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FIRST COMMUNITY BANKSHARES INC /VA/ - Annual Report: 2020 (Form 10-K)

fcbc20191231_10k.htm
 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 000-19297

   
 

FIRST COMMUNITY BANKSHARES, INC.

 
 

(Exact name of registrant as specified in its charter)

 

 

Virginia

 

55-0694814

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

P.O. Box 989

Bluefield, Virginia 24605-0989

 

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (276) 326-9000

   

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbols

 

Name of each exchange on which registered

Common Stock, $1.00 par value

 

FCBC

 

NASDAQ Global Select

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

☐ Yes ☑ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☑ Yes ☐ No

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

Large accelerated filer ☐ Accelerated filer ☑
Non-accelerated filer ☐ Smaller reporting company ☐
  Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐ Yes ☑ No

As of June 30, 2020, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $282.85 million.

 

As of March 2, 2021, there were 17,641,124 shares outstanding of the registrant’s Common Stock, $1.00 par value.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 2021, are incorporated by reference in Part III of this Form 10-K.

 

 

 
 

FIRST COMMUNITY BANKSHARES, INC.

2020 FORM 10-K

INDEX

 

   

Page

PART I

   
     

Item 1.

Business.

4

Item 1A.

Risk Factors.

11

Item 1B.

Unresolved Staff Comments.

17

Item 2.

Properties.

17

Item 3.

Legal Proceedings.

17

Item 4.

Mine Safety Disclosures.

17
     

PART II

   
     

Item 5.

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

18

Item 6.

Selected Financial Data.

20

Item 7.

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

21

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

45

Item 8.

Financial Statements and Supplementary Data.

46

Item 9.

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

106

Item 9A.

Controls and Procedures.

106

Item 9B.

Other Information.

106
     

PART III

   
     

Item 10.

Directors, Executive Officers and Corporate Governance.

107

Item 11.

Executive Compensation.

108

Item 12.

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

108

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

108

Item 14.

Principal Accounting Fees and Services.

108
     

PART IV

   
     

Item 15.

Exhibits and Financial Statement Schedules.

109
 

Signatures

111

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

  the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestics and global economy, which may have an adverse effect on the Company's business;
 

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

 

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

 

inflation, interest rate, market and monetary fluctuations;

 

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

 

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

 

the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

 

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

 

technological changes;

 

the costs and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;

  the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters.
 

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

 

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

 

unanticipated regulatory or judicial proceedings;

 

changes in consumer spending and saving habits; and

 

the Company’s success at managing the risks mentioned above.

 

The list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control.  Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control.  The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part I, Item 1A of this report.

 

 

PART I

 

Item 1.

Business.

 

General

 

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and reincorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The reincorporation was completed on October 2, 2018. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management. Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

 

We focus on building financial partnerships and creating enduring and mutually beneficial relationships with businesses and individuals through a personal and local approach to banking and financial services. We strive to be the bank of choice in the markets we serve by offering impeccable service and a complete line of competitive products that include:

 

 

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

 

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

 

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

 

corporate and personal trust services; and

 

investment management services.

 

Our operations are guided by a strategic plan that focuses on organic growth supplemented by strategic acquisitions of complementary financial institutions. For a summary of our financial performance, see Item 6, “Selected Financial Data,” in Part II of this report.

 

Employees and Human Capital Resources

 

As of December 31, 2020, we had 605 full-time employees and 30 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.

 

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and customized corporate training engagements.

 

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations.  Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance and keeping increases in the employee portion of health care premiums as small as possible and sponsoring various wellness programs.

 

Employee retention helps us operate efficiently and achieve one of our business objectives, which is building financial partnerships. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our current 401(k) plan and a former employee stock ownership plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates.

 

Market Area

 

As of December 31, 2020, we operated 50 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment, Community Banking.  Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals and businesses across a variety of industries such as education; government and health services; retail trade; construction; manufacturing; tourism; coal mining and gas extraction; and transportation.

 

Competition

 

The financial services industry is highly competitive and constantly evolving. We encounter strong competition in attracting and retaining deposit, loan, and other financial relationships in our market areas. We compete with other commercial banks, thrifts, savings and loan associations, credit unions, consumer finance companies, mortgage banking firms, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies. We have positioned ourselves as a regional community bank that provides an alternative to larger banks, which often place less emphasis on personal relationships, and smaller community banks, which lack the capital and resources to efficiently serve customer needs. Factors that influence our ability to remain competitive include the ability to develop, maintain, and build long-term customer relationships; the quality, variety, and pricing of products and services; the convenience of banking locations and office hours; technological developments; and industry and general economic conditions. We seek to mitigate competitive pressures with our relationship style of banking, competitive pricing, cost efficiencies, and disciplined approach to loan underwriting.

 

 

Supervision and Regulation

 

Overview

 

We are subject to extensive examination, supervision, and regulation under applicable federal and state laws and various regulatory agencies. These regulations are intended to protect consumers, depositors, borrowers, deposit insurance funds, and the stability of the financial system and are not for the protection of stockholders or creditors.

 

Applicable laws and regulations restrict our permissible activities and investments and impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our banking subsidiary, and impose capital adequacy requirements on the Company and the Bank. The consequences of noncompliance with these laws and regulations can include substantial monetary and nonmonetary sanctions.

 

The following discussion summarizes significant laws and regulations applicable to the Company and the Bank. These summaries are not intended to be complete and are qualified in their entirety by reference to the applicable statute or regulation. Changes in laws and regulations may have a material effect on our business, financial condition, or results of operations.

 

First Community Bankshares, Inc.

 

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (“BHC Act”) and a financial holding company under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”). The Company elected financial holding company status in December 2006. The Company and its subsidiaries are subject to supervision, regulation, and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The BHC Act generally provides for umbrella regulation of financial holding companies, such as the Company, by the Federal Reserve, as well as functional regulation of financial holding company subsidiaries by applicable regulatory agencies. The Federal Reserve is granted the authority, in certain circumstances, to require reports of, examine, and adopt rules applicable to any bank holding company subsidiary.

 

The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (“Exchange Act”), as administered by the Securities and Exchange Commission (“SEC”). The Company’s common stock is listed on the NASDAQ Global Select Market under the trading symbol FCBC and is subject to NASDAQ’s rules for listed companies.

 

First Community Bank

 

The Bank is a Virginia chartered bank and a member of the Federal Reserve subject to supervision, regulation, and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank (“FRB”) of Richmond. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”), and its deposits are insured by the FDIC to the extent provided by law. The regulations of these agencies govern most aspects of the Bank’s business, including requirements concerning the allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid on deposits, the payment of dividends, loans to affiliates, mergers and acquisitions, capital, and the establishment of branches. Various consumer and compliance laws and regulations also affect the Bank’s operations.

 

As a member bank, the Bank is required to hold stock in the FRB of Richmond in an amount equal to 6% of its capital stock and surplus (half paid to acquire the stock with the remainder held as a cash reserve). Member banks do not have any control over the Federal Reserve as a result of owning the stock and the stock cannot be sold or traded.

 

Permitted Activities under the BHC Act

 

The BHC Act limits the activities of bank holding companies, such as the Company, to the business of banking, managing or controlling banks and other activities the Federal Reserve determines to be closely related to banking. A bank holding company that elects treatment as a financial holding company under the GLB Act, such as the Company, may engage in a broader range of activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system. These activities include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve determines to be closely related to banking.

 

In order to maintain financial holding company status, the Company and the Bank must be well-capitalized and well-managed under applicable Federal Reserve regulations and have received at least a satisfactory rating under the Community Reinvestment Act (“CRA”). See “Prompt Corrective Action” and “Community Reinvestment Act” below. If we fail to meet these requirements, the Federal Reserve may impose corrective capital and managerial requirements and place limitations or conditions on our ability to conduct activities permissible for financial holding companies. If the deficiencies persist, the Federal Reserve may require the Company to divest the Bank or divest investments in companies engaged in activities permissible only for financial holding companies.

 

 

In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. The Company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, subject to certain exemptions, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.

 

The BHC Act requires that bank holding companies obtain the Federal Reserve’s approval before acquiring direct or indirect ownership or control of more than 5% of the voting shares or all, or substantially all, of the assets of a bank. The regulatory authorities are required to consider the financial and managerial resources and future prospects of the bank holding company and the target bank, the convenience and needs of the communities to be served, and various competitive factors when approving acquisitions. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless the Federal Reserve determines it to be closely related to banking.

 

Capital Requirements

 

We are subject to various regulatory capital requirements administered by the Federal Reserve (the "Basel III Capital Rules").

 

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

 

 

A minimum ratio of Common Equity Tier 1 ("CET1") to risk-weighted assets of at least 4.50%, plus a 2.50% "capital conservation buffer" that is composed entirely of CET1 capital (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.00%); 

 

A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.50%);

  A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.00%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.50%); and
 

A minimum leverage ratio of 4.00%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").

 

Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

 

Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the Company and the Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.

 

Basel III Capital Rules prevent certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The rules do not require a phase-out of trust preferred securities issued before May 19, 2010, for holding companies of depository institutions with less than $15 billion in consolidated total assets, as of December 1, 2009.

 

 

 

 

In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected credit losses (“CECL”) on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). 

 

Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

 

In August 2018, the Federal Reserve issued an interim final rule, which expanded the applicability of the Small Bank Holding Company Policy Statement through an increase in the size limitation for qualifying bank holding companies from $1 billion to $3 billion in total consolidated assets. As a result, the Company qualifies under the Small Bank Holding Company Policy Statement for exemption from the Federal Reserve’s consolidated risk-based capital requirements at the holding company level. Management believes that the Company and the Bank would meet all capital adequacy requirements under Basel III Capital Rules on a fully phased-in basis, as of December 31, 2020.

 

Beginning in the first quarter of 2020, a qualifying community banking organization may elect to use the community bank leverage ratio (“CBLR”) framework to eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advance approaches banking organization. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the FDICIA. Temporary relief was provided to community banks under the Coronavirus Aid, Relief and Economic Security Act to set the community bank ratio to 8.00% beginning in the second quarter of 2020 and for the remainder of 2020, and to 8.50% effective January 1, 2021, and 9.00% effective January 1, 2022.  A qualifying community banking organization may opt into and out of the CBLR framework by completing the associated reporting requirements on its call report.

 

Prompt Corrective Action

 

The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if the appropriate federal regulators determine that it is engaging in an unsafe or unsound practice or is in an unsafe or unsound condition. A bank’s capital category is determined solely for applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s financial condition or prospects for other purposes.

 

The Bank was classified as well-capitalized under prompt corrective action regulations as of December 31, 2020. In order to be considered a well-capitalized institution under Basel III Capital Rules, an organization must not be subject to any written agreement, order, capital directive, or prompt corrective action directive and must maintain the following minimum capital ratios:

 

 

6.5% CET1 to risk-weighted assets

 

8.0% Tier 1 capital to risk-weighted assets

 

10.0% Total capital to risk-weighted assets

 

5.0% Tier 1 leverage ratio

 

Undercapitalized institutions are required to submit a capital restoration plan to federal banking regulators. Under the Federal Deposit Insurance Act, as amended (“FDIA”), in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must provide appropriate assurances of performance and guarantee that its subsidiary bank will comply with its capital restoration plan, subject to certain limitations. Agency regulations contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, establishing branches, and engaging in new lines of business. With certain exceptions, a depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to its parent holding company if the institution would be undercapitalized after such distribution or payment.

 

A significantly undercapitalized institution is subject to various requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and ending deposits from correspondent banks. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator.

 

 

Safety and Soundness Standards

 

Guidelines adopted by federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage risks and exposures. If an institution fails to meet safety and soundness standards, the regulatory agencies may require the institution to submit a written compliance plan describing the steps they would take to correct the situation and the time that such steps would be taken. If an institution fails to submit or implement an acceptable compliance plan, after being notified, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions, such as those applicable to undercapitalized institutions under the prompt corrective action provisions of the FDIA. An institution may be subject to judicial proceedings and civil money penalties if it fails to follow such an order.

 

Payment of Dividends

 

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company’s principal source of cash flow is derived from dividends paid by the Bank. There are various restrictions by regulatory agencies related to dividends paid by the Bank to the Company and dividends paid by the Company to its shareholders. The payment of dividends by the Company and the Bank may be limited by certain factors, such as requirements to maintain capital above regulatory guideline minimums.

 

Prior FRB approval is required for the Bank to declare or pay a dividend to the Company if the total of all dividends declared in any given year exceed the total of the Bank’s net profits for that year and its retained profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock. Dividends paid by the Company to shareholders are subject to oversight by the Federal Reserve. Federal Reserve policy states that bank holding companies generally should pay dividends on common stock only from income available over the past year if prospective earnings retention is consistent with the organization’s expected future needs, asset quality, and financial condition.

 

Regulatory agencies have the authority to limit or prohibit the Company and the Bank from paying dividends if the payments are deemed to constitute an unsafe or unsound practice. The appropriate regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only from current operating earnings. In addition, the Bank may not declare or pay a dividend if, after paying the dividend, the Bank would be classified as undercapitalized. In the current financial and economic environment, the FRB has discouraged payout ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that bank holding companies should carefully review their dividend policy. Bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries.

 

Source of Strength

 

Federal Reserve policy and federal law requires the Company to act as a source of financial and managerial strength to the Bank. Under this requirement, the Company is expected to commit resources to support the Bank even when it may not be in a financial position to provide such resources. Because the Company is a legal entity separate and distinct from its subsidiaries, any capital loans it makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

 

Transactions with Affiliates

 

The Federal Reserve Act (“FRA”) and Federal Reserve Regulation W place restrictions on “covered transactions” between the Bank and its affiliates, including the Company. The term “covered transactions” includes making loans, purchasing assets, issuing guarantees, and other similar transactions. The Dodd-Frank Act expanded the definition of “covered transactions” to include derivative activities, repurchase agreements, and securities lending or borrowing activities. These restrictions limit the amount of transactions with affiliates, require certain levels of collateral for loans to affiliates, and require that all transactions with affiliates be on terms that are consistent with safe and sound banking practices. In addition, these transactions must be on terms that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for similar transactions with non-affiliates.

 

The FRA and Federal Reserve Regulation O place restrictions on loans between the Company and the Bank and their directors, executive officers, principal shareholders, affiliates, and interests of those directors, executive officers, and principal shareholders. These restrictions limit the amount of loans to one borrower and require that loans are on terms that are substantially the same as, and follow underwriting procedures that are not less stringent than, those prevailing at the time for similar loans with non-insiders. In addition, the aggregate limit of loans to all insiders, as a group, cannot exceed the Bank’s total unimpaired capital and surplus.

 

 

Deposit Insurance and Assessments

 

Substantially all of the Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to quarterly deposit insurance assessments to maintain the DIF. Deposit insurance premiums are assessed using a risk-based system that places FDIC-insured institutions into one of four risk categories based on capital, supervisory ratings and other factors. The assessment rate determined by considering such information is then applied to the institution's average assets minus average tangible equity to determine the institution's insurance premium. The FDIC may change assessment rates or revise its risk-based assessment system if deemed necessary to maintain an adequate reserve ratio for the DIF. The Dodd-Frank Act required that the minimum reserve ratio for the DIF increase from 1.15% to 1.35% by September 30, 2020. Under the FDIA, the FDIC may terminate deposit insurance if it determines that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The Bank’s FDIC deposit insurance assessments were $426 thousand in 2020, $318 thousand in 2019, and $840 thousand in 2018. The decrease in FDIC assessments in 2019 and 2020 were primarily the result of the receipt of Small Bank Assessment Credits from the FDIC.  On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent.  Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations.  Surcharges on large banks, $10 billion or more in consolidated assets, ended; and small banks, less than $10 billion in consolidated assets, were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ration from 1.15 percent to 1.35 percent.  The credit was applied when the reserve ratio was at least 1.38 percent.  The Small Bank Credit was fully utilized by the second quarter of 2020.

 

In addition, all FDIC-insured institutions were required to pay annual assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”) through March 29, 2019. The FICO is a mixed-ownership government corporation that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The Bank’s FICO assessments, which were set quarterly, were $6 thousand in 2019, and $66 thousand in 2018.

 

The Volcker Rule

 

The Dodd-Frank Act amended the BHC Act to prohibit depository institutions and their affiliates from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with hedge funds or private equity funds, known as the Volcker Rule. The Volcker Rule, which became effective in July 2015 and the implementing regulations of which were amended in 2019 and were subject to further amendment in 2020, does not significantly impact the operations of the Company and its subsidiaries, as we do not have any engagement in the businesses prohibited by the Volcker Rule.

 

Community Reinvestment Act

 

The CRA of 1977, as amended, requires depository institutions to help meet the credit needs of their market areas, including low- and moderate-income individuals and communities, consistent with safe and sound banking practices. Federal banking regulators periodically examine depository institutions and assign ratings based on CRA compliance. A rating of less than satisfactory may restrict certain operating activities, delay or deny certain transactions, or result in an institution losing its financial holding company status. The Bank received a rating of satisfactory in its most recent CRA examination.

 

In December 2019, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the Federal Reserve Board did not join in that proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA rule. In September 2020, the Federal Reserve Board issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invites public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA. The ANPR seeks feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.

 

 Incentive Compensation

 

Federal regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance is based on the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

 

Federal banking regulators periodically examine the incentive compensation arrangements of banking organizations and incorporate any deficiencies in the organization’s supervisory ratings, which can affect certain operating activities. The FRB may initiate enforcement actions if the organization’s incentive compensation arrangements or related risk management, control, or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop. It cannot be determined at this time if or when a final rule will be adopted or if compliance with such a final rule will adversely affect the ability of the Company and its subsidiaries to hire, retain and motivate their key employees.

 

Anti-Tying Restrictions

 

The Bank and its affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company.

 

 

Consumer Protection and Privacy

 

We are subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include the Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collections Act, the Right to Financial Privacy Act, the Fair Housing Act, and various state law counterparts. These laws and regulations contain extensive customer privacy protection provisions that limit the ability of financial institutions to disclose non-public information about consumers to non-affiliated third parties and require financial institutions to disclose certain policies to consumers.

 

The Consumer Financial Protection Bureau (“CFPB”) is a federal agency with broad authority to implement, examine, and enforce compliance with federal consumer protection laws that relate to credit card, deposit, mortgage, and other consumer financial products and services. The CFPB may enforce actions to prevent and remedy unfair, deceptive, or abusive acts and practices related to consumer financial products and services. The agency has authority to impose new disclosure requirements for any consumer financial product or service. The CFPB may impose a civil penalty or injunction against an entity in violation of federal consumer financial laws. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.   As a bank with less than $10 billion in assets, the Bank is subject to these federal consumer financial laws, but continues to be examined for compliance by the Federal Reserve, its primary federal banking regulator, not the CFPB.

 

Cybersecurity

 

In March 2015, federal regulators issued two related statements about cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack. If the Bank fails to observe the regulatory guidance, the Bank could be subject to various regulatory sanctions, including financial penalties.

 

In October 2016, the federal banking regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and interconnected entities under their supervision. If established, the enhanced cyber risk management standards would be designed to help reduce the potential impact of a cyber-attack or other cyber-related failure on the financial system. The advance notice of proposed rulemaking addresses five categories of cyber standards: (i) cyber risk governance; (ii) cyber risk management; (iii) internal dependency management; (iv) external dependency management; and (v) incident response, cyber resilience, and situational awareness.  In May 2019, the Federal Reserve announced that it would revisit the Advance Notice of Proposed Rulemaking in the future.  In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The Notice of Proposed Rulemaking also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

 

Bank Secrecy Act and Anti-Money Laundering

 

The Bank is subject to the requirements of the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA PATRIOT Act”) of 2001. The USA PATRIOT Act broadened existing anti-money laundering legislation by imposing new compliance and due diligence obligations focused on detecting and reporting money laundering transactions. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of our customers. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

 

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

 

Office of Foreign Assets Control Regulation

 

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

 

Sarbanes-Oxley Act

 

The Sarbanes-Oxley Act (“SOX Act”) of 2002 addresses a broad range of corporate governance, auditing and accounting, executive compensation, and disclosure requirements for public companies and their directors and officers. The SOX Act requires our Chief Executive Officer and Chief Financial Officer to certify the accuracy of certain information included in our quarterly and annual reports. The rules require these officers to certify that they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of our financial reporting and disclosure controls and procedures; that they have made certain disclosures to the auditors and to the Audit Committee of the Board of Directors about our controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Section 404 of the SOX Act requires management to undertake an assessment of the adequacy and effectiveness of our internal controls over financial reporting and requires our auditors to attest to and report on the effectiveness of these controls.

 

 

Available Information

 

We file annual, quarterly, and current reports; proxy statements; and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s website at www.sec.gov that contains reports, proxy and information statements, and other information that issuers file electronically with the SEC. We maintain a website at www.firstcommunitybank.com that makes available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any amendments to those reports as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. You are encouraged to access these reports and other information about our business from the Investor Relations section of our website. The Investor Relations section contains information about our Board of Directors, executive officers, and corporate governance policies and principles, which include the charters of the standing committees of the Board of Directors, the Insider Trading Policy, and the Standards of Conduct governing our directors, officers, and employees. Information on our website is not incorporated by reference in this report.

 

Item 1A.

Risk Factors.

 

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

 

Risks Related to the Economic Environment

 

The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

 

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have branches and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.

 

The ultimate effects of the COVID-19 pandemic on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. This may include, or exacerbate, among other consequences, the following:

 

 

employees contracting COVID-19;

 

reductions in our operating effectiveness as our employees work from home;

 

increased cybersecurity risk due to the continuation of the work-from-home measures;

 

a work stoppage, forced quarantine, or other interruption of our business;

 

unavailability of key personnel necessary to conduct our business activities;

 

effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;

 

sustained closures of our branch lobbies or the offices of our customers;

 

declines in demand for loans and other banking services and products;

 

reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic;

 

unprecedented volatility in United States financial markets;

 

volatile performance of our investment securities portfolio;

 

decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for loan losses;

 

declines in value of collateral for loans, including real estate collateral;

 

declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and

 

declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets.

 

 

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.

 

The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

 

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.

 

 

 

The current economic environment poses significant challenges.

 

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

 

In recent years, economic growth and business activity across a wide range of industries has been slow and uneven. There are continuing concerns related to the level of U.S. government debt, fiscal actions that may be taken to address that debt, energy price volatility, global economic conditions, and significant uncertainty with respect to domestic and international fiscal and monetary policy. Economic pressure on consumers and uncertainty about continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. There can be no assurance that these conditions will improve or that these conditions will not worsen. Such conditions could adversely affect the credit quality of the Bank’s loans and the Company’s business, financial condition, and results of operations.

 

As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

 

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020 and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.  Through December 31, 2020 $3.94 million, or 6.46%, of the Company’s Paycheck Protection Program loan balances had been forgiven by the SBA.

 

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both customers and non-customers who approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

 

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

 

Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, the Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that the Bank would have otherwise extended credit.  Rules providing for forgiveness have been constantly evolving, including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.

 

Regulatory Risks

 

We operate in a highly regulated industry subject to examination, supervision, enforcement, and other legal actions by various federal and state governmental authorities, laws, and judicial and administrative decisions.

 

Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these statutes, regulations, and regulatory policies, including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial services and products offered, or allow non-banks to offer competing financial services and products. Failure to follow laws, regulations, and policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of operations.

 

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

 

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity, and the payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank’s dividend payment is governed by various statutes and regulations. For additional information, see “Payment of Dividends” in Item 1 of this report. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, including our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.

 

 

Market and Interest Rate Risk
 
We are subject to interest rate risk.
 

Interest rate risk results principally when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in monetary policy and interest rates could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings. Further, such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income and earnings could be adversely affected. Conversely, if interest rates received on loans and other investments fall more quickly than interest rates paid on deposits and other borrowings, our net interest income and earnings could also be adversely affected.

 

Uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.

 

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR” the benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans), announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. Subsequently, the Federal Reserve Board announced final plans for the production of the Secured Overnight Financing Rate (SOFR), which resulted in the commencement of its published rates by the Federal Reserve Bank of New York on April 3, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.  It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.  At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally.  Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings.  If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results of operations.  On November 30, 2020, ICE Benchmark Administration Limited, the administrator of LIBOR, announced that it will consult on its intention to cease the publication of the one week and two month LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023. The outcome of such consultation and its impact on LIBOR could materially affect the economics as well as the timing of the transition away from LIBOR. 

