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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

or

 

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

 

Commission file number: 000-19297

 

  FIRST COMMUNITY BANCSHARES, INC.  
  (Exact name of registrant as specified in its charter)  

 

Nevada

 

55-0694814

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

P.O. Box 989

Bluefield, Virginia

 

24605-0989

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

☑ Yes ☐ No

 

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

☑ Yes ☐ No

 

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

 
 

Large accelerated filer ☐

Accelerated filer ☑

 

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

Smaller reporting company ☐

   

Emerging growth company ☐

 

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

 

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

☐ Yes ☑ No

 

As of July 27, 2018, there were 16,574,758 shares outstanding of the registrant’s Common Stock, $1.00 par value.

 

 

 

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

INDEX

 

PART I.

FINANCIAL INFORMATION

Page

     

Item 1.

Financial Statements

 
   

Condensed Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017

4

   

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

5

   

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

6

   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

7

   

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

8

   

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

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

59

 

 

 

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, 2017.

 

 

PART I.

FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

 

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30,

   

December 31,

 
   

2018

    2017(1)  

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

 

(Unaudited)

         

Assets

               

Cash and due from banks

  $ 39,091     $ 37,115  

Federal funds sold

    67,921       119,891  

Interest-bearing deposits in banks

    945       945  

Total cash and cash equivalents

    107,957       157,951  

Debt securities available for sale

    196,425       165,525  

Debt securities held to maturity

    25,082       25,149  

Loans held for investment, net of unearned income

               

Non-covered

    1,776,112       1,789,236  

Covered

    22,919       27,948  

Allowance for loan losses

    (19,583 )     (19,276 )

Loans held for investment, net

    1,779,448       1,797,908  

FDIC indemnification asset

    6,390       7,161  

Premises and equipment, net

    45,547       48,126  

Other real estate owned, non-covered

    4,805       2,409  

Other real estate owned, covered

    44       105  

Interest receivable

    5,580       5,778  

Goodwill

    95,779       95,779  

Other intangible assets

    5,628       6,151  

Other assets

    75,435       76,418  

Total assets

  $ 2,348,120     $ 2,388,460  
                 

Liabilities

               

Deposits

               

Noninterest-bearing

  $ 462,851     $ 454,143  

Interest-bearing

    1,441,887       1,475,748  

Total deposits

    1,904,738       1,929,891  

Securities sold under agreements to repurchase

    27,869       30,086  

FHLB borrowings

    50,000       50,000  

Interest, taxes, and other liabilities

    26,392       27,769  

Total liabilities

    2,008,999       2,037,746  
                 

Stockholders' equity

               

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

    -       -  

Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 shares issued at June 30, 2018, and December 31, 2017; 4,802,475 and 4,383,553 shares in treasury at June 30, 2018, and December 31, 2017, respectively

    21,382       21,382  

Additional paid-in capital

    228,949       228,750  

Retained earnings

    184,279       180,543  

Treasury stock, at cost

    (92,904 )     (79,121 )

Accumulated other comprehensive loss

    (2,585 )     (840 )

Total stockholders' equity

    339,121       350,714  

Total liabilities and stockholders' equity

  $ 2,348,120     $ 2,388,460  
                 

(1) Derived from audited financial statements

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

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

 

2018

   

2017

   

2018

   

2017

 

Interest income

                               

Interest and fees on loans

  $ 22,422     $ 22,914     $ 45,177     $ 44,741  

Interest on securities -- taxable

    649       407       1,038       816  

Interest on securities -- tax-exempt

    712       763       1,427       1,560  

Interest on deposits in banks

    514       221       985       380  

Total interest income

    24,297       24,305       48,627       47,497  

Interest expense

                               

Interest on deposits

    1,327       1,233       2,578       2,399  

Interest on short-term borrowings

    202       211       402       421  

Interest on long-term debt

    506       567       1,006       1,242  

Total interest expense

    2,035       2,011       3,986       4,062  

Net interest income

    22,262       22,294       44,641       43,435  

Provision for loan losses

    495       934       990       1,426  

Net interest income after provision for loan losses

    21,767       21,360       43,651       42,009  

Noninterest income

                               

Wealth management

    823       791       1,617       1,581  

Service charges on deposits

    3,612       3,360       7,080       6,473  

Other service charges and fees

    1,991       1,748       3,791       3,447  

Insurance commissions

    338       325       667       698  

Net loss on sale of securities

    -       (657 )     -       (657 )

Net FDIC indemnification asset amortization

    (575 )     (1,586 )     (957 )     (2,918 )

Other operating income

    827       1,074       1,429       1,743  

Total noninterest income

    7,016       5,055       13,627       10,367  

Noninterest expense

                               

Salaries and employee benefits

    8,993       9,022       18,434       17,770  

Occupancy expense

    1,083       1,341       2,333       2,589  

Furniture and equipment expense

    945       1,087       1,991       2,178  

Service fees

    851       1,095       1,679       1,940  

Advertising and public relations

    461       544       983       1,149  

Professional fees

    430       817       737       1,639  

Amortization of intangibles

    263       263       524       524  

FDIC premiums and assessments

    252       227       463       471  

Other operating expense

    3,939       2,642       7,132       5,482  

Total noninterest expense

    17,217       17,038       34,276       33,742  

Income before income taxes

    11,566       9,377       23,002       18,634  

Income tax expense

    2,500       2,959       5,068       6,014  

Net income

    9,066       6,418       17,934       12,620  
                                 

Earnings per common share

                               

Basic

  $ 0.54     $ 0.38     $ 1.06     $ 0.74  

Diluted

    0.54       0.38       1.06       0.74  

Cash dividends per common share

    0.18       0.16       0.84       0.32  

Weighted average shares outstanding

                               

Basic

    16,689,398       17,012,189       16,821,842       17,005,196  

Diluted

    16,788,615       17,082,832       16,912,872       17,075,961  

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

                               

Net income

  $ 9,066     $ 6,418     $ 17,934     $ 12,620  

Other comprehensive income, before tax

                               

Available-for-sale debt securities:

                               

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

    (296 )     1,645       (2,443 )     2,296  

Reclassification adjustment for net losses recognized in net income

    -       657       -       657  

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

    (296 )     2,302       (2,443 )     2,953  

Employee benefit plans:

                               

Net actuarial gain

    93       1       92       134  

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

    71       65       142       129  

Net unrealized gains on employee benefit plans

    164       66       234       263  

Other comprehensive (loss) income, before tax

    (132 )     2,368       (2,209 )     3,216  

Income tax (benefit) expense

    (28 )     888       (464 )     1,206  

Other comprehensive (loss) income, net of tax

    (104 )     1,480       (1,745 )     2,010  

Total comprehensive income

  $ 8,962     $ 7,898     $ 16,189     $ 14,630  

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANCSHARES, INC.

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

 

                                           

Accumulated

         
                   

Additional

                   

Other

         
   

Preferred

   

Common

   

Paid-in

   

Retained

   

Treasury

   

Comprehensive

         

 

 

Stock

   

Stock

   

Capital

   

Earnings

   

Stock

   

Income (Loss)

   

Total

 

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

                                                       

Balance January 1, 2017

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

Net income

    -       -       -       12,620       -       -       12,620  

Other comprehensive income

    -       -       -       -       -       2,010       2,010  

Common dividends declared -- $0.32 per share

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

Equity-based compensation expense

    -       -       124       -       378       -       502  

Common stock options exercised -- 3,566 shares

    -       -       (17 )     -       64       -       47  

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

    -       -       77       -       159       -       236  

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

    -       -       -       -       (256 )     -       (256 )

Balance June 30, 2017

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

Balance January 1, 2018

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

Net income

    -       -       -       17,934       -       -       17,934  

Other comprehensive loss

    -       -       -       -       -       (1,745 )     (1,745 )

Common dividends declared -- $0.36 per share

    -       -       -       (6,064 )     -       -       (6,064 )

Special common dividend declared -- $0.48 per share

    -       -       -       (8,134 )     -       -       (8,134 )

Equity-based compensation expense

    -       -       151       -       594       -       745  

Common stock options exercised -- 10,350 shares

    -       -       (38 )     -       195       -       157  

Issuance of treasury stock to 401(k) plan -- 7,652 shares

    -       -       86       -       143       -       229  

Purchase of treasury shares -- 474,240 shares at $31.03 per share

    -       -       -       -       (14,715 )     -       (14,715 )

Balance June 30, 2018

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

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Six Months Ended

 
   

June 30,

 

(Amounts in thousands)

 

2018

   

2017

 

Operating activities

               

Net income

  $ 17,934     $ 12,620  

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

               

Provision for loan losses

    990       1,426  

Depreciation and amortization of premises and equipment

    1,521       1,775  

Amortization (accretion) of premiums on investments, net

    131       (8 )

Amortization of FDIC indemnification asset, net

    957       2,918  

Amortization of intangible assets

    524       524  

Accretion on acquired loans

    (3,204 )     (2,880 )

Equity-based compensation expense

    745       502  

Issuance of treasury stock to 401(k) plan

    229       236  

Loss on sale of premises and equipment, net

    6       14  

Loss on sale of other real estate owned

    771       386  

Loss on sale of securities

    -       657  

Decrease in accrued interest receivable

    198       481  

Decrease (increase) in other operating activities

    340       (4,273 )

Net cash provided by operating activities

    21,142       14,378  

Investing activities

               

Proceeds from sale of securities available for sale

    55       12,273  

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

    33,948       14,823  

Proceeds from maturities and calls of securities held to maturity

    -       21,840  

Payments to acquire securities available for sale

    (67,355 )     (16,990 )

Proceeds from loans, net

    16,783       12,457  

Proceeds from bank owned life insurance

    458       2,639  

Proceeds from FHLB stock, net

    3       694  

Proceeds from the FDIC

    208       368  

Proceeds from premises and equipment

    489       28  

Payments to acquire premises and equipment

    (384 )     (1,438 )

Proceeds from sale of other real estate owned

    785       1,736  

Net cash (used in) provided by investing activities

    (15,010 )     48,430  

Financing activities

               

Increase in noninterest-bearing deposits, net

    8,708       16,095  

Increase in interest-bearing deposits, net

    (33,861 )     (59 )

Repayments of securities sold under agreements to repurchase, net

    (2,217 )     (11,994 )

Repayments of FHLB and other borrowings, net

    -       (30,708 )

Proceeds from stock options exercised

    157       47  

Payments for repurchase of treasury stock

    (14,715 )     (256 )

Payments of common dividends

    (14,198 )     (5,441 )

Net cash used in financing activities

    (56,126 )     (32,316 )

Net (decrease) increase in cash and cash equivalents

    (49,994 )     30,492  

Cash and cash equivalents at beginning of period

    157,951       76,307  

Cash and cash equivalents at end of period

  $ 107,957     $ 106,799  
                 

Supplemental disclosure -- cash flow information

               

Cash paid for interest

  $ 4,001     $ 4,284  

Cash paid for income taxes

    4,000       9,812  
                 

Supplemental transactions -- noncash items

               

Transfer of loans to other real estate owned

    3,928       775  

(Increase) decrease in accumulated other comprehensive loss

    (1,745 )     2,010  

 

See Notes to Condensed Consolidated Financial Statements.

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note 1. Basis of Presentation

 

General

 

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

 

Principles of Consolidation

 

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

 

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, 2017 (the “2017 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2018. The condensed consolidated balance sheet as of December 31, 2017, 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 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

 

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2018, and 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 2017 Form 10-K.

 

Recent Accounting Standards

 

Standards Adopted in 2018

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted ASU 2017-09 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements.

 

 

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Securities.” This ASU amends the amortization period for certain purchased callable debt securities. The Company early adopted ASU 2017-08 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements since securities held at a premium were already being amortized to the earliest call date.

 

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. The Company adopted ASU 2017-07 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements. In accordance with the standard, the Company reclassified the non-service components of the net periodic benefit costs from salaries and employee benefits to other expense on a retrospective basis which totaled $158 thousand for the three months ended June 30, 2017, and $315 thousand for the six months ended June 30, 2017.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This ASU requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The update should be applied on a retrospective basis, if practicable. The Company adopted ASU 2016-15 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements. In accordance with the standard, the Company reclassified proceeds from bank owned life insurance from operating activities to investing activities on a retrospective basis.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU significantly revises how entities account and disclose financial assets and liabilities. The guidance (1) requires most equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplifies the impairment assessment of equity investments without a readily determinable fair value; (3) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (4) requires public business entities to use exit price notion, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (5) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (6) requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (7) states that a valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets. In February 2018, the FASB issued ASU 2018-03, which included technical corrections and improvements to clarify the guidance in ASU 2016-01. The Company adopted ASU 2016-01 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements. In accordance with the prospective application of the standard, the Company measured the fair value of loans using an exit price notion as of March 31, 2018. For additional information, see Note 13, “Fair Value” to the Condensed Consolidated Financial Statements of this report.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” deferring the effective date of ASU 2014-09 for the Company until fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The Company adopted Topic 606, and related updates, in the first quarter of 2018 using the modified retrospective method. The Company’s primary source of revenue is interest income, which is excluded from the scope of this guidance; however, the Company evaluated the impact on other income; which includes fees for services, commissions on sales, and various deposit service charges; revenue contracts; and disclosures and determined that no cumulative-effect adjustment to retained earnings was necessary. The adoption of the standard did not have a material effect on the Company’s financial statements.

 

 

Revenue Recognition

 

Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,” establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The great majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and derivatives and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are discussed below, are presented in the Company’s consolidated statements of income as components of noninterest income.

 

Wealth management. Wealth management income represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when the performance obligation is completed each month, which is generally the time that payment is received. Income also includes fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that are referred to the third party. These fees are paid to the Company by the third party on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied.

 

Service charges on deposits and other service charges and fees. Service charges on deposits and other service charges and fees represent general service fees for account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees. In accordance with the adoption of ASC 606, the Company reclassified interchange expense, which was previously a component of noninterest expense, to net against interchange income. Net interchange income totaled $1.47 million, which included interchange income of $1.95 million and interchange expense of $487 thousand for the three months ended June 30, 2018. Net interchange income totaled $2.80 million, which included interchange income of $3.72 million and interchange expense of $915 thousand for the six months ended June 30, 2018. Net interchange income totaled $1.30 million, which included interchange income of $1.72 million and interchange expense of $421 thousand for the three months ended June 30, 2017. Net interchange income totaled $2.53 million, which included interchange income of $3.33 million and interchange expense of $799 thousand for the six months ended June 30, 2017.

 

Other operating income. Other operating income consists primarily of dividends received and income on life insurance contracts, which are not subject to the requirements of ASC 606.

