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Section 1: 10-Q (FORM 10-Q)

fcbc20170331_10q.htm Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

or

 

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

 

Commission file number: 000-19297

 

 

FIRST COMMUNITY BANCSHARES, INC.

 
 

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

55-0694814

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

P.O. Box 989

Bluefield, Virginia

 

24605-0989

(Address of principal executive offices)

 

(Zip Code)

 

 

(276) 326-9000

 
 

(Registrant’s telephone number, including area code)

 

 

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

☑ Yes ☐ No

 

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

☑ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐ (Do not check if a smaller reporting company) 

Smaller reporting company ☐

  Emerging growth company ☐

 

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

 

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

☐ Yes ☑ No

 

As of April 28, 2017, there were 17,009,876 shares outstanding of the registrant’s Common Stock, $1.00 par value.

 

 
 

Table of Contents
 

 

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

INDEX

  

     PAGE 

PART I.

FINANCIAL INFORMATION

 
     
Item 1. Financial Statements 4
  Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016 4
  Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 5
  Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 6
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 7
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 8
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

9
Item 2.

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

39
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
Item 4. Controls and Procedures 53
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 54
Item 1A. Risk Factors 54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 55
Item 4. Mine Safety Disclosures 55
Item 5. Other Information 55
Item 6. Exhibits 55
     
SIGNATURES 56
     
EXHIBIT INDEX 58

 

 
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q 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 strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

 

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

 

inflation, interest rate, market and monetary fluctuations;

 

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

 

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

 

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

 

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

 

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

 

technological changes;

 

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

 

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

 

unanticipated regulatory or judicial proceedings;

 

changes in consumer spending and saving habits; and

 

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

 

This 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 Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

 
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PART I.

FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(Unaudited)

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

Assets

               

Cash and due from banks

  $ 35,559     $ 36,645  

Federal funds sold

    116,347       38,717  

Interest-bearing deposits in banks

    945       945  

Total cash and cash equivalents

    152,851       76,307  

Securities available for sale

    158,685       165,579  

Securities held to maturity

    47,092       47,133  

Loans held for investment, net of unearned income

               

Non-covered

    1,784,371       1,795,954  

Covered

    51,412       56,994  

Less: allowance for loan losses

    (18,458 )     (17,948 )

Loans held for investment, net

    1,817,325       1,835,000  

FDIC indemnification asset

    9,931       12,173  

Premises and equipment, net

    50,057       50,085  

Other real estate owned, non-covered

    4,477       5,109  

Other real estate owned, covered

    241       276  

Interest receivable

    5,059       5,553  

Goodwill

    95,779       95,779  

Other intangible assets

    6,947       7,207  

Other assets

    82,069       86,197  

Total assets

  $ 2,430,513     $ 2,386,398  
                 

Liabilities

               

Deposits

               

Noninterest-bearing

  $ 467,677     $ 427,705  

Interest-bearing

    1,438,917       1,413,633  

Total deposits

    1,906,594       1,841,338  

Securities sold under agreements to repurchase

    90,653       98,005  

FHLB borrowings

    65,000       65,000  

Other borrowings

    244       15,708  

Interest, taxes, and other liabilities

    24,618       27,290  

Total liabilities

    2,087,109       2,047,341  
                 

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; 21,381,779 shares issued at March 31, 2017, and December 31, 2016; 4,368,594 and 4,387,571 shares in treasury at March 31, 2017, and December 31, 2016, respectively

    21,382       21,382  

Additional paid-in capital

    228,176       228,142  

Retained earnings

    173,860       170,377  

Treasury stock, at cost

    (78,533 )     (78,833 )

Accumulated other comprehensive loss

    (1,481 )     (2,011 )

Total stockholders' equity

    343,404       339,057  

Total liabilities and stockholders' equity

  $ 2,430,513     $ 2,386,398  

 

See Notes to Consolidated Financial Statements.

