(Amounts in thousands)    Nonaccrual  (1)      Accruing      Total      Nonaccrual  (1)      Accruing      Total  

Commercial loans

                 

Single family non-owner occupied

   $ 130       $ 820       $ 950       $ —         $ 1,088       $ 1,088   

Non-farm, non-residential

     —           4,600         4,600         83         4,743         4,826   

Consumer real estate loans

                 

Home equity lines

     127         43         170         —           47         47   

Single family owner occupied

     733         8,256         8,989         471         8,412         8,883   

Owner occupied construction

     349         243         592         —           244         244   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 1,339       $ 13,962       $ 15,301       $ 554       $ 14,534       $ 15,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated. The post-modification recorded investment represents the loan balance immediately after modification.

 

     Year Ended December 31,  
     2015      2014  

(Amounts in thousands)

   Total
Contracts
     Pre-
Modification
Recorded
Investment
     Post-
Modification

Recorded
Investment
     Total
Contracts
     Pre-
Modification
Recorded
Investment
     Post-
Modification

Recorded
Investment
 
                 

Below market interest rate

                 

Single family owner occupied

     —         $ —         $ —           4       $ 1,850       $ 1,850   

Owner occupied construction

     —           —           —           1         245         245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           5         2,095         2,095   

Extended payment term

                 

Single family non-owner occupied

     —           —           —           1         468         468   

Non-farm, non-residential

     —           —           —           1         303         303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           2         771         771   

Below market interest rate and extended payment term

                 

Single family non-owner occupied

     —           —           —           1         255         255   

Single family owner occupied

     5         342         342         5         487         487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5         342         342         6         742         742   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 342       $ 342         13       $ 3,608       $ 3,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no payment defaults on loans modified as TDRs that were restructured within the previous 12 months as of December 31, 2015 and 2014.

OREO consists of properties acquired through foreclosure. The following table presents information related to OREO as of the dates indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Non-covered OREO

   $ 4,873       $ 6,638   

Covered OREO

     4,034         6,324   
  

 

 

    

 

 

 

Total OREO

   $ 8,907       $ 12,962   
  

 

 

    

 

 

 

Non-covered OREO secured by residential real estate

   $ 2,677       $ 6,155   

Residential real estate loans in the foreclosure process (1)

     2,727         4,561   

 

(1) The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 6. Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems adequate to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by provisions charged to operations and reduced by net charge-offs. While management uses its best judgment and information available, the ultimate adequacy of the allowance is dependent on a variety of factors that may be beyond the Company’s control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities towards loan classifications, and other factors. These uncertainties may result in a material change to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

The Company’s allowance is comprised of specific reserves related to loans individually evaluated, including credit relationships, and general reserves related to loans not individually evaluated that are segmented into groups with similar risk characteristics, based on an internal risk grading matrix. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. For loans acquired in a business combination, loans identified as credit impaired at the acquisition date are grouped into pools and evaluated separately from the non-PCI portfolio. The Company aggregates PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit, Waccamaw serviced home equity lines, Waccamaw residential, Waccamaw consumer, Peoples commercial, and Peoples residential. The Company closed the Waccamaw consumer loan pool during the first quarter of 2015 due to an insignificant remaining balance. Provisions calculated for PCI loans are offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are made to various portfolio segments, the allowance for loan losses, excluding reserves allocated to specific loans and PCI loan pools, is available for use against any loan loss management deems appropriate. As of December 31, 2015, management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio.

The following tables present the aggregate activity in the allowance for loan losses in the periods indicated:

 

     Year Ended December 31, 2015  
(Amounts in thousands)    Allowance Excluding
PCI Loans
    Allowance for
PCI Loans
    Total
Allowance
 

Beginning balance

   $ 20,169      $ 58      $ 20,227   

Provision for (recovery of) loan losses

     2,166        (4     2,162   

Benefit attributable to the FDIC indemnification asset

     —          29        29   
  

 

 

   

 

 

   

 

 

 

Provision for loan losses charged to operations

     2,166        25        2,191   

Recovery of loan losses recorded through the FDIC indemnification asset

     —          (29     (29

Charge-offs

     (3,745     —          (3,745

Recoveries

     1,589        —          1,589   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2,156     —          (2,156
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 20,179      $ 54      $ 20,233   
  

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     Year Ended December 31, 2014  
(Amounts in thousands)    Allowance Excluding
PCI Loans
    Allowance for
PCI Loans
    Total
Allowance
 

Beginning balance

   $ 23,322      $ 755      $ 24,077   

Removal of loans transferred

     (682     —          (682

Provision for (recovery of) loan losses

     420        (697     (277

Benefit attributable to the FDIC indemnification asset

     —          422        422   
  

 

 

   

 

 

   

 

 

 

Provision (recovery) of loan losses charged to operations

     420        (275     145   

Recovery of loan losses recorded through the FDIC indemnification asset

     —          (422     (422

Charge-offs

     (6,481     —          (6,481

Recoveries

     3,590        —          3,590   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2,891     —          (2,891
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 20,169      $ 58      $ 20,227   
  

 

 

   

 

 

   

 

 

 
     Year Ended December 31, 2013  
(Amounts in thousands)    Allowance Excluding
PCI Loans
    Allowance for
PCI Loans
    Total
Allowance
 

Beginning balance

   $ 25,762      $ 8      $ 25,770   

Provision for loan losses

     7,912        747        8,659   

Benefit attributable to the FDIC indemnification asset

     —          (451     (451
  

 

 

   

 

 

   

 

 

 

Provision for loan losses charged to operations

     7,912        296        8,208   

Provision for loan losses recorded through the FDIC indemnification asset

     —          451        451   

Charge-offs

     (12,527     —          (12,527

Recoveries

     2,175        —          2,175   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (10,352     —          (10,352
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 23,322      $ 755      $ 24,077   
  

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present the components of the activity in the allowance for loan losses, excluding PCI loans, by loan segment, in the periods indicated:

 

     Year Ended December 31, 2015  
(Amounts in thousands)    Commercial     Consumer
Real Estate
    Consumer
and Other
    Total  
        

Beginning balance

   $ 13,010      $ 6,489      $ 670      $ 20,169   

Provision for loan losses charged to operations

     931        95        1,140        2,166   

Loans charged off

     (1,282     (906     (1,557     (3,745

Recoveries credited to allowance

     474        678        437        1,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (808     (228     (1,120     (2,156
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,133      $ 6,356      $ 690      $ 20,179   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Year Ended December 31, 2014  
(Amounts in thousands)    Commercial     Consumer
Real  Estate
    Consumer
and Other
    Total  
        

Beginning balance

   $ 16,090      $ 6,597      $ 635      $ 23,322   

Removal of loans transferred

     (418     (244     (20     (682

(Recovery of) provision for loan losses charged to operations

     (1,988     1,273        1,135        420   

Loans charged off

     (2,928     (1,873     (1,680     (6,481

Recoveries credited to allowance

     2,254        736        600        3,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (674     (1,137     (1,080     (2,891
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,010      $ 6,489      $ 670      $ 20,169   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Year Ended December 31, 2013  
(Amounts in thousands)    Commercial     Consumer
Real Estate
    Consumer
and Other
    Total  
        

Beginning balance

   $ 17,259      $ 7,906      $ 597      $ 25,762   

Provision for loan losses charged to operations

     5,643        1,364        905        7,912   

Loans charged off

     (7,743     (3,115     (1,669     (12,527

Recoveries credited to allowance

     931        442        802        2,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (6,812     (2,673     (867     (10,352
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 16,090      $ 6,597      $ 635      $ 23,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the components of the activity in the allowance for loan losses for PCI loans, by loan segment, in the periods indicated:

 

     Year Ended December 31, 2015  
(Amounts in thousands)    Commercial     Consumer
Real  Estate
     Consumer
and Other
     Total  
          

Beginning balance

   $ 37      $ 21       $ —         $ 58   

(Recovery of) provision for PCI loan losses

     (37     33         —           (4

Benefit attributable to FDIC indemnification asset

     29        —           —           29   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Recovery of) provision for loan losses charged to operations

     (8     33         —           25   

Recovery of loan losses recorded through the FDIC indemnification asset

     (29     —           —           (29
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance

   $ —        $ 54       $ —         $ 54   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     Year Ended December 31, 2014  
(Amounts in thousands)    Commercial     Consumer
Real Estate
    Consumer
and Other
     Total  
         

Beginning balance

   $ 77      $ 678      $ —         $ 755   

Recovery of PCI loan losses

     (40     (657     —           (697

Benefit attributable to FDIC indemnification asset

     26        396        —           422   
  

 

 

   

 

 

   

 

 

    

 

 

 

Recovery of loan losses charged to operations

     (14     (261     —           (275

Recovery of loan losses recorded through the FDIC indemnification asset

     (26     (396     —           (422
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 37      $ 21      $ —         $ 58   
  

 

 

   

 

 

   

 

 

    

 

 

 
     Year Ended December 31, 2013  

(Amounts in thousands)

   Commercial     Consumer
Real Estate
    Consumer
and Other
     Total  
         

Beginning balance

   $ 8      $ —        $ —         $ 8   

Provision for PCI loan losses

     69        678        —           747   

Benefit attributable to FDIC indemnification asset

     (55     (396     —           (451
  

 

 

   

 

 

   

 

 

    

 

 

 

Recovery of loan losses charged to operations

     14        282        —           296   

Provision for loan losses recorded through the FDIC indemnification asset

     55        396        —           451   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 77      $ 678      $ —         $ 755   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present the Company’s allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the dates indicated:

 

     December 31, 2015  
(Amounts in thousands)    Loans
Individually
Evaluated for
Impairment
     Allowance for
Loans
Individually
Evaluated
     Loans
Collectively
Evaluated for
Impairment
     Allowance
for Loans
Collectively
Evaluated
 

Commercial loans

           

