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Section 1: 10-K/A (FORM 10-K/A)

Form 10-K/A
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission file number 000-19297

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   55-0694814

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

P.O. Box 989

Bluefield, Virginia 24605-0989

(Address of principal executive offices) (Zip Code)

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

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $1.00 par value   NASDAQ Global Select

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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

 

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

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

As of June 30, 2016, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $294.92 million.

As of February 28, 2017, there were 16,994,616 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 25, 2017, are incorporated by reference in Part III of this Form 10-K.


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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A amends the Annual Report on Form 10-K of First Community Bancshares, Inc. (the “Company”) for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 3, 2017 (the “Original Form 10-K”), solely to correct the date of the Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements of Dixon Hughes Goodman LLP (the “Report”) from March 4, 2017, to March 3, 2017. The Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting with the correct date are filed with this Form 10-K/A.

In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Part II, Item 8 has been amended and restated in its entirety; however, there have been no changes to the text of such Part II, Item 8 other than the change stated in the preceding paragraph. Further, there have been no changes to the XBRL data filed in Exhibit 101 of the Original Form 10-K. As required by Rule 12b-15, this Form 10-K/A includes a new consent of the independent registered public accounting firm as Exhibit 23 and new certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, and 32.

Except as described above, this Form 10-K/A does not amend, update, or restate the information in any other Item of the Original Form 10-K or reflect any events that have occurred after the filing of the Original Form 10-K.

 

2


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PART II

 

Item 8. Financial Statements and Supplementary Data.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX

 

     Page  

Consolidated Balance Sheets as of December 31, 2016 and 2015

     4  

Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014

     5  

Consolidated Statements of Comprehensive Income (Loss) for the years ended December  31, 2016, 2015, and 2014

     6  

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December  31, 2016, 2015, and 2014

     7  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014

     8  

Notes to Consolidated Financial Statements

     9  

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

     69  

Management’s Assessment of Internal Control Over Financial Reporting

     70  

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

     71  

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  
(Amounts in thousands, except share and per share data)    2016     2015  

Assets

    

Cash and due from banks

   $ 36,645     $ 37,383  

Federal funds sold

     38,717       13,498  

Interest-bearing deposits in banks

     945       906  
  

 

 

   

 

 

 

Total cash and cash equivalents

     76,307       51,787  

Securities available for sale

     165,579       366,173  

Securities held to maturity

     47,133       72,541  

Loans held for investment, net of unearned income

    

Non-covered

     1,795,954       1,623,506  

Covered

     56,994       83,035  

Allowance for loan losses

     (17,948     (20,233
  

 

 

   

 

 

 

Loans held for investment, net

     1,835,000       1,686,308  

FDIC indemnification asset

     12,173       20,844  

Premises and equipment, net

     50,085       52,756  

Other real estate owned, non-covered

     5,109       4,873  

Other real estate owned, covered

     276       4,034  

Interest receivable

     5,553       6,007  

Goodwill

     95,779       100,486  

Other intangible assets

     7,207       5,243  

Other assets

     86,197       91,224  
  

 

 

   

 

 

 

Total assets

   $ 2,386,398     $ 2,462,276  
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Noninterest-bearing

   $ 427,705     $ 451,511  

Interest-bearing

     1,413,633       1,421,748  
  

 

 

   

 

 

 

Total deposits

     1,841,338       1,873,259  

Securities sold under agreements to repurchase

     98,005       138,614  

FHLB borrowings

     65,000       65,000  

Other borrowings

     15,708       15,756  

Interest, taxes, and other liabilities

     27,290       26,630  
  

 

 

   

 

 

 

Total liabilities

     2,047,341       2,119,259  

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 December 31, 2016 and 2015, including 4,387,571 and 3,283,638 shares in treasury, respectively

     21,382       21,382  

Additional paid-in capital

     228,142       227,692  

Retained earnings

     170,377       155,647  

Treasury stock

     (78,833     (56,457

Accumulated other comprehensive loss

     (2,011     (5,247
  

 

 

   

 

 

 

Total stockholders’ equity

     339,057       343,017  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,386,398     $ 2,462,276  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended December 31,  
(Amounts in thousands, except share and per share data)    2016     2015     2014  

Interest income

      

Interest and fees on loans

   $ 87,718     $ 87,632     $ 95,492  

Interest on securities — taxable

     3,229       4,225       5,975  

Interest on securities — tax-exempt

     3,624       3,978       4,350  

Interest on deposits in banks

     153       267       291  
  

 

 

   

 

 

   

 

 

 

Total interest income

     94,724       96,102       106,108  

Interest expense

      

Interest on deposits

     4,479       5,878       7,308  

Interest on short-term borrowings

     2,101       1,952       2,024  

Interest on long-term debt

     3,264       3,519       5,958  
  

 

 

   

 

 

   

 

 

 

Total interest expense

     9,844       11,349       15,290  
  

 

 

   

 

 

   

 

 

 