 

Standards Not Yet Adopted

 

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 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2018-09 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This 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 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017-12 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

 

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

 

 

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

 

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:

 

   

June 30, 2018

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 1,166     $ 4     $ -     $ 1,170  

U.S. Treasury securities

    49,827       -       (19 )     49,808  

Municipal securities

    99,451       1,063       (909 )     99,605  

Single issue trust preferred securities

    9,374       -       (391 )     8,983  

Mortgage-backed Agency securities

    37,816       34       (991 )     36,859  

Total

  $ 197,634     $ 1,101     $ (2,310 )   $ 196,425  

 

   

December 31, 2017

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 11,289     $ 17     $ (10 )   $ 11,296  

U.S. Treasury securities

    19,987       -       (16 )     19,971  

Municipal securities

    101,552       2,203       (107 )     103,648  

Single issue trust preferred securities

    9,367       -       (483 )     8,884  

Mortgage-backed Agency securities

    22,095       46       (415 )     21,726  

Total

  $ 164,290     $ 2,266     $ (1,031 )   $ 165,525  

 

 

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

 

   

June 30, 2018

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 17,913     $ -     $ (74 )   $ 17,839  

Corporate securities

    7,169       -       (28 )     7,141  

Total

  $ 25,082     $ -     $ (102 )   $ 24,980  

 

   

December 31, 2017

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(Amounts in thousands)

                               

U.S. Agency securities

  $ 17,937     $ -     $ (49 )   $ 17,888  

Corporate securities

    7,212       -       (16 )     7,196  

Total

  $ 25,149     $ -     $ (65 )   $ 25,084  

 

The following table presents the amortized cost and aggregate fair value of available-for-sale debt securities and held-to-maturity 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.

 

   

June 30, 2018

 
   

Amortized

         

(Amounts in thousands)

 

Cost

   

Fair Value

 

Available-for-sale debt securities

               

Due within one year

  $ 49,827     $ 49,808  

Due after one year but within five years

    9,902       10,014  

Due after five years but within ten years

    97,955       97,590  

Due after ten years

    2,134       2,154  
      159,818       159,566  

Mortgage-backed securities

    37,816       36,859  

Total debt securities available for sale

  $ 197,634     $ 196,425  
                 

Held-to-maturity debt securities

               

Due within one year

  $ 25,082     $ 24,980  

Due after one year but within five years

    -       -  

Due after five years but within ten years

    -       -  

Due after ten years

    -       -  

Total debt securities held to maturity

  $ 25,082     $ 24,980  

 

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:

 

   

June 30, 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

  $ -     $ -     $ -     $ -     $ -     $ -  

U.S. Treasury securities

    49,808       (19 )     -       -       49,808       (19 )

Municipal securities

    27,572       (803 )     1,569       (106 )     29,141       (909 )

Single issue trust preferred securities

    -       -       8,983       (391 )     8,983       (391 )

Mortgage-backed Agency securities

    19,744       (257 )     12,690       (734 )     32,434       (991 )

Total

  $ 97,124     $ (1,079 )   $ 23,242     $ (1,231 )   $ 120,366     $ (2,310 )

 

 

   

December 31, 2017

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

U.S. Agency securities

  $ 10,054     $ (10 )   $ -     $ -     $ 10,054     $ (10 )

U.S. Treasury securities

    19,972       (16 )     -       -       19,972       (16 )

Municipal securities

    8,047       (55 )     2,314       (52 )     10,361       (107 )

Single issue trust preferred securities

    -       -       8,884       (483 )     8,884       (483 )

Mortgage-backed Agency securities

    4,276       (25 )     14,069       (390 )     18,345       (415 )

Total

  $ 42,349     $ (106 )   $ 25,267     $ (925 )   $ 67,616     $ (1,031 )

 

The following tables present 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:

 

   

June 30, 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

  $ 17,839     $ (74 )   $ -     $ -     $ 17,839     $ (74 )

Corporate securities

    7,141       (28 )     -       -       7,141       (28 )

Total

  $ 24,980     $ (102 )   $ -     $ -     $ 24,980     $ (102 )

 

   

December 31, 2017

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

(Amounts in thousands)

                                               

U.S. Agency securities

  $ 17,888     $ (49 )   $ -     $ -     $ 17,888     $ (49 )

Corporate securities

    7,196       (16 )     -       -       7,196       (16 )

Total

  $ 25,084     $ (65 )   $ -     $ -     $ 25,084     $ (65 )

 

There were 111 individual debt securities in an unrealized loss position as of June 30, 2018, and their combined depreciation in value represented 1.09% of the debt securities portfolio. There were 45 individual debt securities in an unrealized loss position as of December 31, 2017, and their combined depreciation in value represented 0.57% 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 six months ended June 30, 2018 and 2017, 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

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

                               

Gross realized gains

  $ -     $ -     $ -     $ -  

Gross realized losses

    -       (657 )     -       (657 )

Net loss on sale of securities

  $ -     $ (657 )   $ -     $ (657 )

 

The carrying amount of securities pledged for various purposes totaled $47.76 million as of June 30, 2018, and $51.34 million as of December 31, 2017.

 

 

 

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 $1.70 million as of June 30, 2018, and $1.71 million as of December 31, 2017. Deferred loan fees, net of loan costs, totaled $4.42 million as of June 30, 2018, and $4.44 million as of December 31, 2017. For information about off-balance sheet financing, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

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

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

 

Non-covered loans held for investment

                               

Commercial loans

                               

Construction, development, and other land

  $ 57,986       3.22 %   $ 60,017       3.30 %

Commercial and industrial

    96,614       5.37 %     92,188       5.07 %

Multi-family residential

    110,067       6.12 %     125,202       6.89 %

Single family non-owner occupied

    142,076       7.90 %     141,670       7.80 %

Non-farm, non-residential

    624,999       34.74 %     616,633       33.93 %

Agricultural

    8,895       0.49 %     7,035       0.39 %

Farmland

    22,055       1.23 %     25,649       1.41 %

Total commercial loans

    1,062,692       59.07 %     1,068,394       58.79 %

Consumer real estate loans

                               

Home equity lines

    100,194       5.57 %     103,205       5.68 %

Single family owner occupied

    517,058       28.74 %     502,686       27.66 %

Owner occupied construction

    22,647       1.26 %     39,178       2.16 %

Total consumer real estate loans

    639,899       35.57 %     645,069       35.50 %

Consumer and other loans

                               

Consumer loans

    68,885       3.83 %     70,772       3.89 %

Other

    4,636       0.26 %     5,001       0.28 %

Total consumer and other loans

    73,521       4.09 %     75,773       4.17 %

Total non-covered loans

    1,776,112       98.73 %     1,789,236       98.46 %

Total covered loans

    22,919       1.27 %     27,948       1.54 %

Total loans held for investment, net of unearned income

  $ 1,799,031       100.00 %   $ 1,817,184       100.00 %

 

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

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

               

Covered loans

               

Commercial loans

               

Construction, development, and other land

  $ 35     $ 39  

Single family non-owner occupied

    252       284  

Non-farm, non-residential

    8       9  

Total commercial loans

    295       332  

Consumer real estate loans

               

Home equity lines

    19,151       23,720  

Single family owner occupied

    3,473       3,896  

Total consumer real estate loans

    22,624       27,616  

Total covered loans

  $ 22,919     $ 27,948  

 

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:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

 

Recorded Investment

   

Unpaid Principal Balance

   

Recorded Investment

   

Unpaid Principal Balance

 

PCI Loans, by acquisition

                               

Peoples

  $ 5,443     $ 7,772     $ 5,278     $ 8,111  

Waccamaw

    9,815       26,137       12,176       31,335  

Other acquired

    923       949       986       1,012  

Total PCI Loans

  $ 16,181     $ 34,858     $ 18,440     $ 40,458  

 

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, 2017

  $ 4,392     $ 21,834     $ 26,226  

Accretion

    (606 )     (3,325 )     (3,931 )

Reclassifications from nonaccretable difference(1)

    681       1,621       2,302  

Other changes, net

    (41 )     (624 )     (665 )

Balance June 30, 2017

  $ 4,426     $ 19,506     $ 23,932  
                         

Balance January 1, 2018

  $ 3,388     $ 19,465     $ 22,853  

Accretion

    (686 )     (3,167 )     (3,853 )

Reclassifications (to) from nonaccretable difference(1)

    (22 )     1,221       1,199  

Other changes, net

    212       (74 )     138  

Balance June 30, 2018

  $ 2,892     $ 17,445     $ 20,337  
                         

(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.

 

 

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.

 

   

June 30, 2018

 
           

Special

                                 

(Amounts in thousands)

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 55,999     $ 835     $ 1,152     $ -     $ -     $ 57,986  

Commercial and industrial

    93,472       2,602       540       -       -       96,614  

Multi-family residential

    105,533       3,877       657       -       -       110,067  

Single family non-owner occupied

    132,858       5,309       3,909       -       -       142,076  

Non-farm, non-residential

    604,886       9,807       10,160       146       -       624,999  

Agricultural

    8,517       202       176       -       -       8,895  

Farmland

    19,154       321       2,444       -       136       22,055  

Consumer real estate loans

                                               

Home equity lines

    97,813       597       1,784       -       -       100,194  

Single family owner occupied

    486,660       4,824       25,574       -       -       517,058  

Owner occupied construction

    22,280       -       367       -       -       22,647  

Consumer and other loans

                                               

Consumer loans

    68,592       7       281       -       5       68,885  

Other

    4,636       -       -       -       -       4,636  

Total non-covered loans

    1,700,400       28,381       47,044       146       141       1,776,112  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    -       35       -       -       -       35  

Single family non-owner occupied

    235       -       17       -       -       252  

Non-farm, non-residential

    -       -       8       -       -       8  

Consumer real estate loans

                                               

Home equity lines

    10,341       7,954       856       -       -       19,151  

Single family owner occupied

    2,708       378       387       -       -       3,473  

Total covered loans

    13,284       8,367       1,268       -       -       22,919  

Total loans

  $ 1,713,684     $ 36,748     $ 48,312     $ 146     $ 141     $ 1,799,031  

 

 

   

December 31, 2017

 
           

Special

                                 

(Amounts in thousands)

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 57,768     $ 1,367     $ 882     $ -     $ -     $ 60,017  

Commercial and industrial

    87,181       3,721       1,286       -       -       92,188  

Multi-family residential

    118,509       5,663       1,030       -       -       125,202  

Single family non-owner occupied

    130,689       7,271       3,710       -       -       141,670  

Non-farm, non-residential

    596,616       12,493       7,351       173       -       616,633  

Agricultural

    6,639       294       102       -       -       7,035  

Farmland

    22,875       210       2,564       -       -       25,649  

Consumer real estate loans

                                               

Home equity lines

    100,833       618       1,754       -       -       103,205  

Single family owner occupied

    471,382       5,480       25,824       -       -       502,686  

Owner occupied construction

    38,947       -       231       -       -       39,178  

Consumer and other loans

                                               

Consumer loans

    70,448       13       311       -       -       70,772  

Other

    5,001       -       -       -       -       5,001  

Total non-covered loans

    1,706,888       37,130       45,045       173       -       1,789,236  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    1       38       -       -       -       39  

Single family non-owner occupied

    265       -       19       -       -       284  

Non-farm, non-residential

    -       -       9       -       -       9  

Consumer real estate loans

                                               

Home equity lines

    11,338       11,685       697       -       -       23,720  

Single family owner occupied

    2,996       411       489       -       -       3,896  

Total covered loans

    14,600       12,134       1,214       -       -       27,948  

Total loans

  $ 1,721,488     $ 49,264     $ 46,259     $ 173     $ -     $ 1,817,184  

 

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.

 

 

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:

 

   

June 30, 2018

   

December 31, 2017

 
           

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

  $ 820     $ 835     $ -     $ 727     $ 988     $ -  

Commercial and industrial

    230       249       -       315       1,142       -  

Multi-family residential

    290       412       -       499       1,010       -  

Single family non-owner occupied

    2,117       2,385       -       2,042       3,521       -  

Non-farm, non-residential

    4,012       4,883       -       3,022       5,955       -  

Agricultural

    176       181       -       102       107       -  

Farmland

    1,335       1,405       -       395       414       -  

Consumer real estate loans

                                               

Home equity lines

    1,833       1,954       -       1,621       1,770       -  

Single family owner occupied

    14,132       15,470       -       16,633       18,964       -  

Owner occupied construction

    292       292       -       231       231       -  

Consumer and other loans

                                               

Consumer loans

    198       207       -       141       144       -  

Total impaired loans with no allowance

    25,435       28,273       -       25,728       34,246       -  
                                                 

Impaired loans with a related allowance

                                               

Commercial loans

                                               

Commercial and industrial

    -       -       -       343       343       270  

Single family non-owner occupied

    -       -       -       446       446       62  

Non-farm, non-residential

    1,378       1,378       473       262       263       15  

Farmland

    410       418       105       936       974       233  

Consumer real estate loans

                                               

Home equity lines

    67       69       67       -       -       -  

Single family owner occupied

    7,043       7,053       2,434       5,586       5,606       1,978  

Total impaired loans with an allowance

    8,898       8,918       3,079       7,573       7,632       2,558  

Total impaired loans(1)

  $ 34,333     $ 37,191     $ 3,079     $ 33,301     $ 41,878     $ 2,558  
                                                 

(1)

Total impaired loans include loans totaling $24.92 million as of June 30, 2018, and $20.13 million as of December 31, 2017, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment. During the first quarter of 2018, the Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from $250 thousand to $500 thousand or greater.