Construction, development, and other land

   $ —         $ —         $ 53,437       $ 1,119   

Commercial and industrial

     —           —           89,885         504   

Multi-family residential

     —           —           95,486         1,535   

Single family non-owner occupied

     1,401         124         147,209         3,245   

Non-farm, non-residential

     14,094         1,568         478,839         4,825   

Agricultural

     —           —           2,945         22   

Farmland

     —           —           28,183         190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     15,495         1,692         895,984         11,440   

Consumer real estate loans

           

Home equity lines

     —           —           126,691         1,091   

Single family owner occupied

     6,874         672         495,761         4,297   

Owner occupied construction

     349         7         43,323         290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     7,223         679         665,775         5,678   

Consumer and other loans

           

Consumer loans

     —           —           72,084         690   

Other

     —           —           7,338         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer and other loans

     —           —           79,422         690   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, excluding PCI loans

   $ 22,718       $ 2,371       $ 1,641,181       $ 17,808   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
(Amounts in thousands)    Loans
Individually
Evaluated for
Impairment
     Allowance
for Loans
Individually
Evaluated
     Loans
Collectively
Evaluated for
Impairment
     Allowance
for Loans
Collectively
Evaluated
 

Commercial loans

           

Construction, development, and other land

   $ —         $ —         $ 51,608       $ 1,151   

Commercial and industrial

     —           —           85,353         690   

Multi-family residential

     —           —           98,880         1,917   

Single family non-owner occupied

     833         45         135,223         3,183   

Non-farm, non-residential

     9,477         1,000         475,353         4,805   

Agricultural

     —           —           1,642         13   

Farmland

     —           —           30,233         206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     10,310         1,045         878,292         11,965   

Consumer real estate loans

           

Home equity lines

     —           —           134,006         1,330   

Single family owner occupied

     5,738         437         489,820         4,498   

Owner occupied construction

     —           —           32,983         224   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     5,738         437         656,809         6,052   

Consumer and other loans

           

Consumer loans

     —           —           69,429         670   

Other

     —           —           6,555         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer and other loans

     —           —           75,984         670   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, excluding PCI loans

   $ 16,048       $ 1,482       $ 1,611,085       $ 18,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the Company’s allowance for loan losses related to PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated:

 

     December 31,  
     2015      2014  
(Amounts in thousands)    Loan Pools
With
Impairment
     Allowance
for Loans
Pools With
Impairment
     Loan Pools
With
Impairment
     Allowance for
Loans Pools
With
Impairment
 

Commercial loans

           

Waccamaw commercial

   $ 3,788       $ —         $ 13,392       $ 37   

Waccamaw lines of credit

     —           —           461         —     

Peoples commercial

     5,525         —           5,875         —     

Other

     1,254         —           1,358         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     10,567         —           21,086         37   

Consumer real estate loans

           

Waccamaw serviced home equity lines

     29,241         —           37,342         —     

Waccamaw residential

     1,678         1         2,638         —     

Peoples residential

     1,156         53         1,215         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     32,075         54         41,195         21   

Consumer and other loans

           

Waccamaw consumer (1)

     —           —           2         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 42,642       $ 54       $ 62,283       $ 58   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Closed during the first quarter of 2015.

 

Note 7. FDIC Indemnification Asset

The Company entered into loss share agreements with the FDIC in 2012 in connection with the FDIC-assisted acquisition of Waccamaw. Under the loss share agreements, the FDIC agreed to cover 80% of most loan and foreclosed real estate losses. Certain expenses incurred in relation to these covered assets are reimbursable by the FDIC. Estimated reimbursements are netted against the expense on covered assets in the Company’s consolidated statements of income. The following table presents activity in the FDIC indemnification asset in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)        2015              2014      

Beginning balance

   $ 27,900       $ 34,691   

(Decrease) increase in estimated losses on covered loans

     (28      (422

Increase in estimated losses on covered OREO

     1,489         1,851   

Reimbursable expenses from the FDIC

     545         527   

Net amortization

     (6,379      (3,979

Reimbursements from the FDIC

     (2,683      (4,768
  

 

 

    

 

 

 

Ending balance

   $ 20,844       $ 27,900   
  

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 8. Premises, Equipment, and Leases

Premises and Equipment

The following table presents the components of premises and equipment as of the dates indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Land

   $ 19,155       $ 19,166   

Buildings and leasehold improvements

     50,776         50,729   

Equipment

     36,709         38,103   
  

 

 

    

 

 

 
     106,640         107,998   

Accumulated depreciation and amortization

     53,884         52,154   
  

 

 

    

 

 

 

Total premises and equipment, net

   $ 52,756       $ 55,844   
  

 

 

    

 

 

 

Certain long-term investments in land and buildings were evaluated for impairment resulting in write-downs totaling $259 thousand in 2015 and $935 thousand in 2014. Depreciation and amortization expense was $4.14 million in 2015, $4.41 million in 2014, and $4.67 million in 2013.

Leases

The Company enters into various noncancelable operating leases. The following schedule presents future minimum lease payments required under noncancelable operating leases, with initial or remaining terms in excess of one year, by year, as of December 31, 2015:

 

(Amounts in thousands)       

2016

   $ 733   

2017

     591   

2018

     528   

2019

     376   

2020

     210   

2021 and thereafter

     887   
  

 

 

 
   $ 3,325   
  

 

 

 

Lease expense was $862 thousand in 2015, $1.06 million in 2014, and $1.18 million in 2013. Certain portions of the Company’s leases have been sublet to third parties for properties not currently being used by the Company. Future minimum lease payments to be received under noncancelable subleases totaled $5 thousand as of December 31, 2015.

 

Note 9. Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is allocated to the appropriate reporting unit when acquired, if applicable. The estimated future value of the cash consideration is recognized as goodwill at the acquisition date. The Company analyzed the carrying value of goodwill as of October 31, 2015, and determined that no impairment charge was necessary.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the activity in goodwill, by reporting unit, in the periods indicated:

 

(Amounts in thousands)    Community
Banking
     Insurance
Services
     Total  

Beginning balance, January 1, 2015

   $ 91,455       $ 9,267       $ 100,722   

Acquisitions and dispositions, net

     —           (324      (324

Cash consideration paid

     —           88         88   
  

 

 

    

 

 

    

 

 

 

Ending balance, December 31, 2015

   $ 91,455       $ 9,031       $ 100,486   
  

 

 

    

 

 

    

 

 

 

Beginning balance, January 1, 2014

   $ 96,541       $ 8,914       $ 105,455   

Acquisitions and dispositions, net

     (6,454      —           (6,454

Cash consideration paid

     1,368         353         1,721   
  

 

 

    

 

 

    

 

 

 

Ending balance, December 31, 2014

   $ 91,455       $ 9,267       $ 100,722   
  

 

 

    

 

 

    

 

 

 

Beginning balance, January 1, 2013

   $ 96,717       $ 8,149       $ 104,866   

Acquisitions and dispositions, net

     (176      324         148   

Cash consideration paid

     —           441         441   
  

 

 

    

 

 

    

 

 

 

Ending balance, December 31, 2013

   $ 96,541       $ 8,914       $ 105,455   
  

 

 

    

 

 

    

 

 

 

Other Intangible Assets

The Company’s intangible assets also include core deposit and other identifiable intangible assets. Core deposit intangible assets are amortized over their estimated useful lives that range from 7 to 11 years. As of December 31, 2015, the remaining lives of core deposit intangible assets ranged from 8 months to 10 years, and the weighted average remaining life was 9 years. Other identifiable intangible assets are amortized using the straight-line method and consist primarily of the value assigned to contractual rights arising from insurance agency acquisitions. The following table presents the components of other intangible assets, by reporting unit, as of the dates indicated:

 

     December 31,  
     2015     2014  
(Amounts in thousands)    Community
Banking
    Insurance
Services
    Total     Community
Banking
    Insurance
Services
    Total  

Core deposit intangibles

   $ 12,282      $ —        $ 12,282      $ 12,282      $ —        $ 12,282   

Accumulated amortization

     (7,958     —          (7,958     (7,148     —          (7,148
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core deposit intangibles, net

     4,324        —          4,324        5,134        —          5,134   

Other identifiable intangibles

     535        3,711        4,246        535        3,711        4,246   

Accumulated amortization

     (464     (2,863     (3,327     (437     (2,522     (2,959
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other identifiable intangibles, net

     71        848        919        98        1,189        1,287   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other intangible assets, net

   $ 4,395      $ 848      $ 5,243      $ 5,232      $ 1,189      $ 6,421   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Amortization expense for other intangible assets was $1.12 million in 2015, $787 thousand in 2014, and $729 thousand in 2013. The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2015:

 

(Amounts in thousands)       

2016

   $ 1,034   

2017

     821   

2018

     624   

2019

     438   

2020

     438   

2021 and thereafter

     1,845   
  

 

 

 
   $ 5,200   
  

 

 

 

 

Note 10. Deposits

The following table presents the components of deposits as of the dates indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Noninterest-bearing demand deposits

   $ 451,511       $ 417,729   

Interest-bearing deposits:

     

Interest-bearing demand deposits

     347,705         353,874   

Money market accounts

     213,982         225,196   

Savings deposits

     316,603         300,282   

Certificates of deposit

     408,519         557,352   

Individual retirement accounts

     134,939         146,326   
  

 

 

    

 

 

 

Total interest-bearing deposits

     1,421,748         1,583,030   
  

 

 

    

 

 

 

Total deposits

   $ 1,873,259       $ 2,000,759   
  

 

 

    

 

 

 

The following schedule presents the contractual maturities of time deposits as of December 31, 2015:

 

(Amounts in thousands)       

2016

   $ 286,687   

2017

     77,117   

2018

     61,662   

2019

     45,874   

2020

     69,796   

2021 and thereafter

     2,322   
  

 

 

 
   $ 543,458   
  

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Time deposits of $250 thousand or more totaled $41.35 million as of December 31, 2015, and $60.27 million as of December 31, 2014. The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2015:

 

(Amounts in thousands)       

Three months or less

   $ 6,813   

Over three through six months

     4,700   

Over six through twelve months

     7,401   

Over twelve months

     22,433   
  

 

