The allowance for loan losses is maintained at a level management deems sufficient to absorb probable losses inherent in the portfolio, and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. The Company consistently applies a review process to periodically evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses.
The Company determines the allowance for loan losses by making specific allocations to impaired loans that exhibit inherent weaknesses and various credit risk factors, and general allocations to commercial loans, consumer residential real estate, and consumer loans are developed giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends and other relevant factors. The general allocations are determined through a methodology that utilizes a rolling five year average loss history that is adjusted for current qualitative or environmental factors that management deem likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience. These factors may include, but are not limited to, actual versus estimated losses, regional and national economic conditions, including unemployment trend,trends, business segment and portfolio concentrations, industry competition, interest rate trends, and the impact of government regulations. The foregoing analysis is performed by management to evaluate the portfolio and calculate an estimated valuation allowance through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.
The use of various estimates and judgments in the Company’s ongoing evaluation of the required level of allowance can significantly impact the Company’s results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions. Differences between actual loan loss experience and estimates are reflected through adjustments either increasing or decreasing the loan loss provisionallowance based upon current measurement criteria.
Certain long-term equity investments representing less than 20% ownership are accounted for under the cost method, are carried at cost, and are included in other assets. At December 31, 2009,2010, these equity investments totaled $1.81$1.86 million. These investments in operating companies represent required long-term investments in insurance, investment and service company affiliates or consortiums which serve as vehicles for the delivery of various support services. In accordance with the cost method, dividends received are recorded as current period revenues and there is no recognition of the Company’s proportionate share of net operating income or loss. The Company has determined that fair value measurement is not practical, and further, nothing has come to the attention of the Company that would indicate impairment of any of these investments.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
relates to the dilutive effect of the underlying options outstanding. To the extent the granted exercise share price is less than the current market price, or “in the money”,money,” there is an economic incentive for the options to be exercised and an increase in the dilutive effect on earnings per share.
Income Taxes
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the Company include income on state and municipal securities which are exempt from federal income tax, income on bank-owned life insurance, and tax credits generated by investments in low income housing and rehabilitation of historic structures.
The Company includes interest and penalties related to income tax liabilities in income tax expense. The Company and its subsidiaries’ tax filings for the years ended December 31, 20052007 through 20082009 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax departments.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Earnings Per Share
Basic earnings per share are determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share are determined by dividing net income available to common shareholders by the weighted average shares outstanding, which includes the dilutive effect of stock options, warrants and contingently issuable shares. The dilutive effects of stock options, warrants, and contingently issuable shares are not considered for the year ended December 31, 2009, because of the reported net loss available to common shareholders. Basic and diluted net income per common share calculations follow:
| | | | | | | | | | | | | | For the Year Ended December 31, | |
| | For the Year Ended December 31, | | | 2010 | | | 2009 | | | 2008 | |
(Amounts in Thousands, Except Share and Per Share Data) | | | | | | | | | | |
Net income (loss) available to common shareholders | | | $ | 21,847 | | | $ | (40,856 | ) | | $ | 1,699 | |
| | 2009 | | 2008 | | 2007 | | | | | | | | | | | | | |
| | (Amounts in thousands, except share and per share data) | | |
| |
Net (loss) income available to common shareholders | | $ | (40,388 | ) | | $ | 2,826 | | | $ | 29,632 | | |
Weighted average shares outstanding | | | 14,868,547 | | | | 11,058,076 | | | | 11,204,676 | | | | 17,802,009 | | | | 14,868,547 | | | | 11,058,076 | |
Dilutive shares for stock options | | | — | | | | 53,680 | | | | 65,320 | | | | 12,463 | | | | - | | | | 53,680 | |
Contingently issuable shares | | | — | | | | 22,269 | | | | 22,875 | | | | 8,472 | | | | - | | | | 22,269 | |
Common stock warrants | | | — | | | | — | | | | — | | |
| | | | | | | | |
Weighted average dilutive shares outstanding | | | 14,868,547 | | | | 11,134,025 | | | | 11,292,871 | | | | 17,822,944 | | | | 14,868,547 | | | | 11,134,025 | |
| | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | (2.72 | ) | | $ | 0.26 | | | $ | 2.64 | | |
Diluted earnings per share | | $ | (2.72 | ) | | $ | 0.25 | | | $ | 2.62 | | |
Basic earnings (loss) per share | | | $ | 1.23 | | | $ | (2.75 | ) | | $ | 0.15 | |
Diluted earnings (loss) per share | | | $ | 1.23 | | | $ | (2.75 | ) | | $ | 0.15 | |
For the years ended December 31, 2010, 2009 2008 and 2007,2008, options and warrants to purchase 483,558, 488,689, 206,996, and 10,000206,996 shares, respectively, of common stock were outstanding but were not included in the computation of diluted earnings per common share because the exercise price was greater than the market price of the Company’s common stock or the Company incurred losses; accordingly, they would have an anti-dilutive effect.
61
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Variable Interest Entities
The Company maintains ownership positions in various entities which it deems variable interest entities (“VIE’s”). These VIE’s include certain tax credit limited partnerships and other limited liability companies which provide aviation services, insurance brokerage, title insurance and other financial and related services. Based on the Company’s analysis, it is a non- primarynon-primary beneficiary; accordingly, these entities do not meet the criteria for consolidation. The carrying value of VIE’s was $1.81$1.86 million and $1.50$1.81 million at December 31, 20092010 and 2008,2009, respectively. The Company’s maximum possible loss exposure was $1.62$1.86 million and $1.51$1.62 million at December 31, 20092010 and 2008,2009, respectively. Management does not believe net losses, if any, resulting from its involvement with the entities discussed above will be material.
Derivative Instruments
The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. In addition, certain contracts and commitments are defined as derivatives under generally accepted accounting principles.
All derivative instruments are carried at fair value on the balance sheet. Special hedge accounting provisions are provided, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedged transaction.
Other Recent Accounting Developments
FASB ASCFIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting Standards Updates
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 320, Investments — Debt and Equity Securities.310, Receivables. New authoritative accounting guidance under ASC Topic 320, “Investments — Debt310 amends prior guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and Equity Securities,” (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recoverycredit quality of its cost basis. Under ASC Topic 320, declinesfinancing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the fair valueadequacy ofheld-to-maturity andavailable-for-sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to its allowance for credit losses. The amount of the impairment related to other factorsnew authoritative guidance is recognized in other comprehensive income.effective for interim and annual reporting periods ending on or after December 15, 2010, for public entities. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 320310 during the firstfourth quarter of 2009, and recorded a cumulative effect adjustment between retained earnings and accumulated other comprehensive loss2010. Other than the additional disclosures, the adoption of $6.13 million.the new guidance had no significant impact on the Company’s financial statements.
FASB ASC Topic 805, Business Combinations.On January 1, 2009, new authoritative accounting guidance under ASC Topic 805, “Business Combinations,” became applicable to the Company’s accounting for business combinations closing on or after January 1, 2009. ASC Topic 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. ContingentAny contingent consideration is also required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration mayacquisition. Acquisition-related costs are to be determinable beyond a reasonable doubt. This fair value approach replaces the cost allocation process required
62
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC Topic 805 requires acquirers to expense acquisition related costsexpensed as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under prior accounting guidance.incurred. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC Topic 450, “Contingencies.” The805 also expands required disclosures regarding the nature and financial effect of business combinations. In 2009, the Company recorded the acquisition of TriStone Community Bank in accordance with the new accounting guidance and recognized a gain of $4.49 million. In accordance with the new accounting guidance, the Company did not record an allowance for loan losses in connection with the TriStone acquisition. The loans acquired were accounted for at fair value; therefore, no allowance was allowed to be recorded at acquisition.guidance.
FASB ASC Topic 810, Consolidation. New authoritative accounting guidance under ASC Topic 810 amendsamended prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purposeestablish accounting and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 is effectivestandards for the Company January 1, 2010,non-controlling interest in a subsidiary and is not expected to havefor the deconsolidation of a significant impact on the Company’s financial statements.
FASB ASC Topic 815, Derivatives and Hedging. New authoritative accountingsubsidiary. This guidance under ASC Topic 815, “Derivatives and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit risk related contingent features in derivative agreements. The new authoritative accounting guidance under ASC Topic 815 became effective for the Company on January 1, 2009 and did not have a significant impact on the required disclosures are reported in Note 13 — Derivative Instruments and Hedging Activities of the Notes to Consolidated Financial Statements included in Item 8 hereof .Company’s financial statements.
FASB ASC Topic 820, Fair Value Measurements and Disclosures. New authoritative guidance under ASC Topic 820, “Fair Value Measurements and Disclosures,” definesamends prior guidance that requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value establisheshierarchy. Entities are also required to disclose information in the Level 3 roll forward about purchases, sales, issuances and settlements on a framework for measuringgross basis. In addition to these new disclosure requirements, existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in generally accepted accounting principles,estimating Level 2 and expands disclosures aboutLevel 3 fair value measurements. The provisions of ASC Topic 820 became effective for the Company on January 1, 2008, for financial assets and financial liabilities and on January 1, 2009, for non-financial assets and non-financial liabilities. See Note 16 — Fair Value of the Notes to Consolidated Financial Statements included in Item 8 hereof.
Additional new authoritative accounting guidance under ASC Topic 820 affirms that the objective of fair value when the market for an assetmeasurements is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements.further clarified. The Company adopted the new authoritative accounting guidance under ASC Topic 820 duringin the first quarter of 2009. Adoption2010 and new disclosures are presented in Note 12 – Fair Value of the Notes to Consolidated Financial Statements. Other than the additional disclosures, the adoption of the new guidance did not significantly impact the Company’s financial statements.
63
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
FASB ASC Topic 855, Subsequent Events. New authoritative accounting guidance under ASC Topic 855, “Subsequent Events,” as amended, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC Topic 855 became effective for the Company’s financial statements for periods ending after June 15, 2009, and did not have ahad no significant impact on the Company’s financial statements.
FASB ASC Topic 860, Transfers and Servicing. New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The Company adopted the new authoritative accounting guidance under ASC Topic 860 will be effective January 1, 2010, and is not expected to have ait had no significant impact on the Company’s financial statements.
| |
Note 2. | Merger, Acquisitions and Branching Activity |
Note 2. Merger, Acquisitions and Branching Activity
In July 2009, the Company acquired TriStone Community Bank (“TriStone”), based in Winston-Salem, North Carolina. TriStone had two full service locations in Winston-Salem, North Carolina. At acquisition, TriStone had total assets of $166.82 million, total loans of $132.23 million and total deposits of $142.27 million. Shares of TriStone were exchanged for .5262 shares of the Company’s common stock and the overall acquisition cost was approximately $10.78 million. The acquisition of TriStone significantly augmented the Company’s market presence and human resources in the Winston-Salem, North Carolina region. The Company recorded a $4.49 million gain on the acquisition of TriStone.
The TriStone merger is being accounted for under the acquisition method of accounting. The statement of net assets acquired as of July 31, 2009 is presented in the following table. The purchased assets and assumed fair value of liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of the merger as information relative to closing date fair value becomes available. After the initial valuation was completed, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all assets acquired and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a preliminary gain on the acquisition of $4.49 million. Goodwill and bargain purchase gains created in business combinations are generally not taxable. For the year ended December 31, 2009, the Company incurred expenses related to the merger of $1.73 million.
Revenue of $3.66 million and net income of $1.75 million for the period of August 1, 2009 to December 31, 2009 included in the consolidated financial statements is related to the newly acquired TriStone. TriStone’s results of operations prior to the acquisition are not included in the Company’s statements of income.
64
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Acquisition of TriStone Community Bank
| | | | |
| | (In thousands) | |
|
Consideration: | | | | |
Common Stock — 741,588 shares | | $ | 10,082 | |
Cash paid for dissenting shares | | | 649 | |
Cash in lieu of fractional shares | | | 4 | |
Option consideration | | | 42 | |
| | | | |
Fair value of total consideration paid | | $ | 10,777 | |
| | | | |
Recognized amounts of assets acquired and liabilities assumed: | | | | |
Cash and cash equivalents | | $ | 21,948 | |
Investments | | | 8,656 | |
Loans, net | | | 130,808 | |
Premises and equipment, net | | | 2,112 | |
Other assets | | | 1,624 | |
| | | | |
Identifiable assets | | | 165,148 | |
Deposits | | | 141,833 | |
Other liabilities, primarily FHLB advances | | | 8,045 | |
| | | | |
Identifiable liabilities | | | 149,878 | |
Identifiable net assets | | | 15,270 | |
| | | | |
Gain on purchase | | $ | (4,493 | ) |
| | | | |
The pro forma consolidated condensed statements of income for the Company and TriStone for the years ended December 31, 2009 and 2008 are presented below as if the combination had occurred on January 1. The unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods.
The pro forma purchase accounting adjustments related to investments, loans and leases, deposits, and other borrowed funds are being accreted or amortized into income using methods that approximate a level yield over their respective estimated lives. Purchase accounting adjustments related to identifiable intangibles, which totaled $1.31 million, are being amortized and recorded as noninterest expense over their respective estimated lives using accelerated methods. The pro forma consolidated condensed statements of income do not reflect any adjustments to TriStone’s historical provision for credit losses. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each fiscal period presented, nor are they necessarily indicative of future consolidated results.
65
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | 2009 | |
| | First
| | | | | | Pro Forma
| | | Pro Forma
| |
| | Community | | | TriStone | | | Adjustments | | | Combined | |
| | (Dollars in thousands) | |
|
Interest Income | | $ | 104,459 | | | $ | 7,527 | | | $ | 265 | | | $ | 112,251 | |
Interest Expense | | | 37,760 | | | | 3,214 | | | | (427 | ) | | | 40,547 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 66,699 | | | | 4,313 | | | | 692 | | | | 71,704 | |
Provision for loan losses | | | 15,053 | | | | 175 | | | | — | | | | 15,228 | |
| | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 51,646 | | | | 4,138 | | | | 692 | | | | 56,476 | |
Noninterest Income | | | (58,237 | ) | | | 992 | | | | 4,493 | | | | (52,752 | ) |
Noninterest Expense | | | 64,004 | | | | 4,177 | | | | 1,726 | | | | 69,907 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (70,595 | ) | | | 953 | | | | 3,459 | | | | (66,183 | ) |
Income tax expense (benefit) | | | (29,007 | ) | | | — | | | | 1,133 | | | | (27,874 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | (41,588 | ) | | | 953 | | | | 2,326 | | | | (38,309 | ) |
Dividends on preferred stock | | | 2,160 | | | | — | | | | — | | | | 2,160 | |
| | | | | | | | | | | | | | | | |
Net income (loss) available to common shareholders | | $ | (43,748 | ) | | $ | 953 | | | $ | 2,326 | | | $ | (40,469 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2008 | |
| | First
| | | | | | Pro Forma
| | | Pro Forma
| |
| | Community | | | TriStone | | | Adjustments | | | Combined | |
| | (Dollars in thousands) | |
|
Interest Income | | $ | 110,765 | | | $ | 7,633 | | | $ | 265 | | | $ | 118,663 | |
Interest Expense | | | 44,930 | | | | 3,882 | | | | (427 | ) | | | 48,385 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 65,835 | | | | 3,751 | | | | 692 | | | | 70,278 | |
Provision for loan losses | | | 7,422 | | | | 687 | | | | — | | | | 8,109 | |
| | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 58,413 | | | | 3,064 | | | | 692 | | | | 62,169 | |
Noninterest Income | | | 2,374 | | | | 680 | | | | 4,493 | | | | 7,547 | |
Noninterest Expense | | | 60,516 | | | | 3,993 | | | | 1,726 | | | | 66,235 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 271 | | | | (249 | ) | | | 3,459 | | | | 3,481 | |
Income tax expense (benefit) | | | (2,810 | ) | | | — | | | | 1,133 | | | | (1,677 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 3,081 | | | | (249 | ) | | | 2,326 | | | | 5,158 | |
Dividends on preferred stock | | | 255 | | | | — | | | | — | | | | 255 | |
| | | | | | | | | | | | | | | | |
Net income (loss) available to common shareholders | | $ | 2,826 | | | $ | (249 | ) | | $ | 2,326 | | | $ | 4,903 | |
| | | | | | | | | | | | | | | | |
In November 2008, the Company acquired Coddle Creek Financial Corp. (“Coddle Creek”), headquartered in Mooresville, North Carolina. Coddle Creek had three full service branch offices located in Mooresville, Cornelius, and Huntersville, North Carolina. At acquisition, Coddle Creek had total assets of $158.66 million, total loans of $136.99 million and total deposits of $137.06 million. Under the terms of the merger agreement, shares of Coddle Creek common stock were exchanged for .9046 shares of the Company’s common stock and $19.60 in cash. The total deal value, including the cash-out of outstanding stock options, was approximately $32.29 million. Concurrent
66
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
with the Coddle Creek acquisition, Mooresville Savings Bank, Inc., SSB, the wholly-owned subsidiary of Coddle Creek, was merged into the First Community Bank, N. A. (the “Bank”), the wholly-owned subsidiary of the Company. As a result of the acquisition and preliminary purchase price allocation, approximately $14.41 million in goodwill was recorded which represents the excess of the purchase price over the fair market value of the net assets acquired and identified intangibles.
In September 2007, the Company acquired GreenPoint Insurance Group (“GreenPoint”), an insurance agency located in High Point, North Carolina. In connection with the acquisition, the Company has issued an aggregate of 78,824101,638 shares to the former shareholders of GreenPoint. Under the terms of the stock purchase agreement, former shareholders of GreenPoint are entitled to additional consideration aggregating up to $906$615 thousand in the form of cash or the Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. IfIt those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the acquisition. The acquisition of GreenPoint has added $11.01$13.15 million of goodwill and intangibles to the Company’s balance sheet, net of amortization of $10.57$12.14 million.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
GreenPoint has acquired sixseven insurance agencies and sold one since its acquisition by the Company. GreenPoint issued aggregate cash consideration of approximately$190 thousand and $803 thousand in 2010 and $2.04 million in 2009, and 2008, respectively, in connection with those acquisitions. Acquisition terms in all instancesTerms for acquisitions prior to 2010 call for issuing further aggregate cash consideration of $3.5$2.86 million if certain operating performance targets are met. If those targets are met, the value of the consideration ultimately paid will be added to the costcosts of the acquisitions. GreenPoint’s 2009 and 2008 acquisitionsAcquisitions prior to 2010 added approximately$692 thousand, $803 thousand, and $2.04 million respectively, of goodwill and intangibles to the Company’s balance sheet.sheet in 2010, 2009, and 2008, respectively. In 2010, GreenPoint acquired one insurance agency. Cash consideration of $190 thousand was provided at the closing date of the transaction. Acquisition terms call for further cash consideration of $760 thousand if certain operating targets are met. The fair value of these payments was booked at acquisition and added $477 thousand of goodwill and intangibles to the Company’s balance sheet during 2010.
The following table summarizes the net cash provided by or used in acquisitions and divestitures during the three years ended December 31, 2009.2010. Net cash paid (received) for acquisition includes transactions that occurred during the current and prior years,
| | 2010 | | | 2009 | | | 2008 | |
(Amounts in Thousands) | | | | | | | | | |
Fair value of investments acquired | | $ | - | | | $ | 7,837 | | | $ | 1,269 | |
Fair value of loans acquired | | | - | | | | 129,937 | | | | 136,035 | |
Fair value of premises and equipment acquired | | | - | | | | 1,797 | | | | 4,505 | |
Fair value of other assets | | | - | | | | 26,746 | | | | 23,872 | |
Fair value of deposits assumed | | | - | | | | (142,697 | ) | | | (137,606 | ) |
Fair value of other liabilities assumed | | | - | | | | (9,008 | ) | | | (4,967 | ) |
Purchase price in excess of (less than) net assets acquired | | | 1,650 | | | | (3,037 | ) | | | 15,991 | |
Total purchase price | | | 1,650 | | | | 11,575 | | | | 39,099 | |
| | | | | | | | | | | | |
Less non-cash purchase price | | | 768 | | | | 11,579 | | | | 19,647 | |
Less cash acquired | | | - | | | | 21,295 | | | | 14,792 | |
Net cash paid (received) for acquisition | | $ | 882 | | | $ | (21,299 | ) | | $ | 4,660 | |
| | | | | | | | | | | | |
Book value of assets sold | | $ | - | | | $ | (110 | ) | | $ | - | |
Book value of liabilities sold | | | - | | | | - | | | | - | |
Sales price in excess of net liabilities assumed | | | - | | | | (340 | ) | | | - | |
Total sales price | | | - | | | | (450 | ) | | | - | |
| | | | | | | | | | | | |
Add cash on hand sold | | | - | | | | - | | | | - | |
Less amount due remaining on books | | | - | | | | - | | | | - | |
Net cash paid received for divestiture | | $ | - | | | $ | (450 | ) | | $ | - | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in thousands) | |
|
Fair value of investments acquired | | $ | 7,837 | | | $ | 1,269 | | | $ | — | |
Fair value of loans acquired | | | 129,937 | | | | 136,035 | | | | — | |
Fair value of premises and equipment acquired | | | 1,797 | | | | 4,505 | | | | — | |
Fair value of other assets | | | 26,746 | | | | 23,872 | | | | 382 | |
Fair value of deposits assumed | | | (142,697 | ) | | | (137,606 | ) | | | — | |
Fair value of other liabilities assumed | | | (9,008 | ) | | | (4,967 | ) | | | (1,167 | ) |
Purchase price (lesser than) in excess of net assets acquired | | | (3,037 | ) | | | 15,991 | | | | 7,838 | |
| | | | | | | | | | | | |
Total purchase price | | | 11,575 | | | | 39,099 | | | | 7,053 | |
Less non-cash purchase price | | | 11,579 | | | | 19,647 | | | | 1,658 | |
Less cash acquired | | | 21,295 | | | | 14,792 | | | | 32 | |
| | | | | | | | | | | | |
Net cash (received) paid for acquisition | | $ | (21,299 | ) | | $ | 4,660 | | | $ | 5,363 | |
| | | | | | | | | | | | |
Book value of assets sold | | $ | (110 | ) | | $ | — | | | $ | — | |
Book value of liabilities sold | | | — | | | | — | | | | — | |
Sales price in excess of net liabilities assumed | | | (340 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Total sales price | | | (450 | ) | | | — | | | | — | |
Add cash on hand sold | | | — | | | | — | | | | — | |
Less amount due remaining on books | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash paid (received) for divestiture | | $ | (450 | ) | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
67
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
intend to sell any of these securities in a loss position and has determined that it is more likely than not going to be required to sell at December 31, 2009,2010, until the security matures or recovers in value.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2009 | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
Description of Securities | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| | (Amounts in thousands) | |
|
U.S. Government agency securities | | $ | 23,271 | | | $ | (155 | ) | | $ | — | | | $ | — | | | $ | 23,271 | | | $ | (155 | ) |
States and political subdivisions | | | 13,864 | | | | (270 | ) | | | 16,285 | | | | (623 | ) | | | 30,149 | | | | (893 | ) |
Trust preferred securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Single Issue | | | — | | | | — | | | | 41,111 | | | | (14,514 | ) | | | 41,111 | | | | (14,514 | ) |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Agency | | | 83,491 | | | | (1,400 | ) | | | 34 | | | | (1 | ) | | | 83,525 | | | | (1,401 | ) |
Prime residential | | | — | | | | — | | | | 5,169 | | | | (573 | ) | | | 5,169 | | | | (573 | ) |
Alt-A residential | | | 11,301 | | | | (9,667 | ) | | | — | | | | — | | | | 11,301 | | | | (9,667 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | 94,792 | | | | (11,067 | ) | | | 5,203 | | | | (574 | ) | | | 99,995 | | | | (11,641 | ) |
Equity securities | | | 86 | | | | (60 | ) | | | 731 | | | | (131 | ) | | | 817 | | | | (191 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 132,013 | | | $ | (11,552 | ) | | $ | 63,330 | | | $ | (15,842 | ) | | $ | 195,343 | | | $ | (27,394 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2008 | | | December 31, 2010 | |
| | Less than 12 Months | | 12 Months or Longer | | Total | | | Less than 12 Months | | | 12 Months or longer | | | Total | |
| | Fair
| | Unrealized
| | Fair
| | Unrealized
| | Fair
| | Unrealized
| | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
Description of Securities | | Value | | Losses | | Value | | Losses | | Value | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| | (Amounts in thousands) | | |
| |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | | |
U.S. Government agency securities | | | $ | 9,832 | | | $ | (168 | ) | | $ | - | | | $ | - | | | $ | 9,832 | | | $ | (168 | ) |
States and political subdivisions | | $ | 85,374 | | | $ | (2,948 | ) | | $ | 16,413 | | | $ | (1,539 | ) | | $ | 101,787 | | | $ | (4,487 | ) | | | 80,420 | | | | (4,660 | ) | | | - | | | | - | | | | 80,420 | | | | (4,660 | ) |
Trust preferred securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Single Issue | | | — | | | | — | | | | 30,693 | | | | (21,950 | ) | | | 30,693 | | | | (21,950 | ) | |
Pooled | | | — | | | | — | | | | 29,567 | | | | (60,757 | ) | | | 29,567 | | | | (60,757 | ) | |
| | | | | | | | | | | | | | |
Total trust preferred securities | | | — | | | | — | | | | 60,260 | | | | (82,707 | ) | | | 60,260 | | | | (82,707 | ) | |
Single issue | | | | 3,390 | | | | (1,517 | ) | | | 37,854 | | | | (12,833 | ) | | | 41,244 | | | | (14,350 | ) |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Agency | | | 42,674 | | | | (1 | ) | | | 43 | | | | (1 | ) | | | 42,717 | | | | (2 | ) | | | 71,613 | | | | (1,307 | ) | | | 18 | | | | - | | | | 71,631 | | | | (1,307 | ) |
Prime residential | | | 5,766 | | | | (1,657 | ) | | | — | | | | — | | | | 5,766 | | | | (1,657 | ) | |
| | | | | | | | | | | | | | |
Alt-A residential | | | | - | | | | - | | | | 11,277 | | | | (7,904 | ) | | | 11,277 | | | | (7,904 | ) |
Total mortgage-backed securities | | | 48,440 | | | | (1,658 | ) | | | 43 | | | | (1 | ) | | | 48,483 | | | | (1,659 | ) | | | 71,613 | | | | (1,307 | ) | | | 11,295 | | | | (7,904 | ) | | | 82,908 | | | | (9,211 | ) |
Equity securities | | | 2,167 | | | | (1,161 | ) | | | 2,201 | | | | (220 | ) | | | 4,368 | | | | (1,381 | ) | | | 155 | | | | (55 | ) | | | 93 | | | | (10 | ) | | | 248 | | | | (65 | ) |
| | | | | | | | | | | | | | |
Total | | $ | 135,981 | | | $ | (5,767 | ) | | $ | 78,917 | | | $ | (84,467 | ) | | $ | 214,898 | | | $ | (90,234 | ) | | $ | 165,410 | | | $ | (7,707 | ) | | $ | 49,242 | | | $ | (20,747 | ) | | $ | 214,652 | | | $ | (28,454 | ) |
| | | | | | | | | | | | | | |
| | December 31, 2009 | |
| | Less than 12 Months | | | 12 Months or longer | | | Total | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
Description of Securities | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | |
U.S. Government agency securities | | $ | 23,271 | | | $ | (155 | ) | | $ | - | | | $ | - | | | $ | 23,271 | | | $ | (155 | ) |
States and political subdivisions | | | 13,864 | | | | (270 | ) | | | 16,285 | | | | (623 | ) | | | 30,149 | | | | (893 | ) |
Trust preferred securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Single issue | | | - | | | | - | | | | 41,111 | | | | (14,514 | ) | | | 41,111 | | | | (14,514 | ) |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Agency | | | 83,491 | | | | (1,400 | ) | | | 34 | | | | (1 | ) | | | 83,525 | | | | (1,401 | ) |
Prime residential | | | - | | | | - | | | | 5,169 | | | | (573 | ) | | | 5,169 | | | | (573 | ) |
Alt-A residential | | | 11,301 | | | | (9,667 | ) | | | - | | | | - | | | | 11,301 | | | | (9,667 | ) |
Total mortgage-backed securities | | | 94,792 | | | | (11,067 | ) | | | 5,203 | | | | (574 | ) | | | 99,995 | | | | (11,641 | ) |
Equity securities | | | 86 | | | | (60 | ) | | | 731 | | | | (131 | ) | | | 817 | | | | (191 | ) |
Total | | $ | 132,013 | | | $ | (11,552 | ) | | $ | 63,330 | | | $ | (15,842 | ) | | $ | 195,343 | | | $ | (27,394 | ) |
At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was 5.93% of the combined reported value of the aggregate securities portfolio. At December 31, 2009, the combined depreciation in value of the 89 individual securities in an unrealized loss position was approximately 5.64% of the combined reported value of the aggregate securities portfolio. At December 31, 2008, the combined depreciation in value of the 310 individual securities in an unrealized loss position was approximately 17.04% of the combined reported value of the aggregate securities portfolio.