 

 

The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

 

Interest Income Recognized

   

Average Recorded Investment

   

Interest Income Recognized

   

Average Recorded Investment

   

Interest Income Recognized

   

Average Recorded Investment

   

Interest Income Recognized

   

Average Recorded Investment

 

Impaired loans with no related allowance:

                                                               

Commercial loans

                                                               

Construction, development, and other land

  $ 1     $ 823     $ -     $ 10     $ 14     $ 969     $ -     $ 11  

Commercial and industrial

    2       237       1       321       3       411       3       325  

Multi-family residential

    -       296       3       557       10       547       3       457  

Single family non-owner occupied

    25       2,307       34       3,308       48       2,634       77       3,317  

Non-farm, non-residential

    -       4,048       21       3,330       39       5,579       25       3,027  

Agricultural

    -       175       -       128       -       229       -       127  

Farmland

    6       1,336       -       1,003       15       887       -       1,005  

Consumer real estate loans

                                                               

Home equity lines

    10       1,837       5       1,052       17       1,822       20       1,047  

Single family owner occupied

    86       14,247       93       15,943       193       14,917       180       14,074  

Owner occupied construction

    3       292       2       234       6       259       5       233  

Consumer and other loans

                                                               

Consumer loans

    5       207       2       43       6       141       2       46  

Total impaired loans with no related allowance

    138       25,805       161       25,929       351       28,395       315       23,669  
                                                                 

Impaired loans with a related allowance:

                                                               

Commercial loans

                                                               

Construction, development, and other land

    -       -       -       -       -       -       -       214  

Commercial and industrial

    -       -       38       2,352       -       -       53       1,332  

Single family non-owner occupied

    -       -       5       344       7       439       13       344  

Non-farm, non-residential

    -       1,374       5       867       -       770       15       1,011  

Farmland

    -       409       -       411       -       407       -       205  

Consumer real estate loans

                                                               

Home equity lines

    2       68       -       -       2       70       -       209  

Single family owner occupied

    59       7,040       33       3,393       91       6,257       68       4,883  

Owner occupied construction

    -       -       -       -       -       -       -       -  

Total impaired loans with a related allowance

    61       8,891       81       7,367       100       7,943       149       8,198  

Total impaired loans

  $ 199     $ 34,696     $ 242     $ 33,296     $ 451     $ 36,338     $ 464     $ 31,867  

 

There were no impaired PCI loan pools as of June 30, 2018, or December 31, 2017. The following table provides information on impaired PCI loan pools for the dates indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

                               

Interest income recognized

  $ -     $ 10     $ -     $ 20  

Average recorded investment

    -       1,053       -       1,064  

 

 

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. PCI loans are generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

 

Non-covered

   

Covered

   

Total

   

Non-covered

   

Covered

   

Total

 

Commercial loans

                                               

Construction, development, and other land

  $ 397     $ -     $ 397     $ -     $ -     $ -  

Commercial and industrial

    212       -       212       211       -       211  

Multi-family residential

    290       -       290       498       -       498  

Single family non-owner occupied

    954       17       971       851       19       870  

Non-farm, non-residential

    4,665       -       4,665       2,448       -       2,448  

Agricultural

    176       -       176       102       -       102  

Farmland

    1,361       -       1,361       805       -       805  

Consumer real estate loans

                                               

Home equity lines

    883       484       1,367       882       306       1,188  

Single family owner occupied

    12,417       -       12,417       13,108       17       13,125  

Owner occupied construction

    64       8       72       -       -       -  

Consumer and other loans

                                               

Consumer loans

    48       -       48       92       -       92  

Total nonaccrual loans

  $ 21,467     $ 509     $ 21,976     $ 18,997     $ 342     $ 19,339  

 

 

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. There were no non-covered accruing loans contractually past due 90 days or more as of June 30, 2018, compared to $1 thousand as of December 31, 2017.

 

   

June 30, 2018

 
   

30 - 59 Days

   

60 - 89 Days

   

90+ Days

   

Total

   

Current

   

Total

 

(Amounts in thousands)

 

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Loans

   

Loans

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 33     $ -     $ 388     $ 421     $ 57,565     $ 57,986  

Commercial and industrial

    221       182       98       501       96,113       96,614  

Multi-family residential

    -       371       -       371       109,696       110,067  

Single family non-owner occupied

    789       78       686       1,553       140,523       142,076  

Non-farm, non-residential

    1,920       40       3,954       5,914       619,085       624,999  

Agricultural

    -       -       74       74       8,821       8,895  

Farmland

    216       -       995       1,211       20,844       22,055  

Consumer real estate loans

                                               

Home equity lines

    162       156       558       876       99,318       100,194  

Single family owner occupied

    3,344       1,233       7,322       11,899       505,159       517,058  

Owner occupied construction

    -       -       64       64       22,583       22,647  

Consumer and other loans

                                               

Consumer loans

    479       141       -       620       68,265       68,885  

Other

    -       -       -       -       4,636       4,636  

Total non-covered loans

    7,164       2,201       14,139       23,504       1,752,608       1,776,112  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    -       -       -       -       35       35  

Single family non-owner occupied

    17       -       -       17       235       252  

Non-farm, non-residential

    -       -       -       -       8       8  

Consumer real estate loans

                                               

Home equity lines

    191       130       297       618       18,533       19,151  

Single family owner occupied

    -       -       -       -       3,473       3,473  

Total covered loans

    208       130       297       635       22,284       22,919  

Total loans

  $ 7,372     $ 2,331     $ 14,436     $ 24,139     $ 1,774,892     $ 1,799,031  

 

 

   

December 31, 2017

 
   

30 - 59 Days

   

60 - 89 Days

   

90+ Days

   

Total

   

Current

   

Total

 

(Amounts in thousands)

 

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Loans

   

Loans

 

Non-covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 20     $ 365     $ -     $ 385     $ 59,632     $ 60,017  

Commercial and industrial

    232       40       142       414       91,774       92,188  

Multi-family residential

    544       -       185       729       124,473       125,202  

Single family non-owner occupied

    223       302       331       856       140,814       141,670  

Non-farm, non-residential

    2,433       383       1,536       4,352       612,281       616,633  

Agricultural

    123       -       -       123       6,912       7,035  

Farmland

    113       -       692       805       24,844       25,649  

Consumer real estate loans

                                               

Home equity lines

    226       198       485       909       102,296       103,205  

Single family owner occupied

    6,959       2,418       8,186       17,563       485,123       502,686  

Owner occupied construction

    326       79       -       405       38,773       39,178  

Consumer and other loans

                                               

Consumer loans

    439       97       17       553       70,219       70,772  

Other

    -       -       -       -       5,001       5,001  

Total non-covered loans

    11,638       3,882       11,574       27,094       1,762,142       1,789,236  

Covered loans

                                               

Commercial loans

                                               

Construction, development, and other land

    -       -       -       -       39       39  

Single family non-owner occupied

    -       -       -       -       284       284  

Non-farm, non-residential

    -       -       -       -       9       9  

Consumer real estate loans

                                               

Home equity lines

    402       -       173       575       23,145       23,720  

Single family owner occupied

    70       -       -       70       3,826       3,896  

Total covered loans

    472       -       173       645       27,303       27,948  

Total loans

  $ 12,110     $ 3,882     $ 11,747     $ 27,739     $ 1,789,445     $ 1,817,184  

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of $250 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally not considered TDRs as long as the loans remain in the assigned loan pool. No covered loans were recorded as TDRs as of June 30, 2018, or December 31, 2017.

 

 

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

 

Nonaccrual(1)

   

Accruing

   

Total

   

Nonaccrual(1)

   

Accruing

   

Total

 

Commercial loans

                                               

Single family non-owner occupied

  $ 339     $ 314     $ 653     $ 364     $ 528     $ 892  

Non-farm, non-residential

    -       289       289       -       295       295  

Consumer real estate loans

                                               

Home equity lines

    -       135       135       -       145       145  

Single family owner occupied

    1,675       5,978       7,653       1,565       6,496       8,061  

Owner occupied construction

    -       228       228       -       233       233  

Consumer and other loans

                                               

Consumer loans

    -       36       36       -       37       37  

Total TDRs

  $ 2,014     $ 6,980     $ 8,994     $ 1,929     $ 7,734     $ 9,663  
                                                 

Allowance for loan losses related to TDRs

                  $ 581                     $ 642  
                                                 

(1)

Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

 

The following table presents interest income recognized on TDRs for the periods indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

                               

Interest income recognized

  $ 64     $ 1     $ 134     $ 85  

 

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 

(Amounts in thousands)

 

Total

Contracts

   

Pre-modification Recorded Investment

   

Post-modification Recorded Investment(1)

   

Total

Contracts

   

Pre-modification Recorded Investment

   

Post-modification Recorded Investment(1)

 

Below market interest rate

                                               

Single family owner occupied

    -     $ -     $ -       1     $ 241     $ 241  

Below market interest rate and extended payment term

                                               

Single family owner occupied

    -       -       -       5       949       949  

Total

    -     $ -     $ -       6     $ 1,190     $ 1,190  
                                                 

(1) Represents the loan balance immediately following modification

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 

(Amounts in thousands)

 

Total

Contracts

   

Pre-modification Recorded Investment

   

Post-modification Recorded Investment(1)

   

Total

Contracts

   

Pre-modification Recorded Investment

   

Post-modification Recorded Investment(1)

 

Below market interest rate

                                               

Single family owner occupied

    -     $ -     $ -       1     $ 241     $ 241  

Below market interest rate and extended payment term

                                               

Single family owner occupied

    -       -       -       5       949       949  

Total

    -     $ -     $ -       6     $ 1,190     $ 1,190  
                                                 

(1) Represents the loan balance immediately following modification

 

There were no payment defaults on loans modified as TDRs that were restructured within the previous 12 months as of June 30, 2018 or 2017.

 

 

The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

               

Non-covered OREO

  $ 4,805     $ 2,409  

Covered OREO

    44       105  

Total OREO

  $ 4,849     $ 2,514  
                 

Non-covered OREO secured by residential real estate

  $ 3,384     $ 2,209  

Residential real estate loans in the foreclosure process(1)

    8,338       9,921  
                 

(1)

The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction

 

 

Note 5. Allowance for Loan Losses

 

The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI loans as of June 30, 2018, or December 31, 2017.

 

   

Three Months Ended June 30, 2018

 

(Amounts in thousands)

 

Commercial

   

Consumer Real Estate

   

Consumer and Other

   

Total

Allowance

 

Total allowance

                               

Beginning balance

  $ 11,778     $ 6,963     $ 759     $ 19,500  

(Recovery of) provision for loan losses charged to operations

    (684 )     906       273       495  

Charge-offs

    (328 )     (124 )     (298 )     (750 )

Recoveries

    136       122       80       338  

Net charge-offs

    (192 )     (2 )     (218 )     (412 )

Ending balance

  $ 10,902     $ 7,867     $ 814     $ 19,583  

 

   

Six Months Ended June 30, 2018

 

(Amounts in thousands)

 

Commercial

   

Consumer Real Estate

   

Consumer and Other

   

Total

Allowance

 

Total allowance

                               

Beginning balance

  $ 11,672     $ 6,810     $ 794     $ 19,276  

(Recovery of) provision for loan losses charged to operations

    (725 )     1,143       572       990  

Charge-offs

    (469 )     (255 )     (724 )     (1,448 )

Recoveries

    424       169       172       765  

Net charge-offs

    (45 )     (86 )     (552 )     (683 )

Ending balance

  $ 10,902     $ 7,867     $ 814     $ 19,583  

 

 

   

Three Months Ended June 30, 2017

 

(Amounts in thousands)

 

Commercial

   

Consumer Real Estate

   

Consumer and Other

   

Total

Allowance

 

Allowance, excluding PCI

                               

Beginning balance

  $ 11,972     $ 5,734     $ 740     $ 18,446  

Provision for loan losses charged to operations

    379       240       319       938  

Charge-offs

    (257 )     (321 )     (324 )     (902 )

Recoveries

    189       149       58       396  

Net charge-offs

    (68 )     (172 )     (266 )     (506 )

Ending balance

  $ 12,283     $ 5,802     $ 793     $ 18,878  
                                 

PCI allowance

                               

Beginning balance

  $ -     $ 12     $ -     $ 12  

Recovery of loan losses

    -       (4 )     -       (4 )

Benefit attributable to the FDIC indemnification asset

    -       -       -       -  

Recovery of loan losses charged to operations

    -       (4 )     -       (4 )

Recovery of loan losses recorded through the FDIC indemnification asset

    -       -       -       -  

Ending balance

  $ -     $ 8     $ -     $ 8  
                                 

Total allowance

                               

Beginning balance

  $ 11,972     $ 5,746     $ 740     $ 18,458  

Provision for loan losses

    379       236       319       934  

Benefit attributable to the FDIC indemnification asset

    -       -       -       -  

Provision for loan losses charged to operations

    379       236       319       934  

Recovery of loan losses recorded through the FDIC indemnification asset

    -       -       -       -  

Charge-offs

    (257 )     (321 )     (324 )     (902 )

Recoveries

    189       149       58       396  

Net charge-offs

    (68 )     (172 )     (266 )     (506 )

Ending balance

  $ 12,283     $ 5,810     $ 793     $ 18,886  

 

 

   

Six Months Ended June 30, 2017

 

(Amounts in thousands)

 

Commercial

   

Consumer Real Estate

   

Consumer and Other

   

Total

Allowance

 

Allowance, excluding PCI

                               

Beginning balance

  $ 11,690     $ 5,487     $ 759     $ 17,936  

Provision for loan losses charged to operations

    464       486       480       1,430  

Charge-offs

    (286 )     (398 )     (575 )     (1,259 )

Recoveries

    415       227       129       771  

Net recoveries (charge-offs)

    129       (171 )     (446 )     (488 )

Ending balance

  $ 12,283     $ 5,802     $ 793     $ 18,878  
                                 

PCI allowance

                               

Beginning balance

  $ -     $ 12     $ -     $ 12  

Recovery of loan losses

    -       (4 )     -       (4 )

Benefit attributable to the FDIC indemnification asset

    -       -       -       -  

Recovery of loan losses charged to operations

    -       (4 )     -       (4 )

Recovery of loan losses recorded through the FDIC indemnification asset

    -       -       -       -  

Ending balance

  $ -     $ 8     $ -     $ 8  
                                 

Total allowance

                               

Beginning balance

  $ 11,690     $ 5,499     $ 759     $ 17,948  

Provision for loan losses

    464       482       480       1,426  

Benefit attributable to the FDIC indemnification asset

    -       -       -       -  

Provision for loan losses charged to operations

    464       482       480       1,426  

Recovery of loan losses recorded through the FDIC indemnification asset

    -       -       -       -  

Charge-offs

    (286 )     (398 )     (575 )     (1,259 )

Recoveries

    415       227       129       771  

Net recoveries (charge-offs)

    129       (171 )     (446 )     (488 )

Ending balance

  $ 12,283     $ 5,810     $ 793     $ 18,886  

 

 

The following tables present the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the dates indicated:

 

   

June 30, 2018

 

(Amounts in thousands)

 

Loans Individually Evaluated for Impairment(1)

   

Allowance for Loans

Individually

Evaluated

   

Loans Collectively Evaluated for Impairment

   

Allowance for Loans

Collectively

Evaluated

 

Commercial loans

                               

Construction, development, and other land

  $ -     $ -     $ 57,375     $ 369  

Commercial and industrial

    -       -       96,602       538  

Multi-family residential

    -       -       110,067       997  

Single family non-owner occupied

    -       -       139,813       1,416  

Non-farm, non-residential

    1,378       473       618,953       6,783  

Agricultural

    -       -       8,895       100  

Farmland

    929       105       21,126       121  

Total commercial loans

    2,307       578       1,052,831       10,324  

Consumer real estate loans

                               

Home equity lines

    67       67       111,616       680  

Single family owner occupied

    7,043       2,434       512,818       4,525  

Owner occupied construction

    -       -       22,647       161  

Total consumer real estate loans

    7,110       2,501       647,081       5,366  

Consumer and other loans

                               

