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

fcbc20170630_10q.htm Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

or

 

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

 

Commission file number: 000-19297

 

 

FIRST COMMUNITY BANCSHARES, INC.

 
 

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

55-0694814

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

P.O. Box 989

Bluefield, Virginia

 

24605-0989

(Address of principal executive offices)

 

(Zip Code)

 

 

(276) 326-9000

 
 

(Registrant’s telephone number, including area code)

 

 

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

☑ Yes ☐ No

 

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

☑ Yes ☐ No

 

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

 

 

Large accelerated filer ☐

Accelerated filer ☑

 

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

   

Emerging growth company ☐

 

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

 

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

Yes ☑ No

 

As of July 28, 2017, there were 17,017,583 shares outstanding of the registrant’s Common Stock, $1.00 par value. 

 

 
 

Table of Contents
 

  

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

INDEX

 

PART I.

FINANCIAL INFORMATION

PAGE

     

Item 1.

Financial Statements

 
   

Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016

4

   

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

5

   

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

6

   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

7

   

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

8

   

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

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

41

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59

Item 4.

Controls and Procedures

59

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

59

Item 1A.

Risk Factors

59

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

60

     

SIGNATURES

63

   

EXHIBIT INDEX

64

 

 
2

Table of Contents
 

  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

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

 

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

 

inflation, interest rate, market and monetary fluctuations;

 

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

 

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

 

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

 

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

 

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

 

technological changes;

 

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

 

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

 

unanticipated regulatory or judicial proceedings;

 

changes in consumer spending and saving habits; and

 

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

 

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

 
3

Table of Contents
 

  

PART I.

FINANCIAL INFORMATION

 

Item 1.     Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30,

   

December 31,

 
   

2017

   

2016(1)

 

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

 

(Unaudited)

         

Assets

               

Cash and due from banks

  $ 38,096     $ 36,645  

Federal funds sold

    67,758       38,717  

Interest-bearing deposits in banks

    945       945  

Total cash and cash equivalents

    106,799       76,307  

Securities available for sale

    157,854       165,579  

Securities held to maturity

    25,216       47,133  

Loans held for investment, net of unearned income

               

Non-covered

    1,796,263       1,795,954  

Covered

    45,845       56,994  

Less: allowance for loan losses

    (18,886 )     (17,948 )

Loans held for investment, net

    1,823,222       1,835,000  

FDIC indemnification asset

    8,159       12,173  

Premises and equipment, net

    49,598       50,085  

Other real estate owned, non-covered

    3,914       5,109  

Other real estate owned, covered

    124       276  

Interest receivable

    5,072       5,553  

Goodwill

    95,779       95,779  

Other intangible assets

    6,683       7,207  

Other assets

    84,183       86,197  

Total assets

  $ 2,366,603     $ 2,386,398  
                 

Liabilities

               

Deposits

               

Noninterest-bearing

  $ 443,800     $ 427,705  

Interest-bearing

    1,413,574       1,413,633  

Total deposits

    1,857,374       1,841,338  

Securities sold under agreements to repurchase

    86,011       98,005  

FHLB borrowings

    50,000       65,000  

Other borrowings

    -       15,708  

Interest, taxes, and other liabilities

    24,443       27,290  

Total liabilities

    2,017,828       2,047,341  
                 

Stockholders' equity

               

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

     -        -  
Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 shares issued at June 30, 2017, and December 31, 2016; 4,364,708 and 4,387,571 shares in treasury at June 30, 2017, and December 31, 2016, respectively     21,382       21,382  

Additional paid-in capital

    228,326       228,142  

Retained earnings

    177,556       170,377  

Treasury stock, at cost

    (78,488 )     (78,833 )

Accumulated other comprehensive loss

    (1 )     (2,011 )

Total stockholders' equity

    348,775       339,057  

Total liabilities and stockholders' equity

  $ 2,366,603     $ 2,386,398  

                                                           

(1) Derived from audited financial statements

 

See Notes to Consolidated Financial Statements. 