Net interest income

     84,880       84,753       90,818  

Provision for loan losses

     1,255       2,191       145  
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     83,625       82,562       90,673  

Noninterest income

      

Wealth management

     2,828       2,975       3,030  

Service charges on deposits

     13,588       13,717       13,828  

Other service charges and fees

     8,102       8,045       7,581  

Insurance commissions

     5,442       6,899       6,555  

Impairment losses on securities

     (4,646     —         (737

Portion of loss recognized in other comprehensive income

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (4,646     —         (737

Net gain (loss) on sale of securities

     335       144       (1,385

Net FDIC indemnification asset amortization

     (5,474     (6,379     (3,979

Net gain on divestitures

     3,682       —         755  

Other operating income

     3,209       4,129       4,355  
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     27,066       29,530       30,003  

Noninterest expense

      

Salaries and employee benefits

     39,912       39,625       40,713  

Occupancy expense

     5,297       5,817       6,338  

Furniture and equipment expense

     4,341       5,199       4,952  

Amortization of intangibles

     1,136       1,118       787  

FDIC premiums and assessments

     1,383       1,513       1,672  

FHLB debt prepayment fees

     —         1,702       5,008  

Merger, acquisition, and divestiture expense

     730       86       1,150  

Other operating expense

     19,947       21,111       22,242  
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     72,746       76,171       82,862  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     37,945       35,921       37,814  

Income tax expense

     12,819       11,381       12,324  
  

 

 

   

 

 

   

 

 

 

Net income

     25,126       24,540       25,490  

Dividends on preferred stock

     —         105       910  
  

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 25,126     $ 24,435     $ 24,580  
  

 

 

   

 

 

   

 

 

 

Earnings per common share

      

Basic

   $ 1.45     $ 1.32     $ 1.34  

Diluted

     1.45       1.31       1.31  

Cash dividends per common share

     0.60       0.54       0.50  

Weighted average shares outstanding

      

Basic

     17,319,689       18,531,039       18,406,363  

Diluted

     17,365,524       18,727,464       19,483,054  

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

     Year Ended December 31,  
(Amounts in thousands)    2016     2015     2014  

Net income

   $ 25,126     $ 24,540     $ 25,490  

Other comprehensive income, before tax

      

Available-for-sale securities

      

Change in net unrealized losses on securities with other-than-temporary impairment

     —         —         (1

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

     1,035       755       12,914  

Reclassification adjustment for net (gains) losses recognized in net income

     (335     (144     1,385  

Reclassification adjustment for other-than-temporary impairment losses recognized in net income

     4,646       —         737  
  

 

 

   

 

 

   

 

 

 

Net unrealized gains on available-for-sale securities

     5,346       611       15,035  

Employee benefit plans

      

Net actuarial loss

     (367     (363     (642

Plan change

     (69     —         —    

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

     273       326       260  
  

 

 

   

 

 

   

 

 

 

Net unrealized losses on employee benefit plans

     (163     (37     (382
  

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     5,183       574       14,653  

Income tax expense

     (1,947     (216     (5,518
  

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     3,236       358       9,135  
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 28,362     $ 24,898     $ 34,625  
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

(Amounts in thousands, except share and

per share data)

   Preferred
Stock
    Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance January 1, 2014

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

Net income

     —         —          —         25,490       —         —         25,490  

Other comprehensive income

     —         —          —         —         —         9,135       9,135  

Common dividends declared — $0.50 per share

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

Preferred dividends declared — $60.00 per share

     —         —          —         (910     —         —         (910

Preferred stock converted to common stock — 6,900 shares

     (100     7        93       —         —         —         —    

Equity-based compensation expense

     —         —          332       —         —         —         332  

Common stock options exercised — 3,854 shares

     —         —          (13     —         66       —         53  

Restricted stock awards — 13,933 shares

     —         —          (202     —         238       —         36  

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

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2014

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2015

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

Net income

     —         —          —         24,540       —         —         24,540  

Other comprehensive income

     —         —          —         —         —         358       358  

Common dividends declared — $0.54 per share

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

Preferred dividends declared — $15.00 per share

     —         —          —         (105     —         —         (105

Preferred stock converted to common stock — 882,096 shares

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

Redemption of preferred stock — 2,367 shares

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

Equity-based compensation expense

     —         —          110       —         —         —         110  

Common stock options exercised — 4,323 shares

     —         —          (11     —         74       —         63  

Restricted stock awards — 23,057 shares

     —         —          (191     —         391       —         200  

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

     —         —          9       —         354       —         363  

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

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2015

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2016

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

Net income

     —         —          —         25,126       —         —         25,126  

Other comprehensive income

     —         —          —         —         —         3,236       3,236  

Common dividends declared — $0.60 per share

     —         —          —         (10,396     —         —         (10,396

Equity-based compensation expense

     —         —          209       —         —         —         209  

Common stock options exercised — 43,463 shares

     —         —          146       —         775       —         921  

Restricted stock awards — 16,680 shares

     —         —          32       —         290       —         322  

Issuance of treasury stock to 401(k) plan — 18,218 shares

     —         —          63       —         321       —         384  

Purchase of treasury shares — 1,182,294 shares at $20.06 per share

     —         —          —         —         (23,762     —         (23,762
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2016