Consumer loans

    -       -       68,885       814  

Other

    -       -       4,636       -  

Total consumer and other loans

    -       -       73,521       814  

Total loans, excluding PCI loans

  $ 9,417     $ 3,079     $ 1,773,433     $ 16,504  

 

   

December 31, 2017

 

(Amounts in thousands)

 

Loans Individually Evaluated for Impairment(1)

   

Allowance for Loans Individually

Evaluated

   

Loans Collectively Evaluated for Impairment

   

Allowance for Loans Collectively

Evaluated

 

Commercial loans

                               

Construction, development, and other land

  $ -     $ -     $ 59,386     $ 830  

Commercial and industrial

    343       270       91,845       492  

Multi-family residential

    -       -       125,202       1,094  

Single family non-owner occupied

    770       62       139,093       1,914  

Non-farm, non-residential

    1,367       15       611,477       6,582  

Agricultural

    -       -       7,035       51  

Farmland

    1,219       233       24,430       129  

Total commercial loans

    3,699       580       1,058,468       11,092  

Consumer real estate loans

                               

Home equity lines

    -       -       115,807       803  

Single family owner occupied

    9,471       1,978       496,348       3,732  

Owner occupied construction

    -       -       39,178       297  

Total consumer real estate loans

    9,471       1,978       651,333       4,832  

Consumer and other loans

                               

Consumer loans

    -       -       70,772       794  

Other

    -       -       5,001       -  

Total consumer and other loans

    -       -       75,773       794  

Total loans, excluding PCI loans

  $ 13,170     $ 2,558     $ 1,785,574     $ 16,718  

 

 

The following table presents the recorded investment in PCI loans and the allowance for loan losses on PCI loans, by loan pool, as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

 

Recorded Investment

   

Allowance for Loan Pools With

Impairment

   

Recorded Investment

   

Allowance for Loan Pools With

Impairment

 

Commercial loans

                               

Waccamaw commercial

  $ 1,330     $ -     $ 64     $ -  

Peoples commercial

    4,479       -       4,279       -  

Other

    923       -       986       -  

Total commercial loans

    6,732       -       5,329       -  

Consumer real estate loans

                               

Waccamaw serviced home equity lines

    7,662       -       11,118       -  

Waccamaw residential

    823       -       994       -  

Peoples residential

    964       -       999       -  

Total consumer real estate loans

    9,449       -       13,111       -  

Total PCI loans

  $ 16,181     $ -     $ 18,440     $ -  

 

Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of June 30, 2018.

 

 

Note 6. FDIC Indemnification Asset

 

In connection with the FDIC-assisted acquisition of Waccamaw Bank (“Waccamaw”) in 2012, the Company entered into loss share agreements with the FDIC that covered $22.92 million of loans and $44 thousand of OREO as of June 30, 2018, compared to $27.95 million of loans and $105 thousand of OREO as of December 31, 2017. Under the loss share agreements, the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to these covered assets. Loss share coverage expired June 30, 2017, for commercial loans, with recoveries continuing until June 30, 2019. Loss share coverage will expire June 30, 2022, for single family loans. The Company’s consolidated statements of income include the expense on covered assets net of estimated reimbursements. The following table presents the changes in the FDIC indemnification asset during the periods indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

                               

Beginning balance

  $ 6,884     $ 9,931     $ 7,161     $ 12,173  

Increase in estimated losses on covered OREO

    -       61       -       67  

Reimbursable expenses from the FDIC

    (15 )     159       (21 )     61  

Net amortization

    (575 )     (1,586 )     (957 )     (2,918 )

Payments to (reimbursements from) the FDIC

    96       (406 )     207       (1,224 )

Ending balance

  $ 6,390     $ 8,159     $ 6,390     $ 8,159  

 

 

 

Note 7. Deposits

 

The following table presents the components of deposits as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

               

Noninterest-bearing demand deposits

  $ 462,851     $ 454,143  

Interest-bearing deposits:

               

Interest-bearing demand deposits

    462,334       465,407  

Money market accounts

    156,421       170,731  

Savings deposits

    352,693       342,064  

Certificates of deposit

    350,582       374,373  

Individual retirement accounts

    119,857       123,173  

Total interest-bearing deposits

    1,441,887       1,475,748  

Total deposits

  $ 1,904,738     $ 1,929,891  

 

 

Note 8. Borrowings

 

The following table presents the components of borrowings as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

 

Balance

   

Weighted

Average Rate

   

Balance

   

Weighted

Average Rate

 

Short-term borrowings

                               

Retail repurchase agreements

  $ 2,869       0.06 %   $ 5,086       0.07 %

Long-term borrowings

                               

Wholesale repurchase agreements

    25,000       3.18 %     25,000       3.18 %

FHLB advances

    50,000       4.00 %     50,000       4.00 %

Total borrowings

  $ 77,869             $ 80,086          

 

The Company pledged certain securities to secure repurchase agreements. Pledged securities remain under the Company’s control during the agreements’ terms. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions.

 

The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of June 30, 2018:

 

   

U.S. Agency Securities

   

Municipal Securities

   

Single Issue

Trust Preferred Securities

   

Mortgage-backed Agency Securities

   

Corporate Securities

   

Total

 

(Amounts in thousands)

                                               

Overnight and continuous

  $ -     $ 1,235     $ -     $ 1,557     $ -     $ 2,792  

Up to 30 days

    -       -       -       -       -       -  

30 - 90 days

    -       -       -       -       -       -  

Greater than 90 days

    5,154       -       8,072       10,845       1,006       25,077  
    $ 5,154     $ 1,235     $ 8,072     $ 12,402     $ 1,006     $ 27,869  

 

 

The following schedule presents the contractual and weighted average maturities of long-term borrowings, by year, as of June 30, 2018:

 

   

Wholesale Repurchase Agreements

   

FHLB Borrowings

   

Total

 

(Amounts in thousands)

                       

2018

  $ -     $ -     $ -  

2019

    25,000       -       25,000  

2020

    -       -       -  

2021

    -       50,000       50,000  

2022

    -       -       -  

2023 and thereafter

    -       -       -  

Total

  $ 25,000     $ 50,000     $ 75,000  
                         

Weighted average maturity (in years)

    0.66       2.52       1.90  

 

The Company pledged certain loans to secure the FHLB advance and letters of credit totaling $888.31 million as of June 30, 2018. The FHLB letters of credit provide an attractive alternative to pledging securities for public unit deposits. Unused borrowing capacity with the FHLB totaled $371.96 million, net of FHLB letters of credit of $139.18 million, as of June 30, 2018. The prepayment of the advance may result in substantial penalties based on the differential between the contractual note and current advance rate for similar maturities.

 

The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of one-month LIBOR plus 2.00% that matures in April 2019. There was no outstanding balance on the line as of June 30, 2018, or December 31, 2017.

 

 

Note 9. Derivative Instruments and Hedging Activities

 

As of June 30, 2018, the Company’s derivative instruments consisted of interest rate swaps. Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

 

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period.

 

The Company enters into various interest rate swap agreements for individual loan hedging. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of June 30, 2018. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 
   

Notional or

   

Fair Value

   

Notional or

   

Fair Value

 

(Amounts in thousands)

  Contractual Amount    

Derivative

Assets

   

Derivative

Liabilities

   

Contractual

Amount

   

Derivative

Assets

   

Derivative

Liabilities

 

Derivatives designated as hedges

                                               

Interest rate swaps

  $ 5,649     $ 99     $ -     $ 5,813     $ -     $ 90  

Total derivatives

  $ 5,649     $ 99     $ -     $ 5,813     $ -     $ 90  

 

 

The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

 

(Amounts in thousands)

 

2018

   

2017

   

2018

   

2017

  Income Statement Location

Derivatives designated as hedges

                                 

Interest rate swaps

  $ 8     $ 19     $ 21     $ 41  

Interest and fees on loans

Total derivative expense

  $ 8     $ 19     $ 21     $ 41    

 

 

Note 10. Employee Benefit Plans

 

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan and the Directors’ Supplemental Retirement Plan. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

 

   

2018

   

2017

   

2018

   

2017

  Income Statement Location

(Amounts in thousands)

                                 

Service cost

  $ 55     $ 58     $ 123     $ 116  

Salaries and employee benefits

Interest cost

    90       93       179       186  

Other expense

Amortization of prior service cost

    55       57       114       114  

Other expense

Amortization of losses

    16       8       28       15  

Other expense

Net periodic cost

  $ 216     $ 216     $ 444     $ 431    

 

 

Note 11. Earnings per Share

 

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

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

                               

Net income

  $ 9,066     $ 6,418     $ 17,934     $ 12,620  
                                 

Weighted average common shares outstanding, basic

    16,689,398       17,012,189       16,821,842       17,005,196  

Dilutive effect of potential common shares

                               

Stock options

    69,914       47,591       62,384       50,356  

Restricted stock

    29,303       23,052       28,646       20,409  

Total dilutive effect of potential common shares

    99,217       70,643       91,030       70,765  

Weighted average common shares outstanding, diluted

    16,788,615       17,082,832       16,912,872       17,075,961  
                                 

Basic earnings per common share

  $ 0.54     $ 0.38     $ 1.06     $ 0.74  

Diluted earnings per common share

    0.54       0.38       1.06       0.74  
                                 

Antidilutive potential common shares

                               

Stock options

    -       71,592       -       59,473  

Restricted stock

    1,793       5,276       867       3,565  

Total potential antidilutive shares

    1,793       76,868       867       63,038  

 

 

 

Note 12. Accumulated Other Comprehensive Income (Loss)

 

The following tables present the changes in accumulated other comprehensive income (“AOCI”), net of tax and by component, during the periods indicated:

 

   

Three Months Ended June 30, 2018

 
   

Unrealized Gains (Losses) on Available-for-Sale Securities

   

Employee Benefit

Plans

   

Total

 

(Amounts in thousands)

                       

Beginning balance

  $ (722 )   $ (1,759 )   $ (2,481 )

Other comprehensive (loss) income before reclassifications

    (233 )     73       (160 )

Reclassified from AOCI

    -       56       56  

Other comprehensive (loss) income, net

    (233 )     129       (104 )

Ending balance

  $ (955 )   $ (1,630 )   $ (2,585 )

 

   

Three Months Ended June 30, 2017

 
   

Unrealized Gains (Losses) on Available-for-Sale Securities

   

Employee Benefit 

Plans

   

Total

 

(Amounts in thousands)

                       

Beginning balance

  $ (137 )   $ (1,344 )   $ (1,481 )

Other comprehensive income before reclassifications

    1,028       -       1,028  

Reclassified from AOCI

    411       41       452  

Other comprehensive income, net

    1,439       41       1,480  

Ending balance

  $ 1,302     $ (1,303 )   $ (1 )

 

   

Six Months Ended June 30, 2018

 
   

Unrealized Gains (Losses) on Available-for-Sale Securities

   

Employee Benefit

Plans

   

Total

 

(Amounts in thousands)

                       

Beginning balance

  $ 975     $ (1,815 )   $ (840 )

Other comprehensive (loss) income before reclassifications

    (1,930 )     73       (1,857 )

Reclassified from AOCI

    -       112       112  

Other comprehensive (loss) income, net

    (1,930 )     185       (1,745 )

Ending balance

  $ (955 )   $ (1,630 )   $ (2,585 )

 

   

Six Months Ended June 30, 2017

 
   

Unrealized Gains (Losses) on Available-for-Sale Securities

   

Employee Benefit

Plans

   

Total

 

(Amounts in thousands)

                       

Beginning balance

  $ (544 )   $ (1,467 )   $ (2,011 )

Other comprehensive income before reclassifications

    1,435       83       1,518  

Reclassified from AOCI

    411       81       492  

Other comprehensive income, net

    1,846       164       2,010  

Ending balance

  $ 1,302     $ (1,303 )   $ (1 )

 

 

The following table presents reclassifications out of AOCI, by component, during the periods indicated:

 

   

Three Months Ended

   

Six Months Ended

   
   

June 30,

   

June 30,

 

Income Statement

(Amounts in thousands)

 

2018

   

2017

   

2018

   

2017

 

Line Item Affected

Available-for-sale securities

                                 

Loss recognized

  $ -     $ 657     $ -     $ 657  

Net loss on sale of securities

Reclassified out of AOCI, before tax

    -       657       -       657  

Income before income taxes

Income tax expense

    -       246       -       246  

Income tax expense

Reclassified out of AOCI, net of tax

    -       411       -       411  

Net income

Employee benefit plans

                                 

Amortization of prior service cost

  $ 55     $ 57     $ 114     $ 114  

(1)

Amortization of net actuarial benefit cost

    16       8       28       15  

(1)

Reclassified out of AOCI, before tax

    71       65       142       129  

Income before income taxes

Income tax expense

    15       24       30       48  

Income tax expense

Reclassified out of AOCI, net of tax

    56       41       112       81  

Net income

Total reclassified out of AOCI, net of tax

  $ 56     $ 452     $ 112     $ 492  

Net income

                                   

(1)

Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."

 

 

Note 13. Fair Value

 

Financial Instruments Measured at Fair Value

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:

 

 

Level 1 – Observable, unadjusted quoted prices in active markets

 

Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability

 

Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions

 

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

 

Assets and Liabilities Reported at Fair Value on a Recurring Basis

 

Available-for-Sale Debt Securities. Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, single issue trust preferred securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

 

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

 

 

Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

 

Loans Held for Investment. Loans held for investment are reported at fair value using the exit price notion, which is derived from third-party models. Loans related to fair value hedges are recorded at fair value on a recurring basis.

 

Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

 

Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

 

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

   

June 30, 2018

 
   

Total

   

Fair Value Measurements Using

 

(Amounts in thousands)

 

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Available-for-sale debt securities

                               

U.S. Agency securities

  $ 1,170     $ -     $ 1,170     $ -  

U.S. Treasury securities

    49,808       -       49,808       -  

Municipal securities

    99,605       -       99,605       -  

Single issue trust preferred securities

    8,983       -       8,983       -  

Mortgage-backed Agency securities

    36,859       -       36,859       -  

Total available-for-sale debt securities

    196,425       -       196,425       -  

Equity securities

    55       55       -       -  

Fair value loans

    5,765       -       -       5,765  

Deferred compensation assets

    3,652       3,652       -       -  

Derivative assets

    99       -       99       -  

Deferred compensation liabilities

    3,652       3,652       -       -  

 

   

December 31, 2017

 
   

Total

   

Fair Value Measurements Using

 

(Amounts in thousands)

 

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Available-for-sale debt securities

                               

U.S. Agency securities

  $ 11,296     $ -     $ 11,296     $ -  

U.S. Treasury securities

    19,971       -       19,971       -  

Municipal securities

    103,648       -       103,648       -  

Single issue trust preferred securities

    8,884       -       8,884       -  

Mortgage-backed Agency securities

    21,726       -       21,726       -  

Total available-for-sale debt securities

    165,525       -       165,525       -  

Equity securities

    55       55       -       -  

Fair value loans

    5,739       -       5,739       -  

Deferred compensation assets

    4,002       4,002       -       -  

Deferred compensation liabilities

    4,002       4,002       -       -  

Derivative liabilities

    90       -       90       -  

 

 

Beginning in 2018, the Company measured the fair value of loans held for investment using an exit price notion in according with the adoption of ASU 2016-01. Prior to 2018, loans held for investment were reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality. As a result of using the exit price, certain loans were transferred from Level 2 into Level 3 of the fair value hierarchy during the six months ended June 30, 2018. No transfers into or out of Level 3 of the fair value hierarchy occurred during the six months ended June 30, 2017.