 

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

 

A decline in the estimated fair value of the investment portfolio may result in a decline in stockholders’ equity, book value per common share, and tangible book value per common share. Unrealized losses are recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security’s maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time. We conduct quarterly reviews of our securities portfolio to determine if unrealized losses are temporary or other than temporary. No assurance can be given that we will not need to recognize other-than-temporary impairment (“OTTI”) charges in the future. Additional OTTI charges may materially affect our financial condition and earnings. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

 

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

 

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

 

Credit Risk

 

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

 

The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset/liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining probable loan losses are inadequate, the allowance for loan losses may not be sufficient to cover actual loan losses and an increase in the loan loss provision could materially and adversely affect our operating results. Federal regulatory agencies regularly review our loans and allowance for loan losses as an integral part of the examination process. There is no assurance that we will not, or that regulators will not require us to, increase our allowance in future periods, which could materially and adversely affect our earnings and profitability. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon the sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition, and results of operations. For additional information, see "Fair Value Measurements" and "Allowance for Loan Losses" in the "Critical Accounting Policies" section in Part II, Item 7 and Note 1, "Basis of Presentation and Accounting Policies," to the Consolidated Financial Statements in Part II, Item 8 of this report.

 

 

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

 

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Financial institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may increase if the collateral we hold cannot be realized or liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our financial condition and results of operations.

 

 Our commercial loan portfolio may expose us to increased credit risk.

 

Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer loans and repayment is usually dependent on cash flows from the borrower’s business or the property securing the loan. Our commercial business loans are primarily made to small business and middle market customers. As of December 31, 2020, commercial business and real estate loans totaled $1.11 billion, or 50.84%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $5.72 million and largest outstanding commercial real estate loan was $9.73 million. Commercial construction loans generally have a higher risk of loss due to the assumptions used to estimate the value of property at completion and the cost of the project, including interest. If the assumptions and estimates are inaccurate, the value of completed property may fall below the related loan amount. As of December 31, 2020, commercial construction loans totaled $44.65 million, or 2.04% of our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $4.51 million. Losses from our commercial loan portfolio could have a material adverse effect on our financial condition and results of operations.

 

Operational Risks

 

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

 

Our larger competitors may have substantially greater resources and lending limits, name recognition, and market presence that allow them to offer products and services that we do not offer and to price loans and deposits more aggressively than we do. The expansion of non-bank competitors, which may have fewer regulatory constraints and lower cost structures, has intensified competitive pressures on core deposit generation and retention. For additional information, see "Competition" in Item 1 of this report. Our success depends, in part, on our ability to attract and retain customers by adapting our products and services to evolving customer needs and industry and economic conditions. Failure to perform in any of these areas could weaken our competitive position, reduce deposits and loan originations, and adversely affect our financial condition, results of operations, cash flows, and prospects.

 

Liquidity risk could impair our ability to fund operations.

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

 

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

 

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

 

We may experience future goodwill impairment.
 

We test goodwill for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a quantitative or qualitative assessment. If we determine that the carrying amount of a reporting unit is greater than its fair value, a goodwill impairment charge is recognized for the difference, but limited to the amount of goodwill allocated to that reporting unit. Unfavorable or uncertain economic and market conditions may trigger additional impairment charges that may cause an adverse effect on our earnings and financial position. For additional information, see “Goodwill and Other Intangible Assets” in the “Critical Accounting Policies” section in Part II, Item 7 and Note 1, “Basis of Presentation and Accounting Policies,” and Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

 

 

We are subject to certain obligations under FDIC loss share agreements that specify how to manage, service, report, and request reimbursement for losses incurred on covered assets.

 

Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and interpretation, and contractual term limitations. Our obligations under loss share agreements are extensive, and failure to follow any obligations could result in a specific asset, or group of assets, losing loss share coverage. Reimbursement requests are subject to FDIC review and may be delayed or disallowed if we do not comply with our obligations. Losses projected to occur during the loss share term may not be realized until after the expiration of the applicable agreement; consequently, those losses may have a material adverse impact on our results of operations. Our current loss estimates only include those projected to occur during the loss share period and for which we expect reimbursement from the FDIC at the applicable reimbursement rate. We are subject to FDIC audits to ensure compliance with the loss share agreements. The loss share agreements are subject to interpretation by the FDIC and us; therefore, disagreements about the coverage of losses, expenses, and contingencies may arise. The realization of benefits to be received from the FDIC ultimately depends on the performance of the underlying covered assets, the passage of time, claims paid by the FDIC, and interpretation; therefore, the amount received could differ materially from the carrying value of expected reimbursements and have a material effect on our financial condition and results of operations. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 7, “FDIC Indemnification Asset,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

 

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

 

Our deposits are insured up to applicable limits by the DIF of the FDIC and we are subject to deposit insurance assessments to maintain the DIF. For additional information, see “Deposit Insurance and Assessments” in Item 1 of this report. We are unable to predict future insurance assessment rates; however, deterioration in our risk-based capital ratios or adjustments to base assessment rates may result in higher insurance premiums or special assessments. The deterioration of banking and economic conditions and financial institution failures deplete the FDIC’s DIF and reduce the ratio of reserves to insured deposits. If the DIF is unable to meet funding requirements, increases in deposit insurance premium rates or special assessments may be required. Future assessments, increases, or required prepayments related to FDIC insurance premiums may negatively affect our financial condition and results of operations.

 

We continue to encounter technological change and are subject to information security risks associated with technology.

 

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

 

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

 

We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and retention of confidential financial and client information. We may be vulnerable to security breaches, such as employee error, cyberattacks, and viruses, beyond our control. In addition to security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-party vendor disruptions may cause operational failures and service interruptions to our communication and information systems. Further, our systems may be temporarily disrupted during implementation or upgrade. Security breaches and service interruptions related to our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.

 

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

 

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

 

 

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

 

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

 

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the Company’s operations, and distracting to management. If the Company is found to have infringed on one or more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third party. In certain cases, the Company may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial condition, and results of operations.

 

Risks Related to Our Common Stock

 

The market price of our common stock may be volatile.

 

Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. Our common stock price may fluctuate significantly due to a variety of factors that include the following:

 

 

actual or expected variations in quarterly results of operations;

 

recommendations by securities analysts;

 

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

 

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

 

perceptions in the marketplace about our Company or competitors;

 

new technology used, or services offered, by competitors;

 

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

 

failure to integrate acquisitions or realize expected benefits from acquisitions;

 

changes in government regulations; and

 

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

 

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

 

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

 

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

 

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

 

Our common stockholders are only entitled to receive dividends when declared by our Board of Directors from funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so, and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. As a financial holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve about capital adequacy and dividends. For additional information, see “Payment of Dividends” in Item 1 of this report.

 

General Risks

 

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

 

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

 

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

 

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

 

 

 

Potential acquisitions may disrupt our business and dilute stockholder value.

 

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

 

 

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

 

exposure to potential asset quality issues of the target company;

 

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

 

potential disruption to our business;

 

potential diversion of management’s time and attention;

 

loss of key employees and customers of the target company;

 

difficulty in estimating the value of the target company;

 

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

 

unexpected costs and delays;

 

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

 

limited experience in new markets or product areas;

 

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

 

potential short-term decreases in profitability.

 

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

 

Attractive acquisition opportunities may not be available in the future.

 

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

 

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

 

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

 

Our internal controls and procedures may fail or be circumvented.

 

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

 

 

Item 1B.

Unresolved Staff Comments.

 

None.

 

Item 2.

Properties.

 

We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2020, the Bank provided financial services through a network of 50 branch locations in West Virginia (18 branches), Virginia (23 branches), North Carolina (7 branches), and Tennessee (2 branches). We own 49 of those branches and lease the remaining branch.  As of December 31, 2020, there were no mortgages or liens against any properties. We believe that our properties are suitable and adequate to serve as financial services facilities. A list of all branch and ATM locations is available on our website at www.firstcommunitybank.com. Information contained on our website is not part of this report. For additional information, see Note 8, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

 

Item 3.

Legal Proceedings.

 

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

 

Item 4.

Mine Safety Disclosures.

 

None.

 

 

PART II

 

Item 5.

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

 

Market Information and Holders

 

Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of March 02, 2021, there were 2,900 record holders and 17,641,124 outstanding shares of our common stock.

 

Purchases of Equity Securities

 

We repurchased 734,653 shares of our common stock in 2020, 487,400 shares of our common stock in 2019, and 1,060,312 shares in 2018.

 

The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:

 

    Total Number of Shares Purchased     Average Price Paid per Share     Total Number of Shares Purchased as Part of a Publicly Announced Plan     Maximum Number of Shares that May Yet be Purchased Under the Plan(1)  
                                 

October 1-31, 2020

        $              

November 1-30, 2020

                       

December 1-31, 2020

                       

Total

        $                

 


(1)

In the first quarter of 2020, the Company exhausted its 6,600,000 shares repurchase authorization.  As a result of the uncertainty associated with the COVID-19 pandemic; the Company elected not to repurchase shares during the remainder of 2020.  In February 2021, the Board of Directors approved a new 2,400,000 shares repurchase authorization.                                                                                                                                                                                  

 

 

Stock Performance Graph

 

The following graph, compiled by S&P Global Market Intelligence (“S&P Global”), compares the cumulative total shareholder return on our common stock for the five years ended December 31, 2020, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and S&P Global’s Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 42 bank holding companies with total assets between $1 billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink sheets. The cumulative returns assume that $100 was originally invested on December 31, 2014, and that all dividends are reinvested.

 

a01.jpg

 

 

   

Year Ended December 31,

 
   

2015

   

2016

   

2017

   

2018

   

2019

   

2020

 
                                                 

First Community Bankshares, Inc.

    100.00       166.50       162.63       185.68       188.32       137.10  

S&P 500 Index

    100.00       111.96       136.40       130.42       171.49       203.04  

NASDAQ Composite Index

    100.00       108.87       141.13       137.12       187.44       271.64  

S&P Global Asset & Regional Peer Group(1)

    100.00       134.61       152.15       142.04       167.21       132.04  

 


(1) Includes the following institutions: American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; BankFirst Capital Corporation; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carter Bankshares, Inc.; Chesapeake Financial Shares, Inc.; Citizens Holding Company; CoastalSouth Bancshares, Inc.; Colony Bankcorp, Inc.; Community Bankers Trust Corporation; Eagle Financial Services, Inc.; F&M Bank Corp.; FineMark Holdings, Inc.; First Community Bankshares, Inc.; First Community Corporation; First Home Bancorp, Inc.; FVCBankcorp, Inc.; GrandSouth Bancorporation; Heritage Southeast Bancorporation, Inc.;  HomeTrust Bancshares, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; Morris State Bancshares, Inc.; Mountain Commerce Bankcorp, Inc.; MVB Financial Corp.; National Bankshares, Inc.; Old Point Financial Corporation; Peoples Bancorp of North Carolina, Inc.; Premier Financial Bancorp, Inc.; Professional Holding Corp.; Reliant Bancorp, Inc.; Select Bancorp, Inc.; SmartFinancial, Inc.; Southern First Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.;  Summit Financial Group, Inc.; TGR Financial, Inc.

 

 

Item 6.

Selected Financial Data.

 

The following table presents selected consolidated financial data, derived from the audited financial statements, as of and for the five years ended December 31, 2020. This information should be read in conjunction with Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.

 

   

Year Ended December 31,

 

(Amounts in thousands, except share and per share data)

 

2020

   

2019

   

2018

   

2017

   

2016

 

Selected Balance Sheet Data

                                       

Investment debt securities

  $ 83,358     $ 169,574     $ 178,129     $ 190,674     $ 212,639  

Loans

    2,186,632       2,114,460       1,775,084       1,817,184       1,852,948  

Allowance for loan losses

    26,182       18,425       18,267       19,276       17,948  

Total assets

    3,011,136       2,798,847       2,244,374       2,388,460       2,386,398  

Average assets

    2,892,287       2,217,241       2,330,611       2,370,321       2,455,458  

Deposits

    2,546,247       2,329,912       1,855,750       1,929,891       1,841,338  

Borrowings

    964       1,641       29,370       80,086       178,713  

Total liabilities

    2,584,406       2,370,028       1,911,517       2,037,746       2,047,341  

Total stockholders' equity

    426,730       428,819       332,857       350,714       339,057  

Average stockholders' equity

    420,792       336,138       341,519       349,701       338,475  
                                         

Summary of Operations

                                       

Interest income

  $ 114,036     $ 94,968     $ 98,294     $ 95,308     $ 94,724  

Interest expense

    5,464       5,515       7,449       8,090       9,844  

Net interest income

    108,572       89,453       90,845       87,218       84,880  

Provision for loan losses

    12,668       3,571       2,393       2,771       1,255  

Noninterest income

    29,833       33,677       26,443       24,568       25,534  

Noninterest expense

    79,625       69,763       69,773       66,902       71,214  

Income tax expense

    10,186       10,994       8,782       20,628       12,819  

Net income

    35,926       38,802       36,340       21,485       25,126  

Net income available to common shareholders

    35,926       38,802       36,340       21,485       25,126  
                                         

Selected Share and Per Share Data

                                       

Basic earnings per common share

  $ 2.02     $ 2.47     $ 2.19     $ 1.26     $ 1.45  

Diluted earnings per common share

    2.02       2.46       2.18       1.26       1.45  

Cash dividends per common share

    1.00       0.96       0.78       0.68       0.60  

Special cash dividend per common share

                0.48              

Book value per common share at year-end

    24.08       23.33       20.79       20.63       19.95  
                                         

Weighted average basic shares outstanding

    17,781,748       15,690,812       16,587,504       17,002,116       17,319,689  

Weighted average diluted shares outstanding

    17,815,380       15,756,093       16,666,385       17,077,842       17,365,524  
                                         

Selected Ratios

                                       

Return on average assets

    1.24 %     1.75 %     1.56 %     0.91 %     1.02 %

Return on average common equity

    8.54 %     11.54 %     10.64 %     6.14 %     7.42 %

Average equity to average assets

    14.55 %     15.16 %     14.65 %     14.75 %     13.78 %

Dividend payout

    49.50 %     38.82 %     57.51 %     53.81 %     41.36 %

Common equity Tier 1 ratio

    14.28 %     14.31 %     13.72 %     13.98 %     13.88 %

Tier 1 risk-based capital ratio

    14.28 %     14.31 %     13.72 %     13.98 %     14.74 %

Total risk-based capital ratio

    15.53 %     15.21 %     14.79 %     15.06 %     15.79 %

Tier 1 leverage ratio

    10.24 %     14.02 %     10.95 %     11.06 %     11.07 %

 

 

Item 7.

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

 

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

 

Executive Overview

 

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of December 31, 2020, the Bank operated 50 branches in Virginia, West Virginia, North Carolina and Tennessee. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.

 

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees. As of December 31, 2020, the Trust Division and FCWM managed and administered $1.18 billion in combined assets under various fee-based arrangements as fiduciary or agent.

 

Our acquisition and divestiture activity during the last three years includes the December 31, 2019, acquisition of Highlands Bankshares, Inc. (“Highlands”), headquartered in Abingdon, Virginia with total assets of $563 million. The completion of the transaction resulted in total consolidated assets increasing to $2.80 billion immediately after the transaction. Activity in prior years include the completion of our Agreement and Plan of Reincorporation and Merger changing our corporate domicile from Nevada to Virginia on October 2, 2018, as well as the sale of our remaining insurance agency assets to Bankers Insurance, LLC on October 1, 2018. For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.

 

Recent Developments: COVID-19 and the CARES Act

 

The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic and almost all public commerce and related business activities have been curtailed, to varying degrees, with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 has the potential to create widespread business continuity issues for the Company.

 

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (“PPP”). The package also included extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s operations and could continue to impact operations going forward.

 

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While progress has been made on the vaccine front, if the global response to contain COVID-19 is prolonged or is unsuccessful, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

 

Financial position and results of operations

 

Pertaining to our December 31, 2020, financial condition and results of operations, COVID-19 had a material impact on our allowance for loan losses (“ALL”). While we have not yet experienced any significant charge-offs related to COVID-19, our ALL calculation and resulting provision for loan losses were significantly impacted by expectations for future losses due to governmental reactions to the pandemic. Refer to our discussion of the ALL in Note 6 of our financial statements as well as additional discussion in MD&A. Should economic conditions worsen, we could experience further increases in our required ALL and record additional loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

 

The Company’s fee income has been reduced due to COVID-19.  Consumer spending behavior has proven to be very conservative during the pandemic resulting in a decrease in overdraft behavior that generates NSF and other fee income.  Should the pandemic and the global response escalate further, it is possible that the Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.

 

 

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of December 31, 2020, the Company carried $3.47 million of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

 

Capital and liquidity

 

As of December 31, 2020, the Company continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2020.  While we believe that we have sufficient capital, our reported and regulatory capital ratios could be adversely impacted by loan losses and other negative trends initiated by the pandemic.  We rely on cash on hand as well as dividends from the Bank to pay dividends to our shareholders.  If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay dividends to our shareholders.

 

We maintain access to multiple sources of liquidity.  Wholesale funding markets remain open to us, however, short-term funding rates have been volatile throughout 2020.  If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.  In addition, if an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

 

Asset valuation

 

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

 

As of December 31, 2020, our goodwill was not impaired. Management performed a quantitative goodwill impairment test as of October 1, 2020. The goodwill impairment test did not identify any goodwill impairment for our one reporting unit, nor was it at risk of failing the quantitative test. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020, we had goodwill of $129.57 million, representing approximately 30.36% of equity.

 

As of December 31, 2020, we did not have any impairment with respect to our intangible assets or other long-lived assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020 we had intangible assets of $7.07 million, representing approximately 1.66% of equity.

 

Our processes, controls and business continuity plan

 

The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the WHO’s pandemic declaration, the Company’s Enterprise Risk Management team implemented its Board approved Business Continuity Plan.  The Company appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-19.   Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company’s preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19. At December 31, 2020, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.

 

As of December 31, 2020, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

 

Lending operations and accommodations to borrowers

 

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.  Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.  It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021 ("CAA") signed into law on December 27, 2000, that extended the ability to provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.

 

 

With the passage of the PPP, administered by the Small Business Administration (“SBA”) small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020, and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.  Through December 31, 2020, $3.94 million, or 6.46%, of the Company’s PPP loan balances had been forgiven by the SBA. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.

 

The Company is committed to assisting our customers in this time of need. Branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members with lobbies available on a limited appointment-only basis.  In addition, we have increased our emphasis on digital banking platforms.

 

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences.

 

It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations.  Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in conformity with generally accepted accounting principles (“GAAP”) in the U.S. and prevailing practices in the banking industry. Our accounting policies, as presented in Note 1, “Basis of Presentation and Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and Supplementary Data,” of this report. Management may be required to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates used, we have identified the allowance for loan losses and goodwill as the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.

 

Allowance for Loan Losses

 

We review our allowance for loan losses quarterly to determine if it is sufficient to absorb probable loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While management uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

 

Our allowance for loan losses consists of specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans that have been segmented into loan classes with similar risk characteristics such as the type of loan and collateral. General reserve allocations are based on management’s judgments of qualitative and quantitative factors that include, but are not limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for loans classified as special mention and substandard within each loan class in the commercial loan segment are adjusted by an additional qualitative factor.  Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020. For additional information, see Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

 

 

Goodwill 

 

Goodwill is tested for impairment annually, on October 31st, or more frequently if events or circumstances indicate there may be impairment.  We have one reporting unit, Community Banking.  If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2020, which resulted in no goodwill impairment.

 

Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value.  The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method).  The Company engaged an independent valuation specialist to assist with goodwill impairment testing utilizing both the market and  DCF methods.  The resulting fair values from the aforementioned methods were appropriately weighted to determine the final fair value of our reporting unit.

 

Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples.  The selection of the multiples considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline companies.  Among other factors considered, are the level and expected growth in return on tangible equity relative to the guideline companies selected, implied control premiums, recent transaction prices, as well as data in comparable macroeconomic environments. 

 

Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate.  The cash flows for the forecasted period are estimated based on management’s most recent projections available as of the testing date, given consideration to minimum equity capital requirements.  The projections include macroeconomic variables developed at the same time.  The terminal growth rate is selected based on management’s long-term expectation for the reporting unit.  The discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.

 

At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment of goodwill.  While the inherent risk related to uncertainty is embedded in the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and uncertainties related to the pandemic.  Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the valuation.  If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment charges in the future.  For additional information, see Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.

 

 

Non-GAAP Financial Measures

 

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent (“FTE”) basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

 

We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21% for periods after January 1, 2018. The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 

(Amounts in thousands)

                       

Net interest income, GAAP

  $ 108,572     $ 89,453     $ 90,845  

FTE adjustment(1)

    647       848       899  

Net interest income, FTE

  $ 109,219     $ 90,301     $ 91,744  
                         

Net interest margin, GAAP

    4.27 %     4.54 %     4.37 %

FTE adjustment(1)

    0.02 %     0.05 %     0.04 %

Net interest margin, FTE

    4.29 %     4.59 %     4.41 %

 


(1)

FTE basis of 21%.

 

 

Performance Overview

 

Highlights of our results of operations in 2020, and financial condition as of December 31, 2020, include the following:

 

 

For the full year, the Company earned $35.93 million, or $2.02 per diluted share, a decrease of $2.88 million, or 7.41% over 2019.

 

Return on average assets remained strong at 1.24% for the twelve-month period.

 

Net interest margin decreased 30 basis points to 4.29% for the full year 2020 compared to 2019.  The decrease is reflective of the current historic low interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired loans.

 

The Company booked loan loss provision of $12.67 million; an increase of $9.10 million compared to the year 2019.  The increase was primarily related to the economic uncertainty caused by the coronavirus pandemic.

 

The Company booked $239.60 million of new residential mortgage loans during the year. 

 

The Company processed 803 loans with original balances totaling $62.74 million through the SBA's Paycheck Protection Program to assist small businesses during the COVID-19 pandemic.  As of December 31, 2020, $3.94 million, or 6.46%, of these loan balances had been forgiven by the SBA.

 

Interest-free deposits grew $144.93 million during 2020, and total deposits grew $216.34 million, or 9.29% , during 2020.

 

Book value per common share increased $0.75 to $24.08 compared to December 31, 2019.

 

The Company completed its stock repurchase authorization in the first quarter of 2020 with the repurchase of 734,653 shares for approximately $21.87 million.  As of December 31, 2020, the Company continues to significantly exceed regulatory "well capitalized" targets, as well as all capital targets of its capital management plan.

 

Results of Operations

 

Net Income

 

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

 

                           

2020 Compared to 2019

   

2019 Compared to 2018

 
   

Year Ended December 31,

   

Increase

   

%

   

Increase

   

%

 

(Amounts in thousands, except per share data)

 

2020

   

2019

   

2018

   

(Decrease)

   

Change

   

(Decrease)

   

Change

 
                                                         

Net income

  $ 35,926     $ 38,802     $ 36,340     $ (2,876 )     (7.41 )%   $ 2,462       6.77 %
                                                         

Basic earnings per common share

    2.02       2.47       2.19       (0.45 )     (18.22 )%     0.28       12.79 %

Diluted earnings per common share

    2.02       2.46       2.18       (0.44 )     (17.88 )%     0.28       12.84 %
                                                         

Return on average assets

    1.24 %     1.75 %     1.56 %     (0.51 )%     (29.14 )%     0.19 %     12.18 %

Return on average common equity

    8.54 %     11.54 %     10.64 %     (3.00 )%     (26.00 )%     0.90 %     8.46 %

 

2020 Compared to 2019. Pre-tax income decreased $3.68 million, or 7.40%, due to an increase in noninterest expense of $9.86 million, an increase in the provision for loan losses of $9.10 million, and a decrease in noninterest income of $3.84 million.  The decreases to income were offset by a increase in net interest income of $19.12 million. Income tax expense decreased $808 thousand primarily as a result of the decrease in pre-tax income.

 

2019 Compared to 2018. Pre-tax income increased $4.67 million, or 10.36%, due to an increase in noninterest income of $7.23 million partially offset by a decrease in net interest income of $1.39 million and an increase in the provision for loan losses of $1.18 million. Income tax expense increased $2.21 million due to an increase in the effective rate from 19.46% in 2019 to 22.08% in 2020. 

