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

fcbc20190930_10q.htm
 

 

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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 September 30, 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)

 

 

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

 

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

 

As of November 01, 2019, there were 15,580,862 shares outstanding of the registrant’s Common Stock, $1.00 par value.

 

 

 

 

FIRST COMMUNITY BANKSHARES, INC.

FORM 10-Q

INDEX

 

PART I.

FINANCIAL INFORMATION

Page

     

Item 1.

Financial Statements

 
 

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018

4

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

5

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended  September 30, 2019 and 2018 (Unaudited)

6

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

7

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)

9

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

10

Item 2.

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

40

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

55

Item 4.

Controls and Procedures

55

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

56

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

57

     

Signatures

60

 

2

 

 

 

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

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PART I.

FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

FIRST COMMUNITY BANKSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30,

   

December 31,

 
   

2019

    2018(1)  

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

 

(Unaudited)

         

Assets

               

Cash and due from banks

  $ 48,209     $ 40,421  

Federal funds sold

    133,253       35,457  

Interest-bearing deposits in banks

    996       995  

Total cash and cash equivalents

    182,458       76,873  

Debt securities available for sale

    115,537       153,116  

Debt securities held to maturity

    -       25,013  

Loans held for investment, net of unearned income (includes covered loans of $14,158 and $18,815, respectively)

    1,694,116       1,775,084  

Allowance for loan losses

    (18,493 )     (18,267 )

Loans held for investment, net

    1,675,623       1,756,817  

FDIC indemnification asset

    3,458       5,108  

Premises and equipment, net

    48,521       45,785  

Other real estate owned (includes covered OREO of $0 and $32, respectively)

    2,528       3,838  

Interest receivable

    4,842       5,481  

Goodwill

    92,744       92,744  

Other intangible assets

    4,280       5,026  

Other assets

    75,056       74,573  

Total assets

  $ 2,205,047     $ 2,244,374  
                 

Liabilities

               

Deposits

               

Noninterest-bearing

  $ 472,478     $ 459,550  

Interest-bearing

    1,364,374       1,396,200  

Total deposits

    1,836,852       1,855,750  

Securities sold under agreements to repurchase

    1,863       29,370  

Interest, taxes, and other liabilities

    28,969       26,397  

Total liabilities

    1,867,684       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; 15,579,740 shares issued and outstanding at September 30, 2019; 16,007,263 shares issued and outstanding at December 31, 2018     15,580       16,007  

Additional paid-in capital

    108,222       122,486  

Retained earnings

    213,866       195,793  

Accumulated other comprehensive loss

    (305 )     (1,429 )

Total stockholders' equity

    337,363       332,857  

Total liabilities and stockholders' equity

  $ 2,205,047     $ 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

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

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

 

2019

   

2018

   

2019

   

2018

 

Interest income

                               

Interest and fees on loans

  $ 22,068     $ 22,556     $ 66,968     $ 67,733  

Interest on securities -- taxable

    261       666       916       1,704  

Interest on securities -- tax-exempt

    596       706       1,930       2,133  

Interest on deposits in banks

    680       358       1,784       1,343  

Total interest income

    23,605       24,286       71,598       72,913  

Interest expense

                               

Interest on deposits

    1,383       1,269       4,080       3,847  

Interest on short-term borrowings

    1       204       122       606  

Interest on long-term debt

    -       488       -       1,494  

Total interest expense

    1,384       1,961       4,202       5,947  

Net interest income

    22,221       22,325       67,396       66,966  

Provision for loan losses

    675       495       3,480       1,485  

Net interest income after provision for loan losses

    21,546       21,830       63,916       65,481  

Noninterest income

                               

Wealth management

    952       791       2,581       2,408  

Service charges on deposits

    3,785       3,803       10,892       10,883  

Other service charges and fees

    2,007       1,925       6,185       5,716  

Insurance commissions

    -       299       -       966  

Net loss on sale of securities

    -       (618 )     (43 )     (618 )

Net FDIC indemnification asset amortization

    (719 )     (645 )     (1,787 )     (1,602 )

Other income

    900       -       4,600       -  

Other operating income

    709       964       1,935       2,393  

Total noninterest income

    7,634       6,519       24,363       20,146  

Noninterest expense

                               

Salaries and employee benefits

    9,334       8,983       27,653       27,417  

Occupancy expense

    1,042       1,075       3,277       3,408  

Furniture and equipment expense

    1,183       985       3,278       2,976  

Service fees

    1,466       1,134       3,727       2,813  

Advertising and public relations

    795       478       1,832       1,461  

Professional fees

    548       337       1,290       1,074  

Amortization of intangibles

    251       261       746       785  

FDIC premiums and assessments

    -       234       318       697  

Merger/acquisition/divestiture expenses

    592       -       592       -  

Loss on extinguishment of debt

    -       1,096       -       1,096  

Goodwill impairment

    -       1,492       -       1,492  

Other operating expense

    2,233       2,056       8,167       9,188  

Total noninterest expense

    17,444       18,131       50,880       52,407  

Income before income taxes

    11,736       10,218       37,399       33,220  

Income tax expense

    2,580       1,118       8,161       6,186  

Net income

  $ 9,156     $ 9,100     $ 29,238     $ 27,034  
                                 

Earnings per common share

                               

Basic

  $ 0.59     $ 0.55     $ 1.86     $ 1.62  

Diluted

    0.58       0.55       1.85       1.61  

Weighted average shares outstanding

                               

Basic

    15,603,992       16,512,823       15,717,678       16,717,704  

Diluted

    15,664,587       16,612,416       15,785,484       16,810,425  

 

See Notes to Condensed Consolidated Financial Statements.

 

5

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FIRST COMMUNITY BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

(Amounts in thousands)

                               

Net income

  $ 9,156     $ 9,100     $ 29,238     $ 27,034  

Other comprehensive income, before tax

                               

Available-for-sale debt securities:

                               

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

    28       (983 )     1,578       (3,426 )

Reclassification adjustment for net losses recognized in net income

    -       618       43       618  

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

    28       (365 )     1,621       (2,808 )

Employee benefit plans:

                               

Net actuarial gain (loss)

    1       (1 )     (405 )     91  

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

    67       72       207       214  

Net unrealized gains (losses) on employee benefit plans

    68       71       (198 )     305  

Other comprehensive income (loss), before tax

    96       (294 )     1,423       (2,503 )

Income tax expense (benefit)

    20       (62 )     299       (526 )

Other comprehensive income (loss), net of tax

    76       (232 )     1,124       (1,977 )

Total comprehensive income

  $ 9,232     $ 8,868     $ 30,362     $ 25,057  

 

See Notes to Condensed Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

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

THREE MONTHS ENDED

September 30, 2019 and 2018

 

                                           

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 July 1, 2018

  $ -     $ 21,382     $ 228,949     $ 184,279     $ (92,904 )   $ (2,585 )   $ 339,121  

Net income

    -       -       -       9,100       -       -       9,100  

Other comprehensive (loss)

    -       -       -       -       -       (232 )     (232 )

Common dividends declared -- $0.21 per share

    -       -       -       (3,477 )     -       -       (3,477 )

Equity-based compensation expense

    -       -       194       -       8       -       202  

Common stock options exercised -- 8,629 shares

    -       -       (3 )     -       167       -       164  

Issuance of treasury stock to 401(k) plan -- 2,891 shares

    -       -       42       -       54       -       96  

Purchase of treasury shares -- 195,776 shares at $33.57 per share

    -       -       -       -       (6,572 )     -       (6,572 )

Balance September 30, 2018

  $ -     $ 21,382     $ 229,182     $ 189,902     $ (99,247 )   $ (2,817 )   $ 338,402  
                                                         

Balance July 1, 2019

  $ -     $ 15,633     $ 109,816     $ 208,618     $ -     $ (381 )   $ 333,686  

Net income

    -       -       -       9,156       -       -       9,156  

Other comprehensive income

    -       -       -       -       -       76       76  

Common dividends declared -- $0.25 per share

    -       -       -       (3,908 )     -       -       (3,908 )

Equity-based compensation expense

    -       -       216       -       -       -       216  

Common stock options exercised -- 3,407 shares

    -       4       37       -       -       -       41  

Issuance of common stock to 401(k) plan -- 3,010 shares

    -       4       95       -       -       -       99  

Repurchase of common shares -- 60,500 shares at $33.11 per share

    -       (61 )     (1,942 )     -       -       -       (2,003 )

Balance September 30, 2019

  $ -     $ 15,580     $ 108,222     $ 213,866     $ -     $ (305 )   $ 337,363  

 

See Notes to Condensed Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

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

NINE MONTHS ENDED

SEPTEMBER 30, 2019 and 2018

 

                                           

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

    -       -       -       27,034       -       -       27,034  

Other comprehensive (loss)

    -       -       -       -       -       (1,977 )     (1,977 )

Common dividends declared -- $1.05 per share

    -       -       -       (17,675 )     -       -       (17,675 )

Equity-based compensation expense

    -       -       345       -       602       -       947  

Common stock options exercised -- 18,979 shares

    -       -       (41 )     -       362       -       321  

Issuance of treasury stock to 401(k) plan -- 10,543 shares

    -       -       128       -       197       -       325  

Purchase of treasury shares -- 670,016 shares at $31.77 per share

    -       -       -       -       (21,287 )     -       (21,287 )

Balance September 30, 2018

  $ -     $ 21,382     $ 229,182     $ 189,902     $ (99,247 )   $ (2,817 )   $ 338,402  
                                                         

Balance January 1, 2019

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

Net income

    -       -       -       29,238       -       -       29,238  

Other comprehensive income

    -       -       -       -       -       1,124       1,124  

Common dividends declared -- $0.71 per share

    -       -       -       (11,165 )     -       -       (11,165 )

Equity-based compensation expense

    -       42       1,180       -       -       -       1,222  

Common stock options exercised -- 7,752 shares

    -       8       116       -       -       -       124  

Issuance of common stock to 401(k) plan -- 9,663 shares

    -       10       315       -       -       -       325  

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

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

Balance September 30, 2019

  $ -     $ 15,580     $ 108,222     $ 213,866     $ -     $ (305 )   $ 337,363  

 

See Notes to Condensed Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2019

   

2018

 

Operating activities

               

Net income

  $ 29,238     $ 27,034  

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

               

Provision for loan losses

    3,480       1,485  

Depreciation and amortization of premises and equipment

    2,491       2,221  

Amortization of premiums on investments, net

    171       26  

Amortization of FDIC indemnification asset, net

    1,787       1,602  

Amortization of intangible assets

    746       785  

Goodwill impairment

    -       1,492  

Accretion on acquired loans

    (2,720 )     (4,257 )

Equity-based compensation expense

    1,222       947  

Issuance of common stock to 401(k) plan

    325       325  

Gain on sale of premises and equipment, net

    (104 )     (8 )

Loss on sale of other real estate owned

    791       833  

Loss on sale of securities

    43       618  

Loss on extinguishment of debt

    -       1,096  

Decrease in accrued interest receivable

    639       404  

Decrease in other operating activities

    1,527       2,543  

Net cash provided by operating activities

    39,636       37,146  

Investing activities

               

Proceeds from sale of securities available for sale

    13,897       8,937  

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

    29,555       57,056  

Proceeds from maturities and calls of securities held to maturity

    25,000       -  

Payments to acquire securities available for sale

    (4,453 )     (67,355 )

Proceeds from repayment of loans, net

    78,036       23,929  

Proceeds from bank owned life insurance

    -       458  

Proceeds from FHLB stock, net (purchase of)

    129       (2,122 )

Payments to the FDIC

    (137 )     (117 )

Proceeds from sale of premises and equipment

    1,038       507  

Payments to acquire premises and equipment

    (6,225 )     (1,076 )

Proceeds from sale of other real estate owned

    2,917       981  

Net cash provided by investing activities

    139,757       21,198  

Financing activities

               

Increase in noninterest-bearing deposits, net

    12,928       9,802  

Decrease in interest-bearing deposits, net

    (31,826 )     (63,842 )

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

    (27,507 )     65  

Repayments of FHLB and other borrowings, net

    -       (50,000 )

Proceeds from stock options exercised

    124       321  

Payments for repurchase of common stock

    (16,362 )     (21,287 )

Payments of common dividends

    (11,165 )     (17,675 )

Net cash used in financing activities

    (73,808 )     (142,616 )

Net increase (decrease) in cash and cash equivalents

    105,585       (84,272 )

Cash and cash equivalents at beginning of period

    76,873       157,951  

Cash and cash equivalents at end of period

  $ 182,458     $ 73,679  
                 

Supplemental disclosure -- cash flow information

               

Cash paid for interest

  $ 4,308     $ 6,447  

Cash paid for income taxes

    7,083       4,800  
                 

Supplemental transactions -- noncash items

               

Transfer of loans to other real estate owned

    2,883       4,135  

Loans originated to finance other real estate owned

    484       92  

Decrease (increase) in accumulated other comprehensive loss

    1,124       (1,977 )

 

See Notes to Condensed Consolidated Financial Statements.