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Impaired Loans. Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

 

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third-party valuation within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

 

Specific reserves are generally recorded for impaired loans while third-party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the third-party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution, except in cases involving bankruptcy and various state judicial processes that may extend the time for ultimate resolution.

 

OREO. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

 

The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

   

June 30, 2018

 
   

Total

   

Fair Value Measurements Using

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

(Amounts in thousands)

                               

Impaired loans, non-covered

  $ 5,819     $ -     $ -     $ 5,819  

OREO, non-covered

    4,389       -       -       4,389  

OREO, covered

    32       -       -       32  

 

   

December 31, 2017

 
   

Total

   

Fair Value Measurements Using

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

(Amounts in thousands)

                               

Impaired loans, non-covered

  $ 5,015     $ -     $ -     $ 5,015  

OREO, non-covered

    2,359       -       -       2,359  

OREO, covered

    105       -       -       105  

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:

 

   

Valuation

   

Unobservable

   

Discount Range (Weighted Average)

 
   

Technique

   

Input

   

June 30, 2018

   

December 31, 2017

 
                                     

Impaired loans, non-covered

 

Discounted appraisals(1)

   

Appraisal adjustments(2)

    7% to 100% (35%)     6% to 79% (34%)  

OREO, non-covered

 

Discounted appraisals(1)

   

Appraisal adjustments(2)

    10% to 100% (31%)     8% to 47% (32%)  

OREO, covered

 

Discounted appraisals(1)

   

Appraisal adjustments(2)

    49% to 49% (49%)     0% to 65% (52%)  
                                     

(1)

Fair value is generally based on appraisals of the underlying collateral.

(2)

Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

 

 

Fair Value of Financial Instruments

 

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of valuation methodologies used for instruments not previously discussed is as follows:

 

Cash and Cash Equivalents. Cash and cash equivalents are reported at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

 

Held-to-Maturity Debt Securities. Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.

 

FDIC Indemnification Asset. The FDIC indemnification asset is reported at fair value using discounted future cash flows that apply current discount rates.

 

Accrued Interest Receivable/Payable. Accrued interest receivable/payable is reported at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

 

Deposits and Securities Sold Under Agreements to Repurchase. Deposits and repurchase agreements with fixed maturities and rates are reported at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.

 

FHLB and Other Borrowings. FHLB and other borrowings are reported at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities. Trust preferred obligations are reported at fair value using current credit spreads in the market for similar issues.

 

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

 

The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

 

   

June 30, 2018

 
   

Carrying

           

Fair Value Measurements Using

 

(Amounts in thousands)

 

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Assets

                                       

Cash and cash equivalents

  $ 107,957     $ 107,957     $ 107,957     $ -     $ -  

Debt securities available for sale

    196,425       196,425       -       196,425       -  

Debt securities held to maturity

    25,082       24,980       -       24,980       -  

Equity securities

    55       55       55       -       -  

Loans held for investment, net of allowance

    1,779,448       1,740,502       -       -       1,740,502  

FDIC indemnification asset

    6,390       3,216       -       -       3,216  

Interest receivable

    5,580       5,580       -       5,580       -  

Derivative financial assets

    99       99       -       99       -  

Deferred compensation assets

    3,652       3,652       3,652       -       -  
                                         

Liabilities

                                       

Time deposits

    470,439       459,771       -       459,771       -  

Securities sold under agreements to repurchase

    27,869       27,978       -       27,978       -  

Interest payable

    1,089       1,089       -       1,089       -  

FHLB and other borrowings

    50,000       51,399       -       51,399       -  

Deferred compensation liabilities

    3,652       3,652       3,652       -       -  

 

   

December 31, 2017

 
   

Carrying

           

Fair Value Measurements Using

 

(Amounts in thousands)

 

Amount

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Assets

                                       

Cash and cash equivalents

  $ 157,951     $ 157,951     $ 157,951     $ -     $ -  

Debt securities available for sale

    165,525       165,525       -       165,525       -  

Debt securities held to maturity

    25,149       25,084       -       25,084       -  

Equity securities

    55       55       55       -       -  

Loans held for investment, net of allowance

    1,797,908       1,760,606       -       5,739       1,754,867  

FDIC indemnification asset

    7,161       3,927       -       -       3,927  

Interest receivable

    5,778       5,778       -       5,778       -  

Deferred compensation assets

    4,002       4,002       4,002       -       -  
                                         

Liabilities

                                       

Demand deposits

    454,143       454,143       -       454,143       -  

Interest-bearing demand deposits

    465,407       465,407       -       465,407       -  

Savings deposits

    512,795       512,795       -       512,795       -  

Time deposits

    497,546       490,628       -       490,628       -  

Securities sold under agreements to repurchase

    30,086       30,449       -       30,449       -  

Interest payable

    1,104       1,104       -       1,104       -  

FHLB and other borrowings

    50,000       52,702       -       52,702       -  

Derivative financial liabilities

    90       90       -       90       -  

Deferred compensation liabilities

    4,002       4,002       4,002       -       -  

 

 

Note 14. Litigation, Commitments, and Contingencies

 

Litigation

 

In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.

 

Commitments and Contingencies

 

The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.

 

Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.

 

The following table presents the off-balance sheet financial instruments as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

               

Commitments to extend credit

  $ 220,150     $ 243,147  

Standby letters of credit and financial guarantees(1)

    144,430       131,587  

Total off-balance sheet risk

    364,580       374,734  
                 

Reserve for unfunded commitments

  $ 66     $ 66  
                 

(1) Includes FHLB letters of credit

 

 

 

ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity.

 

Executive Overview

 

First Community Bancshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of June 30, 2018, the Bank operated 44 branches as First Community Bank in Virginia, West Virginia, and North Carolina and as People’s Community Bank, a Division of First Community Bank, in Tennessee. As of June 30, 2018, full-time equivalent employees, calculated using the number of hours worked, totaled 532. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

 

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees. As of June 30, 2018, the Trust Division and FCWM managed $969 million in combined assets under various fee-based arrangements as fiduciary or agent.

 

The Bank offers insurance products and services through its wholly owned subsidiary First Community Insurance Services (“FCIS”). FCIS provides in-branch commercial and insurance services in West Virginia. Revenues are primarily derived from commissions paid by issuing companies on the sale of policies. As of June 30, 2018, FCIS operated 3 in-branch locations.

 

We had no acquisition and divestiture activity during the six months ended June 30, 2018, or year ended December 31, 2017.

 

Critical Accounting Estimates

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and conform to general practices within the banking industry. Our financial position and results of operations may require management to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve, or when an asset or liability needs recorded based on the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices, when available, or third-party sources. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.

 

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2018, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2017 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2017 Form 10-K.

 

 

Performance Overview

 

Highlights of our results of operations for the three and six months ended June 30, 2018, and financial condition as of June 30, 2018, include the following:

 

 

Pre-tax income increased $2.19 million, or 23.34%, to $11.57 million and net income increased $2.65 million, or 41.26%, to $9.07 million in the second quarter of 2018 compared to the same quarter of 2017.

 

Diluted earnings per share increased $0.16, or 42.11%, to $0.54 and core diluted earnings per share increased $0.17, or 44.74%, to $0.55 in the second quarter of 2018 compared to the same quarter of 2017.

 

Return on average assets improved 45 basis points to 1.53% and return on average equity improved 327 basis points to 10.68% in the second quarter of 2018 compared to the same quarter of 2017.

 

Net interest margin decreased 2 basis points to 4.30%, while the normalized net interest margin increased 5 basis points to 4.04% in the second quarter of 2018 compared to the same quarter of 2017.

 

The Company repurchased 286,940 common shares during the second quarter of 2018. Year to date, the Company has repurchased 474,240 common shares for $14.72 million compared to 10,602 shares during the same period of 2017.

 

The Company and its subsidiary bank both significantly exceed regulatory “well capitalized” targets as of June 30, 2018.

 

Results of Operations

 

Net Income

 

The following table presents the changes in net income and related information for the periods indicated:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
   

June 30,

   

Increase

           

June 30,

   

Increase

         

(Amounts in thousands, except per share

 

2018

   

2017

    (Decrease)     % Change    

2018

   

2017

    (Decrease)     % Change  
data)                                                                

Net income

  $ 9,066     $ 6,418     $ 2,648       41.26 %   $ 17,934     $ 12,620     $ 5,314       42.11 %
                                                                 

Basic earnings per common share

    0.54       0.38       0.17       43.99 %     1.06       0.74       0.31       42.31 %

Diluted earnings per common share

    0.54       0.38       0.16       43.73 %     1.06       0.74       0.32       43.48 %
                                                                 

Return on average assets

    1.53 %     1.08 %     0.45 %     41.67 %     1.53 %     1.07 %     0.46 %     42.99 %

Return on average common equity

    10.68 %     7.41 %     3.27 %     44.13 %     10.49 %     7.38 %     3.11 %     42.14 %

 

Three-Month Comparison. Net income increased in the second quarter of 2018 due to increases in noninterest and net interest income and a decrease in income tax. These changes were offset by a slight increase in noninterest expense.

 

Six-Month Comparison. Net income increased in the first six months of 2018 due to increases in noninterest and net interest income and a decrease in income tax. These changes were offset by a slight increase in noninterest expense.

 

 

Net Interest Income

 

Net interest income, our largest contributor to earnings, is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. For additional information, see “Non-GAAP Financial Measures” below. The following tables present the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 
   

Average

           

Average Yield/

   

Average

           

Average Yield/

 

(Amounts in thousands)

 

Balance

   

Interest(1)

   

Rate(1)

   

Balance

   

Interest(2)

   

Rate(2)

 

Assets

                                               

Earning assets

                                               

Loans(3)

  $ 1,795,094     $ 22,495       5.03 %   $ 1,843,441     $ 22,986       5.00 %

Securities available for sale

    190,605       1,641       3.45 %     167,869       1,455       3.48 %

Securities held to maturity

    25,098       104       1.66 %     34,664       125       1.45 %

Interest-bearing deposits

    109,349       514       1.89 %     68,455       221       1.29 %

Total earning assets

    2,120,146       24,754       4.68 %     2,114,429       24,787       4.70 %

Other assets

    252,843                       263,767                  

Total assets

  $ 2,372,989                     $ 2,378,196                  
                                                 

Liabilities and stockholders' equity

                                               

Interest-bearing deposits

                                               

Demand deposits

  $ 484,776     $ 104       0.09 %   $ 387,113     $ 60       0.06 %

Savings deposits

    518,055       83       0.06 %     525,808       85       0.06 %

Time deposits

    477,691       1,140       0.96 %     514,527       1,088       0.85 %

Total interest-bearing deposits

    1,480,522       1,327       0.36 %     1,427,448       1,233       0.35 %

Borrowings

                                               

Federal funds purchased

    -       -       -       5       -       0.00 %

Retail repurchase agreements

    3,615       1       0.11 %     60,809       10       0.07 %

Wholesale repurchase agreements

    25,000       201       3.22 %     25,000       201       3.22 %

FHLB advances and other borrowings

    50,000       506       4.06 %     55,635       567       4.09 %

Total borrowings

    78,615       708       3.61 %     141,449       778       2.21 %

Total interest-bearing liabilities

    1,559,137       2,035       0.52 %     1,568,897       2,011       0.51 %

Noninterest-bearing demand deposits

    447,048                       441,547                  

Other liabilities

    26,222                       20,197                  

Total liabilities

    2,032,407                       2,030,641                  

Stockholders' equity

    340,582                       347,555                  

Total liabilities and stockholders' equity

  $ 2,372,989                     $ 2,378,196                  

Net interest income, FTE

          $ 22,719                     $ 22,776          

Net interest rate spread

                    4.16 %                     4.19 %

Net interest margin

                    4.30 %                     4.32 %
                                                 

(1)

FTE basis based on the federal statutory rate of 21%

(2)

FTE basis based on the federal statutory rate of 35%

(3)

Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.

 

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 
   

Average

           

Average Yield/

   

Average

           

Average Yield/

 

(Amounts in thousands)

 

Balance

   

Interest(1)

   

Rate(1)

   

Balance

   

Interest(2)

   

Rate(2)

 

Assets

                                               

Earning assets

                                               

Loans(3)

  $ 1,800,438     $ 45,322       5.08 %   $ 1,841,152     $ 44,880       4.92 %

Securities available for sale

    177,897       3,025       3.43 %     164,820       2,939       3.60 %

Securities held to maturity

    25,115       209       1.68 %     40,854       276       1.36 %

Interest-bearing deposits

    113,627       985       1.75 %     62,140       380       1.23 %

Total earning assets

    2,117,077       49,541       4.72 %     2,108,966       48,475       4.64 %

Other assets

    252,592                       267,163                  

Total assets

  $ 2,369,669                     $ 2,376,129                  
                                                 

Liabilities and stockholders' equity

                                               

Interest-bearing deposits

                                               

Demand deposits

  $ 473,819     $ 167       0.07 %   $ 384,098     $ 114       0.06 %

Savings deposits

    518,306       165       0.06 %     525,691       169       0.06 %

Time deposits

    485,574       2,246       0.93 %     515,014       2,116       0.83 %

Total interest-bearing deposits

    1,477,699       2,578       0.35 %     1,424,803       2,399       0.34 %

Borrowings

                                               

Federal funds purchased

    -       -       -       3       -       0.00 %

Retail repurchase agreements

    4,031       2       0.10 %     63,861       21       0.07 %

Wholesale repurchase agreements

    25,000       400       3.23 %     25,000       399       3.22 %

FHLB advances and other borrowings

    50,000       1,006       4.06 %     61,096       1,243       4.10 %

Total borrowings

    79,031       1,408       3.59 %     149,960       1,663       2.24 %

Total interest-bearing liabilities

    1,556,730       3,986       0.52 %     1,574,763       4,062       0.52 %

Noninterest-bearing demand deposits

    439,867                       433,588                  

Other liabilities

    28,168                       22,822                  

Total liabilities

    2,024,765                       2,031,173                  

Stockholders' equity

    344,904                       344,956                  

Total liabilities and stockholders' equity

  $ 2,369,669                     $ 2,376,129                  

Net interest income, FTE

          $ 45,555                     $ 44,413          

Net interest rate spread

                    4.20 %                     4.12 %

Net interest margin

                    4.34 %                     4.25 %
                                                 

(1)

FTE basis based on the federal statutory rate of 21%

(2)

FTE basis based on the federal statutory rate of 35%

(3)

Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.