 

 
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FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 

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

 

2017

   

2016

 

Interest income

               

Interest and fees on loans

  $ 21,827     $ 21,573  

Interest on securities -- taxable

    409       1,019  

Interest on securities -- tax-exempt

    797       938  

Interest on deposits in banks

    159       20  

Total interest income

    23,192       23,550  

Interest expense

               

Interest on deposits

    1,166       1,114  

Interest on short-term borrowings

    210       516  

Interest on long-term debt

    675       809  

Total interest expense

    2,051       2,439  

Net interest income

    21,141       21,111  

Provision for loan losses

    492       1,187  

Net interest income after provision for loan losses

    20,649       19,924  

Noninterest income

               

Wealth management

    790       684  

Service charges on deposits

    3,113       3,291  

Other service charges and fees

    2,078       2,010  

Insurance commissions

    373       2,191  

Net gain on sale of securities

    -       1  

Net FDIC indemnification asset amortization

    (1,332 )     (1,159 )

Other operating income

    669       885  

Total noninterest income

    5,691       7,903  

Noninterest expense

               

Salaries and employee benefits

    8,884       10,475  

Occupancy expense

    1,248       1,531  

Furniture and equipment expense

    1,091       1,096  

Amortization of intangibles

    261       278  

FDIC premiums and assessments

    244       374  

Merger, acquisition, and divestiture expense

    -       39  

Other operating expense

    5,355       5,021  

Total noninterest expense

    17,083       18,814  

Income before income taxes

    9,257       9,013  

Income tax expense

    3,055       2,929  

Net income

    6,202       6,084  

Dividends on preferred stock

    -       -  

Net income available to common shareholders

  $ 6,202     $ 6,084  
                 

Earnings per common share

               

Basic

  $ 0.36     $ 0.34  

Diluted

    0.36       0.34  

Cash dividends per common share

    0.16       0.14  

Weighted average shares outstanding

               

Basic

    16,998,125       17,859,197  

Diluted

    17,072,174       17,892,531  

 

See Notes to Consolidated Financial Statements.

 

 
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FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 

(Amounts in thousands)

               

Net income

  $ 6,202     $ 6,084  

Other comprehensive income (loss), before tax

               

Available-for-sale securities:

               

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

    651       (722 )

Reclassification adjustment for net gains recognized in net income

    -       (1 )

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

    651       (723 )

Employee benefit plans:

               

Net actuarial gain (loss)

    133       (125 )

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

    64       71  

Net unrealized gains (losses) on employee benefit plans

    197       (54 )

Other comprehensive income (loss), before tax

    848       (777 )

Income tax expense (benefit)

    318       (291 )

Other comprehensive income (loss), net of tax

    530       (486 )

Total comprehensive income

  $ 6,732     $ 5,598  

 

See Notes to Consolidated Financial Statements.

 

 
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FIRST COMMUNITY BANCSHARES, INC.

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

 

                                           

Accumulated

         
                   

Additional

                   

Other

         
   

Preferred

   

Common

   

Paid-in

   

Retained

   

Treasury

   

Comprehensive

         

(Amounts in thousands,

 

Stock

   

Stock

   

Capital

   

Earnings

   

Stock

   

Income (Loss)

   

Total

 

except share and per share data)

                                                       

Balance January 1, 2016

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

Net income

    -       -       -       6,084       -       -       6,084  

Other comprehensive loss

    -       -       -       -       -       (486 )     (486 )

Common dividends declared -- $0.14 per share

    -       -       -       (2,508 )     -       -       (2,508 )

Equity-based compensation expense

    -       -       7       -       -       -       7  

Restricted stock awards -- 12,882 shares

    -       -       18       -       222       -       240  

Issuance of treasury stock to 401(k) plan -- 7,727 shares

    -       -       8       -       134       -       142  

Purchase of treasury shares -- 487,739 shares at $18.14 per share

    -       -       -       -       (8,867 )     -       (8,867 )

Balance March 31, 2016

  $ -     $ 21,382     $ 227,725     $ 159,223     $ (64,968 )   $ (5,733 )   $ 337,629  
                                                         

Balance January 1, 2017

  $ -     $ 21,382     $ 228,142     $ 170,377     $ (78,833 )   $ (2,011 )   $ 339,057  

Net income

    -       -       -       6,202       -       -       6,202  

Other comprehensive income

    -       -       -       -       -       530       530  

Common dividends declared -- $0.16 per share

    -       -       -       (2,719 )     -       -       (2,719 )

Equity-based compensation expense

    -       -       57       -       -       -       57  

Common stock options exercised -- 1,500 shares

    -       -       (8 )     -       27       -       19  

Restricted stock awards -- 19,034 shares

    -       -       (62 )     -       342       -       280  

Issuance of treasury stock to 401(k) plan -- 5,243 shares

    -       -       47       -       95       -       142  

Purchase of treasury shares -- 6,800 shares at $24.07 per share

    -       -       -       -       (164 )     -       (164 )

Balance March 31, 2017

  $ -     $ 21,382     $ 228,176     $ 173,860     $ (78,533 )   $ (1,481 )   $ 343,404  

 

See Notes to Consolidated Financial Statements.