 

9

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, and wealth management. 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.

 

10

 

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.

 

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 has established a cross-functional implementation team with assigned roles and responsibilities, key tasks to complete, and a general timeline to be followed. The team meets regularly to discuss the latest developments and ensure progress is being made on the adoption plan. The Company has contracted with a third-party provider for enhanced modeling techniques that incorporate the loss measurement requirements in these amendments and is in the process of finalizing and documenting the methodologies that will be utilized, including challenging estimated credit loss model assumptions and outputs and refining the qualitative framework. The team is also currently developing controls, processes, policies and disclosures and performing parallel runs. The Company expects validation of the new model(s) to be completed during early 2020. The Company continues to evaluate the impact adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures, and while currently unable to reasonably estimate the impact of adopting this ASU, the Company expects that the impact of adoption could be significantly influenced by the composition, characteristics and quality of its loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.

 

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.

 

11

 

 

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:

 

   

September 30, 2019

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 1,019     $ -     $ (3 )   $ 1,016  

Municipal securities

    78,510       1,038       -       79,548  

Mortgage-backed Agency securities

    34,748       353       (128 )     34,973  

Total

  $ 114,277     $ 1,391     $ (131 )   $ 115,537  

 

   

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  

 

The debt securities held in the held-to-maturity portfolio at December 31, 2018, matured during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of 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  

 

12

 

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.

 

   

September 30, 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

    24,555       24,825  

Due after five years but within ten years

    54,974       55,739  

Due after ten years

    -       -  
      79,529       80,564  

Mortgage-backed securities

    34,748       34,973  

Total debt securities available for sale

  $ 114,277     $ 115,537  

 

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:

 

   

September 30, 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

  $ 1,006     $ (3 )   $ -     $ -     $ 1,006     $ (3 )

Municipal securities

    -       -       -       -       -       -  

Mortgage-backed Agency securities

    1,154       (6 )     9,035       (122 )     10,189       (128 )

Total

  $ 2,160     $ (9 )   $ 9,035     $ (122 )   $ 11,195     $ (131 )

 

   

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 )

 

13

 

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 14 individual debt securities in an unrealized loss position as of September 30, 2019, and their combined depreciation in value represented 0.11% 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 and nine months ended September 30, 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.

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

(Amounts in thousands)

                               

Gross realized gains

  $ -     $ -     $ 67     $ -  

Gross realized losses

    -       (618 )     (110 )     (618 )

Net loss on sale of securities

  $ -     $ (618 )   $ (43 )   $ (618 )

 

The carrying amount of securities pledged for various purposes totaled $25.36 million as of September 30, 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 $1.81 million as of September 30, 2019, and $1.79 million as of December 31, 2018. Deferred loan fees, net of loan costs, totaled $4.41 million as of September 30, 2019, and $4.60 million as of December 31, 2018. For information about off-balance sheet financing, see Note 15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

14

 

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

 

   

September 30, 2019

   

December 31, 2018

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

 

Non-covered loans held for investment

                               

Commercial loans

                               

Construction, development, and other land

  $ 61,350       3.62 %   $ 63,508       3.58 %

Commercial and industrial

    93,627       5.53 %     104,863       5.91 %

Multi-family residential

    96,274       5.68 %     107,012       6.03 %

Single family non-owner occupied

    135,298       7.99 %     140,097       7.89 %

Non-farm, non-residential

    584,897       34.52 %     613,877       34.58 %

Agricultural

    9,429       0.56 %     8,545       0.48 %

Farmland

    16,728       0.99 %     18,905       1.07 %

Total commercial loans

    997,603       58.89 %     1,056,807       59.54 %

Consumer real estate loans

                               