 

 

The following table presents the impact to net interest income on a FTE basis due to changes in volume (average volume times the prior year’s average rate), rate (average rate times the prior year’s average volume), and rate/volume (average volume times the change in average rate), for the periods indicated:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2018 Compared to 2017

   

June 30, 2018 Compared to 2017

 
   

Dollar Increase (Decrease) due to

   

Dollar Increase (Decrease) due to

 
                   

Rate/

                           

Rate/

         

(Amounts in thousands)

 

Volume

   

Rate

   

Volume

   

Total

   

Volume

   

Rate

   

Volume

   

Total

 

Interest earned on(1)

                                                               

Loans(2)

  $ (1,199 )   $ 228     $ 480     $ (491 )   $ (992 )   $ 1,467     $ (33 )   $ 442  

Securities available-for-sale

    392       (19 )     (187 )     186       233       (136 )     (11 )     86  

Securities held-to-maturity

    (69 )     37       11       (21 )     (106 )     64       (25 )     (67 )

Interest-bearing deposits with other banks

    263       200       (170 )     293       315       159       131       605  

Total interest earning assets

    (613 )     446       134       (33 )     (550 )     1,554       62       1,066  
                                                                 

Interest paid on(1)

                                                               

Demand deposits

    30       46       (32 )     44       27       21       5       53  

Savings deposits

    (2 )     (2 )     2       (2 )     (2 )     (2 )     -       (4 )

Time deposits

    (155 )     278       (71 )     52       (121 )     266       (15 )     130  

Retail repurchase agreements

    (19 )     14       (4 )     (9 )     (20 )     11       (10 )     (19 )

Wholesale repurchase agreements

    -       -       -       -       -       1       -       1  

FHLB advances and other borrowings

    (114 )     (8 )     61       (61 )     (226 )     (14 )     3       (237 )

Total interest-bearing liabilities

    (260 )     328       (44 )     24       (342 )     283       (17 )     (76 )
                                                                 

Change in net interest income(1)

  $ (353 )   $ 118     $ 178     $ (57 )   $ (208 )   $ 1,271     $ 79     $ 1,142  
                                                                 

(1)

FTE basis based on the federal statutory rate of 21% for periods after January 1, 2018, and 35% for periods prior to January 1, 2018

(2)

Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.

 

The following tables present the net interest analysis on a FTE basis excluding the impact of non-cash purchase accounting accretion from acquired loan portfolios for the periods indicated:

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 

(Amounts in thousands)

 

Interest(1)

   

Average Yield/ Rate(1)

   

Interest(2)

   

Average Yield/ Rate(2)

 

Earning assets

                               

Loans(3)

  $ 22,495       5.03 %   $ 22,986       5.00 %

Accretion income

    1,827               2,534          

Less: cash accretion income

    468               788          

Non-cash accretion income

    1,359               1,746          

Loans, normalized(4)

    21,136       4.72 %     21,240       4.62 %

Other earning assets

    2,259       2.79 %     1,801       2.67 %

Total earning assets

    23,395       4.43 %     23,041       4.37 %

Total interest-bearing liabilities

    2,035       0.52 %     2,011       0.51 %

Net interest income, FTE(4)

  $ 21,360             $ 21,030          

Net interest rate spread, normalized(4)

            3.90 %             3.86 %

Net interest margin, normalized(4)

            4.04 %             3.99 %
                                 

(1)

FTE basis based on the federal statutory rate of 21%

(2)

FTE basis based on the federal statutory rate of 35%

(3)

Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.

(4)

Normalized totals are non-GAAP financial measures that exclude non-cash loan interest accretion related to PCI loans.

 

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 

(Amounts in thousands)

 

Interest(1)

   

Average Yield/ Rate(1)

   

Interest(2)

   

Average Yield/ Rate(2)

 

Earning assets

                               

Loans(3)

  $ 45,322       5.08 %   $ 44,880       4.92 %

Accretion income

    4,151               4,318          

Less: cash accretion income

    947               1,438          

Non-cash accretion income

    3,204               2,880          

Loans, normalized(4)

    42,118       4.72 %     42,000       4.60 %

Other earning assets

    4,219       2.69 %     3,595       2.71 %

Total earning assets

    46,337       4.41 %     45,595       4.36 %

Total interest-bearing liabilities

    3,986       0.52 %     4,062       0.53 %

Net interest income, FTE(4)

  $ 42,351             $ 41,533          

Net interest rate spread, normalized(4)

            3.90 %             3.83 %

Net interest margin, normalized(4)

            4.03 %             3.97 %
                                 

(1)

FTE basis based on the federal statutory rate of 21%

(2)

FTE basis based on the federal statutory rate of 35%

(3)

Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.

(4)

Normalized totals are non-GAAP financial measures that exclude non-cash loan interest accretion related to PCI loans.

 

Three-Month Comparison. Net interest income comprised 76.04% of total net interest and noninterest income in the second quarter of 2018 compared to 81.52% in the same quarter of 2017. Net interest income on a GAAP basis decreased $32 thousand, or 0.41%, and net interest income on a FTE basis decreased $57 thousand, or 0.25%. Normalized net interest income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans. For additional information, see “Non-GAAP Financial Measures” below. Normalized net interest margin increased 5 basis points compared to a decrease of 2 basis points on a FTE basis. Normalized net interest spread increased 4 basis points compared to a decrease of 3 basis points on a FTE basis.

 

Average earning assets increased $5.72 million, or 0.27%, primarily due to increases in interest-bearing deposits and available-for-sale securities offset by decreases in loans. The normalized yield on earning assets increased 6 basis points compared to a decrease of 2 basis points on a GAAP basis. Average loans decreased $48.35 million, or 2.62%, and the average loan to deposit ratio decreased to 93.13% from 98.63%. The normalized yield on loans increased 10 basis points compared to an increase of 3 basis points on a GAAP basis. Non-cash accretion income decreased $387 thousand, or 22.16%, as the effect of accretion income continued to decline from acquired portfolio attrition.

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $9.76 million, or 0.62%, primarily due to a decline in average borrowings. The yield on interest-bearing liabilities increased 1 basis point. Average borrowings decreased $62.83 million, or 44.42%, largely due to a $57.19 million, or 94.06%, decrease in average retail repurchase agreements and a $5.64 million, or 10.13%, decrease in average FHLB advances. Average interest-bearing deposits increased $53.07 million, or 3.72%, which was driven by a $97.66 million, or 25.23%, increase in average interest-bearing demand deposits offset by a $36.84 million, or 7.16%, decrease in average time deposits, and a $7.75 million, or 1.47%, decrease in average savings deposits, which include money market and savings accounts.

 

Six-Month Comparison. Net interest income comprised 76.61% of total net interest and noninterest income in the first six months of 2018 compared to 80.73% in the same period of 2017. Net interest income on a GAAP basis increased $1.21 million, or 2.78%, and net interest income on a FTE basis increased $1.14 million, or 2.57%. Normalized net interest margin increased 6 basis points compared to an increase of 9 basis points on a FTE basis. Normalized net interest spread increased 6 basis points compared to an increase of 7 basis points on a FTE basis.

 

Average earning assets increased $8.11 million, or 0.38%, primarily due to an increase in interest-bearing deposits offset by decreases in loans. The normalized yield on earning assets increased 5 basis points compared to an increase of 8 basis points on a GAAP basis. Average loans decreased $40.71 million, or 2.21%, and the average loan to deposit ratio decreased to 93.89% from 99.07%. The normalized yield on loans increased 12 basis points compared to an increase of 16 basis points on a GAAP basis. Non-cash accretion income increased $324 thousand, or 11.25%.

 

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $18.03 million, or 1.15%, primarily due to a decline in average borrowings. The yield on interest-bearing liabilities remained constant at 0.52%. Average borrowings decreased $70.93 million, or 47.30%, largely due to a $59.83 million, or 93.69%, decrease in average retail repurchase agreements and an $11.10 million, or 18.16%, decrease in average FHLB advances. Average interest-bearing deposits increased $52.90 million, or 3.71%, which was driven by an $89.72 million, or 23.36%, increase in average interest-bearing demand deposits offset by a $29.44 million, or 5.72%, decrease in average time deposits, and a $7.39 million, or 1.40%, decrease in average savings deposits, which include money market and savings accounts.

 

Provision for Loan Losses

 

Three-Month Comparison. The provision charged to operations decreased $439 thousand, or 47.00%, to $495 thousand in the second quarter of 2018 compared to the same quarter of 2017, which was attributed to the non-PCI provision. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.

 

Six-Month Comparison. The provision charged to operations decreased $436 thousand, or 30.58%, to $990 thousand in the first six months of 2018 compared to the same period of 2017, which was attributed to the non-PCI provision.

 

Noninterest Income

 

The following table presents the components of, and changes in, noninterest income for the periods indicated:

 

   

Three Months Ended

   

Three Months Ended

   

Six Months Ended

   

Six Months Ended

 
   

June 30,

   

Increase

   

 

   

June 30,

   

Increase

   

 

 
   

2018

   

2017

    (Decrease)     % Change    

2018

   

2017

    (Decrease)     % Change  

(Amounts in thousands)

                                                               

Wealth management

  $ 823     $ 791     $ 32       4.05 %   $ 1,617     $ 1,581     $ 36       2.28 %

Service charges on deposits

    3,612       3,360       252       7.50 %     7,080       6,473       607       9.38 %

Other service charges and fees

    1,991       1,748       243       13.90 %     3,791       3,447       344       9.98 %

Insurance commissions

    338       325       13       4.00 %     667       698       (31 )     -4.44 %

Net loss on sale of securities

    -       (657 )     657       -100.00 %     -       (657 )     657       -100.00 %

Net FDIC indemnification asset amortization

    (575 )     (1,586 )     1,011       -63.75 %     (957 )     (2,918 )     1,961       -67.20 %

Other operating income

    827       1,074       (247 )     -23.00 %     1,429       1,743       (314 )     -18.01 %

Total noninterest income

  $ 7,016     $ 5,055     $ 1,961       38.79 %   $ 13,627     $ 10,367     $ 3,260       31.45 %

 

Three-Month Comparison. Noninterest income comprised 23.96% of total net interest and noninterest income in the second quarter of 2018 compared to 18.48% in the same quarter of 2017. Noninterest income increased $1.96 million, or 38.79%, primarily due to the decrease in net negative amortization related to the FDIC indemnification asset as loss share coverage expired June 30, 2017, for commercial loans. Service charges on deposits and other service charges and fees increased $495 thousand, or 9.69%, primarily from increases in checking account fees and net interchange income. Other service charges and fees included a $163 thousand, or 12.49%, increase in net interchange income. Other operating income decreased primarily due to the recognition of $459 thousand in death proceeds from bank owned life insurance in the second quarter of 2017. Excluding the impact from sales of securities, net FDIC indemnification asset amortization, and bank owned life insurance proceeds, noninterest income increased $752 thousand, or 11.00%, to $7.59 million in the second quarter of 2018, from $6.84 million in the same quarter of 2017.

 

Six-Month Comparison. Noninterest income comprised 23.39% of total net interest and noninterest income in the first six months of 2018 compared to 19.27% in the same period of 2017. Noninterest income increased $3.26 million, or 31.45%, primarily due to the decrease in net negative amortization related to the FDIC indemnification asset as loss share coverage expired June 30, 2017, for commercial loans. Service charges on deposits and other service charges and fees increased $951 thousand, or 9.59%, primarily from increases in checking account fees and net interchange income. Other service charges and fees included a $270 thousand, or 10.69%, increase in net interchange income. Other operating income decreased primarily due to the recognition of $459 thousand in death proceeds from bank owned life insurance in the first six months of 2017. Excluding the impact from sales of securities, net FDIC indemnification asset amortization, and bank owned life insurance proceeds, noninterest income increased $1.10 million, or 8.17%, to $14.58 million in the first six months of 2018, from $13.48 million in the same period of 2017.

 

 

Noninterest Expense

 

The following table presents the components of, and changes in, noninterest expense for the periods indicated:

 

   

Three Months Ended

   

Three Months Ended

   

Six Months Ended

   

Six Months Ended

 
   

June 30,

   

Increase

           

June 30,

   

Increase

         
   

2018

   

2017

    (Decrease)     % Change    

2018

   

2017

    (Decrease)     % Change  

(Amounts in thousands)

                                                               

Salaries and employee benefits

  $ 8,993     $ 9,022     $ (29 )     -0.32 %   $ 18,434     $ 17,770     $ 664       3.74 %

Occupancy expense

    1,083       1,341       (258 )     -19.24 %     2,333       2,589       (256 )     -9.89 %

Furniture and equipment expense

    945       1,087       (142 )     -13.06 %     1,991       2,178       (187 )     -8.59 %

Service fees

    851       1,095       (244 )     -22.28 %     1,679       1,940       (261 )     -13.45 %

Advertising and public relations

    461       544       (83 )     -15.26 %     983       1,149       (166 )     -14.45 %

Professional fees

    430       817       (387 )     -47.37 %     737       1,639       (902 )     -55.03 %

Amortization of intangibles

    263       263       -       0.00 %     524       524       -       0.00 %

FDIC premiums and assessments

    252       227       25       11.01 %     463       471       (8 )     -1.70 %

Other operating expense

    3,939       2,642       1,297       49.09 %     7,132       5,482       1,650       30.10 %

Total noninterest expense

  $ 17,217     $ 17,038     $ 179       1.05 %   $ 34,276     $ 33,742     $ 534       1.58 %

 

Three-Month Comparison. Noninterest expense increased $179 thousand, or 1.05%, in the second quarter of 2018 compared to the same quarter of 2017, which was largely due to an increase in other operating expense, which included a $400 thousand increase in property write-downs and a $529 thousand increase in the net loss on sales and expenses related to other real estate owned (“OREO”) to $742 thousand from $213 thousand in the second quarter of 2017. Professional fees decreased largely due to a reduction in legal fees.

 

Six-Month Comparison. Noninterest expense increased $534 thousand, or 1.58%, in the first six months of 2018 compared to the same period of 2017, which was largely due to an increase in other operating expense and salaries and employee benefits. Other operating expense included a $910 thousand increase in property write-downs and a $372 thousand increase in the net loss on sales and expenses related to OREO to $913 thousand in the first six months of 2018 from $541 thousand in the first six months of 2017. Professional fees decreased largely due to a reduction in legal fees.