 

 
   $ 41,347   
  

 

 

 

 

Note 11. Borrowings

Short-term borrowings generally consist of federal funds purchased and retail repurchase agreements, which are typically collateralized with agency MBS. Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other obligations. The following table presents the composition of borrowings as of the dates indicated:

 

     December 31,  
     2015     2014  
(Amounts in thousands)    Balance      Weighted
Average  Rate (1)
    Balance      Weighted
Average  Rate(1)
 

Federal funds purchased

   $ —           —        $ —           —     

Securities sold under agreements to repurchase:

          

Retail

     88,614         0.10     71,742         0.13

Wholesale

     50,000         3.71     50,000         3.71
  

 

 

      

 

 

    

Total securities sold under agreements to repurchase

     138,614           121,742      

FHLB borrowings

     65,000         4.03     90,000         4.07

Subordinated debt

     15,464           15,464      

Other debt

     292           2,535      
  

 

 

      

 

 

    

Total borrowings

   $ 219,370         $ 229,741      
  

 

 

      

 

 

    

 

(1) Weighted average contractual rate

The following schedule presents the remaining contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 2015:

 

(Amounts in thousands)    Overnight and
Continuous
     Up to 30
Days
     30-90 Days      Greater Than
90 Days
     Total  

U.S. Agency securities

   $ 71,588       $ —         $ —         $ —         $ 71,588   

Municipal securities

     —           —           —           1,047         1,047   

Mortgage-backed Agency securities

     15,016         202         —           50,761         65,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 86,604       $ 202       $ —         $ 51,808       $ 138,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following schedule presents the contractual maturities of wholesale repurchase agreements and FHLB borrowings, by year, as of December 31, 2015:

 

(Amounts in thousands)    Wholesale Repurchase
Agreements
     FHLB
Borrowings
     Total  

2016

   $ 25,000       $ —         $ 25,000   

2017

     —           15,000         15,000   

2018

     —           —           —     

2019

     25,000         —           25,000   

2020

     —           —           —     

2021 and thereafter

     —           50,000         50,000   
  

 

 

    

 

 

    

 

 

 
   $ 50,000       $ 65,000       $ 115,000   
  

 

 

    

 

 

    

 

 

 

Weighted average maturity (in years)

     2.08         4.17         3.26   

The counterparties to the repurchase agreements may call those borrowings, which could substantially shorten the lives of the borrowings. Prepayment, or unwind, of a repurchase agreement may result in substantial penalties based on market conditions.

The FHLB may redeem callable advances at quarterly intervals, which could substantially shorten the lives of the advances. If called, the advance may be paid in full or converted into another FHLB credit product. Prepayment of an advance may result in substantial penalties based on the differential between the contractual note and current advance rate for similar maturities. The Company prepaid $25 million of a FHLB convertible advance bearing an interest rate of 4.15% that was scheduled to mature in 2017 during the second quarter of 2015. The prepayment penalty associated with the $25 million FHLB debt repayment totaled $1.70 million.

The Company is required to pledge qualifying collateral to secure FHLB advances and letters of credit. As of December 31, 2015, the Company provided for FHLB letters of credit to collateralize public unit deposits totaling $22.69 million. FHLB borrowings were secured by qualifying loans that totaled $874.68 million as of December 31, 2015. Unused borrowing capacity with the FHLB, net of FHLB letters of credit, totaled $403.10 million as of December 31, 2015.

Subordinated debt consists of Company-issued junior subordinated debentures (“Debentures”). The Company-issued Debentures totaling $15.46 million to the Trust in October 2003 with an interest rate of three-month London InterBank Offered Rate (“LIBOR”) plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities, which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are currently callable quarterly. Net proceeds from the offering were contributed as capital to the Bank to support further growth. The Company’s obligations under the Debentures and other relevant Trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of the Trust’s obligations. The preferred securities issued by the Trust are not included in the Company’s consolidated balance sheets; however, these securities qualify as Tier 1 capital for regulatory purposes, subject to guidelines issued by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The Federal Reserve’s quantitative limits did not prevent the Company from including all $15.46 million in trust preferred securities outstanding in Tier 1 capital as of December 31, 2015, and December 31, 2014.

The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution that carries an interest rate of one-month LIBOR plus 2.00% and matures in April 2016. As of December 31, 2015, there was no outstanding balance on the line compared to an outstanding balance of $2.00 million as of December 31, 2014.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 12. Derivative Instruments and Hedging Activities

The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

As of December 31, 2015, the Company’s derivative instruments consisted of interest rate swaps. Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors.

Interest rate lock commitments (“IRLCs”) and forward sale loan commitments. In the normal course of business, the Company may enter into IRLCs with customers on mortgage loans intended to be sold in the secondary market and commitments to sell those originated mortgage loans. The Company enters into IRLCs to provide potential borrowers an interest rate guarantee. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. From the date we issue the commitment through the date of sale into the secondary market, the Company has exposure to interest rate movement resulting from the risk that interest rates will change from the rate quoted to the borrower. Due to these interest rate fluctuations, the Company’s balance of mortgage loans held for sale is subject to changes in fair value. Typically, the fair value of these loans declines when interest rates rise and increase when interest rates decline. The fair values of the Company’s IRLCs and forward sale loan commitments are recorded at fair value as a component of other assets and other liabilities in the consolidated balance sheets. These derivatives do not qualify as hedging instruments; therefore, changes in fair value are recorded in earnings.

Interest rate swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify as fair value hedging instruments; therefore, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period.

The Company entered into a fourteen-year, $1.20 million notional interest rate swap agreement in March 2015, a fifteen-year, $4.37 million notional interest rate swap agreement in February 2014, and a ten-year, $3.50 million notional interest rate swap agreement in October 2013. The loan hedged by the October 2013 swap paid off in 2014 and the swap was terminated. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of December 31, 2015.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the aggregate contractual or notional amounts and the fair values of the Company’s derivative instruments as of the dates indicated:

 

     December 31,  
     2015      2014  
(Amounts in thousands)    Notional  or
Contractual
Amount
     Derivative
Assets
     Derivative
Liabilities
     Notional or
Contractual
Amount
     Derivative
Assets
     Derivative
Liabilities
 

Derivatives designated as hedges:

                 

Interest rate swaps

   $ 5,335       $ —         $ 251       $ 4,363       $ —         $ 209   

Derivatives not designated as hedges:

                 

IRLCs

     —           —           —           1,391         5         —     

Forward sale loan commitments

     —           —           —           3,183         —           5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedges

     —           —           —           4,574         5         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 5,335       $ —         $ 251       $ 8,937       $ 5       $ 214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the effect of the Company’s derivative and hedging activity, if applicable, on the statement of income in the periods indicated:

 

            Year Ended December 31,  
(Amounts in thousands)    Income Statement Location      2015      2014      2013  

Derivatives designated as hedges:

           

Interest rate swaps

     Other income       $ —         $ —         $ —     

Derivatives not designated as hedges:

           

IRLCs

     Other income         —           —           (169

Forward sale loan commitments

     Other income         —           —           41   
     

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedges

  

     —           —           (128
     

 

 

    

 

 

    

 

 

 

Total derivatives

  

   $ —         $ —         $ (128
     

 

 

    

 

 

    

 

 

 

 

Note 13. Employee Benefit Plans

Employee Stock Ownership and Savings Plan

The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”). Coverage under the plan is provided to all employees who meet minimum eligibility requirements. The KSOP held 428,785 shares of the Company’s common stock as of December 31, 2015, 457,765 shares as of December 31, 2014, and 499,075 shares as of December 31, 2013.

Employer Stock Fund

The Company made annual contributions to the stock feature within the KSOP at the discretion of the Board of Directors until December 31, 2006, when the plan was frozen to future contributions. Substantially all plan assets are invested in the Company’s common stock. All KSOP contributions beginning in 2007 have been made to the employee savings feature of the plan.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Employee Savings Plan

The Company provides a 401(k) savings feature within the KSOP. The Company makes matching contributions to employee deferrals at levels determined by the Board of Directors annually. Matching contributions are made in the first quarter following each plan year, and employees must be employed on the last day of the plan year to be eligible to receive the matching contribution. The cost of the Company’s matching contributions to qualified deferrals under the 401(k) savings component of the KSOP was $1.53 million in 2015, $1.58 million in 2014, and $1.61 million in 2013. Matching contributions for 2015 were made in cash and the Company’s common stock and matching contributions for 2014 and 2013 were made in cash.

Employee Welfare Plan

The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits to all full-time employees who elect coverage under this program. A third-party administrator manages the health plan. Monthly employer and employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays claims. As of December 31, 2015, stop-loss insurance coverage generally limited the Company’s risk of loss to $125 thousand for individual claims and $4.08 million aggregate claims. Expenses related to the health plan were $3.06 million in 2015, $2.88 million in 2014, and $3.02 million in 2013.

Deferred Compensation Plan

The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods, commencing at retirement or death. Accrued benefits totaled $458 thousand as of December 31, 2015, and $451 thousand as of December 31, 2014, which are based on the present values of expected payments and estimated life expectancies. Expenses related to the deferred compensation plan were $60 thousand in each of the three years ended December 31, 2015.

Supplemental Executive Retention Plan

The Company maintains the Supplemental Executive Retention Plan (“SERP”) for key members of senior management. The domestic noncontributory, nonqualified SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant’s projected final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The SERP is an unfunded plan; thus, there are no plan assets. The following table presents the components of the SERP’s net periodic pension cost in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Service cost

   $ 133       $ 106       $ 135   

Interest cost

     281         290         246   

Amortization of losses

     7         —           49   

Amortization of prior service cost

     187         187         187   
  

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 608       $ 583       $ 617   
  

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The actuarial benefit plan obligation was $7.08 million as of December 31, 2015, and $6.63 million as of December 31, 2014. The obligation as of December 31, 2015, included a $111 thousand actuarial loss. The assumed discount rate was increased to 4.62% as of December 31, 2015, compared to 4.41% as of December 31, 2014. The following schedule presents the projected benefit payments to be paid under the SERP, by year, as of December 31, 2015:

 

(Amounts in thousands)       

2016

   $ 249   

2017

     352   

2018

     352   

2019

     350   

2020

     374   

2021 through 2025

     2,118   

Directors’ Supplemental Retirement Plan

The Company maintains the Directors’ Supplemental Retirement Plan (“Directors’ Plan”) for non-management directors. The domestic noncontributory, nonqualified Directors’ Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant’s highest consecutive three-year average compensation. Benefits under the Directors’ Plan generally become payable at age 70. The Directors’ Plan is an unfunded plan; thus, there are no plan assets.