 

 
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FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 

(Amounts in thousands)

 

2017

   

2016

 

Operating activities

               

Net income

  $ 6,202     $ 6,084  

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

               

Provision for loan losses

    492       1,187  

Depreciation and amortization of property, plant, and equipment

    874       937  

Amortization of premiums on investments, net

    83       898  

Amortization of FDIC indemnification asset, net

    1,332       1,159  

Amortization of intangible assets

    261       278  

Accretion on acquired loans

    (1,134 )     (1,447 )

Equity-based compensation expense

    57       7  

Restricted stock awards

    280       240  

Issuance of treasury stock to 401(k) plan

    142       142  

Loss on sale of property, plant, and equipment, net

    3       360  

Loss on sale of other real estate

    233       660  

Gain on sale of securities

    -       (1 )

Decrease in accrued interest receivable

    494       39  

Decrease in other operating activities

    1,369       641  

Net cash provided by operating activities

    10,688       11,184  

Investing activities

               

Proceeds from sale of securities available for sale

    -       16,074  

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

    7,503       10,027  

Proceeds from (originations of) loans, net

    17,945       (57,398 )

Proceeds from (payments for) FHLB stock, net

    57       (661 )

Proceeds from the FDIC

    818       1,187  

(Payments to acquire) proceeds from sale of property, plant, and equipment, net

    (849 )     659  

Proceeds from sale of other real estate

    806       2,650  

Net cash provided by (used in) investing activities

    26,280       (27,462 )

Financing activities

               

Increase in noninterest-bearing deposits, net

    39,972       1,825  

Increase (decrease) in interest-bearing deposits, net

    25,284       (419 )

Increase in federal funds purchased

    -       18,000  

Repayments of securities sold under agreements to repurchase, net

    (7,352 )     (3,953 )

Repayments of FHLB and other borrowings, net

    (15,464 )     -  

Proceeds from stock options exercised

    19       -  

Payments for repurchase of treasury stock

    (164 )     (8,867 )

Payments of common dividends

    (2,719 )     (2,508 )

Net cash provided by financing activities

    39,576       4,078  

Net increase (decrease) in cash and cash equivalents

    76,544       (12,200 )

Cash and cash equivalents at beginning of period

    76,307       51,787  

Cash and cash equivalents at end of period

  $ 152,851     $ 39,587  
                 

Supplemental disclosure -- cash flow information

               

Cash paid for interest

  $ 2,200     $ 2,471  

Cash paid for income taxes

    -       -  
                 

Supplemental transactions -- noncash items

               

Transfer of loans to other real estate

    372       1,996  

Loans originated to finance other real estate

    -       -  

 

See Notes to Consolidated Financial Statements.

 

 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Basis of Presentation

 

General

 

First Community Bancshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of Nevada in 1997. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank provides insurance services through its wholly owned subsidiary First Community Insurance Services (“FCIS”) and 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 Bancshares, 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, wealth management, and insurance services. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

 

The condensed consolidated balance sheet as of December 31, 2016, has been derived from the audited consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016 (the “2016 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2017.

 

Reclassifications

 

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

 

Use of Estimates

 

Preparation of the condensed 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, investment securities, the allowance for loan losses, the Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

 

Significant Accounting Policies

 

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2016 Form 10-K.

 

Recent Accounting Standards

 

Standards Adopted

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles -- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” This ASU removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The update should be applied prospectively. The Company early adopted ASU 2017-04 in the first quarter of 2017. The adoption of the standard did not have an effect on the Company’s financial statements.