The Company reviews its investment portfolio on a quarterly basis for indications ofother-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities the Company has determined that, except for a pooled trust preferred securities,security, it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that it will have to sell impaired securities before recovery of the impairment occurs. The Company’s assertion is based upon its investment strategy for the particular type of security and the Company’s cash flow needs, liquidity position, capital adequacy and interest rate risk position.
71
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
For non-beneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies and other qualitative factors to determine if the impairment will be recovered. Non-beneficial interest debt securities consist of U.S. government agency securities, states and political subdivisions, single issue trust preferred securities, and FDIC-backed securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of credit related impairment and records any credit-relatedcredit related OTTI through earnings and the non-credit related OTTI through other comprehensive income (“OCI”). During the years ended December 31, 20092010 and 2008,2009, no OTTI charges were incurred related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, and other current economic factors.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of mortgage-backed securities and pooled trust preferred securities. An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the non-credit related OTTI is accounted for in OCI.
During the years ended December 31, 20092010 and 2008,2009, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $77.59 million$134 thousand and $29.92$77.59 million, respectively. For the beneficial interest debt securities not deemed to have incurred an OTTI, the Company has concluded that the primary difference in the fair value of the securities and credit impairment evident in their cash flow models is the significantly higher rate of return demanded by market participants in an illiquid and inactive market as compared to the rate of return received when the Company purchased the securities in a normally functioning market.
As of December 31, 2009,2010, the Company determined that it cannot assert its intent to hold its remaining pooled trust preferred securitiessecurity to recovery or maturity, and that it is more likely than not it will need to sell the securitiessecurity in order to, among other reasons, convert deferred tax assets to current tax receivables. Accordingly, the Company carries those securitiesthis security at the lower of its adjusted cost basis or market value. The securities continuesecurity continues to remain categorized as available for sale.
For the non-Agency Alt-A residential MBS, the Company models cash flows are modeled using the following assumptions: voluntary constant prepayment speed of 5, a customized constant default rate scenario starting at 15 for the first three quarters ramping down over the coursethat assumes 20% of the next three years to 3, and a customized loss severity scenario starting at 65 for the first three quarters ramping down over the course ofremaining underlying mortgages will default within the next six quarters. For the non-Agency prime residential MBS, cash flows are modeled using the following assumptions: constant prepayment speed of 5, a constant default rate of 5,3 years, and a loss severity of 10. The scenarios presented do not indicate OTTI for either security.
72
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)60.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of an OTTI is recognized in OCI:
| | | | | | Year Ended | | | Year Ended | |
| | Year Ended
| | | December 31, 2010 | | | December 31, 2009 | |
| | December 31, 2009 | | |
| | (In thousands) | | |
| |
Estimated credit losses, beginning balance* | | $ | 19,707 | | |
(In Thousands) | | | | | | | |
Estimated credit losses,beginning balance* | | | $ | 4,251 | | | $ | 4,251 | |
Additions for credit losses on securities not previously recognized | | | 30,953 | | | | - | | | | - | |
Additions for credit losses on securities previously recognized | | | 2,944 | | | | - | | | | - | |
Reduction for increases in cash flows | | | — | | | | - | | | | - | |
Reduction for securities management no longer intends to hold to recovery | | | (14,499 | ) | | | - | | | | - | |
Reduction for securities sold/realized losses | | | (34,854 | ) | | | - | | | | - | |
| | | | |
Estimated credit losses as of December 31, 2009 | | $ | 4,251 | | |
| | | | |
Estimated credit losses, ending balance | | | $ | 4,251 | | | $ | 4,251 | |
| | |
* | | * The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods. |
During the first quarter of 2009, the FASB ASC Topic 320, “Investments — Debt and Equity Securities”, amended the assessment criteria for recognizing and measuring OTTI related to debt securities. It also amends the presentation requirements for OTTI and significantly impacted disclosures of all investment securities. In 2008, $14.47 million in pre-tax OTTI charges related to a non-Agency Alt-A mortgage-backed security were recognized of which $4.25 million was credit related. As a result of the adoptionon debt securities in the first quarter of 2009, the Company made a cumulative effect adjustment to increase retained earnings and decrease OCI by approximately $6.13 million, net of tax. The cumulative effect adjustment represented the non-credit related portion of OTTI losses recognized in the prior year’s earnings, net of tax.periods.
For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the year ended December 31, 2010 and 2009, the Company recognized OTTI charges of $51 thousand and $1.27 million, respectively, on certain of its equity positions. No charges were recognized for the years ended December 31, 2008 and 2007.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 4. Loans
Loans, net of unearned income, consist of the following at December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | (Amounts in thousands) | |
|
Real estate- commercial | | $ | 450,611 | | | $ | 407,638 | |
Real estate- construction | | | 124,896 | | | | 130,610 | |
Real estate- residential | | | 657,367 | | | | 602,573 | |
Commercial, financial and agricultural | | | 96,366 | | | | 85,034 | |
Loans to individuals for household and other consumer expenditures | | | 60,090 | | | | 66,258 | |
All other loans | | | 4,601 | | | | 6,046 | |
| | | | | | | | |
Total loans | | $ | 1,393,931 | | | $ | 1,298,159 | |
| | | | | | | | |
Loans Held for Sale | | $ | 11,576 | | | $ | 1,024 | |
| | | | | | | | |
| | 2010 | | | 2009 | |
(Amounts in Thousands) | | | | | | |
Commercial loans | | | | | | |
Construction — commercial | | $ | 42,694 | | | $ | 47,469 | |
Land development | | | 16,650 | | | | 22,832 | |
Other land loans | | | 24,468 | | | | 32,566 | |
Commercial and industrial | | | 94,123 | | | | 95,115 | |
Multi-family residential | | | 67,824 | | | | 65,603 | |
Non-farm, non-residential | | | 351,904 | | | | 343,975 | |
Agricultural | | | 1,342 | | | | 1,251 | |
Farmland | | | 36,954 | | | | 41,034 | |
Total commercial loans | | | 635,959 | | | | 649,845 | |
Consumer real estate loans | | | | | | | | |
Home equity lines | | | 111,620 | | | | 111,597 | |
Single family residential mortgage | | | 549,157 | | | | 545,770 | |
Owner-occupied construction | | | 18,349 | | | | 22,028 | |
Total consumer real estate loans | | | 679,126 | | | | 679,395 | |
Consumer and other loans | | | | | | | | |
Consumer loans | | | 63,475 | | | | 60,090 | |
Other | | | 7,646 | | | | 4,601 | |
Total consumer and other loans | | | 71,121 | | | | 64,691 | |
Total loans | | $ | 1,386,206 | | | $ | 1,393,931 | |
| | | | | | | | |
Loans Held for Sale | | $ | 4,694 | | | $ | 11,576 | |
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
73
FIRST COMMUNITY BANCSHARES, INC.
Off-Balance Sheet Financial Instruments
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. 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 not a 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 of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.
Standby letters of credit and written 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 loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $233.72 million and standby letters of credit and financial guarantees written of $9.80 million at December 31, 2009. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $4.64 million at December 31, 2009.
In the normal course of business, the Company’s subsidiary bank has made loans to directors and executive officers of the Company and its subsidiaries and their affiliates (collectively referred to as “related parties”). All loans and commitments made to such officers and directors and to companies in which they are officers, or have significant ownership interest, have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The aggregate dollar amount of such loans was $11.37 million and $5.98 million at December 31, 2009 and 2008, respectively. During 2009, approximately $7.05 million in new loans and increases were made and repayments on such loans to officers and directors totaled $1.65 million. Changes in composition of the Company’s subsidiary board members and executive officers resulted in increases of approximately $477 thousand.
At December 31, 2009 and 2008, customer overdrafts totaling $1.56 million and $2.10 million, respectively, were reclassified as loans.
Loans acquired in a business combination closing after January 1, 2009, are recorded at estimated fair value on their purchase date and prohibit the carryover of the related allowance for loan losses, which include loans purchased in the TriStone acquisition. Purchased impaired loans are accounted for under the Loans and Debt Securities Acquired with Deteriorated Credit Quality Topic310-30 of FASB ASC when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal
74
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Purchased performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition.
The carrying amount of acquired loans at July 31, 2009, consisted of loans with credit deterioration, or impaired loans, and loans with no credit deterioration, or performing loans. The following table presents the acquired performing loans receivable at the acquisition date of July 31, 2009. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.
| | | | |
| | (In thousands) | |
|
Contractually required principal payments to balance sheet received | | $ | 125,366 | |
Fair value of adjustment for credit, interest rate, and liquidity | | | (472 | ) |
| | | | |
Fair value of loans receivable, with no credit deterioration | | $ | 124,894 | |
| | | | |
The following table presents the required detail regarding acquired impaired loans for 2009. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference includes estimated future credit losses expected to be incurred over the life of the loan. The Company has not noted any further deterioration in the acquired impaired loans.
| | | | | | | | | | | | |
| | TriStone | | | Other | | | Total | |
| | (In thousands) | |
|
Balance, January 1, 2009 | | $ | — | | | $ | — | | | $ | — | |
Contractually required principal payments to balance sheet receivable | | | 6,862 | | | | 8,790 | | | | 15,652 | |
Nonaccretable difference | | | (1,670 | ) | | | (2,488 | ) | | | (4,158 | ) |
| | | | | | | | | | | | |
Present value of cash flows expected to be collected | | | 5,192 | | | | 6,302 | | | | 11,494 | |
Accretable difference | | | (149 | ) | | | (891 | ) | | | (1,040 | ) |
| | | | | | | | | | | | |
Fair value of acquired impaired loans | | | 5,043 | | | | 5,411 | | | | 10,454 | |
Principal payments received | | | (1,240 | ) | | | (1,215 | ) | | | (2,455 | ) |
Accretion | | | 104 | | | | — | | | | 104 | |
| | | | | | | | | | | | |
Balance, December 31, 2009 | | $ | 3,907 | | | $ | 4,196 | | | $ | 8,103 | |
| | | | | | | | | | | | |
The accretion during 2009 consists of both nonaccretable difference and accretable difference. The nonaccretable difference was collected with the ultimate resolution of the problem credit and was recognized into interest income. The remaining balance of the accretable difference at December 31, 2009, was $1.01 million.
There was no allowance for loan losses related to the acquired impaired loans as of December 31, 2009.
| |
Note 5. | Allowance for Loan Losses |
The allowance for loan losses is maintained at a level sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and
75
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio.
Management performs periodic assessments to determine the appropriate level of allowance. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the loss provision based upon current measurement criteria. Commercial, consumer and mortgage loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans. Management’s allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management
Activity in the allowance for loan losses was as follows:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in thousands) | |
|
Balance at January 1 | | $ | 15,978 | | | $ | 12,833 | | | $ | 14,549 | |
Provision for loan losses | | | 15,053 | | | | 7,422 | | | | 717 | |
Acquisition balance | | | — | | | | 1,169 | | | | — | |
Loans charged off | | | (10,355 | ) | | | (7,371 | ) | | | (4,295 | ) |
Recoveries credited to allowance | | | 1,049 | | | | 1,925 | | | | 1,862 | |
| | | | | | | | | | | | |
Net charge-offs | | | (9,306 | ) | | | (5,446 | ) | | | (2,433 | ) |
| | | | | | | | | | | | |
Balance at December 31 | | $ | 21,725 | | | $ | 15,978 | | | $ | 12,833 | |
| | | | | | | | | | | | |
The following table presents the Company’s investment in loans considered to be impaired and related information on those impaired loans:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in thousands) | |
|
Recorded investment in loans considered to be impaired: | | | | | | | | | | | | |
Recorded investment in impaired loans with related allowance | | $ | 13,241 | | | $ | 4,796 | | | $ | 3,129 | |
Recorded investment in impaired loans with no related allowance | | | 13,371 | | | | 8,504 | | | | 1,196 | |
| | | | | | | | | | | | |
Total recorded investment in loans considered to be impaired | | | 26,612 | | | | 13,300 | | | | 4,325 | |
Loans considered to be impaired that were on a non-accrual basis | | | 17,014 | | | | 12,764 | | | | 2,923 | |
Allowance for loan losses related to loans considered to be impaired | | | 2,932 | | | | 678 | | | | 880 | |
Average recorded investment in impaired loans | | | 15,928 | | | | 14,914 | | | | 4,762 | |
Total interest income recognized on impaired loans | | | 663 | | | | 793 | | | | 237 | |
There were no loans past due 90 days and still accruing interest at December 31, 2009, 2008, and 2007.
76
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
| |
Note 6. | Premises and Equipment |
Premises and equipment are comprised of the following as of December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | (Amounts in thousands) | |
|
Land | | $ | 19,158 | | | $ | 18,634 | |
Bank premises | | | 50,845 | | | | 47,147 | |
Equipment | | | 32,542 | | | | 29,968 | |
| | | | | | | | |
| | | 102,545 | | | | 95,749 | |
Less: accumulated depreciation and amortization | | | 45,599 | | | | 40,725 | |
| | | | | | | | |
Total | | $ | 56,946 | | | $ | 55,024 | |
| | | | | | | | |
Total depreciation and amortization expense for the three years ended December 31, 2009, was $4.03 million, $3.88 million, and $3.28 million, respectively.
The primary contractor for construction of one of the Company’s new branches is a firm which has a preferred shareholder who is an immediate family member of two directors of the Company. All branch construction contracts involving the related party were granted pursuant to a competitive bidding process. There were no payments to the related party in 2009. Payments to the related party were $606 thousand and $703 thousand in 2008 and 2007, respectively.
The Company also enters into land and building leases for the operation of banking and loan production offices, operations centers and for the operation of automated teller machines. All such leases qualify as operating leases. Following is a schedule by year of future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2009:
| | | | |
Year Ended December 31: | | | |
| | (Amounts in
| |
| | thousands) | |
|
2010 | | $ | 1,084 | |
2011 | | | 855 | |
2012 | | | 777 | |
2013 | | | 714 | |
2014 | | | 392 | |
Later years | | | 1,907 | |
| | | | |
Total | | $ | 5,729 | |
| | | | |
Total lease expense for the three years ended December 31, 2009, was $1.03 million, $1.01 million, and $981 thousand, respectively. Certain portions of the above listed leases have been sublet to third parties for properties not
77
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
currently being used by the Company. The impact of the future lease payments to be received and the non-cancelable subleases are as follows:
| | | | |
Year Ended December 31: | | | |
| | (Amounts in
| |
| | thousands) | |
|
2010 | | $ | 157 | |
2011 | | | 284 | |
2012 | | | 215 | |
2013 | | | 197 | |
2014 | | | 21 | |
Later years | | | 253 | |
| | | | |
Total | | $ | 1,127 | |
| | | | |
The following is a summary of interest bearing deposits by type as of December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | (Amounts in thousands) | |
|
Interest bearing demand deposits | | $ | 231,907 | | | $ | 185,117 | |
Money market accounts | | | 199,229 | | | | 144,017 | |
Savings deposits | | | 182,152 | | | | 165,560 | |
Certificates of deposit | | | 718,552 | | | | 708,954 | |
Individual Retirement Accounts | | | 105,876 | | | | 100,398 | |
| | | | | | | | |
Total | | $ | 1,437,716 | | | $ | 1,304,046 | |
| | | | | | | | |
At December 31, 2009, the scheduled maturities of certificates of deposit are as follows:
| | | | |
| | (Amounts in
| |
| | thousands) | |
|
2010 | | $ | 525,780 | |
2011 | | | 118,628 | |
2012 | | | 32,298 | |
2013 | | | 33,564 | |
2014 and thereafter | | | 114,157 | |
| | | | |
| | $ | 824,427 | |
| | | | |
Time deposits of $100 thousand or more were $372.56 million and $286.74 million at December 31, 2009 and 2008, respectively.
78
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
At December 31, 2009, the scheduled maturities of certificates of deposit of $100 thousand or more are as follows:
| | | | |
| | (Amounts in
| |
| | thousands) | |
|
Three months or less | | $ | 99,506 | |
Over three to six months | | | 112,335 | |
Over six to twelve months | | | 76,321 | |
Over twelve months | | | 84,397 | |
| | | | |
Total | | $ | 372,559 | |
| | | | |
Included in total deposits are deposits by related parties in the total amount of $18.13 million and $25.48 million at December 31, 2009 and 2008, respectively.
The following table details borrowings as of December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | (Amounts in thousands) | |
|
Securities sold under agreements to repurchase | | $ | 153,634 | | | $ | 165,914 | |
FHLB borrowings | | | 183,177 | | | | 200,000 | |
Subordinated debt | | | 15,464 | | | | 15,464 | |
Other debt | | | 283 | | | | 413 | |
| | | | | | | | |
Total | | $ | 352,558 | | | $ | 381,791 | |
| | | | | | | | |
Securities sold under agreements to repurchase consist of $103.63 million and $115.91 million of retail overnight and term repurchase agreements at December 31, 2009 and 2008, respectively, and $50.00 million of wholesale repurchase agreements at both December 31, 2009 and 2008. The wholesale repurchase agreements had a weighted average maturity of 7.7 years at December 31, 2009, and are collateralized with agency mortgage-backed securities.
The Bank is a member of the FHLB which provides credit in the form of short-term and long-term advances collateralized by various mortgage assets. At December 31, 2009, credit availability with the FHLB totaled approximately $148.65 million. Advances from the FHLB are secured by stock in the FHLBA, qualifying loans of $302.56 million, mortgage-backed securities, and certain investment securities of $29.09 million. The FHLB advances are subject to restrictions or penalties in the event of prepayment.
FHLB borrowings include $175.00 million and $200.00 million in convertible and callable advances at December 31, 2009 and 2008, respectively. The callable advances may be called, or redeemed at quarterly intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full, converted to another FHLB credit product, or converted to an adjustable rate advance. The weighted average contractual rate of all FHLB advances was 2.41% and 3.70% at December 31, 2009 and 2008, respectively.
79
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
At December 31, 2009, the FHLB advances have approximate contractual final maturities between three months and twelve years. The scheduled maturities of the advances are as follows:
| | | | |
| | (Amounts in
| |
| | thousands) | |
|
2010 | | $ | 8,177 | |
2011 | | | — | |
2012 | | | — | |
2013 | | | — | |
2014 | | | — | |
2015 and thereafter | | | 175,000 | |
| | | | |
| | $ | 183,177 | |
| | | | |
In January 2006, the Company entered into a derivative swap instrument where it receives LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of the derivative swap is $50.00 million and effectively fixes a portion of the FHLB borrowings at approximately 4.34%. After considering the effect of the interest rate swap, the effective weighted average interest rate of the FHLB borrowings was 3.59% and 3.85% at December 31, 2009 and 2008, respectively.
Also included in borrowings is $15.46 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are currently callable. The net proceeds from the offering were contributed as capital to the Company’s subsidiary bank to support further growth.
The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the Trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution, in each case to the extent the Trust has funds available.
| |
Note 9. | Income Taxes, Continuing Operations |
The components of income tax benefit and expense from continuing operations consist of the following:
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in thousands) | |
|
Current tax expense | | | | | | | | | | | | |
Federal | | $ | (9,534 | ) | | $ | 8,577 | | | $ | 10,777 | |
State | | | 246 | | | | 1,260 | | | | 1,341 | |
| | | | | | | | | | | | |
| | | (9,288 | ) | | | 9,837 | | | | 12,118 | |
Deferred tax (benefit) expense | | | | | | | | | | | | |
Federal | | | (17,346 | ) | | | (11,350 | ) | | | 194 | |
State | | | (1,240 | ) | | | (1,297 | ) | | | 22 | |
| | | | | | | | | | | | |
| | | (18,586 | ) | | | (12,647 | ) | | | 216 | |
| | | | | | | | | | | | |
Total income tax (benefit) expense | | $ | (27,874 | ) | | $ | (2,810 | ) | | $ | 12,334 | |
| | | | | | | | | | | | |
80
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Deferred income taxes related to continuing operations reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting versus tax purposes. The tax effects of significant items comprising the Company’s net deferred tax assets as of December 31, 2009 and 2008 are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | (Amounts in thousands) | |
|
Deferred tax assets: | | | | | | | | |
Allowance for loan losses | | $ | 8,147 | | | $ | 6,299 | |
Unrealized losses on AFS securities | | | 6,926 | | | | 33,208 | |
Unrealized loss on derivative security | | | 794 | | | | 1,298 | |
Securities impairments | | | 23,912 | | | | 11,670 | |
Deferred compensation | | | 4,175 | | | | 4,120 | |
Other | | | 3,244 | | | | 1,920 | |
| | | | | | | | |
Total deferred tax assets | | $ | 47,198 | | | $ | 58,515 | |
Deferred tax liabilities: | | | | | | | | |
Intangible assets | | $ | 6,295 | | | $ | 6,209 | |
Odd days interest deferral | | | 1,358 | | | | 1,710 | |
Fixed assets | | | 2,446 | | | | 1,675 | |
Other | | | 1,564 | | | | 1,358 | |
| | | | | | | | |
Total deferred tax liabilities | | | 11,663 | | | | 10,952 | |
| | | | | | | | |
Net deferred tax assets | | $ | 35,535 | | | $ | 47,563 | |
| | | | | | | | |
Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income, as well as the utilization of available tax credits. State and municipal bond income represent the most significant permanent tax difference.
The reconciliation of the statutory federal tax rate and the effective tax rates from continuing operations for the three years ended December 31, 2009, is as follows:
| | | | | | | | | | | | |
| | For Years Ended | |
| | 2009 | | | 2008 | | | 2007 | |
|
Tax at statutory rate | | | 35.00 | % | | | 35.00 | % | | | 35.00 | % |
(Reduction) increase resulting from: | | | | | | | | | | | | |
Tax-exempt interest, net of nondeductible expense | | | 2.91 | | | | (871.99 | ) | | | (5.95 | ) |
State income taxes, net of federal benefit | | | 0.65 | | | | 2.33 | | | | 2.12 | |
Gain on acquisition, net of acquisition related costs | | | 2.27 | | | | 0.00 | | | | 0.00 | |
Other, net | | | 1.30 | | | | (202.24 | ) | | | (1.78 | ) |
| | | | | | | | | | | | |
Effective tax rate | | | 42.13 | % | | | (1036.90 | )% | | | 29.39 | % |
| | | | | | | | | | | | |
| |
Note 10. | Employee Benefits |
Employee Stock Ownership and Savings Plan
The Company maintains an Employee Stock Ownership and Savings Plan (“KSOP”). Coverage under the plan is provided to all employees meeting minimum eligibility requirements.
81
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Employer Stock Fund: Annual contributions to the stock portion of the plan were made through 2006 at the discretion of the Board of Directors, and allocated to plan participants on the basis of relative compensation. The plan was frozen to future contributions for periods after 2006. Substantially all plan assets are invested in common stock of the Company. The Company reports the contributions to the plan as a component of salaries and benefits. All contributions made after 2006 have been made to the employee savings feature of the plan. Accordingly, there were no contributions to the Employer Stock Fund in 2009, 2008, or 2007. The Employer Stock Fund held 504,801 and 418,322 shares of the Company’s common stock at December 31, 2009 and 2008, respectively.
Employee Savings Plan: The Company provides a 401(k) savings feature within the KSOP that is available to substantially all employees meeting minimum eligibility requirements. Under the 401(k) feature, the Company makes matching contributions to employee deferrals at levels determined by the board on an annual basis. The cost of the Company’s 100% matching contributions to qualified deferrals under the 401(k) savings component of the KSOP was $1.37 million, $1.23 million, and $942 thousand in 2009, 2008 and 2007, respectively. In 2009 and 2008, the Company made its matching contribution in Company common stock, while the 2007 contributions were made in cash.
Employee Welfare Plan
The Company provides various medical, dental, vision, life, accidental death and dismemberment and long-term disability insurance benefits to all full-time employees who elect coverage under this program. The health plan is managed by a third party administrator. Monthly employer and employee contributions are made to a tax-exempt employer benefits trust against which the third party administrator processes and pays claims. Stop-loss insurance coverage limits the Company’s risk of loss to $85 thousand and $4.30 million for individual and aggregate claims, respectively. Total Company expenses under the plan were $1.59 million, $2.32 million, and $1.66 million in 2009, 2008 and 2007, respectively.
Deferred Compensation Plan
The Company has deferred compensation agreements with certain current and former officers providing for benefit payments over various periods commencing at retirement or death. The liability at December 31, 2009 and 2008, was approximately $474 thousand and $484 thousand, respectively. The annual expenses associated with these agreements were $60 thousand, $60 thousand and $60 thousand for 2009, 2008 and 2007, respectively. The obligation is based upon the present value of the expected payments and estimated life expectancies of the individuals.
The Company maintains a life insurance contract on the life of one of the participants covered under these agreements. Proceeds derived from death benefits are intended to provide reimbursement of plan benefits paid over the post employment lives of the participants. Premiums on the insurance contract are currently paid through policy dividends on the cash surrender values of $1.20 million, $1.12 million, and $1.03 million at December 31, 2009, 2008, and 2007, respectively.
Executive Retention Plan
The Company maintains an Executive Retention Plan for key members of senior management. The Executive Retention Plan provides for a defined benefit at normal retirement targeted at 35% of projected final base salary. Benefits under the Executive Retention Plan become payable at age 62. The associated benefit accrued as of year-end 2009 and 2008 was $3.41 million and $2.95 million, respectively, while the associated expense incurred in connection with the Executive Retention Plan was $402 thousand, $426 thousand, and $110 thousand for 2009, 2008, and 2007, respectively.
During 2008, the Company amended the plan to convert from an index benefit based on performance of related life insurance policies to a defined benefit based on years of service. The amendment allowed for consideration of
82
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
prior service. In connection with the amendment the Company changed its method of accounting to defined benefit accounting. As the change in the plan was effective at year end, there are no components of periodic pension cost for the year end 2007.
Projected benefit payments are expected to be paid as follows:
| | | | |
| | (Amounts in
| |
| | thousands) | |
|
2010 | | $ | 59 | |
2011 | | | 59 | |
2012 | | | 176 | |
2013 | | | 237 | |
2014 | | | 237 | |
2015 through 2019 | | | 1,384 | |
The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory defined benefit plan for the years ended December 31, 2009 and 2008.
| | | | | | | | |
| | Year Ended
| | | Year Ended
| |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
| | (In thousands) | |
|
Service cost | | $ | 213 | | | $ | 253 | |
Interest cost | | | 189 | | | | 173 | |
| | | | | | | | |
Net periodic cost | | $ | 402 | | | $ | 426 | |
| | | | | | | | |
The discount rates assumed as of December 31, 2009 were lowered from 6.50% to 6.00%. The Executive Retention Plan is an unfunded plan, and as such there are no plan assets. At December 31, 2009, the actuarial benefit plan obligation was $3.41 million.
Directors Supplemental Retirement Plan
The Company maintains a Directors Supplemental Retirement Plan (the “Directors Plan”) for its non-employee directors. The Directors Plan provides for a benefit upon retirement from service on the Board at specified ages depending upon length of service or death. Benefits under the Directors Plan become payable at age 70, 75, and 78 depending upon the individual director’s age and original date of election to the Board. The associated benefit accrued as of year-end 2009 and 2008 was $1.45 million and $1.43 million, respectively, while the associated expense incurred in connection with the Directors Plan was $158 thousand, $161 thousand and $195 thousand for 2009, 2008 and 2007, respectively.
| |
Note 11. | Equity-Based Compensation |
Stock Options
The Company maintains share-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors and individuals performing services for the Company to focus on critical long-range objectives.
At the 2004 Annual Meeting, the Company’s shareholders ratified approval of the 2004 Omnibus Stock Option Plan (“2004 Plan”) which made available up to 200,000 shares for potential grants of incentive stock options, non-qualified stock options, restricted stock awards or performance awards. Non-qualified and incentive stock options, as well as restricted and unrestricted stock may continue to be awarded under the 2004 Plan. Vesting under the 2004 Plan is generally over a three-year period.
83
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
In 2001, the Company also instituted a plan to grant stock options to non-employee directors (the “Directors Option Plan”). The options granted pursuant to the Plan expire at the earlier of ten years from the date of grant or two years after the optionee ceases to serve as a director of the Company. Options not exercised within the appropriate time shall expire and be deemed cancelled. Options under the Directors Option Plan were granted in the form of non-statutory stock options with the aggregate number of shares of common stock available for grant under the Directors Option Plan set at 108,900 shares (adjusted for the 10% stock dividends paid in 2002 and 2003).
In 1999, the Company instituted the 1999 Stock Option Plan (the “1999 Plan”). Options under the 1999 Plan were granted in the form of non-statutory stock options with the aggregate number of shares of common stock available for grant under the Plan set at 332,750 (adjusted for 10% stock dividends paid in 2002 and 2003). The options granted under the 1999 Plan represent the rights to acquire the option shares with deemed grant dates of January 1st for each year beginning with the initial year granted and the following four anniversaries. All stock options granted pursuant to the 1999 Plan vest ratably on the first through the seventh anniversary dates of the deemed grant date. The option price of each stock option is equal to the fair market value (as defined by the 1999 Plan) of the Company’s common stock on the date of each deemed grant during the five-year grant period. Vested stock options granted pursuant to the 1999 Plan are exercisable during employment and for a period of five years after the date of the grantee’s retirement, provided retirement occurs at or after age 62. If employment is terminated other than by early retirement, disability, or death, vested options must be exercised within 90 days after the effective date of termination. Any option not exercised within such period will be deemed cancelled.
The Company also has options from various option plans other than described above (the Prior Plans); however, no common shares of the Company are available for grants under the Prior Plans. Awards outstanding under the Prior Plans will remain in effect in accordance with their respective terms.
The cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options and restricted stock (“excess tax benefits”) are classified as financing cash flows. Excess tax benefits totaling $2 thousand, $85 thousand, and $327 thousand are classified as financing cash inflows for 2009, 2008, and 2007, respectively.
During the three years ended December 31, 2009, the Company recognized pre-tax compensation expense related to total equity-based compensation of approximately $153 thousand, $260 thousand, and $271 thousand, respectively. The Company recognizes equity-based compensation on a straight line pro-rata basis, so that the percentage of the total expense recognized for an award is never less than the percentage of the award that has vested.
As of December 31, 2009, there was approximately $94 thousand in unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 1.2 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.
84
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
A summary of the Company’s stock option activity, and related information for the year ended December 31, 2009, is as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | Weighted
| | | | |
| | | | | Weighted
| | | Average
| | | | |
| | | | | Average
| | | Remaining
| | | Aggregate
| |
| | Option
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | Shares | | | Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | (In thousands) | |
|
Outstanding at January 1, 2009 | | | 252,091 | | | $ | 24.25 | | | | | | | | | |
Granted | | | 15,000 | | | | 13.81 | | | | | | | | | |
Acquired with TriStone Community Bank | | | 148,764 | | | | 20.55 | | | | | | | | | |
Exercised | | | 2,000 | | | | 9.52 | | | | | | | | | |
Forfeited | | | 375 | | | | 26.54 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 413,480 | | | $ | 22.71 | | | | 8.0 | | | $ | 9,389 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2009 | | | 394,481 | | | $ | 22.82 | | | | 7.9 | | | $ | 9,001 | |
| | | | | | | | | | | | | | | | |
The fair value of options was estimated at the date of grant using the Black-Scholes-Merton option pricing model and certain assumptions. Expected volatility is based on the weekly historical volatility of the Company’s stock price over the expected term of the option. Expected dividend yield is based on the ratio of the most recent dividend rate paid per share of the Company’s common stock to recent trading price of the Company’s common stock. The expected term is generally calculated using the “shortcut method.” The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for the period equal to the expected term of the option.
The fair values of grants made during the three years ended December 31, 2009, were estimated using the following weighted average assumptions:
| | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 |
|
Volatility | | | 44.83 | % | | | 29.11 | % | | | 28.33 | % |
Expected dividend yield | | | 2.71 | % | | | 3.64 | % | | | 3.28 | % |
Expected term (in years) | | | 6.20 | | | | 10.00 | | | | 6.00 | |
Risk-free rate | | | 2.81 | % | | | 2.96 | % | | | 4.74 | % |
The weighted average grant-date fair value of options granted during the three years ended December 31, 2009, was $5.33, $7.74, and $8.14, respectively. The aggregate intrinsic value of options exercised during the three years ended December 31, 2009, was approximately $5 thousand, $310 thousand, and $913 thousand, respectively.
Stock Awards
The 2004 Plan permits the granting of restricted and unrestricted stock grants either alone, in addition to, or in tandem with other awards made by the Company. Stock grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value is recognized as expense over the corresponding service period. Compensation costs related to these types of awards are consistently reported for all periods presented.
85
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The following table summarizes the changes in the Company’s nonvested shares for the year ended December 31, 2009.
| | | | | | | | |
| | | | | Grant-Date
| |
| | Shares | | | Fair Value | |
|
Nonvested at January 1, 2009 | | | 2,100 | | | $ | 36.58 | |
Granted | | | 1,000 | | | | 11.67 | |
Vested | | | 1,200 | | | | 36.70 | |
Forfeited | | | 100 | | | | 36.42 | |
| | | | | | | | |
Nonvested at December 31, 2009 | | | 1,800 | | | | 22.67 | |
| | | | | | | | |
As of December 31, 2009, there was approximately $11 thousand in unrecognized compensation cost related to unvested stock awards. That cost is expected to be recognized over a weighted average period of 0.5 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.
| |
Note 12. | Litigation, Commitments and Contingencies |
In the normal course of business, the Company is a defendant in various legal actions and asserted claims, most of which involve lending, collection and employment matters. While the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions, singly or in the aggregate, should not have a material adverse affect on the financial condition, results of operations or cash flows of the Company.
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 on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. 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 not a 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 of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producingincome producing commercial properties.
Standby letters of credit and written 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 loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $209.98 million and standby letters of credit and financial guarantees written of $4.04 million at December 31, 2010. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $7.57 million at December 31, 2010.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Related Party Loans
In the normal course of business, the Company’s subsidiary bank has made loans to directors and executive officers of the Company and its subsidiaries and their affiliates (collectively referred to as “related parties”). All loans and commitments made to such officers and directors and to companies in which they are officers, or have significant ownership interest, have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company. The aggregate dollar amount of such loans was $12.46 million and $11.37 million at December 31, 2010 and 2009, respectively. During 2010, $4.69 million in new loans and increases were made and repayments on such loans to officers and directors totaled $3.52 million. Changes in composition of the Company’s subsidiary board members and executive officers resulted in increases of $2 thousand.
Overdrafts
At December 31, 2010 and 2009, customer overdrafts totaling $1.46 million and $1.56 million, respectively, were reclassified as loans.
Note 5. Allowance for Loan Losses and Credit Quality
The allowance for loan losses is maintained at a level sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
Management performs quarterly assessments to determine the appropriate level of allowance. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans that have been deemed impaired. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.
Activity in the allowance for loan losses was as follows:
| | 2010 | | | 2009 | | | 2008 | |
(Amounts in Thousands) | | | | | | | | | |
Balance at January 1 | | $ | 24,277 | | | $ | 17,782 | | | $ | 12,833 | |
Provision for loan losses | | | 14,757 | | | | 15,801 | | | | 9,226 | |
Acquisition balance | | | - | | | | - | | | | 1,169 | |
Loans charged off | | | (13,602 | ) | | | (10,355 | ) | | | (7,371 | ) |
Recoveries credited to allowance | | | 1,050 | | | | 1,049 | | | | 1,925 | |
Net charge-offs | | | (12,552 | ) | | | (9,306 | ) | | | (5,446 | ) |
Balance at December 31 | | $ | 26,482 | | | $ | 24,277 | | | $ | 17,782 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table details the allocation of the allowance for loan losses by segment as of December 31, 2010.
| | 2010 | |
(Dollars in Thousands) | | | |
Commercial loans | | | 12,518 | |
Consumer real estate loans | | | 12,200 | |
Consumer and other loans | | | 1,764 | |
Total | | $ | 26,482 | |
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 it is determined that it is probable that the Company will not collect all principal and interest amounts contractually due, the loan is generally deemed to be impaired. The following table presents the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the period ended December 31, 2010. The table does not include acquired, impaired loans.
| | Recorded Investment With Allowance | | | Recorded Investment With No Allowance | | | Total Recorded Investment | | | Related Allowance | | | Unpaid Principal Balance | | | Average Recorded Investment | | | Interest Income Recognized | |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | | | | |
Construction -- commercial | | $ | - | | | $ | 285 | | | $ | 285 | | | $ | - | | | $ | 732 | | | $ | 730 | | | $ | 3 | |
Land development | | | - | | | | 50 | | | | 50 | | | | 5 | | | | 144 | | | | 143 | | | | 2 | |
Other land loans | | | 113 | | | | 323 | | | | 436 | | | | - | | | | 855 | | | | 266 | | | | 20 | |
Commercial and industrial | | | - | | | | 3,518 | | | | 3,518 | | | | - | | | | 5,384 | | | | 6,237 | | | | 10 | |
Multi-family residential | | | 723 | | | | 2,526 | | | | 3,249 | | | | 257 | | | | 3,432 | | | | 3,448 | | | | 126 | |
Non-farm, non-residential | | | 1,070 | | | | 3,824 | | | | 4,894 | | | | 158 | | | | 6,125 | | | | 5,809 | | | | 79 | |
Home equity lines | | | 95 | | | | 1,302 | | | | 1,397 | | | | 34 | | | | 1,693 | | | | 1,703 | | | | 40 | |
Single family residential mortgage | | | 8,801 | | | | 7,992 | | | | 16,793 | | | | 1,870 | | | | 18,430 | | | | 18,006 | | | | 640 | |
Owner-occupied construction | | | - | | | | 6 | | | | 6 | | | | - | | | | 6 | | | | 6 | | | | - | |
Consumer loans | | | - | | | | 98 | | | | 98 | | | | - | | | | 102 | | | | 111 | | | | 5 | |
| | $ | 10,802 | | | $ | 19,924 | | | $ | 30,726 | | | $ | 2,324 | | | $ | 36,903 | | | $ | 36,459 | | | $ | 925 | |
The following table presents the Company’s investment in loans considered to be impaired and related information on those impaired loans for the periods ended December 31, 2009:
| | 2009 | |
(Amounts in Thousands) | | | |
Recorded investment in loans considered to be impaired: | | | |
Recorded investment in impaired loans with a related allowance | | $ | 13,241 | |
Recorded investment in impaired loans with no related allowance | | | 13,371 | |
Total recorded investment in loans considered to be impaired | | | 26,612 | |
Loans considered to be impaired that were on a non-accrual basis | | | 17,014 | |
Allowance for loan losses related to loans considered to be impaired | | | 2,932 | |
Average recorded investment in impaired loans | | | 15,928 | |
Total interest income recognized on impaired loans | | | 1,335 | |
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, non-performing loans and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $2.00 million on an annual basis and at various times through the year. Smaller commercial and retail loans are sampled for review throughout the year by our internal loan review department. Through the loan review process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as part of the process.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:
| · | Pass – This grade includes loans to borrowers of acceptable credit quality and risk. The Company further differentiates within this grade based upon borrower characteristics which include: capital strength, earnings stability, leverage, and industry. |
| · | Special Mention –This grade includes loans that require more than a normal degree of supervision and attention. These loans have all the characteristics of an adequate asset, but due to being adversely affected by economic or financial conditions have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. |
| · | Substandard – This grade includes loans that have well defined weaknesses which make payment default or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business to meet the repayment terms. |
| · | Doubtful – This grade includes loans that are placed on non-accrual status. These loans have all the weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined. |
| · | Loss – This grade includes loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be affected in the future. |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the Company’s investment in loans by credit quality indicator at December 31, 2010 and 2009.
| | | | | Special | | | | | | | | | | | | | |
| | Pass | | | Mention | | | Substandard | | | Doubtful | | | Loss | | | Total | |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | |
Construction — commercial | | $ | 40,497 | | | $ | 663 | | | $ | 1,534 | | | $ | - | | | $ | - | | | $ | 42,694 | |
Land development | | | 14,458 | | | | 1,226 | | | | 966 | | | | - | | | | - | | | | 16,650 | |
Other land loans | | | 16,723 | | | | 6,138 | | | | 1,607 | | | | - | | | | - | | | | 24,468 | |
Commercial and industrial | | | 87,156 | | | | 1,756 | | | | 5,211 | | | | 654 | | | | - | | | | 94,777 | |
Multi-family residential | | | 61,059 | | | | 2,553 | | | | 4,212 | | | | - | | | | - | | | | 67,824 | |
Non-farm, non-residential | | | 316,026 | | | | 18,942 | | | | 16,936 | | | | - | | | | - | | | | 351,904 | |
Agricultural | | | 1,318 | | | | - | | | | 24 | | | | - | | | | - | | | | 1,342 | |
Farmland | | | 33,042 | | | | 2,569 | | | | 1,343 | | | | - | | | | - | | | | 36,954 | |
Home equity lines | | | 106,803 | | | | 1,923 | | | | 2,894 | | | | - | | | | - | | | | 111,620 | |
Single family residential mortgage | | | 498,830 | | | | 15,224 | | | | 34,449 | | | | - | | | | - | | | | 548,503 | |
Owner-occupied construction | | | 17,389 | | | | 789 | | | | 171 | | | | - | | | | - | | | | 18,349 | |
Consumer loans | | | 62,676 | | | | 306 | | | | 493 | | | | - | | | | - | | | | 63,475 | |
Other | | | 7,635 | | | | 11 | | | | - | | | | - | | | | - | | | | 7,646 | |
Total loans | | $ | 1,263,612 | | | $ | 52,100 | | | $ | 69,840 | | | $ | 654 | | | $ | - | | | $ | 1,386,206 | |
| | | | | Special | | | | | | | | | | | | | |
| | Pass | | | Mention | | | Substandard | | | Doubtful | | | Loss | | | Total | |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | |
Construction — commercial | | $ | 43,973 | | | $ | 918 | | | $ | 2,578 | | | $ | - | | | $ | - | | | $ | 47,469 | |
Land development | | | 17,229 | | | | 1,383 | | | | 4,220 | | | | - | | | | - | | | | 22,832 | |
Other land loans | | | 22,877 | | | | 5,506 | | | | 4,183 | | | | - | | | | - | | | | 32,566 | |
Commercial and industrial | | | 79,739 | | | | 4,600 | | | | 10,776 | | | | - | | | | - | | | | 95,115 | |
Multi-family residential | | | 60,230 | | | | 3,719 | | | | 1,654 | | | | - | | | | - | | | | 65,603 | |
Non-farm, non-residential | | | 300,357 | | | | 24,480 | | | | 19,138 | | | | - | | | | - | | | | 343,975 | |
Agricultural | | | 1,002 | | | | 4 | | | | 245 | | | | - | | | | - | | | | 1,251 | |
Farmland | | | 39,386 | | | | 567 | | | | 1,081 | | | | - | | | | - | | | | 41,034 | |
Home equity lines | | | 106,475 | | | | 1,908 | | | | 3,214 | | | | - | | | | - | | | | 111,597 | |
Single family residential mortgage | | | 498,799 | | | | 18,829 | | | | 27,682 | | | | 460 | | | | - | | | | 545,770 | |
Owner-occupied construction | | | 21,379 | | | | 450 | | | | 199 | | | | - | | | | - | | | | 22,028 | |
Consumer loans | | | 59,207 | | | | 393 | | | | 490 | | | | - | | | | - | | | | 60,090 | |
Other | | | 4,601 | | | | - | | | | - | | | | - | | | | - | | | | 4,601 | |
Total loans | | $ | 1,255,254 | | | $ | 62,757 | | | $ | 75,460 | | | $ | 460 | | | $ | - | | | $ | 1,393,931 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table details the Company’s recorded investment in loans related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology.
| | 2010 | |
| | Loans Individually Evaluated for Impairment | | | Allowance for Loans Individually Evaluated | | | Loans Collectively Evaluated for Impairment | | | Allowance for Loans Collectively Evaluated | | | Acquired, Impaired Loans Evaluated for Impairment | | | Allowance for Acquired, Impaired Loans Evaluated | |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | | | |
Construction -- commercial | | $ | 285 | | | $ | - | | | $ | 42,409 | | | $ | 1,472 | | | $ | - | | | $ | - | |
Land development | | | 50 | | | | 5 | | | | 16,600 | | | | 1,767 | | | | - | | | | - | |
Other land loans | | | 436 | | | | - | | | | 23,520 | | | | 747 | | | | 512 | | | | - | |
Commercial and industrial | | | 3,518 | | | | - | | | | 90,084 | | | | 4,511 | | | | 521 | | | | - | |
Multi-family residential | | | 3,249 | | | | 257 | | | | 64,575 | | | | 824 | | | | - | | | | - | |
Non-farm, non-residential | | | 4,894 | | | | 158 | | | | 346,586 | | | | 2,688 | | | | 424 | | | | - | |
Agricultural | | | - | | | | - | | | | 1,342 | | | | 19 | | | | - | | | | - | |
Farmland | | | - | | | | - | | | | 36,954 | | | | 70 | | | | - | | | | - | |
Total commercial loans | | | 12,432 | | | | 420 | | | | 622,070 | | | | 12,098 | | | | 1,457 | | | | - | |
Consumer real estate loans | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines | | | 1,397 | | | | 34 | | | | 110,223 | | | | 2,104 | | | | - | | | | - | |
Single family residential mortgage | | | 16,793 | | | | 1,870 | | | | 530,600 | | | | 7,999 | | | | 1,764 | | | | - | |
Owner-occupied construction | | | 6 | | | | - | | | | 18,343 | | | | 193 | | | | - | | | | - | |
Total consumer real estate loans | | | 18,196 | | | | 1,904 | | | | 659,166 | | | | 10,296 | | | | 1,764 | | | | - | |
Consumer and other loans | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans | | | 98 | | | | - | | | | 63,377 | | | | 1,764 | | | | - | | | | - | |
Other | | | - | | | | - | | | | 7,646 | | | | - | | | | - | | | | - | |
Total consumer and other loans | | | 98 | | | | - | | | | 71,023 | | | | 1,764 | | | | - | | | | - | |
Total loans | | $ | 30,726 | | | $ | 2,324 | | | $ | 1,352,259 | | | $ | 24,158 | | | $ | 3,221 | | | $ | - | |
Acquired, Impaired Loans
Loans acquired in a business combination closing after January 1, 2009, are recorded at estimated fair value on their purchase date and prohibit the carryover of the related allowance for loan losses, which include loans purchased in the TriStone acquisition. Purchased impaired loans are accounted for under the Loans and Debt Securities Acquired with Deteriorated Credit Quality Topic 310-30 of FASB ASC when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Purchased performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition.
The carrying amount of acquired loans at July 31, 2009, consisted of loans with credit deterioration, or impaired loans, and loans with no credit deterioration, or performing loans. The following table presents the acquired performing loans receivable at the acquisition date of July 31, 2009. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.
(In thousands) | | | |
Contractually required principal payments to balance sheet received | | $ | 125,366 | |
Fair value of adjustment for credit, interest rate, and liquidity | | | (472 | ) |
Fair value of loans receivable, with no credit deterioration | | $ | 124,894 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the required detail regarding acquired impaired loans for the period. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference includes estimated future credit losses expected to be incurred over the life of the loan. The Company has not noted any further deterioration in the acquired impaired loans.
| | TriStone | | | Other | | | Total | |
(In thousands) | | | | | | | | | |
Balance, January 1, 2009 | | $ | - | | | $ | - | | | $ | - | |
Contractually required principal payments to balance sheet receivable | | | 6,862 | | | | 8,790 | | | | 15,652 | |
Nonaccretable difference | | | (1,670 | ) | | | (2,488 | ) | | | (4,158 | ) |
Present value of cash flows expected to be collected | | | 5,192 | | | | 6,302 | | | | 11,494 | |
Accretable difference | | | (149 | ) | | | (891 | ) | | | (1,040 | ) |
Fair value of acquired impaired loans | | | 5,043 | | | | 5,411 | | | | 10,454 | |
Principal payments received | | | (1,240 | ) | | | (1,215 | ) | | | (2,455 | ) |
Accretion | | | 35 | | | | - | | | | 35 | |
Balance, December 31, 2009 | | $ | 3,838 | | | $ | 4,196 | | | $ | 8,034 | |
| | | | | | | | | | | | |
Balance, January 1, 2010 | | $ | 3,838 | | | $ | 4,196 | | | $ | 8,034 | |
Principal payments received | | | (1,034 | ) | | | (2,900 | ) | | | (3,934 | ) |
Accretion | | | 61 | | | | - | | | | 61 | |
Other | | | 448 | | | | - | | | | 448 | |
Charge-offs | | | (499 | ) | | | (889 | ) | | | (1,388 | ) |
Balance, December 31, 2010 | | $ | 2,814 | | | $ | 407 | | | $ | 3,221 | |
The remaining balance of the accretable difference at December 31, 2010 and 2009, was $1.01 million and $944 thousand, respectively.
Non-accrual and Past Due Loans
Non-accrual loans consisted of the following at December 31:
| | 2010 | | | 2009 | |
(Amounts in Thousands) | | | | | | |
Construction -- commercial | | $ | 285 | | | $ | 1,421 | |
Land development | | | 50 | | | | 1,403 | |
Other land loans | | | 321 | | | | 658 | |
Commercial and industrial | | | 3,518 | | | | 1,331 | |
Multi-family residential | | | 2,463 | | | | 979 | |
Non-farm, non-residential | | | 4,670 | | | | 4,532 | |
Agricultural | | | - | | | | 188 | |
Farmland | | | - | | | | 10 | |
Home equity lines | | | 868 | | | | 582 | |
Single family residential mortgage | | | 6,364 | | | | 6,323 | |
Owner-occupied construction | | | 6 | | | | 37 | |
Consumer loans | | | 99 | | | | 63 | |
Total | | | 18,644 | | | | 17,527 | |
Acquired, impaired loans | | | 770 | | | | - | |
Total non-accrual loans | | $ | 19,414 | | | $ | 17,527 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the aging of the recorded investment in past due loans as of December 31, 2010. There were no loans past due 90 days and still accruing interest at December 31, 2010, and 2009. Non-accural loans are included in the appropriate delinquency category.
| | | | | | | | | | | Total | | | Current | | | Total | |
| | 30 - 59 Days | | | 60-89 Days | | | 90+ Days | | | Past Due | | | Loans | | | Loans | |
(Amounts in Thousands) | | | | | | | | | | | | | | | | | | |
Construction -- commercial | | $ | 531 | | | $ | - | | | $ | 122 | | | $ | 653 | | | $ | 42,041 | | | $ | 42,694 | |
Land development | | | - | | | | - | | | | 50 | | | | 50 | | | | 16,600 | | | | 16,650 | |
Other land loans | | | - | | | | - | | | | 684 | | | | 684 | | | | 23,784 | | | | 24,468 | |
Commercial and industrial | | | 3,648 | | | | 121 | | | | 356 | | | | 4,125 | | | | 89,998 | | | | 94,123 | |
Multi-family residential | | | 956 | | | | - | | | | 1,793 | | | | 2,749 | | | | 65,075 | | | | 67,824 | |
Non-farm, non-residential | | | 3,251 | | | | 2,056 | | | | 3,249 | | | | 8,556 | | | | 343,348 | | | | 351,904 | |
Agricultural | | | 19 | | | | - | | | | - | | | | 19 | | | | 1,323 | | | | 1,342 | |
Farmland | | | 110 | | | | - | | | | - | | | | 110 | | | | 36,844 | | | | 36,954 | |
Home equity lines | | | 682 | | | | 250 | | | | 608 | | | | 1,540 | | | | 110,080 | | | | 111,620 | |
Single family residential mortgage | | | 10,287 | | | | 1,741 | | | | 4,213 | | | | 16,241 | | | | 532,916 | | | | 549,157 | |
Owner-occupied construction | | | 855 | | | | 326 | | | | 6 | | | | 1,187 | | | | 17,162 | | | | 18,349 | |
Consumer loans | | | 433 | | | | 47 | | | | 31 | | | | 511 | | | | 62,964 | | | | 63,475 | |
Other | | | - | | | | - | | | | - | | | | - | | | | 7,646 | | | | 7,646 | |
Total loans | | $ | 20,772 | | | $ | 4,541 | | | $ | 11,112 | | | $ | 36,425 | | | $ | 1,349,781 | | | $ | 1,386,206 | |
Note 6. Premises and Equipment
Premises and equipment are comprised of the following as of December 31:
| | 2010 | | | 2009 | |
(Amounts in Thousands) | | | | | | |
Land | | $ | 19,113 | | | $ | 19,158 | |
Bank premises | | | 51,526 | | | | 50,845 | |
Equipment | | | 33,050 | | | | 32,542 | |
| | | 103,689 | | | | 102,545 | |
Less: accumulated depreciation and amortization | | | 47,445 | | | | 45,599 | |
Total | | $ | 56,244 | | | $ | 56,946 | |
Total depreciation and amortization expense for the three years ended December 31, 2010, was $4.09 million, $4.03 million, and $3.88 million, respectively.
The Company enters into land and building leases for the operation of banking and loan production offices, operations centers and for the operation of automated teller machines. All such leases qualify as operating leases. Following is a schedule by year of future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2010:
(Amounts in Thousands) | | Amount | |
Year ended December 31: | | | |
2011 | | $ | 964 | |
2012 | | | 802 | |
2013 | | | 720 | |
2014 | | | 392 | |
2015 | | | 324 | |
Later years | | | 1,578 | |
Total | | $ | 4,780 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Total lease expense for the three years ended December 31, 2010, was $1.20 million, $1.03 million, and $1.01 million, respectively. Certain portions of the above listed leases have been sublet to third parties for properties not currently being used by the Company. The impact of the future lease payments to be received and the non-cancelable subleases are as follows:
(Amounts in Thousands) | | Amount | |
Year ended December 31: | | | |
2011 | | $ | 297 | |
2012 | | | 219 | |
2013 | | | 200 | |
2014 | | | 21 | |
2015 | | | 21 | |
Later years | | | 233 | |
Total | | $ | 991 | |
Related Party Leases
Included in total lease expense are leases with related parties totaling $160 thousand and $120 thousand at December 31, 2010 and 2009, respectively
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of December 31:
| | 2010 | | | 2009 | |
(Amounts in Thousands) | | | | | | |
Interest bearing demand deposits | | $ | 262,420 | | | $ | 231,907 | |
Money market accounts | | | 217,362 | | | | 199,229 | |
Savings deposits | | | 209,185 | | | | 182,152 | |
Certificates of deposit | | | 619,776 | | | | 718,552 | |
Individual Retirement Accounts | | | 107,061 | | | | 105,876 | |
Total | | $ | 1,415,804 | | | $ | 1,437,716 | |
At December 31, 2010, the scheduled maturities of certificates of deposit were as follows:
| | Amount | |
(Amounts in Thousands) | | | |
2011 | | $ | 463,531 | |
2012 | | | 73,588 | |
2013 | | | 55,259 | |
2014 | | | 34,087 | |
2015 and thereafter | | | 100,372 | |
| | $ | 726,837 | |
Time deposits of $100 thousand or more were $332.09 million and $372.56 million at December 31, 2010 and 2009, respectively. At December 31, 2010, the scheduled maturities of certificates of deposit of $100 thousand or more were as follows:
| | Amount | |
(Amounts in Thousands) | | | |
Three months or less | | $ | 62,285 | |
Over three to six months | | | 85,356 | |
Over six to twelve months | | | 67,313 | |
Over twelve months | | | 117,138 | |
Total | | $ | 332,092 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Related Party Deposits
Included in total deposits are deposits by related parties totaling $15.28 million and $18.13 million at December 31, 2010 and 2009, respectively.
Note 8. Borrowings
The following table details borrowings as of December 31:
| | 2010 | | | 2009 | |
(Amounts in Thousands) | | | | | | |
Securities sold under agreements to repurchase | | $ | 140,894 | | | $ | 153,634 | |
FHLB borrowings | | | 175,000 | | | | 183,177 | |
Subordinated debt | | | 15,464 | | | | 15,464 | |
Other debt | | | 729 | | | | 283 | |
Total | | $ | 332,087 | | | $ | 352,558 | |
Securities sold under agreements to repurchase consist of $90.89 million and $103.63 million of retail overnight and term repurchase agreements at December 31, 2010 and 2009, respectively, and $50.00 million of wholesale repurchase agreements at both December 31, 2010 and 2009. The wholesale repurchase agreements had a weighted average maturity of 5.9 years at December 31, 2010, and are collateralized with agency mortgage-backed securities.
The Company’s banking subsidiary, First Community Bank (the “Bank”), is a member of the FHLB which provides credit in the form of short-term and long-term advances collateralized by various mortgage assets. At December 31, 2010, credit availability with the FHLB totaled $202.28 million. Advances from the FHLB are secured by qualifying loans of $324.35 million. The FHLB advances are subject to restrictions or penalties in the event of prepayment.
FHLB borrowings included $175.00 million in convertible and callable advances at December 31, 2010 and 2009, and an additional $8.18 million of fixed term borrowings at December 31, 2009. The callable advances may be called, or redeemed, at quarterly intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full or converted to another FHLB credit product. The weighted average contractual rate of all FHLB advances was 2.39% and 2.41% at December 31, 2010 and 2009, respectively.
At December 31, 2010, the FHLB advances have approximate contractual final maturities between six and eleven years. The scheduled maturities of the advances are as follows:
| | Amount | |
(Amounts in Thousands) | | | |
2011 | | $ | - | |
2012 | | | - | |
2013 | | | - | |
2014 | | | - | |
2015 | | | - | |
2016 and thereafter | | | 175,000 | |
| | $ | 175,000 | |
In January 2006, the Company entered into a five year derivative swap instrument where it receives LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of the derivative swap is $50.00 million and effectively fixes a portion of the FHLB borrowings at 4.34%. After considering the effect of the interest rate swap, the effective weighted average interest rate of the FHLB borrowings was 3.63% and 3.59% at December 31, 2010 and 2009, respectively.
Also included in borrowings is $15.46 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are currently callable. The net proceeds from the offering were contributed as capital to the Bank to support further growth.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Despite the fact that the accounts of the Trust are not included in the Company’s consolidated financial statements, the trust preferred securities issued by the Trust are included in the Tier 1 capital of the Company for regulatory capital purposes. Federal Reserve Board rules limit the aggregate amount of restricted core capital elements (which includes trust preferred securities, among other things) that may be included in the Tier 1 capital of most bank holding companies to 25% of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. The current quantitative limits do not preclude the Company from including the $15.46 million in trust preferred securities outstanding in Tier 1 capital as of December 31, 2010.
The Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the Trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution, in each case to the extent the Trust has funds available.
Note 9. Income Taxes
The components of income tax expense (benefit) from continuing operations consist of the following:
| | Years Ended December 31, | |
(Amounts in Thousands) | | 2010 | | | 2009 | | | 2008 | |
Current tax expense (benefit) | | | | | | | | | |
Federal | | $ | (5,268 | ) | | $ | (9,534 | ) | | $ | 8,577 | |
State | | | 78 | | | | 246 | | | | 1,260 | |
| | | (5,190 | ) | | | (9,288 | ) | | | 9,837 | |
Deferred tax expense (benefit) | | | | | | | | | | | | |
Federal | | | 12,397 | | | | (17,608 | ) | | | (11,981 | ) |
State | | | 611 | | | | (1,258 | ) | | | (1,343 | ) |
| | | 13,008 | | | | (18,866 | ) | | | (13,324 | ) |
| | | | | | | | | | | | |
Total income tax expense (benefit) | | $ | 7,818 | | | $ | (28,154 | ) | | $ | (3,487 | ) |
Deferred income taxes related to continuing operations reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting versus tax purposes. The tax effects of significant items comprising the Company’s net deferred tax assets as of December 31, 2010 and 2009 are as follows:
| | 2010 | | | 2009 | |
(Amounts in Thousands) | | | | | | |
Deferred tax assets: | | | | | | |
Allowance for loan losses | | $ | 9,931 | | | $ | 8,427 | |
Unrealized losses on AFS securities | | | 6,728 | | | | 6,926 | |
Unrealized loss on derivative security | | | 586 | | | | 794 | |
Securities impairments | | | 5,150 | | | | 23,912 | |
Deferred compensation | | | 4,570 | | | | 4,175 | |
State net operating loss carryforward | | | 1,699 | | | | 902 | |
Alternative minimum tax credit | | | 2,782 | | | | - | |
Other | | | 3,099 | | | | 2,342 | |
Total deferred tax assets | | $ | 34,545 | | | $ | 47,478 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Intangible assets | | $ | 6,254 | | | $ | 6,295 | |
Odd days interest deferral | | | 1,723 | | | | 1,358 | |
Fixed assets | | | 2,564 | | | | 2,446 | |
Other | | | 1,222 | | | | 1,564 | |
Total deferred tax liabilities | | | 11,763 | | | | 11,663 | |
Net deferred tax assets | | $ | 22,782 | | | $ | 35,815 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income, as well as the utilization of available tax credits. State and municipal bond income represent the most significant permanent tax difference.
The reconciliation of the statutory federal tax rate and the effective tax rates from continuing operations for the three years ended December 31, 2010, is as follows:
| | For Years Ended | |
| | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | |
Tax at statutory rate | | | 35.00 | % | | | 35.00 | % | | | 35.00 | % |
Increase resulting from: | | | | | | | | | | | | |
Tax-exempt interest income, net of nondeductible expense | | | (6.79 | ) | | | 2.88 | | | | 154.30 | |
State income taxes, net of federal benefit | | | 2.32 | | | | 0.65 | | | | 2.21 | |
Gain on acquisition, net of acquisition related costs | | | 0.00 | | | | 2.24 | | | | 0.00 | |
Other, net | | | (4.18 | ) | | | 1.29 | | | | 34.42 | |
Effective tax rate | | | 26.35 | % | | | 42.06 | % | | | 225.93 | % |
Note 10. Employee Benefits
Employee Stock Ownership and Savings Plan
The Company maintains an Employee Stock Ownership and Savings Plan (“KSOP”). Coverage under the plan is provided to all employees meeting minimum eligibility requirements.
Employer Stock Fund: Annual contributions to the stock portion of the plan were made through 2006 at the discretion of the Board of Directors, and allocated to plan participants on the basis of relative compensation. The plan was frozen to future contributions for periods after 2006. Substantially all plan assets are invested in common stock of the Company. The Company reports the contributions to the plan as a component of salaries and benefits. All contributions made after 2006 have been made to the employee savings feature of the plan. Accordingly, there were no contributions to the Employer Stock Fund in 2010, 2009, or 2008. The Employer Stock Fund held 583,256 and 504,801 shares of the Company’s common stock at December 31, 2010 and 2009, respectively.
Employee Savings Plan: The Company provides a 401(k) savings feature within the KSOP that is available to substantially all employees meeting minimum eligibility requirements. Under the 401(k) feature, the Company makes matching contributions to employee deferrals at levels determined by the board on an annual basis. The cost of the Company’s 100% matching contributions to qualified deferrals under the 401(k) savings component of the KSOP were $1.12 million, $1.37 million, and $1.23 million in 2010, 2009 and 2008, respectively. In 2010, 2009, and 2008, the Company made its matching contribution in Company common stock.
Employee Welfare Plan
The Company provides various medical, dental, vision, life, accidental death and dismemberment and long-term disability insurance benefits to all full-time employees who elect coverage under this program. The health plan is managed by a third party administrator. Monthly employer and employee contributions are made to a tax-exempt employer benefits trust against which the third party administrator processes and pays claims. Stop-loss insurance coverage limits the Company’s risk of loss to $85 thousand and $4.30 million for individual and aggregate claims, respectively. Total Company expenses under the plan were $2.98 million, $1.59 million, and $2.32 million in 2010, 2009, and 2008, respectively.
Deferred Compensation Plan
The Company has deferred compensation agreements with certain current and former officers providing for benefit payments over various periods commencing at retirement or death. The liability at December 31, 2010 and 2009, was $467 thousand and $474 thousand, respectively. The annual expenses associated with these agreements were $60 thousand for 2010, 2009 and 2008. The obligation is based upon the present value of the expected payments and estimated life expectancies of the individuals.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company maintains a life insurance contract on the life of one of the participants covered under these agreements. Proceeds derived from death benefits are intended to provide reimbursement of plan benefits paid over the post employment lives of the participants. Premiums on the insurance contract are currently paid through policy dividends on the cash surrender values of $1.29 million, $1.20 million, and $1.12 million at December 31, 2010, 2009, and 2008, respectively.
Executive Retention Plan
The Company maintains an Executive Retention Plan for key members of senior management. The Executive Retention Plan provides for a defined benefit at normal retirement targeted at 35% of projected final base salary. Benefits under the Executive Retention Plan become payable at age 60. The associated benefit accrued as of year-end 2010 and 2009 was $4.07 million and $3.41 million, respectively, while the associated expense incurred in connection with the Executive Retention Plan was $424 thousand, $402 thousand, and $426 thousand for 2010, 2009, and 2008, respectively.
Projected benefit payments are expected to be paid as follows:
| | Amount | |
(Amounts in Thousands) | | | |
2011 | | $ | 59 | |
2012 | | | 170 | |
2013 | | | 225 | |
2014 | | | 225 | |
2015 | | | 225 | |
2016 through 2020 | | | 1,413 | |
The following sets forth the components of the net periodic benefit cost of the Company’s domestic non-contributory defined benefit plan for the years ended December 31, 2010 and 2009.
| | Year Ended | | | Year Ended | |
| | December 31, 2010 | | | December 31, 2009 | |
(In Thousands) | | | | | | |
Service cost | | $ | 213 | | | $ | 213 | |
Interest cost | | | 211 | | | | 189 | |
Net periodic cost | | $ | 424 | | | $ | 402 | |
The discount rates assumed as of December 31, 2010, were lowered from 6.00% to 5.50%. The Executive Retention Plan is an unfunded plan, and as such there are no plan assets. At December 31, 2010, the actuarial benefit plan obligation was $4.07 million.
Directors Supplemental Retirement Plan
The Company maintains a Directors Supplemental Retirement Plan (the “Directors Plan”) for its non-employee directors. The Directors Plan provides for a benefit upon retirement from service on the Board at specified ages depending upon length of service or death. Benefits under the Directors Plan become payable at age 70, 75, and 78 depending upon the individual director’s age and original date of election to the Board. The associated benefit accrued as of year-end 2010 and 2009 was $1.60 million and $1.45 million, respectively, while the associated expense incurred in connection with the Directors Plan was $259 thousand, $158 thousand and $161 thousand for 2010, 2009, and 2008, respectively.
Note 11. Equity-Based Compensation
Stock Options
The Company maintains share-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors and individuals performing services for the Company to focus on critical long-range objectives.
At the 2004 Annual Meeting, the Company’s shareholders ratified approval of the 2004 Omnibus Stock Option Plan (“2004 Plan”) which made available up to 200,000 shares for potential grants of incentive stock options, non-qualified stock options, restricted stock awards or performance awards. Non-qualified and incentive stock options, as well as restricted and unrestricted stock may continue to be awarded under the 2004 Plan. Vesting under the 2004 Plan is generally over a three-year period.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2001, the Company instituted a plan to grant stock options to non-employee directors (the “Directors Option Plan”). The options granted pursuant to the Directors Option Plan expire at the earlier of ten years from the date of grant or two years after the optionee ceases to serve as a director of the Company. Options not exercised within the appropriate time shall expire and be deemed cancelled. Options under the Directors Option Plan were granted in the form of non-statutory stock options with the aggregate number of shares of common stock available for grant under the Directors Option Plan set at 108,900 shares (adjusted for the 10% stock dividends paid in 2002 and 2003).
In 1999, the Company instituted the 1999 Stock Option Plan (the “1999 Plan”). Options under the 1999 Plan were granted in the form of non-statutory stock options with the aggregate number of shares of common stock available for grant under the Plan set at 332,750 (adjusted for 10% stock dividends paid in 2002 and 2003). The options granted under the 1999 Plan represent the rights to acquire the option shares with deemed grant dates of January 1st for each year beginning with the initial year granted and the following four anniversaries. All stock options granted pursuant to the 1999 Plan vest ratably on the first through the seventh anniversary dates of the deemed grant date. The option price of each stock option is equal to the fair market value (as defined by the 1999 Plan) of the Company’s common stock on the date of each deemed grant during the five-year grant period. Vested stock options granted pursuant to the 1999 Plan are exercisable during employment and for a period of five years after the date of the grantee’s retirement, provided retirement occurs at or after age 62. If employment is terminated other than by early retirement, disability, or death, vested options must be exercised within 90 days after the effective date of termination. Any option not exercised within such period will be deemed cancelled.
The Company also has options from various option plans other than described above (the Prior Plans); however, no common shares of the Company are available for grants under the Prior Plans. Awards outstanding under the Prior Plans will remain in effect in accordance with their respective terms.
The cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options and restricted stock (“excess tax benefits”) are classified as financing cash flows. Excess tax benefits totaling $9 thousand, $2 thousand, and $85 thousand are classified as financing cash inflows for 2010, 2009, and 2008, respectively.
During the three years ended December 31, 2010, the Company recognized pre-tax compensation expense related to total equity-based compensation of $58 thousand, $153 thousand, and $260 thousand, respectively. The Company recognizes equity-based compensation on a straight line pro-rata basis, so that the percentage of the total expense recognized for an award is never less than the percentage of the award that has vested.
As of December 31, 2010, there was $44 thousand in unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 1.1 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.
A summary of the Company’s stock option activity, and related information for the year ended December 31, 2010, is as follows:
| | | | | Weighted | | | Weighted Average | | | | |
| | | | | Average | | | Remaining | | | Aggregate | |
| | Option | | | Exercise | | | Contractual | | | Intrinsic | |
| | Shares | | | Price | | | Term (Years) | | | Value | |
(Dollars in Thousands) | | | | | | | | | | | | |
Outstanding at January 1, 2010 | | | 413,480 | | | $ | 22.71 | | | | | | | |
Exercised | | | 2,631 | | | | 7.61 | | | | | | | |
Forfeited | | | 7,631 | | | | 24.40 | | | | | | | |
Outstanding at December 31, 2010 | | | 403,218 | | | $ | 22.81 | | | | 7.1 | | | $ | - | |
Exercisable at December 31, 2010 | | | 393,219 | | | $ | 23.00 | | | | 7.1 | | | $ | - | |
The fair value of options was estimated at the date of grant using the Black-Scholes-Merton option pricing model and certain assumptions. Expected volatility is based on the weekly historical volatility of the Company’s stock price over the expected term of the option. Expected dividend yield is based on the ratio of the most recent dividend rate paid per share of the Company’s common stock to recent trading price of the Company’s common stock. The expected term is generally calculated using the “shortcut method.” The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for the period equal to the expected term of the option.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair values of grants made during the three years ended December 31, 2010, were estimated using the following weighted average assumptions:
| | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | |
Volatility | | | - | | | | 44.83 | % | | | 29.11 | % |
Expected dividend yield | | | - | | | | 2.71 | % | | | 3.64 | % |
Expected term (in years) | | | - | | | | 6.20 | | | | 10.00 | |
Risk-free rate | | | - | | | | 2.81 | % | | | 2.96 | % |
There were no grants made during the year ended December 31, 2010. The weighted average grant-date fair value of options granted during the years ended December 31, 2009 and 2008, were $5.33 and $7.74, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2009 and 2008, were $5 thousand and $310 thousand, respectively.
Stock Awards
The 2004 Plan permits the granting of restricted and unrestricted shares of the Company’s common stock either alone, in addition to, or in tandem with other awards made by the Company. Stock grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value is recognized as expense over the corresponding service period. Compensation costs related to these types of awards are consistently reported for all periods presented.
The following table summarizes the changes in the Company’s nonvested shares of the Company’s common stock for the year ended December 31, 2010.
| | | | | Weighted Average | |
| | | | | Grant-Date | |
| | Shares | | | Fair Value | |
| | | | | | |
Nonvested at January 1, 2010 | | | 1,800 | | | $ | 22.67 | |
Granted | | | 3,000 | | | | 15.85 | |
Vested | | | 800 | | | | 36.42 | |
Forfeited | | | 300 | | | | 11.67 | |
Nonvested at December 31, 2010 | | | 3,700 | | | $ | 15.06 | |
As of December 31, 2010, there was $44 thousand in unrecognized compensation cost related to unvested stock awards. That cost is expected to be recognized over a weighted average period of 1.8 years. The actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted and changes in estimated forfeitures.
Note 12. Litigation, Commitments and Contingencies
Litigation
In the normal course of business, the Company is a defendant in various legal actions and asserted claims, most of which involve lending, collection and employment matters. While the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions, singly or in the aggregate, should not have a material adverse affect on the financial condition, results of operations or cash flows of the Company.
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 on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is not a 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 of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and written 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 loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments, whose contract amounts represent credit risk at December 31, 20092010 and 2008,2009, are commitments to extend credit (including availability of lines of credit) of $233.72$209.98 million and $199.29$233.72 million, respectively, and standby letters of credit and financial guarantees of $4.04 million and $9.80 million, and $2.84 million, respectively.
86
The Company maintains a liability of $370 thousand, which represents its reserve for unfunded commitments.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company has issued, through the Trust, $15.00 million of trust preferred securities in a private placement. In connection with the issuance of the trust preferred securities, the Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions and has the funds therefore: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the Trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the Trust remaining available for distribution.
| |
Note 13. | Derivative Instruments and Hedging Activities |
Note 13. Derivative Instruments and Hedging Activities
The Company uses derivative instruments primarily to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivatives may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying asset as specified in the contract.
The primary derivatives that the Company uses are interest rate swaps and interest rate lock commitments (“IRLCs”). Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven loan rates and prices or other economic factors.
The Company entered into an interest rate swap derivative accounted for as a cash flow hedge in January 2006. The $50.00 million notional amount pay fixed, receive variable interest rate swap was a liability with an estimated fair value of $2.12 million$31 thousand and $3.40$2.12 million at December 31, 20092010 and 2008,2009, respectively. The Company pays a fixed rate of 4.34% and receives a LIBOR-based floating rate from the counterparty. Any gains and losses associated with the market value fluctuations of the interest rate swap are included in OCI.
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments as of the dates indicated:
| | | | | | | | | | December 31, 2010 | | | December 31, 2009 | |
| | December 31,
| | December 31,
| |
| | 2009 | | 2008 | |
| | (In thousands) | |
| |
(In Thousands) | | | | | | | |
Interest rate swap | | $ | 50,000 | | | $ | 50,000 | | | $ | 50,000 | | | $ | 50,000 | |
IRLC’s | | | 4,636 | | | | 10,500 | | |
IRLC's | | | | 7,566 | | | | 4,636 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 20092010 and 2008,2009, the fair values of the Company’s derivatives were as follows:
| | | | | | | | | | | | | | | | |
| | Asset Derivatives | |
| | December 31, 2009 | | | December 31, 2008 | |
| | Balance Sheet
| | | Fair
| | | Balance Sheet
| | | Fair
| |
| | Location | | | Value | | | Location | | | Value | |
| | (In thousands) | |
|
Derivatives not designated as hedges | | | | | | | | | | | | | | | | |
IRLC’s | | | Other assets | | | $ | 2 | | | | Other assets | | | $ | 39 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | $ | 2 | | | | | | | $ | 39 | |
| | | | | | | | | | | | | | | | |
87
| | Asset Derivatives | |
| | December 31, 2010 | | December 31, 2009 | |
| | Balance Sheet | | Fair | | Balance Sheet | | Fair | |
(In Thousands) | | Location | | Value | | Location | | Value | |
Derivatives not designated as hedges | | | | | | | | | |
IRLC's | | Other assets | | $ | 28 | | Other assets | | $ | 2 | |
Total | | | | $ | 28 | | | | $ | 2 | |
FIRST COMMUNITY BANCSHARES, INC.
| | Liability Derivatives | |
| | December 31, 2010 | | December 31, 2009 | |
| | Balance Sheet | | Fair | | Balance Sheet | | Fair | |
(In Thousands) | | Location | | Value | | Location | | Value | |
Derivatives designated as hedges | | | | | | | | | |
Interest rate swap | | Other liabilities | | $ | 31 | | Other liabilities | | $ | 2,117 | |
Total | | | | $ | 31 | | | | $ | 2,117 | |
| | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | |
IRLC's | | Other liabilities | | $ | 59 | | Other liabilities | | $ | 74 | |
Total | | | | $ | 59 | | | | $ | 74 | |
| | | | | | | | | | | |
Total derivatives | | | | $ | 90 | | | | $ | 2,191 | |
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | Liability Derivatives | |
| | December 31, 2009 | | | December 31, 2008 | |
| | Balance Sheet
| | | | | | Balance Sheet
| | | | |
| | Location | | | Fair Value | | | Location | | | Fair Value | |
| | (In thousands) | |
|
Derivatives designated as hedges | | | | | | | | | | | | | | | | |
Interest rate swap | | | Other liabilities | | | $ | 2,117 | | | | Other liabilities | | | $ | 3,327 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | $ | 2,117 | | | | | | | $ | 3,327 | |
| | | | | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | | | | |
IRLC’s | | | Other liabilities | | | $ | 74 | | | | Other liabilities | | | $ | 16 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | $ | 74 | | | | | | | $ | 16 | |
| | | | | | | | | | | | | | | | |
Total derivatives | | | | | | $ | 2,191 | | | | | | | $ | 3,343 | |
| | | | | | | | | | | | | | | | |
Interest Rate Swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk. The Company currently employs a cash flow hedging strategy to effectively convert certain floating-rate liabilities into fixed rate instruments. The interest rate swap is accounted for under the “short-cut” method. Changes in fair value of the interest rate swap are reported as a component of OCI. The Company does not currently employ fair value hedging strategies.
Interest Rate Lock Commitments. In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with mortgage loans that are in the “mortgage pipeline.” A pipeline loan is one on which the potential borrower has set the interest rate for the loan by entering into an IRLC. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. During the term of an IRLC, the Company has the risk that interest rates will change from the rate quoted to the borrower.
The Company’s balance of mortgage loans held for sale is subject to changes in fair value, due to fluctuations in interest rates from the loan closing date through the date of sale of the loan into the secondary market. Typically, the fair value of the warehouse declines in value when interest rates increase and rises in value when interest rates decrease.
Effect of Derivatives and Hedging Activities on the Income Statement. For the years ended December 31, 20092010 and 2008,2009, the Company has determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on non-designated hedging instruments for the periods ended December 31, 20092010 and 2008.2009.
| | | | | | | | | | | | |
| | Location of
| | | | | | | |
| | Gain/(Loss)
| | | Amount of Gain/(Loss)
| |
Derivatives not
| | Recognized in
| | | Recognized in Income on Derivative | |
designated as hedging
| | Income on
| | | Year Ended December 31, | |
instruments | | Derivative | | | 2009 | | | 2008 | |
| | (In thousands) | |
|
IRLC’s | | | Other income | | | $ | (94 | ) | | $ | 16 | |
| | | | | | | | | | | | |
Total | | | | | | $ | (94 | ) | | $ | 16 | |
| | | | | | | | | | | | |
| | | | Amount of Gain/(Loss) | |
Derivatives Not | | Location of Gain/(Loss) | | Recognized in Income on Derivative | |
Designated as Hedging | | Recognized in Income on | | Year Ended December 31, | |
Instruments | | Derivative | | 2010 | | | 2009 | |
(In Thousands) | | | | | | | | |
IRLC's | | Other income | | $ | 41 | | | $ | (94 | ) |
Total | | | | $ | 41 | | | $ | (94 | ) |
Counterparty Credit Risk. Like other financial instruments, derivatives contain an element of “credit risk.” Credit risk is the possibility that the Company will incur a loss because a counterparty, which may be a bank, a
88
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee. The Company reviews its counterparty risk regularly and has determined that as of December 31, 2010 and 2009, and 2008, there iswas no significant counterparty credit risk.
| |
Note 14. | Regulatory Capital Requirements and Restrictions |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 14. Regulatory Capital Requirements and Restrictions
The primary source of funds for dividends paid by the Company is dividends received from its subsidiary bank.the Bank. Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provisionApproval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the regulations requires approval byBank to fall below specified minimum levels. As described below, the Office of the Comptroller of the CurrencyBank is required to maintain heightened regulatory capital ratios. Approval is also required if dividends declared in any year would exceed the year’s net income, as defined, plusprofits for that year combined with the retained net profit ofprofits for the preceding two preceding years. Dividends from the Company’s banking subsidiary are restricted and subject to prior approval of the Comptroller of the Currency.
The Company and its subsidiariesthe Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios for total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
To be categorized as well capitalized, the Bank must maintain minimum total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets (leverage) ratios established by banking regulators. In 2010, the Office of the Comptroller of the Currency (the “OCC”) issued an Individual Minimum Capital Ratio directive to the Bank which requires the Bank to maintain a total capital to risk-weighted assets ratio of 11.50%, a Tier 1 capital to risk-weighted assets ratio of 10.00% and a Tier 1 capital to average assets (leverage) ratio of 7.50%. Failure of the Bank to maintain these minimum capital ratios will be deemed by the OCC to constitute an unsafe and unsound banking practice and could subject the Bank to additional regulatory action. As of December 31, 2009,2010, the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 20092010 and 2008,2009, the most recent notifications from regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets (leverage) ratios as set forth in the table below. There are no conditions or events since those notifications that management believes have changed the institution’s category.
The Company’s and the Bank’s capital ratios as of December 31, 20092010 and 2008,2009, are presented in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | |
| | December 31, 2009 | | | | | | | | | | | | | | To Be Well | | | | | | | |
| | | | | | To Be Well
| | | | | | | | For Capital | | | Capitalized Under | | | Individual Minimum | |
| | | | For Capital
| | Capitalized Under
| | | | | | | | Adequacy | | | Prompt Corrective | | | Capital Ratio | |
| | | | Adequacy
| | Prompt Corrective
| | Actual | | | Purposes | | | Action Provisions | | | Directive | |
| | Actual | | Purposes | | Action Provisions | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
| | (Dollars in thousands) | |
| |
(Dollars in Thousands) | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to Risk-Weighted Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Community Bancshares, Inc. | | $ | 210,416 | | | | 13.90 | % | | $ | 121,095 | | | | 8.00 | % | | | N/A | | | | N/A | | | $ | 224,932 | | | | 15.33 | % | | $ | 117,349 | | | | 8.00 | % | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
First Community Bank, N. A. | | | 177,515 | | | | 11.85 | % | | | 119,853 | | | | 8.00 | % | | $ | 149,816 | | | | 10.00 | % | | | 207,143 | | | | 14.18 | % | | | 116,892 | | | | 8.00 | % | | $ | 146,115 | | | | 10.00 | % | | $ | 168,032 | | | | 11.50 | % |
Tier 1 Capital to Risk-Weighted Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Community Bancshares, Inc. | | | 191,452 | | | | 12.65 | % | | | 60,547 | | | | 4.00 | % | | | N/A | | | | N/A | | | | 206,428 | | | | 14.07 | % | | | 58,675 | | | | 4.00 | % | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
First Community Bank, N. A. | | | 158,746 | | | | 10.60 | % | | | 59,926 | | | | 4.00 | % | | | 89,890 | | | | 6.00 | % | | | 188,771 | | | | 12.92 | % | | | 58,446 | | | | 4.00 | % | | | 87,669 | | | | 6.00 | % | | | 146,115 | | | | 10.00 | % |
Tier 1 Capital to Average Assets (Leverage) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Community Bancshares, Inc. | | | 191,452 | | | | 8.58 | % | | | 89,290 | | | | 4.00 | % | | | N/A | | | | N/A | | | | 206,428 | | | | 9.44 | % | | | 87,468 | | | | 4.00 | % | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
First Community Bank, N. A. | | | 158,746 | | | | 7.16 | % | | | 88,709 | | | | 4.00 | % | | | 110,887 | | | | 5.00 | % | | | 188,771 | | | | 8.66 | % | | | 87,155 | | | | 4.00 | % | | | 108,944 | | | | 5.00 | % | | | 163,416 | | | | 7.50 | % |
89
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | |
| | December 31, 2008 | | | | | | | | | | | | | | To Be Well | |
| | | | | | To Be Well
| | | | | | | | For Capital | | | Capitalized Under | |
| | | | For Capital
| | Capitalized Under
| | | | | | | | Adequacy | | | Prompt Corrective | |
| | | | Adequacy
| | Prompt Corrective
| | Actual | | | Purposes | | | Action Provisions | |
| | Actual | | Purposes | | Action Provisions | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
| | (Dollars in thousands) | |
| |
(Dollars in Thousands) | | | | | | | | | | | | | | | | | | | |
Total Capital to Risk-Weighted Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Community Bancshares, Inc. | | $ | 213,949 | | | | 12.91 | % | | $ | 132,591 | | | | 8.00 | % | | | N/A | | | | N/A | | | $ | 208,837 | | | | 13.81 | % | | $ | 120,969 | | | | 8.00 | % | | | N/A | | | | N/A | |
First Community Bank, N. A. | | | 191,104 | | | | 11.69 | % | | | 130,762 | | | | 8.00 | % | | $ | 163,452 | | | | 10.00 | % | | | 176,302 | | | | 11.76 | % | | | 119,726 | | | | 8.00 | % | | $ | 149,657 | | | | 10.00 | % |
Tier 1 Capital to Risk-Weighted Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Community Bancshares, Inc. | | | 197,600 | | | | 11.92 | % | | | 66,296 | | | | 4.00 | % | | | N/A | | | | N/A | | | | 189,858 | | | | 12.56 | % | | | 60,484 | | | | 4.00 | % | | | N/A | | | | N/A | |
First Community Bank, N. A. | | | 174,755 | | | | 10.69 | % | | | 65,381 | | | | 4.00 | % | | | 98,071 | | | | 6.00 | % | | | 157,152 | | | | 10.50 | % | | | 59,863 | | | | 4.00 | % | | | 89,795 | | | | 6.00 | % |
Tier 1 Capital to Average Assets (Leverage) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Community Bancshares, Inc. | | | 197,600 | | | | 9.75 | % | | | 84,629 | | | | 4.00 | % | | | N/A | | | | N/A | | | | 189,858 | | | | 8.51 | % | | | 89,290 | | | | 4.00 | % | | | N/A | | | | N/A | |
First Community Bank, N. A. | | | 174,755 | | | | 8.71 | % | | | 80,232 | | | | 4.00 | % | | | 100,290 | | | | 5.00 | % | | | 157,152 | | | | 7.09 | % | | | 88,709 | | | | 4.00 | % | | | 110,887 | | | | 5.00 | % |
At December 31, 2009
Note 15. Other Operating Income and 2008, $15.46 million in subordinated debt was treated as Tier 1 capital for bank regulatory purposes for the Company.Expense
| |
Note 15. | Other Operating Income and Expenses |
Included in otherOther operating income and expenses areexpense include certain costs, the total of which exceeds one percent of combined interest income and noninterest income. Followingincome, that are such costspresented in the following table for the years indicated:
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in Thousands) | |
Income | | | | | | | | | | | | |
Bank owned life insurance | | $ | 819 | | | $ | 746 | | | $ | 1,306 | |
Expense | | | | | | | | | | | | |
Advertising and public relations | | | 1,633 | | | | 2,166 | | | | 1,616 | |
Service fees | | | 3,767 | | | | 3,557 | | | | 3,031 | |
Telephone and data communications | | | 1,399 | | | | 1,505 | | | | 1,372 | |
Professional fees | | | 1,759 | | | | 1,878 | | | | 1,370 | |
Office supplies | | | 1,323 | | | | 1,426 | | | | 1,378 | |
ATM processing expenses | | | 975 | | | | 986 | | | | 511 | |
Non-employee production commissions | | | 648 | | | | 310 | | | | 54 | |
| | Years Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
(Amounts in Thousands) | | | | | | | | | |
Income | | | | | | | | | |
Credited dividends on life insurance | | $ | 867 | | | $ | 819 | | | $ | 746 | |
Expenses | | | | | | | | | | | | |
Service fees | | | 3,315 | | | | 3,767 | | | | 3,557 | |
Professional fees | | | 1,999 | | | | 1,759 | | | | 1,878 | |
Advertising and public relations | | | 1,584 | | | | 1,633 | | | | 2,166 | |
Telephone and data communications | | | 1,468 | | | | 1,399 | | | | 1,505 | |
Office supplies | | | 1,369 | | | | 1,323 | | | | 1,426 | |
ATM processing expenses | | | 1,248 | | | | 975 | | | | 986 | |
Non-employee production commissions | | | 526 | | | | 648 | | | | 310 | |
Related Party Fees
Included in other operating expense are legal fees paid to related parties totaling $208 thousand, $86 thousand, and $147 thousand in 2010, 2009, and 2008, respectively.
Note 16. 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous, market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
90
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The fair value hierarchy is as follows:
| | |
Level 1 Inputs — | – | Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Level 2 Inputs — | – | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, volatilities, prepayment speeds, and credit risks, or inputs that are derived principally from or corroborated by market data by correlation or other means. |
| Level 3 Inputs — | – | Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon third party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
SecuritiesAvailable-for-Sale: Securities classified asavailable-for-sale are reported at fair value utilizing Level 1, Level 2, and Level 3 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active market. This includes securities whose value is based on quoted market prices in active markets for identical assets. The Company also uses Level 1 inputs for the valuation of equity securities traded in active markets.
Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U.S. Agency securities, mortgage-backed securities, municipal securities, FDIC-backed securities, single-issue trust preferred securities, certain pooled trust preferred securities, and certain equity securities that are not actively traded.
Securities are classified as Level 3 within the valuation hierarchy in certain cases when there is limited activity or less transparency to the valuation inputs. These securities include pooled trust preferred securities. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available. The Level 3 inputs used to value pooled trust preferred security holdings are weighted between discounted cash flow model results and actual trades of the same and similar securities in the inactive trust preferred market. The cash flow modeling uses discount rates based upon observable market expectations, known defaults and deferrals, projected future defaults and deferrals, and projected prepayments to arrive at fair value.
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. The Company’s fair value from third party models utilizes modeling
91
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
software that uses market participant data and knowledge of the structures of each individual security to develop cash flows specific to each security. The fair values of the securities are determined by using the cash flows developed by the fair value model and applying appropriate market observable discount rates. The discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity developed based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Specific securities that have increased uncertainty regarding the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium. 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 the specific markets and the general economic indicators.
Other Assets and Associated Liabilities: Securities held for trading purposes are recorded at fair value and included in “other assets” on the consolidated balance sheets. Securities held for trading purposes include assets related to employee deferred compensation plans. The assets associated with these plans are generally invested in equities and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivatives: Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations based on observable data to value its derivatives.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on appraisals adjusted for customized discounting criteria.
The Company maintains an active and robust problem credit identification system. When a credit is identified as exhibiting characteristics of weakening, the Company will assess the credit for potential impairment. Examples of weakening include delinquency and deterioration of the borrower’s capacity to repay as determined by the Company’s regular credit review function. As part of the impairment review, the Company will evaluate the current collateral value. It is the Company’s standard practice to obtain updated third party collateral valuations to assist management in measuring potential impairment of a credit and the amount of the impairment to be recorded.
Internal collateral valuations are generally performed within two to four weeks of the original identification of potential impairment and receipt of the third party valuation. The internal valuation is performed by comparing the original appraisal to current local real estate market conditions and experience and considers liquidation costs. The result of the internal valuation is compared to the outstanding loan balance, and, if warranted, a specific impairment reserve will be established at the completion of the internal evaluation.
A third party evaluation is typically received within thirty to forty-five days of the completion of the internal evaluation. Once received, the third party evaluation is reviewed by Special Assets staffand/or Credit Appraisal staff for reasonableness. Once the evaluation is reviewed and accepted, discounts to fair market value are applied based upon such factors as the bank’s historical liquidation experience of like collateral, and an estimated net realizable value is established. That estimated net realizable value is then compared to the outstanding loan balance to determine the amount of specific impairment reserve. The specific impairment reserve, if necessary, is adjusted to reflect the results of the updated evaluation. A specific impairment reserve is generally maintained on impaired loans during the time period while awaiting receipt of the third party evaluation as well as on impaired loans that continue to make some form of payment and liquidation is not imminent. Impaired loans not meeting the aforementioned criteria and that do not have a specific impairment reserve have usually been previously written down through a partial charge-off, to their net realizable value.
The Company’s Special Assets staff assumes the management and monitoring of all loans determined to be impaired. While awaiting the completion of the third party appraisal, the Company generally begins to complete the tasks necessary to gain control of the collateral and prepare for liquidation, including, but not limited to engagement
92
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
of counsel, inspection of collateral, and continued communication with the borrower, if appropriate. Special Assets staff also regularly reviews the relationship to identify any potential adverse developments during this time.
Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan less the specific reserve is any downward adjustment to the appraised value that the Company’s Special Assets staff determine appropriate. These differences are generally made up of costs to sell the property, as well as a deflator for the devaluation of property seen when banks are the sellers, and the Company deemed these adjustments as fair value adjustments.
Other Real Estate Owned.Owned. The fair value of the Company’s other real estate owned is determined using current and prior appraisals, estimates of costs to sell, and proprietary qualitative adjustments. Accordingly, other real estate owned is stated at a Level 3 fair value.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 20092010 and 2008,2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | December 31, 2010 | |
| | Fair Value Measurements Using | | | Total | |
(In Thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
Available-for-sale securities: | | | | | | | | | | | | |
Agency securities | | $ | - | | | $ | 9,832 | | | $ | - | | | $ | 9,832 | |
Agency mortgage-backed securities | | | - | | | | 215,013 | | | | - | | | | 215,013 | |
Non-Agency Alt-A residential MBS | | | - | | | | 11,277 | | | | - | | | | 11,277 | |
Municipal securities | | | - | | | | 176,138 | | | | - | | | | 176,138 | |
FDIC-backed securities | | | - | | | | 25,660 | | | | - | | | | 25,660 | |
Single issue trust preferred securities | | | - | | | | 41,244 | | | | - | | | | 41,244 | |
Pooled trust preferred securities | | | - | | | | 264 | | | | - | | | | 264 | |
Equity securities | | | 616 | | | | 20 | | | | - | | | | 636 | |
Total available-for-sale securities | | $ | 616 | | | $ | 479,448 | | | $ | - | | | $ | 480,064 | |
Deferred compensation assets | | $ | 3,192 | | | $ | - | | | $ | - | | | $ | 3,192 | |
Derivative assets | | | | | | | | | | | | | | | | |
Interest rate lock commitments | | $ | - | | | $ | 28 | | | $ | - | | | $ | 28 | |
Total derivative assets | | $ | - | | | $ | 28 | | | $ | - | | | $ | 28 | |
Deferred compensation liabilities | | $ | 3,192 | | | $ | - | | | $ | - | | | $ | 3,192 | |
Derivative liabilities | | | | | | | | | | | | | | | | |
Interest rate swap | | $ | - | | | $ | 31 | | | $ | - | | | $ | 31 | |
Interest rate lock commitments | | | - | | | | 59 | | | | - | | | | 59 | |
Total derivative liabilities | | $ | - | | | $ | 90 | | | $ | - | | | $ | 90 | |
| | | | | | | | | | | | | | | | | | December 31, 2009 | |
| | December 31, 2009 | | | Fair Value Measurements Using | | | Total | |
| | Fair Value Measurements Using | | Total
| | |
| | Level 1 | | Level 2 | | Level 3 | | Fair Value | | |
| | | | (In thousands) | | | | |
| |
(In Thousands) | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Agency securities | | $ | — | | | $ | 25,276 | | | $ | — | | | $ | 25,276 | | | $ | - | | | $ | 25,276 | | | $ | - | | | $ | 25,276 | |
Agency mortgage-backed securities | | | — | | | | 264,218 | | | | — | | | | 264,218 | | | | - | | | | 264,218 | | | | - | | | | 264,218 | |
Non-Agency prime residential MBS | | | — | | | | 5,170 | | | | — | | | | 5,170 | | | | - | | | | 5,170 | | | | - | | | | 5,170 | |
Non-Agency Alt-A residential MBS | | | — | | | | 11,301 | | | | — | | | | 11,301 | | | | - | | | | 11,301 | | | | - | | | | 11,301 | |
Municipal securities | | | — | | | | 135,601 | | | | — | | | | 135,601 | | | | - | | | | 135,601 | | | | - | | | | 135,601 | |
Single-issue trust preferred securities | | | — | | | | 41,110 | | | | — | | | | 41,110 | | |
Single issue trust preferred securities | | | | - | | | | 41,110 | | | | - | | | | 41,110 | |
Pooled trust preferred securities | | | — | | | | — | | | | 1,648 | | | | 1,648 | | | | - | | | | - | | | | 1,648 | | | | 1,648 | |
Equity securities | | | 1,713 | | | | 20 | | | | — | | | | 1,733 | | | | 1,713 | | | | 20 | | | | - | | | | 1,733 | |
| | | | | | | | | | |
Totalavailable-for-sale securities | | | 1,713 | | | | 482,696 | | | | 1,648 | | | | 486,057 | | | $ | 1,713 | | | $ | 482,696 | | | $ | 1,648 | | | $ | 486,057 | |
Deferred compensation assets | | | 2,872 | | | | — | | | | — | | | | 2,872 | | | $ | 2,872 | | | $ | - | | | $ | - | | | $ | 2,872 | |
Derivative assets | | | — | | | | 2 | | | | — | | | | 2 | | | | | | | | | | | | | | | | | |
Interest rate lock commitments | | | $ | - | | | $ | 2 | | | $ | - | | | $ | 2 | |
Total derivative assets | | | $ | - | | | $ | 2 | | | $ | - | | | $ | 2 | |
Deferred compensation liabilities | | | 2,872 | | | | — | | | | — | | | | 2,872 | | | $ | 2,872 | | | $ | - | | | $ | - | | | $ | 2,872 | |
Derivative liabilities | | | — | | | | 2,191 | | | | — | | | | 2,191 | | | | | | | | | | | | | | | | | |
Interest rate swap | | | $ | - | | | $ | 2,117 | | | $ | - | | | $ | 2,117 | |
Interest rate lock commitments | | | | - | | | | 74 | | | | - | | | | 74 | |
Total derivative liabilities | | | $ | - | | | $ | 2,191 | | | $ | - | | | $ | 2,191 | |
93
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| | | | | | | | | | | | | | | | |
| | December 31, 2008 | |
| | Fair Value Measurements Using | | | Total
| |
| | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
| | (In thousands) | |
|
Available-for-sale securities: | | | | | | | | | | | | | | | | |
Agency securities | | $ | — | | | $ | 54,818 | | | $ | — | | | $ | 54,818 | |
Agency mortgage-backed securities | | | — | | | | 216,962 | | | | — | | | | 216,962 | |
Non-Agency prime residential MBS | | | — | | | | 5,766 | | | | — | | | | 5,766 | |
Non-Agency Alt-A residential MBS | | | — | | | | 10,750 | | | | — | | | | 10,750 | |
Municipal securities | | | — | | | | 159,419 | | | | — | | | | 159,419 | |
Single-issue trust preferred securities | | | — | | | | 33,541 | | | | — | | | | 33,541 | |
Pooled trust preferred securities | | | — | | | | 4,445 | | | | 28,067 | | | | 32,512 | |
Equity securities | | | 6,811 | | | | 144 | | | | — | | | | 6,955 | |
| | | | | | | | | | | | | | | | |
Totalavailable-for-sale securities | | | 6,811 | | | | 485,845 | | | | 28,067 | | | | 520,723 | |
Other assets | | | 2,637 | | | | — | | | | — | | | | 2,637 | |
Derivative assets | | | — | | | | 39 | | | | — | | | | 39 | |
Other liabilities | | | 2,637 | | | | — | | | | — | | | | 2,637 | |
Derivative liabilities | | | — | | | | 3,343 | | | | — | | | | 3,343 | |
The following table presents additional information about financial assets and liabilities measured at fair value at December 31, 2009, on a recurring basis as of December 31, 2010 and 2009 for which Level 3 inputs are utilized to determine fair value:
| | | | |
| | Available-for-Sale
| |
| | Securities | |
| | (In thousands) | |
|
Balance, January 1, 2009 | | $ | 28,067 | |
Total gains or losses (realized/unrealized) | | | | |
Included in earnings | | | (26,419 | ) |
Payments and maturities | | | — | |
Transfers in and/or out of Level 3 | | | — | |
| | | | |
Balance, December 31, 2009 | | $ | 1,648 | |
| | | | |
| | Fair Value Measurements | |
| | Using Significant | |
| | Unobservable Inputs | |
| | Available-for-Sale Securities | |
| | Pooled Trust Preferred Securities | |
| | December 31, | |
(In Thousands) | | 2010 | | | 2009 | |
Beginning balance | | $ | 1,648 | | | $ | 28,067 | |
Transfers into Level 3 | | | - | | | | - | |
Transfers out of Level 3 | | | (3,574 | ) | | | - | |
Total gains or losses | | | | | | | | |
Included in earnings (or changes in net assets) | | | - | | | | (26,419 | ) |
Included in other comprehensive income | | | 1,926 | | | | - | |
Purchases, issuances, sales, and settlements | | | | | | | | |
Purchases | | | - | | | | - | |
Issuances | | | - | | | | - | |
Sales | | | - | | | | - | |
Settlements | | | - | | | | - | |
Ending balance | | $ | - | | | $ | 1,648 | |
During the first quarter of 2010, the Company changed the fair value of pooled trust preferred securities from Level 3 to Level 2 pricing resulting in a transfer of $3.57 million out of Level 3. The Company was successful in obtaining a quote from a qualified market participant, and although the market for these securities is increasing, it still remains inactive.
Certain financial and non-financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. Items subjected to nonrecurring fair value adjustments at December 31, 2009,2010, and December 31, 2008,2009, are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, 2009 |
| | Fair Value Measurements Using | | Total
|
| | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | (In thousands) |
|
Impaired loans | | $ | — | | | $ | — | | | $ | 11,702 | | | $ | 11,702 | |
Other real estate owned | | | — | | | | — | | | | 4,578 | | | | 4,578 | |
| | December 31, 2010 | |
| | Fair Value Measurements Using | | | Total | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
(In Thousands) | | | | | | | | | | | | |
Impaired loans | | $ | - | | | $ | - | | | $ | 10,906 | | | $ | 10,906 | |
Restructured loans | | | - | | | | - | | | | 5,771 | | | | 5,771 | |
Other real estate owned | | | - | | | | - | | | | 4,910 | | | | 4,910 | |
94
| | December 31, 2009 | |
| | Fair Value Measurements Using | | | Total | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
(In Thousands) | | | | | | | | | | | | |
Impaired loans | | $ | - | | | $ | - | | | $ | 11,702 | | | $ | 11,702 | |
Other real estate owned | | | - | | | | - | | | | 4,578 | | | | 4,578 | |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| | | | | | | | | | | | | | | | |
| | December 31, 2008 |
| | Fair Value Measurements Using | | Total
|
| | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | (In thousands) |
|
Impaired loans | | $ | — | | | $ | — | | | $ | 5,980 | | | $ | 5,980 | |
Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.
| | December 31, 2010 | | | December 31, 2009 | |
| | Carrying | | | | | | Carrying | | | | |
| | Amount | | | Fair Value | | | Amount | | | Fair Value | |
(Amounts in Thousands) | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 112,189 | | | $ | 112,189 | | | $ | 101,341 | | | $ | 101,341 | |
Investment securities | | | 484,701 | | | | 484,768 | | | | 493,511 | | | | 493,636 | |
Loans held for sale | | | 4,694 | | | | 4,700 | | | | 11,576 | | | | 11,580 | |
Loans held for investment less allowance | | | 1,359,724 | | | | 1,370,173 | | | | 1,369,654 | | | | 1,362,814 | |
Accrued interest receivable | | | 7,675 | | | | 7,675 | | | | 8,610 | | | | 8,610 | |
Bank owned life insurance | | | 42,241 | | | | 42,241 | | | | 40,972 | | | | 40,972 | |
Derivative financial assets | | | 28 | | | | 28 | | | | 2 | | | | 2 | |
Deferred compensation assets | | | 3,192 | | | | 3,192 | | | | 2,872 | | | | 2,872 | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 205,151 | | | $ | 205,151 | | | $ | 208,244 | | | $ | 208,244 | |
Interest-bearing demand deposits | | | 262,420 | | | | 262,420 | | | | 231,907 | | | | 231,907 | |
Savings deposits | | | 426,547 | | | | 426,547 | | | | 381,381 | | | | 381,381 | |
Time deposits | | | 726,837 | | | | 735,332 | | | | 824,428 | | | | 834,546 | |
Securities sold under agreements to repurchase | | | 140,894 | | | | 161,100 | | | | 153,634 | | | | 156,653 | |
Accrued interest payable | | | 3,264 | | | | 3,264 | | | | 4,130 | | | | 4,130 | |
FHLB and other indebtedness | | | 191,193 | | | | 203,539 | | | | 198,924 | | | | 208,334 | |
Derivative financial liabilities | | | 90 | | | | 90 | | | | 2,191 | | | | 2,191 | |
Deferred compensation liabilities | | | 3,192 | | | | 3,192 | | | | 2,872 | | | | 2,872 | |
The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
| | | | | | | | | | | | | | | | |
| | December 31, 2009 | | | December 31, 2008 | |
| | Carrying
| | | | | | Carrying
| | | | |
| | Amount | | | Fair Value | | | Amount | | | Fair Value | |
| | | | | (Amounts in thousands) | | | | |
|
Assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 101,341 | | | $ | 101,341 | | | $ | 46,439 | | | $ | 46,439 | |
Investment Securities | | | 493,511 | | | | 493,636 | | | | 529,393 | | | | 529,525 | |
Loans held for sale | | | 11,576 | | | | 11,580 | | | | 1,024 | | | | 1,026 | |
Loans held for investment | | | 1,372,206 | | | | 1,365,366 | | | | 1,282,181 | | | | 1,276,479 | |
Accrued interest receivable | | | 8,610 | | | | 8,610 | | | | 10,084 | | | | 10,084 | |
Bank owned life insurance | | | 40,972 | | | | 40,972 | | | | 40,784 | | | | 40,784 | |
Derivative financial assets | | | 2 | | | | 2 | | | | 39 | | | | 39 | |
Deferred compensation assets | | | 2,872 | | | | 2,872 | | | | 2,637 | | | | 2,637 | |
Liabilities | | | | | | | | | | | | | | | | |
Demand deposits | | | 208,244 | | | | 208,244 | | | $ | 199,712 | | | $ | 199,712 | |
Interest-bearing demand deposits | | | 231,907 | | | | 231,907 | | | | 185,117 | | | | 185,117 | |
Savings deposits | | | 381,381 | | | | 381,381 | | | | 309,577 | | | | 309,577 | |
Time deposits | | | 824,428 | | | | 834,546 | | | | 809,352 | | | | 824,068 | |
Securities sold under agreements to repurchase | | | 153,634 | | | | 156,653 | | | | 165,914 | | | | 177,454 | |
Accrued interest payable | | | 4,130 | | | | 4,130 | | | | 5,326 | | | | 5,326 | |
FHLB and other indebtedness | | | 198,924 | | | | 208,334 | | | | 215,877 | | | | 242,223 | |
Derivative financial liabilities | | | 2,191 | | | | 2,191 | | | | 3,343 | | | | 3,343 | |
Deferred compensation liabilities | | | 2,872 | | | | 2,872 | | | | 2,637 | | | | 2,637 | |
95
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Cash and Cash Equivalents:
The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair value as a result of the short-term nature of these items.
Investment Securities and Deferred Compensation Assets and Liabilities:
Fair values are determined in the same manner as described above.
Loans:
The estimated fair value of loans held for investment is measured based upon discounted future cash flows using current rates for similar loans. No estimate for market illiquidity has been made. Loans held for sale are recorded at lower of cost or estimated fair value. The fair value of loans held for sale is determined based upon the market sales price of similar loans.
Accrued Interest Receivable and Payable:
The book value is considered to be equal to the fair value due to the short-term nature of the instrument.
Bank-owned Life Insurance:
The fair value is determined by stated contract values.
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivative Financial Instruments:
The estimated fair value of derivative financial instruments is based upon the current market price for similar instruments.
Deposits and Securities Sold Under Agreements to Repurchase:
Deposits without a stated maturity, including demand, interest bearing demand, and savings accounts, are reported at their carrying value. No value has been assigned to the franchise value of these deposits. For other types of deposits and repurchase agreements with fixed maturities and rates, fair value has been estimated by discounting future cash flows based on interest rates currently being offered on instruments with similar characteristics and maturities.
FHLB and Other Indebtedness:
Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. The fair value for trust preferred obligations has been estimated based on credit spreads seen in the marketplace for like issues.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees:
The amount of off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees is considered equal to fair value. Because of the uncertainty involved in attempting to assess the likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the given value of the commitment.
96
FIRST COMMUNITY BANCSHARES, INC.
Note 17. Comprehensive Income (Loss)
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
| |
Note 17. | Accumulated Other Comprehensive Income (Loss) |
The components of the Company’s comprehensive income (loss), net of income taxes, as of December 31, 2010, 2009, 2008 and 2007,2008, were as follows:
| | | | | | | | | | | | |
| | December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | (In thousands) | |
|
Net (loss) income | | $ | (38,228 | ) | | $ | 3,081 | | | $ | 29,632 | |
Other comprehensive income (loss) | | | | | | | | | | | | |
Unrealized loss on securitiesavailable-for-sale withother-than-temporary impairment | | | (28 | ) | | | — | | | | — | |
Unrealized loss on securitiesavailable-for-sale withoutother-than-temporary impairment | | | (10,103 | ) | | | — | | | | — | |
Unrealized loss on securitiesavailable-for-sale prior to adoption of ASC Topic 320 | | | — | | | | (102,303 | ) | | | (11,028 | ) |
Reclassification adjustment for losses (gains) realized in net income | | | 11,673 | | | | 30,100 | | | | 263 | |
Reclassification adjustment for credit relatedother-than-temporary impairments recognized in earnings | | | 78,863 | | | | — | | | | — | |
Cumulative effect of change in accounting principle | | | (9,771 | ) | | | — | | | | — | |
Unrealized (loss) gain on derivative securities | | | 1,073 | | | | (2,007 | ) | | | (1,760 | ) |
Change related to employee benefit plans | | | — | | | | (1,180 | ) | | | — | |
Income tax effect | | | (26,711 | ) | | | 30,156 | | | | 5,010 | |
| | | | | | | | | | | | |
Total other comprehensive income (loss) | | | 44,996 | | | | (45,234 | ) | | | (7,515 | ) |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 6,768 | | | $ | (42,153 | ) | | $ | 22,117 | |
| | | | | | | | | | | | |
| | December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
(In Thousands) | | | | | | | | | |
Net income (loss) | | $ | 21,847 | | | $ | (38,696 | ) | | $ | 1,954 | |
Other comprehensive income (loss) | | | | | | | | | | | | |
Unrealized gain (loss) on securities available-for-sale | | | | | | | | | | | | |
with other-than-temporary impairment | | | 194 | | | | (28 | ) | | | - | |
Unrealized gain (loss) on securities available-for-sale | | | | | | | | | | | | |
without other-than-temporary impairment | | | 8,419 | | | | (9,351 | ) | | | - | |
Unrealized loss on securities available-for-sale | | | | | | | | | | | | |
prior to adoption of ASC Topic 320 | | | - | | | | - | | | | (102,303 | ) |
Reclassification adjustment for (gains) losses | | | | | | | | | | | | |
realized in net income | | | (8,273 | ) | | | 11,673 | | | | 30,100 | |
Reclassification adjustment for credit related | | | | | | | | | | | | |
other-than-temporary impairments recognized | | | | | | | | | | | | |
in earnings | | | 185 | | | | 78,863 | | | | - | |
Cumulative effect of change in accounting principle | | | - | | | | (9,771 | ) | | | - | |
Unrealized gain (loss) on derivative securities | | | 2,078 | | | | 1,073 | | | | (2,007 | ) |
Change related to employee benefit plans | | | (273 | ) | | | (752 | ) | | | (1,180 | ) |
Income tax effect | | | (868 | ) | | | (26,711 | ) | | | 30,156 | |
Total other comprehensive income (loss) | | | 1,462 | | | | 44,996 | | | | (45,234 | ) |
Comprehensive income (loss) | | $ | 23,309 | | | $ | 6,300 | | | $ | (43,280 | ) |
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the Company’s accumulated other comprehensive income (loss),loss, net of income taxes, as of December 31, 20092010 and 2008,2009, were as follows:
| | | | | | | | | | | | | | | | |
| | | | | Unrealized
| | | | | | | |
| | Unrealized
| | | Loss
| | | Benefit
| | | Accumulated
| |
| | Loss
| | | on Cash Flow
| | | Plan
| | | Comprehensive
| |
| | on Securities | | | Hedge Derivative | | | Liability | | | Loss | |
| | (Amounts in thousands) | |
|
December 31, 2009 | | $ | (11,543 | ) | | $ | (1,323 | ) | | $ | (786 | ) | | $ | (13,652 | ) |
| | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | (49,813 | ) | | $ | (1,996 | ) | | $ | (708 | ) | | $ | (52,517 | ) |
| | | | | | | | | | | | | | | | |
97
FIRST COMMUNITY BANCSHARES, INC.
| | Unrealized | | | Unrealized Loss | | | Benefit | | | Accumulated | |
| | Loss | | | on Cash Flow | | | Plan | | | Comprehensive | |
| | on Securities | | | Hedge Derivative | | | Liability | | | Loss | |
(Amounts in Thousands) | | | | | | | | | | | | |
December 31, 2010 | | $ | (11,213 | ) | | $ | (20 | ) | | $ | (957 | ) | | $ | (12,190 | ) |
December 31, 2009 | | $ | (11,543 | ) | | $ | (1,323 | ) | | $ | (786 | ) | | $ | (13,652 | ) |
December 31, 2008 | | $ | (49,813 | ) | | $ | (1,996 | ) | | $ | (708 | ) | | $ | (52,517 | ) |
NOTES TO CONSOLIDATED STATEMENTS — (Continued)Note 18. Parent Company Financial Information
| |
Note 18. | Parent Company Financial Information |
Condensed financial information related to First Community Bancshares, Inc. as of December 31, 20092010 and 2008,2009, and for each of the years ended December 31, 2010, 2009, 2008, and 2007,2008, is as follows:
| | | | | | | | | |
| | December 31, | | | December 31, | |
Condensed Balance Sheets | | 2009 | | 2008 | | | 2010 | | | 2009 | |
| | (Amounts in thousands) | | |
| |
(Amounts in Thousands) | | | | | | | |
Assets | | | | | | | | | | | | | | |
Cash | | $ | 17,426 | | | $ | 2,038 | | | $ | 11,706 | | | $ | 17,426 | |
Securities available for sale | | | 10,142 | | | | 11,609 | | | | 9,663 | | | | 10,142 | |
Loans | | | — | | | | 1,000 | | |
Investment in subsidiary | | | 234,666 | | | | 211,529 | | | | 266,673 | | | | 233,072 | |
Other assets | | | 4,563 | | | | 8,167 | | | | 4,325 | | | | 4,563 | |
| | | | | | |
Total assets | | $ | 266,797 | | | $ | 234,343 | | | $ | 292,367 | | | $ | 265,203 | |
| | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Other liabilities | | $ | 310 | | | $ | 603 | | | $ | 7,025 | | | $ | 310 | |
Long-term debt | | | 15,464 | | | | 15,464 | | | | 15,464 | | | | 15,464 | |
| | | | | | |
Total liabilities | | | 15,774 | | | | 16,067 | | | | 22,489 | | | | 15,774 | |
Stockholders’ Equity | | | | | | | | | |
Stockholders' Equity | | | | | | | | | |
Preferred stock | | | — | | | | 40,419 | | | | - | | | | - | |
Common stock | | | 18,083 | | | | 12,051 | | | | 18,083 | | | | 18,083 | |
Additional paid-in capital | | | 190,967 | | | | 128,526 | | | | 189,239 | | | | 190,967 | |
Retained earnings | | | 65,516 | | | | 105,165 | | | | 79,844 | | | | 63,922 | |
Treasury stock | | | (9,891 | ) | | | (15,368 | ) | | | (6,740 | ) | | | (9,891 | ) |
Accumulated other comprehensive loss | | | (13,652 | ) | | | (52,517 | ) | | | (10,548 | ) | | | (13,652 | ) |
| | | | | | |
Total stockholders’ equity | | | 251,023 | | | | 218,276 | | |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 266,797 | | | $ | 234,343 | | |
| | | | | | |
Total stockholders' equity | | | | 269,878 | | | | 249,429 | |
Total liabilities and stockholders' equity | | | $ | 292,367 | | | $ | 265,203 | |
| | Years Ended December 31, | |
Condensed Statements of Income | | 2010 | | | 2009 | | | 2008 | |
(Amounts in Thousands) | | | | | | | | | |
Cash dividends received from subsidiary bank | | $ | - | | | $ | 4,027 | | | $ | 22,383 | |
Other income | | | 2,134 | | | | 3,774 | | | | 2,104 | |
Operating expense | | | (1,556 | ) | | | (3,030 | ) | | | (2,200 | ) |
Income tax (expense) benefit | | | (223 | ) | | | (2,691 | ) | | | 24 | |
Equity in undistributed earnings (loss) of subsidiary | | | 21,492 | | | | (40,776 | ) | | | (20,357 | ) |
Net income (loss) | | | 21,847 | | | | (38,696 | ) | | | 1,954 | |
Dividends on preferred stock | | | - | | | | 2,160 | | | | 255 | |
Net income (loss) available to common shareholders | | $ | 21,847 | | | $ | (40,856 | ) | | $ | 1,699 | |
| | | | | | | | | | | | |
| | Years Ended December 31, | |
Condensed Statements of Income | | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in thousands) | |
|
Cash dividends received from subsidiary bank | | $ | 4,027 | | | $ | 22,383 | | | $ | 26,408 | |
Other income | | | 3,774 | | | | 2,104 | | | | 2,853 | |
Operating expense | | | (3,030 | ) | | | (2,200 | ) | | | (2,106 | ) |
Income tax benefit (expense) | | | (2,691 | ) | | | 24 | | | | (545 | ) |
Equity in undistributed earnings (loss) of subsidiary | | | (40,308 | ) | | | (19,230 | ) | | | 3,022 | |
| | | | | | | | | | | | |
Net income (loss) | | | (38,228 | ) | | | 3,081 | | | | 29,632 | |
Dividends on preferred stock | | | 2,160 | | | | 255 | | | | — | |
| | | | | | | | | | | | |
Net income (loss) available to common shareholders | | $ | (40,388 | ) | | $ | 2,826 | | | $ | 29,632 | |
| | | | | | | | | | | | |
98
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
Condensed Statements of Cash Flows | | 2009 | | 2008 | | 2007 | | | 2010 | | | 2009 | | | 2008 | |
| | (Amounts in thousands) | | |
| |
(Amounts in Thousands) | | | | | | | | | | |
Cash flows from operating activities | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (38,228 | ) | | $ | 3,081 | | | $ | 29,632 | | | $ | 21,847 | | | $ | (38,696 | ) | | $ | 1,954 | |
Adjustments to reconcile net income to net cash provided by | | | | | | | | | | | | | | | | | | | | | | | | |
operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in undistributed loss (earnings) of subsidiary | | | 40,308 | | | | 19,230 | | | | (3,022 | ) | |
Loss (gain) on sale of securities | | | 60 | | | | 625 | | | | (447 | ) | |
(Increase) decrease in other assets | | | 661 | | | | (2,059 | ) | | | (2,678 | ) | |
(Decrease) increase in other liabilities | | | 881 | | | | (7 | ) | | | 996 | | |
Equity in undistributed (earnings) loss of subsidiary | | | | (21,492 | ) | | | 40,776 | | | | 20,357 | |
Loss on sale of securities | | | | 1 | | | | 60 | | | | 625 | |
Decrease (increase) in other assets | | | | 238 | | | | 661 | | | | (2,059 | ) |
Increase (decrease) in other liabilities | | | | 6,715 | | | | 881 | | | | (7 | ) |
Other, net | | | 1,081 | | | | 2,471 | | | | — | | | | (82 | ) | | | 1,081 | | | | 2,471 | |
| | | | | | | | |
Net cash provided by operating activities | | | 4,763 | | | | 23,341 | | | | 24,481 | | | | 7,227 | | | | 4,763 | | | | 23,341 | |
| | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of securities available for sale | | | (931 | ) | | | (13,117 | ) | | | (3,217 | ) | | | - | | | | (931 | ) | | | (13,117 | ) |
Proceeds from sale of securities available for sale | | | 4,402 | | | | 3,324 | | | | 4,671 | | | | 535 | | | | 4,402 | | | | 3,324 | |
Investment in subsidiary | | | (10,000 | ) | | | (40,000 | ) | | | (5,397 | ) | | | (7,500 | ) | | | (10,000 | ) | | | (40,000 | ) |
Other, net | | | 1,000 | | | | (1,042 | ) | | | (2,390 | ) | | | - | | | | 1,000 | | | | (1,042 | ) |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | (5,529 | ) | | | (50,835 | ) | | | (6,333 | ) | |
Net cash used in investing activities | | | | (6,965 | ) | | | (5,529 | ) | | | (50,835 | ) |
| | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of preferred stock | | | — | | | | 41,500 | | | | — | | | | - | | | | - | | | | 41,500 | |
Redemption of preferred stock | | | (41,500 | ) | | | — | | | | — | | | | - | | | | (41,500 | ) | | | - | |
Issuance of common stock | | | 61,688 | | | | 606 | | | | 1,117 | | | | 29 | | | | 61,688 | | | | 606 | |
Acquisition of treasury stock | | | (167 | ) | | | (4,222 | ) | | | (9,170 | ) | | | - | | | | (167 | ) | | | (4,222 | ) |
Common dividends paid | | | (4,620 | ) | | | (12,452 | ) | | | (12,079 | ) | | | (7,121 | ) | | | (4,620 | ) | | | (12,452 | ) |
Preferred dividends paid | | | (1,116 | ) | | | — | | | | — | | | | - | | | | (1,116 | ) | | | - | |
Other, net | | | 1,869 | | | | 1,220 | | | | 353 | | | | 1,110 | | | | 1,869 | | | | 1,220 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 16,154 | | | | 26,652 | | | | (19,779 | ) | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 15,388 | | | | (842 | ) | | | (1,631 | ) | |
Net cash (used in) provided by financing activities | | | | (5,982 | ) | | | 16,154 | | | | 26,652 | |
Net (decrease) increase in cash and cash equivalents | | | | (5,720 | ) | | | 15,388 | | | | (842 | ) |
Cash and cash equivalents at beginning of year | | | 2,038 | | | | 2,880 | | | | 4,511 | | | | 17,426 | | | | 2,038 | | | | 2,880 | |
| | | | | | | | |
Cash and cash equivalents at end of year | | $ | 17,426 | | | $ | 2,038 | | | $ | 2,880 | | | $ | 11,706 | | | $ | 17,426 | | | $ | 2,038 | |
| | | | | | | | |
| |
Note 19. | Segment Information |
Note 19. Segment Information
The Company operates within two business segments, community banking and insurance services. The Community Banking segment includes both commercial and consumer lending and deposit services. This segment provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. This segment also provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. In addition, the Community Banking segment provides wealth management services to a broad range of customers. The Insurance Services segment is a full-service insurance agency providing commercial and personal lines of insurance.
99
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
The following table sets forth information about the reportable operating segments and reconciliation of this information to the consolidated financial statements at and for the yearyears ended December 31, 20092010 and 2008.2009.
| | December 31, 2010 | |
| | Community | | | Insurance | | | Parent/ | | | | |
| | Banking | | | Services | | | Elimination | | | Total | |
(In Thousands) | | | | | | | | | | | | |
Net interest income (loss) | | $ | 74,072 | | | $ | (125 | ) | | $ | (90 | ) | | $ | 73,857 | |
Provision for loan losses | | | 14,757 | | | | - | | | | - | | | | 14,757 | |
Noninterest income | | | 34,132 | | | | 6,816 | | | | (440 | ) | | | 40,508 | |
Noninterest expense | | | 63,983 | | | | 6,856 | | | | (896 | ) | | | 69,943 | |
Income (loss) before income taxes | | | 29,464 | | | | (165 | ) | | | 366 | | | | 29,665 | |
Provision for income tax expense | | | 7,308 | | | | 345 | | | | 165 | | | | 7,818 | |
Net income (loss) | | $ | 22,156 | | | $ | (510 | ) | | $ | 201 | | | $ | 21,847 | |
| | | | | | | | | | | | | | | | |
End of period goodwill and other intangibles | | $ | 78,696 | | | $ | 11,943 | | | $ | - | | | $ | 90,639 | |
End of period assets | | $ | 2,227,760 | | | $ | 12,445 | | | $ | 4,033 | | | $ | 2,244,238 | |
| | December 31, 2009 | |
| | Community | | | Insurance | | | Parent/ | | | | |
| | Banking | | | Services | | | Elimination | | | Total | |
(In Thousands) | | | | | | | | | | | | |
Net interest income (loss) | | $ | 69,364 | | | $ | (73 | ) | | $ | (39 | ) | | $ | 69,252 | |
Provision for loan losses | | | 15,801 | | | | - | | | | - | | | | 15,801 | |
Noninterest income | | | (60,839 | ) | | | 7,427 | | | | (265 | ) | | | (53,677 | ) |
Noninterest expense | | | 61,523 | | | | 6,139 | | | | (1,038 | ) | | | 66,624 | |
Income (loss) before income taxes | | | (68,799 | ) | | | 1,215 | | | | 734 | | | | (66,850 | ) |
Provision for income tax (benefit) expense | | | (30,568 | ) | | | 506 | | | | 1,908 | | | | (28,154 | ) |
Net income (loss) | | $ | (38,231 | ) | | $ | 709 | | | $ | (1,174 | ) | | $ | (38,696 | ) |
| | | | | | | | | | | | | | | | |
End of period goodwill and other intangibles | | $ | 79,419 | | | $ | 11,642 | | | $ | - | | | $ | 91,061 | |
End of period assets | | $ | 2,247,396 | | | $ | 12,230 | | | $ | 13,657 | | | $ | 2,273,283 | |
| | | | | | | | | | | | | | | | |
| | December 31, 2009 | |
| | Community
| | | Insurance
| | | Parent/
| | | | |
| | Banking | | | Services | | | Elimination | | | Total | |
| | (In thousands) | |
|
Net interest income | | $ | 69,364 | | | $ | (73 | ) | | $ | (39 | ) | | $ | 69,252 | |
Provision for loan losses | | | 15,053 | | | | — | | | | — | | | | 15,053 | |
Noninterest income | | | (60,839 | ) | | | 7,427 | | | | (265 | ) | | | (53,677 | ) |
Noninterest expense | | | 61,523 | | | | 6,139 | | | | (1,038 | ) | | | 66,624 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (68,051 | ) | | | 1,215 | | | | 734 | | | | (66,102 | ) |
Provision for income taxes (benefit) | | | (30,288 | ) | | | 506 | | | | 1,908 | | | | (27,874 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (37,763 | ) | | $ | 709 | | | $ | (1,174 | ) | | $ | (38,228 | ) |
| | | | | | | | | | | | | | | | |
End of period goodwill and other intangibles | | $ | 79,419 | | | $ | 11,642 | | | $ | — | | | $ | 91,061 | |
| | | | | | | | | | | | | | | | |
End of period assets | | $ | 2,248,991 | | | $ | 12,230 | | | $ | 13,657 | | | $ | 2,274,878 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, 2008 | |
| | Community
| | | Insurance
| | | Parent/
| | | | |
| | Banking | | | Services | | | Elimination | | | Total | |
| | (In thousands) | |
|
Net interest income | | $ | 66,703 | | | $ | (49 | ) | | $ | (819 | ) | | $ | 65,835 | |
Provision for loan losses | | | 7,422 | | | | — | | | | — | | | | 7,422 | |
Noninterest income | | | (4,730 | ) | | | 5,042 | | | | 2,062 | | | | 2,374 | |
Noninterest expense | | | 57,704 | | | | 4,371 | | | | (1,559 | ) | | | 60,516 | |
| | | | | | | | | | | | | | | | |
Income before income taxes | | | (3,153 | ) | | | 622 | | | | 2,802 | | | | 271 | |
Provision for income taxes (benefit) | | | (3,802 | ) | | | 183 | | | | 809 | | | | (2,810 | ) |
| | | | | | | | | | | | | | | | |
Net income | | $ | 649 | | | $ | 439 | | | $ | 1,993 | | | $ | 3,081 | |
| | | | | | | | | | | | | | | | |
End of period goodwill and other intangibles | | $ | 78,869 | | | $ | 10,743 | | | $ | — | | | $ | 89,612 | |
| | | | | | | | | | | | | | | | |
End of period assets | | $ | 2,103,445 | | | $ | 12,111 | | | $ | 17,758 | | | $ | 2,133,314 | |
| | | | | | | | | | | | | | | | |
100
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
Note 20. Supplemental Financial Data (Unaudited)
| |
Note 20. | Supplemental Financial Data (Unaudited) |
Quarterly earnings for the years ended December 31, 20092010 and 2008,2009, are as follows:
| | | | | | | | | | | | | | | | |
| | 2009
| |
| | Quarter Ended | |
| | March 31 | | | June 30 | | | Sept 30 | | | Dec 31 | |
| | (Amounts in thousands, except per share Data) | |
|
Interest income | | $ | 26,863 | | | $ | 26,189 | | | $ | 27,130 | | | $ | 27,752 | |
Interest expense | | | 10,430 | | | | 9,868 | | | | 9,594 | | | | 8,790 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 16,433 | | | | 16,321 | | | | 17,536 | | | | 18,962 | |
Provision for loan losses | | | 2,087 | | | | 2,552 | | | | 3,418 | | | | 6,996 | |
| | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 14,346 | | | | 13,769 | | | | 14,118 | | | | 11,966 | |
Other income | | | 8,006 | | | | 3,867 | | | | ( 18,150 | ) | | | (35,727 | ) |
Net securities gains (losses) | | | 411 | | | | 1,653 | | | | 866 | | | | (14,603 | ) |
Other expenses | | | 15,187 | | | | 16,041 | | | | 17,768 | | | | 17,628 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 7,576 | | | | 3,248 | | | | ( 20,934 | ) | | | (55,992 | ) |
Income taxes | | | 2,346 | | | | 843 | | | | (9,633 | ) | | | (21,430 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 5,230 | | | | 2,405 | | | | ( 11,301 | ) | | | (34,562 | ) |
Preferred dividends | | | 571 | | | | 578 | | | | 1,011 | | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) available to common shareholders | | $ | 4,659 | | | $ | 1,827 | | | $ | (12,312 | ) | | $ | (34,562 | ) |
| | | | | | | | | | | | | | | | |
Per share: | | | | | | | | | | | | | | | | |
Basic earnings | | $ | 0.40 | | | $ | 0.14 | | | $ | (0.71 | ) | | $ | (1.95 | ) |
Diluted earnings | | $ | 0.40 | | | $ | 0.14 | | | $ | (0.71 | ) | | $ | (1.95 | ) |
Dividends | | $ | — | | | $ | 0.20 | | | $ | 0.10 | | | $ | — | |
Weighted average basic shares outstanding | | | 11,568 | | | | 12,696 | | | | 17,427 | | | | 17,687 | |
| | | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding | | | 11,617 | | | | 12,741 | | | | 17,427 | | | | 17,687 | |
| | | | | | | | | | | | | | | | |
101
| | Quarter Ended | |
2010 | | March 31 | | | June 30 | | | Sept 30 | | | Dec 31 | |
(Amounts in Thousands, Except Per Share Data) | | | | | | | | | | | | |
Interest income | | $ | 26,612 | | | $ | 26,155 | | | $ | 25,840 | | | $ | 24,975 | |
Interest expense | | | 7,993 | | | | 7,613 | | | | 7,243 | | | | 6,876 | |
Net interest income | | | 18,619 | | | | 18,542 | | | | 18,597 | | | | 18,099 | |
Provision for loan losses | | | 3,665 | | | | 3,596 | | | | 3,810 | | | | 3,686 | |
Net interest income after provision for loan losses | | | 14,954 | | | | 14,946 | | | | 14,787 | | | | 14,413 | |
Other income | | | 8,328 | | | | 7,703 | | | | 8,364 | | | | 7,840 | |
Net securities gains | | | 250 | | | | 1,201 | | | | 2,574 | | | | 4,248 | |
Other expenses | | | 16,072 | | | | 16,598 | | | | 17,429 | | | | 19,844 | |
Income before income taxes | | | 7,460 | | | | 7,252 | | | | 8,296 | | | | 6,657 | |
Income tax | | | 2,182 | | | | 2,121 | | | | 1,743 | | | | 1,772 | |
Net income available to common shareholders | | $ | 5,278 | | | $ | 5,131 | | | $ | 6,553 | | | $ | 4,885 | |
Per share: | | | | | | | | | | | | | | | | |
Basic earnings | | $ | 0.30 | | | $ | 0.29 | | | $ | 0.37 | | | $ | 0.27 | |
Diluted earnings | | $ | 0.30 | | | $ | 0.29 | | | $ | 0.37 | | | $ | 0.27 | |
Dividends | | $ | 0.10 | | | $ | 0.10 | | | $ | 0.10 | | | $ | 0.10 | |
| | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 17,766 | | | | 17,787 | | | | 17,808 | | | | 17,846 | |
Weighted average diluted shares outstanding | | | 17,784 | | | | 17,805 | | | | 17,833 | | | | 17,892 | |
FIRST COMMUNITY BANCSHARES, INC.
| | Quarter Ended | |
2009 | | March 31 | | | June 30 | | | Sept 30 | | | Dec 31 | |
(Amounts in Thousands, Except Per Share Data) | | | | | | | | | | | | |
Interest income | | $ | 26,863 | | | $ | 26,189 | | | $ | 27,130 | | | $ | 27,752 | |
Interest expense | | | 10,430 | | | | 9,868 | | | | 9,594 | | | | 8,790 | |
Net interest income | | | 16,433 | | | | 16,321 | | | | 17,536 | | | | 18,962 | |
Provision for loan losses | | | 2,148 | | | | 2,552 | | | | 3,819 | | | | 7,282 | |
Net interest income after provision for loan losses | | | 14,285 | | | | 13,769 | | | | 13,717 | | | | 11,680 | |
Other income | | | 8,006 | | | | 3,867 | | | | (18,150 | ) | | | (35,734 | ) |
Net securities gains (losses) | | | 411 | | | | 1,653 | | | | 866 | | | | (14,603 | ) |
Other expenses | | | 15,187 | | | | 16,041 | | | | 17,768 | | | | 17,621 | |
Income (loss) before income taxes | | | 7,515 | | | | 3,248 | | | | (21,335 | ) | | | (56,278 | ) |
Income tax (benefit) | | | 2,323 | | | | 843 | | | | (9,783 | ) | | | (21,537 | ) |
Net income (loss) | | | 5,192 | | | | 2,405 | | | | (11,552 | ) | | | (34,741 | ) |
Preferred dividends | | | 571 | | | | 578 | | | | 1,011 | | | | - | |
Net income (loss) available to common shareholders | | $ | 4,621 | | | $ | 1,827 | | | $ | (12,563 | ) | | $ | (34,741 | ) |
Per share: | | | | | | | | | | | | | | | | |
Basic earnings (loss) | | $ | 0.40 | | | $ | 0.14 | | | $ | (0.72 | ) | | $ | (1.96 | ) |
Diluted earnings (loss) | | $ | 0.40 | | | $ | 0.14 | | | $ | (0.72 | ) | | $ | (1.96 | ) |
Dividends | | $ | - | | | $ | 0.20 | | | $ | 0.10 | | | $ | - | |
| | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 11,568 | | | | 12,696 | | | | 17,427 | | | | 17,687 | |
Weighted average diluted shares outstanding | | | 11,617 | | | | 12,741 | | | | 17,427 | | | | 17,687 | |
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | 2008
| |
| | Quarter Ended | |
| | March 31 | | | June 30 | | | Sept 30 | | | Dec 31 | |
| | (Amounts in thousands, except per share Data) | |
|
Interest income | | $ | 29,547 | | | $ | 27,433 | | | $ | 26,550 | | | $ | 27,235 | |
Interest expense | | | 13,187 | | | | 10,808 | | | | 10,227 | | | | 10,708 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 16,360 | | | | 16,625 | | | | 16,323 | | | | 16,527 | |
Provision for loan losses | | | 323 | | | | 937 | | | | 3,461 | | | | 2,701 | |
| | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 16,037 | | | | 15,688 | | | | 12,862 | | | | 13,826 | |
Other income | | | 7,321 | | | | 7,574 | | | | 7,720 | | | | (22,140 | ) |
Net securities gains (losses) | | | 1,820 | | | | 150 | | | | 163 | | | | (234 | ) |
Other expenses | | | 16,283 | | | | 14,759 | | | | 14,441 | | | | 15,033 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 8,895 | | | | 8,653 | | | | 6,304 | | | | (23,581 | ) |
Income taxes | | | 2,583 | | | | 2,415 | | | | 1,753 | | | | (9,561 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 6,312 | | | | 6,238 | | | | 4,551 | | | | (14,020 | ) |
Preferred dividends | | | — | | | | — | | | | — | | | | 255 | |
| | | | | | | | | | | | | | | | |
Net income (loss) available to common shareholders | | $ | 6,312 | | | $ | 6,238 | | | $ | 4,551 | | | $ | (14,275 | ) |
| | | | | | | | | | | | | | | | |
Per share: | | | | | | | | | | | | | | | | |
Basic earnings | | $ | 0.57 | | | $ | 0.57 | | | $ | 0.42 | | | $ | (1.27 | ) |
Diluted earnings | | $ | 0.57 | | | $ | 0.56 | | | $ | 0.41 | | | $ | (1.27 | ) |
Dividends | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.28 | |
Weighted average basic shares outstanding | | | 11,030 | | | | 10,992 | | | | 10,957 | | | | 11,252 | |
| | | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding | | | 11,108 | | | | 11,073 | | | | 11,034 | | | | 11,252 | |
| | | | | | | | | | | | | | | | |
102
- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm -
To the Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and its Subsidiaries (the “Company”) as of December 31, 20092010 and 2008,2009, and the related consolidated statements of income (loss),operations, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009.2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Bancshares, Inc. and its Subsidiaries as of December 31, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20092010 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, theThe Company adopted, in 2009, new business combination and investment impairment accounting standards.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control — Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 201011, 2011, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Asheville, North Carolina
March 4, 2010
103
-Management’s Assessment of Internal Control Over Financial Reporting-
First Community Bancshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report onForm 10-K. The consolidated financial statements and notes included in this Annual Report onForm 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.
We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2009. 2010.
Dixon Hughes PLLC, independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.reporting as of December 31, 2010. The Report of Independent Registered Public Accounting Firm, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, appears hereafter in Item 8 of this Annual Report on Form 10-K.
Dated this 11th day of March, 2011.
/s/ John M. Mendez | | /s/ David D. Brown |
John M. Mendez | | David D. Brown |
President and Chief Executive Officer | | Chief Financial Officer |
- Report of Independent Registered Public Accounting Firm -
To the Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
We have audited First Community Bancshares, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Community Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of First Community Bancshares, Inc. as of and for the year ended December 31, 2010, and our report, dated March 11, 2011, expressed an unqualified opinion on those consolidated financial statements. The Company adopted, in 2009, new business combination and investment impairment accounting standards.
Asheville, North Carolina
March 11, 2011
ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
ITEM 9A. | Controls and Procedures. |
Restatement and Remediation of Material Weakness
As a result of a routine internal audit during the second quarter of 2010, the Company determined there was a computational error in the model that it uses to calculate the quantitative basis for its allowance for loan losses. Based on the Company’s modeling using the corrected computations, the Company, in consultation with the Audit Committee of its Board of Directors, filed with the Securities and Exchange Commission amendments to its Form 10-Ks for each of the years ended December 31, 2009 and 2008 and its Form 10-Qs for each of the quarters ended March 31, 2009, June 30, 2009, September 30, 2009, and March 31, 2010, for the purpose of restating the financial statements and other financial information in those reports to reflect the correction of the computational error in the model (the “Restatement”).
We believe that we have fully remediated the material weakness in our internal control over financial reporting with respect to the calculation of the allowance for loan losses as of December 31, 2010. The remedial actions undertaken by the Company included:
| · | implementing additional management and oversight controls to review documentation related to the calculation of the allowance for loan losses; |
| · | discontinuing practices and processes where sustainable controls did not exist and automating other critical functions within the process; and |
| · | retesting our internal controls with respect to the deficiencies related to the material weakness to ensure they are operating effectively. |
Evaluation of Disclosure Controls and Procedures
In connection with the Restatement, under the direction of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we reevaluated our disclosure controls and procedures. The Company identified a material weakness in our internal control over financial reporting with respect to ensuring the appropriate calculation of its allowance for loan losses. Specifically, during a process enhancement to the model that calculates the allowance for loan losses, the quarterly average loss rate was not annualized. Control procedures in place during the periods covered by the Restatement for reviewing the quantitative model for calculating the allowance for loan losses did not timely identify this error and, as such, the Company did not have adequately designed procedures. Solely as a result of this material weakness, we concluded that our disclosure controls and procedures were not effective as of December 31, 2008, March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, and June 30, 2010.
In connection with this Annual Report on Form 10-K, under the direction of the Company’s CEO and CFO, the Company has evaluated the disclosure controls and procedures currently in effect, including the remedial actions discussed above. Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2010, the Company’s disclosure controls and procedures were effective.
Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management, including the CEO and CFO, does not expect that the Company’s 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 the 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, by collusion of two or more people, or by management override of the controls.
The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. Except as described above, there were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Management’s Report onAssessment of Internal Control Over Financial Reporting appears hereafter inare each hereby incorporated by reference from Item 8 of this Annual Report onForm 10-K.
ITEM 9B. | Other Information. |
None.
PART III
ITEM 10. | Directors, Executive Officers and Corporate Governance. |
The required information concerning directors and executive officers has been omitted in accordance with General Instruction G. Such information regarding directors and executive officers will be set forth under the headings of “Election of Directors,” “Continuing Directors,” and “Executive Officers who are not Directors” of the Proxy Statement relating to the 2011 Annual Meeting of Stockholders (the “2011 Annual Meeting”) to be held on April 26, 2011, and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Exchange Act has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement relating to the 2011 Annual Meeting and is incorporated herein by reference.
The Company has adopted Standards of Conduct that apply to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, as well as all employees and directors of the Company. A copy of the Company’s Standards of Conduct is available on the Company’s website at www.fcbinc.com. There have been no waivers of the standards of conduct related to any of the above officers.
Information relating to the Audit Committee and the Audit Committee Financial Expert has been omitted in accordance with General Instruction G. Such information regarding the Audit Committee and the Audit Committee Financial Expert will be set forth under the heading “Report of the Audit Committee” of the Proxy Statement relating to the 2011 Annual Meeting and is incorporated herein by reference.
Since the last report on Form 10-K, filed on March 4, 2010, the Company has not made any material changes to the procedures by which stockholders may recommend nominees to the Company’s board of directors.
BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
Franklin P. Hall | | John M. Mendez |
Businessman; Senior Partner, Hall & Hall Family Law Firm; | | President and Chief Executive Officer, First Community |
Former Commissioner, Virginia Department of Alcoholic | | Bancshares, Inc.; Chief Executive Officer, First Community |
Beverage Control; Former Chairman, The Commonwealth | | Bank, N. A. |
Bank; Former Minority Leader, Virginia House of Delegates | | |
| | A. A. Modena |
| | Past Executive Vice President and Secretary, First Community |
Allen T. Hamner, Ph.D. | | Bancshares, Inc.; Past President and Chief Executive Officer, |
Retired Professor of Chemistry, West Virginia Wesleyan | | The Flat Top National Bank of Bluefield |
College | | |
| | Robert E. Perkinson, Jr. |
Richard S. Johnson | | Past Vice President-Operations, MAPCO Coal, Inc. — Virginia |
President, The Wilton Companies | | Region |
| | |
I. Norris Kantor | | William P. Stafford |
Of Counsel, Katz, Kantor & Perkins, Attorneys at Law; Board | | President, Princeton Machinery Service, Inc. |
of Governors, Bluefield State College | | |
| | |
John M. Mendez | | William P. Stafford, II |
| | Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, |
| | Kersey & Stafford, PLLC |
EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
John M. Mendez | | E. Stephen Lilly |
President and Chief Executive Officer | | Chief Operating Officer |
| | |
David D. Brown | | Robert L. Buzzo |
Chief Financial Officer | | Vice President and Secretary |
| | |
Robert L. Schumacher | | |
General Counsel | | |
BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.
W. C. Blankenship, Jr. | | I. Norris Kantor |
Agent, State Farm Insurance | | Of Counsel, Katz, Kantor & Perkins, Attorneys at Law; Board |
| | of Governors, Bluefield State College |
Juanita G. Bryan | | |
Homemaker | | John M. Mendez |
| | President and Chief Executive Officer, First Community |
Robert L. Buzzo | | Bancshares, Inc.; Chief Executive Officer, First Community |
Vice President and Secretary, First Community Bancshares, | | Bank, N. A. |
Inc.; President, First Community Bank, N. A. | | |
| | A. A. Modena |
C. William Davis | | Past Executive Vice President and Secretary, First |
Attorney at Law, Richardson & Davis | | Community Bancshares, Inc.; Past President and |
| | Chief Executive Officer, The Flat Top National Bank |
Samuel L. Elmore | | of Bluefield |
Senior Vice President – Commercial Lending for Raleigh | | |
County, W.Va. Market, First Community Bank, N. A. | | Robert E. Perkinson, Jr. |
| | Past Vice President-Operations, MAPCO Coal, Inc. — Virginia |
T. Vernon Foster | | Region |
President of J. La’Verne Print Communications; Past Director, | | |
TriStone Community Bank; Director of Business Solutions, | | William P. Stafford |
University of Louisville, College of Business | | President, Princeton Machinery Service, Inc. |
| | |
Franklin P. Hall | | William P. Stafford, II |
Businessman; Senior Partner, Hall & Hall Family Law Firm; | | Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, |
Former Commissioner, Virginia Department of Alcoholic | | Kersey & Stafford, PLLC |
Beverage Control; Former Chairman, The Commonwealth | | |
Bank; Former Minority Leader, Virginia House of Delegates | | Frank C. Tinder |
| | President, Tinder Enterprises, Inc. and Tinco Leasing |
Allen T. Hamner, Ph.D. | | Corporation; Realtor, Premier Realty |
Retired Professor of Chemistry, West Virginia Wesleyan | | |
College | | Dale F. Woody |
| | President, Woody Lumber Company |
Richard S. Johnson | | |
President, The Wilton Companies | | |
ITEM 11. | Executive Compensation. |
The information called for by Item 11 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Compensation Discussion and Analysis” of the Proxy Statement relating to the 2011 Annual Meeting and is incorporated herein by reference.
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The required information concerning security ownership of certain beneficial owners and management has been omitted in accordance with General Instruction G. Such information appears under the heading of “Information on Stock Ownership” of the Proxy Statement relating to the 2011 Annual Meeting and is incorporated herein by reference.
Equity Compensation Plan Information
Information regarding compensation plans under which the Company’s equity securities are authorized for issuance as of December 31, 2010, is included in the table which follows.
| | | | | | | | Number of securities | |
| | Number of securities | | | | | | remaining available | |
| | to be issued upon | | | Weighted-average | | | for future issuance | |
| | exercise of | | | exercise price of | | | under equity | |
| | outstanding | | | outstanding | | | compensation plans | |
| | options, warrants | | | options, warrants | | | (excluding securities | |
Plan category | | and rights | | | and rights | | | reflected in column (a)) | |
| | (a) | | | (b) | | | (c) | |
Equity compensation plans approved | | | | | | | | | |
by security holders | | | 54,125 | | | $ | 25.11 | | | | 82,343 | |
Equity compensation plans not approved | | | | | | | | | | | | |
by security holders | | | 351,593 | | | $ | 22.21 | | | | 71,801 | |
Total | | | 405,718 | | | | | | | | 154,144 | |
For additional information regarding equity compensation plans, see Note 10 – Employee Benefits of the Notes to Consolidated Financial Statements included in Item 8 hereof.
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information called for by Item 13 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Related Party Transactions” of the Proxy Statement relating to the 2011 Annual Meeting and is incorporated herein by reference.
ITEM 14. | Principal Accounting Fees and Services. |
The information called for by Item 14 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Independent Auditor” of the Proxy Statement relating to the 2011 Annual Meeting and is incorporated herein by reference.
PART IV
ITEM 15. | Exhibits, Financial Statement Schedules. |
(a) Documents Filed as Part of this 4thReport
(1) Financial Statements
Not Applicable
(2) Financial Statement Schedules
Not Applicable
(b) Exhibits
Exhibit No. | | Exhibit |
| | |
3(i) | | Articles of Incorporation of First Community Bancshares, Inc. (31) |
3(ii) | | Bylaws of First Community Bancshares, Inc., as amended. (17) |
3.1 | | Certificate of Designation Series A Preferred Stock (22) |
4.1 | | Specimen stock certificate of First Community Bancshares, Inc. (3) |
4.2 | | Indenture Agreement dated September 25, 2003. (11) |
4.3 | | Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (11) |
4.4 | | Preferred Securities Guarantee Agreement dated September 25, 2003. (11) |
4.5 | | Reserved. |
4.6 | | Warrant to purchase 88,273 shares of Common Stock of First Community Bancshares, Inc. (29) |
4.7 | | Reserved |
4.8 | | Reserved |
10.1** | | First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4) |
10.1.1** | | Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan, as amended. (18) |
10.2** | | First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5) |
10.3** | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and John M. Mendez. (6) and Waiver Agreement (27) |
10.4** | | First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. (24) |
10.5** | | First Community Bancshares, Inc. Split Dollar Plan and Agreement. (8) |
10.6** | | First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan, as amended. (24) |
10.6.1** | | Reserved |
10.7** | | First Community Bancshares, Inc. Wrap Plan. (7) |
10.8 | | Reserved. |
10.9** | | Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers. (9) |
10.10** | | Form of Indemnification Agreement between First Community Bank, N. A, its Directors and Certain Executive Officers. (9) |
10.11 | | Reserved. |
10.12** | | First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Form of Award Agreement. (13) |
10.13 | | Reserved. |
10.14** | | First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7) |
10.15** | | Reserved |
10.16** | | Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald L. Campbell. (19) |
10.17** | | Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc. and Shawn C. Cummings. (20) |
10.18 | | Securities Purchase Agreement by and between the United States Department of the Treasury and First Community Bancshares, Inc. dated November 21, 2008. (22) |
10.19** | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and David D. Brown. (23) |
10.20** | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and Robert L. Buzzo. (26) |
10.21** | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and E. Stephen Lilly. (26) |
10.22** | | Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary R. Mills. (26) |
10.23** | | Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Martyn A. Pell. (26) |
10.24** | | Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Robert. L. Schumacher. (26) |
10.25** | | Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson O. Brown. (25) |
10.26** | | Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R. Evans. (25) |
11 | | Statement regarding computation of earnings per share. (16) |
12* | | Computation of Ratios. |
21 | | Subsidiaries of Registrant – Reference is made to “Item 1. Business” for the required information. |
23.1* | | Consent of Dixon Hughes PLLC, Independent Registered Public Accounting Firm for First Community Bancshares, Inc. |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
32* | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
** | Indicates a management contract or compensation plan. |
(1) | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on August 16, 2010 |
(2) | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002. |
(3) | Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003. |
(4) | Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999, filed on March 30, 2000, as amended April 13, 2000. |
(5) | The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002. |
(6) | Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed December 16, 2008. The Registrant has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title and salary. |
(7) | Incorporated by reference from Item 1.01 of the Current Report on Form 8-K dated August 22, 2006, and filed August 23, 2006. |
(8) | Incorporated by reference from Exhibit 10.5 of the Annual Report on Form 10-K for the period ended December 31, 1999, and filed on April 4, 2000, and amended on April 13, 2000. |
(9) | Form of indemnification agreement entered into by the Company and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2003, filed on March 15, 2004, and amended on May 19, 2004. |
(10) | Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 15, 2004. |
(11) | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003. |
(12) | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004. |
(13) | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004. |
(14) | Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2004, and filed on March 16, 2005. Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and Stafford II. |
(15) | Incorporated by reference from the Current Report on Form 8-K dated October 24, 2006, and filed October 25, 2006. |
(16) | Incorporated by reference from Note 1 of the Notes to Consolidated Financial Statements included herein. |
(17) | Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February 14, 2008, filed on February 20, 2008. |
(18) | Incorporated by reference from Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004. |
(19) | Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May 2, 2007. |
(20) | Incorporated by reference from the Exhibit 10.17 of the Annual Report on Form 10-K for the period ended December 31, 2007, filed on March 13, 2008. |
(22) | Incorporated by reference from the Current Report on Form 8-K dated November 21, 2008, and filed November 24, 2008. |
(23) | Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed December 16, 2008. |
(24) | Incorporated by reference from Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, and filed December 17, 2010. |
(25) | Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009 and filed April 3, 2009. |
(26) | Incorporated by reference from the Current Report on Form 8-K dated and filed July 6, 2009. |
(27) | Incorporated by reference from Exhibit 10.2 on Form 8-K dated December 16, 2010, and filed December 17, 2010. |
(31) | Incorporated by reference from Exhibit 3(i) of the Quarterly Report on Form 10-Q for the period dated June 30, 2010, and filed August 16, 2010. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 11th day of March, 2010.2011.
/s/ John M. Mendez
First Community Bancshares, Inc.(Registrant)
John M. Mendez
President and Chief Executive Officer
By: | /s/ John M. Mendez | | By: | /s/ David D. Brown |
| John M. Mendez | | | David D. Brown |
| President and Chief Executive Officer | | | David D. Brown
Chief Financial Officer |
| (Principal Executive Officer) | | | (Principal Financial Officer and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
To the Audit CommitteeSignature | | Title | | Date |
| | | | |
/s/ John M. Mendez | | Director, President and Chief Executive Officer | | March 11, 2011 |
John M. Mendez | | | | |
| | | | |
/s/ David D. Brown | | Chief Financial Officer | | March 11, 2011 |
David D. Brown | | | | |
| | | | |
/s/ Franklin P. Hall | | Director | | March 11, 2011 |
Franklin P. Hall | | | | |
| | | | |
/s/ Allen T. Hamner | | Director | | March 11, 2011 |
Allen T. Hamner | | | | |
| | | | |
/s/ Richard S. Johnson | | Director | | March 11, 2011 |
Richard S. Johnson | | | | |
| | | | |
/s/ Robert E. Perkinson, Jr. | | Director | | March 11, 2011 |
Robert E. Perkinson, Jr. | | | | |
| | | | |
/s/ William P. Stafford | | Director | | March 11, 2011 |
William P. Stafford | | | | |
| | | | |
/s/ William P. Stafford, II | | Chairman of the Board of Directors and the StockholdersFirst Community Bancshares, Inc.
We have audited First Community Bancshares, Inc. and Subsidiary’s (the “Company”) internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Community Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of First Community Bancshares, Inc. as of and for the year ended December 31, 2009, and our report dated March 4, 2010, expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 1 to the consolidated financial statements, the Company adopted in 2009 new business combination and investment impairment accounting standards.
Asheville, North Carolina
March 4, 2010
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| | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| | ITEM 9A. | CONTROLS AND PROCEDURES. |
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Exchange ActRule 13a-15(b). Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There have not been any changes in the Company’s internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting are each hereby incorporated by reference from Item 8 of this Annual Report onForm 10-K.
| | ITEM 9B. | OTHER INFORMATION. |
None.
PART III
| | ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The required information concerning directors and executive officers has been omitted in accordance with General Instruction G. Such information regarding directors and executive officers will be set forth under the headings of “Election of Directors”, “Continuing Directors”, and “Executive Officers who are not Directors” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Exchange Act has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
The Company has adopted a Standards of Conduct that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, as well as all employees and directors of the Company. A copy of the Company’s Standard of Conduct is available on the Company’s website at www.fcbinc.com. There have been no waivers of the standard of conduct related to any of the above officers.
Information relating to the Audit Committee and the Audit Committee Financial Expert has been omitted in accordance with General Instruction G. Such information regarding the Audit Committee and the Audit Committee
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Financial Expert will be set forth under the heading “Report of the Audit Committee” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
Since the last report onForm 10-K, filed on March 13, 2009, the Company has not made any material changes to the procedures by which stockholders may recommend nominees to the Company’s board of directors.
BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
| | | Franklin P. Hall
| | A. A. Modena | Businessman; Senior Partner, Hall & Hall Family Law Firm; Commissioner, Virginia Department of Alcoholic Beverage Control; Former Delegate, Virginia General Assembly | | Past Executive Vice President and Secretary, First Community Bancshares, Inc.; Past President and Chief Executive Officer, The Flat Top National Bank of Bluefield | | | | Allen T. Hamner, Ph.D. | | Robert E. Perkinson, Jr. | Retired Professor of Chemistry, West Virginia Wesleyan College | | Past Vice President-Operations, MAPCO Coal, Inc. — Virginia Region | | | | Richard S. Johnson | | William P. Stafford | President, The Wilton Companies | | President, Princeton Machinery Service, Inc. | | | | I. Norris Kantor | | March 11, 2011 | William P. Stafford, II | Of Counsel, Katz, Kantor & Perkins,
Attorneys at Law | | Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC | | | | John M. Mendez | | | President and Chief Executive Officer, First Community Bancshares, Inc.; Chief Executive Officer, First Community Bank, N. A. | | |
EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
| | | John M. Mendez
| | E. Stephen Lilly | President and Chief Executive Officer | | Chief Operating Officer | | | | David D. Brown | | Robert L. Buzzo | Chief Financial Officer | | Vice President and Secretary |
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BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.
| | | W. C. Blankenship, Jr.
| | I. Norris Kantor | Agent, State Farm Insurance | | Of Counsel, Katz, Kantor & Perkins,
Attorneys at Law | | | | D. L. Bowling, Jr. | | John M. Mende | President, Best Energy, Inc. | | President and Chief Executive Officer, First Community Bancshares, Inc.; Chief Executive Officer, First Community Bank, N. A. | | | | Juanita G. Bryan | | A. A. Modena | Homemaker | | Past Executive Vice President and Secretary, First Community Bancshares, Inc.; Past President and Chief Executive Officer, The Flat Top National Bank of Bluefield | | | | Robert L. Buzzo | | Robert E. Perkinson, Jr. | Vice President and Secretary, First Community Bancshares, Inc.; President, First Community Bank, N. A. | | Past Vice President-Operations, MAPCO Coal, Inc. — Virginia Region | | | | C. William Davis | | William P. Stafford | Attorney at Law, Richardson & Davis | | President, Princeton Machinery Service, Inc. | | | | T. Vernon Foster | | William P. Stafford, II | President of J. La’Verne Print Communications Past Director, TriStone Community Bank | | Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC | | | | Franklin P. Hall | | Frank C. Tinder | Businessman; Senior Partner, Hall & Hall Family Law Firm; Commissioner, Virginia Department of Alcoholic Beverage Control; Former Delegate, Virginia General Assembly | | President, Tinder Enterprises, Inc. and Tinco Leasing Corporation | | | | Allen T. Hamner, Ph.D. | | Dale F. Woody | Retired Professor of Chemistry, West Virginia Wesleyan College | | President, Woody Lumber Company | | | | Richard S. Johnson | | | President, The Wilton Companies | | |
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| | ITEM 11. | EXECUTIVE COMPENSATION. |
The information called for by Item 11 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Compensation Discussion and Analysis” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
| | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The required information concerning security ownership of certain beneficial owners and management has been omitted in accordance with General Instruction G. Such information appears under the heading of “Information on Stock Ownership” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
Equity Compensation Plan Information
Information regarding compensation plans under which the Company’s equity securities are authorized for issuance as of December 31, 2009 is included in the table which follows.
| | | | | | | | | | | | | | | Number of
| | | | | | Number of Securities
| | | | Securities to be
| | | | | | Remaining Available
| | | | Issued Upon
| | | Weighted-Average
| | | for Future Issuance
| | | | Exercise of
| | | Exercise Price of
| | | Under Equity
| | | | Outstanding
| | | Outstanding
| | | Compensation Plans
| | | | Options, Warrants
| | | Options, Warrants
| | | (Excluding Securities
| | Plan Category | | and Rights | | | and Rights | | | Reflected in Column (a)) | | | | (a) | | | (b) | | | (c) | | | Equity compensation plans approved by security holders | | | 56,625 | | | $ | 26.02 | | | | 85,343 | | Equity compensation plans not approved by security holders | | | 356,855 | | | $ | 22.05 | | | | 71,801 | | | | | | | | | | | | | | | Total | | | 413,480 | | | | | | | | 157,144 | | | | | | | | | | | | | | |
For additional information regarding equity compensation plans, see Note 10 — Employee Benefits of the Notes to Consolidated Financial Statements included in Item 8 hereof.
| | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information called for by Item 13 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Related Party Transactions” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
| | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The information called for by Item 14 has been omitted in accordance with General Instruction G. Such information will be set forth under the heading of “Independent Auditor” of the Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
| | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a) Documents Filed as Part of this Report
(1) Financial Statements
The Consolidated Financial Statements of First Community Bancshares, Inc. and subsidiaries together with the Independent Registered Public Accounting Firm’s Report dated March 2, 2010, are incorporated by reference from Item 8 hereof.
(2) Financial Statement Schedules
No financial statement schedules are being filed since the required information is inapplicable or is presented in the consolidated financial statements or related notes.
(b) Exhibits
| | | | | Exhibit No. | | Exhibit | | | 2 | .1 | | Reserved | | 2 | .2 | | Reserved | | 3 | (i) | | Articles of Incorporation of First Community Bancshares, Inc., as amended.(1) | | 3 | (ii) | | Certificate of Designation Series A Preferred Stock(22) | | 3 | (iii) | | Bylaws of First Community Bancshares, Inc., as amended.(17) | | 4 | .1 | | Specimen stock certificate of First Community Bancshares, Inc.(3) | | 4 | .2 | | Indenture Agreement dated September 25, 2003.(11) | | 4 | .3 | | Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003.(11) | | 4 | .4 | | Preferred Securities Guarantee Agreement dated September 25, 2003.(11) | | 4 | .5 | | Reserved | | 4 | .6 | | Warrant to purchase 176,546 shares of Common Stock of First Community Bancshares, Inc.(22) | | 10 | .1 | | First Community Bancshares, Inc. 1999 Stock Option Agreements(2) and Plan.(4) | | 10 | .1.1 | | Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan.(11) | | 10 | .2 | | First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan.(5) | | 10 | .3 | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and John M. Mendez.(6) | | 10 | .4 | | First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended.(24) | | 10 | .5 | | First Community Bancshares, Inc. Split Dollar Plan and Agreement.(2) | | 10 | .6 | | First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan.(2) | | 10 | .6.1 | | First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second Amendment (B.W. Harvey, Sr. — October 19, 2004).(14) | | 10 | .7 | | First Community Bancshares, Inc. Wrap Plan.(7) | | 10 | .8 | | Reserved | | 10 | .9 | | Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers.(9) | | 10 | .10 | | Form of Indemnification Agreement between First Community Bank, N. A, its Directors and Certain Executive Officers.(9) | | 10 | .11 | | Reserved | | 10 | .12 | | First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Award Agreement.(13) | | 10 | .13 | | Reserved | | 10 | .14 | | First Community Bancshares, Inc. Directors Deferred Compensation Plan.(7) | | 10 | .15 | | First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key Employees.(15) | | 10 | .16 | | Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald L. Campbell.(19) |
110
| | | | | Exhibit No. | | Exhibit | | | 10 | .17 | | Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc. and Shawn C. Cummings.(20) | | 10 | .18 | | Securities Purchase Agreement by and between the United States Department of the Treasury and First Community Bancshares, Inc. dated November 21, 2008.(22) | | 10 | .19 | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and David D. Brown.(23) | | 10 | .20 | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and Robert L. Buzzo.(26) | | 10 | .21 | | Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and E. Stephen Lilly.(26) | | 10 | .22 | | Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary R. Mills.(26) | | 10 | .23 | | Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Martyn A. Pell.(26) | | 10 | .24 | | Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Robert. L. Schumacher.(26) | | 10 | .25 | | Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson O. Brown.(25) | | 10 | .25 | | Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R. Evans.(25) | | 11 | | | Statement regarding computation of earnings per share.(16) | | 12 | * | | Computation of Ratios | | 21 | | | Subsidiaries of Registrant — Reference is made to “Item 1. Business” for the required information | | 23 | .1* | | Consent of Dixon Hughes PLLC, Independent Registered Public Accounting Firm for First Community Bancshares, Inc. | | 31 | .1* | | Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer | | 31 | .2* | | Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer | | 32 | * | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial Officer |
| | | * | | Furnished herewith. | | (1) | | Incorporated by reference from the Quarterly Report onForm 10-Q for the period ended June 30, 2005, filed on August 5, 2005. | | (2) | | Incorporated by reference from the Quarterly Report onForm 10-Q for the period ended June 30, 2002, filed on August 14, 2002. | | (3) | | Incorporated by reference from the Annual Report onForm 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003. | | (4) | | Incorporated by reference from the Annual Report onForm 10-K for the period ended December 31, 1999, filed on March 30, 2000, as amended April 13, 2000. | | (5) | | The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report onForm 10-Q for the period ended June 30, 2002, filed on August 14, 2002. | | (6) | | Incorporated by reference from Exhibit 10.1 of the Current Report onForm 8-K dated and filed December 16, 2008. The Registrant has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title and salary. | | (7) | | Incorporated by reference from the Current Report onForm 8-K dated August 22, 2006, and filed August 23, 2006. |
111
| | | (8) | | Reserved. | | (9) | | Form of indemnification agreement entered into by the Company and by First Community Bank, N. A. with their respective directors and certain officers of each including, for the Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by reference from the Annual Report onForm 10-K for the period ended December 31, 2003, filed on March 15, 2004, and amended on May 19, 2004. | | (10) | | Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 15, 2004. | | (11) | | Incorporated by reference from the Quarterly Report onForm 10-Q for the period ended September 30, 2003, filed on November 10, 2003. | | (12) | | Incorporated by reference from the Quarterly Report onForm 10-Q for the period ended March 31, 2004, filed on May 7, 2004. | | (13) | | Incorporated by reference from the Quarterly Report onForm 10-Q for the period ended June 30, 2004, filed on August 6, 2004. | | (14) | | Incorporated by reference from the Annual Report onForm 10-K for the period ended December 31, 2004, and filed on March 16, 2005. Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and Stafford II. | | (15) | | Incorporated by reference from the Current Report onForm 8-K dated October 24, 2006, and filed October 25, 2006. | | (16) | | Incorporated by reference from Footnote 1 of the Notes to Consolidated Financial Statements included herein. | | (17) | | Incorporated by reference from Exhibit 3.1 of the Current Report onForm 8-K dated February 14, 2008, filed on February 20, 2008. | | (18) | | Reserved | | (19) | | Incorporated by reference from Exhibit 2.1 of theForm S-3 registration statement filed May 2, 2007. | | (20) | | Incorporated by reference from the Annual Report onForm 10-K for the period ended December 31, 2007, filed on March 13, 2008. | | (21) | | Reserved. | | (22) | | Incorporated by reference from the Current Report onForm 8-K dated November 21, 2008, and filed November 24, 2008. | | (23) | | Incorporated by reference from Exhibit 10.2 of the Current Report onForm 8-K dated and filed December 16, 2008. | | (24) | | Incorporated by reference from Exhibit 10.1 of the Current Report onForm 8-K dated December 30, 2008, and filed January 5, 2009. | | (25) | | Incorporated by reference from Exhibit 2.2 of the Current Report onForm 8-K dated April 2, 2009 and filed April 3, 2009. | | (26) | | Incorporated by reference from the Current Report onForm 8-K dated and filed July 6, 2009. |
112
Pursuant to the requirements of Section 13 or 15(d) 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 4th day of March, 2010.
First Community Bancshares, Inc.
(Registrant)
John M. Mendez
President and Chief Executive Officer
(Principal Executive Officer)
David D. Brown
Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | Title
| | Date
|
|
| | | | |
/s/ John M. Mendez
John M. Mendez | | Director, President and
Chief Executive Officer | | March 4, 2010 |
| | | | |
/s/ David D. Brown
David D. Brown | | Chief Financial Officer | | March 4, 2010 |
| | | | |
/s/ Franklin P. Hall
Franklin P. Hall | | Director | | March 4, 2010 |
| | | | |
/s/ Allen T. Hamner
Allen T. Hamner | | Director | | March 4, 2010 |
| | | | |
/s/ Richard S. Johnson
Richard S. Johnson | | Director | | March 4, 2010 |
| | | | |
/s/ Robert E. Perkinson, Jr.
Robert E. Perkinson, Jr. | | Director | | March 4, 2010 |
| | | | |
/s/ William P. Stafford
William P. Stafford | | Chairman of the Board of Directors | | March 4, 2010 |
| | | | |
/s/ William P. Stafford, II
William P. Stafford, II | | Director | | March 4, 2010 |
113