 

 
4

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FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

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

 

2017

   

2016

   

2017

   

2016

 

Interest income

                               

Interest and fees on loans

  $ 22,914     $ 22,237     $ 44,741     $ 43,810  

Interest on securities -- taxable

    407       972       816       1,991  

Interest on securities -- tax-exempt

    763       919       1,560       1,857  

Interest on deposits in banks

    221       9       380       29  

Total interest income

    24,305       24,137       47,497       47,687  

Interest expense

                               

Interest on deposits

    1,233       1,087       2,399       2,201  

Interest on short-term borrowings

    211       549       421       1,065  

Interest on long-term debt

    567       810       1,242       1,619  

Total interest expense

    2,011       2,446       4,062       4,885  

Net interest income

    22,294       21,691       43,435       42,802  

Provision for loan losses

    934       722       1,426       1,909  

Net interest income after provision for loan losses

    21,360       20,969       42,009       40,893  

Noninterest income

                               

Wealth management

    791       810       1,581       1,494  

Service charges on deposits

    3,360       3,361       6,473       6,652  

Other service charges and fees

    2,168       2,054       4,246       4,064  

Insurance commissions

    325       1,600       698       3,791  

Impairment losses on securities

    -       (11 )     -       (11 )

Portion of loss recognized in other comprehensive income

    -       -       -       -  

Net impairment losses recognized in earnings

    -       (11 )     -       (11 )

Net loss on sale of securities

    (657 )     (79 )     (657 )     (78 )

Net FDIC indemnification asset amortization

    (1,586 )     (1,328 )     (2,918 )     (2,487 )

Other operating income

    1,074       623       1,743       1,508  

Total noninterest income

    5,475       7,030       11,166       14,933  

Noninterest expense

                               

Salaries and employee benefits

    9,157       10,198       18,041       20,673  

Occupancy expense

    1,341       1,359       2,589       2,890  

Furniture and equipment expense

    1,087       1,109       2,178       2,205  

Amortization of intangibles

    263       277       524       555  

FDIC premiums and assessments

    227       372       471       746  

Merger, acquisition, and divestiture expense

    -       410       -       449  

Other operating expense

    5,383       4,997       10,738       10,018  

Total noninterest expense

    17,458       18,722       34,541       37,536  

Income before income taxes

    9,377       9,277       18,634       18,290  

Income tax expense

    2,959       3,022       6,014       5,951  

Net income

    6,418       6,255       12,620       12,339  

Dividends on preferred stock

    -       -       -       -  

Net income available to common shareholders

  $ 6,418     $ 6,255     $ 12,620     $ 12,339  
                                 

Earnings per common share

                               

Basic

  $ 0.38     $ 0.36     $ 0.74     $ 0.70  

Diluted

    0.38       0.36       0.74       0.70  

Cash dividends per common share

    0.16       0.14       0.32       0.28  

Weighted average shares outstanding

                               

Basic

    17,012,189       17,414,320       17,005,196       17,636,783  

Diluted

    17,082,832       17,462,845       17,075,961       17,675,128  

 

See Notes to Consolidated Financial Statements.

 

 
5

Table of Contents
 

 

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

(Amounts in thousands)

                               

Net income

  $ 6,418     $ 6,255     $ 12,620     $ 12,339  

Other comprehensive income, before tax

                               

Available-for-sale securities:

                               

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

    1,645       4,119       2,296       3,397  

Reclassification adjustment for net lossess recognized in net income

    657       79       657       78  

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

    -       11       -       11  

Net unrealized gains on available-for-sale securities

    2,302       4,209       2,953       3,486  

Employee benefit plans:

                               

Net actuarial gain (loss)

    1       71       134       (54 )

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

    65       65       129       136  

Net unrealized gains on employee benefit plans

    66       136       263       82  

Other comprehensive income, before tax

    2,368       4,345       3,216       3,568  

Income tax expense

    888       1,629       1,206       1,338  

Other comprehensive income, net of tax

    1,480       2,716       2,010       2,230  

Total comprehensive income

  $ 7,898     $ 8,971     $ 14,630     $ 14,569  

 

See Notes to Consolidated Financial Statements.

 

 
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FIRST COMMUNITY BANCSHARES, INC.