 

 
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In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” This ASU requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. The Company adopted ASU 2017-03 in the first quarter of 2017. The adoption of the standard resulted in enhanced disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on the Company’s financial statements and disclosures. See “Standards Not Yet Adopted” below.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation -- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance eliminates additional paid-in capital pools for equity-based awards and requires that the related income tax effects of awards be recognized in the income statement. The guidance also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis and elected to account for forfeitures of share-based awards as they occur. Excess tax benefits on share-based awards in the statement of cash flows in prior periods have not been adjusted. The adoption of the standard did not have a material effect on the Company’s financial statements.

 

Standards Not Yet Adopted

 

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Securities.” This ASU amends the amortization period for certain purchased callable debt securities held at a premium. ASU 2017-08 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017-08 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. ASU 2017-07 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2017-07 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

In February 2017, the FASB issued ASU 2017-06, “Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting.” This ASU intends to reduce diversity and improve the usefulness of information provided by employee benefit plans that hold interests in master trusts. ASU 2017-06 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017-06 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This ASU requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2016-18 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted. The update should be applied on a retrospective basis, if practicable. The Company expects to adopt ASU 2016-15 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

 
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In June 2016, the FASB issued ASU 2016-13, “Financial Instruments -- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU intends to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2016-13 in the first quarter of 2020 and recognize a cumulative adjustment to retained earnings as of the beginning of the year of adoption. The Company is evaluating the impact of the standard.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. ASU 2016-02 will be effective for the Company for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt ASU 2016-02 in the first quarter of 2019. The Company leases certain banking offices under lease agreements it classifies as operating leases. The Company is evaluating the impact of the standard and expects an increase in assets and liabilities; however, the Company does not expect the guidance to have a material effect on its financial statements.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments -- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The new guidance also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 will be effective for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted for the instrument-specific credit risk provision. The Company expects to adopt ASU 2016-01 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect to recognize a significant cumulative effect adjustment to retained earnings at the beginning of the year of adoption or expect the guidance to have a material effect on its financial statements. The cumulative-effect adjustment will be dependent on the composition and fair value of the Company’s equity securities portfolio at the adoption date.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” deferring the effective date of ASU 2014-09 for the Company until fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. Additional revenue related standards to be adopted concurrently with ASU 2014-09 include ASU 2017-05, ASU 2016-20, ASU 2016-12, ASU 2016-10, and ASU 2016-08. The Company expects to adopt ASU 2014-09, and related updates, in the first quarter of 2018 and recognize a cumulative adjustment to retained earnings as of the beginning of the year of adoption. The Company’s primary source of revenue is interest income, which is excluded from the scope of this guidance; however, the Company is evaluating the impact of the standard on other income, which includes fees for services, commissions on sales, and various deposit service charges. The Company does not expect the guidance to have a material effect on its 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.

 

 
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Note 2. Investment Securities

 

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

 

   

March 31, 2017

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 1,312     $ 8     $ -     $ 1,320  

Municipal securities

    106,853       2,425       (427 )     108,851  

Single issue trust preferred securities

    22,112       -       (1,836 )     20,276  

Mortgage-backed Agency securities

    28,572       75       (482 )     28,165  

Equity securities

    55       18       -       73  

Total securities available for sale

  $ 158,904     $ 2,526     $ (2,745 )   $ 158,685  

 

   

December 31, 2016

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 1,342     $ 3     $ -     $ 1,345  

Municipal securities

    111,659       2,258       (586 )     113,331  

Single issue trust preferred securities

    22,104       -       (2,165 )     19,939  

Mortgage-backed Agency securities

    31,290       66       (465 )     30,891  

Equity securities

    55       18       -       73  

Total securities available for sale

  $ 166,450     $ 2,345     $ (3,216 )   $ 165,579  

 

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

 

   

March 31, 2017

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 36,725     $ 82     $ -     $ 36,807  

Corporate securities

    10,367       22       -       10,389  

Total securities held to maturity

  $ 47,092     $ 104     $ -     $ 47,196  

 

   

December 31, 2016

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 36,741     $ 124     $ -     $ 36,865  

Corporate securities

    10,392       11       (2 )     10,401  

Total securities held to maturity

  $ 47,133     $ 135     $ (2 )   $ 47,266  

 

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

 

   

March 31, 2017

 
   

Amortized

         

(Amounts in thousands)