 

Income Tax Expense

 

Three-Month Comparison. The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The Tax Cuts and Jobs Act (“Tax Reform Act”) enacted on December 22, 2017, reduced our federal statutory income tax rate from 35% to 21% beginning January 1, 2018. Income tax expense decreased $459 thousand, or 15.51%, and the effective tax rate decreased to 21.62% in the second quarter of 2018 from 31.56% in the same quarter of 2017 primarily due to the Tax Reform Act.

 

Six-Month Comparison. Income tax expense decreased $946 thousand, or 15.73%, and the effective tax rate decreased to 22.03% in the second quarter of 2018 from 32.27% in the same quarter of 2017 primarily due to the Tax Reform Act.

 

Non-GAAP Financial Measures 

 

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-GAAP financial measures presented in this report include net interest income on a FTE basis and normalized net interest income on a FTE basis. While we believe these non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions. The reconciliations of these measures to GAAP measures are presented below.

 

We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 21% beginning January 1, 2018, and 35% prior to January 1, 2018. Normalized net interest income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans.

 

 

The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Amounts in thousands)

                               

Net interest income, GAAP

  $ 22,262     $ 22,294     $ 44,641     $ 43,435  

FTE adjustment(1)

    457       482       914       978  

Net interest income, FTE

    22,719       22,776       45,555       44,413  

Less: non-cash accretion income(2)

    1,359       1,746       3,204       2,880  

Net interest income, normalized

  $ 21,360     $ 21,030     $ 42,351     $ 41,533  
                                 

Net interest margin, GAAP

    4.22 %     4.23 %     4.25 %     4.15 %

FTE adjustment(1)

    0.08 %     0.09 %     0.09 %     0.10 %

Net interest margin, FTE

    4.30 %     4.32 %     4.34 %     4.25 %

Less: non-cash accretion income(2)

    0.26 %     0.33 %     0.31 %     0.28 %

Net interest margin, normalized

    4.04 %     3.99 %     4.03 %     3.97 %
                                 

(1)

FTE basis based on the federal statutory rate of 21% for periods after January 1, 2018, and 35% for periods prior to January 1, 2018

(2)

Non-cash purchase accounting accretion income from acquired loan portfolios

 

Financial Condition

 

Total assets as of June 30, 2018, decreased $40.34 million, or 1.69%, to $2.35 billion from $2.39 billion as of December 31, 2017. Total liabilities as of June 30, 2018, decreased $28.75 million, or 1.41%, to $2.01 billion from $2.04 billion as of December 31, 2017.

 

Investment Securities

 

Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.

 

Available-for-sale debt securities as of June 30, 2018, increased $30.90 million, or 18.67%, compared to December 31, 2017, primarily due to the purchase of U.S. Treasury securities offset by the maturity of certain U.S. Agency securities. The market value of debt securities available for sale as a percentage of amortized cost was 99.39% as of June 30, 2018, compared to 100.75% as of December 31, 2017. Held-to-maturity debt securities as of June 30, 2018, decreased $67 thousand, or 0.27%, compared to December 31, 2017, primarily due to an increase in net unrealized losses. The market value of debt securities held to maturity as a percentage of amortized cost was 99.59% as of June 30, 2018, compared to 99.74% as of December 31, 2017.

 

Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities for the three months ended June 30, 2018 or 2017. For additional information, see Note 2, “Debt Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

 

Loans Held for Investment

 

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of June 30, 2018, decreased $18.15 million, or 1.01%, compared to December 31, 2017, primarily due to a $13.12 million, or 0.73%, decrease in non-covered loans, which was driven by declines in owner occupied construction, multi-family residential, and commercial construction segments. Covered loans decreased $5.03 million, or 17.99%, as the covered Waccamaw portfolio continues to pay down. For additional information, see Note 3, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

 

 

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

 

   

June 30, 2018

   

December 31, 2017

   

June 30, 2017

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

   

Amount

   

Percent

 

Non-covered loans held for investment

                                               

Commercial loans

                                               

Construction, development, and other land

  $ 57,986       3.22 %   $ 60,017       3.30 %   $ 58,869       3.20 %

Commercial and industrial

    96,614       5.37 %     92,188       5.07 %     89,455       4.86 %

Multi-family residential

    110,067       6.12 %     125,202       6.89 %     141,228       7.67 %

Single family non-owner occupied

    142,076       7.90 %     141,670       7.80 %     142,150       7.72 %

Non-farm, non-residential

    624,999       34.74 %     616,633       33.93 %     603,272       32.75 %

Agricultural

    8,895       0.49 %     7,035       0.39 %     6,086       0.33 %

Farmland

    22,055       1.23 %     25,649       1.41 %     28,600       1.55 %

Total commercial loans

    1,062,692       59.07 %     1,068,394       58.79 %     1,069,660       58.08 %

Consumer real estate loans

                                               

Home equity lines

    100,194       5.57 %     103,205       5.68 %     102,460       5.56 %

Single family owner occupied

    517,058       28.74 %     502,686       27.66 %     500,582       27.17 %

Owner occupied construction

    22,647       1.26 %     39,178       2.16 %     46,874       2.54 %

Total consumer real estate loans

    639,899       35.57 %     645,069       35.50 %     649,916       35.27 %

Consumer and other loans

                                               

Consumer loans

    68,885       3.83 %     70,772       3.89 %     72,391       3.93 %

Other

    4,636       0.26 %     5,001       0.28 %     4,296       0.23 %

Total consumer and other loans

    73,521       4.09 %     75,773       4.17 %     76,687       4.16 %

Total non-covered loans

    1,776,112       98.73 %     1,789,236       98.46 %     1,796,263       97.51 %

Total covered loans

    22,919       1.27 %     27,948       1.54 %     45,845       2.49 %

Total loans held for investment, net of unearned income

    1,799,031       100.00 %     1,817,184       100.00 %     1,842,108       100.00 %

Less: allowance for loan losses

    19,583               19,276               18,886          

Total loans held for investment, net of unearned income and allowance

  $ 1,779,448             $ 1,797,908             $ 1,823,222          

 

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

 

   

June 30, 2018

   

December 31, 2017

   

June 30, 2017

 

(Amounts in thousands)

 

Amount

   

Percent

   

Amount

   

Percent

   

Amount

   

Percent

 

Commercial loans

                                               

Construction, development, and other land

  $ 35       0.15 %   $ 39       0.14 %   $ 3,560       7.77 %

Commercial and industrial

    -       0.00 %     -       0.00 %     603       1.32 %

Single family non-owner occupied

    252       1.10 %     284       1.02 %     1,020       2.22 %

Non-farm, non-residential

    8       0.04 %     9       0.03 %     3,768       8.22 %

Agricultural

    -       0.00 %     -       0.00 %     24       0.05 %

Farmland

    -       0.00 %     -       0.00 %     376       0.82 %

Total commercial loans

    295       1.29 %     332       1.19 %     9,351       20.40 %

Consumer real estate loans

                                               

Home equity lines

    19,151       83.56 %     23,720       84.87 %     30,818       67.22 %

Single family owner occupied

    3,473       15.15 %     3,896       13.94 %     5,676       12.38 %

Total consumer real estate loans

    22,624       98.71 %     27,616       98.81 %     36,494       79.60 %

Total covered loans

  $ 22,919       100.00 %   $ 27,948       100.00 %   $ 45,845       100.00 %

 

Risk Elements

 

We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.0 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.

 

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 4, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

 

 

The following table presents the components of nonperforming assets and related information as of the periods indicated:

 

   

June 30, 2018

   

December 31, 2017

   

June 30, 2017

 

(Amounts in thousands)

                       

Non-covered nonperforming

                       

Nonaccrual loans

  $ 21,467     $ 18,997     $ 20,146  

Accruing loans past due 90 days or more

    -       1       -  

TDRs(1)

    289       120       100  

Total nonperforming loans

    21,756       19,118       20,246  

Non-covered OREO

    4,805       2,409       3,914  

Total non-covered nonperforming assets

  $ 26,561     $ 21,527     $ 24,160  
                         

Covered nonperforming

                       

Nonaccrual loans

  $ 509     $ 342     $ 446  

Total nonperforming loans

    509       342       446  

Covered OREO

    44       105       124  

Total covered nonperforming assets

  $ 553     $ 447     $ 570  
                         

Total nonperforming

                       

Nonaccrual loans

  $ 21,976     $ 19,339     $ 20,592  

Accruing loans past due 90 days or more

    -       1       -  

TDRs(1)

    289       120       100  

Total nonperforming loans

    22,265       19,460       20,692  

OREO

    4,849       2,514       4,038  

Total nonperforming assets

  $ 27,114     $ 21,974     $ 24,730  
                         

Additional Information

                       

Performing TDRs(2)

  $ 6,691     $ 7,614     $ 8,485  

Total TDRs(3)

    6,980       7,734       8,585  
                         

Non-covered ratios

                       

Nonperforming loans to total loans

    1.22 %     1.07 %     1.13 %

Nonperforming assets to total assets

    1.14 %     0.91 %     1.04 %

Non-PCI allowance to nonperforming loans

    90.01 %     100.83 %     93.24 %

Non-PCI allowance to total loans

    1.10 %     1.08 %     1.05 %
                         

Total ratios

                       

Nonperforming loans to total loans

    1.24 %     1.07 %     1.12 %

Nonperforming assets to total assets

    1.15 %     0.92 %     1.04 %

Allowance for loan losses to nonperforming loans

    87.95 %     99.05 %     91.27 %

Allowance for loan losses to total loans

    1.09 %     1.06 %     1.03 %
                         

(1)

TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $82 thousand, $169 thousand, and $82 thousand for the periods ended June 30, 2018, December 31, 2017, and June 30, 2017, respectively.

(2)

TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $1.93 million, $1.76 million, and $1.51 million for the periods ended June 30, 2018, December 31, 2017, and June 30, 2017, respectively.

(3)

Total TDRs exclude nonaccrual TDRs of $2.01 million, $1.93 million, and $1.59 million for the periods ended June 30, 2018, December 31, 2017, and June 30, 2017, respectively.

 

Non-covered nonperforming assets as of June 30, 2018, increased $5.03 million, or 23.38%, from December 31, 2017, primarily due to an increase in non-covered nonaccrual loans and non-covered OREO. Non-covered nonaccrual loans as of June 30, 2018, increased $2.47 million, or 13.00%, from December 31, 2017. As of June 30, 2018, non-covered nonaccrual loans were largely attributed to single family owner occupied (57.84%) and non-farm, non-residential (21.73%) loans. As of June 30, 2018, approximately $1.38 million, or 6.41%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

 

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $29.44 million as of June 30, 2018, a decrease of $1.27 million, or 4.13%, compared to $30.71 million as of December 31, 2017. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.66% as of June 30, 2018, which includes past due loans (0.45%) and nonaccrual loans (1.21%).

 

 

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of June 30, 2018, decreased $754 thousand, or 9.75%, to $6.98 million from December 31, 2017. Nonperforming accruing TDRs as of June 30, 2018, increased $169 thousand to $289 thousand compared to December 31, 2017. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 4.14% as of June 30, 2018, compared to 1.55% as of December 31, 2017. Specific reserves on TDRs totaled $581 thousand as of June 30, 2018, compared to $642 thousand as of December 31, 2017.

 

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, increased $891 thousand, or 22.76%, as of June 30, 2018, compared to December 31, 2017. Non-covered OREO consisted of 18 properties with an average holding period of 8 months as of June 30, 2018. The net loss on the sale of OREO totaled $671 thousand for the three months ended June 30, 2018, compared to $181 thousand for the same period of the prior year and $774 thousand for the six months ended June 30, 2018, compared to $422 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 
   

Non-covered

   

Covered

   

Total

   

Non-covered

   

Covered

   

Total

 

(Amounts in thousands)

                                               

Beginning balance

  $ 2,409     $ 105     $ 2,514     $ 5,109     $ 276     $ 5,385  

Additions

    3,928       -       3,928       749       26       775  

Disposals

    (983 )     (55 )     (1,038 )     (1,710 )     (204 )     (1,914 )

Valuation adjustments

    (549 )     (6 )     (555 )     (234 )     26       (208 )

Ending balance

  $ 4,805     $ 44     $ 4,849     $ 3,914     $ 124     $ 4,038  

 

 Allowance for Loan Losses

 

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates. As of June 30, 2018, our qualitative risk factors reflect a stable risk of loan losses due to consistent asset quality metrics and relatively stable business and economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of June 30, 2018; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see Note 5, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

 

The allowance for loan losses as of June 30, 2018, increased $307 thousand, or 1.59%, from December 31, 2017. The increase was largely attributed to a $521 thousand increase in specific reserves on impaired loans. The non-PCI allowance as a percent of non-covered loans totaled 1.10% as of June 30, 2018, compared to 1.08% as of December 31, 2017. PCI loans were aggregated into five loan pools as of June 30, 2018, and December 31, 2017: Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial, and Peoples residential. The cash flow analysis identified no impaired PCI loan pools as of June 30, 2018, or December 31, 2017. Net charge-offs decreased $94 thousand, or 18.58%, for the three months ended June 30, 2018, compared to the same period of the prior year, largely due to an increase in charge-offs in the consumer loan segments. Net charge-offs increased $195 thousand, or 39.96%, for the six months ended June 30, 2018, compared to the same period of the prior year, largely due to an increase in charge-offs in the commercial and consumer loan segments.

 

 

The following table presents the changes in the allowance for loan losses, by loan class, during the periods indicated:

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 
   

Non-PCI

Portfolio

   

PCI Portfolio

   

Total

   

Non-PCI

Portfolio

   

PCI Portfolio

   

Total

 

(Amounts in thousands)

                                               

Beginning balance

  $ 19,500     $ -     $ 19,500     $ 18,446     $ 12     $ 18,458  

Provision for (recovery of) loan losses charged to operations

    495       -       495       938       (4 )     934  

Charge-offs

    (750 )     -       (750 )     (902 )     -       (902 )

Recoveries

    338       -       338       396       -       396  

Net charge-offs

    (412 )     -       (412 )     (506 )     -       (506 )

Ending balance

  $ 19,583     $ -     $ 19,583     $ 18,878     $ 8     $ 18,886  

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 
   

Non-PCI

Portfolio

   

PCI Portfolio

   

Total

   

Non-PCI

Portfolio

   

PCI Portfolio

   

Total

 

(Amounts in thousands)

                                               

Beginning balance

  $ 19,276     $ -     $ 19,276     $ 17,936     $ 12     $ 17,948  

Provision for (recovery of) loan losses charged to operations

    990       -       990       1,430       (4 )     1,426  

Charge-offs

    (1,448 )     -       (1,448 )     (1,259 )     -       (1,259 )

Recoveries

    765       -       765       771       -       771  

Net charge-offs

    (683 )     -       (683 )     (488 )     -       (488 )

Ending balance

  $ 19,583     $ -     $ 19,583     $ 18,878     $ 8     $ 18,886  

 

Deposits

 

Total deposits as of June 30, 2018, decreased $25.15 million, or 1.30%, compared to December 31, 2017. Time deposits, which include certificates of deposit and individual retirement accounts, decreased $27.11 million; savings deposits, which include money market accounts and savings accounts, decreased $3.68 million; and interest-bearing demand deposits decreased $3.07 million while noninterest-bearing demand deposits increased $8.71 million as of June 30, 2018, compared to December 31, 2017.