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

 

                                           

Accumulated

         
                   

Additional

                   

Other

         
   

Preferred

   

Common

   

Paid-in

   

Retained

   

Treasury

   

Comprehensive

         

(Amounts in thousands,

 

Stock

   

Stock

   

Capital

   

Earnings

   

Stock

   

Income (Loss)

   

Total

 

except share and per share data)

                                                       

Balance January 1, 2016

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

Net income

    -       -       -       12,339       -       -       12,339  

Other comprehensive loss

    -       -       -       -       -       2,230       2,230  

Common dividends declared -- $0.28 per share

    -       -       -       (4,956 )     -       -       (4,956 )

Equity-based compensation expense

    -       -       75       -       -       -       75  

Common stock options exercised -- 11,572 shares

    -       -       (23 )     -       202       -       179  

Restricted stock awards -- 15,020 shares

    -       -       24       -       260       -       284  

Issuance of treasury stock to 401(k) plan -- 12,140 shares

    -       -       23       -       212       -       235  

Purchase of treasury shares -- 981,551 shares at $19.52 per share

    -       -       -       -       (19,191 )     -       (19,191 )

Balance June 30, 2016

  $ -     $ 21,382     $ 227,791     $ 163,030     $ (74,974 )   $ (3,017 )   $ 334,212  
                                                         

Balance January 1, 2017

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

Net income

    -       -       -       12,620       -       -       12,620  

Other comprehensive income

    -       -       -       -       -       2,010       2,010  

Common dividends declared -- $0.32 per share

    -       -       -       (5,441 )     -       -       (5,441 )

Equity-based compensation expense

    -       -       169       -       -       -       169  

Common stock options exercised -- 3,566 shares

    -       -       (17 )     -       64       -       47  

Restricted stock awards -- 21,030 shares

    -       -       (45 )     -       378       -       333  

Issuance of treasury stock to 401(k) plan -- 8,869 shares

    -       -       77       -       159       -       236  

Purchase of treasury shares -- 10,602 shares at $24.16 per share

    -       -       -       -       (256 )     -       (256 )

Balance June 30, 2017

  $ -     $ 21,382     $ 228,326     $ 177,556     $ (78,488 )   $ (1 )   $ 348,775  

 

See Notes to Consolidated Financial Statements.

 

 
7

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FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Six Months Ended

 
   

June 30,

 

(Amounts in thousands)

 

2017

   

2016

 

Operating activities

               

Net income

  $ 12,620     $ 12,339  

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

               

Provision for loan losses

    1,426       1,909  

Depreciation and amortization of property, plant, and equipment

    1,775       1,841  

(Accretion) amortization of premiums on investments, net

    (8 )     1,763  

Amortization of FDIC indemnification asset, net

    2,918       2,487  

Amortization of intangible assets

    524       555  

Accretion on acquired loans

    (2,880 )     (2,909 )

Equity-based compensation expense

    169       75  

Restricted stock awards

    333       284  

Issuance of treasury stock to 401(k) plan

    236       235  

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

    14       340  

Loss on sale of other real estate

    386       1,278  

Loss on sale of securities

    657       78  

Net impairment losses recognized in earnings

    -       11  

Decrease (increase) in accrued interest receivable

    481       (108 )

(Increase) decrease in other operating activities

    (1,634 )     2,296  

Net cash provided by operating activities

    17,017       22,474  

Investing activities

               

Proceeds from sale of securities available for sale

    12,273       26,479  

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

    14,823       19,838  

Proceeds from maturities and calls of securities held to maturity

    21,840       190  

Payments to acquire securities available for sale

    (16,990 )     (1,174 )

Proceeds from (originations of) loans, net

    12,457       (95,656 )

Proceeds from (payments for) FHLB stock, net

    694       (4,842 )

Proceeds from the FDIC

    368       2,573  

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

    (1,410 )     160  

Proceeds from sale of other real estate

    1,736       3,506  

Net cash provided by (used in) investing activities

    45,791       (48,926 )

Financing activities

               

Increase (decrease) in noninterest-bearing deposits, net

    16,095       (508 )

Decrease in interest-bearing deposits, net

    (59 )     (48,336 )

Increase in federal funds purchased

    -       42,000  

Repayments of securities sold under agreements to repurchase, net

    (11,994 )     (25,222 )

(Repayments of) proceeds from FHLB and other borrowings, net

    (30,708 )     75,000  

Proceeds from stock options exercised

    47       179  

Payments for repurchase of treasury stock

    (256 )     (19,191 )

Payments of common dividends

    (5,441 )     (4,956 )

Net cash (used in) provided by financing activities

    (32,316 )     18,966  

Net increase (decrease) in cash and cash equivalents

    30,492       (7,486 )

Cash and cash equivalents at beginning of period

    76,307       51,787  

Cash and cash equivalents at end of period

  $ 106,799     $ 44,301  
                 

Supplemental disclosure -- cash flow information

               

Cash paid for interest

  $ 4,284     $ 4,926  

Cash paid for income taxes

    9,812       1,300  
                 

Supplemental transactions -- noncash items

               

Transfer of loans to other real estate

    775       2,123  

Loans originated to finance other real estate

    -       42  

 

See Notes to Consolidated Financial Statements.