 

 

Net Interest Income

 

Net interest income, our largest contributor to earnings, is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. For additional information, see “Non-GAAP Financial Measures” above. The following table presents the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 

(Amounts in thousands)

 

Average Balance

   

Interest(1)

   

Average Yield/ Rate(1)

   

Average Balance

   

Interest(1)

   

Average Yield/ Rate(1)

   

Average Balance

   

Interest(1)

   

Average Yield/ Rate(1)

 

Assets

                                                                       

Earning assets

                                                                       

Loans(2)(3)

  $ 2,142,637     $ 110,619       5.16 %   $ 1,722,419     $ 88,990       5.17 %   $ 1,795,391     $ 91,819       5.11 %

Securities available for sale

    105,005       3,259       3.10 %     126,732       4,334       3.42 %     176,766       5,419       3.07 %

Securities held to maturity

                      3,045       45       1.48 %     25,081       418       1.67 %

Interest-bearing deposits

    296,495       805       0.27 %     116,119       2,447       2.10 %     81,520       1,537       1.89 %

Total earning assets

    2,544,137     $ 114,683       4.51 %     1,968,315     $ 95,816       4.87 %     2,078,758     $ 99,193       4.77 %

Other assets

    348,150                       248,926                       251,853                  

Total assets

  $ 2,892,287                     $ 2,217,241                     $ 2,330,611                  
                                                                         

Liabilities and stockholders' equity

                                                                       

Interest-bearing deposits

                                                                       

Demand deposits

  $ 556,279     $ 311       0.06 %   $ 453,824     $ 281       0.06 %   $ 466,403     $ 246       0.05 %

Savings deposits

    711,831       902       0.13 %     504,081       823       0.16 %     508,353       382       0.08 %

Time deposits

    456,755       4,247       0.93 %     418,450       4,288       1.02 %     471,335       4,516       0.96 %

Total interest-bearing deposits

    1,724,865       5,460       0.32 %     1,376,355       5,392       0.39 %     1,446,091       5,144       0.36 %

Borrowings

                                                                       

Retail repurchase agreements

    1,145       3       0.28 %     2,471       4       0.14 %     4,010       5       0.12 %

Wholesale repurchase agreements

                      3,767       119       3.17 %     25,000       806       3.22 %

FHLB advances and other borrowings

    36       1       2.23 %                       36,849       1,494       4.05 %

Total borrowings

    1,181       4       0.34 %     6,238       123       1.96 %     65,859       2,305       3.50 %

Total interest-bearing liabilities

    1,726,046       5,464       0.32 %     1,382,593       5,515       0.40 %     1,511,950       7,449       0.49 %

Noninterest-bearing demand deposits

    707,623                       468,774                       448,903                  

Other liabilities

    37,826                       29,736                       28,239                  

Total liabilities

    2,471,495                       1,881,103                       1,989,092                  

Stockholders' equity

    420,792                       336,138                       341,519                  

Total liabilities and equity

  $ 2,892,287                     $ 2,217,241                     $ 2,330,611                  
                                                                         

Net interest income, FTE(1)

          $ 109,219                     $ 90,301                     $ 91,744          

Net interest rate spread, FTE(1)

                    4.19 %                     4.47 %                     4.28 %

Net interest margin, FTE(1)

                    4.29 %                     4.59 %                     4.41 %

 


(1)

FTE basis based on the federal statutory rate of 21%. 

(2)

Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.

(3)

Interest on loans include non-cash purchase accounting accretion of $7.99 million in 2020, $3.23 million in 2019, and $6.39 million in 2018.

 

 

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

 

   

Year Ended

   

Year Ended

 
   

December 31, 2020 Compared to 2019

   

December 31, 2019 Compared to 2018

 
   

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(1):

                                                               

Loans

  $ 21,736     $ (42 )   $ (65 )   $ 21,629     $ (3,729 )   $ 1,077     $ (177 )   $ (2,829 )

Securities available for sale

    (743 )     (101 )     (231 )     (1,075 )     (1,536 )     619       (168 )     (1,085 )

Securities held to maturity

    (45 )                 (45 )     (368 )     (48 )     43       (373 )

Interest-bearing deposits with other banks

    3,791       (534 )     (4,899 )     (1,642 )     654       171       85       910  

Total interest-earning assets

    24,739       (677 )     (5,195 )     18,867       (4,979 )     1,819       (217 )     (3,377 )
                                                                 

Interest paid on(1):

                                                               

Demand deposits

    63       (7 )     (26 )     30       (6 )     47       (6 )     35  

Savings deposits

    338       (46 )     (213 )     79       (3 )     407       37       441  

Time deposits

    391       (97 )     (335 )     (41 )     (508 )     283       (3 )     (228 )

Retail repurchase agreements

    (2 )     1             (1 )     (2 )     1             (1 )

Wholesale repurchase agreements

    (119 )                 (119 )     (684 )     (12 )     9       (687 )

FHLB advances and other borrowings

                1       1       (1,492 )     (1,492 )     1,490       (1,494 )

Total interest-bearing liabilities

    671       (149 )     (573 )     (51 )     (2,695 )     (766 )     1,527       (1,934 )
                                                                 

Change in net interest income(1)

  $ 24,068     $ (528 )   $ (4,622 )   $ 18,918     $ (2,284 )   $ 2,585     $ (1,744 )   $ (1,443 )

 


(1)

FTE basis based on the federal statutory rate of 21%.

 

2020 Compared to 2019. Net interest income comprised 78.45% of total net interest and noninterest income in 2020 compared to 72.65% in 2019. Net interest income increased $19.12 million, or 21.37%, compared to a increase of $18.92 million, or 20.95%, on a FTE basis. The FTE net interest margin decreased 30 basis points and the FTE net interest spread decreased 28 basis points.  The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired loans.

 

Average earning assets increased $575.82 million, or 29.25%, primarily due to an increase in average loans and average interest-bearing deposits offset by a decrease in average debt securities. The yield on earning assets decreased 36 basis points as the yields on interest-bearing deposits and debt securities decreased primarily due to the historically low rate environment. Average loans increased $420.22 million, or 24.40%, and the average loan to deposit ratio decreased to 88.08% from 93.35%. The increase in average loans was primarily due to the addition of Highlands.  Non-cash accretion income related to PCI loans increased $4.76 million, or 147.37%, to $7.99 million due the addition of Highlands and the fourth quarter payoff of a large acquired loan relationship. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 31 basis points compared to 17 basis points in the prior year.

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $343.45 million, or 24.84%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 8 basis points.  Average interest-bearing deposits increased $348.51 million, or 25.32%, which was driven by the December 31, 2019, Highlands acquisition with increases of $207.75 million, or 41.21%, in average savings deposits, $102.46 million, or 22.58%, in average interest-bearing demand deposits, and $38.31 million, or 9.15%, in average time deposits.

 

2019 Compared to 2018. Net interest income comprised 72.65% of total net interest and noninterest income in 2019 compared to 77.45% in 2018. Net interest income decreased $1.39 million, or 1.53%, compared to a  decrease of $1.44 million, or 1.57%, on a FTE basis. The FTE net interest margin increased 18 basis points and the FTE net interest spread increased 19 basis points.

 

Average earning assets decreased $110.44 million, or 5.31%, primarily due to a decrease in average loans and debt securities offset by an increase in interest-bearing deposits. The yield on earning assets increased 10 basis points as the yields on debt securities, and interest-bearing deposits increased. Average loans decreased $72.97 million, or 4.06%, and the average loan to deposit ratio decreased to 93.35% from 94.74%. Non-cash accretion income related to PCI loans decreased $3.16 million, or 49.46%, to $3.23 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 17 basis points compared to 30 basis points in the prior year.

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $129.36 million, or 8.56%, primarily due to a decline in average interest-bearing deposits and average borrowings. The yield on interest-bearing liabilities decreased 9 basis points. Average borrowings decreased $59.62 million, or 90.53%, largely due to a $22.77 million, or 78.50%, decrease in average retail and wholesale repurchase agreements and a $36.85 million, or 100.00%, decrease in average FHLB advances. Average interest-bearing deposits decreased $69.74 million, or 4.82%, which was driven by a $52.89 million, or 11.22%, decrease in average time deposits, and a $12.58 million, or 2.70%, decrease in average interest-bearing demand deposits.

 

 

 

Provision for Loan Losses

 

2020 Compared to 2019. The provision charged to operations increased $9.10 million, or 254.75%.  The increase was primarily related to the economic uncertainty caused by the coronavirus pandemic.

 

2019 Compared to 2018. The provision charged to operations increased $1.18 million, or 49.23%, to $3.57 million, as we effectively covered net charge-offs for the year.

 

Noninterest Income

 

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

 

                           

2020 Compared to 2019

   

2019 Compared to 2018

 
   

Year Ended December 31,

   

Increase

      %  

Increase

      %
   

2020

   

2019

   

2018

   

(Decrease)

   

Change

   

(Decrease)

   

Change

 

(Amounts in thousands)

                                                       

Wealth management

  $ 3,417     $ 3,423     $ 3,262     $ (6 )     -0.18 %   $ 161       4.94 %

Service charges on deposits

    13,019       14,594       14,733       (1,575 )     -10.79 %     (139 )     -0.94 %

Other service charges and fees

    10,333       8,281       7,733       2,052       24.78 %     548       7.09 %

Insurance commissions

                966                   (966 )     -100.00 %

Net (loss) gain on sale of securities

    385       (43 )     (618 )     428       -995.35 %     575       -93.04 %

Net FDIC indemnification asset amortization

    (1,690 )     (2,377 )     (2,181 )     687       -28.90 %     (196 )     8.99 %

Litigation income

          6,995             (6,995 )     -100.00 %     6,995        

Other operating income

    4,369       2,804       2,548       1,565       55.81 %     256       10.05 %

Total noninterest income

  $ 29,833     $ 33,677     $ 26,443     $ (3,844 )     -11.41 %   $ 7,234       27.36 %

 

2020 Compared to 2019. Noninterest income comprised 21.55% of total net interest and noninterest income in 2020 compared to 27.35% in 2019. Noninterest income decreased $3.84 million, or 11.41%, primarily due to $7.00 million received in litigation settlements in 2019. Service charges on deposits decreased $1.58 million, or 10.79%; the decrease was primarily attributable to pandemic shutdowns throughout 2020.  Other service charges and fees increased $2.05 million, or 24.78%, primarily from an increase in net interchange income for the addition of Highlands accounts.  Other operating income increased $1.57 million, or 55.81%, and was primarily driven by third party incentives associated with debit cards.

 

2019 Compared to 2018. Noninterest income comprised 27.35% of total net interest and noninterest income in 2020 compared to 22.55% in 2019. Noninterest income increased $7.23 million, or 27.36%, primarily due to the receipt of $7.00 million received in litigation settlements. Other service charges and fees increased $548 thousand, or 7.09%, primarily from an increase in net interchange income. Net securities losses decreased $575 thousand, or 93.04%. Other operating income increases were offset by a $966 thousand decrease in insurance commissions due to the divestiture of the Company’s remaining insurance agency assets in 2019.

 

 

Noninterest Expense

 

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

 

                           

2020 Compared to 2019

   

2019 Compared to 2018

 
   

Year Ended December 31,

   

Increase

      %  

Increase

      %
   

2020

   

2019

   

2018

   

(Decrease)

   

Change

   

(Decrease)

   

Change

 

(Amounts in thousands)

                                                       

Salaries and employee benefits

  $ 44,005     $ 37,148     $ 36,690     $ 6,857       18.46 %   $ 458       1.25 %

Occupancy expense

    5,043       4,334       4,542       709       16.36 %     (208 )     -4.58 %

Furniture and equipment expense

    5,558       4,457       3,980       1,101       24.70 %     477       11.98 %

Service fees

    5,665       4,448       3,860       1,217       27.36 %     588       15.23 %

Advertising and public relations

    1,951       2,310       2,011       (359 )     -15.54 %     299       14.87 %

Professional fees

    1,224       1,698       1,430       (474 )     -27.92 %     268       18.74 %

Amortization of intangibles

    1,450       997       1,039       453       45.44 %     (42 )     -4.04 %

FDIC premiums and assessments

    426       318       906       108       33.96 %     (588 )     -64.90 %

Loss on extinguishment of debt

                1,096                   (1,096 )      

Merger, acquisition, and divestiture expense

    1,893       2,124             (231 )     -10.88 %     2,124        

Goodwill impairment

                1,492                   (1,492 )      

Other operating expense

    12,410       11,929       12,727       481       4.03 %     (798 )     -6.27 %

Total noninterest expense

  $ 79,625     $ 69,763     $ 69,773     $ 9,862       14.14 %   $ (10 )     -0.01 %

 

2020 Compared to 2019. Noninterest expense increased $9.86, or 14.14%.  The increase was primarily due to an increase in salaries and benefits of $6.86 million, or 18.46%, which was largely due to the addition of Highlands employees.  In addition, occupancy and furniture and equipment expense increase a combined total of $1.81 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.

 

2019 Compared to 2018. Noninterest expense decreased $10 thousand, or 0.01%, which was largely due to one-time charges recognized in 2019 for goodwill impairment related to the divestiture of the Company’s remaining insurance agency assets of $1.49 million and the loss on extinguishment of the Company’s remaining FHLB debt of $1.10 million. In addition, other operating expense decreased $798 thousand due to property write-downs that occurred in 2019 and FDIC premiums decreased $588 thousand due to small bank assessment credits received from the FDIC. These decreases were offset by an increase in merger expenses of $2.12 million related to the Highlands acquisition as well as increases in service fees, furniture and equipment expense, and an increase in salaries and employee benefits totaling $1.52 million.

 

Income Tax Expense

 

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The Tax Reform Act enacted on December 22, 2017, reduced our federal statutory income tax rate from 35% to 21% beginning January 1, 2018.

 

2020 Compared to 2019. Income tax expense decreased $808 thousand, or 7.35%, and  is primarily attributable to the decrease in pre-tax net income.  The effective tax rate increased to 22.09% in 2020 compared to 22.08% in 2019. 

 

2019 Compared to 2018. Income tax expense increased $2.21 million, or 25.19%, and the effective tax rate increased to 22.08% in 2019 compared to 19.46% in 2018. The lower effective rate in 2019 was primarily due to the enactment of the Tax Reform Act and the completion of the deferred tax asset revaluation, which resulted in a $1.67 million reduction in tax expense.

 

 

Financial Condition

 

Total assets as of December 31, 2020, increased $212.29 million, or 7.58%, to $3.01 billion from $2.80 billion as of December 31, 2019. The increase is primarily attributable to the increase in overnight funds of $247.76 million, or 167.40%. Total liabilities as of December 31, 2020, increased $214.38 million, or 9.05%, to $2.58 billion from $2.37 billion as of December 31, 2019. The increase is primarily the result of an increase in total deposits of $216.34 million, or 9.29%.  The increase in deposits is primarily attributable to the significant increase in demand deposits due to the unprecedented level of stimulus payments from the Federal Government in response to the pandemic. 

 

Investment Securities

 

Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as collateral where required, and to make selective investments for Community Reinvestment Act purposes. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Available-for-sale debt securities as of December 31, 2020, decreased $86.22 million, or 50.84%, compared to December 31, 2019. The decrease was attributable to sales of $51.03 million primarily due to the liquidation of the Highlands portfolio, as well as maturities, prepayments, and calls of $44.68 million offset by purchases of $10.27 million.  The market value of debt securities available for sale as a percentage of amortized cost was 101.71% as of December 31, 2020 compared to 100.65% as of December 31, 2019. There were no held-to-maturity debt securities as of December 31, 2020 or December 31, 2019.  The remaining debt securities in the held-to-maturity category in 2018 matured during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of debt securities as of the dates indicated:

 

   

December 31,

 
   

2020

   

2019

   

2018

 
   

Amortized

   

Fair

   

Amortized

   

Fair

   

Amortized

   

Fair

 

(Amounts in thousands)

 

Cost

   

Value

   

Cost

   

Value

   

Cost

   

Value

 

Available for Sale

                                               

U.S. Agency securities

  $ 555     $ 551     $ 5,038     $ 5,034     $ 1,108     $ 1,113  

U.S. Treasury securities

                            19,970       19,960  

Municipal securities

    43,950       44,459       85,992       86,878       96,886       97,289  

Single issue trust preferred securites

                                   

Mortgage-backed Agency securities

    37,453       38,348       77,448       77,662       35,513       34,754  

Total securities available for sale

  $ 81,958     $ 83,358     $ 168,478     $ 169,574     $ 153,477     $ 153,116  
                                                 

Fair value to amortized cost

            101.71 %             100.65 %             99.76 %
                                                 

Held to Maturity

                                               

U.S. Agency securities

  $     $     $     $     $ 17,887     $ 17,867  

Corporate securities

                            7,126       7,123  

Total securities held to maturity

  $     $     $     $     $ 25,013     $ 24,990  
                                                 

Fair value to amortized cost

                                            99.91 %

 

The following table provides information about our investment portfolio as of the dates indicated:

 

   

December 31,

 
   

2020

   

2019

 
    Available for Sale     Held to Maturity    

Total

    Available for Sale     Held to Maturity    

Total

 

(Amounts in years)

                                               

Average life

    5.02       N/A       5.02       6.41       N/A       6.41  

Average duration

    1.84       N/A       1.84       5.30       N/A       5.30  

 

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity as of December 31, 2020 or 2019.

 

 

The following table presents the amortized cost, fair value, and weighted-average yield of available-for-sale debt securities by contractual maturity, as of December 31, 2020. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

   

Available-for-Sale Securities

 

(Amounts in thousands)

 

U.S. Agency Securities

   

U.S. Treasury Securities

   

Municipal Securities

   

Total

   

Tax Equivalent Purchase Yield(1)

 

Amortized cost maturity:

                                       

One year or less

  $     $     $     $        

After one year through five years

                24,485       24,485       3.78 %

After five years through ten years

    555             19,465       20,020       3.24 %

After ten years

                             

Amortized cost

  $ 555     $     $ 43,950       44,505          

Mortgage-backed securities

                            37,453       2.13 %

Total amortized cost

                          $ 81,958          

Tax equivalent purchase yield(1)

    2.09 %           3.56 %     3.54 %        

Average contractual maturity (in years)

    6.05             4.75       4.77          
                                         

Fair value maturity:

                                       

One year or less

  $     $     $     $          

After one year through five years

                24,703       24,703          

After five years through ten years

    551             19,756       20,307          

After ten years

                               

Fair value

  $ 551     $     $ 44,459       45,010          

Mortgage-backed securities

                            38,348          

Total fair value

                          $ 83,358          

 


(1)

FTE basis of 21%

 

 

Investment securities are reviewed quarterly for indications of other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities in 2020 or 2019. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Item 8 of this report.

 

Loans Held for Investment

 

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). The general characteristics of each loan segment are as follows:

 

 

Commercial loans – This segment consists of loans to small and mid-size industrial, commercial, and service companies that include, but are not limited to, natural gas producers, retail merchants, and wholesale merchants. Commercial real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators. Commercial loan underwriting guidelines require that comprehensive reviews and independent evaluations be performed on credits exceeding predefined size limits. Updates to these loan reviews are done periodically or annually depending on the size of the loan relationship.

 

Consumer real estate loans – This segment consists of loans to individuals within our market footprint for home equity loans and lines of credit and for the purchase or construction of owner occupied homes. Residential real estate loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

 

Consumer and other loans – This segment consists of loans to individuals within our market footprint that include, but are not limited to, personal lines of credit, credit cards, and the purchase of automobiles, boats, mobile homes, and other consumer goods. Consumer loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

 

Total loans held for investment, net of unearned income, as of December 31, 2020, increased $72.17 million, or 3.41%, compared to December 31, 2019. Covered loans decreased $3.18 million, or 24.73%, as the Waccamaw Bank (“Waccamaw”) covered loan portfolio continues to pay down. We had no foreign loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans that represented 10% or more of outstanding loans, as of December 31, 2020 or 2019. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.

 

 

The following table presents loans, net of unearned income and by loan class, as of the dates indicated:

 

   

December 31,

 

(Amounts in thousands)

 

2020

   

2019

   

2018

   

2017

   

2016

 

Non-covered loans held for investment

                                       

Commercial loans

                                       

Construction, development, and other land

  $ 44,649     $ 48,659     $ 63,508     $ 60,017     $ 56,948  

Commercial and industrial

    173,024       142,962       104,863       92,188       92,204  

Multi-family residential

    115,161       121,840       107,012       125,202       134,228  

Single family non-owner occupied

    187,598       163,181       140,097       141,670       142,965  

Non-farm, non-residential

    734,793       727,261       613,877       616,633       598,674  

Agricultural

    9,749       11,756       8,545       7,035       6,003  

Farmland

    19,761       23,155       18,905       25,649       31,729  

Total commercial loans

    1,284,735       1,238,814       1,056,807       1,068,394       1,062,751  

Consumer real estate loans

                                       

Home equity lines

    89,432       110,078       93,466       103,205       106,361  

Single family owner occupied

    658,678       620,697       510,963       502,686       500,891  

Owner occupied construction

    17,720       17,241       18,171       39,178       44,535  

Total consumer real estate loans

    765,830       748,016       622,600       645,069       651,787  

Consumer and other loans

                                       

Consumer loans

    120,373       110,027       71,552       70,772       77,445  

Other

    6,014       4,742       5,310       5,001       3,971  

Total consumer and other loans

    126,387       114,769       76,862       75,773       81,416  

Total non-covered loans

    2,176,952       2,101,599       1,756,269       1,789,236       1,795,954  

Total covered loans

    9,680       12,861       18,815       27,948       56,994  

Total loans held for investment, net of unearned income

    2,186,632       2,114,460       1,775,084       1,817,184       1,852,948  

Less: allowance for loan losses

    26,182       18,425       18,267       19,276       17,948  

Total loans held for investment, net of unearned income and allowance

  $ 2,160,450     $ 2,096,035     $ 1,756,817     $ 1,797,908     $ 1,835,000  
                                         

Loans held for sale

  $     $ 263     $     $     $  

 

 

 

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

 

   

December 31,

 

(Amounts in thousands)

 

2020

   

2019

   

2018

   

2017

   

2016

 

Commercial loans

                                       

Construction, development, and other land

  $ 25     $ 28     $ 35     $ 39     $ 4,570  

Commercial and industrial

                            895  

Multi-family residential

                            8  

Single family non-owner occupied

    185       199       238       284       962  

Non-farm, non-residential

          3       6       9       7,512  

Agricultural

                            25  

Farmland

                            397  

Total commercial loans

    210       230       279       332       14,369  

Consumer real estate loans

                                       

Home equity lines

    7,094       9,853       15,284       23,720       35,817  

Single family owner occupied

    2,376       2,778       3,252       3,896       6,729  

Owner occupied construction

                             

Total consumer real estate loans

    9,470       12,631       18,536       27,616       42,546  

Consumer and other loans

                                       

Consumer loans

                            79  

Total covered loans

  $ 9,680     $ 12,861     $ 18,815     $ 27,948     $ 56,994  

 

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

 

   

December 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 

Commercial loans

                                       

Construction, development, and other land

    2.04 %     2.31 %     3.61 %     3.36 %     3.17 %

Commercial and industrial

    7.95 %     6.80 %     5.97 %     5.15 %     5.13 %

Multi-family residential

    5.29 %     5.80 %     6.09 %     7.00 %     7.47 %

Single family non-owner occupied

    8.62 %     7.76 %     7.98 %     7.92 %     7.96 %

Non-farm, non-residential

    33.75 %     34.62 %     34.95 %     34.46 %     33.34 %

Agricultural

    0.45 %     0.56 %     0.49 %     0.39 %     0.34 %

Farmland

    0.91 %     1.10 %     1.08 %     1.43 %     1.77 %

Total commercial loans

    59.01 %     58.95 %     60.17 %     59.71 %     59.18 %

Consumer real estate loans

                                       

Home equity lines

    4.11 %     5.24 %     5.32 %     5.77 %     5.92 %

Single family owner occupied

    30.26 %     29.52 %     29.09 %     28.09 %     27.89 %

Owner occupied construction

    0.81 %     0.83 %     1.04 %     2.19 %     2.48 %

Total consumer real estate loans

    35.18 %     35.59 %     35.45 %     36.05 %     36.29 %

Consumer and other loans

                                       

Consumer loans

    5.54 %     5.25 %     4.08 %     3.96 %     4.31 %

Other

    0.27 %     0.21 %     0.30 %     0.28 %     0.22 %

Total consumer and other loans

    5.81 %     5.46 %     4.38 %     4.24 %     4.53 %

Total non-covered loans

    100.00 %     100.00 %     100.00 %     100.00 %     100.00 %

 