Home equity lines

    86,349       5.10 %     93,466       5.27 %

Single family owner occupied

    484,567       28.60 %     510,963       28.78 %

Owner occupied construction

    14,872       0.87 %     18,171       1.02 %

Total consumer real estate loans

    585,788       34.57 %     622,600       35.07 %

Consumer and other loans

                               

Consumer loans

    92,027       5.43 %     71,552       4.03 %

Other

    4,540       0.27 %     5,310       0.30 %

Total consumer and other loans

    96,567       5.70 %     76,862       4.33 %

Total non-covered loans

    1,679,958       99.16 %     1,756,269       98.94 %

Total covered loans

    14,158       0.84 %     18,815       1.06 %

Total loans held for investment, net of unearned income

  $ 1,694,116       100.00 %   $ 1,775,084       100.00 %

 

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

 

   

September 30, 2019

   

December 31, 2018

 

(Amounts in thousands)

               

Covered loans

               

Commercial loans

               

Construction, development, and other land

  $ 30     $ 35  

Single family non-owner occupied

    216       238  

Non-farm, non-residential

    4       6  

Total commercial loans

    250       279  

Consumer real estate loans

               

Home equity lines

    11,031       15,284  

Single family owner occupied

    2,877       3,252  

Total consumer real estate loans

    13,908       18,536  

Total covered loans

  $ 14,158     $ 18,815  

 

15

 

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:

 

   

September 30, 2019

   

December 31, 2018

 

(Amounts in thousands)

 

Recorded

Investment

   

Unpaid Principal

Balance

   

Recorded

Investment

   

Unpaid Principal

Balance

 

PCI Loans, by acquisition

                               

Peoples

  $ 5,219     $ 6,680     $ 5,330     $ 7,272  

Waccamaw

    3,469       11,498       5,805       19,602  

Other acquired

    364       390       868       894  

Total PCI Loans

  $ 9,052     $ 18,568     $ 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

    (986 )     (4,157 )     (5,143 )

Reclassifications (to) from nonaccretable difference(1)

    (5 )     1,416       1,411  

Other changes, net

    354       (302 )     52  

Balance September 30, 2018

  $ 2,751     $ 16,422     $ 19,173  
                         

Balance January 1, 2019

  $ 2,590     $ 14,639     $ 17,229  

Accretion

    (734 )     (2,761 )     (3,495 )

Reclassifications from nonaccretable difference(1)

    14       1,200       1,214  

Other changes, net

    167       141       308  

Balance September 30, 2019

  $ 2,037     $ 13,219     $ 15,256  

 


(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.

 

16

 

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.

 

   

September 30, 2019

 
           

Special

                                 

(Amounts in thousands)

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 60,124     $ 574     $ 652     $ -     $ -     $ 61,350  

Commercial and industrial

    90,609       1,524       1,494       -       -       93,627  

Multi-family residential

    94,122       822       1,330       -       -       96,274  

Single family non-owner occupied

    126,204       3,720       5,374       -       -       135,298  

Non-farm, non-residential

    565,732       4,687       14,478       -       -       584,897  

Agricultural

    8,862       71       496       -       -       9,429  

Farmland

    14,697       510       1,521       -       -       16,728  

Consumer real estate loans

                                               

Home equity lines

    83,844       683       1,822       -       -       86,349  

Single family owner occupied

    457,680       3,510       23,377       -       -       484,567  

Owner occupied construction

    14,200       -       672       -       -       14,872  

Consumer and other loans

                                               

Consumer loans

    91,457       3       567       -       -       92,027  

Other

    4,540       -       -       -       -       4,540  

Total non-covered loans

    1,612,071       16,104       51,783       -       -       1,679,958  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    -       30       -       -       -       30  

Single family non-owner occupied

    205       -       11       -       -       216  

Non-farm, non-residential

    -       -       4       -       -       4  

Consumer real estate loans

                                               

Home equity lines

    7,625       3,047       359       -       -       11,031  

Single family owner occupied

    2,157       359       361       -       -       2,877  

Total covered loans

    9,987       3,436       735       -       -       14,158  

Total loans

  $ 1,622,058     $ 19,540     $ 52,518     $ -     $ -     $ 1,694,116  

 

17

 

   

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       -