 

 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Basis of Presentation

 

General

 

First Community Bancshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of Nevada in 1997. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank provides insurance services through its wholly owned subsidiary First Community Insurance Services (“FCIS”) and offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity.

 

Principles of Consolidation

 

The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, wealth management, and insurance services. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

 

The condensed consolidated balance sheet as of December 31, 2016, has been derived from the audited consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2017.

 

Reclassifications

 

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

 

Use of Estimates

 

Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, the Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

 

Significant Accounting Policies

 

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

 

Recent Accounting Standards

 

Standards Adopted

 

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

 

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

 

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

 

Standards Not Yet Adopted

 

In May 2017, the FASB issued ASU 2017-09, “Compensation -- Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2017-09 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 March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Securities.” This ASU amends the amortization period for certain purchased callable debt securities held at a premium. ASU 2017-08 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017-08 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

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

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
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Note 2. Investment Securities

 

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

 

   

June 30, 2017

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               
U.S. Treasury securities   $ 16,993     $ -     $ (13 )   $ 16,980  

U.S. Agency securities

    1,283       17       -       1,300  

Municipal securities

    104,089       2,918       (98 )     106,909  

Single issue trust preferred securities

    9,360       -       (417 )     8,943  

Mortgage-backed Agency securities

    23,990       77       (418 )     23,649  

Equity securities

    55       18       -       73  

Total securities available for sale

  $ 155,770     $ 3,030     $ (946 )   $ 157,854  

 

   

December 31, 2016

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

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

Municipal securities

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

Single issue trust preferred securities

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

Mortgage-backed Agency securities

    31,290       66       (465 )     30,891  

Equity securities

    55       18       -       73  

Total securities available for sale

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

 

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

 

   

June 30, 2017

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 17,961     $ 54     $ -     $ 18,015  

Corporate securities

    7,255       18       -       7,273  

Total securities held to maturity

  $ 25,216     $ 72     $ -     $ 25,288  

 

   

December 31, 2016

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

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

Corporate securities

    10,392       11       (2 )     10,401  

Total securities held to maturity

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

 

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

 

   

June 30, 2017

 
   

Amortized

         

(Amounts in thousands)

 

Cost

   

Fair Value

 

Available-for-sale securities

               

Due within one year

  $ 17,643     $ 17,632  

Due after one year but within five years

    4,725       4,818  

Due after five years but within ten years

    97,909       100,054  

Due after ten years

    11,448       11,628  
      131,725       134,132  

Mortgage-backed securities

    23,990       23,649  

Equity securities

    55       73  

Total securities available for sale

  $ 155,770     $ 157,854  
                 

Held-to-maturity securities

               

Due within one year

  $ -     $ -  

Due after one year but within five years

    25,216       25,288  

Due after five years but within ten years

    -       -  

Due after ten years

    -       -  

Total securities held to maturity

  $ 25,216     $ 25,288  

 

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: 

 

   

June 30, 2017

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

U.S. Treasury securities

  $ 16,980     $ (13 )   $ -     $ -     $ 16,980     $ (13 )

Municipal securities

    10,101       (64 )     740       (34 )     10,841       (98 )

Single issue trust preferred securities

    -       -       8,943       (417 )     8,943       (417 )

Mortgage-backed Agency securities

    9,489       (136 )     7,542       (282 )     17,031       (418 )

Total

  $ 36,570     $ (213 )   $ 17,225     $ (733 )   $ 53,795     $ (946 )

 

   

December 31, 2016

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

Municipal securities

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

Single issue trust preferred securities

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

Mortgage-backed Agency securities

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

Total

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

  

 
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There were no unrealized losses for held-to-maturity securities as of June 30, 2017. The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the date indicated: 

 

   

December 31, 2016

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

Corporate securities

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

Total

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

 

There were 45 individual securities in an unrealized loss position as of June 30, 2017, and their combined depreciation in value represented 0.52% of the investment securities portfolio. There were 82 individual securities in an unrealized loss position as of December 31, 2016, and their combined depreciation in value represented 1.51% of the investment securities portfolio.

