FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2014 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

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)		(IRS Employer Identification No.)

P.O. Box 989 Bluefield, Virginia		24605-0989
(Address of principal executive offices)		(Zip Code)

(276) 326-9000

(Registrant’s telephone number, including area code)

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 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.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class – Common Stock, $1.00 Par Value; 18,402,919 shares outstanding as of November 3, 2014

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

For the quarter ended September 30, 2014

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013		3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		45

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		62

Item 4.	Controls and Procedures		63

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		64

Item 1A.	Risk Factors		64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64

Item 3.	Defaults Upon Senior Securities		64

Item 4.	Mine Safety Disclosures		64

Item 5.	Other Information		64

Item 6.	Exhibits		65

SIGNATURES			68

EXHIBIT INDEX			69

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2014			December 31, 2013
(Amounts in thousands, except share and per share data)	(Unaudited)
Assets
Cash and due from banks	$	44,703		$	43,598
Federal funds sold		55,503			1,817
Interest-bearing deposits in banks		5,716			11,152

Total cash and cash equivalents		105,922			56,567
Securities available for sale		351,693			519,820
Securities held to maturity		31,029			568
Loans held for sale		1,150			883
Loans held for investment, net of unearned income:
Covered under loss share agreements		126,611			151,682
Not covered under loss share agreements		1,636,181			1,559,039
Less allowance for loan losses		(21,159	)		(24,077	)

Loans held for investment, net		1,741,633			1,686,644
FDIC indemnification asset		29,745			34,691
Premises and equipment, net		59,283			61,116
Other real estate owned:
Covered under loss share agreements		7,620			7,541
Not covered under loss share agreements		5,612			7,318
Interest receivable		6,346			7,521
Goodwill		105,657			105,455
Other intangible assets		2,334			2,866
Other assets		102,103			111,524

Total assets	$	2,550,127		$	2,602,514

Liabilities
Deposits:
Noninterest-bearing	$	397,523		$	339,680
Interest-bearing		1,534,752			1,611,062

Total deposits		1,932,275			1,950,742
Interest, taxes, and other liabilities		25,131			22,770
Federal funds purchased		—			16,000
Securities sold under agreements to repurchase		114,439			118,308
FHLB borrowings		115,000			150,000
Other borrowings		16,047			16,088

Total Liabilities		2,202,892			2,273,908
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; 15,151 and 15,251 shares outstanding at September 30, 2014, and December 31, 2013, respectively		15,151			15,251
Common stock, $1 par value; 50,000,000 shares authorized; 20,499,683 and 20,493,057 shares issued at September 30, 2014, and December 31, 2013, respectively; 2,096,764 and 1,978,478 shares in treasury at September 30, 2014, and December 31, 2013, respectively		20,500			20,493
Additional paid-in capital		215,729			215,663
Retained earnings		138,111			125,826
Treasury stock, at cost		(35,808	)		(33,887	)
Accumulated other comprehensive loss		(6,448	)		(14,740	)

Total stockholders’ equity		347,235			328,606

Total Liabilities and Stockholders’ Equity	$	2,550,127		$	2,602,514

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Amounts in thousands, except share and per share data)	2014			2013			2014			2013
Interest income
Interest and fees on loans held for investment	$	23,407		$	23,439		$	69,651		$	72,547
Interest on securities — taxable		1,196			1,999			4,830			5,754
Interest on securities — nontaxable		1,108			1,216			3,329			3,631
Interest on deposits in banks		40			42			117			180

Total interest income		25,751			26,696			77,927			82,112
Interest expense
Interest on deposits		1,782			2,147			5,505			6,792
Interest on short-term borrowings		526			517			1,511			1,686
Interest on long-term debt		1,428			1,706			4,803			5,084

Total interest expense		3,736			4,370			11,819			13,562

Net interest income		22,015			22,326			66,108			68,550
(Recovery of) provision for loan losses		(2,439	)		2,333			633			6,680

Net interest income after provision for loan losses		24,454			19,993			65,475			61,870
Noninterest income
Wealth management		670			863			2,396			2,680
Service charges on deposit accounts		3,606			3,582			10,099			10,065
Other service charges and fees		1,852			1,777			5,473			5,356
Insurance commissions		1,695			1,559			5,113			4,533
Impairment losses on securities		(219	)		—			(737	)		—
Portion of losses recognized in other comprehensive income		—			—			—			—

Net impairment losses recognized in earnings		(219	)		—			(737	)		—
Net gain (loss) on sale of securities		320			(39	)		306			191
Net FDIC indemnification asset amortization		(1,096	)		(1,089	)		(3,166	)		(4,290	)
Other operating income		839			1,458			3,021			4,285

Total noninterest income		7,667			8,111			22,505			22,820
Noninterest expense
Salaries and employee benefits		9,924			11,080			29,872			31,150
Occupancy expense of bank premises		1,469			1,700			4,825			5,350
Furniture and equipment		1,212			1,288			3,611			3,931
Amortization of intangible assets		179			183			532			545
FDIC premiums and assessments		419			460			1,311			1,401
FHLB debt prepayment fees		3,047			—			3,047			—
Merger, acquisition, and divestiture expense		285			—			285			57
Other operating expense		4,934			5,442			15,329			15,796

Total noninterest expense		21,469			20,153			58,812			58,230

Income before income taxes		10,652			7,951			29,168			26,460
Income tax expense		3,609			2,539			9,393			8,472

Net income		7,043			5,412			19,775			17,988
Dividends on preferred stock		228			261			683			772

Net income available to common shareholders	$	6,815		$	5,151		$	19,092		$	17,216

Basic earnings per common share	$	0.37		$	0.26		$	1.04		$	0.86
Diluted earnings per common share		0.36			0.26			1.02			0.85
Cash dividends per common share		0.13			0.12			0.37			0.36
Weighted average basic shares outstanding		18,402,764			20,008,861			18,407,173			20,013,095
Weighted average diluted shares outstanding		19,466,126			21,123,788			19,472,136			21,196,063

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Amounts in thousands, except share and per share data)	2014			2013			2014			2013
Comprehensive Income
Net income	$	7,043		$	5,412		$	19,775		$	17,988
Other comprehensive income (loss), before tax:
Available-for-sale securities:
Unrealized losses on securities available for sale with other-than-temporary impairment		(346	)		(861	)		(128	)		(1,043	)
Unrealized gains (losses) on securities available for sale without other-than-temporary impairment		846			(453	)		12,774			(16,057	)
Less: reclassification adjustment for (gains) losses realized in net income		(320	)		39			(306	)		(191	)
Less: reclassification adjustment for credit related other-than-temporary impairments recognized in net income		219			—			737			—

Unrealized gains (losses) on available-for-sale securities		399			(1,275	)		13,077			(17,291	)
Employee benefit plans:
Net actuarial (loss) gain on pension and other postretirement benefit plans		(2	)		220			29			(104	)
Net prior service cost attributed to plan amendments		—			(94	)		—			(282	)
Less: reclassification adjustment for amortization of prior service cost and net actuarial loss included in net periodic benefit cost		66			82			195			245

Unrealized gains (losses) on employee benefit plans		64			208			224			(141	)

Other comprehensive income (loss), before tax		463			(1,067	)		13,301			(17,432	)
Income tax (expense) benefit		(174	)		400			(5,009	)		6,512

Other comprehensive income (loss), net of tax		289			(667	)		8,292			(10,920	)

Total comprehensive income	$	7,332		$	4,745		$	28,067		$	7,068

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


															Accumulated
						Additional									Other
	Preferred			Common		Paid-in			Retained			Treasury			Comprehensive
	Stock			Stock		Capital			Earnings			Stock			Income (Loss)			Total
(Amounts in thousands, except share and per share data)
Balance January 1, 2013	$	17,421		$	20,343	$	213,829		$	113,013		$	(6,458	)	$	(1,825	)	$	356,323
Net income		—			—		—			17,988			—			—			17,988
Other comprehensive loss		—			—		—			—			—			(10,920	)		(10,920	)
Common dividends declared — $0.36 per share		—			—		—			(7,211	)		—			—			(7,211	)
Preferred dividends declared — $45.00 per share		—			—		—			(772	)		—			—			(772	)
Preferred stock converted to common stock — 134,550 shares		(1,950	)		135		1,815			—			—			—			—
Equity-based compensation expense		—			—		213			—			—			—			213
Common stock options exercised — 789 shares		—			—		(9	)		—			16			—			7
Restricted stock awards — 35,117 shares		—			—		(177	)		—			703			—			526
Purchase of treasury shares — 335,192 shares at $15.52 per share		—			—		—			—			(5,207	)		—			(5,207	)

Balance September 30, 2013	$	15,471		$	20,478	$	215,671		$	123,018		$	(10,946	)	$	(12,745	)	$	350,947

Balance January 1, 2014	$	15,251		$	20,493	$	215,663		$	125,826		$	(33,887	)	$	(14,740	)	$	328,606
Net income		—			—		—			19,775			—			—			19,775
Other comprehensive income		—			—		—			—			—			8,292			8,292
Common dividends declared — $0.37 per share		—			—		—			(6,807	)		—			—			(6,807	)
Preferred dividends declared — $45.00 per share		—			—		—			(683	)		—			—			(683	)
Preferred stock converted to common stock — 6,900 shares		(100	)		7		93			—			—			—			—
Equity-based compensation expense		—			—		175			—			—			—			175
Common stock options exercised — 554 shares		—			—		—			—			9			—			9
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 September 30, 2014	$	15,151		$	20,500	$	215,729		$	138,111		$	(35,808	)	$	(6,448	)	$	347,235

See Notes to Consolidated Financial Statements.

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30,
(Amounts in thousands)	2014			2013
Operating activities
Net income	$	19,775		$	17,988
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		633			6,680
Depreciation and amortization of property, plant, and equipment		3,286			3,730
Amortization of premiums on investments, net		4,509			408
Amortization of FDIC indemnification asset, net		3,166			4,290
Amortization of intangible assets		532			545
Gain on sale of loans		(536	)		(1,040	)
Equity-based compensation expense		175			213
Gain on sale of property, plant, and equipment		(64	)		(51	)
Loss on sale of other real estate		2,407			1,733
Gain on sale of securities		(306	)		(191	)
Net impairment losses recognized in earnings		737			—
FHLB debt prepayment fees		3,047			—
Gain on prepayment of debt		—			(296	)
Proceeds from sale of mortgage loans		23,237			65,823
Origination of mortgage loans		(22,968	)		(58,936	)
Decrease (increase) in accrued interest receivable		1,175			(1,472	)
Decrease (increase) in other operating activities		2,581			(10,835	)

Net cash provided by operating activities		41,386			28,589
Investing activities
Proceeds from sale of securities available for sale		139,544			104,240
Proceeds from maturities, prepayments, and calls of securities available for sale		40,703			67,650
Proceeds from maturities and calls of securities held to maturity		190			250
Payments to acquire securities available for sale		(4,311	)		(201,138	)
Payments to acquire securities held to maturity		(30,704	)		—
(Originations) collections of loans, net		(64,120	)		10,892
Proceeds from the redemption of FHLB stock, net		3,224			1,184
Net cash paid in mergers, acquisitions, and divestitures		(202	)		(201	)
Proceeds from the FDIC		2,937			13,573
Payments to acquire property, plant, and equipment		(2,346	)		(2,460	)
Proceeds from sale of property, plant, and equipment		957			113
Proceeds from sale of other real estate		8,169			4,885

Net cash provided by (used in) investing activities		94,041			(1,012	)
Financing activities
Net increase in noninterest-bearing deposits		57,843			10,599
Net decrease in interest-bearing deposits		(76,310	)		(44,209	)
Net decrease in federal funds purchased		(16,000	)		—
Repayments of securities sold under agreements to repurchase		(3,869	)		(21,471	)
Repayments of long-term debt		(38,088	)		(11,596	)
Proceeds from stock options exercised		9			7
Excess tax benefit from equity-based compensation		1			—
Payments for repurchase of treasury stock		(2,168	)		(5,207	)
Payments of common dividends		(6,807	)		(7,211	)
Payments of preferred dividends		(683	)		(761	)

Net cash used in financing activities		(86,072	)		(79,849	)

Net increase (decrease) in cash and cash equivalents		49,355			(52,272	)
Cash and cash equivalents at beginning of period		56,567			144,847

Cash and cash equivalents at end of period	$	105,922		$	92,575

Supplemental transactions — noncash items
Transfer of loans to other real estate	$	9,631		$	13,631
Loans originated to finance other real estate		671			3,184

See Notes to Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

First Community Bancshares, Inc. is a financial holding company 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, and personal and commercial insurance products and services through its wholly-owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”). 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. Unless the context suggests otherwise, the use of the term “Company” refers to First Community Bancshares, Inc. (“the Company”) and its subsidiaries as a consolidated entity. The Company operates in one business segment, Community Banking, which consists of commercial and consumer banking, lending activities, wealth management, and insurance services. The Company’s executive office is located at One Community Place, Bluefield, Virginia. As of September 30, 2014, our operations were conducted through 69 locations in 5 states: Virginia, West Virginia, North Carolina, South Carolina, and Tennessee.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full calendar year.

The condensed consolidated balance sheet as of December 31, 2013, has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (the “2013 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2014. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2013 Form 10-K.

Significant Accounting Policies

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2013 Form 10-K. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

Reclassifications and Corrections

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.

Acquisitions and Divestitures

On October 24, 2014, the Company completed the acquisition of seven branches from Bank of America, National Association. At acquisition, the seven branches had deposit totals of approximately $318 million. No loans were included in the purchase. The transaction was accounted for under the business combination method of accounting and accordingly, assets and liabilities acquired and consideration exchanged were recorded at estimated fair value on the acquisition date. The acquisition expands the Company’s presence by six branches in southwestern Virginia and one branch in central North Carolina.

On August 6, 2014, the Company entered into a Purchase and Assumption Agreement with CresCom Bank, Charleston, South Carolina, in which the Bank is selling thirteen branches to CresCom Bank. Ten of the branches are located in the southeastern, coastal region of North Carolina and three branches are located in South Carolina. At announcement, the thirteen branches had deposit totals of approximately $230 million and loan totals of approximately $59 million. The loans being sold are not subject to the Company’s loss share agreement with the Federal Deposit Insurance Corporation (“FDIC”) in connection with its purchase and assumption of Waccamaw Bank (“Waccamaw”). Subject to the satisfaction of customary closing conditions, the transaction is expected to close in the fourth quarter of 2014.

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. In accordance with the treasury stock method of accounting, potential common stock could 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:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Amounts in thousands, except share and per share data)	2014		2013		2014		2013
Net income	$	7,043	$	5,412	$	19,775	$	17,988
Dividends on preferred stock		228		261		683		772

Net income available to common shareholders	$	6,815	$	5,151	$	19,092	$	17,216

Weighted average number of common shares outstanding, basic		18,402,764		20,008,861		18,407,173		20,013,095
Dilutive effect of potential common shares from:
Stock options		17,375		19,877		18,027		17,640
Restricted stock		568		3,588		506		6,613
Convertible preferred stock		1,045,419		1,091,462		1,046,430		1,158,715

Weighted average number of common shares outstanding, diluted		19,466,126		21,123,788		19,472,136		21,196,063

Basic earnings per common share	$	0.37	$	0.26	$	1.04	$	0.86
Diluted earnings per common share		0.36		0.26		1.02		0.85
Antidilutive potential common shares:
Stock options		255,244		310,558		255,244		328,258
Restricted stock		—		76		—		26

Total potential antidilutive shares		255,244		310,634		255,244		328,284

The Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carries a 6% dividend rate. Each share of the Series A Preferred Stock is convertible into 69 shares of the Company’s common stock at any time. The Company may redeem the shares at face value and the shares mandatorily convert on May 20, 2016. The Series A Preferred Stock outstanding totaled 15,151 shares as of September 30, 2014, 15,251 shares as of December 31, 2013, and 15,471 shares as of September 30, 2013.