 

 

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

 

   

December 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 

Commercial loans

                                       

Construction, development, and other land

    0.26 %     0.22 %     0.19 %     0.14 %     8.02 %

Commercial and industrial

    0.00 %     0.00 %     0.00 %     0.00 %     1.57 %

Multi-family residential

    0.00 %     0.00 %     0.00 %     0.00 %     0.01 %

Single family non-owner occupied

    1.91 %     1.55 %     1.26 %     1.02 %     1.69 %

Non-farm, non-residential

    0.00 %     0.02 %     0.03 %     0.03 %     13.18 %

Agricultural

    0.00 %     0.00 %     0.00 %     0.00 %     0.04 %

Farmland

    0.00 %     0.00 %     0.00 %     0.00 %     0.70 %

Total commercial loans

    2.17 %     1.79 %     1.48 %     1.19 %     25.21 %

Consumer real estate loans

                                       

Home equity lines

    73.28 %     76.61 %     81.23 %     84.87 %     62.84 %

Single family owner occupied

    24.55 %     21.60 %     17.29 %     13.94 %     11.81 %

Owner occupied construction

    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %

Total consumer real estate loans

    97.83 %     98.21 %     98.52 %     98.81 %     74.65 %

Consumer and other loans

                                       

Consumer loans

    0.00 %     0.00 %     0.00 %     0.00 %     0.14 %

Total covered loans

    100.00 %     100.00 %     100.00 %     100.00 %     100.00 %

 

 

 

The following table presents the maturities and rate sensitivities of the non-covered loan portfolio as of December 31, 2020:

 

(Amounts in thousands)

  Due in One Year or Less     Due After One Year Through Five Years    

Due After Five Years

   

Total

 

Commercial loans

                               

Construction, development, and other land(1)

  $ 8,954     $ 8,533     $ 27,162     $ 44,649  

Commercial and industrial

    18,539       117,394       37,091       173,024  

Multi-family residential

    3,197       19,411       92,553       115,161  

Single family non-owner occupied

    8,900       21,630       157,068       187,598  

Non-farm, non-residential

    54,172       169,001       511,620       734,793  

Agricultural

    1,615       7,174       960       9,749  

Farmland

    2,329       6,414       11,018       19,761  

Total commercial loans

    97,706       349,557       837,472       1,284,735  

Consumer real estate loans

                               

Home equity lines

    5,263       11,912       72,257       89,432  

Single family owner occupied

    2,734       21,836       634,108       658,678  

Owner occupied construction

    270       764       16,686       17,720  

Total consumer real estate loans

    8,267       34,512       723,051       765,830  

Consumer and other loans

                               

Consumer loans

    9,770       87,023       23,580       120,373  

Other

    6,014                   6,014  

Total consumer and other loans

    15,784       87,023       23,580       126,387  

Total non-covered loans

  $ 121,757     $ 471,092     $ 1,584,103     $ 2,176,952  
                                 

Rate sensitivities

                               

Predetermined interest rate

  $ 77,371     $ 434,895     $ 862,277     $ 1,374,543  

Floating or adjustable interest rate

    44,385       36,197       721,827       802,409  

Total non-covered loans

  $ 121,756     $ 471,092     $ 1,584,104     $ 2,176,952  

 


(1)

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

 

The following table presents the maturities and rate sensitivities of the covered loan portfolio as of December 31, 2020:

 

(Amounts in thousands)

  Due in One Year or Less     Due After One Year Through Five Years    

Due After Five Years

   

Total

 

Commercial loans

                               

Construction, development, and other land

  $     $ 25     $     $ 25  

Single family non-owner occupied

    168       17             185  

Non-farm, non-residential

                       

Total commercial loans

    168       42             210  

Consumer real estate loans

                               

Home equity lines

    792       4,553       1,749       7,094  

Single family owner occupied

    8       202       2,166       2,376  

Total consumer real estate loans

    800       4,755       3,915       9,470  

Total covered loans

  $ 968     $ 4,797     $ 3,915     $ 9,680  
                                 

Rate sensitivities

                               

Predetermined interest rate

  $ 222     $ 703     $ 2,192     $ 3,117  

Floating or adjustable interest rate

    746       4,094       1,723       6,563  

Total covered loans

  $ 968     $ 4,797     $ 3,915     $ 9,680  

 

 

Risk Elements

 

We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.00 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.

 

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5, “Credit Quality,” to the Consolidated Financial Statements in Item 8 of this report.

 

 

The following table presents the components of nonperforming assets and related information as of the periods indicated:

 

   

December 31,

 

(Amounts in thousands)

 

2020

   

2019

   

2018

   

2017

   

2016

 

Non-covered nonperforming

                                       

Nonaccrual loans

  $ 21,706     $ 16,113     $ 19,583     $ 18,997     $ 15,854  

Accruing loans past due 90 days or more

    295       144       58       1        

TDRs(1)

    187       720       161       120       114  

Total non-covered nonperforming loans

    22,188       16,977       19,802       19,118       15,968  

Non-covered OREO

    2,083       3,969       3,806       2,409       5,109  

Total non-covered nonperforming assets

  $ 24,271     $ 20,946     $ 23,608     $ 21,527     $ 21,077  
                                         

Covered nonperforming

                                       

Nonaccrual loans

  $ 297     $ 244     $ 322     $ 342     $ 608  

Total covered nonperforming loans

    297       244       322       342       608  

Covered OREO

                32       105       276  

Total covered nonperforming assets

  $ 297     $ 244     $ 354     $ 447     $ 884  
                                         

Total nonperforming

                                       

Nonaccrual loans

  $ 22,003     $ 16,357     $ 19,905     $ 19,339     $ 16,462  

Accruing loans past due 90 days or more

    295       144       58       1        

TDRs(1)

    187       720       161       120       114  

Total nonperforming loans

    22,485       17,221       20,124       19,460       16,576  

OREO

    2,083       3,969       3,838       2,514       5,385  

Total nonperforming assets

  $ 24,568     $ 21,190     $ 23,962     $ 21,974     $ 21,961  
                                         

Additional Information

                                       

Performing TDRs(2)

  $ 10,061     $ 5,855     $ 6,266     $ 7,614     $ 12,838  

Total TDRs(3)

    10,248       6,575       6,427       7,734       12,952  

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

          1,068       1,175       1,217       1,414  

Actual interest income recorded on restructured and nonperforming loans

    473       277       264       222       424  
                                         

Non-covered ratios

                                       

Nonperforming loans to total loans

    1.02 %     0.81 %     1.13 %     1.07 %     0.89 %

Nonperforming assets to total assets

    0.81 %     0.75 %     1.06 %     0.91 %     0.90 %

Non-PCI allowance to nonperforming loans

    118.00 %     108.53 %     92.25 %     100.83 %     112.32 %

Non-PCI allowance to total loans

    1.20 %     0.88 %     1.04 %     1.08 %     1.00 %
                                         

Total ratios

                                       

Nonperforming loans to total loans

    1.03 %     0.81 %     1.13 %     1.07 %     0.89 %

Nonperforming assets to total assets

    0.82 %     0.76 %     1.07 %     0.92 %     0.92 %

Allowance for loan losses to nonperforming loans

    116.44 %     106.99 %     90.77 %     99.05 %     108.28 %

Allowance for loan losses to total loans

    1.20 %     0.87 %     1.03 %     1.06 %     0.97 %

 


(1)

TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.18 million, $95 thousand, $898 thousand, $169 thousand, and $224 thousand for the five years ended December 31, 2020.  They are included in nonaccrual loans.

(2)

TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $637 thousand, $2.25 million, $1.68 million, $1.76 million, and $1.06 million for the five years ended December 31, 2020.  They are included in nonaccrual loans.

(3)

Total accruing TDRs exclude nonaccrual TDRs of $1.81 million, $2.34 million, $2.58 million, $1.93 million, and $1.28 million for the five years ended December 31, 2020.  They are included in nonaccrual loans.

 

 

Non-covered nonperforming assets as of December 31, 2020, increased $3.33 million, or 15.87%, from December 31, 2019, primarily due to an increase of  $5.59 million, or 34.71%, in non-covered nonaccrual loans offset by a $1.89 million, or 47.52% decrease in non-covered OREO, and a $533 thousand, or 74.03%, decrease in non-covered, non-performing troubled debt restructurings.  Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 22 properties with an average holding period of 16 months as of December 31, 2020. The net loss on the sale of OREO was $316 thousand in 2020, $1.25 million in 2019, and $1.33 million in 2018. The following table presents the changes in OREO during the periods indicated:

 

   

Year Ended December 31,

 
   

2020

   

2019

 
   

Non-covered

   

Covered

   

Total

   

Non-covered

   

Covered

   

Total

 

(Amounts in thousands)

                                               

Beginning balance

  $ 3,969     $     $ 3,969     $ 3,806     $ 32     $ 3,838  

Acquired

                      1,962             1,962  

Additions

    695             695       3,030       131       3,161  

Disposals

    (2,139 )           (2,139 )     (3,837 )     (152 )     (3,989 )

Valuation adjustments

    (442 )           (442 )     (992 )     (11 )     (1,003 )

Ending balance

  $ 2,083     $     $ 2,083     $ 3,969     $     $ 3,969  

 

As of December 31, 2020, non-covered nonaccrual loans were largely attributed to single family owner occupied (36.67%) and non-farm, non-residential (29.22%) loans. As of December 31, 2020, approximately $6.09 million, or 28.06%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

 

Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Total TDRs as of December 31, 2020, increased $3.15 million, or 35.27%, to $12.06 million from December 31, 2019. Nonperforming accruing TDRs as of December 31, 2020, decreased $533 thousand, or 74.03%, to $187 thousand from December 31, 2019. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 1.82% as of December 31, 2020, compared to 13.69% as of December 31, 2019. Specific reserves on TDRs totaled $233 thousand as of December 31, 2020, compared to $353 thousand as of December 31, 2019. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.

 

The Coronavirus Aid, Relief and Economic Security ("CARES") Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.

 

Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.

 

Commercial Loans Modified Under CARES Act 
 

The following table details the balance of commercial loans modified for short-term payment deferral under provision of the CARES Act as of the dates indicated.

 

   

December 31, 2020

   

September 30, 2020

   

June 30, 2020

 
           

Percent

           

Percent

           

Percent

 

(unaudited, in thousands)

 

Balance

   

Modified

   

Balance

   

Modified

   

Balance

   

Modified

 
                                           

Construction, development, and other land

  $ 1,409     3.15 %   $ 3,753     8.88 %   $ 14,377     27.33 %

Commercial and industrial

    1,363     0.79 %     6,700     3.61 %     25,584     13.88 %

Multi-family residential

    351     0.30 %     5,919     5.61 %     22,021     20.82 %

Single family non-owner occupied

    1,683     0.90 %     7,049     3.65 %     39,135     20.75 %

Commercial Real Estate - Hotel/Motel

    17,465     17.42 %     48,225     46.69 %     92,940     89.75 %

Commercial Real Estate - Retail Strip Centers

              4,432     6.45 %     19,740     38.17 %

Commercial Real Estate - Other

    3,968     0.69 %     22,912     3.92 %     116,871     20.58 %

Agricultural

    33     0.34 %     1,322     12.93 %     3,464     33.29 %

Farmland

    266     1.35 %     2,223     9.56 %     5,865     24.79 %

Total commercial modifications

  $ 26,538     2.07 %   $ 102,535     7.78 %   $ 339,997     26.39 %

 

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $35.72 million as of December 31, 2020, an increase of $97 thousand, or 0.27%, compared to $35.62 million as of December 31, 2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.64% as of December 31, 2020, which includes past due loans (0.64%) and nonaccrual loans (1.00%), compared to 1.69% as of December 31, 2019.

 

 

 

Allowance for Loan Losses

 

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates. As of December 31, 2020, our qualitative risk factors reflect a increased risk of possible loan losses due to the effects of the COVID-19 pandemic. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of December 31, 2020; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see “Allowance for Loan Losses” in the “Critical Accounting Policies” section above and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

The allowance for loan losses as of December 31, 2020, increased $7.76, or 42.10%, from December 31, 2019, primarily due the increased potential for loan defaults and losses related to the COVID-19 pandemic.  The non-PCI allowance as a percent of non-covered loans totaled 1.20% as of December 31, 2020, compared to 0.88% as of December 31, 2019. PCI loans were aggregated into fifteen loan pools as of December 31, 2020 and five loan pools in 2019. The Highlands transaction added ten additional pools to the five existing pools from 2019. Effective January 1, 2020, the Company collapsed the PCI loans and discounts for Peoples and Waccamaw acquired loans into the non-PCI loan portfolio.  The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and Home Equity Lines, Commercial Land and Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner Occupied, Commercial and Industrial, and Consumer.  Net charge-offs increased $1.50 million, or 43.89% in 2020 compared to 2019.

 

The following table presents the changes in the allowance for loan losses, by loan class, during the periods indicated:

 

   

December 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 

(Amounts in thousands)

                                       

Beginning balance

  $ 18,425     $ 18,267     $ 19,276     $ 17,948     $ 20,233  

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

    12,668       3,571       2,393       2,783       1,296  

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

                      (12 )     (41 )

Recovery of loan losses recorded through the FDIC indemnification asset

                            (1 )

Charge-offs

                                       

Commercial loans

                                       

Construction, development, and other land

    349       353       100       427       254  

Commercial and industrial

    856       549       566       224       144  

Multi-family residential

    295       310       16       9       64  

Single family non-owner occupied

    442       64       88       52       237  

Non-farm, non-residential

    650       1,015       119       142       1,684  

Agricultural

    160       52       68              

Farmland

    17       205       279       68       9  

Consumer real estate loans

                                       

Home equity lines

    145       474       285       13       1,073  

Single family owner occupied

    413       1,316       1,720       675       508  

Owner occupied construction

                      11       31  

Consumer and other loans

                                       

Consumer loans

    3,296       1,923       1,666       1,322       1,172  

Total charge-offs

    6,623       6,261       4,907       2,943       5,176  

Recoveries

                                       

Commercial loans

                                       

Construction, development, and other land

    266       146       210       306       282  

Commercial and industrial

    177       99       200       160       484  

Multi-family residential

    39       3       17       9       15  

Single family non-owner occupied

    37       12       98       180       79  

Non-farm, non-residential

    95       546       191       146       59  

Agricultural

    11       1       7              

Farmland

    5       66                    

Consumer real estate loans

                                       

Home equity lines

    262       401       216       201       137  

Single family owner occupied

    142       1,045       238       108       182  

Owner occupied construction

          42             105       39  

Consumer and other

                                       

Consumer loans

    678       487       328       285       360  

Total recoveries

    1,712       2,848       1,505       1,500       1,637  

Net charge-offs

    4,911       3,413       3,402       1,443       3,539  

Ending balance

  $ 26,182     $ 18,425     $ 18,267     $ 19,276     $ 17,948  
                                         

Net charge-offs to average non-covered loans

    0.23 %     0.20 %     0.19 %     0.08 %     0.21 %

Net charge-offs to average total loans

    0.23 %     0.20 %     0.19 %     0.08 %     0.20 %

 

 

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

 

   

December 31,

 

(Amounts in thousands)

 

2020

   

2019

   

2018

   

2017

   

2016

 

Commercial loans

                                       

Construction, development, and other land

  $ 528     $ 245     $ 417     $ 830     $ 889  

Commercial and industrial

    1,024       699       663       762       495  

Multi-family residential

    1,417       969       1,192       1,094       1,157  

Single family non-owner occupied

    1,861       1,323       1,442       1,976       2,752  

Non-farm, non-residential

    9,417       6,653       6,530       6,597       6,185  

Agricultural

    218       145       85       51       43  

Farmland

    196       201       170       362       169  

Consumer real estate loans

                                       

Home equity lines

    799       673       748       803       895  

Single family owner occupied

    7,957       5,528       5,853       5,710       4,364  

Owner occupied construction

    195       124       131       297       228  

Consumer and other loans

                                       

Consumer loans

    2,570       1,865       1,036       794       759  

Total allowance, excluding PCI loans

  $ 26,182     $ 18,425     $ 18,267     $ 19,276     $ 17,936  

 

There was no allowance related to PCI loans as of December 31, 2020, nor for December 31, 2019, 2018, or 2017.  As of December 31, 2016 there was an allowance of $12 thousand related to PCI loans.


Deposits

 

Total deposits as of December 31, 2020, increased $216.34 million, or 9.29%, compared to December 31, 2019. Time deposits, which consist of certificates of deposit and individual retirement accounts, decreased $95.00 million; savings deposits, which consist of money market accounts and savings accounts, increased $65.73 million; interest-bearing demand deposits increased $100.68 million while noninterest-bearing demand deposits increased $144.93 million as of December 31, 2020, compared to December 31, 2019.  We attribute the significant increase in demand deposits to the unprecedented level of stimulus payments from the Federal Government in response to the pandemic.  We had no material deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of December 31, 2020 or 2019.

 

The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2020:

 

(Amounts in thousands)

       

Three months or less

  $ 22,487  

Over three through six months

    24,516  

Over six through twelve months

    32,584  

Over twelve months

    74,197  
    $ 153,784  

 

Borrowings

 

Total borrowings as of December 31, 2020, decreased $637 thousand, or 39.79%, compared to December 31, 2019. Total borrowings for 2020 were comprised entirely of short-term borrowings, which consist of retail repurchase agreements.  The weighted average rate increased 18 basis points to 0.32% as of December 31, 2020, compared to December 31, 2019.

 

 

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

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 
   

Amount

   

Rate

   

Amount

   

Rate

   

Amount

   

Rate

 

(Amounts in thousands)

                                               

Year-end balance

  $ 964       0.23 %   $ 1,601       0.16 %   $ 4,370       0.13 %

Average annual balance(1)

    1,181       0.32 %     2,471       0.14 %     4,010       0.12 %

Maximum month-end balance(1)

    2,348               28,508               29,305          

 


 

Long-term borrowings consisted of a $40 thousand amortizing advance with the FHLB of Atlanta that was assumed in the Highlands transaction. That small borrowing was repaid early in 2020. In the first quarter of 2019, the Company’s remaining wholesale repurchase agreement of $25.00 million with a weighted average rate of 3.18% matured. During 2018, the prepayment of the FHLB advance resulted in a prepayment penalty of $1.10 million. The prepayment was funded with cash and equivalents on hand, as well as proceeds from the sale of single issue trust preferred investment securities, and resulted in annualized net pre-tax savings of approximately $800 thousand. 

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity is a measure of our ability to convert assets to cash or raise cash to meet financial obligations. We believe that liquidity management should encompass an overall balance sheet approach that draws together all sources and uses of liquidity. Poor or inadequate liquidity risk management may result in a funding deficit that could have a material impact on our operations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) to detect potential liquidity issues and protect our depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee (“ALCO”) of the Board of Directors. ALCO reviews liquidity risk exposure and policies related to liquidity management; ensures that systems and internal controls are consistent with liquidity policies; and provides accurate reports about liquidity needs, sources, and compliance. The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows during a funding crisis. The liquidity model incorporates various funding crisis scenarios and a specific action plan is formulated, and activated, when a financial shock that affects our normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will be met through liquidation of balance sheet assets, including unpledged securities.

 

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of December 31, 2020, the Company’s cash reserves totaled $10.09 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. There was no outstanding balance on the line of credit as of December 31, 2020. The Company’s cash reserves and investments provide adequate working capital to meet obligations, projected dividends to shareholders, and anticipated debt repayments for the next twelve months.

 

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of December 31, 2020, our unencumbered cash totaled $456.56 million, unused borrowing capacity from the FHLB totaled $292.92 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $85.00 million, and unpledged available-for-sale securities totaled $46.79 million.

 

 

Cash Flows

 

The following table summarizes the components of cash flow for the periods indicated:

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 

(Amounts in thousands)

                       

Net cash provided by operating activities

  $ 45,844     $ 56,655     $ 49,499  

Net cash provided by investing activities

    17,798       171,377       49,398  

Net cash used in financing activities

    175,910       (87,896 )     (179,975 )

Net increase (decrease) in cash and cash equivalents

    239,552       140,136       (81,078 )

Cash and cash equivalents, beginning balance

    217,009       76,873       157,951  

Cash and cash equivalents, ending balance

  $ 456,561     $ 217,009     $ 76,873  

 

2020 Compared to 2019. Cash and cash equivalents increased $239.55 million compared to a increase of $140.14 million in the prior year. The increase was primarily due to an increase in both interest-bearing and noninterest-bearing deposits for a total of $216.34 million.  The increase in deposits was largely due to the significant inflow of unprecedented government stimulus in response to the COVID-19 pandemic and changes in consumer spending.

 

2019 Compared to 2018. Cash and cash equivalents increased $140.14 million compared to a decrease of $81.08 million in the prior year. The increase was primarily due to a $121.98 million increase in net cash used in investing activities due to a net decrease in funds used to purchase investment securities and an increase in loan proceeds received. Net cash provided by financing activities increased $92.08 million largely due to a reduction in the net decrease in deposits year over year, and a net decrease in the repayment of borrowings. Net cash provided by operating activities increased $7.16 million primarily due to an increase in net income and a decrease in accretion income on acquired loans.

 

Capital Resources

 

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of December 31, 2020, decreased $2.09 million, or 0.49%, to $426.73 million from $428.82 million as of December 31, 2019.  The Company earned $35.93 million, which was offset by repurchasing 734,653 shares of our common stock totaling $21.87 million and declaring dividends on our common stock of $17.88 million. Our book value per common share increased $0.75 to $24.08 as of December 31, 2020, from $23.33 as of December 31, 2019.

 

Capital Adequacy Requirements

 

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III.  Our current required capital ratios are as follows:

 

 

4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)

 

6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)

 

8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)

 

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

 

 

The following table presents our capital ratios as of the dates indicated:

 

   

December 31,

 
   

2020

   

2019

   

2018

 

The Company

                       

Common equity Tier 1 ratio

    14.28 %     14.31 %     13.72 %

Tier 1 risk-based capital ratio

    14.28 %     14.31 %     13.72 %

Total risk-based capital ratio

    15.53 %     15.21 %     14.79 %

Tier 1 leverage ratio

    10.24 %     14.01 %     10.95 %
                         

The Bank

                       

Common equity Tier 1 ratio

    13.57 %     12.87 %     12.55 %

Tier 1 risk-based capital ratio

    13.57 %     12.87 %     12.55 %

Total risk-based capital ratio

    14.82 %     13.78 %     13.62 %

Tier 1 leverage ratio

    9.73 %     12.61 %     9.98 %

 

As of December 31, 2020, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2020. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 21, “Regulatory Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.

 

Commitments, Contingencies, and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We enter into certain contractual obligations in the normal course of business that require future cash payments. Management believes we have adequate resources to fund our outstanding commitments and the ability to adjust rates on certificates of deposit, in a changing interest rate environment; attract new deposits; and replace deposits with FHLB advances or other fund providers, if cost effective. The following table presents our contractual cash obligations, by payment date, as of December 31, 2020:

 

   

Less Than

   

One to

   

Three to

   

More than

         
   

One Year

   

Three Years

   

Five Years

   

Five Years

   

Total

 

(Amounts in thousands)

                                       

Deposits without a stated maturity(1)

  $ 2,125,628     $     $     $     $ 2,125,628  

Certificates of deposit(2)(3)

    228,133       134,403       55,765       7,898       426,199  

Securities sold under agreements to repurchase

    964                         964  

Operating leases

    154       250       218       362       984  

Total contractual cash obligations

  $ 2,354,879     $ 134,653     $ 55,983     $ 8,260     $ 2,553,775  

 


(1)

Excludes interest

(2)

Includes interest on fixed and variable rate obligations (changes in market interest rates may materially affect the variable rate obligation to be paid, which is reflected using the rates in effect as of December 31, 2020) 

(3)

Excludes unamortized premiums and discounts

 

Off-Balance Sheet Arrangements

 

We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument.

 

 

The following table presents our off-balance sheet arrangements, by commitment expiration, as of December 31, 2020:

 

   

Less than

   

One to

   

Three to

   

More than

         
   

One Year(1)

   

Three Years

   

Five Years

   

Five Years

   

Total

 

(Amounts in thousands)

                                       

Commitments to extend credit

  $ 101,309     $ 53,429     $ 7,511     $ 67,159     $ 229,408  

Financial letters of credit

    80       160       50             290  

Performance letters of credit(2)

    2,288       176,239       205             178,732  

Total off-balance sheet risk

  $ 103,677     $ 229,828     $ 7,766     $ 67,159     $ 408,430  

 


(1)

Lines of credit with no stated maturity date are included in the less than one year expiration category.