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
(Amounts in thousands)    2016     2015     2014  

Operating activities

      

Net income

   $ 25,126     $ 24,540     $ 25,490  

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

      

Provision for loan losses

     1,255       2,191       145  

Depreciation and amortization of property, plant, and equipment

     3,563       4,135       4,405  

Amortization of premiums on investments, net

     1,066       1,375       961  

Amortization of FDIC indemnification asset, net

     5,474       6,379       3,979  

Amortization of intangible assets

     1,136       1,118       787  

Accretion on acquired loans

     (4,766     (7,109     (9,645

Gain on divestiture, net

     (3,682     —         (755

Gain on sale of loans, net

     —         (501     (671

Equity-based compensation expense

     209       110       332  

Restricted stock awards

     322       200       36  

Issuance of treasury stock to 401(k) plan

     384       363       —    

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

     238       23       (113

Loss on sale of other real estate

     1,495       3,002       3,227  

(Gain) loss on sale of securities

     (335     (144     1,385  

Net impairment losses recognized in earnings

     4,646       —         737  

FHLB debt prepayment fees

     —         1,702       5,008  

Proceeds from sale of mortgage loans

     —         21,993       28,443  

Originations of mortgage loans

     —         (19,700     (28,681

Decrease in accrued interest receivable

     454       308       1,206  

Decrease in other operating activities

     6,503       18,534       5,413  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     43,088       58,519       41,689  

Investing activities

      

Proceeds from sale of securities available for sale

     104,928       10,999       162,443  

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

     99,906       29,931       48,915  

Proceeds from maturities and calls of securities held to maturity

     25,190       190       190  

Payments to acquire securities available for sale

     (1,174     (81,540     (6,047

Payments to acquire securities held to maturity

     —         (15,003     (57,675

Originations of loans, net

     (159,243     (24,719     (64,115

Proceeds from FHLB stock, net

     130       1,279       4,349  

Cash proceeds from (paid in) mergers, acquisitions, and divestitures, net (See Note 2)

     29,716       (88     178,604  

Proceeds from the FDIC

     4,403       2,683       4,770  

Payments to acquire property, plant, and equipment, net

     (793     (1,239     (1,098

Proceeds from sale of other real estate

     7,147       6,722       10,619  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     110,210       (70,785     280,955  

Financing activities

      

(Decrease) increase in noninterest-bearing deposits, net

     (17,482     33,782       68,246  

Decrease in interest-bearing deposits, net

     (37,576     (161,282     (121,912

Decrease in federal funds purchased

     —         —         (16,000

(Repayments of) proceeds from securities sold under agreements to repurchase, net

     (40,609     16,872       3,432  

Repayments of FHLB and other borrowings, net

     (48     (28,945     (63,097

Redemption of preferred stock

     —         (2,367     —    

Proceeds from stock options exercised

     921       63       53  

Excess tax benefit from equity-based compensation

     174       8       5  

Payments for repurchase of treasury stock

     (23,762     (21,525     (2,168

Payments of common dividends

     (10,396     (9,994     (9,200

Payments of preferred dividends

     —         (219     (910
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (128,778     (173,607     (141,551
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,520       (185,873     181,093  

Cash and cash equivalents at beginning of period

     51,787       237,660       56,567  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 76,307     $ 51,787     $ 237,660  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure — cash flow information

      

Cash paid for interest

   $ 9,845     $ 11,757     $ 15,791  

Cash paid for income taxes

     6,588       6,900       12,552  

Supplemental transactions — noncash items

      

Transfer of loans to other real estate

     5,162       6,317       12,620  

Loans originated to finance other real estate

     57       649       671  

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

First Community Bancshares, Inc. (the “Company”) is a financial holding company headquartered in Bluefield, Virginia that provides banking products and services to individuals and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”). The Bank offers insurance products and services through First Community Insurance Services (“FCIS”) and trust and wealth management services through its Trust Division and wholly owned subsidiary First Community Wealth Management. Unless the context suggests otherwise, the term “Company” refers 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.

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.

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, investment securities, the allowance for loan losses, the Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, goodwill and other intangible assets, and income taxes.

Reclassification

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

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,

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

knowledgeable, able to transact, and willing to transact. 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

These valuation methodologies are applied to all the Company’s assets and liabilities carried at fair value. Methodologies used to determine fair value might be highly subjective and judgmental in nature. The Company may 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. 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 and marketable equity 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 and marketable equity securities 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. Nonmarketable equity investments are reported in other assets. The Company performs extensive quarterly reviews of held-to-maturity and available-for-sale securities to determine if unrealized losses are temporary or other than temporary. If the security is deemed to have other-than-temporary impairment (“OTTI”), the amount representing the credit loss is recognized as a charge to noninterest income and the amount representing all other factors is recognized in other comprehensive income (“OCI”).