 

Cost

   

Fair Value

 

Available-for-sale securities

               

Due within one year

  $ 650     $ 653  

Due after one year but within five years

    2,787       2,862  

Due after five years but within ten years

    107,291       107,929  

Due after ten years

    19,549       19,003  
      130,277       130,447  

Mortgage-backed securities

    28,572       28,165  

Equity securities

    55       73  

Total securities available for sale

  $ 158,904     $ 158,685  
                 

Held-to-maturity securities

               

Due within one year

  $ 21,844     $ 21,844  

Due after one year but within five years

    25,248       25,352  

Due after five years but within ten years

    -       -  

Due after ten years

    -       -  

Total securities held to maturity

  $ 47,092     $ 47,196  

 

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

 

   

March 31, 2017

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

Municipal securities

  $ 20,153     $ (375 )   $ 721     $ (52 )   $ 20,874     $ (427 )

Single issue trust preferred securities

    -       -       20,276       (1,836 )     20,276       (1,836 )

Mortgage-backed Agency securities

    13,648       (191 )     10,283       (291 )     23,931       (482 )

Total

  $ 33,801     $ (566 )   $ 31,280     $ (2,179 )   $ 65,081     $ (2,745 )

 

   

December 31, 2016

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

Municipal securities

  $ 24,252     $ (527 )   $ 715     $ (59 )   $ 24,967     $ (586 )

Single issue trust preferred securities

    -       -       19,939       (2,165 )     19,939       (2,165 )

Mortgage-backed Agency securities

    12,834       (166 )     11,851       (299 )     24,685       (465 )

Total

  $ 37,086     $ (693 )   $ 32,505     $ (2,523 )   $ 69,591     $ (3,216 )

 

 
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There were no unrealized losses for held-to-maturity securities as of March 31, 2017. The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the date indicated:

 

   

December 31, 2016

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

Corporate securities

  $ 3,533     $ (2 )   $ -     $ -     $ 3,533     $ (2 )

Total

  $ 3,533     $ (2 )   $ -     $ -     $ 3,533     $ (2 )

 

There were 73 individual securities in an unrealized loss position as of March 31, 2017, and their combined depreciation in value represented 1.33% of the investment securities portfolio. There were 82 individual securities in an unrealized loss position as of December 31, 2016, and their combined depreciation in value represented 1.51% of the investment securities portfolio.

 

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for both debt and equity securities is a decline in fair value below book value and the severity and duration of the decline. For debt securities, the credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the three months ended March 31, 2017 and 2016, the Company incurred no OTTI charges on debt securities. 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. For equity securities, the OTTI is recognized as a charge to noninterest income. During the three months ended March 31, 2017 and 2016, the Company incurred no OTTI charges related to equity securities.

 

The carrying amount of securities pledged for various purposes totaled $133.79 million as of March 31, 2017, and $139.75 million as of December 31, 2016.

 

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

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 

(Amounts in thousands)

               

Gross realized gains

  $ -     $ 132  

Gross realized losses

    -       (131 )

Net gain on sale of securities

  $ -     $ 1  

 

Note 3. 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 Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled $1.28 million as of March 31, 2017, and $1.41 million as of December 31, 2016. Deferred loan fees totaled $3.75 million for the three months ended March 31, 2017, and $3.94 million for the same period of the prior year. For information about off-balance sheet financing, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

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

 

   

March 31, 2017

   

December 31, 2016

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

 

Non-covered loans held for investment

                               

Commercial loans

                               

Construction, development, and other land

  $ 61,070       3.33 %   $ 56,948       3.07 %

Commercial and industrial

    88,370       4.81 %     92,204       4.98 %

Multi-family residential

    143,847       7.84 %     134,228       7.24 %

Single family non-owner occupied

    143,308       7.81 %     142,965       7.72 %

Non-farm, non-residential

    584,064       31.81 %     598,674       32.31 %

Agricultural

    6,133       0.33 %     6,003       0.32 %

Farmland

    29,241       1.59 %     31,729       1.71 %

Total commercial loans

    1,056,033       57.52 %     1,062,751       57.35 %

Consumer real estate loans

                               