(2)

Includes FHLB letters of credit

 

The reserve for the risk inherent in unfunded lending commitments totaled $66 thousand as of December 31, 2020 and 2019. For additional information, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.

 

Market Risk and Interest Rate Sensitivity

 

Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. ALCO reviews our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and mitigate the effect of interest rate changes.

 

In order to manage our exposure to interest rate risk, we periodically review internal and third-party simulation models that project net interest income at risk, which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate shock.

 

During 2020, the Federal Open Market Committee decreased the benchmark federal funds rate 150 basis points to a range of 0 to 25 basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. Due to the current target Fed Funds rate as of December 31, 2020, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.

 

   

Year Ended December 31,

 
   

2020

   

2019

 

Increase (Decrease) in Basis Points

 

Change in Net Interest Income

    Percent Change    

Change in Net Interest Income

    Percent Change  

(Dollars in thousands)

                               

300

  $ 8,429       8.5 %   $ 171       0.2 %

200

    5,912       6.0 %     428       0.4 %

100

    3,130       3.2 %     426       0.4 %

(100)

    (4,749 )     -4.8 %     (4,631 )     -4.3 %

(200)

    N/A       N/A       (8,571 )     -8.0 %

 

 

 

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of December 31, 2020, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.

 

The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of December 31, 2020, we maintained interest rate swap agreements with notional amounts totaling $16.70 million to modify our exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. The total of the fair value of the swap agreements on the balance sheet, which are accounted for as fair value hedges, was recorded as a derivative liability totaling $1.13 million as of December 31, 2020, and a derivative liability totaling $510 thousand as of December 31, 2019. For additional information, see Note 12, “Derivative Instruments and Hedging Activities,” to the Consolidated Financial Statements in Item 8 of this report.

 

Inflation and Changing Prices

 

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

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

 

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 7 of this report.

 

 

Item 8.

Financial Statements and Supplementary Data.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

 

 

Page

   

Consolidated Balance Sheets as of December 31, 2020 and 2019

47

Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018

48

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018

49

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018

50

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018

51

Notes to Consolidated Financial Statements

52

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

102

Management’s Assessment of Internal Control Over Financial Reporting

104

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

105

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

 

  

December 31,

 

(Amounts in thousands, except share and per share data)

 

2020

  

2019

 

Assets

        

Cash and due from banks

 $58,404  $66,818 

Federal funds sold

  395,756   148,000 

Interest-bearing deposits in banks

  2,401   2,191 

Total cash and cash equivalents

  456,561   217,009 

Debt securities available for sale

  83,358   169,574 

Loans held for sale

     263 

Loans held for investment, net of unearned income (includes covered loans of $9,680 and $12,861, respectively)

  2,186,632   2,114,460 

Allowance for loan losses

  (26,182)  (18,425)

Loans held for investment, net

  2,160,450   2,096,035 

FDIC indemnification asset

  1,223   2,883 

Premises and equipment, net

  57,700   62,824 

Other real estate owned

  2,083   3,969 

Interest receivable

  9,052   6,677 

Goodwill

  129,565   129,565 

Other intangible assets

  7,069   8,519 

Other assets

  104,075   101,529 

Total assets

 $3,011,136  $2,798,847 
         

Liabilities

        

Noninterest-bearing deposits

 $772,795  $627,868 

Interest-bearing deposits

  1,773,452   1,702,044 

Total deposits

  2,546,247   2,329,912 

Securities sold under agreements to repurchase

  964   1,601 

Interest, taxes, and other liabilities

  37,195   38,515 

Total liabilities

  2,584,406   2,370,028 
         

Stockholders' equity

        

Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding

      

Common stock, $1 par value; 50,000,000 shares authorized; 24,319,076 issued and 17,722,507 outstanding at December 31, 2020; 24,238,907 shares issued and 18,376,991 shares outstanding at December 31, 2019.

  17,723   18,377 

Additional paid-in capital

  173,345   192,413 

Retained earnings

  237,585   219,535 

Accumulated other comprehensive loss

  (1,923)  (1,506)

Total stockholders' equity

  426,730   428,819 

Total liabilities and stockholders' equity

 $3,011,136  $2,798,847 

 

See Notes to Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

   

Year Ended December 31,

 

(Amounts in thousands, except share and per share data)

 

2020

   

2019

   

2018

 

Interest income

                       

Interest and fees on loans

  $ 110,447     $ 88,805     $ 91,671  

Interest on securities -- taxable

    1,004       1,219       2,258  

Interest on securities -- tax-exempt

    1,785       2,497       2,828  

Interest on deposits in banks

    800       2,447       1,537  

Total interest income

    114,036       94,968       98,294  

Interest expense

                       

Interest on deposits

    5,460       5,392       5,144  

Interest on short-term borrowings

    4       123       811  

Interest on long-term debt

                1,494  

Total interest expense

    5,464       5,515       7,449  

Net interest income

    108,572       89,453       90,845  

Provision for loan losses

    12,668       3,571       2,393  

Net interest income after provision for loan losses

    95,904       85,882       88,452  

Noninterest income

                       

Wealth management

    3,417       3,423       3,262  

Service charges on deposits

    13,019       14,594       14,733  

Other service charges and fees

    10,333       8,281       7,733  

Insurance commissions

                966  

Net gain (loss) on sale of securities

    385       (43 )     (618 )

Net FDIC indemnification asset amortization

    (1,690 )     (2,377 )     (2,181 )

Litigation settlements

          6,995        

Other operating income

    4,369       2,804       2,548  

Total noninterest income

    29,833       33,677       26,443  

Noninterest expense

                       

Salaries and employee benefits

    44,005       37,148       36,690  

Occupancy expense

    5,043       4,334       4,542  

Furniture and equipment expense

    5,558       4,457       3,980  

Service fees

    5,665       4,448       3,860  

Advertising and public relations

    1,951       2,310       2,011  

Professional fees

    1,224       1,698       1,430  

Amortization of intangibles

    1,450       997       1,039  

FDIC premiums and assessments

    426       318       906  

Loss on extinguishment of debt

                1,096  

Goodwill impairment

                1,492  

Merger expense

    1,893       2,124        

Other operating expense

    12,410       11,929       12,727  

Total noninterest expense

    79,625       69,763       69,773  

Income before income taxes

    46,112       49,796       45,122  

Income tax expense

    10,186       10,994       8,782  

Net income

  $ 35,926     $ 38,802     $ 36,340  
                         

Earnings per common share

                       

Basic

  $ 2.02     $ 2.47     $ 2.19  

Diluted

    2.02       2.46       2.18  

Cash dividends per common share

    1.00       0.96       0.78  

Special cash divided per common share

                0.48  

Weighted average shares outstanding

                       

Basic

    17,781,748       15,690,812       16,587,504  

Diluted

    17,815,380       15,756,093       16,666,385  

 

See Notes to Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANKSHARES, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 

(Amounts in thousands)

                       

Net income

  $ 35,926     $ 38,802     $ 36,340  

Other comprehensive income, before tax

                       

Available-for-sale debt securities:

                       

Change in net unrealized gains (losses) on securities without other-than-temporary impairment

    689       1,414       (2,213 )

Reclassification adjustment for net (gain) loss recognized in net income

    (385 )     43       618  

Net unrealized gains (losses) on available-for-sale debt securities

    304       1,457       (1,595 )

Employee benefit plans:

                       

Net actuarial (loss) gain

    (1,217 )     (1,570 )     565  

Plan change

          (262 )      

Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income

    386       278       285  

Net unrealized (losses) gains on employee benefit plans

    (831 )     (1,554 )     850  

Other comprehensive (loss) income, before tax

    (527 )     (97 )     (745 )

Income tax expense

    110       20       156  

Other comprehensive (loss) income, net of tax

    (417 )     (77 )     (589 )

Total comprehensive income

  $ 35,509     $ 38,725     $ 35,751  

 

See Notes to Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

                      

Accumulated

     
          

Additional

          

Other

     
  

Preferred

  

Common

  

Paid-in

  

Retained

  

Treasury

  

Comprehensive

     

(Amounts in thousands, except share and per share data)

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

Income (Loss)

  

Total

 
                             

Balance January 1, 2018

 $  $21,382  $228,750  $180,543  $(79,121) $(840) $350,714 

Net income

           36,340         36,340 

Other comprehensive income

                 (589)  (589)

Common dividends declared -- $0.78 per share

           (12,966)        (12,966)

Special common dividend declared -- $0.48 per share

           (8,124)        (8,124)

Equity-based compensation expense

        535      623      1,158 

Common stock options exercised -- 24,186 shares

        (84)     468      384 

Issuance of treasury stock to 401(k) plan -- 11,331 shares

        138      214      352 

Purchase of treasury shares -- 1,060,312 shares at $32.45 per share

              (34,412)     (34,412)

Reclassification of treasury stock

     (5,375)  (106,853)     112,228       

Balance December 31, 2018

 $  $16,007  $122,486  $195,793  $  $(1,429) $332,857 
                             

Balance January 1, 2019

 $  $16,007  $122,486  $195,793  $  $(1,429) $332,857 

Net income

           38,802         38,802 

Other comprehensive loss

                 (77)  (77)

Common dividends declared -- $0.96 per share

           (15,060)        (15,060)

Equity-based compensation expense

     44   1,437            1,481 

Common stock options exercised -- 8,459 shares

     8   128            136 

Issuance of stock to 401(k) plan -- 12,407 shares

     12   399            411 

Repurchase of common shares -- 487,400 shares at $33.57 per share

     (487)  (15,875)           (16,362)

Highlands Bankshares, Inc. acquisition

     2,793   83,838            86,631 

Balance December 31, 2019

 $  $18,377  $192,413  $219,535  $  $(1,506) $428,819 
                             

Balance January 1, 2020

 $  $18,377  $192,413  $219,535  $  $(1,506) $428,819 

Net income

           35,926         35,926 

Other comprehensive loss

                 (417)  (417)

Common dividends declared -- $1.00 per share

           (17,876)        (17,876)

Equity-based compensation expense

     58   1,585            1,643 

Issuance of stock to 401(k) plan -- 22,693 shares

     23   484            507 

Repurchase of common shares -- 734,653 shares at $29.77 per share

     (735)  (21,137)           (21,872)

Balance December 31, 2020

 $  $17,723  $173,345  $237,585  $  $(1,923) $426,730 

 

See Notes to Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows

 

   

Year Ended December 31,

 

(Amounts in thousands)

 

2020

   

2019

   

2018

 

Operating activities

                       

Net income

  $ 35,926     $ 38,802     $ 36,340  

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

                       

Provision for loan losses

    12,668       3,571       2,393  

Depreciation and amortization of premises and equipment

    4,458       3,448       2,912  

Amortization of premiums on investments, net

    1,468       195       40  

Amortization of FDIC indemnification asset, net

    1,690       2,377       2,181  

Amortization of intangible assets

    1,450       997       1,039  

Goodwill impairment

                1,492  

Accretion on acquired loans

    (7,991 )     (3,231 )     (6,391 )

Equity-based compensation expense

    1,643       1,481       1,158  

Issuance of common stock to 401(k) plan

    507       411       352  

Gain on sale of premises and equipment, net

    (59 )     (75 )     (25 )

Provision expense and loss on sale of other real estate owned

    319       1,253       1,313  

(Gain) loss on sale of securities

    (385 )     43       618  

Writedowns of property, plant & equipment

    812       380       1,007  

Loss on extinguishment of debt

                1,096  

(Increase) decrease in other operating activities

    (6,662 )     7,003       3,974  

Net cash provided by operating activities

    45,844       56,655       49,499  

Investing activities

                       

Proceeds from sale of securities available for sale

    51,027       13,898       8,937  

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

    44,676       32,863       68,765  

Proceeds from maturities and calls of securities held to maturity

          25,000        

Payments to acquire securities available for sale

    (10,267 )     (8,255 )     (67,355 )

(Originations of) proceeds from repayments loans, net

    (69,259 )     85,233       39,512  

Proceeds from bank owned life insurance

                458  

(Redemption of) payments for FHLB stock, net

    (12 )     129       (2,122 )

Cash proceeds from mergers, acquisitions, and divestitures, net

          25,863       10  

Payments to the FDIC

    (30 )     (152 )     (151 )

Proceeds from sale of premises and equipment

    2,861       1,955       955  

Payments to acquire premises and equipment

    (3,195 )     (8,411 )     (2,551 )

Proceeds from sale of other real estate owned

    1,997       3,254       2,940  

Net cash provided by investing activities

    17,798       171,377       49,398  

Financing activities

                       

Increase in noninterest-bearing deposits, net

    144,927       12,604       5,407  

Increase (decrease) in interest-bearing deposits, net

    71,408       (41,445 )     (79,548 )

Repayments of securities sold under agreements to repurchase, net

    (637 )     (27,769 )     (716 )

Repayments of FHLB and other borrowings, net

    (40 )           (50,000 )

Proceeds from stock options exercised

          136       384  

Payments for repurchase of common stock

    (21,872 )     (16,362 )     (34,412 )

Payments of common stock dividends

    (17,876 )     (15,060 )     (21,090 )

Net cash provided by (used in) financing activities

    175,910       (87,896 )     (179,975 )

Net increase (decrease) in cash and cash equivalents

    239,552       140,136       (81,078 )

Cash and cash equivalents at beginning of period

    217,009       76,873       157,951  

Cash and cash equivalents at end of period

  $ 456,561     $ 217,009     $ 76,873  
                         

Supplemental disclosure -- cash flow information

                       

Cash paid for interest

  $ 5,500     $ 5,661     $ 7,935  

Cash paid for income taxes

    9,074       8,057       7,610  
                         

Supplemental transactions -- non-cash items

                       

Transfer of loans to other real estate

    695       3,160       5,686  

Loans originated to finance other real estate

    266       484       164  

Increase in accumulated other comprehensive loss

    417       77       589  

Non-cash sales price related to divestitures

                1,603  

Acquisitions:

                       

Fair value of assets acquired

          556,005        

Fair value of liabilities assumed

          506,179        

Net assets acquired

          49,826        

Common stock issued in acquisition

          86,631        

 

See Notes to Consolidated Financial Statements.

 

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and reincorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

 

Principles of Consolidation

 

The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management.

 

The Company maintains investments in variable interest entities (“VIEs”). VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is required if a reporting entity is the primary beneficiary of the VIE. The Company periodically reviews its VIEs and has determined that it is not the primary beneficiary of any VIE; therefore, the assets and liabilities of these entities are not consolidated into the financial statements.

 

Reclassification

 

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

 

Use of Estimates

 

Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, the allowance for loan losses and goodwill and other intangible asset. For additional information, see “Critical Accounting Policies” in Part II, Item 7 of this report.

 

Summary of Significant Accounting Policies

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

 

52

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value hierarchy ranks the inputs used in measuring fair value as follows:

 

 

Level 1 – Observable, unadjusted quoted prices in active markets

 

Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability

 

Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions

 

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period.

 

Cash and Cash Equivalents

 

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

 

Investment Securities

 

Management classifies debt securities as held-to-maturity or available-for-sale based on the intent and ability to hold the securities to maturity. Debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Debt securities not classified as held to maturity are classified as available-for-sale securities and carried at estimated fair value. Available-for-sale securities consist of securities the Company intends to hold for indefinite periods of time including securities to be used as part of the Company’s asset/liability management strategy and securities that may be sold in response to changes in interest rates, prepayment risk, or other similar factors. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income (“AOCI”), net of income taxes, in stockholders’ equity. Gains or losses on calls, maturities, or sales of investment securities are recorded based on the specific identification method and included in noninterest income. Premiums and discounts are amortized or accreted over the life of a security into interest income.

 

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”) using inputs from independent third parties to determine the fair value of investment securities, which are reviewed and corroborated by management. Unrealized losses are evaluated to determine whether the impairment is temporary or other-than-temporary in nature. For debt securities, management considers its intent to sell the securities, the evidence available to determine if it is more likely than not that the securities will have to be sold before recovery of amortized cost, and the probable credit losses. Probable credit losses are evaluated using the present value of expected future cash flows; the severity and duration of the impairment; the issuer’s financial condition and near-term prospects to service the debt; the cause of the decline, such as adverse conditions related to the issuer, the industry, or economic environment; the payment structure of the debt; the issuer’s failure to make scheduled interest or principal payments; and any change in the issuer’s credit rating by rating agencies. If the present value of expected future cash flows discounted at the security's effective yield is less than the net book value, the difference is recognized as a credit-related OTTI in noninterest income. If management does not intend to sell and if we are not likely to be required to sell the security, the OTTI is separated into an amount representing the credit loss, which is recognized as a charge to noninterest income, and the amount representing all other factors, which is recognized in other comprehensive income (“OCI”).

 

Other Investments

 

As a condition of membership in the FHLB and the FRB, the Company is required to hold a minimum level of stock in the FHLB of Atlanta and the FRB of Richmond. These securities are carried at cost and periodically reviewed for impairment. The total investment in FHLB and FRB stock, which is included in other assets, was $10.80 million as of December 31, 2020, and $8.90 million as of December 31, 2019.

 

The Company owns certain long-term equity investments without readily determinable fair values, including certain tax credit limited partnerships and various limited liability companies that manage real estate investments, facilitate tax credits, and provide title insurance and other related financial services. These investments are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The total carrying value in these investments, which is included other assets, totaled $3.93 million as of December 31, 2020, and $3.68 million as of December 31, 2019.

 

53

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Business Combinations

 

The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Acquisition and divestiture activities are included in the Company’s consolidated results of operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred. For additional information, see “Purchased Credit Impaired Loans” and “Intangible Assets” below.

 

Loans Held for Investment

 

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

 

Purchased Performing Loans. Purchased loans that are deemed to be performing at the acquisition date are accounted for using the contractual cash flow method of accounting, which results in the loans being recorded at fair value with a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated contractual lives of the loans. No allowance for loan losses is recorded at acquisition for purchased loans because the fair values of the acquired loans incorporate credit risk assumptions.

 

Purchased Credit Impaired (“PCI”) Loans. When purchased loans exhibit evidence of credit deterioration after the acquisition date, and it is probable at acquisition the Company will not collect all contractually required principal and interest payments, the loans are referred to as PCI loans. PCI loans are accounted for using Topic 310-30 of the FASB ASC. PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Per the guidance, the Company groups PCI loans that have common risk characteristics into loan pools. Evidence of credit quality deterioration at acquisition may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans identified as credit impaired. If contractually required payments at acquisition exceed cash flows expected to be collected, the excess is the non-accretable difference, which is available to absorb credit losses on those loans or pools of loans. If the cash flows expected at acquisition exceed the estimated fair values, the excess is the accretable yield, which is recognized in interest income over the remaining lives of those loans or pools of loans when there is a reasonable expectation about the amount and timing of such cash flows.

 

Impaired Loans and Nonperforming Assets. The Company maintains an active and robust problem credit identification system through its ongoing credit review function. When a credit is identified as exhibiting characteristics of weakening, the Company assesses the credit for potential impairment. Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management. Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. Interest income realized on impaired loans in nonaccrual status, if any, is recognized upon receipt. The accrual of interest, which is based on the daily amount of principal outstanding, on impaired loans is generally continued unless the loan becomes delinquent 90 days or more.

 

54

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

Loans are considered troubled debt restructurings (“TDRs”) when the Company grants concessions, for legal or economic reasons, to borrowers experiencing financial difficulty that would not otherwise be considered. The Company generally makes concessions in interest rates, loan terms, and/or amortization terms. All TDRs $500 thousand or greater are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs under $500 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the date of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

 

Other real estate owned (“OREO”) acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The fair value is generally based on current third-party appraisals. When a property is transferred into OREO, any excess of the loan balance over the net realizable fair value is charged against the allowance for loan losses. Operating expenses, gains, and losses on the sale of OREO are included in other noninterest expense in the Company’s consolidated statements of income after any fair value write-downs are recorded as valuation adjustments.

 

Allowance for Loan Losses

 

We review our allowance for loan losses quarterly to determine if it is sufficient to absorb probable loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While management uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

 

Our allowance for loan losses consists of specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans that have been segmented into loan classes with similar risk characteristics such as the type of loan and collateral. General reserve allocations are based on management’s judgments of qualitative and quantitative factors that include, but are not limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for loans classified as special mention and substandard within each loan class in the commercial loan segment are adjusted by an additional qualitative factor.  Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020. For additional information, see Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

FDIC Indemnification Asset

 

The FDIC indemnification asset represents the carrying amount of the right to receive payments from the FDIC for losses incurred on certain loans and OREO purchased from the FDIC that are covered by loss share agreements. The FDIC indemnification asset is measured separately from related covered assets because it is not contractually embedded in the assets or transferable should the assets be disposed. Under the acquisition method of accounting, the FDIC indemnification asset is recorded at fair value using projected cash flows based on expected reimbursements and applicable loss share percentages as outlined in the loss share agreements. The expected reimbursements do not include reimbursable amounts related to future covered expenditures. The cash flows are discounted to reflect the timing and receipt of reimbursements from the FDIC. The discount is accreted through noninterest income over future periods. Post-acquisition adjustments to the indemnification asset are measured on the same basis as the underlying covered assets. Increases in the cash flows of covered loans reduce the FDIC indemnification asset balance, which is recognized as amortization through noninterest income over the shorter of the remaining life of the FDIC indemnification asset or the underlying loans. Decreases in the cash flows of covered loans increase the FDIC indemnification asset balance, which is recognized as accretion through noninterest income. Certain expenses related to covered assets are reimbursable from the FDIC through monthly and quarterly claims. Estimated reimbursements from the FDIC are netted against covered expenses in the consolidated statements of income.

 

55

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Premises and Equipment

 

Premises, equipment, and capital leases are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and equipment; 3 to 5 years for computer software, hardware, and data handling equipment; and 7 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 10 years and most contain options to renew with increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

 

Intangible Assets

 

Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired that is allocated to the appropriate reporting unit when acquired. Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that are amortized using the straight-line method.

 

Goodwill is tested for impairment annually, on October 31st, or more frequently if events or circumstances indicate there may be impairment.  We have one reporting unit, Community Banking.  If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2020, which resulted in no goodwill impairment.

 

Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value.  The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method).  The Company engaged an independent valuation specialist to assist with goodwill impairment testing utilizing both the market and  DCF methods.  The resulting fair values from the aforementioned methods were appropriately weighted to determine the final fair value of our reporting unit.

 

Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples.  The selection of the multiples considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline companies.  Among other factors considered, are the level and expected growth in return on tangible equity relative to the guideline companies selected, implied control premiums, recent transaction prices, as well as data in comparable macroeconomic environments. 

 

Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate.  The cash flows for the forecasted period are estimated based on management’s most recent projections available as of the testing date, given consideration to minimum equity capital requirements.  The projections include macroeconomic variables developed at the same time.  The terminal growth rate is selected based on management’s long-term expectation for the reporting unit.  The discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.

 

At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment of goodwill.  While the inherent risk related to uncertainty is embedded in the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and uncertainties related to the pandemic.  Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the valuation.  If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment charges in the future. 

 

Securities Sold Under Agreements to Repurchase

 

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

 

Derivative Instruments

 

The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract such as interest rates, equity security prices, currencies, commodity prices, or credit spreads. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount, such as interest rate swaps or currency forwards, or to purchase or sell other financial instruments at specified terms on a specified date, such as options to buy or sell securities or currencies. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

 

56

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. The recognition of changes in the fair value of a derivative instrument varies depending on the intended use of the derivative and the resulting designation. The Company accounts for hedges of customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. All derivative instruments are reported at fair value in the consolidated balance sheets.

 

Equity-Based Compensation

 

The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. The Black-Scholes-Merton valuation model is used to estimate the fair value of stock options at the grant date while the fair value of restricted stock awards is based on the market price of the Company’s common stock on the grant date. The Black-Scholes-Merton model incorporates the following assumptions: the expected volatility is based on the weekly historical volatility of the Company’s common stock price over the expected term of the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the U.S. Department of the Treasury’s (“Treasury”) yield curve on the grant date with a term comparable to the grant; and the dividend yield is based on the Company’s dividend yield using the most recent dividend rate paid per share and trading price of the Company’s common stock. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Revenue Recognition

 

Wealth management. Wealth management income represents monthly fees due from wealth management customers in consideration for managing and administrating the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when the performance obligation is completed each month, which is generally the time that payment is received. Income also includes fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that are referred to the third party. These fees are paid to the Company by the third party on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied.