Nonmarketable Equity 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 nonmarketable securities are carried at cost and periodically reviewed for impairment. When evaluating these investments, managements considers publicly available information about the profitability and asset quality of the issuer, dividend payment history, and redemption experience in determining the recoverability of the investment. The investment in FHLB and FRB stock was $10.60 million as of December 31, 2016, and $10.73 million as of December 31, 2015.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other Investments

The Company has certain long-term investments that are considered VIEs, including its subsidiary FCBI Capital Trust (the “Trust”), 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. The Company uses the equity method of accounting if it is able to exercise significant influence over the entity and records its share of the entity’s earnings or losses in noninterest income. The Company uses the cost method of accounting if it is not able to exercise significant influence over the entity. There were no equity investments as of December 31, 2016, or December 31, 2015. The carrying value and maximum potential loss exposure of VIEs totaled $1.14 million as of December 31, 2016, and $934 thousand as of December 31, 2015.

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

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

310-30 of the FASB ASC, formerly the American Institute of Certified Public Accountants’ Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Per the guidance, the Company 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 $250 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. 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.

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

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

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Company generally makes concessions in interest rates, loan terms, and/or amortization terms. All TDRs $250 thousand or greater are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs under $250 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the date of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

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

Management performs quarterly assessments of the allowance for loan losses. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The provision is calculated and charged to earnings to bring the allowance to a level that, through a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses in the portfolio. The Company’s allowance for loan losses is segmented into commercial, consumer real estate, and consumer and other loans with each segment divided into classes with similar characteristics, such as the type of loan and collateral. The allowance for loan losses includes specific allocations related to significant individual loans and credit relationships and general reserves related to loans not individually evaluated. Loans not individually evaluated are grouped into pools based on similar risk characteristics. A loan that becomes adversely classified or graded is moved into a group of adversely classified or graded loans with similar risk characteristics for evaluation. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date.

PCI loans are grouped into pools and evaluated separately from the non-PCI portfolio. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. If cash flows for PCI loans are expected to decline, generally a provision for loan losses is charged to earnings, resulting in an increase to the allowance for loan losses. If cash flows for PCI loans are expected to improve, any previously established allowance is first reversed to the extent of prior charges and then interest income is increased using the prospective yield adjustment over the remaining life of the loan, or pool of loans. Any provision established for PCI loans covered under the FDIC loss share agreements is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are made to various portfolio segments, the allowance for loan losses is available for use against any loan loss management deems appropriate, excluding reserves allocated to specific loans and PCI loan pools.

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

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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 software, hardware, and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 20 years and most contain options to renew with reasonable increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

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 annually, or more frequently if necessary, using a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step quantitative goodwill impairment test is performed. Step 1 consists of calculating and comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of a reporting unit is greater than its calculated fair value, goodwill impairment may exist and Step 2 is required to determine the amount of the impairment loss.

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.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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 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 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.

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.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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.

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.

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 September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments.” This ASU simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The Company adopted ASU 2015-16 in the first quarter of 2016. The adoption of the standard did not have an effect on the Company’s financial statements.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.” This ASU changes the analysis that an entity performs to determine whether to consolidate certain legal entities. The Company adopted ASU 2015-02 in the first quarter of 2016. The Company evaluated its investments in VIEs under the guidance and concluded that not consolidating these entities was still appropriate; therefore, the adoption of the standard did not have an effect on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the service has already been rendered. The Company adopted ASU 2014-12 in the first quarter of 2016. The adoption of the standard did not have an effect on the Company’s financial statements.

Standards Not Yet Adopted

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 explain 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 the 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.

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 the 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.

 

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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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. ASU 2016-09 will be effective for the Company for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company expects to adopt ASU 2016-09 in the first quarter of 2017. 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 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 the 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 is evaluating the impact of the standard and expects a minimal 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 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.

 

18


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FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 2. Acquisitions and Divestitures

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

 

     Year Ended December 31,  
(Amounts in thousands)    2016      2015      2014  

Acquisitions

        

Fair value of assets and liabilities acquired:

        

Loans

   $ 149,122      $ —        $ 140  

Premises and equipment

     4,829        —          4,547  

Other assets

     448        —          4,563  

Other intangible assets

     3,842        —          —    

Deposits

     (134,307      —          (318,877

Other liabilities

     (75      —          (76

Purchase price in excess of net assets acquired

     2,446        88        1,721  
  

 

 

    

 

 

    

 

 

 

Total purchase price

     26,305        88        (307,982

Non-cash purchase price

     —          —          —    

Cash acquired

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net cash paid (received) in acquisitions

     26,305        88        (307,982

Divestitures

        

Book value of assets sold

     (165,742      389        (83,283

Book value of liabilities sold

     111,198        (152      215,268  

Sales price in excess of net liabilities assumed

     (3,682      (6      (755
  

 

 

    

 

 

    

 

 

 

Total sales price

     (58,226      231        131,230  

Cash sold

     —          —          (1,852

Amount due remaining on books

     2,205        (231      —    
  

 

 

    

 

 

    

 

 

 

Net cash (received) paid in divestitures

     (56,021      —          129,378  
  

 

 

    

 

 

    

 

 

 

Net cash (received) paid in acquisitions and divestitures

   $ (29,716    $ 88      $ (178,604
  

 

 

    

 

 

    

 

 

 

Ascension Insurance Agency, Inc.