The following table presents the components of the Directors’ Plan’s net periodic pension cost in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Service cost

   $ 47       $ 22       $ 26   

Interest cost

     53         46         41   

Amortization of losses

     60         —           1   

Amortization of prior service cost

     72         73         90   
  

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 232       $ 141       $ 158   
  

 

 

    

 

 

    

 

 

 

The actuarial benefit plan obligation was $1.31 million as of December 31, 2015, and $997 thousand as of December 31, 2014. The assumed discount rate increased to 4.62% as of December 31, 2015, compared to 4.41% as of December 31, 2014. The following schedule presents the projected benefit payments to be paid under the Directors’ Plan, by year, as of December 31, 2015:

 

(Amounts in thousands)       

2016

   $ 84   

2017

     110   

2018

     108   

2019

     106   

2020

     149   

2021 through 2025

     702   

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 14. Equity-Based Compensation

The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors, and other individuals performing services for the Company to focus on critical long-range objectives. The Company’s equity-based compensation plans include the 2012 Omnibus Equity Compensation Plan (“2012 Plan”), 2004 Omnibus Stock Option Plan, 2001 Director’s Option Plan, 1999 Stock Option Plan, and various other plans obtained through acquisitions. As of December 31, 2015, the 2012 Plan was the only plan available for the issuance of future grants. All plans issued or obtained before the 2012 Plan are frozen and no new grants may be issued; however, any options or awards unexercised and outstanding under those plans remain in effect per their respective terms.

The 2012 Plan made available a total of 600,000 shares for potential grants of incentive stock options, nonqualified stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, bonus stock, and stock awards. Options granted under the 2012 Plan state the period of time the grant may be exercised, not to exceed more than ten years from the date granted. The Company’s Compensation and Retirement Committee determines the vesting period for each grant; however, if no vesting period is specified the vesting occurs in 25% increments on the first four anniversaries of the grant date.

The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation plans in the periods indicated:

 

    

 Year Ended December 31, 

 
(Amounts in thousands)    2015      2014      2013  

Pre-tax compensation expense

   $ 93       $ 349       $ 574   

Excess tax benefit

     8         5         9   

Stock Options

The Company uses the Black-Scholes valuation model to estimate the fair value of stock options at the grant date. The model incorporates the following assumptions: the expected volatility is based on the weekly historical volatility of the Company’s common stock price over the expected term of the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the Treasury yield curve on the grant date with a term comparable to the grant; and the dividend yield is based on the Company’s dividend yield using the most recent dividend rate paid per share and trading price of the Company’s common stock. There were no stock options granted in 2015, 2014, or 2013.

The following table presents stock option activity under the equity-based compensation plans in the period indicated:

 

(Amounts in thousands,

except share and per share data)

   Option
Shares
     Weighted  Average
Exercise Price
Per Share
     Weighted  Average
Remaining Contractual
Term (Years)
     Aggregate
Intrinsic
Value
 
           
           

Outstanding, January 1, 2015

     326,022       $ 20.54         

Granted

     —           —           

Exercised

     4,323         12.64         

Canceled

     85,295         21.98         
  

 

 

    

 

 

       

Outstanding, December 31, 2015

     236,404       $ 20.17         5.5       $ 707   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable, December 31, 2015

     236,404       $ 20.17         5.5       $ 707   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The aggregate intrinsic value of options exercised was $20 thousand in 2015, $13 thousand in 2014, and $22 thousand in 2013. As of December 31, 2015, there was no unrecognized compensation expense related to nonvested stock options. The actual compensation cost recognized will differ from this estimate due to various items, including new grants and changes in estimated forfeitures.

Restricted Stock Awards

Restricted stock awards represent shares issued upon grant that are restricted. The fair value of restricted stock awards is calculated using the Company’s common stock price on the grant date. The following table presents restricted stock activity under the equity-based compensation plans in the period indicated:

 

     Shares      Weighted Average
Grant-Date
Fair Value
 
     

Nonvested, January 1, 2015

     900       $ 16.24   

Granted

     9,654         16.90   

Vested

     (5,227      16.84   

Canceled

     —           —     
  

 

 

    

 

 

 

Nonvested, December 31, 2015

     5,327       $ 16.85   
  

 

 

    

 

 

 

As of December 31, 2015, unrecognized compensation cost related to nonvested restricted stock awards was $54 thousand with an expected weighted average recognition period of 0.56 years. The actual compensation cost recognized will differ from this estimate due to various items, including new awards granted and changes in estimated forfeitures.

Performance Stock Awards

Performance stock awards represent shares potentially issuable in the future. The fair values of performance stock awards are calculated using the Company’s stock price on the grant date. The following table presents performance stock activity under the 2012 Plan in the period indicated:

 

     Shares      Weighted Average
Grant-Date
Fair Value
 
     

Nonvested, January 1, 2015

     22,902       $ 15.79   

Granted

     —           —     

Vested

     (12,906      15.77   

Canceled

     (148      15.56   
  

 

 

    

 

 

 

Nonvested, December 31, 2015

     9,848       $ 15.83   
  

 

 

    

 

 

 

As of December 31, 2015, there was no unrecognized compensation cost related to nonvested performance stock awards. The actual compensation cost recognized will differ from this estimate due to various items, including new awards granted, changes in estimated forfeitures, and resolution of performance contingencies.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 15. Other Operating Income and Expense

The following table presents the components of other operating income and expense in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Other operating income

        

Increase in cash value of bank owned life insurance

   $ 1,690       $ 1,304       $ 1,162   

Other  (1)

     2,439         3,051         4,073   
  

 

 

    

 

 

    

 

 

 

Total other operating income

   $ 4,129       $ 4,355       $ 5,235   
  

 

 

    

 

 

    

 

 

 

Other operating expense

        

Service fees

   $ 3,401       $ 3,856       $ 3,157   

OREO expense and net loss

     2,438         2,094         2,037   

ATM processing expenses

     2,407         2,102         1,605   

Telephone and data communications

     1,595         1,715         1,707   

Advertising and public relations

     1,309         1,001         1,686   

Professional fees

     1,272         1,436         2,564   

Office supplies

     1,228         1,514         1,472   

Premises and equipment write-downs

     259         935         1,520   

Other (1)

     7,202         7,589         7,500   
  

 

 

    

 

 

    

 

 

 

Total other operating expense

   $ 21,111       $ 22,242       $ 23,248   
  

 

 

    

 

 

    

 

 

 

 

(1) Other components of other operating income or expense that do not exceed 1% of total income.

 

Note 16. Income Taxes

Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following table presents the components of income tax expense in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015      2014      2013  

Current tax expense (benefit):

        

Federal

   $ (254    $ 7,234       $ 12,819   

State

     581         1,325         1,743   
  

 

 

    

 

 

    

 

 

 

Total current tax expense

     327         8,559         14,562   

Deferred tax expense (benefit):

        

Federal

     10,034         2,971         (3,136

State

     1,020         794         (518
  

 

 

    

 

 

    

 

 

 

Total deferred tax expense (benefit)

     11,054         3,765         (3,654
  

 

 

    

 

 

    

 

 

 

Total income tax expense

   $ 11,381       $ 12,324       $ 10,908   
  

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the net deferred tax asset as of the dates indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Deferred tax assets:

     

Allowance for loan losses

   $ 7,741       $ 7,519   

Unrealized losses on available-for-sale securities

     2,331         2,560   

Unrealized asset losses

     1,511         4,477   

Purchase accounting

     5,014         5,343   

FDIC assisted transactions

     6,551         6,582   

Intangible assets

     4,082         7,584   

Deferred compensation assets

     4,529         4,421   

Other deferred tax assets

     2,578         6,427   
  

 

 

    

 

 

 

Total deferred tax assets

     34,337         44,913   
     

Deferred tax liabilities:

     

FDIC indemnification asset

     13,162         12,548   

Fixed assets

     2,658         2,453   

Odd days interest deferral

     1,975         2,007   

Other

     347         442   
  

 

 

    

 

 

 

Total deferred tax liabilities

     18,142         17,450   
  

 

 

    

 

 

 

Net deferred tax asset

   $ 16,195       $ 27,463   
  

 

 

    

 

 

 

The Company’s effective tax rate, defined as income tax expense divided by pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences include income on municipal securities, which are exempt from federal income tax, income on bank-owned life insurance, and tax credits generated by investments in low income housing and rehabilitation of historic structures. The following table reconciles the federal statutory tax rate to the Company’s effective tax rate from continuing operations in the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2015     2014     2013  

Federal statutory tax rate

     35.00     35.00     35.00

(Reduction) increase resulting from:

      

Tax-exempt interest

     (4.07     (4.35     (5.14

State income taxes, net of federal benefit

     1.78        2.66        2.35   

Bank owned life insurance

     (1.92     (1.47     (1.48

Other, net

     0.89        0.75        1.15   
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     31.68     32.59     31.88
  

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 17. Accumulated Other Comprehensive Income

The following table presents the activity in AOCI, net of tax, by component for the periods indicated:

 

(Amounts in thousands)    Unrealized Gains (Losses)
on Available-for-Sale
Securities
    Employee
Benefit Plan
    Total  

Beginning balance, January 1, 2015

   $ (4,266   $ (1,339   $ (5,605

Other comprehensive gain before reclassifications

     291        180        471   

Reclassified from AOCI

     90        (203     (113
  

 

 

   

 

 

   

 

 

 

Net comprehensive gain (loss)

     381        (23     358   
  

 

 

   

 

 

   

 

 

 

Ending balance, December 31, 2015

   $ (3,885   $ (1,362   $ (5,247
  

 

 

   

 

 

   

 

 

 

Beginning balance, January 1, 2014

   $ (13,640   $ (1,100   $ (14,740

Other comprehensive gain (loss) before reclassifications

     10,697        (77     10,620   

Reclassified from AOCI

     (1,323     (162     (1,485
  

 

 

   

 

 

   

 

 

 

Net comprehensive gain (loss)

     9,374        (239     9,135   
  

 

 

   

 

 

   

 

 

 

Ending balance, December 31, 2014

   $ (4,266   $ (1,339   $ (5,605
  

 

 

   

 

 

   

 

 

 

Beginning balance, January 1, 2013

   $ (283   $ (1,542   $ (1,825

Other comprehensive (loss) gain before reclassifications

     (13,406     647        (12,759

Reclassified from AOCI

     49        (205     (156
  

 

 

   

 

 

   

 

 

 

Net comprehensive (loss) gain

     (13,357     442        (12,915
  

 

 

   

 

 

   

 

 

 

Ending balance, December 31, 2013

   $ (13,640   $ (1,100   $ (14,740
  

 

 

   

 

 

   

 

 

 

The following table presents reclassifications out of AOCI by component in the periods indicated:

 

    Year Ended December 31,    

Income Statement

Line Item Affected

(Amounts in thousands)   2015     2014     2013    

Available-for-sale securities

       

Gains (losses) realized in net income

  $ 144      $ (1,385   $ 399     

Net gain (loss) on sale of securities

Credit-related OTTI recognized in net income

    —          (737     (320  

Net impairment losses recognized in earnings

 

 

 

   

 

 

   

 

 

   
    144        (2,122     79     

Income before taxes

Income tax effect

    54        (799     30     

Income tax expense (benefit)

 

 

 

   

 

 

   

 

 

   
    90        (1,323     49     

Net income

Employee benefit plans

       

Amortization of prior service cost

    (260     (260     (277  

(1)

Amortization of losses

    (66     —          (50  

(1)

 

 

 

   

 

 

   

 

 

   
    (326     (260     (327  

Income before taxes

Income tax effect

    (123     (98     (122  

Income tax expense (benefit)

 

 

 

   

 

 

   

 

 

   
    (203     (162     (205  

Net income

 

 

 

   

 

 

   

 

 

   

Reclassified from AOCI, net of tax

  $ (113   $ (1,485   $ (156  

Net income

 

 

 

   

 

 

   

 

 

   

 

(1) Amortization is included in net periodic pension cost. See Note 13, “Employee Benefit Plans.”

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 18. Fair Value

Financial Instruments Measured at Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy, is presented in the following discussion. The fair value hierarchy ranks the inputs used in measuring fair value as follows:

 

   

Level 1 – Observable, unadjusted quoted prices in active markets

 

   

Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability

 

   

Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. Additionally, the Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature, such as cash flow estimates, risk characteristics, credit quality measurements, and interest rates; therefore, valuations may not be precise. Since fair values are estimated as of a specific date, the amounts actually realized or paid on the settlement or maturity of these instruments may be significantly different from estimates. See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements of this report.

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-Sale Securities. Securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. The Company also uses Level 1 inputs to value equity securities that are traded in active markets. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Treasury securities, single issue trust preferred securities, corporate securities, MBS, and certain equity securities that are not actively traded. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of the specific markets and the general economic indicators.

Loans Held for Investment. Loans held for investment are reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality. Loans related to fair value hedges are recorded at fair value on a recurring basis.

Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, segregated by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

     December 31, 2015  
     Total
Fair Value
     Fair Value Measurements Using  
(Amounts in thousands)       Level 1      Level 2      Level 3  

Available-for-sale securities:

           

U.S. Agency securities

   $ 30,702       $ —         $ 30,702       $ —     

Municipal securities

     128,678         —           128,678         —     

Single issue trust preferred securities

     47,832         —           47,832         —     

Corporate securities

     70,333         —           70,333         —     

Certificates of deposit

     5,000         —           5,000         —     

Agency MBS

     83,556         —           83,556         —     

Equity securities

     72         54         18         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 366,173       $ 54       $ 366,119       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value loans

   $ 4,886       $ —         $ 4,886       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred compensation assets

   $ 3,464       $ 3,464       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred compensation liabilities

   $ 3,464       $ 3,464       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities

           

Interest rate swaps

   $ 251       $ —         $ 251       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 251       $ —         $ 251       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     December 31, 2014  
     Total
Fair Value
     Fair Value Measurements Using  
(Amounts in thousands)       Level 1      Level 2      Level 3  

Available-for-sale securities:

           

U.S. Agency securities

   $ 33,598       $ —         $ 33,598       $ —     

Municipal securities

     138,915         —           138,915         —     

Single issue trust preferred securities

     46,137         —           46,137         —     

Corporate securities

     5,109         —           5,109         —     

Agency MBS

     102,119         —           102,119         —     

Equity securities

     239         221         18         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 326,117       $ 221       $ 325,896       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value loans

   $ 3,406       $ —         $ 3,406       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred compensation assets

   $ 3,380       $ 3,380       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets

           

Forward sale loan commitments

   $ 5       $ —         $ 5       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 5       $ —         $ 5       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred compensation liabilities

   $ 3,380       $ 3,380       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities

           

Interest rate swaps

   $ 209       $ —         $ 209       $ —     

IRLCs

     5         —           5         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 214       $ —         $ 214       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no changes in valuation techniques during the years ended December 31, 2015 or 2014. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. In addition, there were no transfers into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2015 or 2014.

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be impaired. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. A third-party valuation is typically received within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Specific reserves are generally recorded for impaired loans while third-party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the third-party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution, except in cases involving bankruptcy and various state judicial processes that may extend the time for ultimate resolution.

Other Real Estate Owned. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

The following tables summarize assets measured at fair value on a nonrecurring basis, segregated by the level of valuation inputs in the fair value hierarchy, in the periods indicated:

 

     December 31, 2015  
     Total
Fair  Value
       Fair Value Measurements Using   
(Amounts in thousands)       Level 1      Level 2      Level 3  

Impaired loans not covered by loss share agreements

   $ 9,164         —           —         $ 9,164   

OREO, not covered by loss share agreements

     4,819         —           —           4,819   

OREO, covered by loss share agreements

     4,034         —           —           4,034   

 

     December 31, 2014  
     Total
Fair  Value
       Fair Value Measurements Using   
(Amounts in thousands)       Level 1      Level 2      Level 3  

Impaired loans not covered by loss share agreements

   $ 4,999         —           —         $ 4,999   

OREO, not covered by loss share agreements

     5,462         —           —           5,462   

OREO, covered by loss share agreements

     5,247         —           —           5,247   

Quantitative Information about Level 3 Fair Value Measurements

The following table presents quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs in the periods indicated:

 

    

Valuation Technique

   Unobservable Input     Range (Weighted Average)  
          December 31, 2015      December 31, 2014  

Impaired loans

   Discounted appraisals  (1)      Appraisal adjustments  (2)      1% to 39% (21%)         1% to 33% (22%)   

OREO, not covered

   Discounted appraisals  (1)      Appraisal adjustments  (2)      1% to 100% (33%)         10% to 47% (26%)   

OREO, covered

   Discounted appraisals  (1)      Appraisal adjustments  (2)      21% to 65% (46%)         10% to 52% (44%)   

 

(1) Fair value is generally based on appraisals of the underlying collateral.
(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Fair Value of Financial Instruments

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of the valuation methodologies used for instruments not previously discussed is as follows:

Cash and Cash Equivalents. Cash and cash equivalents are reported at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Held-to-Maturity Securities. Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.

Loans Held for Sale. Loans held for sale are reported at the lower of cost or estimated fair value. Estimated fair value is based on the market price of similar loans.

FDIC Indemnification Asset. The FDIC indemnification asset is reported at fair value using discounted future cash flows that apply current discount rates.

Accrued Interest Receivable/Payable. Accrued interest receivable/payable is reported at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Deposits and Securities Sold Under Agreements to Repurchase. Deposits without a stated maturity, such as demand, interest-bearing demand, and savings, are reported at their carrying amount, the amount payable on demand as of the reporting date, which is considered a reasonable estimate of fair value. Deposits and repurchase agreements with fixed maturities and rates are reported at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.

FHLB and Other Borrowings. FHLB and other borrowings are reported at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities. Trust preferred obligations are reported at fair value using current credit spreads in the market for similar issues.

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information regarding the unfunded, contractual value of off-balance sheet financial instruments see Note 20, “Litigation, Commitments and Contingencies,” to the Consolidated Financial Statements of this report.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present the carrying amount and fair value of the Company’s financial instruments, segregated by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

     December 31, 2015  
     Carrying             Fair Value Measurements Using  
(Amounts in thousands)    Amount      Fair Value      Level 1      Level 2      Level 3  

Assets

              

Cash and cash equivalents

   $ 51,787       $ 51,787       $ 51,787       $ —         $ —     

Available-for-sale securities

     366,173         366,173         54         366,119         —     

Held-to-maturity securities

     72,541         72,490         —           72,490         —     

Loans held for sale

     —           —           —           —           —     

Loans held for investment less allowance

     1,686,308         1,685,061         —           5,137         1,679,924   

FDIC indemnification asset

     20,844         10,753         —           —           10,753   

Accrued interest receivable

     6,007         6,007         —           6,007         —     

Derivative financial assets

     —           —           —           —           —     

Deferred compensation assets

     3,464         3,464         3,464         —           —     

Liabilities

              

Demand deposits

   $ 451,511       $ 451,511       $ —         $ 451,511       $ —     

Interest-bearing demand deposits

     347,705         347,705         —           347,705         —     

Savings deposits

     530,585         530,585         —           530,585         —     

Time deposits

     543,458         541,059         —           541,059         —     

Securities sold under agreements to repurchase

     138,614         140,880         —           140,880         —     

Accrued interest payable

     1,260         1,260         —           1,260         —     

FHLB and other borrowings

     80,756         85,774         —           85,774         —     

Derivative financial liabilities

     251         251         —           251         —     

Deferred compensation liabilities

     3,464         3,464         3,464         —           —     
     December 31, 2014  
     Carrying             Fair Value Measurements Using  
(Amounts in thousands)    Amount      Fair Value      Level 1      Level 2      Level 3  

Assets

              

Cash and cash equivalents

   $ 237,660       $ 237,660       $ 237,660       $ —         $ —     

Available-for-sale securities

     326,117         326,117         221         325,896         —     

Held-to-maturity securities

     57,948         57,889         —           57,889         —     

Loans held for sale

     1,792         1,790         —           1,790         —     

Loans held for investment less allowance

     1,669,189         1,738,553         —           3,406         1,735,147   

FDIC indemnification asset

     27,900         18,040         —           —           18,040   

Accrued interest receivable

     6,315         6,315         —           6,315         —     

Derivative financial assets

     5         5         —           5         —     

Deferred compensation assets

     3,380         3,380         3,380         —           —     

Liabilities

              

Demand deposits

   $ 417,729       $ 417,729       $ —         $ 417,729       $ —     

Interest-bearing demand deposits

     353,874         353,874         —           353,874         —     

Savings deposits

     525,478         525,478         —           525,478         —     

Time deposits

     703,678         704,590         —           704,590         —     

Securities sold under agreements to repurchase

     121,742         123,114         —           123,114         —     

Accrued interest payable

     1,668         1,668         —           1,668         —     

FHLB and other borrowings

     107,999         116,599         —           116,599         —     

Derivative financial liabilities

     214         214         —           214         —     

Deferred compensation liabilities

     3,380         3,380         3,380         —           —     

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 19. Related Party Transactions

The Company is involved in certain transactions with related parties in the normal course of business. Related parties include directors and executive officers and the immediate family members, business interests, and affiliates of such directors and officers. All loans and commitments with related parties have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. The following table summarizes deposit and loan activity with related parties in the periods indicated:

 

(Amounts in thousands)    Deposits      Loans  

Beginning balance, January 1, 2015

   $ 3,820       $ 22,826   

Increase in accounts, including new accounts

     4,084         1,066   

Decrease in accounts, including closed accounts

     (1,356      (2,006
  

 

 

    

 

 

 

Net change

     2,728         (940
  

 

 

    

 

 

 

Ending balance, December 31, 2015

   $ 6,548       $ 21,886   
  

 

 

    

 

 

 

Beginning balance, January 1, 2014

   $ 2,922       $ 17,181   

Increase in accounts, including new accounts

     1,321         6,123   

Decrease in accounts, including closed accounts

     (423      (478
  

 

 

    

 

 

 

Net change

     898         5,645   
  

 

 

    

 

 

 

Ending balance, December 31, 2014

   $ 3,820       $ 22,826   
  

 

 

    

 

 

 

Beginning balance, January 1, 2013

   $ 2,589       $ 16,617   

Increase in accounts, including new accounts

     907         2,037   

Decrease in accounts, including closed accounts

     (574      (1,473
  

 

 

    

 

 

 

Net change

     333         564   
  

 

 

    

 

 

 

Ending balance, December 31, 2013

   $ 2,922       $ 17,181   
  

 

 

    

 

 

 

Changes in the composition of the Company’s subsidiary board members and executive officers resulted in a net decrease in deposits of $420 thousand in 2015 compared to a net increase of $481 thousand in 2014 and $103 thousand in 2013. Changes in the composition of the Company’s subsidiary board members and executive officers resulted in no change to loans in 2015 compared to a net increase of $5.47 million in 2014 and a net decrease in loans of $613 thousand in 2013.

The Company’s other operating expense includes certain expenses associated with related parties. Legal fees paid to related parties totaled $88 thousand in 2015, $27 thousand in 2014, and $57 thousand in 2013. Lease expense paid to related parties totaled $95 thousand in 2015, $92 thousand in 2014, and $134 thousand in 2013. Other expense paid to related parties totaled $21 thousand in 2015.

 

Note 20. Litigation, Commitments, and Contingencies

Litigation

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Commitments and Contingencies

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. Commitments to extend credit also include outstanding commitments related to mortgage loans that are sold on a best efforts basis into the secondary loan market. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.

Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.

The following table presents the Company’s off-balance sheet financial instruments as of the dates indicated:

 

     December 31,  
(Amounts in thousands)    2015      2014  

Commitments to extend credit

   $ 235,302       $ 236,471   

Commitments related to secondary market mortgage loans

     —           1,391   

Standby letters of credit and financial guarantees

     7,765         3,581   
  

 

 

    

 

 

 

Total off-balance sheet risk

   $ 243,067       $ 241,443   
  

 

 

    

 

 

 

Reserve for unfunded commitments

   $ 326       $ 326   

The Company provided for letters of credit with the FHLB totaling $22.69 million as of December 31, 2015, and $6.18 million as of December 31, 2014. The FHLB letters of credit provide an attractive alternative to pledging securities for public unit deposits.

The Company issued $15.46 million of trust preferred securities in a private placement through the Trust. The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions to holders of the trust preferred securities to the extent the Trust has not made such payments or distributions and the Company has the funds available: accrued and unpaid distributions, the redemption price, and, upon a dissolution or termination of the Trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 21. Regulatory Capital Requirements and Restrictions

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s balance sheet assets and off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Basel III Capital Rules became effective on January 1, 2015, subject to a four-year phase-in period. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total capital, and Tier 1 capital, as defined in the regulations, to risk-weighted assets, as defined, and of Tier 1 capital to adjusted quarterly average assets, as defined.

The following table presents actual and required capital ratios as of December 31, 2015, under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum capital levels as of December 31, 2015, based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019, when the Basel III Capital Rules are fully phased in. A detailed description of the Basel III Capital Rules is included in Item 1, “Capital Adequacy Requirements” in Part I of this report.

 

     December 31, 2015  
     Actual     Minimum Capital
Required-Basel III
Phase-In Schedule
    Minimum Capital
Required-Basel III
Fully Phased-In
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
(Amounts in thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Common Equity Tier 1 Ratio

                    

First Community Bancshares, Inc.

   $ 246,237         14.54   $ 76,196         4.50   $ 118,527         7.00     NA         NA   

First Community Bank

     228,669         13.60     75,682         4.50     117,728         7.00     109,319         6.50

Total Capital to Risk-Weighted Assets

                    

First Community Bancshares, Inc.

     269,998         15.95     135,459         8.00     177,791         10.50     NA         NA   

First Community Bank

     249,228         14.82     134,546         8.00     176,592         10.50     168,183         10.00

Tier 1 Capital to Risk-Weighted Assets

                    

First Community Bancshares, Inc.

     249,436         14.73     101,595         6.00     143,926         8.50     NA         NA   

First Community Bank

     228,669         13.60     100,910         6.00     142,955         8.50     134,546         8.00

Tier 1 Capital to Average Assets (Leverage)

                    

First Community Bancshares, Inc.

     249,436         10.62     93,935         4.00     93,935         4.00     NA         NA   

First Community Bank

     228,669         9.77     93,616         4.00     93,616         4.00     117,020         5.00

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the Company’s and the Bank’s actual and required capital ratios as of December 31, 2014, under the regulatory capital rules then in effect.

 

     December 31, 2014  
     Actual     For Capital
Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
(Amounts in thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total Capital to Risk-Weighted Assets

               

First Community Bancshares, Inc.

   $ 284,999         17.68   $ 128,962         8.00     N/A         N/A   

First Community Bank

     251,256         15.73     127,761         8.00   $ 159,701         10.00

Tier 1 Capital to Risk-Weighted Assets

               

First Community Bancshares, Inc.

     264,838         16.43     64,481         4.00     N/A         N/A   

First Community Bank

     231,286         14.48     63,881         4.00     95,821         6.00

Tier 1 Capital to Average Assets (Leverage)

               

First Community Bancshares, Inc.

     264,838         10.12     104,679         4.00     N/A         N/A   

First Community Bank

     231,286         8.87     104,330         4.00     130,412         5.00

As of December 31, 2015, the Company and the Bank continued to meet all capital adequacy requirements. As of December 31, 2015, the most recent notifications from regulators continued to categorize the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III Capital Rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2015.

The primary source of funds for dividends paid by the Company to shareholders is dividends received from the Bank, which are subject to banking regulation restrictions. Approval by regulatory authorities is required to declare dividends if the dividends are to be paid in something other than cash, if the cumulative dividend payment exceeds the net retained income of the current year to date plus the retained net income of the preceding two years, or if payment of the dividend would cause the Bank to become undercapitalized.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 22. Parent Company Financial Information

The following tables present condensed financial information for the parent company as of the dates and in the periods indicated:

 

     CONDENSED BALANCE SHEETS  
                            December 31,              
(Amounts in thousands)            2015                      2014          

Assets

     

Cash and due from banks

   $ 8,367       $ 21,646   

Securities available for sale

     8,459         8,172   

Investment in subsidiary

     336,311         334,155   

Other assets

     5,489         5,100   
  

 

 

    

 

 

 

Total assets

   $ 358,626       $ 369,073   
  

 

 

    

 

 

 

Liabilities

     

Other borrowings

   $ 145       $ 2,235   

Subordinated debt

     15,464         15,464   
  

 

 

    

 

 

 

Total liabilities

     15,609         17,699   

Stockholders’ Equity

     

Preferred stock

     —           15,151   

Common stock

     21,382         20,500   

Additional paid-in capital

     227,692         215,873   

Retained earnings

     154,550         140,014   

Treasury stock

     (56,457      (35,751

Accumulated other comprehensive loss

     (4,150      (4,413
  

 

 

    

 

 

 

Total stockholders’ equity

     343,017         351,374   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 358,626       $ 369,073   
  

 

 

    

 

 

 

 

     CONDENSED STATEMENTS OF INCOME  
                 Years Ended December 31,              
(Amounts in thousands)          2015                  2014                  2013        

Cash dividends received from subsidiary bank

   $ 22,970       $ 14,148       $ 43,900   

Other income

     1,039         515         726   

Operating expense

     (2,080      (1,793      (1,647

Income tax expense

     616         511         368   

Equity in undistributed earnings of subsidiary

     1,995         12,109         (20,035
  

 

 

    

 

 

    

 

 

 

Net income

     24,540         25,490         23,312   

Dividends on preferred stock

     105         910         1,024   
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 24,435       $ 24,580       $ 22,288   
  

 

 

    

 

 

    

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     CONDENSED STATEMENTS OF CASH FLOWS  
                                  Years Ended December 31,                                   
(Amounts in thousands)    2015     2014     2013  

Operating activities

      

Net income

   $ 24,540      $ 25,490      $ 23,312   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Equity in undistributed earnings of subsidiary

     (1,995     (12,109     20,035   

(Gain) loss on sale of securities

     (38     2        (193

Decrease (increase) in other assets

     1,104        4,624        (5,293

(Decrease) increase in other liabilities

     (1,773     (347     333   

Decrease (increase) in other operating activities

     43        (65     (106
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     21,881        17,595        38,088   

Investing activities

      

Proceeds from sales of securities available-for-sale

     199        5,030        3,380   

Payments to acquire securities available-for-sale

     —          —          (5,000

Investment in subsidiary

     —          (2,000     —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     199        3,030        (1,620

Financing activities

      

(Repayments of) proceeds from other borrowings

     (2,000     2,000        —     

Redemption of preferred stock

     (2,367     —          —     

Proceeds from stock options exercised

     264        89        789   

Payments for repurchase of treasury stock

     (21,525     (2,168     (28,421

Payments of common dividends

     (9,994     (9,200     (9,476

Payments of preferred dividends

     (219     (910     (992

Proceeds from other financing activities

     482        338        28   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (35,359     (9,851     (38,072
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (13,279     10,774        (1,604

Cash and cash equivalents at beginning of year

     21,646        10,872        12,476   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 8,367      $ 21,646      $ 10,872   
  

 

 

   

 

 

   

 

 

 

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 23. Quarterly Financial Data (Unaudited)

The following tables present selected financial data by quarter for the periods indicated:

 

     Year Ended December 31, 2015  
(Amounts in thousands, except share and per share data)    First
Quarter
    Second
Quarter
     Third
Quarter
    Fourth
Quarter
 

Interest income

   $ 24,098      $ 23,979       $ 24,348      $ 23,677   

Interest expense

     3,259        2,909         2,679        2,502   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     20,839        21,070         21,669        21,175   

Provision for loan losses

     1,100        276         381        434   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     19,739        20,794         21,288        20,741   

Other income, excluding net (loss) gain on sale of securities

     6,859        7,924         7,113        7,490   

Net (loss) gain on sale of securities

     (23     213         (39     (7

Total noninterest expense

     17,780        20,289         19,019        19,083   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     8,795        8,642         9,343        9,141   

Income tax

     2,837        2,467         3,084        2,993   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     5,958        6,175         6,259        6,148   

Dividends on preferred stock

     105        —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 5,853      $ 6,175       $ 6,259      $ 6,148   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per common share

   $ 0.31      $ 0.33       $ 0.34      $ 0.34   

Diluted earnings per common share

     0.31        0.33         0.34        0.34   

Dividend per common share

     0.13        0.13         0.14        0.14   

Weighted average basic shares outstanding

     18,633,574        18,831,742         18,470,348        18,193,824   

Weighted average diluted shares outstanding

     19,344,443        18,860,119         18,500,975        18,226,719   

 

     Year Ended December 31, 2014  
(Amounts in thousands, except share and per share data)    First
Quarter
     Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Interest income

   $ 26,083       $ 26,093      $ 25,751      $ 28,181   

Interest expense

     4,058         4,025        3,736        3,471   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     22,025         22,068        22,015        24,710   

Provision for (recovery of) loan losses

     1,793         1,279        (2,439     (488
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     20,232         20,789        24,454        25,198   

Other income, excluding net gain (loss) on sale of securities

     7,189         7,663        7,347        9,189   

Net gain (loss) on sale of securities

     45         (59     320        (1,691

Total noninterest expense

     19,180         18,163        21,469        24,050   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     8,286         10,230        10,652        8,646   

Income tax

     2,561         3,223        3,609        2,931   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     5,725         7,007        7,043        5,715   

Dividends on preferred stock

     228         227        228        227   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 5,497       $ 6,780      $ 6,815      $ 5,488   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.30       $ 0.37      $ 0.37      $ 0.30   

Diluted earnings per common share

     0.29         0.36        0.36        0.29   

Dividend per common share

     0.12         0.12        0.13        0.13   

Weighted average basic shares outstanding

     18,423,123         18,395,996        18,402,764        18,403,959   

Weighted average diluted shares outstanding

     19,506,647         19,457,237        19,466,126        19,482,000   

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 24. Subsequent Events

On March 4, 2016, the Company announced that it had entered into agreements with First Bank, North Carolina, pursuant to which the Bank is swapping a portion of its North Carolina branch network for First Bank’s Virginia branch network. Under the agreements, the Bank will acquire seven branches in southwestern Virginia with deposits totaling approximately $150 million and sell six branches in the Winston-Salem and Mooresville areas of North Carolina with deposits totaling approximately $130 million. Additionally, the swap will include up to $175 million of loans. The branch exchange is intended to complement the Bank’s 2014 acquisition of seven branches from Bank of America. Subject to regulatory approval and the satisfaction of customary closing conditions, the transaction is expected to close in the third quarter of 2016.

 

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- Report of Independent Registered Public Accounting Firm -

Audit Committee of the Board of Directors and the Stockholders

First Community Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Bancshares, Inc. and its Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Dixon Hughes Goodman LLP

Charlotte, North Carolina

March 4, 2016

 

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- Management’s Assessment of Internal Control over Financial Reporting -

First Community Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2015.

Dixon Hughes Goodman LLP, independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. The Report of Independent Registered Public Accounting Firm, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, appears hereafter in Item 8 of this Annual Report on Form 10-K.

Dated this 4th day of March, 2016.

 

/s/ William P. Stafford, II

   

/s/ David D. Brown

William P. Stafford, II     David D. Brown
Chief Executive Officer     Chief Financial Officer

 

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- Report of Independent Registered Public Accounting Firm -

Audit Committee of the Board of Directors and the Stockholders

First Community Bancshares, Inc.

We have audited First Community Bancshares, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, First Community Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of First Community Bancshares, Inc. as of and for the year ended December 31, 2015, and our report, dated March 4, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ Dixon Hughes Goodman LLP

Charlotte, North Carolina

March 4, 2016

 

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2015, our disclosure controls and procedures were effective.

Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.

Changes in Internal Control over Financial Reporting

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Controls over Financial Reporting

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015, is included in Item 8, “Management’s Assessment of Internal Control over Financial Reporting,” of this report. Our independent auditors’ report on management’s assessment of internal controls over financial reporting as of December 31, 2015, is included in Item 8, “Report of Independent Registered Public Accounting Firm,” of this report.

 

Item 9B. Other Information.

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

The information required in Item 10 of this report is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2016 (“2016 Annual Meeting”). The Proxy Statement will be filed with the SEC prior to the 2016 Annual Meeting. The following list provides the heading under which the required information is incorporated by reference in our Proxy Statement for the 2016 Annual Meeting:

 

   

Information regarding directors and executive officers is included in “Proposal 1: Election of Directors,” “Nominees for the Class of 2018,” “Continuing Incumbent Directors,” “Non-Director Executive Officers,” and “Corporate Governance.”

 

   

Information regarding compliance with Section 16(a) of the Exchange Act is included in “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

   

Information regarding the Audit Committee and the Audit Committee Financial Expert is included in “Board Committees.”

We adopted a Standards of Conduct that applies to all our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our Standards of Conduct is available on our website, www.fcbinc.com. There have been no waivers of the Standards of Conduct related to any officers.

Since the disclosure presented in our Proxy Statement filed with the SEC on March 17, 2015, for the Annual Meeting of Stockholders held in 2015, no material changes have been made to the procedures by which stockholders may recommend nominees to our Company’s Board of Directors.

BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.

 

W. C. Blankenship, Jr.

Retired Agent, State Farm Insurance

 

C. William Davis

Attorney at Law, Richardson & Davis

 

Samuel L. Elmore

Retired Senior Vice President – Commercial Lending for Raleigh County, W.Va. Market, and Past Chief Credit Officer, First Community Bank; Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and Chief Operations Officer, Beckley National Bank; Past Vice President, Key Centurion Bancshares; Director, Raleigh County Commission on Aging

 

Richard S. Johnson

Chairman, President, and CEO, The Wilton Companies; Director and Past Chairman, Economic Development Authority of the City of Richmond; Trustee Emeritus, University of Richmond

   

I. Norris Kantor

Of Counsel, Katz, Kantor, Stonestreet & Buckner, Attorneys at Law; Board of Governors, Bluefield State College

 

M. Adam Sarver

Member/Co-Manager, Main Street Builders, LLC, Clover Leaf Properties, LLC, and Eastern Door & Glass, LLC; Principal, Melrose Enterprises, LTD

 

William P. Stafford

President, Princeton Machinery Service, Inc.

 

William P. Stafford, II

Chief Executive Officer, First Community Bancshares, Inc.; Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC

 

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EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.

 

 

William P. Stafford, II

Chief Executive Officer

   

Robert L. Schumacher

General Counsel

 
 

Gary R. Mills

President

   

E. Stephen Lilly

Chief Operating Officer

 
 

David D. Brown

Chief Financial Officer

     

BOARD OF DIRECTORS, FIRST COMMUNITY BANK

 

James H. Atkinson, Jr.

Retired Chief Executive Officer, Peoples Bank of Virginia

 

W. C. Blankenship, Jr.

Retired Agent, State Farm Insurance

 

Robert L. Buzzo

Retired Vice President and Secretary, First Community Bancshares, Inc.; Retired President Emeritus, First Community Bank

 

Samuel D. Campbell

Attorney at Law

 

C. William Davis

Attorney at Law, Richardson & Davis

 

Samuel L. Elmore

Retired Senior Vice President – Commercial Lending for Raleigh County, W.Va. Market, and Past Chief Credit Officer, First Community Bank; Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and Chief Operations Officer, Beckley National Bank; Past Vice President, Key Centurion Bancshares; Director, Raleigh County Commission on Aging

 

T. Vernon Foster

President of J. La’Verne Print Communications; Past Director, TriStone Community Bank; Executive Director: MBA Programs, Career Management & Public Relations, University of Louisville, College of Business

 

Richard H. Jarrell

Chick-fil-A Franchise Owner; Director, Raleigh General Hospital Board of Trustees; Director, Beckley-Raleigh County Chamber of Commerce; Director, United Way of Southwest Virginia; Director, Raleigh County Board of Education

   

Richard S. Johnson

Chairman, President, and CEO, The Wilton Companies; Director and Past Chairman, Economic Development Authority of the City of Richmond; Trustee Emeritus, University of Richmond

 

I. Norris Kantor

Of Counsel, Katz, Kantor, Stonestreet & Buckner, Attorneys at Law; Board of Governors, Bluefield State College

 

Gary R. Mills

President, First Community Bancshares, Inc.; Chief Executive Officer, First Community Bank

 

Martyn A. Pell

President, First Community Bank

 

M. Adam Sarver

Member/Co-Manager, Main Street Builders, LLC, Clover Leaf Properties, LLC, and Eastern Door & Glass, LLC; Principal, Melrose Enterprises, LTD

 

William P. Stafford

President, Princeton Machinery Service, Inc.

 

William P. Stafford, II

Chief Executive Officer, First Community Bancshares, Inc.; Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC

 

Frank C. Tinder

President, Tinder Enterprises, Inc. and Tinco Leasing Corporation; Realtor, Premier Realty

 

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Item 11. Executive Compensation.

Information regarding executive compensation is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting under the headings “Board Committees,” “Compensation Discussion and Analysis,” and “Director Compensation.”

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table presents information regarding compensation plans under which our equity securities are authorized for issuance as of December 31, 2015:

 

Plan category

   Number of securities
to be issued upon
exercise of
outstanding

options, warrants
and rights
     Weighted-average
exercise price of
outstanding
options, warrants
and rights
     Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
 
     (a)      (b)      (c)  

Equity compensation plans approved by security holders (1)

     44,442       $ 17.76         513,504  (3) 

Equity compensation plans not approved by security holders (2)

     191,962         20.72         —     
  

 

 

       

 

 

 

Total

     236,404            513,504   
  

 

 

       

 

 

 

 

(1) Includes the 2012 Omnibus Equity Compensation Plan and 2004 Omnibus Stock Option Plan.
(2) Includes the 2001 Directors’ Option Plan, 1999 Stock Option Plan, and other plans related to past business combinations. These plans are generally expired or not available to issue new options, warrants, or rights.
(3) Shares available for future issuance are under the 2012 Omnibus Equity Compensation Plan.

Additional information regarding security ownership of certain beneficial owners and management is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting under the heading “Information on Stock Ownership.”

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information regarding certain relationships and related transactions and director independence is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting under the headings “Corporate Governance” and “Related Person Transactions.”

 

Item 14. Principal Accounting Fees and Services.

Information regarding principal accounting fees and services is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting under the heading “Independent Registered Public Accounting Firm.”

 

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PART IV

 

Item 15.  Exhibits, Financial Statement Schedules.

 

(a) Documents Filed as a Part of this Report

 

  (1) The following financial statements are incorporated by reference from Item 8 of this Report:

Consolidated Balance Sheets as of December 31, 2015 and 2014.

Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013.

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013.

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015, 2014, and 2013.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014, and 2013.

Notes to Consolidated Financial Statements.

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements.

 

  (2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes thereto.

 

(b) Exhibits

 

  Exhibit

No.

  

Exhibit

  3.1    Articles of Incorporation of First Community Bancshares, Inc., as amended (1)
  3.2    Amended and Restated Bylaws of First Community Bancshares, Inc. (2)
  4.1    Specimen stock certificate of First Community Bancshares, Inc. (3)
  4.2    Indenture Agreement dated September 25, 2003. (4)
  4.3    Declaration of Trust of FCBI Capital Trust dated September 25, 2003, as amended and restated. (5)
  4.4    Preferred Securities Guarantee Agreement dated September 25, 2003. (6)
10.1**    First Community Bancshares, Inc. 1999 Stock Option Agreement (7) and Plan. (8)
10.1.1**    First Community Bancshares, Inc. 1999 Stock Option Plan, Amendment One. (9)
10.2**    First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Plan. (10)
10.3**    Employment Agreement between First Community Bancshares, Inc. and John M. Mendez dated December 16, 2008, as amended and restated (20) and Waiver Agreement. (27)
10.4**    First Community Bancshares, Inc. and Affiliates Executive Retention Plan (11), Amendment #1 (12), and Amendment #2. (30)
10.5**    First Community Bancshares, Inc. Split Dollar Plan and Agreement. (13)
10.6**    First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated. (14)
10.7**    First Community Bancshares, Inc. Nonqualified Supplemental Cash or Deferred Retirement Plan, as amended and restated. (15)
10.9**    Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors, and Certain Executive Officers. (16)
10.10**    Form of Indemnification Agreement between First Community Bank, its Directors, and Certain Executive Officers. (16)

 

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  Exhibit

No.

 

Exhibit

10.11**   First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (17) and Stock Award Agreement. (18)
10.12**   First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan. (29)
10.13**   First Community Bancshares, Inc. Directors Deferred Compensation Plan, as amended and restated. (19)
10.14**   Employment Agreement between First Community Bancshares, Inc. and David D. Brown dated April 16, 2015. (21)
10.16**   Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly dated April 16, 2015. (22)
10.17**   Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills dated April 16, 2015. (23)
10.18**   Employment Agreement between First Community Bancshares, Inc. and Martyn A. Pell dated April 16, 2015. (24)
10.19**   Employment Agreement between First Community Bank and Robert L. Schumacher dated April 16, 2015. (25)
10.20**   Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II dated April 16, 2015. (33)
10.21**   Employment Agreement between First Community Bank and Mark R. Evans dated July 31, 2009. (26)
10.22**   Form of Restricted Stock Grant Agreement under First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan. (31)
10.23**   Separation Agreement and Release between First Community Bancshares, Inc. and John M. Mendez dated August 28, 2013. (32)
11   Statement Regarding Computation of Earnings per Share. (28)
12*   Statement Regarding Computation of Ratios.
21*   Subsidiaries of the Registrant.
23.1*   Consent of Independent Public Accounting Firm.
31.1*   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2*   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101***   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2015, and 2014; (ii) Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and 2013; (iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014, and 2013; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013; and (vi) Notes to Consolidated Financial Statements.

 

* Incorporated herewith.
** Indicates a management contract or compensation plan.
*** Submitted electronically herewith.

 

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(1) Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on August 16, 2010.
(2) Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February 23, 2016, filed on February 25, 2016.
(3) Incorporated by reference from Exhibit 4.1 of the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, amended on March 31, 2003.
(4) Incorporated by reference from Exhibit 4.2 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.
(5) Incorporated by reference from Exhibit 4.3 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.
(6) Incorporated by reference from Exhibit 4.4 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003.
(7) Incorporated by reference from Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
(8) Incorporated by reference from Exhibit 10.1 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, amended on April 13, 2000.
(9) Incorporated by reference from Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004.
(10) Incorporated by reference from Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002.
(11) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.
(12) Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
(13) Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, amended on April 13, 2000.
(14) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
(15) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.
(16) Incorporated by reference from Exhibit 10.1 and Exhibit 10.2 of the Current Report on Form 8-K dated February 25, 2014, filed on March 3, 2014.
(17) Incorporated by reference from Annex B to the 2004 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 15, 2004.
(18) Incorporated by reference from Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004.
(19) Incorporated by reference from Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.
(20) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on December 16, 2008.
(21) Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015.
(22) Incorporated by reference from Exhibit 10.5 of the Current Report on Form 8-K dated and filed on April 16, 2015.
(23) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015.
(24) Incorporated by reference from Exhibit 10.4 of the Current Report on Form 8-K dated and filed on April 16, 2015.
(25) Incorporated by reference from the Current Report on Form 8-K dated and filed on April 16, 2015.
(26) Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009.

 

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(27) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.
(28) Incorporated by reference from Note 1 of the Notes to Condensed Consolidated Financial Statements included herein.
(29) Incorporated by reference from the 2012 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 7, 2012.
(30) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013.
(31) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013.
(32) Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K/A dated August 12, 2013, filed on September 3, 2013.
(33) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th day of March, 2016.

First Community Bancshares, Inc.

(Registrant)

 

By:  

/s/ William P. Stafford, II

    By:  

/s/ David D. Brown

  William P. Stafford, II       David D. Brown
 

Chief Executive Officer

(Principal Executive Officer)

     

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ William P. Stafford, II

 

William P. Stafford, II

   Chairman and Chief Executive Officer   March 4, 2016
    

/s/ David D. Brown

   Chief Financial Officer   March 4, 2016
David D. Brown     

/s/ W.C. Blankenship, Jr.

   Director   March 4, 2016
W.C. Blankenship, Jr.     

/s/ C. William Davis

   Director   March 4, 2016
C. William Davis     

/s/ Samuel L. Elmore

   Director   March 4, 2016
Samuel L. Elmore     

/s/ Richard S. Johnson

   Director   March 4, 2016
Richard S. Johnson     

/s/ M. Adam Sarver

   Director   March 4, 2016
M. Adam Sarver     

/s/ William P. Stafford

   Director   March 4, 2016
William P. Stafford     

 

149