 

Borrowings

 

Total borrowings as of June 30, 2018, decreased $2.22 million, or 2.77%, compared to December 31, 2017 due to short-term borrowings. Short-term borrowings consisted of retail repurchase agreements, which decreased $2.22 million, or 43.59%, while the weighted average rate decreased 1 basis point to 0.06% as of June 30, 2018, compared to December 31, 2017.

 

Long-term borrowings consisted of a wholesale repurchase agreement and a convertible FHLB advance as of June 30, 2018. The wholesale repurchase agreement totaled $25.00 million with a weighted average contractual rate of 3.18% as of June 30, 2018, and December 31, 2017. Long-term FHLB borrowings totaled $50.00 million with a weighted average contractual rate of 4.00% as of June 30, 2018, and December 31, 2017.

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity is a measure of our ability to convert assets to cash or raise cash to meet financial obligations. We believe that liquidity management should encompass an overall balance sheet approach that draws together all sources and uses of liquidity. Poor or inadequate liquidity risk management may result in a funding deficit that could have a material impact on our operations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) to detect potential liquidity issues and protect our depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee (“ALCO”) of the Board of Directors. ALCO reviews liquidity risk exposure and policies related to liquidity management; ensures that systems and internal controls are consistent with liquidity policies; and provides accurate reports about liquidity needs, sources, and compliance. The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows during a funding crisis. The liquidity model incorporates various funding crisis scenarios and a specific action plan is formulated, and activated, when a financial shock that affects our normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will be met through liquidation of balance sheet assets, including unpledged securities.

 

 

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of June 30, 2018, the Company’s cash reserves totaled $22.14 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. There was no outstanding balance on the line of credit as of June 30, 2018. The Company’s cash reserves and investments provide adequate working capital to meet obligations, projected dividends to shareholders, and anticipated debt repayments for the next twelve months.

 

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of June 30, 2018, our unencumbered cash totaled $107.96 million, unused borrowing capacity from the FHLB totaled $371.96 million, available credit from the FRB Discount Window totaled $6.15 million, available lines from correspondent banks totaled $90.00 million, and unpledged available-for-sale securities totaled $148.67 million.

 

Cash Flows

 

The following table summarizes the components of cash flow for the periods indicated:

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 

(Amounts in thousands)

               

Net cash provided by operating activities

  $ 21,142     $ 14,378  

Net cash (used in) provided by investing activities

    (15,010 )     48,430  

Net cash used in financing activities

    (56,126 )     (32,316 )

Net (decrease) increase in cash and cash equivalents

    (49,994 )     30,492  

Cash and cash equivalents, beginning balance

    157,951       76,307  

Cash and cash equivalents, ending balance

  $ 107,957     $ 106,799  

 

Cash and cash equivalents decreased $49.99 million for the six months ended June 30, 2018, compared to an increase of $30.49 million for the same period of the prior year primarily due to a $63.44 million reduction in net cash provided by investing activities from the purchase of available-for-sale securities. Net cash used in financing activities increased $23.81 million largely due to a net decrease in deposit accounts and an increase in cash dividends offset by the absence of repayments of FHLB and other borrowings that occurred in 2017. Net cash provided by operating activities increased $6.76 million primarily due to an increase in net income and a decrease in other operating activities.

 

Capital Resources

 

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of June 30, 2018, decreased $11.59 million, or 3.31%, to $339.12 million from $350.71 million as of December 31, 2017. The change in stockholders’ equity was largely due to the repurchase of 474,240 shares of our common stock totaling $14.72 million and dividends declared on our common stock of $14.20 million, which includes a one-time special dividend totaling $8.13 million, offset by net income of $17.93 million. Accumulated other comprehensive loss increased $1.75 million to $2.59 million as of June 30, 2018, compared to December 31, 2017, primarily due to net unrealized losses on securities. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders' equity in the calculation of our capital ratios. Our book value per common share decreased $0.17, or 0.82%, to $20.46 as of June 30, 2018, from $20.63 as of December 31, 2017.

 

 

Capital Adequacy Requirements

 

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements, based on the international capital standards known as Basel III, became effective on January 1, 2015, subject to a four-year phase-in period. Basel III’s capital conservation buffer became effective on January 1, 2016, at 0.625%, and will be phased in over a four-year period (increasing by an additional 0.625% each year until it reaches 2.5% on January 1, 2019). A description of the Basel III capital rules is included in Part I, Item 1 of the 2017 Form 10-K. Our current required capital ratios are as follows:

 

 

4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 5.75% including the capital conservation buffer)

 

6.0% Tier 1 capital to risk-weighted assets (effectively 7.25% including the capital conservation buffer)

 

8.0% Total capital to risk-weighted assets (effectively 9.25% including the capital conservation buffer)

 

4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)

 

The following table presents our capital ratios as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 
   

Company

   

Bank

   

Company

   

Bank

 
                         

Common equity Tier 1 ratio

  13.75%     12.09%     13.98%     12.47%  

Tier 1 risk-based capital ratio

  13.75%     12.09%     13.98%     12.47%  

Total risk-based capital ratio

  14.88%     13.21%     15.06%     13.55%  

Tier 1 leverage ratio

  10.58%     9.28%     11.06%     9.84%  

 

Our risk-based capital ratios as of June 30, 2018, decreased from December 31, 2017, due to a decrease in Tier 1 and total risk-based capital. As of June 30, 2018, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of June 30, 2018.

 

Off-Balance Sheet Arrangements

 

We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument. The following table presents our off-balance sheet arrangements as of the dates indicated:

 

   

June 30, 2018

   

December 31, 2017

 

(Amounts in thousands)

               

Commitments to extend credit

  $ 220,150     $ 243,147  

Financial letters of credit

    600       250  

Performance letters of credit(1)

    143,830       131,337  

Total off-balance sheet risk

  $ 364,580     $ 374,734  
                 

Reserve for unfunded commitments

  $ 66     $ 66  
                 

(1) Includes FHLB letters of credit

 

Market Risk and Interest Rate Sensitivity

 

Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. ALCO reviews our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and mitigate the effect of interest rate changes.

 

 

In order to manage our exposure to interest rate risk, we periodically review third-party and internal simulation models that project net interest income at risk, which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate shock.

 

During the second quarter of 2018, the Federal Open Market Committee increased the benchmark federal funds rate to a range of 175 to 200 basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. Due to the current target rate, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.

 

   

June 30, 2018

   

December 31, 2017

 
   

Change in

   

Percent

   

Change in

   

Percent

 

Increase (Decrease) in Basis Points

 

Net Interest Income

   

Change

   

Net Interest Income

   

Change

 

(Dollars in thousands)

                               
300   $ 661    

0.8

%   $ 3,759       4.3 %
200     677    

0.8

%     2,756       3.2 %
100     482    

0.6

%     1,535       1.8 %

(100)

    (3,982 )  

-4.5

%     (4,405 )     -5.1 %

 

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of June 30, 2018, exposure to interest rate risk is within our defined policy limits.

 

The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of June 30, 2018, we maintained interest rate swap agreements with notional amounts totaling $5.65 million to modify our exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. The fair values of the swap agreements, which are accounted for as fair value hedges, were recorded as a derivative asset totaling $99 thousand as of June 30, 2018, and a derivative liability totaling $90 thousand as of December 31, 2017. For additional information, see Note 9, “Derivative Instruments and Hedging Activities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

 

Inflation and Changing Prices

 

Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of operations and financial position in historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations is increased operating costs. In management’s opinion, interest rates have a greater impact on our financial performance than inflation. Interest rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation on businesses with large investments in property, plant, and inventory is generally more significant than the effect on financial institutions. The U.S. inflation rate continues to be relatively stable, and management believes that any changes in inflation will not be material to our financial performance.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 1 of this report.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of June 30, 2018, our disclosure controls and procedures were effective.

 

 

Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions about required disclosure.

 

Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.

 

Changes in Internal Control over Financial Reporting

 

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2018, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

 

We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome of each matter with certainty, we believe that the resolution of these actions should not have a material adverse effect on our financial position, results of operations, or cash flows.

 

ITEM 1A.

Risk Factors

 

Our risk factors discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included, or incorporated by reference, in this report before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our 2017 Form 10-K.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Not Applicable

 

(b)

Not Applicable

 

(c)

Issuer Purchases of Equity Securities

 

We repurchased 286,940 shares of our common stock during the second quarter of 2018 compared to 3,802 shares during the same quarter of 2017 and 474,240 shares during the first six months of 2018 compared to 10,602 shares during the same period of 2017.

 

 

The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:

 

   

Total Number

of Shares

Purchased

   

Average

Price Paid

per Share

   

Total Number of Shares

Purchased as Part of a

Publicly Announced Plan

   

Maximum Number of

Shares that May Yet be

Purchased Under the Plan(1)

 
                                 

April 1-30, 2018

    81,630     $ 30.49       81,630       389,294  

May 1-30, 2018

    152,120       32.69       152,120       237,187  

June 1-30, 2018

    53,190       34.44       53,190       1,792,568  

Total

    286,940     $ 32.39       286,940          
                                 

(1)

On June 27, 2018, our Board of Directors increased the number of shares authorized under the stock repurchase plan by 1,600,000 shares. Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 6,600,000 shares. The plan has no expiration date and is currently in effect. No determination has been made to terminate the plan or to cease making purchases. We held 4,807,432 shares in treasury as of June 30, 2018.

 

ITEM 3.

Defaults Upon Senior Securities

 

None.

 

ITEM 4.

Mine Safety Disclosures

 

None.

 

ITEM 5.

Other Information

 

None.

 

ITEM 6.

Exhibits

 

Exhibit

No.

 

Exhibit Description

 

Exhibit No.

 

Form

 

Dated

 

Filed

 

Filed Herewith

2.1

 

Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc.

 

Appendix A

 

the Definitive Proxy Statement on Form DEF 14A

 

4/24/2018

 

3/13/2018

   

3.1

 

Articles of Incorporation of First Community Bancshares, Inc., as amended

 

3(i)

 

Form 10-Q

 

6/30/2010

 

8/16/2010

   

3.2

 

Amended and Restated Bylaws of First Community Bancshares, Inc.

 

3.1

 

Form 8-K

 

2/23/2016

 

2/25/2016

   

4.1

 

Specimen stock certificate of First Community Bancshares, Inc.

 

4.1

 

Form 10-K

 

12/31/2002

 

3/25/2003

   

10.1.1**

 

First Community Bancshares, Inc. 1999 Stock Option Plan

 

10.1

 

Form 10-K/A

 

12/31/1999

 

4/13/2000

   

10.1.2**

 

Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan

 

10.1.1

 

Form 10-Q

 

3/31/2004

 

5/7/2004

   

10.2**

 

First Community Bancshares, Inc. 1999 Stock Option Agreement

 

10.5

 

Form 10-Q

 

6/30/2002

 

8/14/2002

   

10.3**

 

First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement

 

10.4

 

Form 10-Q

 

6/30/2002

 

8/14/2002

   

10.4**

 

First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan

 

Annex B

 

the Definitive Proxy Statement on Form DEF 14A

 

4/27/2004

 

3/15/2004

   

10.5**

 

First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement

 

10.13

 

Form 10-Q

 

6/30/2004

 

8/6/2004

   

10.6**

 

First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan

 

Appendix B

 

the Definitive Proxy Statement on Form DEF 14A

 

4/24/2012

 

3/7/2012

   

10.7**

 

First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement

 

99.1

 

Form 8-K

 

5/28/2013

 

5/28/2013

   

 

 

10.8**

 

First Community Bancshares, Inc. Life Insurance Endorsement Method  Split Dollar Plan and Agreement

 

10.5

 

Form 10-K/A

 

12/31/1999

 

4/13/2000

   

10.9.1**

 

First Community Bancshares, Inc. and Affiliates Executive Retention Plan

 

10.1

 

Form 8-K

 

12/30/2008

 

1/5/2009

   

10.9.2**

 

Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan

 

10.3

 

Form 8-K

 

12/16/2010

 

12/17/2010

   

10.9.3**

 

Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan

 

10.1

 

Form 8-K

 

2/21/2013

 

2/25/2013

   

10.9.4**

 

Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan

 

10.1

 

Form 8-K

 

5/24/2016

 

5/31/2016

   

10.9.5**

 

Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan

 

10.1

 

Form 8-K

 

2/28/2017

 

2/28/2017

   

10.10**

 

Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates

 

99.2

 

Form 8-K

 

8/22/2006

 

8/23/2006

   

10.11.1**

 

First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan

 

99.1

 

Form 8-K

 

8/22/2006

 

8/23/2006

   

10.11.2**

 

Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan

10.2

 

Form 8-K

 

2/28/2017

 

2/28/2017

   

10.12.1**

 

First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated

 

10.1

 

Form 8-K

 

12/16/2010

 

12/17/2010

   

10.12.2**

 

Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated

 

10.2

 

Form 8-K

 

5/24/2016

 

5/31/2016

   

10.13**

 

Employment Agreement between First Community Bancshares, Inc. and David D. Brown

 

10.3

 

Form 8-K

 

4/16/2015

 

4/16/2015

   

10.14**

 

Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly

 

10.5

 

Form 8-K

 

4/16/2015

 

4/16/2015

   

10.15**

 

Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills

 

10.2

 

Form 8-K

 

4/16/2015

 

4/16/2015

   

10.16**

 

Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II

 

10.1

 

Form 8-K

 

4/16/2015

 

4/16/2015

   

10.17**

 

Employment Agreement between First Community Bank and Mark R. Evans

 

2.1

 

Form 8-K 

 

4/2/2009

 

4/3/2009

   

11

 

Statement Regarding Computation of Earnings per Share

 

Note 13 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report

   

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

                 

X

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

                 

X

32*

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

                 

X

101***

 

Interactive data files pursuant to Rule 405 of Regulation S-T

                 

X

 

* Filed herewith

** Indicates a management contract or compensation plan or agreement

*** Submitted electronically herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 3rd day of August, 2018.

 

   

First Community Bancshares, Inc.

(Registrant)

     
     
   

/s/ William P. Stafford, II

     
   

William P. Stafford, II

   

Chief Executive Officer

   

(Principal Executive Officer)

     
     
     
     
   

/s/ David D. Brown

     
   

David D. Brown

   

Chief Financial Officer

   

(Principal Accounting Officer)

 

59