 

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for both debt and equity securities is a decline in fair value below book value and the severity and duration of the decline. For debt securities, the credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the three and six months ended June 30, 2017 and 2016, the Company incurred no OTTI charges on debt securities. Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current economic factors. For equity securities, the OTTI is recognized as a charge to noninterest income. During the three and six months ended June 30, 2017, the Company incurred no OTTI charges related to equity securities. During the three and six months ended June 30, 2016, the Company incurred OTTI charges related to certain equity holdings of $11 thousand.

 

The carrying amount of securities pledged for various purposes totaled $132.60 million as of June 30, 2017, and $139.75 million as of December 31, 2016.

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

(Amounts in thousands)

                               

Gross realized gains

  $ -     $ 9     $ -     $ 141  

Gross realized losses

    (657 )     (88 )     (657 )     (219 )

Net loss on sale of securities

  $ (657 )   $ (79 )   $ (657 )   $ (78 )

 

Note 3. Loans

 

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are those loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled $1.43 million as of June 30, 2017, and $1.41 million as of December 31, 2016. Deferred loan fees totaled $4.46 million for the three months ended June 30, 2017, and $3.94 million for the same period of the prior year. For information about off-balance sheet financing, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

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

 

   

June 30, 2017

   

December 31, 2016

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

 

Non-covered loans held for investment

                               

Commercial loans

                               

Construction, development, and other land

  $ 58,869       3.20 %   $ 56,948       3.07 %

Commercial and industrial

    89,455       4.86 %     92,204       4.98 %

Multi-family residential

    141,228       7.67 %     134,228       7.24 %

Single family non-owner occupied

    142,150       7.72 %     142,965       7.72 %

Non-farm, non-residential

    603,272       32.75 %     598,674       32.31 %

Agricultural

    6,086       0.33 %     6,003       0.32 %

Farmland

    28,600       1.55 %     31,729       1.71 %

Total commercial loans

    1,069,660       58.08 %     1,062,751       57.35 %

Consumer real estate loans

                               

Home equity lines

    102,460       5.56 %     106,361       5.74 %

Single family owner occupied

    500,582       27.17 %     500,891       27.03 %

Owner occupied construction

    46,874       2.54 %     44,535       2.41 %

Total consumer real estate loans

    649,916       35.27 %     651,787       35.18 %

Consumer and other loans

                               

Consumer loans

    72,391       3.93 %     77,445       4.18 %

Other

    4,296       0.23 %     3,971       0.21 %

Total consumer and other loans

    76,687       4.16 %     81,416       4.39 %

Total non-covered loans

    1,796,263       97.51 %     1,795,954       96.92 %

Total covered loans

    45,845       2.49 %     56,994       3.08 %

Total loans held for investment, net of unearned income

  $ 1,842,108       100.00 %   $ 1,852,948       100.00 %

 

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

 

   

June 30, 2017

   

December 31, 2016

 

(Amounts in thousands)

               

Covered loans

               

Commercial loans

               

Construction, development, and other land

  $ 3,560     $ 4,570  

Commercial and industrial

    603       895  

Multi-family residential

    -       8  

Single family non-owner occupied

    1,020       962  

Non-farm, non-residential

    3,768       7,512  

Agricultural

    24       25  

Farmland

    376       397  

Total commercial loans

    9,351       14,369  

Consumer real estate loans

               

Home equity lines

    30,818       35,817  

Single family owner occupied

    5,676       6,729  

Total consumer real estate loans

    36,494       42,546  

Consumer and other loans

               

Consumer loans

    -       79  

Total covered loans

  $ 45,845     $ 56,994  

 

The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest.

 

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

 

   

June 30, 2017

   

December 31, 2016

 

(Amounts in thousands)

 

Recorded Investment

   

Unpaid Principal

Balance

   

Recorded Investment

   

Unpaid Principal

Balance

 

PCI Loans, by acquisition

                               

Peoples

  $ 5,063