On October 1, 2016, the Company completed the sale of Greenpoint Insurance Group, Inc. (“Greenpoint”) to Ascension Insurance Agency, Inc. for $7.11 million, including earn-out payments of $2.21 million to be received over the next three years if certain operating targets are met. The divestiture consisted of two North Carolina offices operating as Greenpoint and two Virginia offices operating under the trade name Carr & Hyde Insurance. The Company recorded a net gain of $617 thousand in connection with the divestiture and eliminated $6.49 million in goodwill and other intangible assets. The Company incurred expenses related to the divestiture of $46 thousand in 2016. The transaction did not impact the Company’s in-branch insurance offices operating as FCIS in West Virginia and Virginia.

On October 31, 2015, the Company sold one insurance agency for $372 thousand. The Company recorded a net loss of $8 thousand in connection with the sale and eliminated $385 thousand in goodwill and other intangible assets. In addition, the Company recorded additional goodwill of $88 thousand in 2015 related to contingent earn-out payments from acquisitions that occurred before 2009.

 

19


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

First Bank

On July 15, 2016, the Company completed the branch exchange with First Bank, North Carolina, pursuant to which the Bank exchanged a portion of its North Carolina branch network for First Bank’s Virginia branch network. Under the agreements, the Bank simultaneously sold six branches in the Winston-Salem and Mooresville areas of North Carolina and acquired seven branches in Southwestern Virginia. The branch acquisition complements the Company’s 2014 acquisition of seven branches from Bank of America by expanding the Company’s existing presence in Southwest Virginia and affords the opportunity to realize certain operating cost savings.

In connection with the branch exchange, the Company acquired total assets of $160.69 million, including total loans of $149.12 million and goodwill and other intangibles of $6.29 million, and total liabilities of $134.38 million, including total deposits of $134.31 million. The Company did not acquire any PCI loans. The consideration transferred included the net fair value of divested assets and a purchase premium of $3.84 million. The Company divested total assets of $162.17 million, including loans of $155.54 million and goodwill and other intangibles of $2.33 million, and total liabilities of $111.05 million, including deposits of $111.02 million, and received a deposit premium of $4.07 million. In connection with the divestiture, the Company recorded a net gain of $3.07 million. The Company incurred expenses related to the First Bank transaction of $684 thousand in 2016. The estimated fair values, including identifiable intangible assets, are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

CresCom Bank

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

Bank of America

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

 

20


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 3. 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:

 

     December 31, 2016  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

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  
  

 

 

    

 

 

    

 

 

    

 

 

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

U.S. Agency securities

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

Municipal securities

     124,880        4,155        (357      128,678  

Single issue trust preferred securities

     55,882        —          (8,050      47,832  

Corporate securities

     70,571        —          (238      70,333  

Certificates of deposit

     5,000        —          —          5,000  

Mortgage-backed Agency securities

     84,576        155        (1,175      83,556  

Equity securities

     66        6        —          72  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

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

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the amortized cost and fair value of available-for-sale securities, by contractual maturity, as of December 31, 2016. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

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

Amortized cost maturity:

           

One year or less

   $ —        $ 1,135      $ —        $ 1,135  

After one year through five years

     1        1,035        —          1,036  

After five years through ten years

     —          88,449        —          88,449  

After ten years

     1,341        21,040        22,104        44,485  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortized cost

   $ 1,342      $ 111,659      $ 22,104        135,105  
  

 

 

    

 

 

    

 

 

    

Mortgage-backed securities

              31,290  

Equity securities

              55  
           

 

 

 

Total amortized cost

            $ 166,450  
           

 

 

 

Fair value maturity:

           

One year or less

   $ —        $ 1,141      $ —        $ 1,141  

After one year through five years

     1        1,059        —          1,060  

After five years through ten years

     —          90,360        —          90,360  

After ten years

     1,344        20,771        19,939        42,054  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value

   $ 1,345      $ 113,331      $ 19,939        134,615  
  

 

 

    

 

 

    

 

 

    

Mortgage-backed securities

              30,891  

Equity securities

              73  
           

 

 

 

Total fair value

            $ 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:

 

     December 31, 2016  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

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  
  

 

 

    

 

 

    

 

 

   

 

 

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

U.S. Agency securities

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

Municipal securities

     190        3        —         193  

Corporate securities

     10,488        —          (23     10,465  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities held to maturity