Home equity lines

    104,817       5.71 %     106,361       5.74 %

Single family owner occupied

    500,394       27.26 %     500,891       27.03 %

Owner occupied construction

    45,346       2.47 %     44,535       2.41 %

Total consumer real estate loans

    650,557       35.44 %     651,787       35.18 %

Consumer and other loans

                               

Consumer loans

    73,634       4.01 %     77,445       4.18 %

Other

    4,147       0.23 %     3,971       0.21 %

Total consumer and other loans

    77,781       4.24 %     81,416       4.39 %

Total non-covered loans

    1,784,371       97.20 %     1,795,954       96.92 %

Total covered loans

    51,412       2.80 %     56,994       3.08 %

Total loans held for investment, net of unearned income

  $ 1,835,783       100.00 %   $ 1,852,948       100.00 %

 

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

 

   

March 31, 2017

   

December 31, 2016

 

(Amounts in thousands)

               

Covered loans

               

Commercial loans

               

Construction, development, and other land

  $ 4,337     $ 4,570  

Commercial and industrial

    637       895  

Multi-family residential

    4       8  

Single family non-owner occupied

    980       962  

Non-farm, non-residential

    6,020       7,512  

Agricultural

    25       25  

Farmland

    386       397  

Total commercial loans

    12,389       14,369  

Consumer real estate loans

               

Home equity lines

    32,943       35,817  

Single family owner occupied

    6,080       6,729  

Total consumer real estate loans

    39,023       42,546  

Consumer and other loans

               

Consumer loans

    -       79  

Total covered loans

  $ 51,412     $ 56,994  

 

The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those purchased credit impaired (“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.

 

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

 

   

March 31, 2017

   

December 31, 2016

 

(Amounts in thousands)

 

Recorded Investment

   

Unpaid Principal

Balance

   

Recorded Investment

   

Unpaid Principal

Balance

 

PCI Loans, by acquisition

                               

Peoples

  $ 5,078     $ 8,713     $ 5,576     $ 9,397  

Waccamaw

    19,409       41,762       21,758       45,030  

Other acquired

    1,071       1,097       1,095       1,121  

Total PCI Loans

  $ 25,558     $ 51,572     $ 28,429     $ 55,548  

 

The following table presents the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated:

 

   

Peoples

   

Waccamaw

   

Total

 

(Amounts in thousands)

                       

Balance January 1, 2016

  $ 3,589     $ 26,109     $ 29,698  

Accretion

    (459 )     (1,484 )     (1,943 )

Reclassifications from nonaccretable difference(1)

    (221 )     (272 )     (493 )

Other changes, net

    1,724       598       2,322  

Balance March 31, 2016

  $ 4,633     $ 24,951     $ 29,584  
                         

Balance January 1, 2017

  $ 4,392     $ 21,834     $ 26,226  

Accretion

    (295 )     (1,270 )     (1,565 )

Reclassifications from nonaccretable difference(1)

    578       1,301       1,879  

Other changes, net

    (107 )     (175 )     (282 )

Balance March 31, 2017

  $ 4,568     $ 21,690     $ 26,258  

                                                                                          

(1)  Represents changes attributable to expected loss assumptions

 

 Note 4. 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.

 

 
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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.

 

   

March 31, 2017

 
           

Special

                                 

(Amounts in thousands)

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 59,923     $ 745     $ 402     $ -     $ -     $ 61,070  

Commercial and industrial

    82,879       2,125       3,366       -       -       88,370  

Multi-family residential

    135,915       7,178       754       -       -       143,847  

Single family non-owner occupied

    132,231       5,545       5,532       -       -       143,308  

Non-farm, non-residential

    565,814       9,912       8,136       202       -       584,064  

Agricultural

    5,739       266       128       -       -       6,133  

Farmland

    26,976       828       1,437       -       -       29,241  

Consumer real estate loans

                                               

Home equity lines

    102,487       851       1,479       -       -       104,817  

Single family owner occupied

    473,505       4,260       22,629       -       -       500,394  

Owner occupied construction

    44,704       -       235       407       -       45,346  

Consumer and other loans

                                               

Consumer loans

    73,460       3       171       -       -       73,634  

Other

    4,147       -       -       -       -       4,147  

Total non-covered loans

    1,707,780       31,713       44,269       609       -       1,784,371  

Covered loans