 

Service charges on deposits and other service charges and fees. Service charges on deposits and other service charges and fees represent general service fees for account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees.

 

Advertising Expenses

 

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

 

Income Taxes

 

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

 

57

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Per Share Results

 

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

 

Risks and Uncertainties

 

Recent COVID-19 Virus Developments

 

During the year of 2020, government reaction to the novel coronavirus (“COVID-19”) pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services.

 

Company Response to COVID-19

 

As COVID-19 events unfolded during 2020, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In particular, the Company took the following actions, among others:

 

 

Implemented its board-approved pandemic business continuity plan

 

Appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-19

 

Modified branch operations:

 

o

Branch lobbies remain available, but on a limited appointment-only basis

 

o

Most transactions conducted via drive-throughs

 

o

Increased emphasis on digital banking platforms

 

Implemented physical separation of critical operational workforce for Bank and non-Bank financial services subsidiaries

 

Expanded paid time off and health benefits for employees

 

Implemented work from home strategy for appropriate staff:

 

Many of the Company's non-branch, operational essential employees remain working remotely

 

o

Geographically separated work locations of Bank and Company CEO’s and most other executive management team members

 

o

Suspended non-essential work-related travel

 

Implemented a pay differential for employees continuing to work at branch or back office locations which ended May 31, 2020

 

Adopted self-monitoring and quarantining procedures

 

Implemented enhanced facility cleaning protocols

 

Redeployed staff to critical customer service operations to expedite loan payment deferral requests, Paycheck Protection Program lending efforts, and other operations

 

Potential Effects of COVID-19 – 

 

The adverse impact of COVID-19 to the economy has impaired some of the Company’s customers’ ability to fulfill their financial obligations to the Company, reducing interest income on loans or increasing loan losses. In keeping with Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the Company continues to work with COVID-19 affected borrowers to defer loan payments, interest, and fees. Through December 31, 2020, the Company has modified or deferred payments on a total of 3,625 loans totaling $458.17 million in principal.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.  Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.

 

The general economic slowdown caused by COVID-19 in local economies in communities served by the Company has affected loan demand and consumption of financial services, generally, reducing interest income, service fees, and the demand for other profitable financial services provided by the Company.

 

58

 

 

In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other legislative and regulatory actions may materially impact the Company. The Company is participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through December 31, 2020 the Company processed 803 loans with original principal balances totaling $62.74 million through the PPP.  As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA.

 

COVID-19 could cause a sustained decline in the Company’s stock price or the occurrence of an event that could, under certain circumstances, create the impairment of goodwill. In the event the Company deems all or a portion of its goodwill to be impaired, the Company could record a non-cash charge to earnings for the amount of such impairment. Such a charge would have no impact on tangible or regulatory capital.

 

To date, the Company has identified no material, unmitigated operational or internal control challenges or risks and anticipates no significant challenges to its ability to maintain systems and controls as a result of the actions taken to prevent the spread of COVID-19. In addition, the Company currently faces no material resource constraints arising due to implementation of the business continuity plan.

 

It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations. Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.

 

Recent Accounting Standards

 

Standards to be Adopted in 2021

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  This ASU requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance for credit losses (“ACL”) that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses for loans, investment securities portfolio, and purchased financial assets with credit deterioration.  We do not expect this standard to have a material impact on our investment securities portfolio at implementation.  This ASU also will require enhanced disclosures.  The new guidance was effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The CARES Act, as amended, allowed certain relief on the implementation of the ASU, and the Company adopted the new standard as of January 1, 2021, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company currently estimates that our ACL under CECL will total approximately $39.29 million and the allowance for unfunded commitments will approximate $576 thousand.  The estimated decline in stockholders' equity, net of tax, approximated $5.87 million. 

 

This estimate is influenced by the composition, characteristics and quality of our loan portfolio, as well as the economic conditions and forecasts as of each reporting period.  These economic conditions and forecasts could be significantly different in future periods.  The impact of the change in the allowance on our results of operations in a provision for credit losses will depend on the current period net charge-offs, level of loan originations, and change in mix of the loan portfolio.

 

Standards Adopted in 2020

 

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)".  This ASU provides for the simplification of the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  After adoption, an entity should measure impairment of goodwill in a reporting unit when the carrying amount exceeds its fair value by the difference in these amounts.  This ASU was effective for fiscal years beginning after December 15, 2019.  The Company adopted this ASU effective January 1, 2020.  The ASU did not have any material effect on the Company's consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820):  Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement."  The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement "Conceptual Framework for Financial Reporting--Chapter 8:  Notes to Financial Statements."  This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

 

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)--Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary".  This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.  LIBOR (London Inter-bank Offered Rate) and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally.  With global capital markets expected to move away from LIBOR and other inter-bank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.  The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  This ASU is effective March 12, 2020 through December 31, 2022.  The Company adopted this ASU on March 12, 2020.  The updates is not expected to have any material effect on the Company's financial statements when and as changes are made to various assets and liabilities for reference rates.

 

 

59

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Standards Not Yet Adopted

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The update is not expected to have any material effect on the Company’s financial statements.

 

The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements.

 

 

Note 2. Acquisitions and Divestitures

 

The following are business combinations and divestitures which have occurred over the past three years:

 

Highlands Bankshares, Inc.

 

On December 31, 2019, the Company acquired Highlands Bankshares, Inc. (“Highlands”) of Abingdon, Virginia. Under the terms of the acquisition, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock.  The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.

 

60

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.

 

  

As recorded by

  

Fair Value

   

As recorded by

 

(Amounts in thousands, except share data)

 

Highlands

  

Adjustments

   

the Company

 

Assets

             

Cash and cash equivalents

 $25,879  $   $25,879 

Securities available for sale

  53,732       53,732 

Loans held for sale

  263       263 

Loans held for investment, net of allowance and mark

  438,896   (11,429)

( a )

  427,467 

Premises and equipment

  16,722   (2,317)

( b )

  14,405 

Other real estate

  1,963       1,963 

Other assets

  25,556   2,250 

( c )

  27,806 

Intangible assets

     4,490 

( d )

  4,490 

Total assets

 $563,011  $(7,006)  $556,005 
              

LIABILITIES

             

Deposits:

             

Noninterest-bearing

 $155,714  $   $155,714 

Interest-bearing

  346,028   1,261 

( e )

  347,289 

Total deposits

  501,742   1,261    503,003 

Long term debt

  40       40 

Other liabilities

  2,938   198 

( f )

  3,136 

Total liabilities

  504,720   1,459    506,179 

Net identifiable assets acquired over (under) liabilities assumed

  58,291   (8,465)   49,826 

Goodwill

     36,821    36,821 

Net assets acquired over liabilities assumed

 $58,291  $28,356   $86,647 
              

Consideration:

             

First Community Bankshares, Inc. common

           2,792,729 

Purchase price per share of the Company's common stock

          $31.02 

Fair Value of Company common stock issued

          $86,631 

Cash paid for fractional shares

           16 

Fair Value of total consideration transferred

          $86,647 

 

     Explanation of fair value adjustments:

     ( a ) - Adjustment reflects the fair value adjustments of $(14.70) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses and deferred loan fees of $3.27 million recorded by Highlands.

     ( b ) - Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.

     ( c ) - Adjustment to record the deferred tax asset related to the fair value adjustments.

     ( d ) - Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

     ( e ) - Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.

     ( f ) - Adjustment reflects the fair value adjustment for death benefits payable of $320 thousand, the fair value adjustment for lease liability of $(37) thousand and the fair value adjustment to the reserve for unfunded commitments of $(85) thousand.

 

61

 

The following table presents the carrying amount of acquired loans at December 31, 2019, which consist of loans with no credit deterioration, or performing loans, and loans with credit deterioration, or impaired loans.

 

  

December 31, 2019

 
  

Purchased

  

Purchased

     

(Amounts in thousands)

 

Performing

  

Impaired

  

Total

 

Commercial loans

            

Construction, development, and other land

 $15,763  $1,956  $17,719 

Commercial and industrial

  44,474   2,829   47,303 

Multi-family residential

  21,032   1,663   22,695 

Single family non-owner occupied

  29,357   4,564   33,921 

Non-farm, non-residential

  107,489   21,710   129,199 

Agricultural

  2,298      2,298 

Farmland

  3,287   3,722   7,009 

Total commercial loans

  223,700   36,444   260,144 

Consumer real estate loans

            

Home equity lines

  23,654   2,157   25,811 

Single family owner occupied

  116,413   13,174   129,587 

Owner occupied construction

  1,097      1,097 

Total consumer real estate loans

  141,164   15,331   156,495 

Consumer and other loans

            

Consumer loans

  9,487   1,341   10,828 

Loans acquired at fair value

 $374,351  $53,116  $427,467 

 

Comparative and Pro Forma Financial Information for Acquisitions in 2020

 

As the merger date was the close of business, December 31, 2019, Highlands had no earnings contribution to the 2019 consolidated statement of income for the Company.  Merger-related expenses of $2.12 million were recorded in the consolidated statement of income and include incremental costs related to the closing of the acquisition, including legal, investment banker costs, and other costs.

 

The following table discloses the impact of the merger.  The table also presents certain pro forma information as if Highlands had been acquired on January 1, 2018.  These results combine the historical results of Highlands in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018.

 

Merger-related costs of $1.89 million incurred by the Company for the year ended December 31, 2020, and merger-related costs incurred by both the Company and Highlands of $7.16 million for the year ended 2019 have been excluded from the proforma information below.  No adjustments have been made to the pro formas to eliminate the provision for loan losses for the years ended December 31, 2019 and 2018 of Highlands in the amount of $738,000 and $1.84 million, respectively.  The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisitions which are not reflected in the pro forma amounts below: 

 

  

ProForma

  

ProForma

 
  

Year Ended

  

Year Ended

 

(Dollars in thousands)

 

December 31, 2019

  

December 31, 2018

 

Total revenues (net interest income plus noninterest income)

 $150,618  $145,656 

Net adjusted income available to the common shareholder

 $43,463  $42,470 

 

62

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Bankers Insurance, LLC

 

On October 1, 2018, the Company completed the sale of its remaining insurance agency assets to Bankers Insurance, LLC (“BI”) of Glen Allen, Virginia, in exchange for an equity interest in BI. The sale strategically allows the Company to continue offering insurance products to its customers through a larger, more diversified insurance agency. In connection with the divestiture, the Company recognized a one-time goodwill impairment charge of $1.49 million during the third quarter of 2018. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment.

 

  

Year Ended December 31,

 

(Amounts in thousands)

 

2020

  

2019

  

2018

 

Divestitures

            

Book value of assets sold

        (1,685)

Book value of liabilities sold

        37 

Sales price in excess of net liabilities assumed

         

Total sales price

        (1,648)

Cash sold

        35 

Non-cash sales price

        1,603 

Amount due remaining on books

         

Net cash received in divestitures

        (10)

Net cash received in acquisitions and divestitures

 $  $  $ 

 

 

Note 3. Debt Securities

 

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

 

  

December 31, 2020

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

(Amounts in thousands)

                

U.S. Agency securities

 $555  $  $(4) $551 

Municipal securities

  43,950   509      44,459 

Mortgage-backed Agency securities

  37,453   992   (97)  38,348 

Total

 $81,958  $1,501  $(101) $83,358 

 

  

December 31, 2019

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

(Amounts in thousands)

                

U.S. Agency securities

 $5,038  $  $(4) $5,034 

Municipal securities

  85,992   886      86,878 

Mortgage-backed Agency securities

  77,448   380   (166)  77,662 

Total

 $168,478  $1,266  $(170) $169,574 

 

 

63

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the amortized cost and fair value of available-for-sale debt securities, by contractual maturity, as of December 31, 2020. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)

 

U.S. Agency Securities

  

Municipal Securities

  

Total

 

Amortized cost maturity:

            

One year or less

 $  $  $ 

After one year through five years

     24,485   24,485 

After five years through ten years

  555   19,465   20,020 

After ten years

         

Amortized cost

 $555  $43,950   44,505 

Mortgage-backed securities

          37,453 

Total amortized cost

         $81,958 
             

Fair value maturity:

            

One year or less

 $  $  $ 

After one year through five years

     24,703   24,703 

After five years through ten years

  551   19,756   20,307 

After ten years

         

Fair value

 $551  $44,459   45,010 

Mortgage-backed securities

          38,348 

Total fair value

         $83,358 

 

 

 

64

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

  

December 31, 2020

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

(Amounts in thousands)

                        

U.S. Agency securities

 $  $  $544  $(4) $544  $(4)

Municipal securities

                  

Mortgage-backed Agency securities

  11,018   (97)        11,018   (97)

Total

 $11,018  $(97) $544  $(4) $11,562  $(101)

 

  

December 31, 2019

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

(Amounts in thousands)

                        

U.S. Agency securities

 $975  $(4) $  $  $975  $(4)

Municipal securities

                  

Mortgage-backed Agency securities

  8,020   (48)  8,319   (118)  16,339   (166)

Total

 $8,995  $(52) $8,319  $(118) $17,314  $(170)

 

 

There were 6 individual debt securities in an unrealized loss position as of December 31, 2020, and their combined depreciation in value represented 0.12% of the debt securities portfolio. These securities included 1 security in a continuous unrealized loss position for 12 months or longer that the Company does not intend to sell, and that it has determined is not more likely than not going to be required to sell, prior to maturity or recovery. There were 17 individual debt securities in an unrealized loss position as of December 31, 2019, and their combined depreciation in value represented 0.10% of the debt securities portfolio.

 

65

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company reviews its investment portfolio quarterly for indications of OTTI. The initial indicator of OTTI for debt securities is a decline in fair value below book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in OCI. Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current economic factors.

 

The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated:

 

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

(Amounts in thousands)

            

Gross realized gains

 $419  $67  $ 

Gross realized losses

  (34)  (110)  (618)

Net gain (loss) on sale of securities

 $385  $(43) $(618)

 

The carrying amount of securities pledged for various purposes totaled $36.56 million as of December 31, 2020, and $27.87 million as of December 31, 2019.

 

66

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Loans

 

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are those loans acquired in FDIC assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled $1.13 million as of December 31, 2020, and $2.20 million as of December 31, 2019. Deferred loan fees were $5.58 million as of December 31, 2020, and $4.60 million as of December 31, 2019. For information about off-balance sheet financing, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements of this report.

 

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

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

 

Amount

  

Percent

  

Amount

  

Percent

 

Non-covered loans held for investment

                

Commercial loans

                

Construction, development, and other land

 $44,649   2.04% $48,659   2.30%

Commercial and industrial

  173,024   7.91%  142,962   6.76%

Multi-family residential

  115,161   5.27%  121,840   5.76%

Single family non-owner occupied

  187,598   8.58%  163,181   7.72%

Non-farm, non-residential

  734,793   33.60%  727,261   34.39%

Agricultural

  9,749   0.45%  11,756   0.56%

Farmland

  19,761   0.90%  23,155   1.10%

Total commercial loans

  1,284,735   58.75%  1,238,814   58.59%

Consumer real estate loans

                

Home equity lines

  89,432   4.09%  110,078   5.21%

Single family owner occupied

  658,678   30.12%  620,697   29.35%

Owner occupied construction

  17,720   0.81%  17,241   0.82%

Total consumer real estate loans

  765,830   35.02%  748,016   35.38%

Consumer and other loans

                

Consumer loans

  120,373   5.50%  110,027   5.20%

Other

  6,014   0.28%  4,742   0.22%

Total consumer and other loans

  126,387   5.78%  114,769   5.42%

Total non-covered loans

  2,176,952   99.56%  2,101,599   99.39%

Total covered loans

  9,680   0.44%  12,861   0.61%

Total loans held for investment, net of unearned income

 $2,186,632   100.00% $2,114,460   100.00%
                 

Loans held for Sale

 $  $  $263  $ 

 

 

67

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

 

Commercial and industrial loan balances grew significantly compared to December 31, 2019. The Company began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender during the second quarter of 2020. At December 31, 2020, the PPP loans had a current balance of $57.06 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $2.30 million at December 31, 2020, were also recorded. During 2020, the Company recorded amortization of net deferred loan origination fees of $868 thousand on PPP loans. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA. 

 

 

The following table presents the covered loan portfolio, by loan class, as of the dates indicated.

 

  

December 31,

 

(Amounts in thousands)

 

2020

  

2019

 

Covered loans

        

Commercial loans

        

Construction, development, and other land

 $25  $28 

Single family non-owner occupied

  185   199 

Non-farm, non-residential

     3 

Total commercial loans

  210   230 

Consumer real estate loans

        

Home equity lines

  7,094   9,853 

Single family owner occupied

  2,376   2,778 

Total consumer real estate loans

  9,470   12,631 

Total covered loans

 $9,680  $12,861 

 

The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those PCI loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest.   Effective January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio.  The only remaining PCI pools are those loans acquired in the Highlands acquisition on December 31, 2019.  The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

 

Recorded Investment

  

Unpaid Principal Balance

  

Recorded Investment

  

Unpaid Principal Balance

 

PCI Loans, by acquisition

                

Peoples

 $  $  $5,071  $6,431 

Waccamaw

        2,708   14,277 

Highlands

  39,662   47,514   53,116   64,096 

Other acquired

        352   378 

Total PCI Loans

 $39,662  $47,514  $61,247  $85,182 

 

68

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Highlands acquisition added $8.15 million in accretable yield. The total fair value of the Highlands PCI loans was $53.12 million at the time of the acquisition. The gross contractual cash flows for the Highlands PCI loans was $76.45 million. The following table presents the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated:

 

  

Peoples

  

Waccamaw

  

Highlands

  

Total

 

(Amounts in thousands)

                

Balance January 1, 2018

 $3,388  $19,465  $  $22,853 

Accretion

  (1,263)  (6,269)     (7,532)

Reclassifications from nonaccretable difference(1)

  8   1,770      1,778 

Other changes, net

  457   (327)     130 

Balance December 31, 2018

 $2,590  $14,639  $  $17,229 
                 

Balance January 1, 2019

 $2,590  $14,639  $  $17,229 

Accretion

  (950)  (3,317)     (4,267)

Reclassifications from nonaccretable difference(1)

  17   1,440      1,457 

Other changes, net

  233   (188)     45 

Balance December 31, 2019

 $1,890  $12,574  $  $14,464 
                 

Balance January 1, 2020

 $1,890  $12,574  $  $14,464 

Additions

        8,152   8,152 

Accretion

        (2,497)  (2,497)

Other changes, net

  (1,890)  (12,574)     (14,464)

Balance Balance at December 31, 2020

 $  $  $5,655  $5,655 

 


(1)

Represents changes attributable to expected loss assumptions

 

 

Note 5. Credit Quality

 

The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:

 

 

Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.

 

Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.

 

Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.

 

Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

 

Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.

 

69

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately.

 

  

December 31, 2020

 
      

Special

                 

(Amounts in thousands)

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

 

Non-covered loans

                        

Commercial loans

                        

Construction, development, and other land

 $36,934  $4,950  $2,765  $  $  $44,649 

Commercial and industrial

  160,474   7,031   5,519         173,024 

Multi-family residential

  103,291   8,586   3,284         115,161 

Single family non-owner occupied

  165,146   9,602   12,838   12      187,598 

Non-farm, non-residential

  568,438   125,907   40,448         734,793 

Agricultural

  7,724   1,686   339         9,749 

Farmland

  13,527   2,597   3,637         19,761 
Consumer real estate loans                       

Home equity lines

  85,316   1,112   3,004         89,432 

Single family owner occupied

  622,082   3,594   33,002         658,678 

Owner occupied construction

  17,232   201   287         17,720 
Consumer and other loans                       

Consumer loans

  118,134   28   2,211         120,373 

Other

  6,014               6,014 

Total non-covered loans

  1,904,312   165,294   107,334   12      2,176,952 

Covered loans

                        

Commercial loans

                        

Construction, development, and other land

     25            25 

Single family non-owner occupied

  151   34            185 

Consumer real estate loans

                        

Home equity lines

  6,396   376   322         7,094 

Single family owner occupied

  1,778   265   333         2,376 

Total covered loans

  8,325   700   655         9,680 

Total loans

 $1,912,637  $165,994  $107,989  $12  $  $2,186,632 

 

70

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  

December 31, 2019

 
      

Special

                 

(Amounts in thousands)

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

 

Non-covered loans

                        

Commercial loans

                        

Construction, development, and other land

 $45,781  $2,079  $799  $  $  $48,659 

Commercial and industrial

  135,651   4,327   2,984         142,962 

Multi-family residential

  118,045   2,468   1,327         121,840 

Single family non-owner occupied

  149,916   7,489   5,776         163,181 

Non-farm, non-residential

  683,481   27,160   16,620         727,261 

Agricultural

  11,299   122   335         11,756 

Farmland

  17,609   4,107   1,439         23,155 

Consumer real estate loans

                        

Home equity lines

  106,246   2,014   1,818         110,078 

Single family owner occupied

  580,580   17,001   23,116         620,697 

Owner occupied construction

  16,341   179   721         17,241 

Consumer and other loans

                        

Consumer loans

  108,065   1,341   621         110,027 

Other

  4,742               4,742 

Total non-covered loans

  1,977,756   68,287   55,556         2,101,599 

Covered loans

                        

Commercial loans

                        

Construction, development, and other land

     28            28 

Single family non-owner occupied

  199               199 

Non-farm, non-residential

        3         3 

Consumer real estate loans

                        

Home equity lines

  7,177   2,327   349         9,853 

Single family owner occupied

  2,111   275   392         2,778 

Total covered loans

  9,487   2,630   744         12,861 

Total loans

 $1,987,243  $70,917  $56,300  $  $  $2,114,460 

  

The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed impaired.

 

71

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the dates indicated:

 

  

December 31, 2020

  

December 31, 2019

 
      

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

                        

Construction, development, and other land

 $616  $891  $  $552  $768  $ 

Commercial and industrial

  2,341   2,392      576   599    

Multi-family residential

  946   1,593      1,254   1,661    

Single family non-owner occupied

  4,816   5,785      2,652   3,176    

Non-farm, non-residential

  8,238   9,467      4,158   4,762    

Agricultural

  218   226      158   164    

Farmland

  1,228   1,311      1,437   1,500    

Consumer real estate loans

                        

Home equity lines

  1,604   1,772      1,372   1,477    

Single family owner occupied

  16,778   19,361      15,588   17,835    

Owner occupied construction

  216   216      648   648    

Consumer and other loans

                        

Consumer loans

  818   833      290   294    

Total impaired loans with no allowance

  37,819   43,847      28,685   32,884    
                         

Impaired loans with a related allowance

                        

Commercial loans

                        

Non-farm, non-residential

  1,068   1,121   319   1,241   1,227   292 

Consumer real estate loans

                        

Single family owner occupied

  338   338   108   1,246   1,246   353 

Total impaired loans with an allowance

  1,406   1,459   427   2,487   2,473   645 

Total impaired loans(1)

 $39,225  $45,306  $427  $31,172  $35,357  $645 

 


(1)

Total impaired loans include loans totaling $31.18 million as of December 31, 2020, and $24.64 million as of December 31, 2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment. During the first quarter of 2018, the Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from $250 thousand to $500 thousand or greater.

 

72

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:

 

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

(Amounts in thousands)

 

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

 

Impaired loans with no related allowance:

                        

Commercial loans

                        

Construction, development, and other land

 $25  $935  $22  $704  $26  $921 

Commercial and industrial

  155   2,749   34   363   19   383 

Multi-family residential

  19   808   24   1,356   47   910 

Single family non-owner occupied

  189   4,890   123   2,979   123   2,652 

Non-farm, non-residential

  295   7,450   123   4,683   133   4,828 

Agricultural

  9   241   9   121      164 

Farmland

  63   1,569   55   1,469   64   1,172 

Consumer real estate loans

                        

Home equity lines

  51   1,594   46   1,439   44   1,637 

Single family owner occupied

  578   17,044   599   16,058   503   15,423 

Owner occupied construction

  10   407   29   308   8   244 

Consumer and other loans

                        

Consumer loans

  42   543   13   213   9   161 

Total impaired loans with no related allowance

  1,436   38,230   1,077   29,693   976   28,495 
                         

Impaired loans with a related allowance:

                        

Commercial loans

                        

Multi-family residential

     707         2   270 

Single family non-owner occupied

              7   110 

Non-farm, non-residential

  17   1,524   48   766   2   809 

Farmland

                 307 

Consumer real estate loans

                        

Home equity lines

              3   68 

Single family owner occupied

  29   1,196   46   1,947   158   5,296 

Total impaired loans with a related allowance

  46   3,427   94   2,713   172   6,860 

Total impaired loans

 $1,482  $41,657  $1,171  $32,406  $1,148  $35,355 

 

There were no PCI loan pools that became impaired subsequent to the acquisition of the loans as of December 31, 2020 or 2019

 

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. PCI loans are generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

 

  

December 31, 2020

  

December 31, 2019

 

(Amounts in thousands)

 

Non-covered

  

Covered

  

Total

  

Non-covered

  

Covered

  

Total

 

Commercial loans

                        

Construction, development, and other land

 $244  $  $244  $211  $  $211 

Commercial and industrial

  895      895   530      530 

Multi-family residential

  946      946   1,144      1,144 

Single family non-owner occupied

  2,990      2,990   1,286      1,286 

Non-farm, non-residential

  6,343      6,343   3,400      3,400 

Agricultural

  217      217   158      158 

Farmland

  489      489   713      713 

Consumer real estate loans

                        

Home equity lines

  841   281   1,122   753   220   973 

Single family owner occupied

  7,960   16   7,976   7,259   24   7,283 

Owner occupied construction

           428      428 

Consumer and other loans

                        

Consumer loans

  781      781   231      231 

Total nonaccrual loans

 $21,706  $297  $22,003  $16,113  $244  $16,357 

 

 

74

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $295 thousand as of December 31, 2020, and $144 thousand as of December 31, 2019.

 

  

December 31, 2020

 
  

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

 $1,039  $  $235  $1,274  $43,375  $44,649 

Commercial and industrial

  669   230   700   1,599   171,425   173,024 

Multi-family residential

  103      946   1,049   114,112   115,161 

Single family non-owner occupied

  925   488   2,144   3,557   184,041   187,598 

Non-farm, non-residential

  601   296   3,368   4,265   730,528   734,793 

Agricultural

  70   189   88   347   9,402   9,749 

Farmland

  43      457   500   19,261   19,761 

Consumer real estate loans

                        

Home equity lines

  574   380   171   1,125   88,307   89,432 

Single family owner occupied

  5,283   2,265   3,891   11,439   647,239   658,678 

Owner occupied construction

  82         82   17,638   17,720 

Consumer and other loans

                        

Consumer loans

  2,637   746   651   4,034   116,339   120,373 

Other

              6,014   6,014 

Total non-covered loans

  12,026   4,594   12,651   29,271   2,147,681   2,176,952 

Covered loans

                        

Commercial loans

                        

Construction, development, and other land

              25   25 

Single family non-owner occupied

              185   185 

Consumer real estate loans

                        

Home equity lines

  75      254   329   6,765   7,094 

Single family owner occupied

  34         34   2,342   2,376 

Total covered loans

  109      254   363   9,317   9,680 

Total loans

 $12,135  $4,594  $12,905  $29,634  $2,156,998  $2,186,632 

 

75

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  

December 31, 2019

 
  

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

 $63  $65  $211  $339  $48,320  $48,659 

Commercial and industrial

  1,913   238   507   2,658   140,304   142,962 

Multi-family residential

  375      1,144   1,519   120,321   121,840 

Single family non-owner occupied

  754   267   661   1,682   161,499   163,181 

Non-farm, non-residential

  917   1,949   3,027   5,893   721,368   727,261 

Agricultural

  86   164      250   11,506   11,756 

Farmland

  856   349   664   1,869   21,286   23,155 

Consumer real estate loans

                        

Home equity lines

  1,436   165   503   2,104   107,974   110,078 

Single family owner occupied

  7,728   2,390   3,766   13,884   606,813   620,697 

Owner occupied construction

  207      428   635   16,606   17,241 

Consumer and other loans

                        

Consumer loans

  1,735   439   202   2,376   107,651   110,027 

Other

  22         22   4,720   4,742 

Total non-covered loans

  16,092   6,026   11,113   33,231   2,068,368   2,101,599 

Covered loans

                        

Commercial loans

                        

Construction, development, and other land

              28   28 

Single family non-owner occupied

              199   199 

Non-farm, non-residential

              3   3 

Consumer real estate loans

                        

Home equity lines

  144   28      172   9,681   9,853 

Single family owner occupied

     50      50   2,728   2,778 

Total covered loans

  144   78      222   12,639   12,861 

Total loans

 $16,236  $6,104  $11,113  $33,453  $2,081,007  $2,114,460 

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of $500 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $500 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally not considered TDRs as long as the loans remain in the assigned loan pool. No covered loans were recorded as TDRs as of December 31, 2020 or 2019.

 

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

 

Through December 31, 2020, the Company had modified a total of 3,625 loans with principal balances totaling $458.17 million related to COVID-19 relief.  Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act.  The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.

 

76

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

 

Nonaccrual(1)

  

Accruing

  

Total

  

Nonaccrual(1)

  

Accruing

  

Total

 

Commercial loans

                        
Commercial and industrial $  $1,326  $1,326  $  $  $ 

Single family non-owner occupied

  1,585   1,265   2,850   552   595   1,147 

Non-farm, non-residential

     2,407   2,407      307   307 

Consumer real estate loans

                        

Home equity lines

     77   77      115   115 

Single family owner occupied

  229   4,927   5,156   1,790   5,305   7,095 

Owner occupied construction

     216   216      221   221 

Consumer and other loans

                        

Consumer loans

     30   30      32   32 

Total TDRs

 $1,814  $10,248  $12,062  $2,342  $6,575  $8,917 
                         

Allowance for loan losses related to TDRs

         $          $353 

 


(1)

Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

 

The following table presents interest income recognized on TDRs for the periods indicated:

 

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

(Amounts in thousands)

            

Interest income recognized

 $473  $277  $264 

 

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

 

  

Year Ended December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

 

Total Contracts

  

Pre-modification Recorded Investment

  

Post modification Recorded Investment(1)

  

Total Contracts

  

Pre-modification Recorded Investment

  

Post modification Recorded Investment(1)

 

Below market interest rate

                        

Single family owner occupied

  1  $50  $50     $  $ 

Below market interest rate and extended payment term

                        

Single family owner occupied

           6   887   871 

Principal deferral

                        
Construction, development, and other land development  3   1,708   1,708          
Non-farm, non-residential  3   2,115   2,115          
Home equity           1   5   2 

Single family owner occupied

  5   1,085   1,054   3   331   279 

Total principal deferral

  11   4,908   4,877   4   336   281 

Total

  12  $4,958  $4,927   10  $1,223  $1,152 

 

77

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

  

Year Ended December 31,

 
  

2020

  

2019

 
  

Total

  

Recorded

  

Total

  

Recorded

 
  

Contracts

  

Investment

  

Contracts

  

Investment

 

(Amounts in thousands)

                

Single family owner occupied

  1  $53     $ 

Total

  1  $53     $ 

 

The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

 

  

December 31, 2020

  

December 31, 2019

 

(Amounts in thousands)

        

Non-covered OREO

 $2,083  $3,969 

Total OREO

 $2,083  $3,969 
         

Non-covered OREO secured by residential real estate

 $769  $2,232 

Residential real estate loans in the foreclosure process(1)

  4,141   1,539 

 


(1)

The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction

 

 

Note 6. Allowance for Loan Losses

 

The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI loans as of December 31, 2020 or 2019.

 

  

Year Ended December 31, 2020

 

(Amounts in thousands)

 

Commercial

  

Consumer Real Estate

  

Consumer and Other

  Total Allowance 

Beginning balance

 $10,235  $6,325  $1,865  $18,425 

Provision for loan losses charged to operations

  6,583   2,760   3,325   12,668 

Charge-offs

  (2,769)  (558)  (3,296)  (6,623)

Recoveries

  612   424   676   1,712 

Net charge-offs

  (2,157)  (134)  (2,620)  (4,911)

Ending balance

 $14,661  $8,951  $2,570  $26,182 

 

  

Year Ended December 31, 2019

 

(Amounts in thousands)

 

Commercial

  

Consumer Real Estate

  

Consumer and Other

  Total Allowance 

Beginning balance

 $10,499  $6,732  $1,036  $18,267 

Provision for (recovery of) loan losses charged to operations

  1,411   (105)  2,265   3,571 

Charge-offs

  (2,548)  (1,790)  (1,923)  (6,261)

Recoveries

  873   1,488   487   2,848 

Net charge-offs

  (1,675)  (302)  (1,436)  (3,413)

Ending balance

 $10,235  $6,325  $1,865  $18,425 

 

 

78

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

  

December 31, 2020

 

(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

 $  $  $43,716  $528 

Commercial and industrial

  724      171,486   1,024 

Multi-family residential

  695      112,852   1,417 

Single family non-owner occupied

  1,041      183,283   1,861 

Non-farm, non-residential

  3,916   319   714,160   9,097 

Agricultural

        9,728   218 
Farmland        17,540   196 

Total commercial loans

  6,376   319   1,252,765   14,341 

Consumer real estate loans

                

Home equity lines

        95,765   799 

Single family owner occupied

  1,673   108   647,040   7,849 

Owner occupied construction

        17,567   195 

Total consumer real estate loans

  1,673   108   760,372   8,843 

Consumer and other loans

                

Consumer loans

        119,770   2,570 

Other

        6,014    

Total consumer and other loans

        125,784   2,570 

Total loans, excluding PCI loans

 $8,049  $427  $2,138,921  $25,754 

 

  

December 31, 2019

 

(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

 $  $  $30,334  $245 

Commercial and industrial

        95,659   699 

Multi-family residential

  944      98,201   969 

Single family non-owner occupied

        128,520   1,323 

Non-farm, non-residential

  2,575   292   591,520   6,361 

Agricultural

        9,458   145 
Farmland        16,146   201 

Total commercial loans

  3,519   292   969,838   9,943 

Consumer real estate loans

                

Home equity lines

        91,999   673 

Single family owner occupied

  3,016   353   490,712   5,175 

Owner occupied construction

        16,144   124 

Total consumer real estate loans

  3,016   353   598,855   5,972 

Consumer and other loans

                

Consumer loans

        99,199   1,865 

Other

        4,742    

Total consumer and other loans

        103,941   1,865 

Total loans, excluding PCI loans

 $6,535  $645  $1,672,634  $17,780 

 

 

79

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table presents the allowance for loan losses on PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated:

 

  

December 31, 2020

  

December 31, 2019

 

(Amounts in thousands)

 

Recorded Investment

  

Allowance for Loan Pools With Impairment

  

Recorded Investment

  

Allowance for Loan Pools With Impairment

 

Commercial loans

                

Waccamaw commercial

 $  $  $  $ 

Peoples commercial

        4,371    

Highlands:

                

1-4 family, senior-commercial

        4,564    

Construction & land development

  958      1,956    

Farmland and other agricultural

  2,242      3,722    

Multifamily

  1,614      1,663    

Commercial real estate-owner occupied

  16,717      13,024    

Commercial real estate- non-owner occupied

  3,459      8,686    

Commercial and industrial

  814      2,829    

Other

        352    

Total commercial loans

  25,804      41,167    

Consumer real estate loans

                

Waccamaw serviced home equity lines

        2,121    

Waccamaw residential

        587    
Highlands:                

1-4 family, junior and HELOCS

  761      2,157    

1-4 family, senior-consumer

  12,494      13,174    

Consumer

  603      1,341    

Peoples residential

        700    

Total consumer real estate loans

  13,858      20,080    

Total PCI loans

 $39,662  $  $61,247  $ 

 

Management believes the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020.

 

80

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 7. FDIC Indemnification Asset

 

In connection with the FDIC-assisted acquisition of Waccamaw Bank in 2012, the Company entered into loss share agreements with the FDIC in which the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to those covered assets. Loss share coverage on commercial loans expired June 30, 2017, with recoveries continuing until June 30, 2020. Loss share coverage on single family loans will expire June 30, 2022. The Company’s consolidated statements of income include the expense on covered assets net of estimated reimbursements. The following table presents the changes in the FDIC indemnification asset and total covered loans for the periods indicated:

 

   

Year Ended December 31,

 
   

2020

   

2019

 

(Amounts in thousands)

               

Beginning balance

  $ 2,883     $ 5,108  

Net amortization

    (1,690 )     (2,377 )

Payments to the FDIC

    30       152  

Ending balance

  $ 1,223     $ 2,883  
                 

Covered loans

  $ 9,680     $ 12,861  

 

 

Note 8. Premises, Equipment, and Leases

 

Premises and Equipment

 

The following table presents the components of premises and equipment as of the dates indicated:

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

        

Land

 $21,693  $22,899 

Buildings and leasehold improvements

  50,639   52,351 

Equipment

  40,072   38,173 

Total premises and equipment

  112,404   113,423 

Accumulated depreciation and amortization

  (54,704)  (50,599)

Total premises and equipment, net

 $57,700  $62,824 

 

Impairment charges related to certain long-term investments in land and buildings totaled $812 thousand in 2020, $380 thousand in 2019, and $1.01 million in 2018. Depreciation and amortization expense for premises and equipment was $4.46 million in 2020, $3.45 million in 2019, and $2.91 million in 2018.

 

Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” the standard was adopted prospectively. The Company currently has two operating leases that are recorded as a right of use (“ROU”) asset and operating lease liability. The right of use asset is recorded in other assets on the consolidated balance sheet, while the lease liability is recorded in other liabilities. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The current ROU asset and lease liability were recognized at the adoption date of January 1, 2019, based on the present value of the remaining lease payments using a discount rate that represented our incremental borrowing rate at the time of adoption. The lease expense which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income.

 

The Company’s current operating leases relate primarily to bank branches. Two operating leases were acquired in the Highlands transaction; neither of which were for bank branches. One of the leases was terminated in the first quarter of 2020; while the other remaining Highlands’ lease will terminate in early 2022. No ROU was recorded in the transaction due to the ROU asset related to the lease that terminates in 2022 being impaired as of the acquisition date; a lease liability was recorded for $82 thousand. The Company’s total operating leases have remaining terms of 1 – 9 years. As of December 31, 2020, the Company’s ROU asset and lease liability were $830 thousand and $891 thousand, respectively. The weighted average discount rate was 3.22%.

 

81

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Year

 

Amount

 

(Amounts in thousands)

    

2021

 $154 

2022

  131 

2023

  119 

2024

  117 

2025 and thereafter

  463 

Total lease payments

  984 

Less: Interest

  (93)

Present value of lease liabilities

 $891 

 

Lease expense was $180 thousand in 2020, $203 thousand in 2019, and $318 thousand in 2018. The Company maintained no subleases as of December 31, 2020.

  

 

Note 9. Goodwill and Other Intangible Assets

 

Goodwill

 

The Company has one reporting unit for goodwill impairment testing purposes, Community Banking. In October 2018, the Company sold its remaining insurance agency assets to BI in exchange for an equity interest in BI. In connection with the divestiture, the Company recognized a one-time goodwill impairment charge of $1.49 million. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment. The Company performed its annual assessment of goodwill during the fourth quarter of 2020 and concluded that the carrying value of goodwill was not impaired. No events have occurred after the analysis to indicate potential impairment.

 

The following table presents the changes in goodwill, by reporting unit, during the periods indicated:

 

(Amounts in thousands)

    

Balance January 1, 2018

 $95,779 

Dispositions

  (1,543)

Impairment Charges

  (1,492)

Balance December 31, 2018

 $92,744 
     

Balance January 1, 2019

 $92,744 

Acquisitions

  36,821 

Balance December 31, 2019

 $129,565 
     

Balance January 1, 2020

 $129,565 

Acquisitions and dispositions, net

   

Balance December 31, 2020

 $129,565 

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other Intangible Assets

 

As of December 31, 2020, the remaining lives of core deposit intangibles ranged from 4 years to 10 years with a weighted average remaining life of 7 years. Other identifiable intangibles currently consist primarily of the value assigned to contractual rights arising from FCWM. The following table presents the components of other intangible assets as of the dates indicated:

 

  

December 31,

 
  

2020

  

2019

  

2018

 

(Amounts in thousands)

            

Core deposit intangibles

 $8,519  $8,184  $8,184 

Acquisitions

     4,490    

Accumulated amortization

  (1,450)  (4,155)  (3,158)

Core deposit intangibles, net

  7,069   8,519   5,026 

Other identifiable intangibles

        535 

Accumulated amortization

        (535)

Other identifiable intangibles, net

         

Total other intangible assets, net

 $7,069  $8,519  $5,026 

 

Amortization expense for other intangible assets was $1.45 million in 2020, $997 thousand in 2019, and $1.04 million in 2018.

 

The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2020:

 

(Amounts in thousands)

    

2021

 $1,446 

2022

  1,446 

2023

  878 

2024

  856 

2025

  648 

2026 and thereafter

  1,795 

Total estimated amortization expense

 $7,069 

 

 

83

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 10. Deposits

 

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

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

        

Noninterest-bearing demand deposits

 $772,795  $627,868 

Interest-bearing deposits

        

Interest-bearing demand deposits

  598,148   497,470 

Money market accounts

  258,864   235,712 

Savings deposits

  495,821   453,240 

Certificates of deposit

  293,848   372,821 

Individual retirement accounts

  126,771   142,801 

Total interest-bearing deposits

  1,773,452   1,702,044 

Total deposits

 $2,546,247  $2,329,912 

 

The following schedule presents the contractual maturities of time deposits, by year, as of December 31, 2020:

 

(Amounts in thousands)

    

2021

 $225,521 

2022

  86,293 

2023

  45,797 

2024

  24,440 

2025

  30,820 

2026 and thereafter

  7,748 

Total contractual maturities

 $420,619 

 

Time deposits of $250 thousand or more totaled $35.93 million as of December 31, 2020, and $53.49 million as of December 31, 2019. The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2020:

 

(Amounts in thousands)

    

Three months or less

 $3,372 

Over three through six months

  6,605 

Over six through twelve months

  9,841 

Over twelve months

  16,112 

Total contractual maturities

 $35,930 

 

 

84

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 11. Borrowings

 

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

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

 

Balance

  Weighted Average Rate  

Balance

  Weighted Average Rate 

Short-term borrowings

                

Retail repurchase agreements

 $964   0.32% $1,601   0.14%

Long-term borrowings

                
Wholesale repurchase agreements            

Total borrowings

 $964      $1,601     

 

Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 2020:

 

  

Overnight and Continuous

  

Up to 30 Days

  

30 - 90 Days

  Greater than 90 Days  

Total

 
                     

(Amounts in thousands)

                    

U.S. Agency securities

 $  $  $  $  $ 

Municipal securities

  542            542 

Mortgage-backed Agency securities

  422            422 

Total

 $964  $  $  $  $964 

 

The Company’s remaining wholesale repurchase agreement of $25 million matured during the first quarter of 2019. The Company repaid the borrowing with then current liquidity.

 

As of December 31, 2020, unused borrowing capacity with the FHLB totaled $292.92 million, net of FHLB letters of credit of $175.83 million. The Company pledged $840.63 million in qualifying loans to secure the FHLB letters of credit, which provide an attractive alternative to pledging securities for public unit deposits.

 

The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of one-month LIBOR plus 2.00% that matures in April 2021. There was no outstanding balance on the line as of December 31, 2020 or 2019.

 

 

Note 12. Derivative Instruments and Hedging Activities

 

Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

 

85

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. Certain of the Company’s interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of December 31, 2020. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.  The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

 

Notional or Contractual Amount

  Derivative Assets  

Derivative Liabilities

  

Notional or Contractual Amount

  Derivative Assets  

Derivative Liabilities

 

Derivatives designated as hedges

                        

Interest rate swaps

 $4,772  $  $465  $5,136  $  $217 
Derivatives not designated as hedges                        
Interest rate swaps  11,928   -   666   12,296   -   293 

Total derivatives

 $16,700  $  $1,131  $17,432  $  $510 

 

The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:

 

  

Year Ended December 31,

  

(Amounts in thousands)

 

2020

  

2019

  

2018

 

Income Statement Location

Derivatives designated as hedges

             

Interest rate swaps

 $85  $12  $40 

Interest and fees on loans

Derivatives not designated as hedges             
Interest rate swaps  235   -   - Interest and fees on loans

Total derivative expense

 $320  $12  $40  

 

 

 

Note 13. Employee Benefit Plans

 

Defined Benefit Plans

 

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan (“SERP”) and the Directors’ Supplemental Retirement Plan (“Directors’ Plan”). The SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant’s projected final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The Directors’ Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant’s highest consecutive three-year average compensation. Benefits under the Directors’ Plan generally become payable at age 70. The following table presents the changes in the aggregate actuarial benefit obligation during the periods indicated:

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

        

Beginning balance

 $11,312  $9,265 

Plan change

     262 

Service cost

  310   320 

Interest cost

  355   404 

Actuarial loss

  1,217   1,570 

Benefits paid

  (615)  (509)

Ending balance

 $12,579  $11,312 

 

 

86

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the components of net periodic pension cost, the effect on the consolidated statements of income, and the assumed discount rate for the periods indicated:

 

  

Year Ended December 31,

  
  

2020

  

2019

  

2018

 

Income Statement Location

(Amounts in thousands)

             

Service cost

 $310  $320  $245 

Salaries and employee benefits

Interest cost

  355   404   358 

Other expense

Amortization of prior service cost

  201   257   228 

Other expense

Amortization of losses

  186   20   57 

Other expense

Net periodic cost

 $1,052  $1,001  $888  
              

Assumed discount rate

  2.53%  3.10%  4.28% 

 

The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 2020:

 

(Amounts in thousands)

    

2021

 $664 

2022

  675 

2023

  675 

2024

  717 

2025

  707 

2026 through 2030

  3,694 

 

Deferred Compensation Plan

 

The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods, commencing at retirement or death. There were no accrued benefits, which are based on the present values of expected payments and estimated life expectancies, as of December 31, 2020 or 2019. There was no deferred compensation plan expense in 2020,  2019 , or 2018.

 

Employee Welfare Plan

 

The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits to all full-time employees who elect coverage under this program. A third-party administrator manages the health plan. Monthly employer and employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays claims. As of December 31, 2020, stop-loss insurance coverage generally limits the Company’s risk of loss to $200 thousand for individual claims and $6.00 million for aggregate claims. Health plan expenses were $4.17 million in 2020, $3.97 million in 2019, and $3.72 million in 2018.

 

Employee Stock Ownership and Savings Plan

 

The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”) that consists of a 401(k) savings feature that covers all employees that meet minimum eligibility requirements. The Company matches employee contributions at levels determined by the Board of Directors annually. These contributions are made in the first quarter following each plan year and employees must be employed on the last day of the plan year to be eligible. Matching contributions to qualified deferrals under the 401(k) savings component of the KSOP totaled $1.51 million in 2020, $1.10 million in 2019, and $1.06 million in 2018. The KSOP held 351,222 shares of the Company’s common stock as of December 31, 2020, 346,833 shares as of December 31, 2019, and 366,969 shares as of December 31, 2018.

 

Equity-Based Compensation Plans

 

The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors, and other individuals performing services for the Company to focus on critical long-range objectives. The Company’s equity-based compensation plans include the 2012 Omnibus Equity Compensation Plan (“2012 Plan”), 2004 Omnibus Stock Option Plan, 2001 Director’s Option Plan, 1999 Stock Option Plan, and various other plans obtained through acquisitions. As of December 31, 2020, the 2012 Plan was the only plan available for the issuance of future grants. All plans issued or obtained before the 2012 Plan are frozen and no new grants may be issued; however, any options or awards unexercised and outstanding under those plans remain in effect per their respective terms. The 2012 Plan authorized 600,000 shares available for potential grants of incentive stock options, nonqualified stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, bonus stock, and stock awards. Grants issued under the 2012 Plan state the period of time the grant may be exercised, not to exceed more than ten years from the date granted. The Company’s Compensation and Retirement Committee determines the vesting period for each grant; however, if no vesting period is specified the vesting occurs in 25% increments on the first four anniversaries of the grant date.

 

87

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation plans for the periods indicated:

 

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

(Amounts in thousands)

            

Pre-tax compensation expense

 $1,643  $1,481  $1,158 

Excess tax benefit

        95 

 

Stock Options

 

The following table presents stock option activity and related information for the year ended December 31, 2020:

 

(Amounts in thousands, except share and per share data)

 

Option Shares

  

Weighted Average Exercise Price Per Share

  

Weighted Average Remaining Contractual Term (Years)

  

Aggregate Intrinsic Value

 
                 

Outstanding, January 1, 2020

  147,200  $21.10         

Granted

              

Exercised

              

Canceled/Expired

  (32,921)  26.44         

Outstanding, December 31, 2020

  114,279  $19.56   4.52  $432 

Exercisable, December 31, 2020

  114,279  $19.56   4.52  $432 

 

There were no options granted in 2020 or 2019.

 

There was no options exercised in 2020; the intrinsic value of options was exercised was $150 thousand in 2019, and $423 thousand in 2018. As of December 31, 2020, there were no nonvested stock options or unrecognized expense. The actual compensation cost recognized might differ from this estimate due to various items, including new grants and changes in estimated forfeitures.

 

Restricted Stock Awards

 

The following table presents restricted stock activity and related information for the year ended December 31, 2020:

 

  

Shares

  

Weighted Average Grant-Date Fair Value

 
         

Nonvested, January 1, 2020

  57,653  $31.93 

Granted

  89,097   21.20 

Vested

  (57,962)  25.28 

Canceled

  (3,873)  29.92 

Nonvested, December 31, 2020

  84,915  $25.31 

 

As of December 31, 2020, unrecognized compensation cost related to nonvested restricted stock awards totaled $1.38 million with an expected weighted average recognition period of 1.83 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and changes in estimated forfeitures.

 

88

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 14. Other Operating Income and Expense

 

The following table presents the components of other operating income and expense for the periods indicated:

 

   

Year Ended December 31,

 

(Amounts in thousands)

 

2020

   

2019

   

2018

 

Other operating income

                       

Bank owned life insurance

  $ 814     $ 916     $ 687  

Other(1)

    3,555       1,888       1,861  

Total other operating income

  $ 4,369     $ 2,804     $ 2,548  
                         

Other operating expense

                       

OREO expense and net loss

    414       1,494       1,549  

Telephone and data communications

    2,188       1,404       1,333  

Office supplies

    660       647       1,045  

Other(1)

    9,148       8,384       8,800  

Total other operating expense

  $ 12,410     $ 11,929     $ 12,727  

 


(1)

Components of other operating income or expense that do not exceed 1% of total income

 

 

Note 15. Income Taxes 

 

Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following table presents the components of the income tax provision for the periods indicated:

 

  

Year Ended December 31,

 

(Amounts in thousands)

 

2020

  

2019

  

2018

 

Current tax expense:

            

Federal

 $10,048  $9,603  $7,201 

State

  1,643   1,554   1,233 

Total current tax expense

  11,691   11,157   8,434 
             

Deferred tax expense (benefit):

            

Federal

  (1,266)  (152)  296 

State

  (239)  (11)  52 

Total deferred tax expense (benefit)

  (1,505)  (163)  348 

Total income tax expense

 $10,186  $10,994  $8,782 

 

 

89

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The following table reconciles the Company’s income tax expense to the amount computed by applying the federal statutory tax rate to pre-tax income for the periods indicated:

 

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 
  

Amount

  

Percent

  

Amount

  

Percent

  

Amount

  

Percent

 

(Amounts in thousands)

                        

Federal income tax at the statutory rate

 $9,683   21.00% $10,457   21.00% $9,475   21.00%

State income tax, net of federal benefit

  1,109   3.12%  1,220   3.12%  1,016   2.25%
   10,792   24.12%  11,677   24.12%  10,491   23.25%

Increase (decrease) resulting from:

                        

Tax-exempt interest income

  (500)  (1.51)%  (637)  (1.28)%  (702)  (1.56)%

Nondeductible goodwill impairment and disposition

     0.00%     0.00%  569   1.26%

Bank owned life insurance

  (139)  (0.42)%  (249)  (0.50)%  (144)  (0.32)%

Deferred tax revaluation

     0.00%  (98)  (0.20)%  (1,669)  (3.70)%

Other items, net

  33   (0.10)%  301   0.10%  237   0.53%

Income tax at the effective tax rate

 $10,186   22.09% $10,994   22.24% $8,782   19.46%

 

Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the net deferred tax asset as of the dates indicated:

 

  

December 31,

 

(Amounts in thousands)

 

2020

  

2019

 

Deferred tax assets

        

Allowance for loan losses

 $6,128  $4,312 

Unrealized asset losses

  545   540 

Purchase accounting

  2,559   3,689 

FDIC assisted transactions

  1,685   1,597 

Intangible assets

  217   745 

Deferred compensation assets

  4,048   4,079 

Federal net operating loss carryforward

  4,093   4,279 

Deferred loan fees

  2,401   1,247 

Other

  1,816   1,746 

Total deferred tax assets

  23,492   22,234 
         

Deferred tax liabilities

        

FDIC indemnification asset

  286   675 

Fixed assets

  2,450   1,080 

Odd days interest deferral

  1,482   1,912 

Unrealized gains on available for sale securities

  257   230 

Other

  287   399 

Total deferred tax liabilities

  4,762   4,296 

Net deferred tax asset

 $18,730  $17,938 

 

The Company had no unrecognized tax benefits or accrued interest or penalties as of December 31, 2020 or 2019. The Company had no deferred tax valuation allowance recorded as of December 31, 2020 or 2019, as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state tax departments for the years ended December 31, 2017 through 2019.

 

90

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   

 

Note 16. Accumulated Other Comprehensive Income

 

The following table presents the changes in AOCI, net of tax and by component, during the periods indicated:

 

  

Unrealized Gains (Losses) on Available for-Sale Securities

  Employee Benefit Plans  

Total

 

(Amounts in thousands)

            

Balance January 1, 2018

 $975  $(1,815) $(840)

Other comprehensive (loss) income before reclassifications

  (1,748)  446   (1,302)

Reclassified from AOCI

  488   225   713 

Other comprehensive (loss) income, net

  (1,260)  671   (589)

Balance December 31, 2018

 $(285) $(1,144) $(1,429)
             

Balance January 1, 2019

 $(285) $(1,144) $(1,429)

Other comprehensive income (loss) before reclassifications

  1,117   (1,448)  (331)

Reclassified from AOCI

  34   220   254 

Other comprehensive income (loss), net

  1,151   (1,228)  (77)

Balance December 31, 2019

 $866  $(2,372) $(1,506)
             

Balance January 1, 2020

 $866  $(2,372) $(1,506)

Other comprehensive income (loss) before reclassifications

  544   (961)  (417)

Reclassified from AOCI

  (304)  304    

Other comprehensive income (loss), net

  240   (657)  (417)

Balance December 31, 2020

 $1,106  $(3,029) $(1,923)

 

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

 

  

Year Ended December 31,

 

Income Statement

(Amounts in thousands)

 

2020

  

2019

  

2018

 

Line Item Affected

Available-for-sale securities

             

(Losses) gains recognized

 $(385) $43  $618 

Net loss on sale of securities

Reclassified out of AOCI, before tax

  (385)  43   618 

Income before income taxes

Income tax benefit

  81   (9)  (130)

Income tax expense

Reclassified out of AOCI, net of tax

  (304)  34   488 

Net income

Employee benefit plans

             

Amortization of prior service cost

  201   257   228 

Other operating expense

Amortization of net actuarial loss

  185   21   57 

Other operating expense

Reclassified out of AOCI, before tax

  386   278   285 

Income before income taxes

Income tax expense

  (82)  (58)  (60)

Income tax expense

Reclassified out of AOCI, net of tax

  304   220   225 

Net income

Total reclassified out of AOCI, net of tax

 $  $254  $713 

Net income

 

 

91

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 17. Fair Value 

 

Financial Instruments Measured at Fair Value

 

The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

 

Assets and Liabilities Reported at Fair Value on a Recurring Basis

 

Available-for-Sale Debt Securities. Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

 

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

 

Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

 

Loans Held for Investment. Loans held for investment are reported at fair value using the exit price notion, which is derived from third-party models. Loans related to fair value hedges are recorded at fair value on a recurring basis.

 

Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

 

Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

 

92

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

  

December 31, 2020

 
  

Total

  

Fair Value Measurements Using

 

(Amounts in thousands)

 

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Available-for-sale debt securities

                

U.S. Agency securities

 $551  $  $551  $ 

Municipal securities

  44,459      44,459    

Mortgage-backed Agency securities

  38,348      38,348    

Total available-for-sale debt securities

  83,358      83,358    

Equity securities

  55      55    

Fair value loans

  17,831         17,831 

Deferred compensation assets

  4,181   4,181       

Deferred compensation liabilities

  4,181   4,181       

Derivative liabilities

  1,131      1,131    

 

 

  

December 31, 2019

 
  

Total

  

Fair Value Measurements Using

 

(Amounts in thousands)

 

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Available-for-sale debt securities

                

U.S. Agency securities

 $5,034  $  $5,034  $ 

Municipal securities

  86,878      86,878    

Mortgage-backed Agency securities

  77,662      77,662    

Total available-for-sale debt securities

  169,574      169,574    

Equity securities

  55      55    

Fair value loans

  17,942         17,942 

Deferred compensation assets

  3,990   3,990       

Deferred compensation liabilities

  3,990   3,990       

Derivative liabilities

  510      510    

 

Changes in Level 3 Fair Value Measurements

 

The following table presents the changes in Level 3 assets recorded at fair value on a recurring basis during the period indicated:

 

  

Assets

 

(Amounts in thousands)

    

Balance January 1, 2019

 $5,412 

Transfer of certain loans into Level 3 (Highlands acquisition)

  12,295 

Changes in fair value

  522 

Changes due to principal reduction

  (287)

Balance December 31, 2019

 $17,942 
     

Balance January 1, 2020

 $17,942 

Changes in fair value

  621 

Changes due to principal reduction

  (732)

Balance December 31, 2020

 $17,831 

 

 No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2020.

 

93

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Impaired Loans. Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

 

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third-party valuation within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

 

Specific reserves are generally recorded for impaired loans while third-party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the third-party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution, except in cases involving bankruptcy and various state judicial processes that may extend the time for ultimate resolution.

 

OREO. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

 

The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

  

December 31, 2020

 
  

Total

  

Fair Value Measurements Using

 
  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

(Amounts in thousands)

                

Impaired loans, non-covered

 $979  $  $  $979 

OREO, non-covered

  2,083         2,083 

 

  

December 31, 2019

 
  

Total

  

Fair Value Measurements Using

 
  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

(Amounts in thousands)

                

Impaired loans, non-covered

 $1,828  $  $  $1,828 

OREO, non-covered

  3,969         3,969 

 

 

94

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Quantitative Information about Level 3 Fair Value Measurements

 

The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:

 

  

Valuation

 

Unobservable

 

Discount Range (Weighted Average)

 
  

Technique

 

Input

 

December 31, 2020

  

December 31, 2019

 
               

Impaired loans, non-covered

 

Discounted appraisals(1)

 

Appraisal adjustments(2)

  22% to 38%(30)%   22% to 36%(26)% 

OREO, non-covered

 

Discounted appraisals(1)

 

Appraisal adjustments(2)

  8% to 77%(25)%   15% to 100%(8)% 

 


(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.

 

The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

  

December 31, 2020

 
  

Carrying

      

Fair Value Measurements Using

 

(Amounts in thousands)

 

Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Assets

                    

Cash and cash equivalents

 $456,561  $456,561  $456,561  $  $ 

Debt securities available for sale

  83,358   83,358      83,358    

Equity securities

  55   55      55    

Loans held for investment, net of allowance

  2,160,450   2,126,221         2,126,221 

FDIC indemnification asset

  1,223   509         509 

Interest receivable

  9,052   9,052      9,052    

Deferred compensation assets

  4,181   4,181   4,181       
                     

Liabilities

                    

Time deposits

  420,619   423,120      423,120    

Securities sold under agreements to repurchase

  964   964      964    

Interest payable

  582   582      582    

Deferred compensation liabilities

  4,181   4,181   4,181       

Derivative liabilities

  1,131   1,131      1,131    

 

  

December 31, 2019

 
  

Carrying

      

Fair Value Measurements Using

 

(Amounts in thousands)

 

Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Assets

                    

Cash and cash equivalents

 $217,009  $217,009  $217,009  $  $ 

Debt securities available for sale

  169,574   169,574      169,574    

Equity securities

  55   55      55    

Loans held for sale

  263   263         263 

Loans held for investment, net of allowance

  2,096,035   2,068,257         2,068,257 

FDIC indemnification asset

  2,883   1,201         1,201 

Interest receivable

  6,677   6,677      6,677    

Deferred compensation assets

  3,990   3,990   3,990       
                     

Liabilities

                    

Time deposits

  515,622   512,134      512,134    

Securities sold under agreements to repurchase

  1,601   1,601      1,601    

Interest payable

  472   472      472    

Deferred compensation liabilities

  3,990   3,990   3,990       

Derivative liabilities

  510   510      510    

 

95

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 18. Earnings per Share

 

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 

(Amounts in thousands, except share and per share data)

                       

Net income

  $ 35,926     $ 38,802     $ 36,340  
                         

Weighted average common shares outstanding, basic

    17,781,748       15,690,812       16,587,504  

Dilutive effect of potential common shares

                       

Stock options

    22,495       53,907       62,417  

Restricted stock

    11,137       11,374       16,464  

Total dilutive effect of potential common shares

    33,632       65,281       78,881  

Weighted average common shares outstanding, diluted

    17,815,380       15,756,093       16,666,385  
                         

Basic earnings per common share

  $ 2.02     $ 2.47     $ 2.19  

Diluted earnings per common share

    2.02       2.46       2.18  
                         

Antidilutive potential common shares

                       

Stock options

    58,166       25       19  

Restricted stock

    26,900       25,853       2,736  

Total potential antidilutive shares

    85,066       25,878       2,755  

 

 

Note 19. Related Party Transactions

 

The Company engages in transactions with related parties in the normal course of business. Related parties include directors, executive officers, and principal shareholders and their immediate family members, business interests, and affiliates. All related party transactions are made on terms that are substantially the same as those prevailing at the time for similar transactions with unrelated parties, including interest rates and collateral. The following table presents the changes in loans with related parties during the periods indicated:

 

  

Year Ended December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

        

Beginning balance

 $20,345  $22,033 

New loans and advances

  4,821   3,958 

Loan repayments

  (5,023)  (5,634)

Reclassifications(1)

  23   (12)

Ending balance

 $20,166  $20,345 

 


(1)

Changes related to the composition of the Company's directors, executive officers, and related insiders

 

Deposits from related parties totaled $8.04 million as of December 31, 2020, and $7.29 million as of December 31, 2019. Legal fees paid to related parties totaled $70 thousand in 2020, $150 thousand in 2019, and $67 thousand in 2018. There were no lease payments paid to related parties in 2020 2019 ,2018. Other expense paid to related parties totaled $68 thousand in 2020, $7 thousand in 2019, and $4 thousand in 2018.

 

 

Note 20. Litigation, Commitments, and Contingencies

 

Litigation

 

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.

 

96

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Commitments and Contingencies

 

The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.

 

Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.

 

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

 

  

December 31,

 
  

2020

  

2019

 

(Amounts in thousands)

        

Commitments to extend credit

 $229,408  $228,716 

Standby letters of credit and financial guarantees(1)

  179,022   167,612 

Total off-balance sheet risk

  408,430   396,328 
         

Reserve for unfunded commitments

 $66  $66 

 


(1)

Includes FHLB letters of credit

 

 

Note 21. Regulatory Requirements and Restrictions 

 

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s balance sheet assets and off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Company and the Bank are subject to various regulatory restrictions related to the payment of dividends, including requirements to maintain capital at or above regulatory minimums.

 

The current risk-based capital requirements, based on the international capital standards known as Basel III, requires the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to risk-weighted assets, and of Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”), as defined in the regulations. On January 1, 2016, Basel III’s capital conservation buffer (“CCB”), which is intended to absorb losses during periods of economic stress, became effective at 0.625%, and was phased in over a four-year period (increased an additional 0.625% each year until it reached 2.5% on January 1, 2019).

 

97

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:

 

  

December 31, 2020

 
  

Actual

  Minimum Basel III Requirement  Minimum Basel III Requirement - with CCB  Well Capitalized Requirement(1) 

(Amounts in thousands)

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

The Company

                                
Common equity Tier 1 ratio $292,019   14.28% $92,043   4.50% $143,178   7.00%  N/A   N/A 
Tier 1 risk-based capital ratio  292,019   14.28%  122,724   6.00%  214,767   8.50%  N/A   N/A 
Total risk-based capital ratio  317,595   15.53%  163,632   8.00%  173,859   10.50%  N/A   N/A 
Tier 1 Leverage ratio  292,019   10.24%  114,081   4.00%  N/A   N/A   N/A   N/A 
                                 

The Bank

                                

Common equity Tier 1 ratio

 $277,449   13.57% $92,017   4.50% $143,137   7.00% $132,913   6.50%

Tier 1 risk-based capital ratio

  277,449   13.57%  122,689   6.00%  173,809   8.50%  163,585   8.00%

Total risk-based capital ratio

  303,018   14.82%  163,585   8.00%  214,706   10.50%  204,482   10.00%
Tier 1 Leverage ratio  277,449   9.73%  114,058   4.00%  N/A   N/A   142,572   5.00%

 


(1)

Based on prompt corrective action provisions

 

  

December 31, 2019

 
  

Actual

  Minimum Basel III Requirement  Minimum Basel III Requirement - with CCB  Well Capitalized Requirement(1) 

(Amounts in thousands)

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

The Company

                                

Common equity Tier 1 ratio

 $292,241   14.31% $91,926   4.50% $142,996   7.00%  N/A   N/A 

Tier 1 risk-based capital ratio

  292,241   14.31%  122,568   6.00%  173,637   8.50%  N/A   N/A 

Total risk-based capital ratio

  310,732   15.21%  163,423   8.00%  214,493   10.50%  N/A   N/A 

Tier 1 Leverage ratio

  292,241   14.01%  83,408   4.00%  N/A   N/A   N/A   N/A 
                                 

The Bank

                                

Common equity Tier 1 ratio

 $262,716   12.87% $91,860   4.50% $142,893   7.00% $132,686   6.50%

Tier 1 risk-based capital ratio

  262,716   12.87%  122,480   6.00%  173,513   8.50%  163,306   8.00%

Total risk-based capital ratio

  281,207   13.78%  163,306   8.00%  214,339   10.50%  204,133   10.00%

Tier 1 Leverage ratio

  262,716   12.61%  83,313   4.00%  N/A   N/A   104,141   5.00%

 


(1)

Based on prompt corrective action provisions

 

98

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 22. Parent Company Financial Information 

 

The following tables present condensed financial information for the parent company, First Community Bankshares, Inc., as of and for the dates indicated:

 

  

CONDENSED BALANCE SHEETS

 
  

December 31,

 

(Amounts in thousands)

 

2020

  

2019

 

Assets

        

Cash and due from banks

 $10,089  $23,998 

Loans to affiliates

     184 

Investment in subsidiaries

  412,161   399,294 

Other assets

  5,089   5,888 

Total assets

 $427,339  $429,364 
         

Liabilities

        

Other liabilities

 $609  $545 

Total liabilities

  609   545 
         

Stockholders' equity

        

Common stock

  17,723   18,377 

Additional paid-in capital

  173,345   192,413 

Retained earnings

  237,585   219,535 

Accumulated other comprehensive loss

  (1,923)  (1,506)

Total stockholders' equity

  426,730   428,819 

Total liabilities and stockholders' equity

 $427,339  $429,364 

 

  

CONDENSED STATEMENTS OF INCOME

 
  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

(Amounts in thousands)

            

Cash dividends received from subsidiary bank

 $23,710  $38,500  $48,000 

Other income

  3   444   306 

Other operating expense

  1,446   1,420   2,293 

Income before income taxes and equity in undistributed net income of subsidiaries

  22,267   37,524   46,013 

Income tax benefit

  (375)  (276)  (595)

Income before equity in undistributed net income of subsidiaries

  22,642   37,800   46,608 

Equity in (dividends in excess) of undistributed net income of subsidiaries

  13,284   1,002   (10,268)

Net income

 $35,926  $38,802  $36,340 

 

 

99

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  

CONDENSED STATEMENTS OF CASH FLOWS

 
  

Year Ended December 31,

 

(Amounts in thousands)

 

2020

  

2019

  

2018

 

Operating activities

            

Net income

 $35,926  $38,802  $36,340 

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

            

Net change in other operating activities

  1,047   1,865   1,509 

Net cash provided by operating activities

  36,973   40,667   37,849 

Investing activities

            

Dividends in excess of undistributed net income of subsidiaries

  (13,284)  (1,002)  10,268 

Net cash provided by investing activities

  (13,284)  (1,002)  10,268 

Financing activities

            

Proceeds from issuance of common stock

     136   832 

Payments for repurchase of common stock

  (21,872)  (16,362)  (34,412)

Payments of common dividends

  (17,876)  (15,060)  (21,090)

Net change in other financing activities

  2,150   1,893   1,063 

Net cash used in financing activities

  (37,598)  (29,393)  (53,607)

Net increase (decrease) in cash and cash equivalents

  (13,909)  10,272   (5,490)

Cash and cash equivalents at beginning of period

  23,998   13,726   19,216 

Cash and cash equivalents at end of period

 $10,089  $23,998  $13,726 

 

 

Note 23. Quarterly Financial Data (Unaudited)

 

The following tables present selected financial data for the periods indicated:

 

  

Year Ended December 31, 2020

 
  

First

  

Second

  

Third

  

Fourth

 
  

Quarter

  

Quarter

  

Quarter

  

Quarter

 

(Amounts in thousands, except share and per share data)

                

Interest income

 $29,509  $27,786  $27,995  $28,746 

Interest expense

  1,827   1,447   1,161   1,029 

Net interest income

  27,682   26,339   26,834   27,717 

Provision for loan losses

  3,500   3,831   4,703   634 

Net interest income after provision

  24,182   22,508   22,131   27,083 

Noninterest income, excluding net loss on sale of securities

  7,164   6,913   7,638   7,733 

Net loss on sale of securities

  385          

Noninterest expense

  21,664   18,913   19,171   19,877 

Income before income taxes

  10,067   10,508   10,598   14,939 

Income tax expense

  2,195   2,270   2,332   3,389 

Net income

 $7,872  $8,238  $8,266  $11,550 
                 

Basic earnings per common share

 $0.44  $0.47  $0.47  $0.65 

Diluted earnings per common share

  0.44   0.46   0.47   0.65 

Dividends per common share

  0.25   0.25   0.25   0.25 
                 

Weighted average basic shares outstanding

  17,998,994   17,701,853   17,710,283   17,717,356 

Weighted average diluted shares outstanding

  18,050,071   17,728,300   17,732,428   17,751,805 

 

100

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  

Year Ended December 31, 2019

 
  

First

  

Second

  

Third

  

Fourth

 
  

Quarter

  

Quarter

  

Quarter

  

Quarter

 

(Amounts in thousands, except share and per share data)

                

Interest income

 $23,611  $24,382  $23,605  $23,370 

Interest expense

  1,425   1,393   1,384   1,313 

Net interest income

  22,186   22,989   22,221   22,057 

Provision for loan losses

  1,220   1,585   675   91 

Net interest income after provision

  20,966   21,404   21,546   21,966 

Noninterest income, excluding net loss on sale of securities

  8,080   8,692   7,634   9,314 

Net loss on sale of securities

     (43)      

Noninterest expense

  16,785   16,651   17,444   18,883 

Income before income taxes

  12,261   13,402   11,736   12,397 

Income tax expense

  2,630   2,951   2,580   2,833 

Net income

 $9,631  $10,451  $9,156  $9,564 
                 

Basic earnings per common share

 $0.61  $0.67  $0.59  $0.61 

Diluted earnings per common share

  0.60   0.66   0.58   0.61 

Dividends per common share

  0.21   0.25   0.25   0.25 
                 

Weighted average basic shares outstanding

  15,839,424   15,712,204   15,603,992   15,611,093 

Weighted average diluted shares outstanding

  15,920,950   15,775,320   15,664,587   15,670,047 

 

101

 
 

- Report of Independent Registered Public Accounting Firm -

 

Board of Directors and the Stockholders

First Community Bankshares, Inc. and Subsidiary

Bluefield, Virginia