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

 

 

    

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the amortized cost and fair value of held-to-maturity securities, by contractual maturity, as of December 31, 2016. 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
     Corporate Notes      Total  

Amortized cost maturity:

        

One year or less

   $ 18,756      $ 3,095      $ 21,851  

After one year through five years

     17,985        7,297        25,282  

After five years through ten years

     —          —          —    

After ten years

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total amortized cost

   $ 36,741      $ 10,392      $ 47,133  
  

 

 

    

 

 

    

 

 

 

Fair value maturity:

        

One year or less

   $ 18,768      $ 3,096      $ 21,864  

After one year through five years

     18,097        7,305        25,402  

After five years through ten years

     —          —          —    

After ten years

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total fair value

   $ 36,865      $ 10,401      $ 47,266  
  

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     December 31, 2016  
(Amounts in thousands)    Percent of
Municipal Portfolio
    Amortized Cost      Unrealized Gains      Unrealized Losses     Fair Value  

New York

     11.66   $ 12,876      $ 334      $ —       $ 13,210  

Minnesota

     9.70     10,796        232        (40     10,988  

Wisconsin

     8.66     9,786        74        (42     9,818  

Ohio

     8.50     9,599        125        (88     9,636  

Massachusetts

     8.45     9,355        229        (10     9,574  

New Jersey

     7.14     7,891        202        —         8,093  

Connecticut

     6.90     7,628        190        —         7,818  

Texas

     6.55     7,397        130        (103     7,424  

Iowa

     5.66     6,467        36        (88     6,415  

Other

     26.78     29,864        706        (215     30,355  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

     100.00   $ 111,659      $ 2,258      $ (586   $ 113,331  
    

 

 

    

 

 

    

 

 

   

 

 

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

New York

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

Minnesota

     8.72     11,011        283        (64     11,230  

Wisconsin

     8.69     10,797        420        (14     11,203  

Ohio

     8.38     10,416        388        —         10,804  

Connecticut

     7.76     9,786        217        (5     9,998  

New Jersey

     7.69     9,554        378        (22     9,910  

Massachusetts

     7.60     9,479        315        —         9,794  

Texas

     6.04     7,651        208        (75     7,784  

Other

     5.03     6,471        75        (60     6,486  

Total

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     December 31, 2016  
     Less than 12 Months     12 Months or Longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses     Value      Losses  

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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

U.S. Agency securities

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

Municipal securities

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

Single issue trust preferred securities

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

Corporate securities

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

Mortgage-backed Agency securities

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     December 31, 2016  
     Less than 12 Months     12 Months or Longer      Total  
     Fair      Unrealized     Fair      Unrealized      Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses      Value      Losses  

Corporate securities

   $ 3,533      $ (2   $ —        $ —        $ 3,533      $ (2
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,533      $ (2   $ —        $ —        $ 3,533      $ (2
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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

U.S. Agency securities

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

Corporate securities

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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. These securities included 15 securities in a continuous unrealized loss position for 12 months or longer that the Company does not intend to

 

25


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 107 individual securities in an unrealized loss position as of December 31, 2015, and their combined depreciation in value represented 2.44% of the investment securities portfolio.

The Company reviews its investment portfolio quarterly for indications of 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 OCI. The Company incurred credit-related OTTI charges on debt securities of $4.64 million in 2016 related to the Company’s change in intent to hold certain securities to recovery. The intent was changed to sell specific trust preferred securities in the Company’s investment portfolio primarily to reduce credit concentrations with two issuers. The Company incurred credit-related OTTI charges on debt securities of $705 thousand in 2014 related to a non-Agency mortgage-backed security that was sold in November 2014. 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. The Company incurred OTTI charges related to equity securities of $11 thousand in 2016 and $32 thousand in 2014. There were no OTTI charges recognized in 2015.

The following table presents the changes in credit-related losses recognized in earnings on debt securities where a portion of the impairment was recognized in OCI during the periods indicated:

 

     Year Ended December 31,  
(Amounts in thousands)    2016     2015      2014  

Beginning balance (1)

   $ —       $ —        $ 7,798  

Additions for credit losses on securities not previously recognized

     4,646       —          —    

Additions for credit losses on securities previously recognized

     —         —          705  

Reduction for securities sold/realized losses

     (4,646     —          (8,503
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ —       $ —        $ —    
  

 

 

   

 

 

    

 

 

 

 

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

The carrying amount of securities pledged for various purposes totaled $139.75 million as of December 31, 2016, and $236.73 million as of December 31, 2015.

