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

fcbc20190331_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

or

 

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

 

Commission file number: 000-19297

 
 

FIRST COMMUNITY BANKSHARES, INC.

 
 

(Exact name of registrant as specified in its charter)

 
 

Virginia

 

55-0694814

(State or other jurisdiction of incorporation or organization)

 

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

☑ Yes ☐ No

 

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

 
 

Large accelerated filer ☐

Accelerated filer ☑

 

Non-accelerated filer ☐ 

Smaller reporting company ☐

   

Emerging growth company ☐

 

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

 

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

☐ Yes ☑ No

 

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

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock ($1.00 par value)  

FCBC

 

NASDAQ Global Select

As of April 30, 2019, there were 15,756,830 shares outstanding of the registrant’s Common Stock, $1.00 par value.

 

 

 
Table of Contents

 

FIRST COMMUNITY BANKSHARES, INC.

FORM 10-Q

INDEX

 
    Page

PART I.

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

 
   

Condensed Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018

4

   

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

5

   

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended  March 31, 2019 and 2018 (Unaudited)

6

   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

7

   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

8

   

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 4.

Controls and Procedures

49

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

50

Item 1A.

Risk Factors

50

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

51

     

Signatures

53

 

2

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

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

 

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

 

inflation, interest rate, market and monetary fluctuations;

 

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

 

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

 

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

 

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

 

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

 

technological changes;

 

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

 

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

 

unanticipated regulatory or judicial proceedings;

 

changes in consumer spending and saving habits; and

 

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

 

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

3

Table of Contents

 

PART I.

FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

 

FIRST COMMUNITY BANKSHARES, INC.

 CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

March 31,

   

December 31,

 
   

2019

    2018(1)  

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

 

(Unaudited)

         

Assets

               

Cash and due from banks

  $ 36,600     $ 40,421  

Federal funds sold

    110,950       35,457  

Interest-bearing deposits in banks

    996       995  

Total cash and cash equivalents

    148,546       76,873  

Debt securities available for sale

    132,597       153,116  

Debt securities held to maturity

    -       25,013  

Loans held for investment, net of unearned income (includes covered loans of $17,475 and $18,815, respectively)

    1,737,380       1,775,084  

Allowance for loan losses

    (18,243 )     (18,267 )

Loans held for investment, net

    1,719,137       1,756,817  

FDIC indemnification asset

    4,578       5,108  

Premises and equipment, net

    46,636       45,785  

Other real estate owned (includes covered OREO of $152 and $32, respectively)

    4,055       3,838  

Interest receivable

    5,227       5,481  

Goodwill

    92,744       92,744  

Other intangible assets

    4,780       5,026  

Other assets

    84,035       74,573  

Total assets

  $ 2,242,335     $ 2,244,374  
                 

Liabilities

               

Deposits

               

Noninterest-bearing

  $ 479,299     $ 459,550  

Interest-bearing

    1,399,138       1,396,200  

Total deposits

    1,878,437       1,855,750  

Securities sold under agreements to repurchase

    3,700       29,370  

Interest, taxes, and other liabilities

    27,096       26,397  

Total liabilities

    1,909,233       1,911,517  
                 

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; 15,818,368 shares issued and outstanding at March 31, 2019; 16,007,263 shares issued and outstanding at December 31, 2018      15,818       16,007  

Additional paid-in capital

    115,914       122,486  

Retained earnings

    202,103       195,793  

Accumulated other comprehensive loss

    (733 )     (1,429 )

Total stockholders' equity

    333,102       332,857  

Total liabilities and stockholders' equity

  $ 2,242,335     $ 2,244,374  

(1) Derived from audited financial statements

 

See Notes to Condensed Consolidated Financial Statements.

 

4

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FIRST COMMUNITY BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 

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

 

2019

   

2018

 

Interest income

               

Interest and fees on loans

  $ 22,179     $ 22,755  

Interest on securities -- taxable

    409       389  

Interest on securities -- tax-exempt

    685       715  

Interest on deposits in banks

    338       471  

Total interest income

    23,611       24,330  

Interest expense

               

Interest on deposits

    1,305       1,251  

Interest on short-term borrowings

    120       200  

Interest on long-term debt

    -       500  

Total interest expense

    1,425       1,951  

Net interest income

    22,186       22,379  

Provision for loan losses

    1,220       495  

Net interest income after provision for loan losses

    20,966       21,884  

Noninterest income

               

Wealth management

    745       794  

Service charges on deposits

    3,408       3,468  

Other service charges and fees

    2,049       1,857  

Insurance commissions

    -       329  

Net FDIC indemnification asset amortization

    (552 )     (382 )

Other income

    1,675       -  

Other operating income

    755       602  

Total noninterest income

    8,080       6,668  

Noninterest expense

               

Salaries and employee benefits

    9,166       9,441  

Occupancy expense

    1,153       1,250  

Furniture and equipment expense

    1,033       1,046  

Service fees

    1,030       828  

Advertising and public relations

    524       522  

Professional fees

    414       307  

Amortization of intangibles

    246       261  

FDIC premiums and assessments

    168       211  

Other operating expense

    3,051       3,250  

Total noninterest expense

    16,785       17,116  

Income before income taxes

    12,261       11,436  

Income tax expense

    2,630       2,568  

Net income

    9,631       8,868  
                 

Earnings per common share

               

Basic

  $ 0.61     $ 0.52  

Diluted

    0.60       0.52  

Cash dividends per common share

    0.21       0.66  

Weighted average shares outstanding

               

Basic

    15,839,424       16,955,758  

Diluted

    15,920,950       17,047,638  

 

See Notes to Condensed Consolidated Financial Statements.

 

5

Table of Contents

 

 

FIRST COMMUNITY BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

(Amounts in thousands)

               

Net income

  $ 9,631     $ 8,868  

Other comprehensive income, before tax

               

Available-for-sale debt securities:

               

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

    1,218       (2,147 )

Reclassification adjustment for net losses recognized in net income

    -       -  

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

    1,218       (2,147 )

Employee benefit plans:

               

Net actuarial (loss)

    (407 )     (1 )

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

    69       71  

Net unrealized gains (losses) on employee benefit plans

    (338 )     70  

Other comprehensive (loss) income, before tax

    880       (2,077 )

Income tax (benefit) expense

    184       (436 )

Other comprehensive (loss) income, net of tax

    696       (1,641 )

Total comprehensive income

  $ 10,327     $ 7,227  

 

See Notes to Condensed Consolidated Financial Statements.

 

6

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FIRST COMMUNITY BANKSHARES, 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, 2018

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

Net income

    -       -       -       8,868       -       -       8,868  

Other comprehensive (loss)

    -       -       -       -       -       (1,641 )     (1,641 )

Common dividends declared -- $0.66 per share

    -       -       -       (11,184 )     -       -       (11,184 )

Equity-based compensation expense

    -       -       (16 )     -       547       -       531  

Common stock options exercised -- 1,697 shares

    -       -       (9 )     -       31       -       22  

Issuance of treasury stock to 401(k) plan -- 4,943 shares

    -       -       49       -       91       -       140  

Purchase of treasury shares -- 187,300 shares at $28.90 per share

    -       -       -       -       (5,413 )     -       (5,413 )

Balance March 31, 2018

  $ -     $ 21,382     $ 228,774     $ 178,227     $ (83,865 )   $ (2,481 )   $ 342,037  
                                                         

Balance January 1, 2019

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

Net income

    -       -       -       9,631       -       -       9,631  

Other comprehensive income

    -       -       -       -       -       696       696  

Common dividends declared -- $0.21 per share

    -       -       -       (3,321 )     -       -       (3,321 )

Equity-based compensation expense

    -       38       819       -       -       -       857  

Common stock options exercised -- 1,418 shares

    -       2       22       -       -       -       24  

Issuance of common stock to 401(k) plan -- 4,098 shares

    -       4       136       -       -       -       140  

Purchase of common shares -- 232,900 shares at $33.41 per share

    -       (233 )     (7,549 )     -       -       -       (7,782 )

Balance March 31, 2019

  $ -     $ 15,818     $ 115,914     $ 202,103     $ -     $ (733 )   $ 333,102  

 

See Notes to Condensed Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 

(Amounts in thousands)

 

2019

   

2018

 

Operating activities

               

Net income

  $ 9,631     $ 8,868  

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

               

Provision for loan losses

    1,220       495  

Depreciation and amortization of premises and equipment

    736       806  

Amortization of premiums on investments, net

    16       112  

Amortization of FDIC indemnification asset, net

    552       382  

Amortization of intangible assets

    246       261  

Accretion on acquired loans

    (765 )     (1,845 )

Equity-based compensation expense

    857       531  

Issuance of common stock to 401(k) plan

    140       140  

(Gain) loss on sale of premises and equipment, net

    (20 )     7  

Loss on sale of other real estate owned

    364       103  

Decrease in accrued interest receivable

    254       623  

(Increase) decrease in other operating activities

    862       350  

Net cash provided by operating activities

    14,093       10,833  

Investing activities

               

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

    11,735       2,552  

Proceeds from maturities and calls of securities held to maturity

    25,000       -  

Payments to acquire securities available for sale

    -       (23,387 )

Proceeds from repayment of loans, net

    35,316       22,862  

Proceeds from bank owned life insurance

    -       171  

(Redemption of) proceeds from FHLB stock, net

    (129 )     3  

(Payments to) proceeds from the FDIC

    (23 )     111  

Proceeds from sale of premises and equipment

    40       475  

Payments to acquire premises and equipment

    (1,625 )     (121 )

Proceeds from sale of other real estate owned

    1,328       508  

Net cash provided by investing activities

    71,642       3,174  

Financing activities

               

Increase in noninterest-bearing deposits, net

    19,749       6,335  

Increase in interest-bearing deposits, net

    2,938       44,393  

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

    (25,670 )     (971 )

Proceeds from stock options exercised

    24       22  

Payments for repurchase of common stock

    (7,782 )     (5,413 )

Payments of common dividends

    (3,321 )     (11,184 )

Net cash (used in) provided by financing activities

    (14,062 )     33,182  

Net increase in cash and cash equivalents

    71,673       47,189  

Cash and cash equivalents at beginning of period

    76,873       157,951  

Cash and cash equivalents at end of period

  $ 148,546     $ 205,140  
                 

Supplemental disclosure -- cash flow information

               

Cash paid for interest

  $ 1,515     $ 1,983  

Cash paid for income taxes

    2,678       -  
                 

Supplemental transactions -- noncash items

               

Transfer of loans to other real estate owned

    1,908       2,787  

Loans originated to finance other real estate owned

    488       -  

Decrease (increase) in accumulated other comprehensive loss

    696       (1,641 )

Security settlements in process

    10,000       20,000  

 

See Notes to Condensed Consolidated Financial Statements.

 

8

Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note 1. Basis of Presentation

 

General

 

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

 

Principles of Consolidation

 

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

 

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, 2018 (the “2018 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2019. The condensed consolidated balance sheet as of December 31, 2018, has been derived from the audited consolidated financial statements.

 

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 net 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, 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

 

The Company’s significant accounting policies are 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 2018 Form 10-K.

 

9

 

Recent Accounting Standards

 

Standards Adopted in 2019

 

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 became effective for the Company for fiscal years beginning after December 15, 2018. The Company adopted ASU 2018-09 in the first quarter of 2019. The adoption of the standard had no material effect on its financial statements.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The ASU intends to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of hedge accounting guidance. ASU 2017-12 became effective for the Company for fiscal years beginning after December 15, 2018. The Company adopted ASU 2017-12 in the first quarter of 2019. The adoption of the standard had no 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. In January 2018, the FASB issued ASU 2018-01, which allows entities the option to apply the provisions of the new guidance at the effective date without adjusting the comparative periods presented.  In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which updates narrow aspects of the guidance issued in ASU 2016-02, as well as issuing ASU 2018-11, which allows entities to choose an additional transition method in which an entity is allowed to apply the standard at adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption  Under this method, the entity shall recognize and measure the leases that exist at the adoption date and the prior comparative periods are not adjusted.  The Company adopted ASU 2016-02 January 1, 2019, electing to recognize and measure existing leases at the adoption date with no adjustments to prior periods.   In addition, the Company elected the practical expedients of not re-assessing the classifications of existing leases, not re-assessing if existing leases have initial direct costs, or examining expired or existing contracts to determine if a lease exists.  All of the current leases are classified as operating leases.  The adoption of the standard resulted in a right-of-use asset of $915 thousand and a lease liability of $915 thousand which are included in other assets and other liabilities, respectively, in the condensed consolidated balance sheets. The adoption did not have a material impact on the financial position or results of operations of the Company. 

 

10

 

Standards Not Yet Adopted

 

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 has established a working group to prepare for, and implement changes related to, the standard and has engaged a third-party vendor solution to assist in the application of the standard. The Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, but expects that the impact of adoption could be significantly influenced by the composition, characteristics, and quality of the Company’s loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. The adoption of the standard could result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in shareholders’ equity and regulatory capital, differences in the timing of recognizing changes to the allowance for credit losses, expanded disclosures about the allowance for credit losses, and the Company’s internal control over financial reporting related to the allowance for credit losses.

 

 

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

 

 

Note 2. Debt Securities

 

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

 

   

March 31, 2019

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 1,079     $ -     $ (1 )   $ 1,078  

U.S. Treasury securities

    -       -       -       -  

Municipal securities

    95,810       1,231       (44 )     96,997  

Mortgage-backed Agency securities

    34,851       92       (421 )     34,522  

Total

  $ 131,740     $ 1,323     $ (466 )   $ 132,597  

 

   

December 31, 2018

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 1,108     $ 5     $ -     $ 1,113  

U.S. Treasury securities

    19,970       -       (10 )     19,960  

Municipal securities

    96,886       912       (509 )     97,289  

Mortgage-backed Agency securities

    35,513       14       (773 )     34,754  

Total

  $ 153,477     $ 931     $ (1,292 )   $ 153,116  

 

11

 

The remaining debt securities held in the held-to-maturity portfolio at year-end matured during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of held-to-maturity debt securities, including gross unrealized gains and losses, at year-end:

 

   

December 31, 2018

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 17,887     $ -     $ (20 )   $ 17,867  

Corporate securities

    7,126       -       (3 )     7,123  

Total

  $ 25,013     $ -     $ (23 )   $ 24,990  

 

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

 

   

March 31, 2019

 
   

Amortized

         

(Amounts in thousands)

 

Cost

   

Fair Value

 

Available-for-sale debt securities

               

Due within one year

  $ -     $ -  

Due after one year but within five years

    17,977       18,188  

Due after five years but within ten years

    78,912       79,887  

Due after ten years

    -       -  
      96,889       98,075  

Mortgage-backed securities

    34,851       34,522  

Total debt securities available for sale

  $ 131,740     $ 132,597  

 

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

 

   

March 31, 2019

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

U.S. Agency securities

  $ 1,068     $ (1 )   $ -     $ -     $ 1,068     $ (1 )

Municipal securities

    -       -       4,999       (44 )     4,999       (44 )

Mortgage-backed Agency securities

    518       (2 )     16,317       (419 )     16,835       (421 )

Total

  $ 1,586     $ (3 )   $ 21,316     $ (463 )   $ 22,902     $ (466 )

 

   

December 31, 2018

 
   

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

  $ 19,960     $ (10 )   $ -     $ -     $ 19,960     $ (10 )

Municipal securities

    7,116       (62 )     18,081       (447 )     25,197       (509 )

Mortgage-backed Agency securities

    15,762       (99 )     15,344       (674 )     31,106       (773 )

Total

  $ 42,838     $ (171 )   $ 33,425     $ (1,121 )   $ 76,263     $ (1,292 )

 

12

 

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

 

   

December 31, 2018

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

U.S. Agency securities

  $ -     $ -     $ 17,867     $ (20 )   $ 17,867     $ (20 )

Corporate securities

    -       -       7,123       (3 )     7,123       (3 )

Total

  $ -     $ -     $ 24,990     $ (23 )   $ 24,990     $ (23 )

 

There were 35 individual debt securities in an unrealized loss position as of March 31, 2019, and their combined depreciation in value represented 0.35% of the debt securities portfolio. There were 90 individual debt securities in an unrealized loss position as of December 31, 2018, and their combined depreciation in value represented 0.74% of the debt securities portfolio.

 

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for debt securities is a decline in fair value below book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the three months ended March 31, 2019 and 2018, 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.

 

There were no gross realized gains or losses from the sale of available-for-sale debt securities for the three months ended March 31, 2019 or 2018. The carrying amount of securities pledged for various purposes totaled $27.14 million as of March 31, 2019, and $38.25 million as of December 31, 2018.

 

 

 

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 $1.60 million as of March 31, 2019, and $1.79 million as of December 31, 2018. Deferred loan fees, net of loan costs, totaled $4.23 million as of March 31, 2019, and $4.60 million as of December 31, 2018. For information about off-balance sheet financing, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

13

 

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

 

   

March 31, 2019

   

December 31, 2018

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

 

Non-covered loans held for investment

                               

Commercial loans

                               

Construction, development, and other land

  $ 63,975       3.68 %   $ 63,508       3.58 %

Commercial and industrial

    94,039       5.41 %     104,863       5.91 %

Multi-family residential

    102,071       5.87 %     107,012       6.03 %

Single family non-owner occupied

    140,037       8.06 %     140,097       7.89 %

Non-farm, non-residential

    602,207       34.67 %     613,877       34.58 %

Agricultural

    8,975       0.52 %     8,545       0.48 %

Farmland

    18,569       1.07 %     18,905       1.07 %

Total commercial loans

    1,029,873       59.28 %     1,056,807       59.54 %

Consumer real estate loans

                               

Home equity lines

    90,000       5.18 %     93,466       5.27 %

Single family owner occupied

    502,059       28.89 %     510,963       28.79 %

Owner occupied construction

    13,867       0.80 %     18,171       1.02 %

Total consumer real estate loans

    605,926       34.87 %     622,600       35.08 %

Consumer and other loans

                               

Consumer loans

    79,185       4.56 %     71,552       4.03 %

Other

    4,921       0.28 %     5,310       0.30 %

Total consumer and other loans

    84,106       4.84 %     76,862       4.33 %

Total non-covered loans

    1,719,905       98.99 %     1,756,269       98.94 %

Total covered loans

    17,475       1.01 %     18,815       1.06 %

Total loans held for investment, net of unearned income

  $ 1,737,380       100.00 %   $ 1,775,084       100.00 %

 

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

 

   

March 31, 2019

   

December 31, 2018

 

(Amounts in thousands)

               

Covered loans

               

Commercial loans

               

Construction, development, and other land

  $ 33     $ 35  

Single family non-owner occupied

    231       238  

Non-farm, non-residential

    6       6  

Total commercial loans

    270       279  

Consumer real estate loans

               

Home equity lines

    14,076       15,284  

Single family owner occupied

    3,129       3,252  

Total consumer real estate loans

    17,205       18,536  

Total covered loans

  $ 17,475     $ 18,815  

 

14

 

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.

 

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

 

   

March 31, 2019

   

December 31, 2018

 

(Amounts in thousands)

 

Recorded

Investment

   

Unpaid Principal

Balance

   

Recorded

Investment

   

Unpaid Principal

Balance

 

PCI Loans, by acquisition

                               

Peoples

  $ 5,348     $ 7,116     $ 5,330     $ 7,272  

Waccamaw

    5,266       18,436       5,805       19,602  

Other acquired

    853       879       868       894  

Total PCI Loans

  $ 11,467     $ 26,431     $ 12,003     $ 27,768  

 

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

 

   

Peoples

   

Waccamaw

   

Total

 

(Amounts in thousands)

                       

Balance January 1, 2018

  $ 3,388     $ 19,465     $ 22,853  

Accretion

    (364 )     (1,845 )     (2,209 )

Reclassifications (to) from nonaccretable difference(1)

    (29 )     601       572  

Other changes, net

    132       (261 )     (129 )

Balance March 31, 2018

  $ 3,127     $ 17,960     $ 21,087  
                         

Balance January 1, 2019

  $ 2,590     $ 14,639     $ 17,229  

Accretion

    (259 )     (752 )     (1,011 )

Reclassifications from nonaccretable difference(1)

    7       653       660  

Other changes, net

    58       250       308  

Balance March 31, 2019

  $ 2,396     $ 14,790     $ 17,186  

(1) Represents changes attributable to expected loss assumptions

 

 

Note 4. Credit Quality

 

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

 

 

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

 

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

 

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

 

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

 

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

 

15

 

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

 

   

March 31, 2019

 
           

Special

                                 

(Amounts in thousands)

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 62,395     $ 639     $ 941     $ -     $ -     $ 63,975  

Commercial and industrial

    91,320       1,852       867       -       -       94,039  

Multi-family residential

    99,811       847       1,413       -       -       102,071  

Single family non-owner occupied

    131,049       4,139       4,849       -       -       140,037  

Non-farm, non-residential

    582,290       7,447       12,324       146       -       602,207  

Agricultural

    8,807       119       49       -       -       8,975  

Farmland

    16,300       528       1,741       -       -       18,569  

Consumer real estate loans

                                               

Home equity lines

    87,657       641       1,702       -       -       90,000  

Single family owner occupied

    474,928       3,925       23,206       -       -       502,059  

Owner occupied construction

    13,570       -       297       -       -       13,867  

Consumer and other loans

                                               

Consumer loans

    78,830       11       344       -       -       79,185  

Other

    4,921       -       -       -       -       4,921  

Total non-covered loans

    1,651,878       20,148       47,733       146       -       1,719,905  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    -       33       -       -       -       33  

Single family non-owner occupied

    216       -       15       -       -       231  

Non-farm, non-residential

    -       -       6       -       -       6  

Consumer real estate loans

                                               

Home equity lines

    8,953       4,791       332       -       -       14,076  

Single family owner occupied

    2,393       339       397       -       -       3,129  

Total covered loans

    11,562       5,163       750       -       -       17,475  

Total loans

  $ 1,663,440     $ 25,311     $ 48,483     $ 146     $ -     $ 1,737,380  

 

16

 

   

December 31, 2018

 
           

Special

                                 

(Amounts in thousands)

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 61,877     $ 661     $ 970     $ -     $ -     $ 63,508  

Commercial and industrial

    102,044       2,166       653       -       -       104,863  

Multi-family residential

    104,183       1,087       1,742       -       -       107,012  

Single family non-owner occupied

    131,443       4,395       4,259       -       -       140,097  

Non-farm, non-residential

    595,659       8,166       9,906       146       -       613,877  

Agricultural

    8,328       131       86       -       -       8,545  

Farmland

    16,898       538       1,469       -       -       18,905  

Consumer real estate loans

                                               

Home equity lines

    91,194       649       1,623       -       -       93,466  

Single family owner occupied

    482,794       4,355       23,814       -       -       510,963  

Owner occupied construction

    17,872       -       299       -       -       18,171  

Consumer and other loans

                                               

Consumer loans

    71,240       4       308       -       -       71,552  

Other

    5,310       -       -       -       -       5,310  

Total non-covered loans

    1,688,842       22,152       45,129       146       -       1,756,269  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    -       35       -       -       -       35  

Single family non-owner occupied

    223       -       15       -       -       238  

Non-farm, non-residential

    -       -       6       -       -       6  

Consumer real estate loans

                                               

Home equity lines

    9,511       5,244       529       -       -       15,284  

Single family owner occupied

    2,507       355       390       -       -       3,252  

Total covered loans

    12,241       5,634       940       -       -       18,815  

Total loans

  $ 1,701,083     $ 27,786     $ 46,069     $ 146     $ -     $ 1,775,084  

 

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.

 

17

 

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:

 

   

March 31, 2019

   

December 31, 2018

 
           

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

  $ 803     $ 831     $ -     $ 824     $ 840     $ -  

Commercial and industrial

    615       641       -       386       416       -  

Multi-family residential

    1,334       1,804       -       1,127       1,274       -  

Single family non-owner occupied

    3,003       3,255       -       2,761       3,095       -  

Non-farm, non-residential

    4,553       4,987       -       4,154       4,494       -  

Agricultural

    49       51       -       86       96       -  

Farmland

    1,464       1,548       -       1,464       1,547       -  

Consumer real estate loans

                                               

Home equity lines

    1,411       1,515       -       1,315       1,451       -  

Single family owner occupied

    15,554       17,912       -       15,451       18,390       -  

Owner occupied construction

    224       224       -       225       225       -  

Consumer and other loans

                                               

Consumer loans

    104       107       -       145       156       -  

Total impaired loans with no allowance

    29,114       32,875       -       27,938       31,984       -  
                                                 

Impaired loans with a related allowance

                                               

Commercial loans

                                               

Commercial and industrial

    -       -       -       -       -       -  

Multi-family residential

    -       -       -       534       536       230  

Single family non-owner occupied

    -       -       -       -       -       -  

Non-farm, non-residential

    -       -       -       840       842       235  

Farmland

    -       -