Note 2. Investment Securities

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


	September 30, 2014
	Amortized		Unrealized		Unrealized			Fair		OTTI in
(Amounts in thousands)	Cost		Gains		Losses			Value		AOCI⁽¹⁾
U.S. Treasury securities	$	9,729	$	—	$	(251	)	$	9,478	$	—
Municipal securities		137,899		4,411		(1,248	)		141,062		—
Single issue trust preferred securities		55,807		—		(7,125	)		48,682		—
Corporate securities		5,000		48		—			5,048		—
Mortgage-backed securities:
Agency		140,528		292		(3,301	)		137,519		—
Non-Agency Alt-A residential		11,284		—		(1,622	)		9,662		(1,622	)

Total mortgage-backed securities		151,812		292		(4,923	)		147,181		(1,622	)
Equity securities		226		20		(4	)		242		—

Total	$	360,473	$	4,771	$	(13,551	)	$	351,693	$	(1,622	)


	December 31, 2013
	Amortized		Unrealized		Unrealized			Fair		OTTI in
(Amounts in thousands)	Cost		Gains		Losses			Value		AOCI⁽¹⁾
U.S. Treasury securities	$	9,708	$	—	$	(695	)	$	9,013	$	—
Municipal securities		147,049		1,868		(4,637	)		144,280		—
Single issue trust preferred securities		55,764		—		(9,530	)		46,234		—
Corporate securities		5,000		—		(129	)		4,871		—
Mortgage-backed securities:
Agency		306,319		2,575		(8,508	)		300,386		—
Non-Agency Alt-A residential		12,543		—		(2,754	)		9,789		(2,754	)

Total mortgage-backed securities		318,862		2,575		(11,262	)		310,175		(2,754	)
Equity securities		5,259		24		(36	)		5,247		—

Total	$	541,642	$	4,467	$	(26,289	)	$	519,820	$	(2,754	)

(1)	Other-than-temporary impairment in accumulated other comprehensive income

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


	September 30, 2014
	Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value
U.S. Agency securities	$	20,045	$	—	$	(87	)	$	19,958
Municipal securities		379		3		—			382
Corporate securities		10,605		1		(43	)		10,563

Total	$	31,029	$	4	$	(130	)	$	30,903


	December 31, 2013
	Amortized		Unrealized		Unrealized			Fair
(Amounts in thousands)	Cost		Gains		Losses			Value
Municipal securities	$	568	$	11	$	—		$	579

Total	$	568	$	11	$	—		$	579

The following table presents the amortized cost and fair value of available-for-sale securities and held-to-maturity securities, by contractual maturity, as of September 30, 2014. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.


	Amortized
(Amounts in thousands)	Cost		Fair Value
Available-for-sale securities
Due within one year	$	3,229	$	3,233
Due after one year but within five years		6,994		7,196
Due after five years but within ten years		53,570		55,008
Due after ten years		144,642		138,833

		208,435		204,270
Mortgage-backed securities		151,812		147,181
Equity securities		226		242

Total	$	360,473	$	351,693

Held-to-maturity securities
Due within one year	$	190	$	191
Due after one year but within five years		30,839		30,712
Due after five years but within ten years		—		—
Due after ten years		—		—

Total	$	31,029	$	30,903

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:


	September 30, 2014
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities	$	—	$	—		$	9,478	$	(251	)	$	9,478	$	(251	)
Municipal securities		1,023		(7	)		27,964		(1,241	)		28,987		(1,248	)
Single issue trust preferred securities		—		—			48,682		(7,125	)		48,682		(7,125	)
Mortgage-backed securities:
Agency		19,654		(76	)		95,524		(3,225	)		115,178		(3,301	)
Non-Agency Alt-A residential		—		—			9,661		(1,622	)		9,661		(1,622	)

Total mortgage-backed securities		19,654		(76	)		105,185		(4,847	)		124,839		(4,923	)
Equity securities		152		(4	)		—		—			152		(4	)

Total	$	20,829	$	(87	)	$	191,309	$	(13,464	)	$	212,138	$	(13,551	)


	December 31, 2013
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities	$	9,013	$	(695	)	$	—	$	—		$	9,013	$	(695	)
Municipal securities		57,950		(4,147	)		3,049		(490	)		60,999		(4,637	)
Single issue trust preferred securities		—		—			46,234		(9,530	)		46,234		(9,530	)
Corporate securities		4,871		(129	)		—		—			4,871		(129	)
Mortgage-backed securities:
Agency		114,047		(4,361	)		55,706		(4,147	)		169,753		(8,508	)
Non-Agency Alt-A residential		—		—			9,789		(2,754	)		9,789		(2,754	)

Total mortgage-backed securities		114,047		(4,361	)		65,495		(6,901	)		179,542		(11,262	)
Equity securities		4,976		(24	)		20		(12	)		4,996		(36	)

Total	$	190,857	$	(9,356	)	$	114,798	$	(16,933	)	$	305,655	$	(26,289	)

The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated. There were no held-to-maturity securities in a continuous unrealized loss position as of December 31, 2013.


	September 30, 2014
	Less than 12 Months					12 Months or longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses		Value		Losses
U.S. Agency securities	$	19,958	$	(87	)	$	—	$	—	$	19,958	$	(87	)
Corporate securities		7,439		(43	)		—		—		7,439		(43	)

Total	$	27,397	$	(130	)	$	—	$	—	$	27,397	$	(130	)

As of September 30, 2014, there were 114 individual securities in an unrealized loss position, and their combined depreciation in value represented 3.57% of the investment securities portfolio. As of December 31, 2013, there were 219 individual securities in an unrealized loss position, and their combined depreciation in value represented 5.06% of the available-for-sale securities portfolio.

The following table presents the components of the Company’s net loss or gain from the sale of securities in the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Amounts in thousands)	2014			2013			2014			2013
Gross realized gains	$	746		$	—		$	2,257		$	307
Gross realized losses		(426	)		(39	)		(1,951	)		(116	)

Net gain (loss) on sale of securities	$	320		$	(39	)	$	306		$	191

The carrying value of securities pledged to secure public deposits and for other purposes was $260.45 million as of September 30, 2014, and $284.77 million as of December 31, 2013.

The Company reviews its investment portfolio on a quarterly basis for indications of OTTI. Debt securities not beneficially owned by the Company include securities issued from the U.S. Department of the Treasury (the “Treasury”), municipal securities, and single issue trust preferred securities. 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 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. During the three and nine months ended September 30, 2014, and September 30, 2013, the Company incurred no OTTI charges related to debt securities not beneficially owned. Temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors.

Debt securities beneficially owned by the Company consist of corporate securities and 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. During the three months ended September 30, 2014, the Company incurred credit-related OTTI charges associated with debt securities beneficially owned of $219 thousand. During the nine months ended September 30, 2014, the Company incurred credit-related OTTI charges associated with debt securities beneficially owned of $705 thousand. These charges were related to a non-Agency MBS. During the three and nine months ended September 30, 2013, the Company incurred no credit-related OTTI charges associated with debt securities beneficially owned.

The Company uses a discounted cash flow model for the non-Agency Alt-A residential MBS with the following assumptions: constant voluntary prepayment rate of 2.5%, a customized constant default rate scenario that assumes approximately 13% of the remaining underlying mortgages will default over the life of the security, and a customized loss severity rate scenario that ramps the loss rate down from 45% to 10% over the course of approximately 27 months. 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:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Amounts in thousands)	2014		2013		2014		2013
Beginning balance⁽¹⁾	$	8,284	$	7,478	$	7,798	$	7,478
Additions for credit losses on securities previously recognized		219		—		705		—

Ending balance	$	8,503	$	7,478	$	8,503	$	7,478

(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. During the three months ended September 30, 2014, the Company incurred no OTTI charges related to equity holdings. During the nine months ended September 30, 2014, the Company incurred OTTI charges related to certain equity holdings of $32 thousand. During the three and nine months ended September 30, 2013, the Company recognized no OTTI charges related to equity securities.

Note 3. 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:


	September 30, 2014					December 31, 2013
(Amounts in thousands)	Amount		Percent			Amount		Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	42,775		2.43	%	$	35,255		2.06	%
Commercial and industrial		88,709		5.03	%		95,455		5.58	%
Multi-family residential		99,812		5.66	%		70,197		4.10	%
Single family non-owner occupied		143,904		8.16	%		135,559		7.92	%
Non-farm, non-residential		491,933		27.91	%		475,911		27.82	%
Agricultural		2,149		0.12	%		2,324		0.14	%
Farmland		31,938		1.81	%		32,614		1.91	%

Total commercial loans		901,220		51.12	%		847,315		49.53	%
Consumer real estate loans
Home equity lines		112,863		6.40	%		111,770		6.53	%
Single family owner occupied		498,523		28.28	%		496,012		28.99	%
Owner occupied construction		45,015		2.56	%		28,703		1.68	%

Total consumer real estate loans		656,401		37.24	%		636,485		37.20	%
Consumer and other loans
Consumer loans		71,252		4.04	%		71,313		4.17	%
Other		7,308		0.42	%		3,926		0.23	%

Total consumer and other loans		78,560		4.46	%		75,239		4.40	%

Total non-covered loans		1,636,181		92.82	%		1,559,039		91.13	%
Total covered loans		126,611		7.18	%		151,682		8.87	%

Total loans held for investment, net of unearned income	$	1,762,792		100.00	%	$	1,710,721		100.00	%

Loans held for sale	$	1,150				$	883

The following table presents the components of the Company’s covered loan portfolio, disaggregated by class, as of the dates indicated:


	September 30,		December 31,
(Amounts in thousands)	2014		2013
Covered loans
Commercial loans
Construction, development, and other land	$	13,184	$	15,865
Commercial and industrial		2,646		3,325
Multi-family residential		1,612		1,933
Single family non-owner occupied		6,212		7,449
Non-farm, non-residential		26,238		34,646
Agricultural		151		164
Farmland		729		873

Total commercial loans		50,772		64,255
Consumer real estate loans
Home equity lines		62,772		69,206
Single family owner occupied		12,504		16,919
Owner occupied construction		466		1,184

Total consumer real estate loans		75,742		87,309
Consumer and other loans
Consumer loans		97		118

Total covered loans	$	126,611	$	151,682

Purchased Credit Impaired Loans

When the fair values of purchased loans are established at acquisition, certain loans are identified as impaired. These purchased credit impaired (“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, Peoples Bank of Virginia (“Peoples”) commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest.

The following table presents the carrying and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:


(Amounts in thousands)	Peoples		Waccamaw		Other		Total
Carrying balance, January 1, 2013	$	26,907	$	112,093	$	2,340	$	141,340
Carrying balance, December 31, 2013		9,196		70,584		1,931		81,711
Unpaid principal balance, December 31, 2013		17,431		105,677		5,390		128,498
Carrying balance, January 1, 2014	$	9,196	$	70,584	$	1,931	$	81,711
Carrying balance, September 30, 2014		7,432		56,580		1,393		65,405
Unpaid principal balance, September 30, 2014		14,142		89,385		4,824		108,351

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
Nine months ended September 30, 2013
Beginning balance	$	2,342		$	21,886		$	15		$	24,243
Additions		148			189			—			337
Accretion		(1,315	)		(4,558	)		(108	)		(5,981	)
Reclassifications from (to) nonaccretable difference		4,276			(6,477	)		101			(2,100	)
Removal events		(1,417	)		(2,127	)		—			(3,544	)

Ending balance	$	4,034		$	8,913		$	8		$	12,955

Nine months ended September 30, 2014
Beginning balance	$	5,294		$	10,338		$	8		$	15,640
Additions		98			24			—			122
Accretion		(1,601	)		(4,540	)		(29	)		(6,170	)
Reclassifications from nonaccretable difference		1,205			13,968			29			15,202
Removal events		(521	)		(1,445	)		—			(1,966	)

Ending balance	$	4,475		$	18,345		$	8		$	22,828

For information concerning off-balance sheet financing, see Note 13, “Litigation, Commitments and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

Note 4. 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 table presents the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated:


	September 30, 2014						December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Amounts in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance:
Commercial loans
Commercial and industrial	$	1,258	$	1,439	$	—	$	292	$	292	$	—
Single family non-owner occupied		268		268		—		289		317		—
Non-farm, non-residential		5,468		5,812		—		5,352		5,682		—
Farmland		—		—		—		351		363		—
Consumer real estate loans
Home equity lines		—		—		—		257		264		—
Single family owner occupied		2,787		2,878		—		2,006		2,414		—

Total impaired loans with no allowance		9,781		10,397		—		8,547		9,332		—
Impaired loans with a related allowance:
Commercial loans
Commercial and industrial		—		—		—		4,897		10,244		3,794
Multi-family residential		5,567		5,567		500		—		—		—
Single family non-owner occupied		369		369		46		375		375		47
Non-farm, non-residential		4,382		4,382		623		600		600		114
Consumer real estate loans
Single family owner occupied		2,374		2,526		504		4,844		5,035		735

Total impaired loans with an allowance		12,692		12,844		1,673		10,931		16,484		4,742

Total impaired loans	$	22,473	$	23,241	$	1,673	$	19,478	$	25,816	$	4,742

The following tables present the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, in the periods indicated:


	For the Three Months Ended
	September 30, 2014				September 30, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	6,375	$	40
Commercial and industrial		1,258		—		—		—
Multi-family residential		—		—		—		—
Single family non-owner occupied		321		7		317		—
Non-farm, non-residential		5,971		—		8,194		—
Farmland		—		—		667		3
Consumer real estate loans
Home equity lines		—		—		546		—
Single family owner occupied		2,880		10		2,794		—
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with no allowance		10,430		17		18,893		43
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		463		—
Commercial and industrial		—		—		5,328		11
Multi-family residential		5,568		1		—		—
Single family non-owner occupied		369		1		365		—
Non-farm, non-residential		4,386		6		606		—
Consumer real estate loans
Home equity lines		—		—		535		9
Single family owner occupied		2,528		8		5,093		13

Total impaired loans with an allowance		12,851		16		12,390		33

Total impaired loans	$	23,281	$	33	$	31,283	$	76


	For the Nine Months Ended
	September 30, 2014				September 30, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	—	$	—	$	5,133	$	294
Commercial and industrial		614		17		834		11
Multi-family residential		—		—		24		3
Single family non-owner occupied		247		8		1,146		93
Non-farm, non-residential		6,089		89		7,739		296
Farmland		241		11		372		12
Consumer real estate loans
Home equity lines		88		2		518		25
Single family owner occupied		2,179		61		2,069		70
Owner occupied construction		—		—		20		5
Consumer and other loans
Consumer loans		—		—		4		—

Total impaired loans with no allowance		9,458		188		17,859		809
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		—		—		1,409		117
Commercial and industrial		2,932		47		4,009		11
Multi-family residential		5,586		23		126		7
Single family non-owner occupied		370		2		1,064		12
Non-farm, non-residential		4,404		31		1,791		26
Consumer real estate loans
Home equity lines		76		1		329		3
Single family owner occupied		3,216		42		4,318		54

Total impaired loans with an allowance		16,584		146		13,046		230

Total impaired loans	$	26,042	$	334	$	30,905	$	1,039

The Company determined that one of the seven PCI loan pools was impaired as of September 30, 2014, compared to four impaired pools as of December 31, 2013, and September 30, 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:


(Amounts in thousands)	September 30, 2014		December 31, 2013
Recorded investment	$	1,208	$	52,033
Unpaid principal balance		1,223		69,320
Allowance for loan losses		196		747


	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2014		2013		2014		2013
Interest income recognized	$	82	$	721	$	2,154	$	839
Average recorded investment		1,416		23,538		35,063		15,799

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 on an annual basis and at various times during the year. In addition, 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. In addition, PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest income under the accretion method of accounting.