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

 

     Year Ended December 31,  
(Amounts in thousands)    2016      2015      2014  

Gross realized gains

   $ 757      $ 363      $ 2,257  

Gross realized losses

     (422      (219      (3,642
  

 

 

    

 

 

    

 

 

 

Net gain (loss) on sale of securities

   $ 335      $ 144      $ (1,385
  

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 $1.41 million as of December 31, 2016, and $1.24 million as of December 31, 2015. Deferred loan fees totaled $3.90 million in 2016, $3.78 million in 2015, and $3.39 million in 2014. 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,  
     2016     2015  
(Amounts in thousands)    Amount      Percent     Amount      Percent  

Non-covered loans held for investment

          

Commercial loans

          

Construction, development, and other land

   $ 56,948        3.07   $ 48,896        2.86

Commercial and industrial

     92,204        4.98     88,903        5.21

Multi-family residential

     134,228        7.24     95,026        5.57

Single family non-owner occupied

     142,965        7.72     149,351        8.75

Non-farm, non-residential

     598,674        32.31     485,460        28.45

Agricultural

     6,003        0.32     2,911        0.17

Farmland

     31,729        1.71     27,540        1.61
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     1,062,751        57.35     898,087        52.62

Consumer real estate loans

          

Home equity lines

     106,361        5.74     107,367        6.29

Single family owner occupied

     500,891        27.03     495,209        29.02

Owner occupied construction

     44,535        2.41     43,505        2.55
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer real estate loans

     651,787        35.18     646,081        37.86

Consumer and other loans

          

Consumer loans

     77,445        4.18     72,000        4.22

Other

     3,971        0.21     7,338        0.43
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer and other loans

     81,416        4.39     79,338        4.65
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-covered loans

     1,795,954        96.92     1,623,506        95.13

Total covered loans

     56,994        3.08     83,035        4.87
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held for investment, net of unearned income

   $ 1,852,948        100.00   $ 1,706,541        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

27


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     December 31,  
(Amounts in thousands)    2016      2015  

Covered loans

     

Commercial loans

     

Construction, development, and other land

   $ 4,570      $ 6,303  

Commercial and industrial

     895        1,170  

Multi-family residential

     8        640  

Single family non-owner occupied

     962        2,674  

Non-farm, non-residential

     7,512        14,065  

Agricultural

     25        34  

Farmland

     397        643  
  

 

 

    

 

 

 

Total commercial loans

     14,369        25,529  

Consumer real estate loans

     

Home equity lines

     35,817        48,565  

Single family owner occupied

     6,729        8,595  

Owner occupied construction

     —          262  
  

 

 

    

 

 

 

Total consumer real estate loans

     42,546        57,422  

Consumer and other loans

     

Consumer loans

     79        84  
  

 

 

    

 

 

 

Total covered loans

   $ 56,994      $ 83,035  
  

 

 

    

 

 

 

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

 

     December 31,  
     2016      2015  
(Amounts in thousands)    Recorded Investment      Unpaid Principal
Balance
     Recorded Investment      Unpaid Principal
Balance
 

PCI Loans, by acquisition

           

Peoples

   $ 5,576      $ 9,397      $ 6,681      $ 11,249  

Waccamaw

     21,758        45,030        34,707        63,151  

Other acquired

     1,095        1,121        1,254        1,297  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI Loans

   $ 28,429      $ 55,548      $ 42,642      $ 75,697  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

(Amounts in thousands)    Peoples     Waccamaw     Other     Total  

Balance January 1, 2014

   $ 5,294     $ 10,338     $ 8     $ 15,640  

Additions

     267       26       —         293  

Accretion

     (2,147     (6,118     (37     (8,302

Reclassifications from nonaccretable difference

     1,912       16,400       29       18,341  

Other changes, net

     (581     (1,598     —         (2,179
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2014

   $ 4,745     $ 19,048     $ —       $ 23,793  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2015

   $ 4,745     $ 19,048     $ —       $ 23,793  

Additions

     —         2       —         2  

Accretion

     (2,712     (6,459     —         (9,171

Reclassifications from nonaccretable difference

     1,283       6,564       —         7,847  

Other changes, net

     273       6,954       —         7,227  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2015

   $ 3,589     $ 26,109     $ —       $ 29,698  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2016

   $ 3,589     $ 26,109     $ —       $ 29,698  

Accretion

     (1,237     (5,380     —         (6,617

Reclassifications from nonaccretable difference

     287       1,620       —         1,907  

Other changes, net

     1,753       (515     —         1,238  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2016

   $ 4,392     $ 21,834     $ —       $ 26,226  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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.