The following tables present loans held for investment, by internal credit risk grade, as of the periods indicated:


	September 30, 2014
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	40,408	$	1,107	$	1,260	$	—	$	—	$	42,775
Commercial and industrial		84,377		585		2,489		1,258		—		88,709
Multi-family residential		91,963		1,466		6,383		—		—		99,812
Single family non-owner occupied		133,860		3,361		6,683		—		—		143,904
Non-farm, non-residential		457,927		14,380		19,626		—		—		491,933
Agricultural		2,138		—		11		—		—		2,149
Farmland		28,991		1,585		1,362		—		—		31,938
Consumer real estate loans
Home equity lines		109,825		1,593		1,445		—		—		112,863
Single family owner occupied		467,381		10,182		20,960		—		—		498,523
Owner occupied construction		44,545		—		470		—		—		45,015
Consumer and other loans
Consumer loans		70,350		689		213		—		—		71,252
Other		7,308		—		—		—		—		7,308

Total non-covered loans		1,539,073		34,948		60,902		1,258		—		1,636,181
Covered loans
Commercial loans
Construction, development, and other land		7,467		2,750		2,967		—		—		13,184
Commercial and industrial		2,483		83		80		—		—		2,646
Multi-family residential		1,421		—		191		—		—		1,612
Single family non-owner occupied		2,907		2,123		1,182		—		—		6,212
Non-farm, non-residential		13,227		5,081		7,930		—		—		26,238
Agricultural		151		—		—		—		—		151
Farmland		431		—		298		—		—		729
Consumer real estate loans
Home equity lines		21,767		40,090		915		—		—		62,772
Single family owner occupied		7,619		1,565		3,320		—		—		12,504
Owner occupied construction		152		151		163		—		—		466
Consumer and other loans
Consumer loans		97		—		—		—		—		97
Other		—		—		—		—		—		—

Total covered loans		57,722		51,843		17,046		—		—		126,611

Total loans	$	1,596,795	$	86,791	$	77,948	$	1,258	$	—	$	1,762,792


	December 31, 2013
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	30,719	$	1,094	$	3,139	$	303	$	—	$	35,255
Commercial and industrial		87,589		1,056		2,919		3,891		—		95,455
Multi-family residential		67,257		2,237		703		—		—		70,197
Single family non-owner occupied		121,367		4,501		9,316		375		—		135,559
Non-farm, non-residential		440,334		21,046		14,500		31		—		475,911
Agricultural		2,306		8		10		—		—		2,324
Farmland		27,421		1,721		3,472		—		—		32,614
Consumer real estate loans
Home equity lines		107,411		1,355		2,789		215		—		111,770
Single family owner occupied		460,166		8,170		27,507		169		—		496,012
Owner occupied construction		28,242		261		200		—		—		28,703
Consumer and other loans
Consumer loans		69,973		864		472		—		4		71,313
Other		3,918		—		8		—		—		3,926

Total non-covered loans		1,446,703		42,313		65,035		4,984		4		1,559,039
Covered loans
Commercial loans
Construction, development, and other land		9,722		1,378		4,714		51		—		15,865
Commercial and industrial		2,865		247		189		24		—		3,325
Multi-family residential		1,472		—		461		—		—		1,933
Single family non-owner occupied		4,362		1,519		1,552		16		—		7,449
Non-farm, non-residential		13,077		4,630		16,901		38		—		34,646
Agricultural		164		—		—		—		—		164
Farmland		572		—		301		—		—		873
Consumer real estate loans
Home equity lines		23,189		44,746		1,269		2		—		69,206
Single family owner occupied		10,832		148		5,939		—		—		16,919
Owner occupied construction		198		—		986		—		—		1,184
Consumer and other loans
Consumer loans		118		—		—		—		—		118
Other		—		—		—		—		—		—

Total covered loans		66,571		52,668		32,312		131		—		151,682

Total loans	$	1,513,274	$	94,981	$	97,347	$	5,115	$	4	$	1,710,721

Credit quality continued to improve in the non-covered and covered loan portfolios as non-covered classified loans declined $15.23 million, or 13.56%, and covered classified loans declined $16.22 million, or 19.06%, as of September 30, 2014, compared to December 31, 2013.

The following table presents nonaccrual loans, by loan class, as of the dates indicated:


	September 30, 2014						December 31, 2013
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	—	$	90	$	90	$	1,187	$	761	$	1,948
Commercial and industrial		2,356		22		2,378		5,341		92		5,433
Multi-family residential		80		—		80		—		—		—
Single family non-owner occupied		761		77		838		1,966		222		2,188
Non-farm, non-residential		2,338		152		2,490		2,685		—		2,685
Farmland		—		—		—		441		301		742
Consumer real estate loans
Home equity lines		180		204		384		765		232		997
Single family owner occupied		5,497		471		5,968		6,567		1,555		8,122
Owner occupied construction		226		115		341		—		190		190
Consumer and other loans
Consumer loans		42		—		42		201		—		201

Total		11,480		1,131		12,611		19,153		3,353		22,506
Purchased impaired loans		—		—		—		8		—		8

Total nonaccrual loans	$	11,480	$	1,131	$	12,611	$	19,161	$	3,353	$	22,514

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 accruing loans contractually past due 90 days or more as of September 30, 2014, or December 31, 2013. There were no covered accruing loans contractually past due 90 days or more as of September 30, 2014, compared to $86 thousand as of December 31, 2013.


	September 30, 2014
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	27	$	—	$	—	$	27	$	42,748	$	42,775
Commercial and industrial		1,433		—		1,079		2,512		86,197		88,709
Multi-family residential		173		—		—		173		99,639		99,812
Single family non-owner occupied		1,074		280		667		2,021		141,883		143,904
Non-farm, non-residential		411		871		1,229		2,511		489,422		491,933
Agricultural		4		—		—		4		2,145		2,149
Farmland		—		—		—		—		31,938		31,938
Consumer real estate loans
Home equity lines		444		466		174		1,084		111,779		112,863
Single family owner occupied		4,770		2,423		3,881		11,074		487,449		498,523
Owner occupied construction		—		—		226		226		44,789		45,015
Consumer and other loans
Consumer loans		381		100		37		518		70,734		71,252
Other		—		—		—		—		7,308		7,308

Total non-covered loans		8,717		4,140		7,293		20,150		1,616,031		1,636,181
Covered loans
Commercial loans
Construction, development, and other land		226		—		72		298		12,886		13,184
Commercial and industrial		17		104		22		143		2,503		2,646
Multi-family residential		—		—		—		—		1,612		1,612
Single family non-owner occupied		100		40		77		217		5,995		6,212
Non-farm, non-residential		68		—		152		220		26,018		26,238
Agricultural		—		—		—		—		151		151
Farmland		—		—		—		—		729		729
Consumer real estate loans
Home equity lines		585		76		204		865		61,907		62,772
Single family owner occupied		125		13		389		527		11,977		12,504
Owner occupied construction		—		—		115		115		351		466
Consumer and other loans
Consumer loans		—		—		—		—		97		97
Other		—		—		—		—		—		—

Total covered loans		1,121		233		1,031		2,385		124,226		126,611

Total loans	$	9,838	$	4,373	$	8,324	$	22,535	$	1,740,257	$	1,762,792


	December 31, 2013
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans
Non-covered loans
Commercial loans
Construction, development, and other land	$	118	$	10	$	532	$	660	$	34,595	$	35,255
Commercial and industrial		93		39		2,631		2,763		92,692		95,455
Multi-family residential		115		—		—		115		70,082		70,197
Single family non-owner occupied		611		554		1,203		2,368		133,191		135,559
Non-farm, non-residential		1,014		318		1,770		3,102		472,809		475,911
Agricultural		—		—		—		—		2,324		2,324
Farmland		245		—		—		245		32,369		32,614
Consumer real estate loans
Home equity lines		289		317		442		1,048		110,722		111,770
Single family owner occupied		7,428		1,228		145		8,801		487,211		496,012
Owner occupied construction		205		—		2,284		2,489		26,214		28,703
Consumer and other loans
Consumer loans		811		86		105		1,002		70,311		71,313
Other		—		—		—		—		3,926		3,926

Total non-covered loans		10,929		2,552		9,112		22,593		1,536,446		1,559,039
Covered loans
Commercial loans
Construction, development, and other land		479		—		453		932		14,933		15,865
Commercial and industrial		5		44		92		141		3,184		3,325
Multi-family residential		—		—		—		—		1,933		1,933
Single family non-owner occupied		—		—		184		184		7,265		7,449
Non-farm, non-residential		209		—		—		209		34,437		34,646
Agricultural		—		—		—		—		164		164
Farmland		—		—		301		301		572		873
Consumer real estate loans
Home equity lines		488		86		163		737		68,469		69,206
Single family owner occupied		197		120		1,466		1,783		15,136		16,919
Owner occupied construction		—		—		190		190		994		1,184
Consumer and other loans												—
Consumer loans		—		—		—		—		118		118
Other		—		—		—		—		—		—

Total covered loans		1,378		250		2,849		4,477		147,205		151,682

Total loans	$	12,307	$	2,802	$	11,961	$	27,070	$	1,683,651	$	1,710,721

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. All restructured loans to borrowers experiencing financial difficulty 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 troubled debt restructurings (“TDRs”) totaled $653 thousand as of September 30, 2014, and $1.84 million as of December 31, 2013. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. The Company recognized interest income on TDRs of $188 thousand for the three months ended September 30, 2014, and $183 thousand for the three months ended September 30, 2013. The Company recognized interest income on TDRs of $466 thousand for the nine months ended September 30, 2014, and $422 thousand for the nine months ended September 30, 2013.

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 September 30, 2014, or December 31, 2013. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:


	September 30, 2014						December 31, 2013
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Commercial and industrial	$	—	$	—	$	—	$	1,115	$	—	$	1,115
Single family non-owner occupied		—		837		837		375		—		375
Non-farm, non-residential		103		5,370		5,473		128		5,490		5,618
Consumer real estate loans
Home equity lines		—		48		48		159		51		210
Single family owner occupied		382		8,652		9,034		423		6,670		7,093
Owner occupied construction		—		244		244		—		—		—

Total TDRs	$	485	$	15,151	$	15,636	$	2,200	$	12,211	$	14,411

(1)	TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated. The post-modification recorded investment represents the loan balance immediately following modification.


	Three Months Ended September 30,
	2014						2013
(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		3	$	1,715	$	1,715		1	$	359	$	326
Extended payment term
Single family non-owner occupied		1		468		468		—		—		—
Below market interest rate and extended payment term
Single family owner occupied		2		84		84		2		642		600

Total		6	$	2,267	$	2,267		3	$	1,001	$	926


	Nine Months Ended September 30,
	2014						2013
(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		1	$	359	$	326
Owner occupied construction		1		245		245		—		—		—

Total		5		2,095		2,095		1		359		326
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 owner occupied		5		487		487		2		642		600

Total		12	$	3,353	$	3,353		3	$	1,001	$	926

The following tables present loans modified as TDRs, by loan class, that were restructured within the previous 12 months, for which there was a payment default during the periods indicated:


	Three Months Ended September 30,
	2014				2013
	Total		Pre-Modification		Total		Pre-Modification
(Amounts in thousands)	Contracts		Recorded Investment		Contracts		Recorded Investment
Commercial loans
Non-farm, non-residential		—	$	—		1	$	978
Consumer real estate loans								—
Single family owner occupied		2		312		—		—

Total		2	$	312		1	$	978


	Nine Months Ended September 30,
	2014				2013
	Total		Pre-Modification		Total		Pre-Modification
(Amounts in thousands)	Contracts		Recorded Investment		Contracts		Recorded Investment
Commercial loans
Non-farm, non-residential		—	$	—		1	$	978
Consumer real estate loans
Single family owner occupied		2		312		—		—

Total		2	$	312		1	$	978

Note 5. 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 utilizes 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 has aggregated PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. 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 September 30, 2014, management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio.

The following tables present the aggregate activity in the allowance for loan losses in the periods indicated:


(Amounts in thousands)	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
Three months ended September 30, 2013
Beginning balance	$	23,114		$	8		$	23,122
Provision for loan losses		2,110			1,035			3,145
Benefit attributable to the FDIC indemnification asset		—			(812	)		(812	)

Provision for loan losses charged to operations		2,110			223			2,333
Provision for loan losses recorded through the FDIC indemnification asset		—			812			812
Charge-offs		(3,022	)		—			(3,022	)
Recoveries		1,420			—			1,420

Net charge-offs		(1,602	)		—			(1,602	)

Ending balance	$	23,622		$	1,043		$	24,665

Three months ended September 30, 2014
Beginning balance	$	23,493		$	418		$	23,911
Recovery of loan losses		(2,335	)		(214	)		(2,549	)
Benefit attributable to the FDIC indemnification asset		—			110			110

Recovery of loan losses charged to operations		(2,335	)		(104	)		(2,439	)
Recovery of loan losses recorded through the FDIC indemnification asset		—			(110	)		(110	)
Charge-offs		(1,118	)		—			(1,118	)
Recoveries		915			—			915

Net charge-offs		(203	)		—			(203	)

Ending balance	$	20,955		$	204		$	21,159


(Amounts in thousands)	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
Nine months ended September 30, 2013
Beginning balance	$	25,762		$	8		$	25,770
Provision for loan losses		6,457			1,035			7,492
Benefit attributable to the FDIC indemnification asset		—			(812	)		(812	)

Provision for loan losses charged to operations		6,457			223			6,680
Provision for loan losses recorded through the FDIC indemnification asset		—			812			812
Charge-offs		(11,511	)		—			(11,511	)
Recoveries		2,914			—			2,914

Net charge-offs		(8,597	)		—			(8,597	)

Ending balance	$	23,622		$	1,043		$	24,665

Nine months ended September 30, 2014
Beginning balance	$	23,322		$	755		$	24,077
Provision for (recovery of) loan losses		733			(551	)		182
Benefit attributable to the FDIC indemnification asset		—			451			451

Provision for (recovery of) loan losses charged to operations		733			(100	)		633
Recovery of loan losses recorded through the FDIC indemnification asset		—			(451	)		(451	)
Charge-offs		(5,119	)		—			(5,119	)
Recoveries		2,019			—			2,019

Net charge-offs		(3,100	)		—			(3,100	)

Ending balance	$	20,955		$	204		$	21,159

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:


				Consumer			Consumer
(Amounts in thousands)	Commercial			Real Estate			and Other			Total
Three months ended September 30, 2013
Beginning balance	$	15,873		$	6,658		$	583		$	23,114
Provision for (recovery of) loan losses charged to operations		1,551			(807	)		1,366			2,110
Loans charged off		(2,561	)		1,026			(1,487	)		(3,022	)
Recoveries credited to allowance		1,194			39			187			1,420

Net (charge-offs) recoveries		(1,367	)		1,065			(1,300	)		(1,602	)

Ending balance	$	16,057		$	6,916		$	649		$	23,622

Three months ended September 30, 2014
Beginning balance	$	16,747		$	6,123		$	623		$	23,493
(Recovery of) provision for loan losses charged to operations		(3,131	)		561			235			(2,335	)
Loans charged off		(558	)		(219	)		(341	)		(1,118	)
Recoveries credited to allowance		613			192			110			915

Net recoveries (charge-offs)		55			(27	)		(231	)		(203	)

Ending balance	$	13,671		$	6,657		$	627		$	20,955


				Consumer			Consumer
(Amounts in thousands)	Commercial			Real Estate			and Other			Total
Nine months ended September 30, 2013
Beginning balance	$	17,259		$	7,906		$	597		$	25,762
Provision for loan losses charged to operations		4,338			422			1,697			6,457
Loans charged off		(7,394	)		(1,747	)		(2,370	)		(11,511	)
Recoveries credited to allowance		1,854			335			725			2,914

Net charge-offs		(5,540	)		(1,412	)		(1,645	)		(8,597	)

Ending balance	$	16,057		$	6,916		$	649		$	23,622

Nine months ended September 30, 2014
Beginning balance	$	16,090		$	6,597		$	635		$	23,322
(Recovery of) provision for loan losses charged to operations		(478	)		592			619			733
Loans charged off		(2,839	)		(1,184	)		(1,096	)		(5,119	)
Recoveries credited to allowance		898			652			469			2,019

Net charge-offs		(1,941	)		(532	)		(627	)		(3,100	)

Ending balance	$	13,671		$	6,657		$	627		$	20,955

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:


				Consumer			Consumer
(Amounts in thousands)	Commercial			Real Estate			and Other		Total
Three months ended September 30, 2013
Beginning balance	$	8		$	—		$	—	$	8
Purchased impaired provision		158			877			—		1,035
Benefit attributable to FDIC indemnificaton asset		(242	)		(570	)		—		(812	)

(Recovery of) provision for loan losses charged to operations		(84	)		307			—		223
Provision for loan losses recorded through the FDIC indemnificaton asset		242			570			—		812

Ending balance	$	166		$	877		$	—	$	1,043

Three months ended September 30, 2014
Beginning balance	$	16		$	402		$	—	$	418
Purchased impaired recovery		(8	)		(206	)		—		(214	)
Benefit attributable to FDIC indemnificaton asset		—			110			—		110

Recovery of loan losses charged to operations		(8	)		(96	)		—		(104	)
Recovery of loan losses recorded through the FDIC indemnificaton asset		—			(110	)		—		(110	)

Ending balance	$	8		$	196		$	—	$	204


				Consumer			Consumer
(Amounts in thousands)	Commercial			Real Estate			and Other		Total
Nine months ended September 30, 2013
Beginning balance	$	8		$	—		$	—	$	8
Purchased impaired provision		158			877			—		1,035
Benefit attributable to FDIC indemnificaton asset		(242	)		(570	)		—		(812	)

(Recovery of) provision for loan losses charged to operations		(84	)		307			—		223
Provision for loan losses recorded through the FDIC indemnificaton asset		242			570			—		812

Ending balance	$	166		$	877		$	—	$	1,043

Nine months ended September 30, 2014
Beginning balance	$	77		$	678		$	—	$	755
Purchased impaired recovery		(69	)		(482	)		—		(551	)
Benefit attributable to FDIC indemnificaton asset		55			396			—		451

Recovery of loan losses charged to operations		(14	)		(86	)		—		(100	)
Recovery of loan losses recorded through the FDIC indemnificaton asset		(55	)		(396	)		—		(451	)

Ending balance	$	8		$	196		$	—	$	204

The following tables present the Company’s allowance for loan losses and recorded investment in loans, excluding PCI loans, by loan class, as of the dates indicated:


	September 30, 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	$	—	$	—	$	52,809	$	1,189
Commercial and industrial		1,258		—		89,680		1,064
Multi-family residential		5,567		500		95,666		1,786
Single family non-owner occupied		637		46		144,344		3,299
Non-farm, non-residential		9,850		623		493,317		4,910
Agricultural		—		—		2,300		18
Farmland		—		—		32,667		236

Total commercial loans		17,312		1,169		910,783		12,502
Consumer real estate loans
Home equity lines		—		—		136,429		1,346
Single family owner occupied		5,161		504		503,846		4,503
Owner occupied construction		—		—		45,212		304

Total consumer real estate loans		5,161		504		685,487		6,153
Consumer and other loans
Consumer loans		—		—		71,336		627
Other		—		—		7,308		—

Total consumer and other loans		—		—		78,644		627

Total loans, excluding PCI loans	$	22,473	$	1,673	$	1,674,914	$	19,282


	December 31, 2013
(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	$	—	$	—	$	46,404	$	1,141
Commercial and industrial		5,189		3,794		92,612		1,421
Multi-family residential		—		—		71,669		1,211
Single family non-owner occupied		664		47		136,567		3,502
Non-farm, non-residential		5,952		114		483,126		4,536
Agricultural		—		—		2,488		23
Farmland		351		—		33,136		301

Total commercial loans		12,156		3,955		866,002		12,135
Consumer real estate loans
Home equity lines		472		52		136,896		1,309
Single family owner occupied		6,850		735		502,229		4,295
Owner occupied construction		—		—		29,090		206

Total consumer real estate loans		7,322		787		668,215		5,810
Consumer and other loans
Consumer loans		—		—		71,389		635
Other		—		—		3,926		—

Total consumer and other loans		—		—		75,315		635

Total loans, excluding PCI loans	$	19,478	$	4,742	$	1,609,532	$	18,580

The Company aggregates PCI loans into the following loan pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. The following table presents the Company’s allowance for loan losses and recorded investment in PCI loans, by loan pool, as of the dates indicated:


	September 30, 2014				December 31, 2013
(Amounts in thousands)	Loan Pools		Allowance for Loan Pools With Impairment		Loan Pools		Allowance for Loan Pools With Impairment
Commercial loans
Waccamaw commercial	$	13,695	$	—	$	19,851	$	—
Waccamaw lines of credit		820		—		2,594		69
Peoples commercial		6,224		—		7,862		—
Other		1,393		8		1,931		8

Total commercial loans		22,132		8		32,238		77
Consumer real estate loans
Waccamaw serviced home equity lines		39,206		—		43,608		277
Waccamaw residential		2,853		—		4,497		217
Peoples residential		1,208		196		1,334		184

Total consumer real estate loans		43,267		196		49,439		678
Consumer and other loans
Waccamaw consumer		6		—		34		—

Total loans	$	65,405	$	204	$	81,711	$	755

Note 6. 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:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2014			2013			2014			2013
Beginning balance	$	30,908		$	40,389		$	34,691		$	48,149
(Decrease) increase in estimated losses on covered loans		(110	)		812			(451	)		812
Increase in estimated losses on covered OREO		674			3,654			1,233			3,752
Reimbursable expenses from the FDIC		88			327			375			818
Net amortization		(1,096	)		(1,089	)		(3,166	)		(4,290	)
Reimbursements from the FDIC		(719	)		(6,991	)		(2,937	)		(12,139	)

Ending balance	$	29,745		$	37,102		$	29,745		$	37,102

Note 7. Deposits

The following table presents the components of deposits as of the dates indicated:


(Amounts in thousands)	September 30, 2014		December 31, 2013
Noninterest-bearing demand deposits	$	397,523	$	339,680
Interest-bearing deposits:
Interest-bearing demand deposits		347,589		361,821
Money market accounts		226,156		237,845
Savings deposits		293,746		286,165
Certificates of deposit		551,089		606,178
Individual retirement accounts		116,172		119,053

Total interest-bearing deposits		1,534,752		1,611,062

Total deposits	$	1,932,275	$	1,950,742

Note 8. Borrowings

The following table presents the composition of borrowings as of the dates indicated:


(Amounts in thousands)	September 30, 2014		December 31, 2013
Federal funds purchased	$	—	$	16,000
Securities sold under agreements to repurchase:
Retail		64,439		68,308
Wholesale		50,000		50,000

Total securities sold under agreements to repurchase		114,439		118,308
FHLB borrowings		115,000		150,000
Subordinated debt		15,464		15,464
Other debt		583		624

Total borrowings	$	245,486	$	300,396

Short-term borrowings consist of federal funds purchased and retail repurchase agreements, which are typically collateralized with agency MBS. The weighted average rate of federal funds purchased was 0.36% as of December 31, 2013. The weighted average rate of retail repurchase agreements was 0.13% as of September 30, 2014, and 0.38% as of December 31, 2013.

Long-term borrowings consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; and other obligations. The weighted average contractual rate of wholesale repurchase agreements was 3.71% as of September 30, 2014, and December 31, 2013. The weighted average contractual rate of FHLB borrowings was 4.09% as of September 30, 2014, and 4.12% December 31, 2013. During the third quarter of 2014, the Company prepaid $35 million of a $50 million FHLB convertible advance that matures in May 2017 and bears an interest rate of 4.21%. The following schedule presents the contractual maturities of wholesale repurchase agreements and FHLB borrowings, by year, as of September 30, 2014:


(Amounts in thousands)	Wholesale Repurchase Agreements		FHLB Borrowings		Total
2014	$	—	$	—	$	—
2015		—		—		—
2016		25,000		—		25,000
2017		—		65,000		65,000
2018		—		—		—
2019 and thereafter		25,000		50,000		75,000

	$	50,000	$	115,000	$	165,000

Weighted average maturity (in years)		3.33		4.19

FHLB callable advances may be redeemed by the FHLB at quarterly intervals after various lockout periods that 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. FHLB advances were secured by qualifying loans that totaled $1.18 billion as of September 30, 2014, and $1.13 billion as of December 31, 2013. Unused borrowing capacity with the FHLB was $395.44 million as of September 30, 2014.

Subordinated debt consists of junior subordinated debentures (“Debentures”) of $15.46 million that were issued by the Company in October 2003 to FCBI Capital Trust (the “Trust”). The Debentures had an interest rate of three-month 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. 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 (the “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 September 30, 2014, and December 31, 2013.

Note 9. 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 September 30, 2014, the Company’s derivative instruments consisted of IRLCs, forward sale loan commitments, and 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.

IRLCs and forward sale loan commitments. In the normal course of business, the Company enters into interest rate lock commitments (“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 London InterBank Offered Rate (“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 fifteen-year, $4.34 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 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 September 30, 2014.

The following table presents the aggregate contractual or notional amounts of the Company’s derivative instruments as of the dates indicated:


	September 30, 2014		December 31, 2013		September 30, 2013
(Amounts in thousands)	Notional or Contractual Amount		Notional or Contractual Amount		Notional or Contractual Amount
Derivatives designated as hedges:
Interest rate swaps	$	7,819	$	3,453	$	—
Derivatives not designated as hedges:
IRLCs		2,948		3,677		1,094
Forward sale loan commitments		4,094		4,560		—

Total derivatives not designated as hedges		7,042		8,237		1,094

Total derivatives	$	14,861	$	11,690	$	1,094

The following table presents the fair values of the Company’s derivative instruments as of the dates indicated:


	September 30, 2014				December 31, 2013				September 30, 2013
(Amounts in thousands)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges:
Interest rate swaps	$	—	$	189	$	43	$	—	$	—	$	—
Derivatives not designated as hedges:
IRLCs		—		7		—		41		19		19
Forward sale loan commitments		7		—		41		—		—		—

Total derivities not designated as hedges		7		7		41		41		19		19

Total derivaties	$	7	$	196	$	84	$	41	$	19	$	19

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:


		Three Months Ended				Nine Months Ended
	Income Statement	September 30,				September 30,
(Amounts in thousands)	Location	2014		2013		2014		2013
Derivatives designated as hedges:
Interest rate swaps	Other income	$	—	$	—	$	—	$	—
Derivatives not designated as hedges:
IRLCs	Other income		—		307		—		(128	)
Forward sale loan commitments	Other income		—		—		—		—

Total derivatives not designated as hedges			—		307		—		(128	)

Total derivatives		$	—	$	307	$	—	$	(128	)

Note 10. Employee Benefit Plans

The Company maintains the Supplemental Executive Retention Plan (the “SERP”) for key members of senior management. The following table presents the components of the SERP’s net periodic pension cost in the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2014		2013		2014		2013
Service cost	$	26	$	33	$	79	$	101
Interest cost		73		62		218		185
Amortization of losses		—		13		—		37
Amortization of prior service cost		47		46		140		140

Net periodic cost	$	146	$	154	$	437	$	463

The Company maintains the Directors’ Supplemental Retirement Plan (the “Directors’ Plan”) for non-management directors. The following table presents the components of the Directors’ Plan’s net periodic pension cost in the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2014		2013		2014		2013
Service cost	$	6	$	7	$	17	$	20
Interest cost		12		10		35		31
Amortization of prior service cost		18		22		54		67

Net periodic cost	$	36	$	39	$	106	$	118

Note 11. Accumulated Other Comprehensive Income

The following table presents the activity in accumulated other comprehensive income (“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
Three months ended September 30, 2013
Beginning balance	$	(10,317	)	$	(1,761	)	$	(12,078	)
Other comprehensive (loss) gain before reclassifications		(773	)		181			(592	)
Reclassified from AOCI		(24	)		(51	)		(75	)

Net comprehensive (loss) gain		(797	)		130			(667	)

Ending balance	$	(11,114	)	$	(1,631	)	$	(12,745	)

Three months ended September 30, 2014
Beginning balance	$	(5,736	)	$	(1,001	)	$	(6,737	)
Other comprehensive gain before reclassifications		186			81			267
Reclassified from AOCI		63			(41	)		22

Net comprehensive gain		249			40			289

Ending balance	$	(5,487	)	$	(961	)	$	(6,448	)


(Amounts in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Employee Benefit Plan			Total
Nine months ended September 30, 2013
Beginning balance	$	(283	)	$	(1,542	)	$	(1,825	)
Other comprehensive (loss) gain before reclassifications		(10,951	)		64			(10,887	)
Reclassified from AOCI		120			(153	)		(33	)

Net comprehensive loss		(10,831	)		(89	)		(10,920	)

Ending balance	$	(11,114	)	$	(1,631	)	$	(12,745	)

Nine months ended September 30, 2014
Beginning balance	$	(13,640	)	$	(1,100	)	$	(14,740	)
Other comprehensive gain before reclassifications		8,422			261			8,683
Reclassified from AOCI		(269	)		(122	)		(391	)

Net comprehensive gain		8,153			139			8,292

Ending balance	$	(5,487	)	$	(961	)	$	(6,448	)

The following table presents reclassifications out of AOCI by component in the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Income Statement
(Amounts in thousands)	2014			2013			2014			2013			Line Item Affected
Available-for-sale securities
Gains (losses) realized in net income	$	320		$	(39	)	$	306		$	191		Net gain (loss) on sale of securities
Credit-related OTTI recognized in net income		(219	)		—			(737	)		—		Net impairment losses recognized in earnings

		101			(39	)		(431	)		191		Income before income taxes
Income tax effect		38			(15	)		(162	)		71		Income tax expense

		63			(24	)		(269	)		120		Net income
Employee benefit plans
Amortization of prior service cost		(66	)		(69	)		(195	)		(208	)	(1)
Amortization of losses		—			(13	)		—			(37	)	(1)

		(66	)		(82	)		(195	)		(245	)	Income before income taxes
Income tax effect		(25	)		(31	)		(73	)		(92	)	Income tax expense

		(41	)		(51	)		(122	)		(153	)	Net income

Reclassified from AOCI, net of tax	$	22		$	(75	)	$	(391	)	$	(33	)	Net income

(1)	Amortization is included in net periodic pension cost. See Note 10, “Employee Benefit Plans.”

Note 12. 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 pursuant to the valuation hierarchy, is presented in the following discussion. The fair value hierarchy prioritizes 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 may 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 “Summary of Significant Accounting Policies” in Note 1, “General,” to the Condensed 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 appropriate 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 regarding the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of 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:


	September 30, 2014
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. Treasury securities	$	9,478	$	—	$	9,478	$	—
Municipal securities		141,062		—		141,062		—
Single issue trust preferred securities		48,682		—		48,682		—
Corporate securities		5,048		—		5,048		—
Agency MBS		137,519		—		137,519		—
Non-Agency Alt-A residential MBS		9,662		—		9,662		—
Equity securities		242		224		18		—

Total available-for-sale securities	$	351,693	$	224	$	351,469	$	—

Fair value loans	$	7,849	$	—	$	7,849	$	—

Deferred compensation assets	$	3,266	$	3,266	$	—	$	—

Derivative assets
Forward sale loan commitments	$	7	$	—	$	7	$	—

Total derivative assets	$	7	$	—	$	7	$	—

Deferred compensation liabilities	$	3,266	$	3,266	$	—	$	—

Derivative liabilities
Interest rate swaps	$	189	$	—	$	189	$	—
IRLCs		7		—		7		—

Total derivative liabilities	$	196	$	—	$	196	$	—


	December 31, 2013
	Total		Fair Value Measurements Using
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. Treasury securities	$	9,013	$	—	$	9,013	$	—
Municipal securities		144,280		—		144,280		—
Single issue trust preferred securities		46,234		—		46,234		—
Corporate securities		4,871		—		4,871		—
Agency MBS		300,386		—		300,386		—
Non-Agency Alt-A residential MBS		9,789		—		9,789		—
Equity securities		5,247		251		4,996		—

Total available-for-sale securities	$	519,820	$	251	$	519,569	$	—

Deferred compensation assets	$	4,200	$	4,200	$	—	$	—

Derivatives assets
Interest rate swaps	$	43	$	—	$	43	$	—
Forward sale loan commitments		41		—		41		—

Total derivative assets	$	84	$	—	$	84	$	—

Deferred compensation liabilities	$	4,200	$	4,200	$	—	$	—

Derivative liabilities
IRLCs	$	41	$	—	$	41	$	—

Total derivative liabilities	$	41	$	—	$	41	$	—

There were no changes in valuation techniques during the nine months ended September 30, 2014 or 2013. 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 in to or out of Level 3 of the fair value hierarchy during the three months ended September 30, 2014 or 2013.

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 assist management in identifying potential credit impairment and determining 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.

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, if appropriate. 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 and a deflator for the devaluation of property when banks are the sellers. Impaired loans that do not meet the aforementioned 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, which 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:


	September 30, 2014
	Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans not covered by loss share agreements	$	12,692		—		—	$	12,692
OREO, not covered by loss share agreements		4,183		—		—		4,183
OREO, covered by loss share agreements		5,997		—		—		5,997


	December 31, 2013
	Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans not covered by loss share agreements	$	8,935		—		—	$	8,935
OREO, not covered by loss share agreements		7,180		—		—		7,180
OREO, covered by loss share agreements		6,433		—		—		6,433

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	Unobservable	Range (Weighted Average)
	Technique	Input	September 30, 2014	December 31, 2013
Impaired loans	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	2% to 34% (21%)	6% to 100% (47%)
OREO, not covered	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	10% to 58% (33%)	0% to 65% (34%)
OREO, covered	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾	10% to 52% (44%)	4% to 70% (41%)

(1)	Fair value is generally based on appraisals of the underlying collateral.

(2)	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Fair Value of Financial Instruments

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of 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 currently available in the market for instruments with similar characteristics and maturities.

FHLB and Other Indebtedness. FHLB and other indebtedness is reported at fair value using discounted future cash flows that apply interest rates currently 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. 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, the Company believes it is not feasible or practicable to accurately disclose the fair values of off-balance sheet instruments. For additional information regarding the unfunded, contractual value of off-balance sheet financial instruments see Note 13, “Litigation, Commitments and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

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:


	September 30, 2014
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	105,922	$	105,922	$	105,922	$	—	$	—
Available-for-sale securities		351,693		351,693		224		351,469		—
Held-to-maturity securities		31,029		30,903		—		30,903		—
Loans held for sale		1,150		1,150		—		1,150		—
Loans held for investment less allowance		1,741,633		1,778,672		—		7,849		1,770,823
FDIC indemnification asset		29,745		19,459		—		—		19,459
Accrued interest receivable		6,346		6,346		—		6,346		—
Derivative financial assets		7		7		—		7		—
Deferred compensation assets		3,266		3,266		3,266		—		—
Liabilities
Demand deposits	$	397,523	$	397,523	$	—	$	397,523	$	—
Interest-bearing demand deposits		347,589		347,589		—		347,589		—
Savings deposits		519,902		519,902		—		519,902		—
Time deposits		667,261		668,014		—		668,014		—
Securities sold under agreements to repurchase		114,439		116,055		—		116,055		—
Accrued interest payable		1,889		1,889		—		1,889		—
FHLB and other indebtedness		131,047		140,270		—		140,270		—
Derivative financial liabilities		196		196		—		196		—
Deferred compensation liabilities		3,266		3,266		3,266		—		—


	December 31, 2013
	Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	56,567	$	56,567	$	56,567	$	—	$	—
Available-for-sale securities		519,820		519,820		251		519,569		—
Held-to-maturity securities		568		579		—		579		—
Loans held for sale		883		883		—		883		—
Loans held for investment less allowance		1,686,644		1,655,430		—		—		1,655,430
FDIC indemnification asset		34,691		34,691		—		—		34,691
Accrued interest receivable		7,521		7,521		—		7,521		—
Derivative financial assets		84		84		—		84		—
Deferred compensation assets		4,200		4,200		4,200		—		—
Liabilities
Demand deposits	$	339,680	$	339,680	$	—	$	339,680	$	—
Interest-bearing demand deposits		361,821		361,821		—		361,821		—
Savings deposits		524,010		524,010		—		524,010		—
Time deposits		725,231		728,999		—		728,999		—
Securities sold under agreements to repurchase		118,308		121,320		—		121,320		—
Accrued interest payable		2,169		2,169		—		2,169		—
FHLB and other indebtedness		166,088		178,031		—		178,031		—
Derivative financial liabilities		41		41		—		41		—
Deferred compensation liabilities		4,200		4,200		4,200		—		—

Note 13. 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.

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:


	September 30, 2014		December 31, 2013
(Amounts in thousands)
Commitments to extend credit	$	223,710	$	216,179
Commitments related to secondary market mortgage loans		2,948		3,677
Standby letters of credit and financial guarantees		3,378		4,193

Total off-balance sheet risk	$	230,036	$	224,049

Reserve for unfunded commitments	$	326	$	326

The Company issued $15.46 million of trust preferred securities in a private placement through the Trust. In connection with the issuance, the Company has committed to irrevocably and unconditionally guarantee the following payments or distributions, with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions and has the funds therefore: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) 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.

ITEM 2.

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. 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 Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K (the “2013 Form 10-K”).

Cautionary Statement Regarding Forward-Looking Statements

We may make forward-looking statements in filings with the Securities and Exchange Commission (the “SEC”), including this Annual Report on Form 10-K and the Exhibits hereto, 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. Such statements are subject to significant risks, uncertainties, and change 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 are intended to 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 concerning 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 all-inclusive. 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 SEC. 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. All forward-looking statements attributable to our Company are expressly qualified by these cautionary statements. See Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of our 2013 Form 10-K.

Company 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 fifty-nine banking locations under the name First Community Bank in West Virginia, Virginia, and North Carolina and under the trade name Peoples Community Bank, a Division of First Community Bank, in Tennessee and South Carolina. The Bank offers wealth management and investment advice through its wholly-owned subsidiary First Community Wealth Management (“FCWM”) and the Bank’s Trust Division, which reported combined assets under management of $700 million as of September 30, 2014. These assets are not our assets, but are managed under various fee-based arrangements as fiduciary or agent. The Company provides insurance services through its wholly-owned subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”), headquartered in High Point, North Carolina, which operates eleven locations under the Greenpoint name and under the trade names First Community Insurance Services (“FCIS”) and Carolina Insurers Associates in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia. We reported total assets of $2.55 billion as of September 30, 2014. Our Common Stock is traded on the NASDAQ Global Select Market under the symbol, “FCBC.”

We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network, with additional funding provided by retail and wholesale repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”). We invest our funds primarily in loans to retail and commercial customers. In addition to loans, we invest a portion of our funds in various debt securities, including those of the United States and its agencies, municipals, and certain corporate notes, debt instruments, and equity securities. We also maintain overnight interest-bearing balances with the Federal Reserve and other correspondent banks. The difference between interest earned on assets and interest paid on liabilities is our primary source of earnings. Our net interest income is supplemented by fees for services, commissions on sales, and various deposit service charges.

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 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 are based on historical experience and other factors including expectations of future events believed to be reasonable under the circumstances that are periodically evaluated. 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, valuation adjustments are estimated by management 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 the notes to consolidated statements. Our critical accounting estimates are described in detail in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2013 Form 10-K.

Performance Overview

Highlights of our results of operations for the quarter and nine months ended September 30, 2014, and financial condition as of September 30, 2014, include the following:

•

Diluted earnings per common share of $0.36 for the third quarter of 2014 represents an increase of 38.46% over $0.26 reported for the third quarter of 2013. Diluted earnings per common share of $1.02 for the nine months ended September 30, 2014, represents an increase of 20.00% over $0.85 reported for the nine months ended September 30, 2013.

•

The non-covered loan portfolio increased $77.14 million compared to year-end 2013 and $102.91 million compared to the third quarter of 2013. This marks the sixth consecutive quarter non-covered loan growth has exceeded covered loan declines.

•

Non-covered delinquent loans as a percentage of total non-covered loans experienced a significant decrease of 97 basis points, or 43.11%, to 1.28% compared to the third quarter of 2013. The decrease is attributed to significant declines in non-covered nonaccrual loans. This marks the sixth consecutive quarter the percentage of non-covered delinquent loans to total non-covered loans has improved.

•

The Company experienced positive resolution of a sizeable credit during the third quarter, which resulted in the significant recovery of loan loss provision. Additionally, net charge-offs of $203 thousand were a decrease of $825 thousand, or 80.25%, from $1.03 million for the second quarter of 2014 and $1.40 million, or 87.33%, from $1.60 million for the third quarter of 2013.

•

The Company significantly exceeds regulatory “well capitalized” targets as of September 30, 2014, with a total risk-based capital ratio of 16.76%, a Tier 1 risk-based capital ratio of 15.51%, and a Tier 1 leverage ratio of 10.70%.

•

During the third quarter of 2014, the Company prepaid $35 million of a $50 million FHLB convertible advance.

•

During the third quarter of 2014, the Company announced the pending sale of 13 branches, 10 in the southeastern, coastal region of North Carolina and 3 in South Carolina, with deposits of approximately $230 million and loans of approximately $59 million. The transaction is expected to close during the fourth quarter of 2014.

•

On October 24, 2014, the Company completed the purchase of seven branches in southwestern Virginia and central North Carolina from Bank of America, with deposits of approximately $318 million.

Results of Operations

Net Income

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended						Nine Months Ended
(Amounts in thousands, except per share data)	2014			2013			2014			2013			Increase (Decrease)			% Change			Increase (Decrease)			% Change
Net income	$	7,043		$	5,412		$	19,775		$	17,988		$	1,631			30.14	%	$	1,787			9.93	%
Net income available to common shareholders		6,815			5,151			19,092			17,216			1,664			32.30	%		1,876			10.90	%
Basic earnings per common share		0.37			0.26			1.04			0.86			0.11			42.31	%		0.18			20.93	%
Diluted earnings per common share		0.36			0.26			1.02			0.85			0.10			38.46	%		0.17			20.00	%
Return on average assets		1.06	%		0.77	%		0.99	%		0.86	%		0.29	%		37.47	%		0.13	%		15.46	%
Return on average common equity		8.15	%		6.06	%		7.86	%		6.71	%		2.09	%		34.42	%		1.15	%		17.20	%

Three Month Comparison. Net income increased in the third quarter of 2014 compared to the same quarter of the prior year primarily due to a $4.77 million decrease in the provision for loan losses, offset by a $3.05 million FHLB debt prepayment fee.

Nine Month Comparison. Net income increased in the first nine months of 2014 compared to the same period of the prior year primarily due to a $6.05 million decrease in the provision for loan losses, a $1.26 million decrease in salaries and employee benefits, and a $1.12 million decrease in the net amortization related to the FDIC indemnification asset, offset by a $3.05 million FHLB debt prepayment fee, a $2.44 million decrease in net interest income, and a $1.26 million decrease in other operating income.

Net Interest Income

Net interest income, our largest contributor to earnings, comprised 74.17% of total net interest and noninterest income in the third quarter of 2014 compared to 73.35% in the same quarter of 2013. Net interest income comprised 74.60% of total net interest and noninterest income in the first nine months of 2014 compared to 75.02% in the same period of 2013. For the following discussion, net interest income is presented on a tax equivalent basis to provide a comparison among all types of interest earning assets. The tax equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although non-GAAP, management believes this financial measure is more widely used in the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. We use this non-GAAP financial measure to monitor net interest income performance and manage the composition of our balance sheet.

The following tables present our average consolidated balance sheets in the periods indicated:


	Three Months Ended September 30,
	2014							2013
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾	$	1,766,769	$	23,460		5.27	%	$	1,694,243	$	23,476		5.50	%
Securities available-for-sale		376,778		2,811		2.96	%		547,686		3,857		2.79	%
Securities held-to-maturity		24,189		73		1.20	%		597		12		7.97	%
Interest-bearing deposits		45,826		40		0.35	%		45,259		42		0.37	%

Total earning assets		2,213,562		26,384		4.73	%		2,287,785		27,387		4.75	%
Other assets		331,771							356,847

Total assets	$	2,545,333						$	2,644,632

Liabilities
Interest-bearing deposits
Demand deposits	$	349,013	$	49		0.06	%	$	362,548	$	58		0.06	%
Savings deposits		521,334		121		0.09	%		520,884		142		0.11	%
Time deposits		675,454		1,612		0.95	%		757,575		1,947		1.02	%

Total interest-bearing deposits		1,545,801		1,782		0.46	%		1,641,007		2,147		0.52	%
Borrowings
Federal funds purchased		69		—		0.00	%		—		—		—
Retail repurchase agreements		69,565		23		0.13	%		65,382		34		0.21	%
Wholesale repurchase agreements		50,000		474		3.76	%		50,000		473		3.75	%
FHLB advances and other borrowings		142,115		1,457		4.07	%		165,868		1,716		4.10	%

Total borrowings		261,749		1,954		2.96	%		281,250		2,223		3.14	%

Total interest-bearing liabilities		1,807,550		3,736		0.82	%		1,922,257		4,370		0.90	%

Noninterest-bearing demand deposits		371,877							349,156
Other liabilities		18,888							20,226

Total liabilities		2,198,315							2,291,639
Stockholders’ equity		347,018							352,993

Total liabilities and stockholders’ equity	$	2,545,333						$	2,644,632

Net interest income, tax equivalent			$	22,648						$	23,017

Net interest rate spread⁽³⁾						3.91	%						3.85	%

Net interest margin⁽⁴⁾						4.06	%						3.99	%

(1)

Fully taxable equivalent at the rate of 35% (“FTE”). The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and nontaxable amounts.

(2)	Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.

(3)	Represents the difference between the yield on earning assets and cost of funds.

(4)	Represents tax equivalent net interest income divided by average earning assets.


	Nine Months Ended September 30,
	2014							2013
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾	$	1,744,422	$	69,818		5.35	%	$	1,697,533	$	72,671		5.72	%
Securities available-for-sale		434,462		9,808		3.02	%		546,603		11,297		2.76	%
Securities held-to-maturity		12,858		127		1.32	%		700		43		8.21	%
Interest-bearing deposits		40,587		117		0.39	%		75,577		180		0.32	%

Total earning assets		2,232,329		79,870		4.78	%		2,320,413		84,191		4.85	%
Other assets		337,298							355,025

Total assets	$	2,569,627						$	2,675,438

Liabilities
Interest-bearing deposits
Demand deposits	$	363,780	$	154		0.06	%	$	359,439	$	173		0.06	%
Savings deposits		525,269		387		0.10	%		514,447		444		0.12	%
Time deposits		695,585		4,964		0.95	%		785,690		6,176		1.05	%

Total interest-bearing deposits		1,584,634		5,505		0.46	%		1,659,576		6,793		0.55	%
Borrowings
Federal funds purchased		1,192		3		0.34	%		—		—		—
Retail repurchase agreements		73,669		74		0.13	%		71,476		240		0.45	%
Wholesale repurchase agreements		50,000		1,405		3.76	%		52,521		1,416		3.60	%
FHLB advances and other borrowings		158,009		4,832		4.09	%		169,190		5,113		4.04	%

Total borrowings		282,870		6,314		2.98	%		293,187		6,769		3.09	%

Total interest-bearing liabilities		1,867,504		11,819		0.85	%		1,952,763		13,562		0.93	%

Noninterest-bearing demand deposits		343,568							341,903
Other liabilities		18,758							20,882

Total liabilities		2,229,830							2,315,548
Stockholders’ equity		339,797							359,890

Total liabilities and stockholders’ equity	$	2,569,627						$	2,675,438

Net interest income, tax equivalent			$	68,051						$	70,629

Net interest rate spread⁽³⁾						3.93	%						3.92	%

Net interest margin⁽⁴⁾						4.08	%						4.07	%

(1)

(2)	Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.

(3)	Represents the difference between the yield on earning assets and cost of funds.

(4)	Represents tax equivalent net interest income divided by average earning assets.

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


	Three Months Ended												Nine Months Ended
	September 30, 2014 Compared to 2013												September 30, 2014 Compared to 2013
	Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to
							Rate/												Rate/
(Amounts in thousands)	Volume			Rate			Volume			Total			Volume			Rate			Volume			Total
Interest earned on:
Loans (FTE)	$	2,982		$	(979	)	$	(2,019	)	$	(16	)	$	2,007		$	(4,730	)	$	(130	)	$	(2,853	)
Securities available-for-sale (FTE)		(3,572	)		229			2,297			(1,046	)		(2,318	)		1,043			(214	)		(1,489	)
Securities held-to-maturity (FTE)		1,407			(10	)		(1,336	)		61			747			(36	)		(627	)		84
Interest-bearing deposits with other banks		2			(2	)		(2	)		(2	)		(83	)		38			(18	)		(63	)

Total interest earning assets		819			(762	)		(1,060	)		(1,003	)		353			(3,685	)		(989	)		(4,321	)
Interest paid on:
Demand deposits		(6	)		(7	)		4			(9	)		2			(21	)		—			(19	)
Savings deposits		—			(21	)		—			(21	)		9			(65	)		(1	)		(57	)
Time deposits		(626	)		(139	)		430			(335	)		(708	)		(569	)		65			(1,212	)
Federal funds purchased		—			—			0			0			—			—			3			3
Retail repurchase agreements		6			(12	)		(5	)		(11	)		7			(168	)		(5	)		(166	)
Wholesale repurchase agreements		—			1			—			1			(68	)		60			(3	)		(11	)
FHLB advances and other borrowings		(729	)		(15	)		485			(259	)		(338	)		61			(4	)		(281	)

Total interest-bearing liabilities		(1,355	)		(193	)		914			(634	)		(1,096	)		(702	)		55			(1,743	)

Change in net interest income, tax equivalent	$	2,174		$	(569	)	$	(1,974	)	$	(369	)	$	1,449		$	(2,983	)	$	(1,044	)	$	(2,578	)

The following table reconciles the differences between net interest income under GAAP and net interest income on a tax equivalent basis in the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
(Amounts in thousands)
Net interest income, GAAP basis	$	22,015	$	22,326	$	66,108	$	68,550
Tax equivalent adjustment⁽¹⁾		633		691		1,943		2,079

Net interest income, tax equivalent	$	22,648	$	23,017	$	68,051	$	70,629

(1)

Interest and yield on loans include accretion income from the Peoples and Waccamaw acquired loan portfolios. We expect the purchase accounting interest accretion to continue to decline in future periods due to acquired portfolio attrition. The following table presents net interest margin and related average balance sheet information excluding the impact of purchase accounting accretion in the periods indicated:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2014					2013					2014					2013
(Amounts in thousands)	Interest⁽¹⁾		Average Yield/ Rate⁽¹⁾			Interest⁽¹⁾		Average Yield/ Rate⁽¹⁾			Interest⁽¹⁾		Average Yield/ Rate⁽¹⁾			Interest⁽¹⁾		Average Yield/ Rate⁽¹⁾
Earning assets
Loans⁽²⁾	$	23,460		5.27	%	$	23,476		5.50	%	$	69,818		5.35	%	$	72,671		5.72	%
Accretion income		2,813					3,472					8,724					11,077
Less: cash accretion income		1,367					1,737					3,214					5,227

Non-cash accretion income		1,446					1,735					5,510					5,850

Loans, excluding non-cash accretion		22,014		4.94	%		21,741		5.09	%		64,308		4.93	%		66,821		5.26	%
Other earning assets		2,924		2.60	%		3,911		2.61	%		10,052		2.75	%		11,520		2.47	%

Total earning assets		24,938		4.47	%		25,652		4.45	%		74,360		4.46	%		78,341		4.51	%
Total interest-bearing liabilities		3,736		0.82	%		4,370		0.90	%		11,819		0.85	%		13,562		0.93	%

Net interest income, tax equivalent	$	21,202				$	21,282				$	62,541				$	64,779

Net interest rate spread⁽³⁾, less non-cash accretion				3.65	%				3.55	%				3.61	%				3.59	%

Net interest margin⁽⁴⁾, less non-cash accretion				3.80	%				3.69	%				3.75	%				3.73	%

(1)

(2)	Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.

(3)	Represents the difference between the yield on earning assets and cost of funds.

(4)	Represents tax equivalent net interest income divided by average earning assets.

Three Month Comparison. Net interest income under GAAP decreased $311 thousand, or 1.39%, and tax equivalent net interest income decreased $369 thousand, or 1.60%, in the third quarter of 2014 compared to the same quarter of the prior year. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted in a 6 basis point increase in the net interest rate spread and a 7 basis point increase in the net interest margin.

Loan interest accretion stemming from the Peoples and Waccamaw acquisitions totaled $2.81 million in the third quarter of 2014, of which $1.37 million was received in cash, compared to $3.47 million in the same quarter of the prior year, of which $1.74 million was received in cash. Excluding non-cash accretion income, the yield on loans decreased 15 basis points, compared to a decrease of 23 basis points under GAAP. Excluding non-cash accretion income, the net interest margin increased 11 basis points compared to an increase of 7 basis points under GAAP. We expect the effect of accretion income on acquired loans to continue to be lessened in future periods.

Average earning assets decreased $74.22 million, or 3.24%, in the third quarter of 2014 compared to the same quarter of the prior year primarily due to the decrease in securities available for sale, which was offset by the increase in the noncovered loan portfolio. Interest-bearing deposits with banks, which are primarily comprised of excess liquidity kept at the Federal Reserve Bank (“FRB”) of Richmond, bear overnight market rates. The yield on earning assets decreased 2 basis points, which was largely due to a 23 basis point decrease in the yield on loans, a result of the continued low rate environment.

As of September 30, 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 $114.71 million, or 5.97%, in the third quarter of 2014 compared to the same quarter of the prior year, primarily due to the prepayment of FHLB advances and the decline in average time deposit balances. During the third quarter of 2014, we prepaid $35 million of a $50 million FHLB convertible advance that matures in May 2017 and bears an interest rate of 4.21%. The yield on interest-bearing liabilities decreased 8 basis points, which was largely due to a 6 basis point decrease in the rate on interest-bearing deposits and a 17 basis point decrease in the rate on borrowings. Average interest-bearing deposits decreased $95.21 million, or 5.80%, which was driven by an $82.12 million, or 10.84%, decrease in average time deposits and a $13.54 million, or 3.73%, decrease in interest-bearing demand deposits, partially offset by an increase in average savings deposits, which include money market and savings accounts, of $450 thousand, or 0.09%. Average borrowings decreased $19.50 million, or 6.93%, which was driven by a $23.75 million, or 14.32%, decrease in FHLB and other borrowings, partially offset by an increase in average retail repurchase agreements of $4.18 million, or 6.40%.

Nine Month Comparison. Net interest income under GAAP decreased $2.44 million, or 3.56%, and tax equivalent net interest income decreased $2.58 million, or 3.65%, in the first nine months of 2014 compared to the same period of the prior year. Changes in the average balances of and yields/rates on earning assets and interest-bearing liabilities resulted in a 1 basis point increase in both the net interest rate spread and the net interest margin.

Loan interest accretion stemming from the Peoples and Waccamaw acquisitions totaled $8.72 million in the first nine months of 2014, of which $3.21 million was received in cash, compared to $11.08 million in the same period of the prior year, of which $5.23 million was received in cash. Excluding non-cash accretion income, the yield on loans decreased 33 basis points compared to a decrease of 37 basis points under GAAP. Excluding non-cash accretion income, the net interest margin increased 2 basis points compared to an increase of 1 basis point under GAAP.

Average earning assets decreased $88.08 million, or 3.80%, in the first nine months of 2014 compared to the same period of the prior year primarily due to a decrease in securities available for sale, which was offset by the increase in the noncovered loan portfolio. The yield on earning assets decreased 7 basis points, which was largely due to a 37 basis point decrease in the yield on loans. During the first nine months of 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.

Average interest-bearing liabilities decreased $85.26 million, or 4.37%, in the first nine months of 2014 compared to the same period of the prior year, primarily due to declines in average time deposit balances. The yield on interest-bearing liabilities decreased 8 basis points, which was largely due to an 8 basis point decrease in the rate on interest-bearing deposits and 10 basis point decrease in the rate on borrowings. Average interest-bearing deposits decreased $74.94 million, or 4.52%, which was driven by a $90.11 million, or 11.47%, decrease in average time deposits, partially offset by increases in average interest-bearing demand deposits of $4.34 million, or 1.21%, and average savings deposits, which include money market and savings accounts, of $10.82 million, or 2.10%. Average borrowings decreased $10.32 million, or 3.52%, largely due to an $11.18 million, or 6.61%, decrease in FHLB and other borrowings.

Provision for Loan Losses

Three Month Comparison. The provision for loan losses is the amount added to the allowance for loan losses after net charge-offs have been deducted in order to bring the allowance to a level management determines necessary to absorb probable losses in the existing loan portfolio. A net recovery of $2.44 million was attributed to the provision for loan losses previously charged to operations in the third quarter of 2014, a decrease of $4.77 million, compared to a net provision of $2.33 million in the same quarter of the prior year. The recovery was primarily due to the release of specific reserves on a problem credit that experienced favorable resolution during the third quarter of 2014, as well as a decrease in specific reserves on loans identified as impaired during the quarter, lower average loss rates, significantly lower charge-offs, and lower classified asset levels. A recovery of $214 thousand was attributed to the provision for purchased credit impaired (“PCI”) loans in the third quarter of 2014 due to better than expected performance in the Waccamaw PCI loan portfolio, of which $110 thousand was recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and $104 thousand was applied to operations. The provision for PCI loans in the third quarter of 2013 totaled $1.04 million, of which $812 was recorded through the FDIC indemnification asset and $223 thousand was applied to operations. See “Allowance for Loan Losses” in the “Financial Condition” section below.

Nine Month Comparison. The provision charged to operations of $633 thousand was reduced by $6.05 million in the first nine months of 2014 compared to the same period of the prior year due to the release of specific reserves on a problem credit that experienced favorable resolution during the third quarter of 2014, as well as a decrease in specific reserves on loans identified as impaired during the period, lower average loss rates, significantly lower charge-offs, and lower classified asset levels. A recovery of $551 thousand was attributed to the provision for PCI loans in the first nine months of 2014 due to better than expected performance in the Waccamaw PCI loan portfolio, of which $451 thousand was recorded through the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure and $100 thousand was applied to operations. The provision for PCI loans in the first nine months of 2013 totaled $1.04 million, of which $812 thousand was recorded through the FDIC indemnification asset and $223 thousand was applied to operations. There was no provision attributed to PCI loans prior to the third quarter of 2013. 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 25.83% of total net interest and noninterest income in the third quarter of 2014 compared to 26.65% in the same quarter of the prior year. Noninterest income comprised 25.40% of total net interest and noninterest income in the first nine months of 2014 compared to 24.98% in the same period of the prior year.

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						Increase (Decrease)			% Change			Increase (Decrease)			% Change
	2014			2013			2014			2013			Increase (Decrease)			% Change			Increase (Decrease)			% Change
(Amounts in thousands)
Wealth management	$	670		$	863		$	2,396		$	2,680		$	(193	)		-22.36	%	$	(284	)		-10.60	%
Service charges on deposit accounts		3,606			3,582			10,099			10,065			24			0.67	%		34			0.34	%
Other service charges and fees		1,852			1,777			5,473			5,356			75			4.22	%		117			2.18	%
Insurance commissions		1,695			1,559			5,113			4,533			136			8.72	%		580			12.80	%
Net impairment loss		(219	)		—			(737	)		—			(219	)		—			(737	)		—
Net gain (loss) on sale of securities		320			(39	)		306			191			359			-920.51	%		115			60.21	%
Net FDIC indemnification asset amortization		(1,096	)		(1,089	)		(3,166	)		(4,290	)		(7	)		0.64	%		1,124			-26.20	%
Other operating income		839			1,458			3,021			4,285			(619	)		-42.46	%		(1,264	)		-29.50	%

Noninterest income	$	7,667		$	8,111		$	22,505		$	22,820		$	(444	)		-5.47	%	$	(315	)		-1.38	%

Three Month Comparison. Noninterest income decreased $444 thousand, or 5.47%, in the third quarter of 2014 compared to the same quarter of the prior year. Wealth management revenues, which include fees and commissions for trust and investment advisory services, decreased as a result of a decrease in FCWM income. Service charges on deposit accounts and other charges and fees increased primarily from an increase in interchange fee income and credit card income. Insurance commissions increased largely due to a general increase in premium commissions. In the third quarter of 2014, we incurred OTTI charges of $219 thousand related to a non-Agency mortgage-backed security (“MBS”) and realized a net gain of $320 thousand on the sale of securities. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. We recorded net amortization related to the FDIC indemnification asset of $1.10 million as a result of improved loss estimates in the covered Waccamaw loan portfolio. Other operating income decreased primarily due to a $510 thousand decrease in secondary market income and a $107 thousand decrease in income from bank owned life insurance policies.

Excluding the impact from OTTI charges, the sale of securities, and the net amortization on the FDIC indemnification asset, noninterest income decreased $577 thousand, or 6.25%, to $8.66 million in the third quarter of 2014, compared with $9.24 million in the same quarter of the prior year.

Nine Month Comparison. Noninterest income decreased $315 thousand, or 1.38%, in the first nine months of 2014 compared to the same period of the prior year. Wealth management revenues decreased as a result of the recognition of estate settlement fees and decrease in FCWM income. Service charges on deposit accounts and other charges and fees increased primarily from an increase in monthly service charges on demand deposit accounts and credit card 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. In the first nine months of 2014, we incurred OTTI charges of $737 thousand related to a non-Agency MBS and certain equity holdings and realized a net gain of $306 thousand on the sale of securities. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. We recorded net amortization related to the FDIC indemnification asset of $3.17 million as a result of improved loss estimates in the covered Waccamaw loan portfolio. Other operating income decreased primarily due to a $504 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.

Excluding the impact from OTTI charges, the sale of securities, the net amortization on the FDIC indemnification asset, a nonrecurring life insurance benefit, and the net gain on debt prepayments, noninterest income decreased $1.06 million, or 3.97%, to $25.57 million in the first nine months of 2014, compared with $26.62 million in the same period of the prior year.

Noninterest Expense

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


	Three Months Ended				Nine Months Ended				Three Months Ended						Nine Months Ended
	September 30,				September 30,				Increase						Increase
(Amounts in thousands)	2014		2013		2014		2013		(Decrease)			% Change			(Decrease)			% Change
Salaries and employee benefits	$	9,924	$	11,080	$	29,872	$	31,150	$	(1,156	)		-10.43	%	$	(1,278	)		-4.10	%
Occupancy of bank premises		1,469		1,700		4,825		5,350		(231	)		-13.59	%		(525	)		-9.81	%
Furniture and equipment		1,212		1,288		3,611		3,931		(76	)		-5.90	%		(320	)		-8.14	%
Amortization of intangible assets		179		183		532		545		(4	)		-2.19	%		(13	)		-2.39	%
FDIC premiums and assessments		419		460		1,311		1,401		(41	)		-8.91	%		(90	)		-6.42	%
FHLB debt prepayment		3,047		—		3,047		—		3,047			—			3,047			—
Merger, acquisition, and divestiture		285		—		285		57		285			—			228			400.00	%
Other operating expense		4,934		5,442		15,329		15,796		(508	)		-9.33	%		(467	)		-2.96	%

Total noninterest expense	$	21,469	$	20,153	$	58,812	$	58,230	$	1,316			6.53	%	$	582			1.00	%

Three Month Comparison. Noninterest expense increased $1.32 million, or 6.53%, in the third quarter of 2014 compared to the same quarter of the prior year. Salaries and employee benefits decreased primarily from a one-time charge to accrue for contractual executive severance of $1.07 million in the same quarter of the prior year. Exclusive of the severance charge, salaries and employee benefits decreased $85 thousand, or 0.85%, for the quarter ended September 30, 2014, compared with the same quarter of 2013. Full-time equivalent employees, calculated using the number of hours worked, decreased to 691 as of September 30, 2014, from 726 as of September 30, 2013. The reduction in full-time equivalent employees was primarily seen throughout our North Carolina branches. Occupancy, furniture, and equipment expense decreased $307 thousand, or 10.27%, in the third quarter of 2014, which was primarily due to branch closures between the periods. In the third quarter of 2014, we prepaid $35 million of a $50 million FHLB convertible advance that matures in May 2017 and bears an interest rate of 4.21%, which resulted in a prepayment penalty of $3.05 million. Acquisition and divestiture expense totaled $285 thousand in the third quarter of 2014, which was related to the pending seven branch acquisitions from Bank of America and thirteen branch sales to CresCom Bank. The decrease in other operating expense included a $282 thousand decrease in problem loan expense, a $252 thousand decrease in marketing expense, and a $175 thousand decrease in legal expense. The decrease was offset by an increase in other service fees of $155 thousand and an increase in the net loss on sales and expenses related to OREO of $307 thousand to $579 thousand in the third quarter of 2014 compared to $273 thousand in the same quarter of the prior year.

Nine Month Comparison. Noninterest expense experienced an increase of $582 thousand, or 1.00%, in the first nine months of 2014 compared to the same period of the prior year. Salaries and employee benefits decreased primarily from a one-time charge to accrue for contractual executive severance of $1.07 million in the same quarter of the prior year. Exclusive of the severance charge, salaries and employee benefits decreased $207 thousand, or 0.69%, for the nine months ended September 30, 2014, compared with the same period of 2013. Occupancy, furniture, and equipment expense decreased $845 thousand, or 9.10%, in the first nine months of 2014, which was primarily due to branch closures between the periods. In the first nine months of 2014, we incurred a FHLB debt prepayment penalty of $3.05 million. Acquisition and divestiture expense totaled $285 thousand in the first nine months of 2014 related to the pending branch acquisitions and divestitures. The decrease in other operating expense included a $587 thousand decrease in marketing expenses and a $335 thousand decrease in legal expenses, offset by an increase in the net loss on sales and expenses related to OREO of $623 thousand to $1.69 million in the first nine months of 2014 compared to $1.07 million in the same period of the prior year.

Income Tax Expense

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 officers’ life insurance policies, which are both exempt from federal income tax. Income tax expense increased $1.07 million, or 42.14%, and the effective rate increased 197 basis points to 33.89% in the third quarter of 2014 compared to the same quarter of the prior year. Income tax expense increased $921 thousand, or 10.87%, and the effective rate increased 19 basis points to 32.21% in the first nine months of 2014 compared to the same period of the prior year. Increases in the effective tax rates were largely due to an increase in taxable revenues as a percent of net earnings and a decrease in the relative amounts of nontaxable revenues.

Financial Condition

Total assets were $2.55 billion as of September 30, 2014, a decrease of $52.39 million, or 2.01%, compared with $2.60 billion as of December 31, 2013. Total liabilities were $2.20 billion as of September 30, 2014, a decrease of $71.02 million, or 3.12%, compared with $2.27 billion as of December 31, 2013. Our book value per as-converted common share was $17.85 as of September 30, 2014, an increase of 106 basis points, compared with $16.79 as of December 31, 2013.

Investment Securities

Available-for-sale securities as of September 30, 2014, decreased $168.13 million, or 32.34%, compared to December 31, 2013. The market value of securities available-for-sale as a percentage of amortized cost was 97.56% as of September 30, 2014, compared to 95.97% as of December 31, 2013.

Held-to-maturity securities as of September 30, 2014, increased $30.46 million to $31.03 million compared to $568 thousand as of December 31, 2013, due to the purchase of 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 market value of securities held to maturity as a percentage of amortized cost was 99.59% as of September 30, 2014, compared with 101.94% as of December 31, 2013.

We recognized credit-related OTTI charges in earnings associated with debt securities beneficially owned of $219 thousand for the three months ended September 30, 2014, and no charges for the three months ended September 30, 2013. We recognized credit-related OTTI charges in earnings associated with debt securities beneficially owned of $705 thousand for the nine months ended September 30, 2014, and no charges for the nine months ended September 30, 2013. These charges were related to a non-Agency MBS. Temporary impairment on the non-Agency MBS is primarily related to changes in interest rates. We recognized no OTTI charges in earnings associated with equity securities for the three months ended September 30, 2014, or the three months ended September 30, 2013. We recognized OTTI charges in earnings associated with certain equity securities of $32 thousand for the nine months ended September 30, 2014, and no charges for the nine months ended September 30, 2013. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Loans Held for Sale

Loans held for sale as of September 30, 2014, increased $267 thousand, or 30.24%, compared to December 31, 2013. 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. The gross notional amount of outstanding commitments related to secondary market mortgage loans as of September 30, 2014, was $2.95 million for 20 loans compared to $3.68 million for 19 loans as of December 31, 2013.

Loans Held for Investment

Loans held for investment as of September 30, 2014, increased $52.07 million, or 3.04%, compared to December 31, 2013. The increase was primarily due to continued growth in commercial real estate originations in the Carolinas and southern West Virginia. The non-covered loan portfolio increased $77.14 million, or 4.95%, compared to December 31, 2013. The average loan to deposit ratio was 92.13% for the three months ended September 30, 2014, compared to 85.13% for the same period of 2013, and 90.47% for the nine months ended September 30, 2014, compared to 84.81% for the same period of 2013. 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. See Note 3, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The following table presents loans, net of unearned income with non-covered loans disaggregated by class, as of the periods indicated:


	September 30, 2014					December 31, 2013					September 30, 2013
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	42,775		2.43	%	$	35,255		2.06	%	$	55,791		3.29	%
Commercial and industrial		88,709		5.03	%		95,455		5.58	%		95,972		5.66	%
Multi-family residential		99,812		5.66	%		70,197		4.10	%		56,079		3.31	%
Single family non-owner occupied		143,904		8.16	%		135,559		7.92	%		132,253		7.79	%
Non-farm, non-residential		491,933		27.91	%		475,911		27.82	%		455,247		26.83	%
Agricultural		2,149		0.12	%		2,324		0.14	%		2,274		0.13	%
Farmland		31,938		1.81	%		32,614		1.91	%		31,885		1.88	%

Total commercial loans		901,220		51.12	%		847,315		49.53	%		829,501		48.89	%
Consumer real estate loans
Home equity lines		112,863		6.40	%		111,770		6.53	%		109,611		6.46	%
Single family owner occupied		498,523		28.28	%		496,012		28.99	%		492,424		29.02	%
Owner occupied construction		45,015		2.56	%		28,703		1.68	%		25,349		1.50	%

Total consumer real estate loans		656,401		37.24	%		636,485		37.20	%		627,384		36.98	%
Consumer and other loans
Consumer loans		71,252		4.04	%		71,313		4.17	%		71,679		4.22	%
Other		7,308		0.42	%		3,926		0.23	%		4,708		0.28	%

Total consumer and other loans		78,560		4.46	%		75,239		4.40	%		76,387		4.50	%

Non-covered loans held for investment		1,636,181		92.82	%		1,559,039		91.13	%		1,533,272		90.37	%
Covered loans		126,611		7.18	%		151,682		8.87	%		163,425		9.63	%
Less unearned income		—					—					—

Total loans held for investment		1,762,792		100.00	%		1,710,721		100.00	%		1,696,697		100.00	%
Allowance for loan losses		21,159					24,077					24,665

Total loans held for investment, less allowance		1,741,633					1,686,644					1,672,032

Loans held for sale	$	1,150				$	883				$	825

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 Condensed Consolidated Financial Statements in Item 1 of this report. The following table summarizes the components of nonperforming assets and presents additional details for nonperforming and restructured loans as of the periods indicated:


(Amounts in thousands)	September 30, 2014			December 31, 2013			September 30, 2013
Non-covered nonperforming
Nonaccrual loans	$	11,480		$	19,161		$	26,397
Accruing loans past due 90 days or more		—			—			—
TDRs⁽¹⁾		3,450			1,311			2,228

Total nonperforming loans		14,930			20,472			28,625
Non-covered OREO		5,612			7,318			5,450

Total nonperforming assets	$	20,542		$	27,790		$	34,075

Covered nonperforming
Nonaccrual loans	$	1,131		$	3,353		$	3,579
Accruing loans past due 90 days or more		—			86			82

Total nonperforming loans		1,131			3,439			3,661
Covered OREO		7,620			7,541			7,381

Total nonperforming assets	$	8,751		$	10,980		$	11,042

Total nonperforming
Nonaccrual loans	$	12,611		$	22,514		$	29,976
Accruing loans past due 90 days or more		—			86			82
TDRs⁽¹⁾		3,450			1,311			2,228

Total nonperforming loans		16,061			23,911			32,286
OREO		13,232			14,859			12,831

Total nonperforming assets	$	29,293		$	38,770		$	45,117

Additional Information
Performing TDRs⁽²⁾	$	11,701		$	10,900		$	9,697
Total TDRs⁽³⁾		15,151			12,211			11,925
Non-covered ratios
Nonperforming loans to total loans		0.91	%		1.31	%		1.87	%
Nonperforming assets to total assets		0.85	%		1.14	%		1.37	%
Non-PCI allowance to nonperforming loans		140.35	%		113.92	%		82.52	%
Non-PCI allowance to total loans		1.28	%		1.50	%		1.54	%
Total ratios
Nonperforming loans to total loans		0.91	%		1.40	%		1.90	%
Nonperforming assets to total assets		1.15	%		1.49	%		1.70	%
Allowance for loan losses to nonperforming loans		131.74	%		100.69	%		76.40	%
Allowance for loan losses to total loans		1.20	%		1.41	%		1.45	%

(1)	TDRs not performing or restructured within the past six months, excludes nonaccrual TDRs of $306 thousand, $734 thousand, and $1.04 million for the periods ended September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

(2)	TDRs with six months or more of satisfactory payment performance, excludes nonaccrual TDRs of $179 thousand, $1.47 million, and $1.62 million for the periods ended September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

(3)	Perfoming and nonperforming TDRs, excludes nonaccrual TDRs of $485 thousand, $2.20 million, and $2.66 million for the periods ended September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

Non-covered nonperforming assets totaled $20.54 million as of September 30, 2014, a $7.25 million, or 26.08%, decrease from December 31, 2013, and a $13.53 million, or 39.72%, decrease from September 30, 2013. Non-covered nonperforming assets as a percentage of total non-covered assets were 0.85% as of September 30, 2014, 1.14% as of December 31, 2013, and 1.37% as of September 30, 2013.

Non-covered nonaccrual loans totaled $11.48 million as of September 30, 2014, $19.16 million as of December 31, 2013, and $26.40 million as of September 30, 2013. As of September 30, 2014, non-covered nonaccrual loans were largely attributed to the following loan classes: single family owner occupied (47.88%); commercial and industrial (20.52%); and non-farm, non-residential (20.36%). As of September 30, 2014, approximately $1.48 million, or 12.90%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations. Certain loans included in the nonaccrual category have been written down to the estimated realizable value or assigned specific reserves within 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 $15.15 million as of September 30, 2014, $12.21 million as of December 31, 2013, and $11.93 million as of September 30, 2013. Nonperforming accruing TDRs totaled $3.45 million, or 22.77%, of total accruing TDRs as of September 30, 2014, as compared to 10.74% of accruing TDRs as of December 31, 2013, and 18.68% of accruing TDRs as of September 30, 2013. The allowance for loan losses attributed to TDRs totaled $653 thousand as of September 30, 2014, $1.84 million as of December 31, 2013, and $1.69 million as of September 30, 2013.

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 as a result of changing economic conditions, borrower financial capacity, or resolution efforts. There were no covered accruing loans contractually past due 90 days or as of September 30, 2014, compared to $86 thousand as of December 31, 2013, and $82 thousand as of September 30, 2013.

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, totaled $5.61 million as of September 30, 2014, a decrease of $1.71 million, or 23.31%, compared with December 31, 2013. As of September 30, 2014, non-covered OREO consisted of 55 properties with an average holding period of 8 months. The net loss on the sale of OREO totaled $422 thousand in the third quarter of 2014 compared to $264 thousand in the same quarter of the prior year. The net loss on the sale of OREO totaled $1.20 million in the first nine months of 2014 compared to $606 thousand in the same period of the prior year. Pursuant to FDIC loss share agreements, covered OREO is presented net of the related fair value discount. The following tables detail activity within OREO for the periods indicated:


(Amounts in thousands)	Non-covered			Covered			Total
Beginning balance, January 1, 2013	$	5,749		$	3,255		$	9,004
Additions		6,651			6,978			13,629
Disposals		(6,106	)		(1,827	)		(7,933	)
Valuation adjustments		(844	)		(1,025	)		(1,869	)

Ending balance, September 30, 2013	$	5,450		$	7,381		$	12,831

Beginning balance, January 1, 2014	$	7,318		$	7,541		$	14,859
Additions		3,111			6,509			9,620
Disposals		(4,016	)		(4,839	)		(8,855	)
Valuation adjustments		(801	)		(1,591	)		(2,392	)

Ending balance, September 30, 2014	$	5,612		$	7,620		$	13,232

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $20.94 million as of September 30, 2014, a decrease of $9.92 million, or 32.14%, compared with December 31, 2013, and a decrease of $13.52 million, or 39.23%, compared with September 30, 2013. Non-covered delinquent loans as a percentage of total non-covered loans measured 1.28% as of September 30, 2014, which is attributed to loans 30 to 89 days past due of 0.58% and nonaccrual loans of 0.70%. Non-covered nonperforming loans, comprised of nonaccrual loans, nonperforming TDRs, and unseasoned TDRs, as a percentage of total non-covered loans were 0.91% as of September 30, 2014, 1.31% at December 31, 2013, and 1.87% at September 30, 2013.

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, as well as “Significant Accounting Policies” in Note 1, “General,” and Note 6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Our allowance for loan losses totaled $21.16 million as of September 30, 2014, $24.08 million as of December 31, 2013, and $24.67 million as of September 30, 2013. During the third quarter of 2014, we released $3.2 million of specific reserves as a result of a favorable resolution of litigation related to a large, commercial non-performing credit. The allowance attributed to non-PCI loans as a percentage of non-covered loans held for investment was 1.28% as of September 30, 2014, 1.50% at December 31, 2013, and 1.54% at September 30, 2013. The cash flow analysis performed for the third quarter of 2014 identified one of our seven PCI loan pools as impaired with a cumulative impairment of $196 thousand as of September 30, 2014. The portfolio will continue to be monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in a future period.

Our qualitative risk factors continue to reflect a reduced risk of loan losses due to improvements in unemployment trends, general economic conditions, and asset quality metrics. As of September 30, 2014, 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. Net charge-offs decreased $1.40 million, or 87.33%, in the third quarter of 2014 compared to the same quarter of the prior year and decreased $5.50 million, or 63.94%, in the first nine months of 2014 compared to the same period of the prior year.

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


	Three Months Ended September 30,
	2014									2013
(Amounts in thousands)	Non-acquired Impaired			Acquired Impaired			Total			Non-acquired Impaired			Acquired Impaired			Total
Beginning balance	$	23,493		$	418		$	23,911		$	23,114		$	8		$	23,122
(Recovery of) provision for loan losses		(2,335	)		(214	)		(2,549	)		2,110			1,035			3,145
Benefit attributable to the FDIC indemnification asset		—			110			110			—			(812	)		(812	)

(Recovery of) provision for loan losses charged to operations		(2,335	)		(104	)		(2,439	)		2,110			223			2,333
(Recovery of) provision for loan losses recorded through the FDIC indemnification asset		—			(110	)		(110	)		—			812			812
Charge-offs		(1,118	)		—			(1,118	)		(3,022	)		—			(3,022	)
Recoveries		915			—			915			1,420			—			1,420

Net charge-offs		(203	)		—			(203	)		(1,602	)		—			(1,602	)

Ending balance	$	20,955		$	204		$	21,159		$	23,622		$	1,043		$	24,665


	Nine Months Ended September 30,
	2014									2013
(Amounts in thousands)	Non-acquired Impaired			Acquired Impaired			Total			Non-acquired Impaired			Acquired Impaired			Total
Beginning balance	$	23,322		$	755		$	24,077		$	25,762		$	8		$	25,770
Provision for (recovery of) loan losses		733			(551	)		182			6,457			1,035			7,492
Benefit attributable to the FDIC indemnification asset		—			451			451			—			(812	)		(812	)

Provision for (recovery of) loan losses charged to operations		733			(100	)		633			6,457			223			6,680
(Recovery of) provision for loan losses recorded through the FDIC indemnification asset		—			(451	)		(451	)		—			812			812
Charge-offs		(5,119	)		—			(5,119	)		(11,511	)		—			(11,511	)
Recoveries		2,019			—			2,019			2,914			—			2,914

Net charge-offs		(3,100	)		—			(3,100	)		(8,597	)		—			(8,597	)

Ending balance	$	20,955		$	204		$	21,159		$	23,622		$	1,043		$	24,665

Deposits

Total deposits as of September 30, 2014, decreased $18.47 million, or 0.95%, compared to December 31, 2013. Noninterest-bearing deposits increased $57.84 million as of September 30, 2014, compared to December 31, 2013. Interest-bearing deposits decreased $14.23 million; savings deposits, which include money market and savings accounts, decreased $4.11 million; and time deposits decreased $57.97 million as of September 30, 2014, compared to December 31, 2013.

Borrowings

Total borrowings as of September 30, 2014, decreased $54.91 million, or 18.28%, compared to December 31, 2013. Short-term borrowings consist of federal funds purchased and retail repurchase agreements. No federal funds were purchased as of September 30, 2014, compared to $16.00 million as of December 31, 2013. The balance of retail repurchase agreements decreased $3.87 million, or 5.66%, as of September 30, 2014, compared to December 31, 2013. 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 September 30, 2014, compared to December 31, 2013. As of September 30, 2014, wholesale repurchase agreements had contractual maturities between two and five years. The balance of FHLB borrowings decreased $35.00 million, or 23.33%, and the weighted average rate decreased 3 basis points to 4.09% as of September 30, 2014, compared to December 31, 2013. As of September 30, 2014, FHLB borrowings had contractual maturities between two and seven years. During the third quarter of 2014, we prepaid $35 million of a $50 million FHLB convertible advance that matures in May 2017 and bears an interest rate of 4.21%, which resulted in a prepayment penalty of $3.05 million.

Stockholders’ Equity

Total stockholders’ equity increased $18.63 million, or 5.67%, from $328.61 million as of December 31, 2013, to $347.24 million as of September 30, 2014. The change in stockholders’ equity was largely impacted by net income of $19.78 million, dividends declared on our common and Series A Noncumulative Convertible Preferred Stock of $7.49 million, repurchases of 132,773 shares of our common stock totaling $2.15 million, and other comprehensive income (“OCI”) of $8.29 million. OCI was driven by unrealized gains on available-for-sale securities.

Liquidity and Capital Resources

We maintain a liquidity risk management policy and contingency funding policy (the “Liquidity Plan”) that is designed to detect potential liquidity issues in order 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 is responsible for reviewing liquidity risk exposure and policies related to liquidity management and ensuring that systems and internal controls are consistent with liquidity policies and provide accurate reports regarding liquidity needs, sources, and compliance.

As of September 30, 2014, we maintained liquidity in the form of unencumbered cash on hand and deposits with other financial institutions of $105.92 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 $395.44 million, and unpledged available-for-sale securities of $91.24 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. 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 September 30, 2014, the Company’s liquid assets consisted of cash and investment securities totaling $30.05 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 maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution. As of September 30, 2014, there was no outstanding balance on the line.

Capital Resources

Risk-based capital guidelines, promulgated 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. As of September 30, 2014, and December 31, 2013, the Company and the Bank were deemed “well capitalized” under regulatory capital adequacy standards. The following table presents our capital ratios as of the dates indicated:


	September 30, 2014			December 31, 2013
Total risk-based capital ratio
First Community Bancshares, Inc.		16.76	%		16.44	%
First Community Bank		14.77	%		14.55	%
Tier 1 risk-based capital ratio
First Community Bancshares, Inc.		15.51	%		15.19	%
First Community Bank		13.52	%		13.30	%
Tier 1 leverage ratio
First Community Bancshares, Inc.		10.70	%		9.95	%
First Community Bank		9.27	%		8.63	%

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. The following table presents the Company’s off-balance sheet financial instruments as of the dates indicated:


(Amounts in thousands)	September 30, 2014		December 31, 2013
Commitments to extend credit	$	223,710	$	216,179
Commitments related to secondary market mortgage loans		2,948		3,677
Standby letters of credit and financial guarantees		3,378		4,193

Total off-balance sheet risk	$	230,036	$	224,049

Reserve for unfunded commitments	$	326	$	326

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 terms of 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 financial institutions is generally not as significant as the effect on businesses with large investments in property, plant, and inventory. The U.S. inflation rate continues to be relatively stable, and management believes that any changes in inflation will not have a material impact on our financial performance.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Our profitability is dependent to a large extent 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.

Our primary component of operational revenue, net interest income, is subject to variation as a result of changes in interest rate environments in conjunction with 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 the underlying rates on the assets and liabilities the institution holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between two or more rates for different maturities for the same instrument. Lastly, option risk is due to embedded options, often put or call options, given or sold to holders of financial instruments.

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. The results of these simulations indicate the existence and severity of interest rate risk in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and our estimate of yields to be attained in those future rate environments and rates that will be paid on various 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 timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and our strategies. However, the earnings simulation model is currently the best tool available to us and the industry for managing interest rate risk.

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 according to 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 plus 300 to minus 100 basis point changes from the base case rate simulation and illustrates the prospective effects of hypothetical interest rate changes over a twelve-month time 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. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also 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. As of September 30, 2014, the Federal Open Market Committee maintained a target range for federal funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis points meaningless; accordingly, downward rate scenarios are limited to minus 100 basis points. In the downward rate shocks presented, benchmark interest rates are assumed at levels with floors near 0%.


(Amounts in thousands, except basis points)	September 30, 2014						December 31, 2013
Increase (Decrease) in Interest Rates in Basis Points	Change in Net Interest Income			Percent Change			Change in Net Interest Income		Percent Change
300	$	552			0.6		$	2,649		3.1
200		151			0.2			1,517		1.8
100		(168	)		(0.2	)		454		0.5
(100)		827			1.0			497		0.6

Item 4.

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 pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of September 30, 2014, 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 time 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 September 30, 2014, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

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 1A.

Risk Factors

A description of the Company’s risk factors is included in Part I, Item 1A, “Risk Factors,” of our 2013 Form 10-K. Our risk factors 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. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, our risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes from the risk factors previously disclosed in our 2013 Form 10-K.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not Applicable

(b)	Not Applicable

(c)	Issuer Purchases of Equity Securities

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⁾
July 1-31, 2014		1,273	$	15.56		1,273		902,736
August 1-31, 2014		—		—		—		902,736
September 1-30, 2014		—		—		—		903,236

Total		1,273	$	15.56		1,273

(1)

Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 3,000,000 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 2,096,764 shares in treasury as of September 30, 2014.

ITEM 3.

Defaults Upon Senior Securities

None

ITEM 4.

Mine Safety Disclosures

None

ITEM 5.

Other Information

None

ITEM 6.

Exhibits

(a)	Exhibits and index required


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)

4.5		Certificate of Designation of 6.00% Series A Noncumulative Convertible Preferred Stock. (7)

10.1**		First Community Bancshares, Inc. 1999 Stock Option Agreement (8) and Plan. (9)

10.1.1**		First Community Bancshares, Inc. 1999 Stock Option Plan, Amendment One. (10)

10.2**		First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Plan. (11)

10.3**		Employment Agreement between First Community Bancshares, Inc. and John M. Mendez dated December 16, 2008, as amended and restated (21) and Waiver Agreement. (29)

10.4**		First Community Bancshares, Inc. and Affiliates Executive Retention Plan (12), Amendment #1 (13), and Amendment #2. (32)

10.5**		First Community Bancshares, Inc. Split Dollar Plan and Agreement. (14)

10.6**		First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated. (15)

10.7**		First Community Bancshares, Inc. Wrap Plan, as amended and restated. (16)

10.9**		Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors, and Certain Executive Officers. (17)

10.10**		Form of Indemnification Agreement between First Community Bank, its Directors, and Certain Executive Officers. (17)

10.11**		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (18) and Stock Award Agreement. (19)

10.12**		First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan (31)

10.13**		First Community Bancshares, Inc. Directors Deferred Compensation Plan, as amended and restated. (20)

10.14**		Employment Agreement between First Community Bancshares, Inc. and David D. Brown dated December 16, 2008. (22)

10.15**		Employment Agreement between First Community Bancshares, Inc. and Robert L. Buzzo dated December 16, 2008, as amended and restated. (23)

10.16**		Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly dated December 16, 2008, as amended and restated. (24)

10.17**		Employment Agreement between First Community Bank and Gary R. Mills dated December 16, 2008. (25)

10.18**		Employment Agreement between First Community Bank and Martyn A. Pell dated December 16, 2008. (26)

10.19**		Employment Agreement between First Community Bank and Robert L. Schumacher dated December 16, 2008. (27)

10.21**		Employment Agreement between First Community Bank and Mark R. Evans dated July 31, 2009. (28)

10.22**		Form of Restricted Stock Grant Agreement under First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan. (33)

10.23**		Separation Agreement and Release between First Community Bancshares, Inc. and John M. Mendez dated August 28, 2013. (34)

10.24		Purchase and Assumption Agreement between Bank of America, National Association and First Community Bank. (35)

10.25		Purchase and Assumption Agreement between First Community Bank and CresCom Bank. (36)

11		Statement Regarding Computation of Earnings per Share. (30)

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101***		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of September 30, 2014, (Unaudited), and December 31, 2013; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2014 and 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2014 and 2013; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and 2013; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

*	Incorporated herewith.

**	Indicates a management contract or compensation plan.

***	Submitted electronically herewith.

(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 September 24, 2013, filed on September 26, 2013.

(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 4.1 of the Current Report on Form 8-K dated May 20, 2011, filed on May 23, 2011.

(8)	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.

(9)	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.

(10)	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.

(11)	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.

(12)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.

(13)	Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.

(14)	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.

(15)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.

(16)	Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.

(17)	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.

(18)	Incorporated by reference from Annex B to the 2004 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 15, 2004.

(19)	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.

(20)	Incorporated by reference from Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006.

(21)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on December 16, 2008.

(22)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on December 16, 2008.

(23)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(24)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(25)	Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(26)	Incorporated by reference from Exhibit 10.4 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(27)	Incorporated by reference from Exhibit 10.5 of the Current Report on Form 8-K dated and filed on July 6, 2009.

(28)	Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009.

(29)	Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010.

(30)	Incorporated by reference from Note 1 of the Notes to Condensed Consolidated Financial Statements included herein.

(31)	Incorporated by reference from the 2012 First Community Bancshares, Inc. Definitive Proxy Statement filed on March 7, 2012.

(32)	Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013.

(33)	Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013.

(34)	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.

(35)	Incorporated by reference from Exhibit 99.3 of the Current Report on Form 8-K/A dated June 9, 2014, filed on June 10, 2014.

(36)	Incorporated by reference from Exhibit 99.1 of the Current Report on Form 8-K dated August 6, 2014, filed on August 7, 2014.

SIGNATURES

Pursuant to the requirements 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 7^th day of November, 2014.

First Community Bancshares, Inc.

(Registrant)

/s/ William P. Stafford, II

William P. Stafford, II

Chief Executive Officer

(Principal Executive Officer)

/s/ David D. Brown

David D. Brown

Chief Financial Officer

(Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Exhibit

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of September 30, 2014, (Unaudited), and December 31, 2013; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2014 and 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2014 and 2013; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and 2013; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).