 

29


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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, 2016  
            Special                              
(Amounts in thousands)    Pass      Mention      Substandard      Doubtful      Loss      Total  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 55,188      $ 980      $ 780      $ —        $ —        $ 56,948  

Commercial and industrial

     87,581        3,483        1,137        —          3        92,204  

Multi-family residential

     126,468        6,992        768        —          —          134,228  

Single family non-owner occupied

     131,934        5,466        5,565        —          —          142,965  

Non-farm, non-residential

     579,134        10,236        9,102        202        —          598,674  

Agricultural

     5,839        164        —          —          —          6,003  

Farmland

     28,887        1,223        1,619        —          —          31,729  

Consumer real estate loans

                 

Home equity lines

     104,033        871        1,457        —          —          106,361  

Single family owner occupied

     475,402        4,636        20,381        472        —          500,891  

Owner occupied construction

     43,833        —          702        —          —          44,535  

Consumer and other loans

                 

Consumer loans

     77,218        11        216        —          —          77,445  

Other

     3,971        —          —          —          —          3,971  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,719,488        34,062        41,727        674        3        1,795,954  

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     2,768        803        999        —          —          4,570  

Commercial and industrial

     882        —          13        —          —          895  

Multi-family residential

     —          —          8        —          —          8  

Single family non-owner occupied

     796        63        103        —          —          962  

Non-farm, non-residential

     6,423        537        552        —          —          7,512  

Agricultural

     25        —          —          —          —          25  

Farmland

     132        —          265        —          —          397  

Consumer real estate loans

                 

Home equity lines

     14,283        20,763        771        —          —          35,817  

Single family owner occupied

     4,601        928        1,200        —          —          6,729  

Consumer and other loans

                 

Consumer loans

     79        —          —          —          —          79  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     29,989        23,094        3,911        —          —          56,994  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,749,477      $ 57,156      $ 45,638      $ 674      $ 3      $ 1,852,948  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     December 31, 2015  
            Special                              
(Amounts in thousands)    Pass      Mention      Substandard      Doubtful      Loss      Total  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 46,816      $ 974      $ 1,106      $ —        $ —        $ 48,896  

Commercial and industrial

     87,223        663        1,017        —          —          88,903  

Multi-family residential

     81,168        12,969        889        —          —          95,026  

Single family non-owner occupied

     139,680        3,976        5,695        —          —          149,351  

Non-farm, non-residential

     454,906        15,170        15,384        —          —          485,460  

Agricultural

     2,886        25        —          —          —          2,911  

Farmland

     25,855        1,427        258        —          —          27,540  

Consumer real estate loans

                 

Home equity lines

     104,897        1,083        1,387        —          —          107,367  

Single family owner occupied

     468,155        6,686        20,368        —          —          495,209  

Owner occupied construction

     42,783        —          722        —          —          43,505  

Consumer and other loans

                 

Consumer loans

     71,685        61        254        —          —          72,000  

Other

     7,338        —          —          —          —          7,338  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,533,392        43,034        47,080        —          —          1,623,506  

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     3,908        1,261        1,134        —          —          6,303  

Commercial and industrial

     1,144        4        22        —          —          1,170  

Multi-family residential

     460        —          180        —          —          640  

Single family non-owner occupied

     1,808        457        409        —          —          2,674  

Non-farm, non-residential

     9,192        2,044        2,829        —          —          14,065  

Agricultural

     34        —          —          —          —          34  

Farmland

     364        —          279        —          —          643  

Consumer real estate loans

                 

Home equity lines

     17,893        29,823        849        —          —          48,565  

Single family owner occupied

     5,102        1,963        1,530        —          —          8,595  

Owner occupied construction

     112        51        99        —          —          262  

Consumer and other loans

                 

Consumer loans

     84        —          —          —          —          84  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     40,101        35,603        7,331        —          —          83,035  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,573,493      $ 78,637      $ 54,411      $ —        $ —        $ 1,706,541  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

31


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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, 2016      December 31, 2015  
            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

   $ 33      $ 35      $ —        $ 57      $ 57      $ —    

Commercial and industrial

     346        383        —          16        23        —    

Multi-family residential

     294        369        —          84        94        —    

Single family non-owner occupied

     3,084        3,334        —          2,095        2,239        —    

Non-farm, non-residential

     3,829        4,534        —          10,369        11,055        —    

Agricultural

     —          —          —          —          —          —    

Farmland

     1,161        1,188        —          310        326        —    

Consumer real estate loans

                 

Home equity lines

     913        968        —          868        898        —    

Single family owner occupied

     11,779        12,630        —          11,289        11,996        —    

Owner occupied construction

     573        589        —          243        243        —    

Consumer and other loans

                 

Consumer loans

     62        103        —          71        74        —    

Other

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance

     22,074        24,133        —          25,402        27,005        —    

Impaired loans with a related allowance

                 

Commercial loans

                 

Single family non-owner occupied

     351        351        31        619        623        124  

Non-farm, non-residential

     —          —          —          5,667        5,673        1,568  

Farmland

     430        430        18        —          —          —    

Consumer real estate loans

                 

Single family owner occupied

     4,118        4,174        770        4,899        4,907        672  

Owner occupied construction

     —          —          —          349        355        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance

     4,899        4,955        819        11,534        11,558        2,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans(1)

   $ 26,973      $ 29,088      $ 819      $ 36,936      $ 38,563      $ 2,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes loans totaling $16.89 million as of December 31, 2016, and $14.22 million as of December 31, 2015, that do not meet the Company’s evaluation threshold for individual impairment and are therefore collectively evaluated for impairment

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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,  
     2016      2015      2014  
(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: