FIRST COMMUNITY BANKSHARES, INC.

20182020 FORM 10-K

INDEX

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

The list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control.  Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control.  The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part I, Item 1A of this report.

PART I

General

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporatedreincorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The reincorporation was completed on October 2, 2018. The Company’s principal executive office is located at One Community Place,in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management. Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

We focus on building financial partnerships and creating enduring and completemutually beneficial relationships with businesses and individuals through a personal and local approach to banking and financial services. We strive to be the bank of choice in the markets we serve by offering impeccable service and a complete line of competitive products that include:

Our operations are guided by a strategic plan that focuses on organic growth supplemented by strategic acquisitions of complementary financial institutions. For a summary of our financial performance, see Item 6, “Selected Financial Data,” in Part II of this report.

Employees and Human Capital Resources

As of December 31, 2018,2020, we had 519605 full-time equivalentemployees and 30 part-time employees. OurThe employees are not represented by a collective bargaining agreementsunit and we consider employee relationsour relationship with our employees to be excellent.good.

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and customized corporate training engagements.

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations.  Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance and keeping increases in the employee portion of health care premiums as small as possible and sponsoring various wellness programs.

Employee retention helps us operate efficiently and achieve one of our business objectives, which is building financial partnerships. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our current 401(k) plan and a former employee stock ownership plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates.

Market Area

As of December 31, 2018,2020, we operated 4450 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment, Community Banking.  Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals and businesses across a variety of industries such as education,education; government and health services; retail trade; construction; manufacturing; tourism; coal mining and gas extraction; retail trade; construction; manufacturing; tourism; and transportation.

Competition

The financial services industry is highly competitive and constantly evolving. We encounter strong competition in attracting and retaining deposit, loan, and other financial relationships in our market areas. We compete with other commercial banks, thrifts, savings and loan associations, credit unions, consumer finance companies, mortgage banking firms, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies. We have positioned ourselves as a regional community bank that provides an alternative to larger banks, which often place less emphasis on personal relationships, and smaller community banks, which lack the capital and resources to efficiently serve customer needs. Factors that influence our ability to remain competitive include the ability to develop, maintain, and build long-term customer relationships; the quality, variety, and pricing of products and services; the convenience of banking locations and office hours; technological developments; and industry and general economic conditions. We seek to mitigate thesecompetitive pressures with our relationship style of banking, competitive pricing, cost efficiencies, and disciplined approach to loan underwriting.

Supervision and Regulation

Overview

We are subject to extensive examination, supervision, and regulation under applicable federal and state laws and various regulatory agencies. These regulations are intended to protect consumers, depositors, borrowers, deposit insurance funds, and the stability of the financial system and are not for the protection of stockholders or creditors.

Applicable laws and regulations restrict our permissible activities and investments and impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our banking subsidiary, and impose capital adequacy requirements on the Company and the Bank. The consequences of noncompliance with these laws and regulations can include substantial monetary and nonmonetary sanctions.

The following discussion summarizes significant laws and regulations applicable to the Company and the Bank. These summaries are not intended to be complete and are qualified in their entirety by reference to the applicable statute or regulation. Changes in laws and regulations may have a material effect on our business, financial condition, or results of operations.

First Community Bankshares, Inc.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (“BHC Act”) and a financial holding company under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”). The Company elected financial holding company status in December 2006. The Company and its subsidiaries are subject to supervision, regulation, and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The BHC Act generally provides for umbrella regulation of financial holding companies, such as the Company, by the Federal Reserve, as well as functional regulation of financial holding company subsidiaries by applicable regulatory agencies. The Federal Reserve is granted the authority, in certain circumstances, to require reports of, examine, and adopt rules applicable to any bank holding company subsidiary.

The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (“Exchange Act”), as administered by the Securities and Exchange Commission (“SEC”). The Company’s common stock is listed on the NASDAQ Global Select Market under the trading symbol FCBC and is subject to NASDAQ’s rules for listed companies.

First Community Bank

The Bank is a Virginia chartered bank and a member of the Federal Reserve subject to supervision, regulation, and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank (“FRB”) of Richmond. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”), and its deposits are insured by the FDIC to the extent provided by law. The regulations of these agencies govern most aspects of the Bank’s business, including requirements concerning the allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid on deposits, the payment of dividends, loans to affiliates, mergers and acquisitions, capital, and the establishment of branches. Various consumer and compliance laws and regulations also affect the Bank’s operations.

As a member bank, the Bank is required to hold stock in the FRB of Richmond in an amount equal to 6% of its capital stock and surplus (half paid to acquire the stock with the remainder held as a cash reserve). Member banks do not have any control over the Federal Reserve as a result of owning the stock and the stock cannot be sold or traded.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) of 2010 significantly restructured the U.S. financial regulatory regime. The Dodd-Frank Act is extensive, complicated, and comprehensive legislation that impacts practically all aspects of a banking organization, including the following provisions:

Many of the provisions of the Dodd-Frank Act and other laws are subject to further rulemaking, guidance, and interpretation by applicable federal regulators. We continue to evaluate the impact of any new regulations.

Permitted Activities under the BHC Act

The BHC Act limits the activities of bank holding companies, such as the Company, to the business of banking, managing or controlling banks and other activities the Federal Reserve determines to be closely related to banking. A bank holding company that elects treatment as a financial holding company under the GLB Act, such as the Company, may engage in a broader range of activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system. These activities include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve determines to be closely related to banking.

In order to maintain financial holding company status, the Company and the Bank must be well-capitalized and well-managed under applicable Federal Reserve regulations and have received at least a satisfactory rating under the Community Reinvestment Act (“CRA”). See “Prompt Corrective Action” and “Community Reinvestment Act” below. If we fail to meet these requirements, the Federal Reserve may impose corrective capital and managerial requirements and place limitations or conditions on our ability to conduct activities permissible for financial holding companies. If the deficiencies persist, the Federal Reserve may require the Company to divest the Bank or divest investments in companies engaged in activities permissible only for financial holding companies.

In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. The Company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, subject to certain exemptions, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.

The BHC Act requires that bank holding companies obtain the Federal Reserve’s approval before acquiring direct or indirect ownership or control of more than 5% of the voting shares or all, or substantially all, of the assets of a bank. The regulatory authorities are required to consider the financial and managerial resources and future prospects of the bank holding company and the target bank, the convenience and needs of the communities to be served, and various competitive factors when approving acquisitions. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless the Federal Reserve determines it to be closely related to banking.

Capital Requirements

We are subject to various regulatory capital requirements administered by the Federal Reserve. The current risk-based capital requirements are based on the December 2010 international capital standards of the Basel Committee on Banking Supervision (“Basel Committee”Reserve (the "Basel III Capital Rules"), known as Basel III..

On July 2, 2013, the Federal Reserve approved capital rules for U.S. banking organizations implementing Basel III (“Basel III Capital Rules”) and certain requirements of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. Basel III Capital Rules (1) introduced a new Common Equity Tier 1 (“CET1”) capital measure, (2) specified that Tier 1 capital consist of CET1 and additional Tier 1 capital instruments meeting specified requirements, (3) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (4) expanded the scope of the deductions/adjustments to capital as compared to prior regulations. The following initial minimum capital ratios became effective, subject to a phase-in period, for the Company and the Bank under Basel III Capital Rules on January 1, 2015:

Basel III Capital Rules introduced a capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer was implemented on January 1, 2016, at 0.625% and was phased in over a four-year period (increased an additional 0.625% each year until it reached 2.5% on January 1, 2019). Basel III Capital Rules also provide for a countercyclical capital buffer that applies to certain covered institutions; however, the buffer does not apply to the Company or the Bank. Banking institutions with a CET1 to risk-weighted assets ratio above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, if applicable) face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

WhenSince fully phased in on January 1, 2019, Basel III Capital Rules will require an additional capital conservation buffer of 2.5% of CET1, effectively resulting in the following minimum ratios:Company and the Bank to maintain the following:

Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the Company and the Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.

Basel III Capital Rules prevent certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The rules do not require a phase-out of trust preferred securities issued before May 19, 2010, for holding companies of depository institutions with less than $15 billion in consolidated total assets, as of December 1, 2009.

In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected credit losses (“CECL”) on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). 

Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

In August 2018, the Federal Reserve issued an interim final rule, which expanded the applicability of the Small Bank Holding Company Policy Statement through an increase in the size limitation for qualifying bank holding companies from $1 billion to $3 billion in total consolidated assets. As a result, the Company qualifies under the Small Bank Holding Company Policy Statement for exemption from the Federal Reserve’s consolidated risk-based capital requirements at the holding company level. Management believes that the Company and the Bank would meet all capital adequacy requirements under Basel III Capital Rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2018.2020.

Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories,Beginning in the aggregate, exceed 15%first quarter of CET1. Implementation2020, a qualifying community banking organization may elect to use the community bank leverage ratio (“CBLR”) framework to eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advance approaches banking organization. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the deductionsFDICIA. Temporary relief was provided to community banks under the Coronavirus Aid, Relief and other adjustmentsEconomic Security Act to CET1 began onset the community bank ratio to 8.00% beginning in the second quarter of 2020 and for the remainder of 2020, and to 8.50% effective January 1, 2015, at 40%2021, and were phased in over a four-year period (increasing an additional 20% each year until it reached 100% on9.00% effective January 1, 2018).

Basel III Capital Rules prevent certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The rules do not require a phase-out of trust preferred securities issued before May 19, 2010, for holding companies of depository institutions with less than $15 billion in consolidated total assets, as of December 1, 2009.

Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50%2022.  A qualifying community banking organization may opt into and 100%) to a larger and more risk-sensitive number of categories, depending on the natureout of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.CBLR framework by completing the associated reporting requirements on its call report.

Prompt Corrective Action

The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if the appropriate federal regulators determine that it is engaging in an unsafe or unsound practice or is in an unsafe or unsound condition. A bank’s capital category is determined solely for applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s financial condition or prospects for other purposes.

The Bank was classified as well-capitalized under prompt corrective action regulations as of December 31, 2018.2020. In order to be considered a well-capitalized institution under Basel III Capital Rules, an organization must not be subject to any written agreement, order, capital directive, or prompt corrective action directive and must maintain the following minimum capital ratios:

Undercapitalized institutions are required to submit a capital restoration plan to federal banking regulators. Under the Federal Deposit Insurance Act, as amended (“FDIA”), in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must provide appropriate assurances of performance and guarantee that its subsidiary bank will comply with its capital restoration plan, subject to certain limitations. Agency regulations contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, establishing branches, and engaging in new lines of business. With certain exceptions, a depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to its parent holding company if the institution would be undercapitalized after such distribution or payment.

A significantly undercapitalized institution is subject to various requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and ending deposits from correspondent banks. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator.

Safety and Soundness Standards

Guidelines adopted by federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage risks and exposures. If an institution fails to meet safety and soundness standards, the regulatory agencies may require the institution to submit a written compliance plan describing the steps they would take to correct the situation and the time that such steps would be taken. If an institution fails to submit or implement an acceptable compliance plan, after being notified, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions, such as those applicable to undercapitalized institutions under the prompt corrective action provisions of the FDIA. An institution may be subject to judicial proceedings and civil money penalties if it fails to follow such an order.

Payment of Dividends

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company’s principal source of cash flow is derived from dividends paid by the Bank. There are various restrictions by regulatory agencies related to dividends paid by the Bank to the Company and dividends paid by the Company to its shareholders. The payment of dividends by the Company and the Bank may be limited by certain factors, such as requirements to maintain capital above regulatory guideline minimums.

Prior FRB approval is required for the Bank to declare or pay a dividend to the Company if the total of all dividends declared in any given year exceed the total of the Bank’s net profits for that year and its retained profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock. Dividends paid by the Company to shareholders are subject to oversight by the Federal Reserve. Federal Reserve policy states that bank holding companies generally should pay dividends on common stock only from income available over the past year if prospective earnings retention is consistent with the organization’s expected future needs, asset quality, and financial condition.

Regulatory agencies have the authority to limit or prohibit the Company and the Bank from paying dividends if the payments are deemed to constitute an unsafe or unsound practice. The appropriate regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only from current operating earnings. In addition, the Bank may not declare or pay a dividend if, after paying the dividend, the Bank would be classified as undercapitalized. In the current financial and economic environment, the FRB has discouraged payout ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that bank holding companies should carefully review their dividend policy. Bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries.

Source of Strength

Federal Reserve policy and federal law requires the Company to act as a source of financial and managerial strength to the Bank. Under this requirement, the Company is expected to commit resources to support the Bank even when it may not be in a financial position to provide such resources. Because the Company is a legal entity separate and distinct from its subsidiaries, any capital loans it makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Transactions with Affiliates

The Federal Reserve Act (“FRA”) and Federal Reserve Regulation W place restrictions on “covered transactions” between the Bank and its affiliates, including the Company. The term “covered transactions” includes making loans, purchasing assets, issuing guarantees, and other similar transactions. The Dodd-Frank Act expanded the definition of “covered transactions” to include derivative activities, repurchase agreements, and securities lending or borrowing activities. These restrictions limit the amount of transactions with affiliates, require certain levels of collateral for loans to affiliates, and require that all transactions with affiliates be on terms that are consistent with safe and sound banking practices. In addition, these transactions must be on terms that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for similar transactions with non-affiliates.

The FRA and Federal Reserve Regulation O place restrictions on loans between the Company and the Bank and their directors, executive officers, principal shareholders, affiliates, and interests of those directors, executive officers, and principal shareholders. These restrictions limit the amount of loans to one borrower and require that loans are on terms that are substantially the same as, and follow underwriting procedures that are not less stringent than, those prevailing at the time for similar loans with non-insiders. In addition, the aggregate limit of loans to all insiders, as a group, cannot exceed the Bank’s total unimpaired capital and surplus.

Deposit Insurance and Assessments

Substantially all of the Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to quarterly deposit insurance assessments to maintain the DIF. Deposit insurance premiums are assessed using a risk-based system that places FDIC-insured institutions into one of four risk categories based on capital, supervisory ratings and other factors. The assessment rate determined by considering such information is then applied to the institution's average assets minus average tangible equity to determine the institution's insurance premium. The FDIC may change assessment rates or revise its risk-based assessment system if deemed necessary to maintain an adequate reserve ratio for the DIF. The Dodd-Frank Act required that the minimum reserve ratio for the DIF increase from 1.15% to 1.35% by September 30, 2020. Under the FDIA, the FDIC may terminate deposit insurance if it determines that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The Bank’s FDIC deposit insurance assessments were $426 thousand in 2020, $318 thousand in 2019, and $840 thousand in 2018. The decrease in FDIC assessments in 2019 and 2020 were primarily the result of the receipt of Small Bank Assessment Credits from the FDIC.  On September 30, 2018, $797 thousandthe Deposit Insurance Fund Reserve Ratio reached 1.36 percent.  Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations.  Surcharges on large banks, $10 billion or more in 2017,consolidated assets, ended; and $1.25 millionsmall banks, less than $10 billion in 2016.consolidated assets, were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ration from 1.15 percent to 1.35 percent.  The credit was applied when the reserve ratio was at least 1.38 percent.  The Small Bank Credit was fully utilized by the second quarter of 2020.

In addition, all FDIC-insured institutions mustwere required to pay annual assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”). through March 29, 2019. The FICO is a mixed-ownership government corporation that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The Bank’s FICO assessments, which arewere set quarterly, were $6 thousand in 2019, and $66 thousand in 2018, $113 thousand in 2017, and $124 thousand in 2016.2018.

The Volcker Rule

The Dodd-Frank Act amended the BHC Act to prohibit depository institutions and their affiliates from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with hedge funds or private equity funds, known as the Volcker Rule. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions. The Volcker Rule, which became effective on April 1, 2014, butin July 2015 and the Federal Reserve extended the conformance period for certain requirementsimplementing regulations of which were amended in 2019 and were subject to July 21, 2017. Upon application of a banking entity, the Federal Reserve may provide an additional transition period of up to 5 years to conform investmentsfurther amendment in a limited class of legacy illiquid funds. The Volcker Rule has2020, does not had a material effect onsignificantly impact the operations of the Company and its subsidiaries, as the Company doeswe do not engagehave any engagement in the businesses prohibited by the Volcker Rule. The Company may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not expected to be material.

Community Reinvestment Act

The CRA of 1977, as amended, requires depository institutions to help meet the credit needs of their market areas, including low- and moderate-income individuals and communities, consistent with safe and sound banking practices. Federal banking regulators periodically examine depository institutions and assign ratings based on CRA compliance. A rating of less than satisfactory may restrict certain operating activities, delay or deny certain transactions, or result in an institution losing its financial holding company status. The Bank received a rating of satisfactory in its most recent CRA examination.

In December 2019, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the Federal Reserve Board did not join in that proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA rule. In September 2020, the Federal Reserve Board issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invites public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA. The ANPR seeks feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.

Incentive Compensation

Federal regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance is based on the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that do not encourage risk-takingrisk taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Federal banking regulators periodically examine the incentive compensation arrangements of banking organizations and incorporate any deficiencies in the organization’s supervisory ratings, which can affect certain operating activities. The FRB may initiate enforcement actions if the organization’s incentive compensation arrangements or related risk management, control, or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop. It cannot be determined at this time if or when a final rule will be adopted or if compliance with such a final rule will adversely affect the ability of the Company and its subsidiaries to hire, retain and motivate their key employees.

Anti-Tying Restrictions

The Bank and its affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company.

Consumer Protection and Privacy

We are subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include the Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collections Act, the Right to Financial Privacy Act, the Fair Housing Act, and various state law counterparts. These laws and regulations contain extensive customer privacy protection provisions that limit the ability of financial institutions to disclose non-public information about consumers to non-affiliated third parties and require financial institutions to disclose certain policies to consumers.

The CFPBConsumer Financial Protection Bureau (“CFPB”) is a federal agency with broad authority to implement, examine, and enforce compliance with federal consumer protection laws that relate to credit card, deposit, mortgage, and other consumer financial products and services. The CFPB may enforce actions to prevent and remedy unfair, deceptive, or abusive acts and practices related to consumer financial products and services. The agency has authority to impose new disclosure requirements for any consumer financial product or service. The CFPB may impose a civil penalty or injunction against an entity in violation of federal consumer financial laws. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.   As a bank with less than $10 billion in assets, the Bank is subject to these federal consumer financial laws, but continues to be examined for compliance by the Federal Reserve, its primary federal banking regulator, not the CFPB.

Cybersecurity

In March 2015, federal regulators issued two related statements about cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution’s operations after a cyber-attackcyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack.cyberattack. If the Bank fails to observe the regulatory guidance, the Bank could be subject to various regulatory sanctions, including financial penalties.

Bank Secrecy Act and Anti-Money Laundering

The Bank is subject to the requirements of the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA PATRIOT Act”) of 2001. The USA PATRIOT Act broadened existing anti-money laundering legislation by imposing new compliance and due diligence obligations focused on detecting and reporting money laundering transactions. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of our customers. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

O

Officeffice of Foreign Assets Control Regulation

The U.S. Department of the Treasury’s (“Treasury”) Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals, and others. OFAC publishes lists of specially designated targets and countries. We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them, and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences, including causing applicable bank regulatory authorities to not approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act (“SOX Act”) of 2002 addresses a broad range of corporate governance, auditing and accounting, executive compensation, and disclosure requirements for public companies and their directors and officers. The SOX Act requires our Chief Executive Officer and Chief Financial Officer to certify the accuracy of certain information included in our quarterly and annual reports. The rules require these officers to certify that they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of our financial reporting and disclosure controls and procedures; that they have made certain disclosures to the auditors and to the Audit Committee of the Board of Directors about our controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Section 404 of the SOX Act requires management to undertake an assessment of the adequacy and effectiveness of our internal controls over financial reporting and requires our auditors to attest to and report on the effectiveness of these controls.

Available Information

We file annual, quarterly, and current reports; proxy statements; and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s website at www.sec.gov that contains reports, proxy and information statements, and other information that issuers file electronically with the SEC. We maintain a website at www.firstcommunitybank.com that makes available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any amendments to those reports as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. You are encouraged to access these reports and other information about our business from the Investor Relations section of our website. The Investor Relations section contains information about our Board of Directors, executive officers, and corporate governance policies and principles, which include the charters of the standing committees of the Board of Directors, the Insider Trading Policy, and the Standards of Conduct governing our directors, officers, and employees. Information on our website is not incorporated by reference in this report.

The risk factors described below discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included, or incorporated by reference, in this report before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be an exhaustive list of all risks we face.

Risks Related to the Economic Environment

The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have branches and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.

The ultimate effects of the COVID-19 pandemic on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. This may include, or exacerbate, among other consequences, the following:

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.

The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.

Risks Related to Our Business

The current economic environment poses significant challenges.

Our financial performance is generally highly dependent on the business environment in the markets we operate in and of the U.S. as a whole, which includes the ability of borrowers to pay interest, repay principal on outstanding loans, the value of collateral securing those loans, and demand for loans and other products and services we offer. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, and investor or business confidence; limitations on the availability, or increases, in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.

In recent years, economic growth and business activity across a wide range of industries has been slow and uneven. There are continuing concerns related to the level of U.S. government debt, fiscal actions that may be taken to address that debt, energy price volatility, global economic conditions, and significant uncertainty with respect to domestic and international fiscal and monetary policy. Economic pressure on consumers and uncertainty about continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. There can be no assurance that these conditions will improve or that these conditions will not worsen. Such conditions could adversely affect the credit quality of the Bank’s loans and the Company’s business, financial condition, and results of operations.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020 and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.  Through December 31, 2020 $3.94 million, or 6.46%, of the Company’s Paycheck Protection Program loan balances had been forgiven by the SBA.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both customers and non-customers who approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, the Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that the Bank would have otherwise extended credit.  Rules providing for forgiveness have been constantly evolving, including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.

Regulatory Risks

We operate in a highly regulated industry subject to examination, supervision, enforcement, and other legal actions by various federal and state governmental authorities, laws, and judicial and administrative decisions.

Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these statutes, regulations, and regulatory policies, including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial services and products offered, or allow non-banks to offer competing financial services and products. Failure to follow laws, regulations, and policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of operations.

The Bank’s ability to pay dividends is subject to regulatory limitations that may affect the Company’s ability to pay expenses and dividends to shareholders.

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity, and the payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank’s dividend payment is governed by various statutes and regulations. For additional information, see “Payment of Dividends” in Item 1 of this report. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, including our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.

We face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to our offerings.

Our larger competitors may have substantially greater resources and lending limits, name recognition, and market presence that allow them to offer products and services that we do not offer and to price loans and deposits more aggressively than we do. The expansion of non-bank competitors, which may have fewer regulatory constraints and lower cost structures, has intensified competitive pressures on core deposit generation and retention. For additional information, see “Competition” in Item 1 of this report. Our success depends, in part, on our ability to attract and retain customers by adapting our products and services to evolving customer needs and industry and economic conditions. Failure to perform in any of these areas could weaken our competitive position, reduce deposits and loan originations, and adversely affect our financial condition, results of operations, cash flows, and prospects.

Interest rate risk results principally when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in monetary policy and interest rates could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings. Further, such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income and earnings could be adversely affected. Conversely, if interest rates received on loans and other investments fall more quickly than interest rates paid on deposits and other borrowings, our net interest income and earnings could also be adversely affected.

Uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR” the benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans), announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. Subsequently, the Federal Reserve Board announced final plans for the production of the Secured Overnight Financing Rate (SOFR), which resulted in the commencement of its published rates by the Federal Reserve Bank of New York on April 3, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.  It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.  At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally.  Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings.  If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results of operations.  On November 30, 2020, ICE Benchmark Administration Limited, the administrator of LIBOR, announced that it will consult on its intention to cease the publication of the one week and two month LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023. The outcome of such consultation and its impact on LIBOR could materially affect the economics as well as the timing of the transition away from LIBOR. 

Changes in the fair value of our investment securities may reduce stockholders’ equity and net income.

A decline in the estimated fair value of the investment portfolio may result in a decline in stockholders’ equity, book value per common share, and tangible book value per common share. Unrealized losses are recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security’s maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time. We conduct quarterly reviews of our securities portfolio to determine if unrealized losses are temporary or other than temporary. No assurance can be given that we will not need to recognize other-than-temporary impairment (“OTTI”) charges in the future. Additional OTTI charges may materially affect our financial condition and earnings. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and net interest margin will decrease if we offer interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of operations.

Credit Risk

Our accounting estimates and risk management processes rely on analytical and forecasting models.

The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset/liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining probable loan losses are inadequate, the allowance for loan losses may not be sufficient to cover actual loan losses and an increase in the loan loss provision could materially and adversely affect our operating results. Federal regulatory agencies regularly review our loans and allowance for loan losses as an integral part of the examination process. There is no assurance that we will not, or that regulators will not require us to, increase our allowance in future periods, which could materially and adversely affect our earnings and profitability. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon the sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition, and results of operations. For additional information, see “Fair"Fair Value Measurements”Measurements" and “Allowance"Allowance for Loan Losses”Losses" in the “Critical"Critical Accounting Policies”Policies" section in Part II, Item 7 and Note 1, “Basis"Basis of Presentation and Accounting Policies,”" to the Consolidated Financial Statements in Part II, Item 8 of this report.

Changes in the fair value of our investment securities may reduce stockholders’ equity and net income.

A decline in the estimated fair value of the investment portfolio may result in a decline in stockholders’ equity, book value per common share, and tangible book value per common share. Unrealized losses are recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security’s maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time. We conduct quarterly reviews of our securities portfolio to determine if unrealized losses are temporary or other than temporary. No assurance can be given that we will not need to recognize other-than-temporary impairment (“OTTI”) charges in the future. Additional OTTI charges may materially affect our financial condition and earnings. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

We are subject to credit risk associated with the financial condition of other financial institutions.institutions

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Financial institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may increase if the collateral we hold cannot be realized or liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our financial condition and results of operations.

Our commercial loan portfolio may expose us to increased credit risk.

Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer loans and repayment is usually dependent on cash flows from the borrower’s business or the property securing the loan. Our commercial business loans are primarily made to small business and middle market customers. As of December 31, 2018,2020, commercial business and real estate loans totaled $994 million, $1.11 billion, or 55.97%50.84%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $8.81 millionwas $5.72 million and largest outstanding commercial real estate loan was $10.60 million. $9.73 million. Commercial construction loans generally have a higher risk of loss due to the assumptions used to estimate the value of property at completion and the cost of the project, including interest. If the assumptions and estimates are inaccurate, the value of completed property may fall below the related loan amount. As of December 31, 2018,2020, commercial construction loans totaled $64 $44.65 million, or 3.58% of 2.04% of our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $8.25 million. $4.51 million. Losses from our commercial loan portfolio could have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities.Operational Risks

A significant portionWe face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to our offerings.

Our larger competitors may have substantially greater resources and lending limits, name recognition, and market presence that allow them to offer products and services that we do not offer and to price loans and deposits more aggressively than we do. The expansion of our loan portfolio is secured by real property. In the ordinary coursenon-bank competitors, which may have fewer regulatory constraints and lower cost structures, has intensified competitive pressures on core deposit generation and retention. For additional information, see "Competition" in Item 1 of business, we foreclosethis report. Our success depends, in part, on and take title to properties that secure certain loans. Hazardous or toxic substances could be found on properties we own. If substances are present, we may be liable for remediation costs, personal injury claims, and property damage and our ability to useattract and retain customers by adapting our products and services to evolving customer needs and industry and economic conditions. Failure to perform in any of these areas could weaken our competitive position, reduce deposits and loan originations, and adversely affect our financial condition, results of operations, cash flows, and prospects.

Liquidity risk could impair our ability to fund operations.

Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or sell the property would be limited. We have policies and procedures in place that require environmental reviews before initiating foreclosure actions on real property; however, these reviews may not detect all potential environmental hazards. Environmental laws that require us to incur substantial remediation costs, which could materially reduce the affected property’s value, and other liabilities associated with environmental hazardssources could have a materialmaterially adverse effect on our liquidity. Company specific factors such as a decline in our credit rating, an increase in the cost of capital from financial condition and results of operations.capital markets, a decrease in business activity due to adverse regulatory action or other company specific event, or a decrease in depositor or investor confidence may impair our access to funding with acceptable terms adequate to finance our activities. General factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a decrease in business activity due to political or environmental events may impair our access to liquidity.

Potential acquisitionsWe may disrupt require additional capital in the future that may not be available when needed.our business and dilute stockholder value.

We may seek mergerneed to raise additional capital to strengthen our capital position, increase our liquidity, satisfy obligations, or acquisition partners thatpursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are culturally similar, have experienced management,outside our control, and possess either significantour financial performance. Certain economic conditions and declining market presence or the potential for improved profitability through financial management, economiesconfidence may increase our cost of scale, or expanded services. Risks inherent in acquiring other banks, businesses,funds and banking branches may include the following:

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactionscapital, such as borrowings with other financial institutions, repurchase agreements, and financial services companies. Asavailability under the FRB’s Discount Window. Events that limit access to capital markets and the inability to obtain capital may have a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over the acquired company’s book and market values; therefore, dilution ofmaterially adverse effect on our tangible book value and net income per common share may occur. If we are unable to realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, ourbusiness, financial condition, and results of operations, mayand market value of common stock. We cannot provide any assurance that additional capital will be adversely affected.

Attractive acquisition opportunities may not be available, on acceptable terms or at all, in the future.

We expect banking and financial companies, which may have significantly greater resources, to compete for the acquisition of financial service businesses. This competition could increase the price of potential acquisitions that we believe are attractive. If we fail to receive proper regulatory approval, we will not be able to consummate an acquisition. Our regulators consider our capital, liquidity, profitability, regulatory compliance, level of goodwill and intangible assets, and other factors when considering acquisition and expansion proposals. Future acquisitions may be dilutive to our earnings and equity per share of our common stock.

We test goodwill for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a quantitative or qualitative assessment. If we determine that the carrying amount of a reporting unit is greater than its fair value, a goodwill impairment charge is recognized for the difference, but limited to the amount of goodwill allocated to that reporting unit. Unfavorable or uncertain economic and market conditions may trigger additional impairment charges that may cause an adverse effect on our earnings and financial position. For additional information, see “Goodwill and Other Intangible Assets” in the “Critical Accounting Policies” section in Part II, Item 7 and Note 1, “Basis of Presentation and Accounting Policies,” and Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

We are subject to certain obligations under FDIC loss share agreements that specify how to manage, service, report, and request reimbursement for losses incurred on covered assets.

Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and interpretation, and contractual term limitations. Our obligations under loss share agreements are extensive, and failure to follow any obligations could result in a specific asset, or group of assets, losing loss share coverage. Reimbursement requests are subject to FDIC review and may be delayed or disallowed if we do not comply with our obligations. Losses projected to occur during the loss share term may not be realized until after the expiration of the applicable agreement; consequently, those losses may have a material adverse impact on our results of operations. Our current loss estimates only include those projected to occur during the loss share period and for which we expect reimbursement from the FDIC at the applicable reimbursement rate. We are subject to FDIC audits to ensure compliance with the loss share agreements. The loss share agreements are subject to interpretation by the FDIC and us; therefore, disagreements about the coverage of losses, expenses, and contingencies may arise. The realization of benefits to be received from the FDIC ultimately depends on the performance of the underlying covered assets, the passage of time, claims paid by the FDIC, and interpretation; therefore, the amount received could differ materially from the carrying value of expected reimbursements and have a material effect on our financial condition and results of operations. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 7, “FDIC Indemnification Asset,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

We may be required to pay higher FDIC insurance premiums or special assessments.

Our deposits are insured up to applicable limits by the DIF of the FDIC and we are subject to deposit insurance assessments to maintain the DIF. For additional information, see “Deposit Insurance and Assessments” in Item 1 of this report. We are unable to predict future insurance assessment rates; however, deterioration in our risk-based capital ratios or adjustments to base assessment rates may result in higher insurance premiums or special assessments. The deterioration of banking and economic conditions and financial institution failures deplete the FDIC’s DIF and reduce the ratio of reserves to insured deposits. If the DIF is unable to meet funding requirements, increases in deposit insurance premium rates or special assessments may be required. Future assessments, increases, or required prepayments related to FDIC insurance premiums may negatively affect our financial condition and results of operations.

The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and net interest margin will decrease if we offer interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of operations.

We may lose members of our management team and have difficulty attracting skilled personnel.

Our success depends, in large part, on our ability to attract and retain key employees. Competition for the best people can be intense. The unexpected loss of key personnel could have a material adverse impact on our business due to the loss of certain skills, market knowledge, and industry experience and the difficulty of promptly finding qualified replacement personnel. Certain existing and proposed regulatory guidance on compensation may also negatively affect our ability to retain and attract skilled personnel.

Ourinternal controls and procedures may fail or be circumvented.

We review our internal controls over financial reporting quarterly and enhance controls in response to these assessments, internal and external audit, and regulatory recommendations. A control system, no matter how well conceived and operated, includes certain assumptions and can only provide reasonable assurance that the objectives of the control system are met. These controls may be circumvented by individual acts, collusion, or management override. Any failure or circumvention related to our controls and procedures or failure to follow regulations related to controls and procedures could have a material adverse effect on our business, reputation, results of operations, and financial condition.

We continue to encounter technological change and are subject to information security risks associated with technology.

The financial services industry continues to experience rapid technological change with the introduction of new, and increasingly complex, technology-driven products and services. The effective use of technology increases operational efficiency that enables financial service institutions to reduce costs. Our future success depends, in part, on our ability to provide products and services that satisfactorily meet the financial needs of our customers, as well as to realize additional efficiencies in our operations. We may fail to use technology-driven products and services effectively to better serve our customers and increase operational efficiency or sufficiently invest in technology solutions and upgrades to ensure systems are operating properly. Further, many of our competitors have substantially greater resources to invest in technology, which may adversely affect our ability to compete.

We rely on electronic communications and information systems, including those provided by third-party vendors, to conduct our business operations. Our security risks increase as our reliance on technology increases; consequently, the expectation to safeguard information by monitoring systems for potential failures, disruptions, and breakdowns has also increased. Risks associated with technology include security breaches, operational failures and service interruptions, and reputational damages. These risks also apply to our third-party service providers. Our third-party vendors include large entities with significant market presence in their respective fields; therefore, their services could be difficult to replace quickly if there are operational failures or service interruptions.

We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and retention of confidential financial and client information. We may be vulnerable to security breaches, such as employee error, cyber-attacks,cyberattacks, and viruses, beyond our control. In addition to security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-party vendor disruptions may cause operational failures and service interruptions to our communication and information systems. Further, our systems may be temporarily disrupted during implementation or upgrade. Security breaches and service interruptions related to our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.

Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information, or to introduce viruses or other malware through "Trojan horse" programs to our information systems and/or our customers' computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology, and customer and employee education, such cyber-attackscyberattacks against us or our merchants and our third-party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber-crimecybercrime are complex and continue to evolve. More generally, publicized information about security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.

While we have not experienced a significant compromise, significant data loss, or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber-attackscyberattacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third-party vendors, including as a result of cyber-attacks,cyberattacks, could (1) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of our customers; (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (3) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose us to civil litigation, governmental fines and possible financial liability; (4) require significant management attention and resources to remedy the damages that result; or (5) harm our reputation or cause a decrease in the number of customers who choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to claims and litigation pertaining to intellectual property.

Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support the Company’s day-to-day operations. Technology companies often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions often seek injunctions and substantial damages.

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the Company’s operations, and distracting to management. If the Company is found to have infringed on one or more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third party. In certain cases, the Company may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial condition, and results of operations.

Risks Related to Our Common Stock

The market price of our common stock may be volatile.

Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. Our common stock price may fluctuate significantly due to a variety of factors that include the following:

General market fluctuations; industry factors; political conditions; and general economic conditions and events, such as economic slowdowns, recessions, interest rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.

The trading volume in our common stock is less than that of other larger financial services companies.

Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock or the expectation of these sales could cause our stock price to fall.

We may not continue to pay dividends on our common stock in the future.

Our common stockholders are only entitled to receive dividends when declared by our Board of Directors from funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so, and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. As a financial holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve about capital adequacy and dividends. For additional information, see “Payment of Dividends” in Item 1 of this report.

General Risks

We may require additional capital in the future that may not be available when needed.

We may need to raise additional capital to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB's Discount Window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital will be available, on acceptable terms or at all, in the future.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. In the ordinary course of business, we foreclose on and take title to properties that secure certain loans. Hazardous or toxic substances could be found on properties we own. If substances are present, we may be liable for remediation costs, personal injury claims, and property damage and our ability to use or sell the property would be limited. We have policies and procedures in place that require environmental reviews before initiating foreclosure actions on real property; however, these reviews may not detect all potential environmental hazards. Environmental laws that require us to incur substantial remediation costs, which could materially reduce the affected property’s value, and other liabilities associated with environmental hazards could have a material adverse effect on our financial condition and results of operations.

Potential acquisitions may disrupt our business and dilute stockholder value.

We may seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or the potential for improved profitability through financial management, economies of scale, or expanded services. Risks inherent in acquiring other banks, businesses, and banking branches may include the following:

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over the acquired company’s book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of operations may be adversely affected.

Attractive acquisition opportunities may not be available in the future.

We expect banking and financial companies, which may have significantly greater resources, to compete for the acquisition of financial service businesses. This competition could increase the price of potential acquisitions that we believe are attractive. If we fail to receive proper regulatory approval, we will not be able to consummate an acquisition. Our regulators consider our capital, liquidity, profitability, regulatory compliance, level of goodwill and intangible assets, and other factors when considering acquisition and expansion proposals. Future acquisitions may be dilutive to our earnings and equity per share of our common stock.

We may lose members of our management team and have difficulty attracting skilled personnel.

Our success depends, in large part, on our ability to attract and retain key employees. Competition for the best people can be intense. The unexpected loss of key personnel could have a material adverse impact on our business due to the loss of certain skills, market knowledge, and industry experience and the difficulty of promptly finding qualified replacement personnel. Certain existing and proposed regulatory guidance on compensation may also negatively affect our ability to retain and attract skilled personnel.

Our internal controls and procedures may fail or be circumvented.

We review our internal controls over financial reporting quarterly and enhance controls in response to these assessments, internal and external audit, and regulatory recommendations. A control system, no matter how well conceived and operated, includes certain assumptions and can only provide reasonable assurance that the objectives of the control system are met. These controls may be circumvented by individual acts, collusion, or management override. Any failure or circumvention related to our controls and procedures or failure to follow regulations related to controls and procedures could have a material adverse effect on our business, reputation, results of operations, and financial condition.

None.

We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2018,2020, the Bank provided financial services through a network of 4450 branch locations in West Virginia (18 branches), Virginia (19(23 branches), North Carolina (5(7 branches), and Tennessee (2 branches). We own 4249 of those branches and lease the remaining 2 branches. We also own our wealth management office and call center location.branch.  As of December 31, 2018,2020, there were no mortgages or liens against any properties. We believe that our properties are suitable and adequate to serve as financial services facilities. A list of all branch and ATM locations is available on our website at www.firstcommunitybank.com. Information contained on our website is not part of this report. For additional information, see Note 8, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

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

None.

PART II

Market Information and Holders

Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of February 26, 2019,March 02, 2021, there were 2,222 2,900 record holders and 15,799,187 outstanding17,641,124 outstanding shares of our common stock.

Purchases of Equity Securities

We repurchased 1,060,312734,653 shares of our common stock in 2018, 50,1182020, 487,400 shares of our common stock in 2017,2019, and 1,182,2941,060,312 shares in 2016.2018.

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

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of a Publicly Announced Plan				Maximum Number of Shares that May Yet be Purchased Under the Plan(1)
October 1-31, 2018			124,078			$	33.76				124,078				1,484,645
November 1-30, 2018			137,248				34.42				137,248				1,347,397
December 1-31, 2018			128,970				32.62				128,970				1,218,427
Total			390,296			$	33.62				390,296

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of a Publicly Announced Plan

Maximum Number of Shares that May Yet be Purchased Under the Plan(1)

October 1-31, 2020

—

$

—

—

—

November 1-30, 2020

—

—

—

—

December 1-31, 2020

—

—

—

—

Total

—

$

—

—

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(1)

On June 27, 2018, ourIn the first quarter of 2020, the Company exhausted its 6,600,000 shares repurchase authorization.  As a result of the uncertainty associated with the COVID-19 pandemic; the Company elected not to repurchase shares during the remainder of 2020.  In February 2021, the Board of Directors increased the number ofapproved a new 2,400,000 shares authorized under the stock repurchase plan by 1,600,000 shares. Our stock repurchase plan, as amended, authorizes the purchase of up to 6,600,000 shares. The plan has no expiration date and is currently in effect. No determination has been made to terminate the plan or to cease making purchases.authorization.

 

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Stock Performance Graph

 

The following graph, compiled by S&P Global Market Intelligence (“S&P Global”), compares the cumulative total shareholder return on our common stock for the five years ended December 31, 2018,2020, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and S&P Global’s Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 4142 bank holding companies with total assets between $1 billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink sheets. The cumulative returns assume that $100 was originally invested on December 31, 2013,2014, and that all dividends are reinvested.

 

 

			Year Ended December 31,
			2013				2014				2015				2016				2017				2018
First Community Bankshares, Inc.				100.00				101.92				118.89				197.95				193.35				220.75
S&P 500 Index				100.00				113.69				115.26				129.05				157.22				150.33
NASDAQ Composite Index				100.00				114.75				122.74				133.62				173.22				168.30
S&P Global Asset & Regional Peer Group(1)				100.00				107.74				122.17				163.81				184.85				171.68

 

		Year Ended December 31,
		2015				2016				2017				2018				2019				2020
First Community Bankshares, Inc.			100.00				166.50				162.63				185.68				188.32				137.10
S&P 500 Index			100.00				111.96				136.40				130.42				171.49				203.04
NASDAQ Composite Index			100.00				108.87				141.13				137.12				187.44				271.64
S&P Global Asset & Regional Peer Group(1)			100.00				134.61				152.15				142.04				167.21				132.04

(1) Includes the following institutions: Access National Corporation; American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; Burke & Herbert Bank & Trust Company; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carolina Financial Corporation; Carter Bank & Trust; City Holding Company; CNB Corporation; Colony Bankcorp, Inc.; Community Bankers Trust Corporation; Entegra Financial Corp.; Fidelity Southern Corporation; First Bancshares, Inc.; First Citizens Bancshares, Inc.; First Community Bankshares, Inc.; First Community Corporation; First Farmers and Merchants Corporation; FVCBankcorp, Inc.; HomeTrust Bancshares, Inc.; Live Oak Bancshares, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; MVB Financial Corp.; National Bankshares, Inc.; National Commerce Corporation; Old Point Financial Corporation; Peoples Bancorp of North Carolina, Inc.; Premier Financial Bancorp, Inc.; Reliant Bancorp, Inc.; Select Bancorp, Inc.; SmartFinancial, Inc.; Southern BancShares (N.C.), Inc.; Southern First Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.; Summit Financial Group, Inc.; TGR Financial, Inc.; Three Shores Bancorporation, Inc.; and Wilson Bank Holding Co.

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(1) Includes the following institutions: American National Bankshares Inc.; Atlantic Capital Bancshares, Inc.; BankFirst Capital Corporation; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carter Bankshares, Inc.; Chesapeake Financial Shares, Inc.; Citizens Holding Company; CoastalSouth Bancshares, Inc.; Colony Bankcorp, Inc.; Community Bankers Trust Corporation; Eagle Financial Services, Inc.; F&M Bank Corp.; FineMark Holdings, Inc.; First Community Bankshares, Inc.; First Community Corporation; First Home Bancorp, Inc.; FVCBankcorp, Inc.; GrandSouth Bancorporation; Heritage Southeast Bancorporation, Inc.;  HomeTrust Bancshares, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; Morris State Bancshares, Inc.; Mountain Commerce Bankcorp, Inc.; MVB Financial Corp.; National Bankshares, Inc.; Old Point Financial Corporation; Peoples Bancorp of North Carolina, Inc.; Premier Financial Bancorp, Inc.; Professional Holding Corp.; Reliant Bancorp, Inc.; Select Bancorp, Inc.; SmartFinancial, Inc.; Southern First Bancshares, Inc.; Southern National Bancorp of Virginia, Inc.;  Summit Financial Group, Inc.; TGR Financial, Inc.

 

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Item 6.

Selected Financial Data.

 

The following table presents selected consolidated financial data, derived from the audited financial statements, as of and for the five years ended December 31, 2018.2020. This information should be read in conjunction with Item 7, “Management’s“Management Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.

 

		Year Ended December 31,
(Amounts in thousands, except share and per share data)		2018				2017				2016				2015				2014
Selected Balance Sheet Data
Investment debt securities		$	178,129			$	190,674			$	212,639			$	438,642			$	383,826
Loans			1,775,084				1,817,184				1,852,948				1,706,541				1,691,208
Allowance for loan losses			18,267				19,276				17,948				20,233				20,227
Total assets			2,244,374				2,388,460				2,386,398				2,462,276				2,607,936
Average assets			2,330,611				2,370,321				2,455,458				2,520,934				2,608,570
Deposits			1,855,750				1,929,891				1,841,338				1,873,259				2,000,759
Borrowings			29,370				80,086				178,713				219,370				229,741
Total liabilities			1,911,517				2,037,746				2,047,341				2,119,259				2,256,562
Preferred stock			-				-				-				-				15,151
Total stockholders' equity			332,857				350,714				339,057				343,017				351,374
Average stockholders' equity			341,519				349,701				338,475				348,199				342,619
Summary of Operations
Interest income		$	98,294			$	95,308			$	94,724			$	96,102			$	106,108
Interest expense			7,449				8,090				9,844				11,349				15,290
Net interest income			90,845				87,218				84,880				84,753				90,818
Provision for loan losses			2,393				2,771				1,255				2,191				145
Noninterest income			26,443				24,568				25,534				27,981				28,588
Noninterest expense			69,773				66,902				71,214				74,622				81,447
Income tax expense			8,782				20,628				12,819				11,381				12,324
Net income			36,340				21,485				25,126				24,540				25,490
Dividends on preferred stock			-				-				-				105				910
Net income available to common shareholders			36,340				21,485				25,126				24,435				24,580
Selected Share and Per Share Data
Basic earnings per common share		$	2.19			$	1.26			$	1.45			$	1.32			$	1.34
Diluted earnings per common share			2.18				1.26				1.45				1.31				1.31
Cash dividends per common share			1.26				0.68				0.60				0.54				0.50
Book value per common share at year-end(1)			20.79				20.63				19.95				18.95				18.06
Weighted average basic shares outstanding			16,587,504				17,002,116				17,319,689				18,531,039				18,406,363
Weighted average diluted shares outstanding			16,666,385				17,077,842				17,365,524				18,727,464				19,483,054
Selected Ratios
Return on average assets			1.56	%			0.91	%			1.02	%			0.97	%			0.94	%
Return on average common equity			10.64	%			6.14	%			7.42	%			7.08	%			7.51	%
Average equity to average assets			14.65	%			14.75	%			13.78	%			13.81	%			13.13	%
Dividend payout			57.51	%			53.81	%			41.36	%			40.95	%			37.44	%
Common equity Tier 1 ratio(2)			13.72	%			13.98	%			13.88	%			14.54	%			N/A
Tier 1 risk-based capital ratio			13.72	%			13.98	%			14.74	%			14.73	%			16.43	%
Total risk-based capital ratio			14.79	%			15.06	%			15.79	%			15.95	%			17.68	%
Tier 1 leverage ratio			10.95	%			11.06	%			11.07	%			10.62	%			10.12	%

(1) Book value per common share is defined as stockholders' equity divided by as-converted common shares outstanding.

(2) The common equity Tier 1 ratio became effective on January 1, 2015.

		Year Ended December 31,
(Amounts in thousands, except share and per share data)		2020				2019				2018				2017				2016
Selected Balance Sheet Data
Investment debt securities		$	83,358			$	169,574			$	178,129			$	190,674			$	212,639
Loans			2,186,632				2,114,460				1,775,084				1,817,184				1,852,948
Allowance for loan losses			26,182				18,425				18,267				19,276				17,948
Total assets			3,011,136				2,798,847				2,244,374				2,388,460				2,386,398
Average assets			2,892,287				2,217,241				2,330,611				2,370,321				2,455,458
Deposits			2,546,247				2,329,912				1,855,750				1,929,891				1,841,338
Borrowings			964				1,641				29,370				80,086				178,713
Total liabilities			2,584,406				2,370,028				1,911,517				2,037,746				2,047,341
Total stockholders' equity			426,730				428,819				332,857				350,714				339,057
Average stockholders' equity			420,792				336,138				341,519				349,701				338,475
Summary of Operations
Interest income		$	114,036			$	94,968			$	98,294			$	95,308			$	94,724
Interest expense			5,464				5,515				7,449				8,090				9,844
Net interest income			108,572				89,453				90,845				87,218				84,880
Provision for loan losses			12,668				3,571				2,393				2,771				1,255
Noninterest income			29,833				33,677				26,443				24,568				25,534
Noninterest expense			79,625				69,763				69,773				66,902				71,214
Income tax expense			10,186				10,994				8,782				20,628				12,819
Net income			35,926				38,802				36,340				21,485				25,126
Net income available to common shareholders			35,926				38,802				36,340				21,485				25,126
Selected Share and Per Share Data
Basic earnings per common share		$	2.02			$	2.47			$	2.19			$	1.26			$	1.45
Diluted earnings per common share			2.02				2.46				2.18				1.26				1.45
Cash dividends per common share			1.00				0.96				0.78				0.68				0.60
Special cash dividend per common share			—				—				0.48				—				—
Book value per common share at year-end			24.08				23.33				20.79				20.63				19.95
Weighted average basic shares outstanding			17,781,748				15,690,812				16,587,504				17,002,116				17,319,689
Weighted average diluted shares outstanding			17,815,380				15,756,093				16,666,385				17,077,842				17,365,524
Selected Ratios
Return on average assets			1.24	%			1.75	%			1.56	%			0.91	%			1.02	%
Return on average common equity			8.54	%			11.54	%			10.64	%			6.14	%			7.42	%
Average equity to average assets			14.55	%			15.16	%			14.65	%			14.75	%			13.78	%
Dividend payout			49.50	%			38.82	%			57.51	%			53.81	%			41.36	%
Common equity Tier 1 ratio			14.28	%			14.31	%			13.72	%			13.98	%			13.88	%
Tier 1 risk-based capital ratio			14.28	%			14.31	%			13.72	%			13.98	%			14.74	%
Total risk-based capital ratio			15.53	%			15.21	%			14.79	%			15.06	%			15.79	%
Tier 1 leverage ratio			10.24	%			14.02	%			10.95	%			11.06	%			11.07	%

 

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Item 7.

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

 

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

 

Executive Overview

 

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of December 31, 2018,2020, the Bank operated 4450 branches as First Community Bank in Virginia, West Virginia, and North Carolina and as People’s Community Bank, a Division of First Community Bank, in Tennessee. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.

 

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees. As of December 31, 2018,2020, the Trust Division and FCWM managed and administered $975 million$1.18 billion in combined assets under various fee-based arrangements as fiduciary or agent.

 

Our acquisition and divestiture activity during the last three years endedincludes the December 31, 2018, includes2019, acquisition of Highlands Bankshares, Inc. (“Highlands”), headquartered in Abingdon, Virginia with total assets of $563 million. The completion of the transaction resulted in total consolidated assets increasing to $2.80 billion immediately after the transaction. Activity in prior years include the completion of our Agreement and Plan of Reincorporation and Merger changing our corporate domicile from Nevada to Virginia on October 2, 2018;2018, as well as the sale of our remaining insurance agency assets to Bankers Insurance, LLC on October 1, 2018; the sale of Greenpoint Insurance Group, Inc. (“Greenpoint”) to Ascension Insurance Agency, Inc. on October 31, 2016; and the simultaneous sale of six branches to and purchase of seven branches from First Bank on July 15, 2016.2018. For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.

Recent Developments: COVID-19 and the CARES Act

The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic and almost all public commerce and related business activities have been curtailed, to varying degrees, with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 has the potential to create widespread business continuity issues for the Company.

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (“PPP”). The package also included extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s operations and could continue to impact operations going forward.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While progress has been made on the vaccine front, if the global response to contain COVID-19 is prolonged or is unsuccessful, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

Pertaining to our December 31, 2020, financial condition and results of operations, COVID-19 had a material impact on our allowance for loan losses (“ALL”). While we have not yet experienced any significant charge-offs related to COVID-19, our ALL calculation and resulting provision for loan losses were significantly impacted by expectations for future losses due to governmental reactions to the pandemic. Refer to our discussion of the ALL in Note 6 of our financial statements as well as additional discussion in MD&A. Should economic conditions worsen, we could experience further increases in our required ALL and record additional loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company’s fee income has been reduced due to COVID-19.  Consumer spending behavior has proven to be very conservative during the pandemic resulting in a decrease in overdraft behavior that generates NSF and other fee income.  Should the pandemic and the global response escalate further, it is possible that the Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.

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The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of December 31, 2020, the Company carried $3.47 million of accrued interest income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

As of December 31, 2020, the Company continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2020.  While we believe that we have sufficient capital, our reported and regulatory capital ratios could be adversely impacted by loan losses and other negative trends initiated by the pandemic.  We rely on cash on hand as well as dividends from the Bank to pay dividends to our shareholders.  If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay dividends to our shareholders.

We maintain access to multiple sources of liquidity.  Wholesale funding markets remain open to us, however, short-term funding rates have been volatile throughout 2020.  If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.  In addition, if an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

As of December 31, 2020, our goodwill was not impaired. Management performed a quantitative goodwill impairment test as of October 1, 2020. The goodwill impairment test did not identify any goodwill impairment for our one reporting unit, nor was it at risk of failing the quantitative test. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020, we had goodwill of $129.57 million, representing approximately 30.36% of equity.

As of December 31, 2020, we did not have any impairment with respect to our intangible assets or other long-lived assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020 we had intangible assets of $7.07 million, representing approximately 1.66% of equity.

Our processes, controls and business continuity plan

The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the WHO’s pandemic declaration, the Company’s Enterprise Risk Management team implemented its Board approved Business Continuity Plan.  The Company appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-19.   Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company’s preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19. At December 31, 2020, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.

As of December 31, 2020, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.  Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.  It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021 ("CAA") signed into law on December 27, 2000, that extended the ability to provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.

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With the passage of the PPP, administered by the Small Business Administration (“SBA”) small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020, and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.  Through December 31, 2020, $3.94 million, or 6.46%, of the Company’s PPP loan balances had been forgiven by the SBA. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.

The Company is committed to assisting our customers in this time of need. Branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members with lobbies available on a limited appointment-only basis.  In addition, we have increased our emphasis on digital banking platforms.

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences.

It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations.  Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in conformity with generally accepted accounting principles (“GAAP”) in the U.S. and prevailing practices in the banking industry. Our accounting policies, as presented in Note 1, “Basis of Presentation and Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and Supplementary Data,” of this report. Management may be required to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates used, we have identified fair value measurements, the allowance for loan losses goodwill and other intangible assets, and income taxesgoodwill as the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.

Fair Value Measurements

We use the fair value hierarchy to determine the fair value of certain assets and liabilities. The hierarchy consists of three levels that include valuations based on observable quoted prices in active markets; quoted prices in inactive markets or other observable inputs, such as third-party sources; and unobservable inputs. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates. The assumptions and estimates used to determine fair value may be highly subjective in nature, such as cash flow estimates, risk characteristics, credit quality measurements, and interest rates; therefore, valuations may not be precise. The amounts realized or paid on the settlement or maturity of fair value instruments may be significantly different from estimates. While management believes our valuation methodologies are appropriate and consistent with other market participants, different methodologies or assumptions used to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. For additional information, see Note 17, “Fair Value,” to the Consolidated Financial Statements in Item 8 of this report.

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Allowance for Loan Losses

 

We review our allowance for loan losses quarterly to determine if it is sufficient to absorb probable loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While management uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

 

Our allowance for loan losses consists of specific reserves assigned to specificimpaired loans and credit relationships and general reserves assigned to unimpaired loans not separately identified that have been segmented into groupsloan classes with similar risk characteristics using our internal risk grades.such as the type of loan and collateral. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. Factors considered in this evaluationthat include, but are not 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 nonaccruals. Historical loss rates for loans classified as special mention and substandard within each risk grade ofloan class in the commercial loansloan segment are adjusted by environmental factorsan additional qualitative factor.  Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to estimatebe impaired. Factors considered in determining impairment include, but are not limited to, the amount of reserve needed by segment. Individually significant loans require additional analysis that may include the borrower’s underlying cash flow and capacity for debt repayment, specific business conditions,the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management, Impairment is measured based upon the present value of secondary sourcesexpected future cash flows discounted at the loan's effective interest rate or the net realizable value of repayment; consequently, this analysis may result in the identification of weakness and a corresponding need for a specific reserve.collateral if the loan is collateral dependent. No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2018.2020. For additional information, see Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

Third-party collateral valuations are regularly obtained and evaluated to help management determine changes in cash flows on purchased loans acquired in business combinations, potential credit impairment, and the amount

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Table of impairment to record. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal evaluation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. When a third-party evaluation is received, it is reviewed for reasonableness. Once the evaluation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve. Specific reserves are generally recorded for impaired loans while third-party evaluations are in process and for impaired loans that continue to make some form of payment. While waiting for receipt of the third-party appraisal, we regularly review the relationship to identify any potential adverse developments and begin the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to appraised value that we determine appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Impaired credits move quickly through the process towards ultimate resolution except in cases involving bankruptcy and various state judicial processes, which may extend the time for ultimate resolution.Contents

 

Goodwill and Other Intangible Assets

 

We test goodwillGoodwill is tested for impairment annually, on October 31^st, or more frequently if events or circumstances indicate there may be impairment, using either a qualitative or quantitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.impairment.  We have one reporting unit, which is consistent with our sole operating segment, Community Banking.  If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in assessingdetermining if it is more likely than not that the fair value of our reporting unit.unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference, but limiteddifference. We performed a quantitative assessment for the annual test on October 31, 2020, which resulted in no goodwill impairment.

Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value.  The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method).  The Company engaged an independent valuation specialist to assist with goodwill impairment testing utilizing both the market and  DCF methods.  The resulting fair values from the aforementioned methods were appropriately weighted to determine the final fair value of our reporting unit.

Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples.  The selection of the multiples considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline companies.  Among other factors considered, are the level and expected growth in return on tangible equity relative to the amountguideline companies selected, implied control premiums, recent transaction prices, as well as data in comparable macroeconomic environments. 

Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate.  The cash flows for the forecasted period are estimated based on management’s most recent projections available as of goodwill allocatedthe testing date, given consideration to minimum equity capital requirements.  The projections include macroeconomic variables developed at the same time.  The terminal growth rate is selected based on management’s long-term expectation for the reporting unit.  Other identifiable intangible assets are evaluated forThe discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.

At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment if events or changesof goodwill.  While the inherent risk related to uncertainty is embedded in circumstances indicate a possible impairment.the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and uncertainties related to the pandemic.  Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the valuation.  If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment charges in the future.  For additional information, see Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.

 

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Income Taxes

The establishment of provisions for federal and state income taxes is a complex area of accounting that involves judgments and estimates in applying relevant tax statutes. We operate in many state tax jurisdictions, which requires the appropriate allocation of income and expense to each state based on a variety of apportionment or allocation bases. Audits by federal and state tax authorities may reveal liabilities that differ from our estimates and provisions. We continually evaluate our exposure to possible tax assessments arising from audits and record an estimate of possible exposure based on current facts and circumstances.

We measure deferred tax assets and liabilities using the enacted tax rates applicable in the periods we expect temporary differences to be realized or settled. As changes in tax laws and rates are enacted, we adjust deferred tax assets and liabilities through the provision for income taxes. When evidence indicates that it is more likely than not that some, or all, of the deferred tax asset is not recoverable, we may record a valuation allowance to reduce the carrying value of the asset. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

The Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted on December 22, 2017. Among other things, the new law established a new, flat corporate federal statutory income tax rate of 21%; eliminated the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year; limits the deduction for net interest expense incurred by U.S. corporations; allows businesses to immediately expense the cost of new investments in certain qualified depreciable assets for tax purposes; eliminates or reduces certain deductions related to meals and entertainment expenses; modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee; and limits the deductibility of deposit insurance premiums for certain size financial institutions. The Tax Reform Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact us. For additional information, see Note 15, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report.

Non-GAAP Financial Measures

 

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent (“FTE”) basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

 

We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21% for periods after January 1, 2018, and 35% for periods prior to January 1, 2018. The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:

 

			Year Ended December 31,												Year Ended December 31,
			2018				2017				2016				2020				2019				2018
(Amounts in thousands)	(Amounts in thousands)
Net interest income, GAAP	Net interest income, GAAP		$	90,845			$	87,218			$	84,880			$	108,572			$	89,453			$	90,845
FTE adjustment(1)				1,822				1,914				2,081
FTE adjustment(1)																647				848				899
Net interest income, FTE	Net interest income, FTE		$	92,667			$	89,132			$	86,961			$	109,219			$	90,301			$	91,744
Net interest margin, GAAP	Net interest margin, GAAP			4.37	%			4.14	%			3.91	%			4.27	%			4.54	%			4.37	%
FTE adjustment(1)				0.09	%			0.09	%			0.10	%
FTE adjustment(1)																0.02	%			0.05	%			0.04	%
Net interest margin, FTE	Net interest margin, FTE			4.46	%			4.23	%			4.01	%			4.29	%			4.59	%			4.41	%

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(1) FTE basis of 21% for 2018 and 35% for 2017 and 2016

FTE basis of 21%.

 

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Performance Overview

 

Highlights of our results of operations in 2018,2020, and financial condition as of December 31, 2018,2020, include the following:

 

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For the full year, the Company earned $35.93 million, or $2.02 per diluted share, a decrease of $2.88 million, or 7.41% over 2019.

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Return on average assets remained strong at 1.24% for the twelve-month period.

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Net income increased $14.86 millioninterest margin decreased 30 basis points to $36.34 million and diluted earnings per share increased $0.92 to $2.184.29% for the full year 2020 compared to 2019.  The decrease is reflective of the prior year. The large increase reflectscurrent historic low interest rate environment partially offset by purchase accounting accretion from the deferred tax asset revaluation charge taken in the fourth quarterHighlands portfolio as well as accelerated paydowns of 2017.acquired loans.

●

GAAP net interest margin increased 23 basis points to 4.37% and non-GAAP, FTE net interest margin increased 23 basis points to 4.46%The Company booked loan loss provision of $12.67 million; an increase of $9.10 million compared to the prior year.year 2019.  The increase was primarily related to the economic uncertainty caused by the coronavirus pandemic.

●

We repurchased 1,060,312 sharesThe Company booked $239.60 million of our common stock for $34.41new residential mortgage loans during the year.

●

The Company processed 803 loans with original balances totaling $62.74 million and paid common stock cash dividendsthrough the SBA's Paycheck Protection Program to assist small businesses during the COVID-19 pandemic.  As of $21.09December 31, 2020, $3.94 million, or $1.26 per share, in 2018. Cash dividends included a one-time special dividend to common shareholders6.46%, of $0.48 per common share.these loan balances had been forgiven by the SBA.

	●	Interest-free deposits grew $144.93 million during 2020, and total deposits grew $216.34 million, or 9.29% , during 2020.
	●	Book value per common share increased $0.16$0.75 to $20.79$24.08 compared to the prior year.December 31, 2019.

●

We finalized the deferred tax asset revaluation charge originally taken in the fourth quarter of 2017, which resulted in a reduction in tax expense of approximately $1.67 million.

●

We sold our remaining insurance agency assets to Bankers Insurance, LLC of Glen Allen, Virginia (“BI”) in exchange for an equity interest in BI, which resulted in a one-time goodwill impairment of $1.49 million.

●

We prepaid our remaining $50 million FHLB convertible advance, which resulted in a loss on the extinguishment of the debt of $1.10 million.

●

We completed our Agreement and Plan of Reincorporation and Merger changing our corporate domicile from Nevada to Virginia.

●

The divestiture of the insurance agency assets and the extinguishment of FHLB debt, in conjunction with the sale of the remaining trust preferred securities, culminate a 5-year plan to return the balance sheet and business model to a traditional, simplified, and de-risked community bank.

●

The Company andcompleted its subsidiary bank bothstock repurchase authorization in the first quarter of 2020 with the repurchase of 734,653 shares for approximately $21.87 million.  As of December 31, 2020, the Company continues to significantly exceed regulatory “well-capitalized”"well capitalized" targets, as well as all capital targets of December 31, 2018.its capital management plan.

Results of Operations

 

Net Income

 

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

 

														2018 Compared to 2017								2017 Compared to 2016																				2020 Compared to 2019								2019 Compared to 2018
		Year Ended December 31,												Increase				%				Increase				%				Year Ended December 31,												Increase				%				Increase				%
(Amounts in thousands, except per share data)		2018				2017				2016				(Decrease)				Change				(Decrease)				Change				2020				2019				2018				(Decrease)				Change				(Decrease)				Change
Net income		$	36,340			$	21,485			$	25,126			$	14,855				69.14	%		$	(3,641	)			-14.49	%		$	35,926			$	38,802			$	36,340			$	(2,876	)			(7.41	)%		$	2,462				6.77	%
Basic earnings per common share			2.19				1.26				1.45				0.93				73.81	%			(0.19	)			-13.10	%			2.02				2.47				2.19				(0.45	)			(18.22	)%			0.28				12.79	%
Diluted earnings per common share			2.18				1.26				1.45				0.92				73.02	%			(0.19	)			-13.10	%			2.02				2.46				2.18				(0.44	)			(17.88	)%			0.28				12.84	%
Return on average assets			1.56	%			0.91	%			1.02	%			0.65	%			71.43	%			-0.11	%			-10.78	%			1.24	%			1.75	%			1.56	%			(0.51	)%			(29.14	)%			0.19	%			12.18	%
Return on average common equity			10.64	%			6.14	%			7.42	%			4.50	%			73.29	%			-1.28	%			-17.25	%			8.54	%			11.54	%			10.64	%			(3.00	)%			(26.00	)%			0.90	%			8.46	%

 

20182020 Compared to 20172019. Net income increased in 2018 due to a decrease in income tax expense, driven by a lower federal statutory rate and the deferred tax asset revaluation charge taken in 2017, in accordance with the Tax Reform Act. Pre-tax income increased $3.01decreased $3.68 million, or 7.15%, due to increases in net interest and noninterest income and a decrease in the provision for loan losses. These changes were offset by an increase in noninterest expense.

2017 Compared to 2016. Net income decreased in 2017 due to an increase in income tax expense, driven by the deferred tax asset revaluation charge taken in accordance with the Tax Reform Act. Pre-tax income increased $4.17 million, or 10.98%7.40%, due to an increase in net interest income and a decrease in noninterest expense. These changes were offset byexpense of $9.86 million, an increase in the provision for loan losses of $9.10 million, and a decrease in noninterest income of $3.84 million.  The decreases to income were offset by a increase in net interest income of $19.12 million. Income tax expense decreased $808 thousand primarily as a result of the decrease in pre-tax income.

2019 Compared to 2018. Pre-tax income increased $4.67 million, or 10.36%, due to an increase in noninterest income of $7.23 million partially offset by a decrease in net interest income of $1.39 million and an increase in the provision for loan losses of $1.18 million. Income tax expense increased $2.21 million due to an increase in the effective rate from 19.46% in 2019 to 22.08% in 2020. 

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Net Interest Income

 

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

 

		Year Ended December 31,																																				Year Ended December 31,
		2018												2017												2016												2020												2019												2018
(Amounts in thousands)		Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)
Assets
Earning assets
Loans(2)(3)		$	1,795,391			$	91,971				5.12	%		$	1,837,092			$	90,032				4.90	%		$	1,793,618			$	87,848				4.90	%
Loans(2)(3)																																						$	2,142,637			$	110,619				5.16	%		$	1,722,419			$	88,990				5.17	%		$	1,795,391			$	91,819				5.11	%
Securities available for sale			176,766				6,190				3.50	%			164,489				5,695				3.46	%			287,332				8,047				2.80	%			105,005				3,259				3.10	%			126,732				4,334				3.42	%			176,766				5,419				3.07	%
Securities held to maturity			25,081				418				1.67	%			32,954				487				1.48	%			71,069				757				1.07	%			—				—				—				3,045				45				1.48	%			25,081				418				1.67	%
Interest-bearing deposits			81,520				1,537				1.89	%			73,405				1,008				1.37	%			18,864				153				0.81	%			296,495				805				0.27	%			116,119				2,447				2.10	%			81,520				1,537				1.89	%
Total earning assets			2,078,758			$	100,116				4.82	%			2,107,940			$	97,222				4.61	%			2,170,883			$	96,805				4.46	%			2,544,137			$	114,683				4.51	%			1,968,315			$	95,816				4.87	%			2,078,758			$	99,193				4.77	%
Other assets			251,853												262,381												284,575												348,150												248,926												251,853
Total assets		$	2,330,611											$	2,370,321											$	2,455,458											$	2,892,287											$	2,217,241											$	2,330,611
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits		$	466,403			$	246				0.05	%		$	401,092			$	224				0.06	%		$	342,169			$	156				0.05	%		$	556,279			$	311				0.06	%		$	453,824			$	281				0.06	%		$	466,403			$	246				0.05	%
Savings deposits			508,353				382				0.08	%			520,430				336				0.06	%			531,050				342				0.06	%			711,831				902				0.13	%			504,081				823				0.16	%			508,353				382				0.08	%
Time deposits			471,335				4,516				0.96	%			510,411				4,427				0.87	%			525,162				3,981				0.76	%			456,755				4,247				0.93	%			418,450				4,288				1.02	%			471,335				4,516				0.96	%
Total interest-bearing deposits			1,446,091				5,144				0.36	%			1,431,933				4,987				0.35	%			1,398,381				4,479				0.32	%			1,724,865				5,460				0.32	%			1,376,355				5,392				0.39	%			1,446,091				5,144				0.36	%
Borrowings
Federal funds purchased			-				-				-				1				-				0.00	%			4,058				26				0.64	%
Retail repurchase agreements			4,010				5				0.12	%			47,716				32				0.07	%			68,701				49				0.07	%			1,145				3				0.28	%			2,471				4				0.14	%			4,010				5				0.12	%
Wholesale repurchase agreements			25,000				806				3.22	%			25,000				806				3.22	%			49,727				1,874				3.77	%			—				—				—				3,767				119				3.17	%			25,000				806				3.22	%
FHLB advances and other borrowings			36,849				1,494				4.05	%			55,502				2,265				4.08	%			116,602				3,416				2.93	%			36				1				2.23	%			—				—				—				36,849				1,494				4.05	%
Total borrowings			65,859				2,305				3.50	%			128,219				3,103				2.42	%			239,088				5,365				2.24	%			1,181				4				0.34	%			6,238				123				1.96	%			65,859				2,305				3.50	%
Total interest-bearing liabilities			1,511,950				7,449				0.49	%			1,560,152				8,090				0.52	%			1,637,469				9,844				0.60	%			1,726,046				5,464				0.32	%			1,382,593				5,515				0.40	%			1,511,950				7,449				0.49	%
Noninterest-bearing demand deposits			448,903												438,513												456,474												707,623												468,774												448,903
Other liabilities			28,239												21,955												23,040												37,826												29,736												28,239
Total liabilities			1,989,092												2,020,620												2,116,983												2,471,495												1,881,103												1,989,092
Stockholders' equity			341,519												349,701												338,475												420,792												336,138												341,519
Total liabilities and equity		$	2,330,611											$	2,370,321											$	2,455,458											$	2,892,287											$	2,217,241											$	2,330,611
Net interest income, FTE(1)						$	92,667											$	89,132											$	86,961
Net interest rate spread, FTE(1)											4.33	%											4.09	%											3.86	%
Net interest margin, FTE(1)											4.46	%											4.23	%											4.01	%
Net interest income, FTE(1)																																										$	109,219											$	90,301											$	91,744
Net interest rate spread, FTE(1)																																															4.19	%											4.47	%											4.28	%
Net interest margin, FTE(1)																																															4.29	%											4.59	%											4.41	%

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(1)  FTE basis based on the federal statutory rate of 21% for periods after January 1, 2018, and 35% for periods prior to January 1, 2018 (2)  Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual. (3)  Interest on loans include non-cash purchase accounting accretion of $6.39 million in 2018, $5.42 million in 2017, and $4.77 million in 2016.	FTE basis based on the federal statutory rate of 21%.
(2)	Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.
(3)	Interest on loans include non-cash purchase accounting accretion of $7.99 million in 2020, $3.23 million in 2019, and $6.39 million in 2018.

 

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

 

		Year Ended																Year Ended																Year Ended																Year Ended
		December 31, 2018 Compared to 2017																December 31, 2017 Compared to 2016																December 31, 2020 Compared to 2019																December 31, 2019 Compared to 2018
		Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to
										Rate/																Rate/																Rate/																Rate/
(Amounts in thousands)		Volume				Rate				Volume				Total				Volume				Rate				Volume				Total				Volume				Rate				Volume				Total				Volume				Rate				Volume				Total
Interest earned on(1):
Interest earned on(1):
Loans		$	(2,043	)		$	4,042			$	(60	)		$	1,939			$	2,130			$	-			$	54			$	2,184			$	21,736			$	(42	)		$	(65	)		$	21,629			$	(3,729	)		$	1,077			$	(177	)		$	(2,829	)
Securities available for sale			425				66				4				495				(3,440	)			1,896				(808	)			(2,352	)			(743	)			(101	)			(231	)			(1,075	)			(1,536	)			619				(168	)			(1,085	)
Securities held to maturity			(117	)			63				(15	)			(69	)			(408	)			291				(153	)			(270	)			(45	)			—				—				(45	)			(368	)			(48	)			43				(373	)
Interest-bearing deposits with other banks			111				382				36				529				442				106				307				855				3,791				(534	)			(4,899	)			(1,642	)			654				171				85				910
Total interest-earning assets			(1,624	)			4,553				(35	)			2,894				(1,276	)			2,293				(600	)			417				24,739				(677	)			(5,195	)			18,867				(4,979	)			1,819				(217	)			(3,377	)
Interest paid on(1):
Interest paid on(1):
Demand deposits			39				(40	)			23				22				29				34				5				68				63				(7	)			(26	)			30				(6	)			47				(6	)			35
Savings deposits			(7	)			104				(51	)			46				(6	)			-				-				(6	)			338				(46	)			(213	)			79				(3	)			407				37				441
Time deposits			(340	)			459				(30	)			89				(112	)			578				(20	)			446				391				(97	)			(335	)			(41	)			(508	)			283				(3	)			(228	)
Federal funds purchased			-				-				-				-				(26	)			(26	)			26				(26	)
Retail repurchase agreements			(31	)			24				(20	)			(27	)			(15	)			-				(2	)			(17	)			(2	)			1				—				(1	)			(2	)			1				—				(1	)
Wholesale repurchase agreements			-				-				-				-				(932	)			(273	)			137				(1,068	)			(119	)			—				—				(119	)			(684	)			(12	)			9				(687	)
FHLB advances and other borrowings			(761	)			(17	)			7				(771	)			(1,790	)			1,341				(702	)			(1,151	)			—				—				1				1				(1,492	)			(1,492	)			1,490				(1,494	)
Total interest-bearing liabilities			(1,100	)			530				(71	)			(641	)			(2,852	)			1,654				(556	)			(1,754	)			671				(149	)			(573	)			(51	)			(2,695	)			(766	)			1,527				(1,934	)
Change in net interest income(1)		$	(524	)		$	4,023			$	36			$	3,535			$	1,576			$	639			$	(44	)		$	2,171
Change in net interest income(1)																																		$	24,068			$	(528	)		$	(4,622	)		$	18,918			$	(2,284	)		$	2,585			$	(1,744	)		$	(1,443	)

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

FTE basis based on the federal statutory rate of 21%.

 

20182020 Compared to 20172019. Net interest income comprised 77.45%78.45% of total net interest and noninterest income in 20182020 compared to 78.02%72.65% in 2017.2019. Net interest income increased $3.63$19.12 million, or 4.16%21.37%, compared to a increase of $18.92 million, or 20.95%, on a FTE basis. The FTE net interest margin decreased 30 basis points and the FTE net interest spread decreased 28 basis points.  The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired loans.

Average earning assets increased $575.82 million, or 29.25%, primarily due to an increase of $3.54in average loans and average interest-bearing deposits offset by a decrease in average debt securities. The yield on earning assets decreased 36 basis points as the yields on interest-bearing deposits and debt securities decreased primarily due to the historically low rate environment. Average loans increased $420.22 million, or 3.97%24.40%, and the average loan to deposit ratio decreased to 88.08% from 93.35%. The increase in average loans was primarily due to the addition of Highlands.  Non-cash accretion income related to PCI loans increased $4.76 million, or 147.37%, to $7.99 million due the addition of Highlands and the fourth quarter payoff of a large acquired loan relationship. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 31 basis points compared to 17 basis points in the prior year.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $343.45 million, or 24.84%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 8 basis points.  Average interest-bearing deposits increased $348.51 million, or 25.32%, which was driven by the December 31, 2019, Highlands acquisition with increases of $207.75 million, or 41.21%, in average savings deposits, $102.46 million, or 22.58%, in average interest-bearing demand deposits, and $38.31 million, or 9.15%, in average time deposits.

2019 Compared to 2018. Net interest income comprised 72.65% of total net interest and noninterest income in 2019 compared to 77.45% in 2018. Net interest income decreased $1.39 million, or 1.53%, compared to a  decrease of $1.44 million, or 1.57%, on a FTE basis. The FTE net interest margin increased 2318 basis points and the FTE net interest spread increased 2419 basis points.

 

Average earning assets decreased $29.18$110.44 million, or 1.38%5.31%, primarily due to a decrease in average loans and debt securities offset by an increase in available-for-sale securities and interest-bearing deposits. The yield on earning assets increased 2110 basis points as the yields on loans, debt securities, and interest-bearing deposits increased. Average loans decreased $41.70$72.97 million, or 2.27%4.06%, and the average loan to deposit ratio decreased to 94.74%93.35% from 98.22%94.74%. Non-cash accretion income related to PCI loans increased $974 thousand,decreased $3.16 million, or 17.98%49.46%, to $6.39$3.23 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 3117 basis points compared to 2630 basis points in the prior year.

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $48.20$129.36 million, or 3.09%8.56%, primarily due to a decline in average interest-bearing deposits and average borrowings. The yield on interest-bearing liabilities decreased 39 basis points. Average borrowings decreased $62.36$59.62 million, or 48.64%90.53%, largely due to a $43.71$22.77 million, or 91.60%78.50%, decrease in average retail and wholesale repurchase agreements and an $18.65a $36.85 million, or 33.61%100.00%, decrease in average FHLB advances. Average interest-bearing deposits increased $14.16decreased $69.74 million, or 0.99%4.82%, which was driven by a $65.31$52.89 million, or 16.28%, increase in average interest-bearing demand deposits offset by a $39.08 million, or 7.66%11.22%, decrease in average time deposits, and a $12.08$12.58 million, or 2.32%2.70%, decrease in average savings deposits, which include money market and savings accounts.

2017 Compared to 2016. Net interest income comprised 78.02% of total net interest and noninterest income in 2017 compared to 76.87% in 2016. Net interest income increased $2.34 million, or 2.75%, compared to an increase of $2.17 million, or 2.50%, on a FTE basis. The FTE net interest margin increased 22 basis points and the FTE net interest spread increased 23 basis points.interest-bearing demand deposits.

 

Average earning assets decreased $62.94 million, or 2.90%, primarily due to decreases in investment securities offset by an increase in interest-bearing deposits and loan growth. The yield on earning assets increased 15 basis points. Average loans increased $43.47 million, or 2.42%, and the average loan to deposit ratio increased to 98.22% from 96.70%. Non-cash accretion income related to PCI loans increased $651 thousand, or 13.66%, to $5.42 million. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 26 basis points compared to 22 basis points in the prior year.

 

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Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $77.32 million, or 4.72%, primarily due to a decline in average borrowings. The yield on interest-bearing liabilities decreased 8 basis points, largely driven by a decrease in the average balance of borrowings. Average borrowings decreased $110.87 million, or 46.37%, largely due to a $61.10 million, or 52.40%, decrease in average FHLB advances and other borrowings, a $24.73 million, or 49.73%, decrease in average wholesale repurchase agreements, a $20.99 million, or 30.55%, decrease in average retail repurchase agreements, and a $4.06 million, or 99.98%, decrease in average federal funds purchased. Average interest-bearing deposits increased $33.55 million, or 2.40%, which was driven by a $58.92 million, or 17.22%, increase in average interest-bearing demand deposits offset by a $14.75 million, or 2.81%, decrease in average time deposits, and a $10.62 million, or 2.00%, decrease in average savings deposits, which include money market and savings accounts.

Provision for Loan Losses

 

20182020 Compared to 2017. The provision charged to operations decreased $378 thousand, or 13.64%, to $2.39 million, which was largely attributed to a decrease in the loan portfolio and continued good credit quality.

2017 Compared to 20162019. The provision charged to operations increased $1.52$9.10 million, or 254.75%.  The increase was primarily related to $2.77 million, which included a $1.49 million increase in the non-PCI provision to $2.78 million and a $30 thousand increase ineconomic uncertainty caused by the PCI provision to a recovery of $12 thousand.coronavirus pandemic.

 

2019 Compared to 2018. The provision charged to operations increased $1.18 million, or 49.23%, to $3.57 million, as we effectively covered net charge-offs for the year.

Noninterest Income

 

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

 

														2018 Compared to 2017								2017 Compared to 2016																				2020 Compared to 2019								2019 Compared to 2018
		Year Ended December 31,												Increase				%				Increase				%				Year Ended December 31,												Increase						%		Increase						%
		2018				2017				2016				(Decrease)				Change				(Decrease)				Change				2020				2019				2018				(Decrease)				Change				(Decrease)				Change
(Amounts in thousands)
Wealth management		$	3,262			$	3,150			$	2,828			$	112				3.56	%		$	322				11.39	%		$	3,417			$	3,423			$	3,262			$	(6	)			-0.18	%		$	161				4.94	%
Service charges on deposits			14,733				13,803				13,588				930				6.74	%			215				1.58	%			13,019				14,594				14,733				(1,575	)			-10.79	%			(139	)			-0.94	%
Other service charges and fees			7,733				6,944				6,570				789				11.36	%			374				5.69	%			10,333				8,281				7,733				2,052				24.78	%			548				7.09	%
Insurance commissions			966				1,347				5,442				(381	)			-28.29	%			(4,095	)			-75.25	%			—				—				966				—				—				(966	)			-100.00	%
Net impairment loss			-				-				(4,646	)			-				-				4,646				-100.00	%
Net (loss) gain on sale of securities			(618	)			(661	)			335				43				-6.51	%			(996	)			-297.31	%			385				(43	)			(618	)			428				-995.35	%			575				-93.04	%
Net FDIC indemnification asset amortization			(2,181	)			(3,517	)			(5,474	)			1,336				-37.99	%			1,957				-35.75	%			(1,690	)			(2,377	)			(2,181	)			687				-28.90	%			(196	)			8.99	%
Net gain on divestitures			-				-				3,682				-				-				(3,682	)			-100.00	%
Litigation income																															—				6,995				—				(6,995	)			-100.00	%			6,995				—
Other operating income			2,548				3,502				3,209				(954	)			-27.24	%			293				9.13	%			4,369				2,804				2,548				1,565				55.81	%			256				10.05	%
Total noninterest income		$	26,443			$	24,568			$	25,534			$	1,875				7.63	%		$	(966	)			-3.78	%		$	29,833			$	33,677			$	26,443			$	(3,844	)			-11.41	%		$	7,234				27.36	%

 

20182020 Compared to 20172019. Noninterest income comprised 22.55%21.55% of total net interest and noninterest income in 20182020 compared to 21.98%27.35% in 2017.2019. Noninterest income increased $1.88decreased $3.84 million, or 7.63%11.41%, primarily due to the decrease$7.00 million received in net negative amortization related to the FDIC indemnification asset as loss share coverage expired June 30, 2017, for commercial loans.litigation settlements in 2019. Service charges on deposits and otherdecreased $1.58 million, or 10.79%; the decrease was primarily attributable to pandemic shutdowns throughout 2020.  Other service charges and fees increased $1.72$2.05 million, or 8.29%24.78%, primarily from increasesan increase in checking account fees and net interchange income.income for the addition of Highlands accounts.  Other operating income decreasedincreased $1.57 million, or 55.81%, and was primarily due to a $678 thousand decrease in death proceeds from bank owned life insurance.driven by third party incentives associated with debit cards.

 

20172019 Compared to 20162018. Noninterest income comprised 21.98%27.35% of total net interest and noninterest income in 20172020 compared to 23.13%22.55% in 2016.2019. Noninterest income decreased $966 thousand,increased $7.23 million, or 3.78%27.36%, primarily due to the receipt of $7.00 million received in litigation settlements. Other service charges and fees increased $548 thousand, or 7.09%, primarily from an increase in net interchange income. Net securities losses decreased $575 thousand, or 93.04%. Other operating income increases were offset by a $966 thousand decrease in insurance commissions and the associated net gain relateddue to the Greenpoint divestiture in the fourth quarter of 2016 and divestiture of six bank branches to First Bankthe Company’s remaining insurance agency assets in the third quarter of 2016. The decrease was largely offset by the absence of net impairment losses and the decrease in net negative amortization related to the FDIC indemnification asset as loss share coverage on commercial loans expired on June 30, 2017. We recognized a net loss of $661 thousand on the sale of securities related primarily to certain single issue trust preferred securities. See Note 3, “Debt Securities,” to the Consolidated Financial Statements in Item 1 of this report.2019.

 

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Noninterest Expense

 

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

 

														2020 Compared to 2019								2019 Compared to 2018
		Year Ended December 31,												Increase						%		Increase						%
		2020				2019				2018				(Decrease)				Change				(Decrease)				Change
(Amounts in thousands)
Salaries and employee benefits		$	44,005			$	37,148			$	36,690			$	6,857				18.46	%		$	458				1.25	%
Occupancy expense			5,043				4,334				4,542				709				16.36	%			(208	)			-4.58	%
Furniture and equipment expense			5,558				4,457				3,980				1,101				24.70	%			477				11.98	%
Service fees			5,665				4,448				3,860				1,217				27.36	%			588				15.23	%
Advertising and public relations			1,951				2,310				2,011				(359	)			-15.54	%			299				14.87	%
Professional fees			1,224				1,698				1,430				(474	)			-27.92	%			268				18.74	%
Amortization of intangibles			1,450				997				1,039				453				45.44	%			(42	)			-4.04	%
FDIC premiums and assessments			426				318				906				108				33.96	%			(588	)			-64.90	%
Loss on extinguishment of debt			—				—				1,096				—				—				(1,096	)			—
Merger, acquisition, and divestiture expense			1,893				2,124				—				(231	)			-10.88	%			2,124				—
Goodwill impairment			—				—				1,492				—				—				(1,492	)			—
Other operating expense			12,410				11,929				12,727				481				4.03	%			(798	)			-6.27	%
Total noninterest expense		$	79,625			$	69,763			$	69,773			$	9,862				14.14	%		$	(10	)			-0.01	%

 

														2018 Compared to 2017								2017 Compared to 2016
		Year Ended December 31,												Increase				%				Increase				%
		2018				2017				2016				(Decrease)				Change				(Decrease)				Change
(Amounts in thousands)
Salaries and employee benefits		$	36,690			$	35,774			$	39,389			$	916				2.56	%		$	(3,615	)			-9.18	%
Occupancy expense			4,542				4,775				5,297				(233	)			-4.88	%			(522	)			-9.85	%
Furniture and equipment expense			3,980				4,425				4,341				(445	)			-10.06	%			84				1.94	%
Service fees			3,860				3,348				3,641				512				15.29	%			(293	)			-8.05	%
Advertising and public relations			2,011				2,206				1,532				(195	)			-8.84	%			674				43.99	%
Professional fees			1,430				2,567				1,501				(1,137	)			-44.29	%			1,066				71.02	%
Amortization of intangibles			1,039				1,056				1,136				(17	)			-1.61	%			(80	)			-7.04	%
FDIC premiums and assessments			906				910				1,383				(4	)			-0.44	%			(473	)			-34.20	%
Loss on extinguishment of debt			1,096				-				-				1,096				-				-				-
Merger, acquisition, and divestiture expense			-				-				730				-				-				(730	)			-100.00	%
Goodwill impairment			1,492				-				-				1,492				-				-				-
Other operating expense			12,727				11,841				12,264				886				7.48	%			(423	)			-3.45	%
Total noninterest expense		$	69,773			$	66,902			$	71,214			$	2,871				4.29	%		$	(4,312	)			-6.05	%

20182020 Compared to 20172019. Noninterest expense increased $2.87$9.86, or 14.14%.  The increase was primarily due to an increase in salaries and benefits of $6.86 million, or 4.29%18.46%, which was largely due to the addition of Highlands employees.  In addition, occupancy and furniture and equipment expense increase a combined total of $1.81 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.

2019 Compared to 2018. Noninterest expense decreased $10 thousand, or 0.01%, which was largely due to one-time charges recognized in 2019 for goodwill impairment charge related to the divestiture of the Company’s remaining insurance agency assets of $1.49 million and the loss on extinguishment of the Company’s remaining FHLB debt of $1.10 million. In addition, other operating expense decreased $798 thousand due to property write-downs that occurred in 2019 and FDIC premiums decreased $588 thousand due to small bank assessment credits received from the FDIC. These decreases were offset by an increase in merger expenses of $2.12 million related to the Highlands acquisition as well as increases in service fees, furniture and equipment expense, and an increase in salaries and employee benefits. These increases were offset by a decrease in professional fees, which were largely due to a reduction in legal fees. The increase in other operating expense included a $330 thousand increase in property write-downs and a $347 thousand increase in the net loss on sales and expenses related to other real estate owned (“OREO”) to $1.55 million in 2018 from $1.20 million in 2017.benefits totaling $1.52 million.

 

2017 Compared to 2016. Noninterest expense decreased $4.31 million, or 6.05%, which was largely due to a decrease in salaries and employee benefits coupled with the absence of merger, acquisition, and divestiture expense. Salaries and employee benefits decreased as full-time equivalent employees, calculated using the number of hours worked, decreased to 562 as of December 31, 2017, from 580 as of December 31, 2016, largely due to the divestiture of Greenpoint. The decrease in other operating expense included a $218 thousand decrease in the net loss on sales and expenses related to OREO to $1.20 million in 2017 from $1.42 million in 2016.

Income Tax Expense

 

2018 Compared to 2017. The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The Tax Reform Act enacted on December 22, 2017, reduced our federal statutory income tax rate from 35% to 21% beginning January 1, 2018.

2020 Compared to 2019. Income tax expense decreased $11.85 million,$808 thousand, or 57.43%7.35%, and  is primarily attributable to the decrease in pre-tax net income.  The effective tax rate decreasedincreased to 19.46%22.09% in 20182020 compared to 48.98%22.08% in 2017 primarily due to the decreased tax rate and deferred tax asset revaluation charge taken in 2017 as a result of the enactment of the Tax Reform Act.

2019. 

2017

2019 Compared to 20162018. Income tax expense increased $7.81$2.21 million, or 60.92%25.19%, and the effective tax rate increased to 48.98%22.08% in 20172019 compared to 33.78%19.46% in 2016.2018. The increaselower effective rate in 2019 was largely attributed to tax expense of $6.55 million relatedprimarily due to the revaluationenactment of our netthe Tax Reform Act and the completion of the deferred tax asset revaluation, which resulted in accordance with the Tax Reform Act. Excluding the impact of the revaluation, incomea $1.67 million reduction in tax expense increased $1.26 million, or 9.81%, and the effective rate decreased 36 basis points to 33.42% largely from a decrease in taxable revenues as a percent of operating earnings. For additional information, see Note 15, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report.expense.

 

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Financial Condition

 

Total assets as of December 31, 2018, decreased $144.092020, increased $212.29 million, or 6.03%7.58%, to $2.24$3.01 billion from $2.39$2.80 billion as of December 31, 2017.2019. The increase is primarily attributable to the increase in overnight funds of $247.76 million, or 167.40%. Total liabilities as of December 31, 2018, decreased $126.232020, increased $214.38 million, or 6.19%9.05%, to $1.91$2.58 billion from $2.04$2.37 billion as of December 31, 2017.2019. The increase is primarily the result of an increase in total deposits of $216.34 million, or 9.29%.  The increase in deposits is primarily attributable to the significant increase in demand deposits due to the unprecedented level of stimulus payments from the Federal Government in response to the pandemic. 

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Investment Securities

 

Our investment securities are used to generate interest income through the employmentdeployment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required.required, and to make selective investments for Community Reinvestment Act purposes. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Available-for-sale debt securities as of December 31, 2018,2020, decreased $12.41$86.22 million, or 7.50%50.84%, compared to December 31, 2017,2019. The decrease was attributable to sales of $51.03 million primarily due to the liquidation of the Highlands portfolio, as well as maturities, prepayments, and included thecalls of $44.68 million offset by purchases of $10.27 million.  The market value of debt securities available for sale as a percentage of our remaining single issue trust preferred securities. Held-to-maturityamortized cost was 101.71% as of December 31, 2020 compared to 100.65% as of December 31, 2019. There were no held-to-maturity debt securities as of December 31, 2018, decreased $136 thousand,2020 or 0.54%, compared to December 31, 2017.2019.  The remaining debt securities in the held-to-maturity category in 2018 matured during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of debt securities as of the dates indicated:

 

		December 31,																								December 31,
		2018								2017								2016								2020								2019								2018
		Amortized				Fair				Amortized				Fair				Amortized				Fair				Amortized				Fair				Amortized				Fair				Amortized				Fair
(Amounts in thousands)		Cost				Value				Cost				Value				Cost				Value				Cost				Value				Cost				Value				Cost				Value
Available for Sale
U.S. Agency securities		$	1,108			$	1,113			$	11,289			$	11,296			$	1,342			$	1,345			$	555			$	551			$	5,038			$	5,034			$	1,108			$	1,113
U.S. Treasury securities			19,970				19,960				19,987				19,971				-				-				—				—				—				—				19,970				19,960
Municipal securities			96,886				97,289				101,552				103,648				111,659				113,331				43,950				44,459				85,992				86,878				96,886				97,289
Single issue trust preferred securites			-				-				9,367				8,884				22,104				19,939				—				—				—				—				—				—
Mortgage-backed Agency securities			35,513				34,754				22,095				21,726				31,290				30,891				37,453				38,348				77,448				77,662				35,513				34,754
Total securities available for sale		$	153,477			$	153,116			$	164,290			$	165,525			$	166,395			$	165,506			$	81,958			$	83,358			$	168,478			$	169,574			$	153,477			$	153,116
Fair value to amortized cost							99.76	%							100.75	%							99.47	%							101.71	%							100.65	%							99.76	%
Held to Maturity
U.S. Agency securities		$	17,887			$	17,867			$	17,937			$	17,888			$	36,741			$	36,865			$	—			$	—			$	—			$	—			$	17,887			$	17,867
Corporate securities			7,126				7,123				7,212				7,196				10,392				10,401				—				—				—				—				7,126				7,123
Total securities held to maturity		$	25,013			$	24,990			$	25,149			$	25,084			$	47,133			$	47,266			$	—			$	—			$	—			$	—			$	25,013			$	24,990
Fair value to amortized cost							99.91	%							99.74	%							100.28	%																							99.91	%

 

The following table provides information about our investment portfolio as of the dates indicated:

 

		December 31,																								December 31,
		2018												2017												2020												2019
		Available for Sale				Held to Maturity				Total				Available for Sale				Held to Maturity				Total				Available for Sale				Held to Maturity				Total				Available for Sale				Held to Maturity				Total
(Amounts in years)
Average life			6.61				0.11				5.70				5.44				1.11				4.87				5.02				N/A				5.02				6.41				N/A				6.41
Average duration			5.37				0.11				4.64				4.74				1.09				4.26				1.84				N/A				1.84				5.30				N/A				5.30

 

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity as of December 31, 20182020 or 2017.2019.

 

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The following tables presenttable presents the amortized cost, fair value, and weighted-average yield of available-for-sale and held-to-maturity debt securities by contractual maturity, as of December 31, 2018.2020. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

		Available-for-Sale Securities
(Amounts in thousands)		U.S. Agency Securities				U.S. Treasury Securities				Municipal Securities				Total				Tax Equivalent Purchase Yield(1)
Amortized cost maturity:
One year or less		$	-			$	19,970			$	-			$	19,970				2.17	%
After one year through five years			-				-				14,447				14,447				3.81	%
After five years through ten years			1,108				-				82,439				83,547				3.56	%
After ten years			-				-				-				-				-
Amortized cost		$	1,108			$	19,970			$	96,886				117,964
Mortgage-backed securities															35,513				3.17	%
Total amortized cost														$	153,477
Tax equivalent purchase yield(1)			4.06	%			2.17	%			3.59	%			3.36	%
Average contractual maturity (in years)			8.07				0.17				6.54				5.48
Fair value maturity:
One year or less		$	-			$	19,960			$	-			$	19,960
After one year through five years			-				-				14,595				14,595
After five years through ten years			1,113				-				82,694				83,807
After ten years			-				-				-				-
Fair value		$	1,113			$	19,960			$	97,289				118,362
Mortgage-backed securities															34,754
Total fair value														$	153,116

(1)  FTE basis of 21%

		Available-for-Sale Securities
(Amounts in thousands)		U.S. Agency Securities				U.S. Treasury Securities				Municipal Securities				Total				Tax Equivalent Purchase Yield(1)
Amortized cost maturity:
One year or less		$	—			$	—			$	—			$	—				—
After one year through five years			—				—				24,485				24,485				3.78	%
After five years through ten years			555				—				19,465				20,020				3.24	%
After ten years			—				—				—				—				—
Amortized cost		$	555			$	—			$	43,950				44,505
Mortgage-backed securities															37,453				2.13	%
Total amortized cost														$	81,958
Tax equivalent purchase yield(1)			2.09	%			—				3.56	%			3.54	%
Average contractual maturity (in years)			6.05				—				4.75				4.77
Fair value maturity:
One year or less		$	—			$	—			$	—			$	—
After one year through five years			—				—				24,703				24,703
After five years through ten years			551				—				19,756				20,307
After ten years			—				—				—				—
Fair value		$	551			$	—			$	44,459				45,010
Mortgage-backed securities															38,348
Total fair value														$	83,358

 

		Held-to-Maturity Securities
(Amounts in thousands)		U.S. Agency Securities				Corporate Notes				Total				Tax Equivalent Purchase Yield(1)
Amortized cost maturity:
One year or less		$	17,887			$	7,126			$	25,013				1.67	%
After one year through five years			-				-				-				-
After five years through ten years			-				-				-				-
After ten years			-				-				-				-
Total amortized cost		$	17,887			$	7,126			$	25,013
Tax equivalent purchase yield(1)			1.59	%			1.84	%			1.67	%
Average contractual maturity (in years)			0.14				0.06				0.11
Fair value maturity:
One year or less		$	17,867			$	7,123			$	24,990
After one year through five years			-				-				-
After five years through ten years			-				-				-
After ten years			-				-				-
Total fair value		$	17,867			$	7,123			$	24,990

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(1)

(1)  FTE basis of 21%

 

Investment securities are reviewed quarterly for indications of other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities in 20182020 or 2017.2019. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Item 8 of this report.

 

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Loans Held for Investment

 

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). The general characteristics of each loan segment are as follows:

 

●

Commercial loans – This segment consists of loans to small and mid-size industrial, commercial, and service companies that include, but are not limited to, natural gas producers, retail merchants, and wholesale merchants. Commercial real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators. Commercial loan underwriting guidelines require that comprehensive reviews and independent evaluations be performed on credits exceeding predefined size limits. Updates to these loan reviews are done periodically or annually depending on the size of the loan relationship.

●

Consumer real estate loans – This segment consists of loans to smallindividuals within our market footprint for home equity loans and mid-size industrial, commercial,lines of credit and service companies that include, but are not limited to, natural gas producers, retail merchants, and wholesale merchants. Commercialfor the purchase or construction of owner occupied homes. Residential real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators. Commercial loan underwriting guidelines require that comprehensive reviewsborrowers meet certain credit, income, and independent evaluations be performed on credits exceeding predefined size limits. Updates to these loan reviews are done periodically or annually depending on the size of the loan relationship.collateral standards at origination.

●

Consumer real estate loans – This segment consists of loans to individuals within our market footprint for home equity loans and lines of credit and for the purchase or construction of owner occupied homes. Residential real estate loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

●

Consumer and other loans – This segment consists of loans to individuals within our market footprint that include, but are not limited to, personal lines of credit, credit cards, and the purchase of automobiles, boats, mobile homes, and other consumer goods. Consumer loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

 

Total loans held for investment, net of unearned income, as of December 31, 2018, decreased $42.102020, increased $72.17 million, or 2.32%3.41%, compared to December 31, 2017, primarily due to a $32.97 million, or 1.84%, decrease in non-covered loans, which was driven by declines in owner occupied construction; multi-family residential; and farmland segments.2019. Covered loans decreased $9.13$3.18 million, or 32.68%24.73%, as the Waccamaw Bank (“Waccamaw”) covered loan portfolio continues to pay down. We had no foreign loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans that represented 10% or more of outstanding loans, as of December 31, 20182020 or 2017.2019. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.

 

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

 

			December 31,																				December 31,
(Amounts in thousands)	(Amounts in thousands)		2018				2017				2016				2015				2014				2020				2019				2018				2017				2016
Non-covered loans held for investment	Non-covered loans held for investment
Commercial loans	Commercial loans
Construction, development, and other land	Construction, development, and other land		$	63,508			$	60,017			$	56,948			$	48,896			$	41,271			$	44,649			$	48,659			$	63,508			$	60,017			$	56,948
Commercial and industrial	Commercial and industrial			104,863				92,188				92,204				88,903				83,099				173,024				142,962				104,863				92,188				92,204
Multi-family residential	Multi-family residential			107,012				125,202				134,228				95,026				97,480				115,161				121,840				107,012				125,202				134,228
Single family non-owner occupied	Single family non-owner occupied			140,097				141,670				142,965				149,351				135,171				187,598				163,181				140,097				141,670				142,965
Non-farm, non-residential	Non-farm, non-residential			613,877				616,633				598,674				485,460				473,906				734,793				727,261				613,877				616,633				598,674
Agricultural	Agricultural			8,545				7,035				6,003				2,911				1,599				9,749				11,756				8,545				7,035				6,003
Farmland	Farmland			18,905				25,649				31,729				27,540				29,517				19,761				23,155				18,905				25,649				31,729
Total commercial loans	Total commercial loans			1,056,807				1,068,394				1,062,751				898,087				862,043				1,284,735				1,238,814				1,056,807				1,068,394				1,062,751
Consumer real estate loans	Consumer real estate loans
Home equity lines	Home equity lines			93,466				103,205				106,361				107,367				110,957				89,432				110,078				93,466				103,205				106,361
Single family owner occupied	Single family owner occupied			510,963				502,686				500,891				495,209				485,475				658,678				620,697				510,963				502,686				500,891
Owner occupied construction	Owner occupied construction			18,171				39,178				44,535				43,505				32,799				17,720				17,241				18,171				39,178				44,535
Total consumer real estate loans	Total consumer real estate loans			622,600				645,069				651,787				646,081				629,231				765,830				748,016				622,600				645,069				651,787
Consumer and other loans	Consumer and other loans
Consumer loans	Consumer loans			71,552				70,772				77,445				72,000				69,347				120,373				110,027				71,552				70,772				77,445
Other	Other			5,310				5,001				3,971				7,338				6,555				6,014				4,742				5,310				5,001				3,971
Total consumer and other loans	Total consumer and other loans			76,862				75,773				81,416				79,338				75,902				126,387				114,769				76,862				75,773				81,416
Total non-covered loans	Total non-covered loans			1,756,269				1,789,236				1,795,954				1,623,506				1,567,176				2,176,952				2,101,599				1,756,269				1,789,236				1,795,954
Total covered loans	Total covered loans			18,815				27,948				56,994				83,035				122,240				9,680				12,861				18,815				27,948				56,994
Total loans held for investment, net of unearned income	Total loans held for investment, net of unearned income			1,775,084				1,817,184				1,852,948				1,706,541				1,689,416				2,186,632				2,114,460				1,775,084				1,817,184				1,852,948
Less: allowance for loan losses	Less: allowance for loan losses			18,267				19,276				17,948				20,233				20,227				26,182				18,425				18,267				19,276				17,948
Total loans held for investment, net of unearned income and allowance	Total loans held for investment, net of unearned income and allowance		$	1,756,817			$	1,797,908			$	1,835,000			$	1,686,308			$	1,669,189			$	2,160,450			$	2,096,035			$	1,756,817			$	1,797,908			$	1,835,000
Loans held for sale	Loans held for sale		$	-			$	-			$	-			$	-			$	1,792			$	—			$	263			$	—			$	—			$	—

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

 

			December 31,
(Amounts in thousands)			2018				2017				2016				2015				2014
Commercial loans
Construction, development, and other land			$	35			$	39			$	4,570			$	6,303			$	13,100
Commercial and industrial				-				-				895				1,170				2,662
Multi-family residential				-				-				8				640				1,584
Single family non-owner occupied				238				284				962				2,674				5,918
Non-farm, non-residential				6				9				7,512				14,065				25,317
Agricultural				-				-				25				34				43
Farmland				-				-				397				643				716
Total commercial loans				279				332				14,369				25,529				49,340
Consumer real estate loans
Home equity lines				15,284				23,720				35,817				48,565				60,391
Single family owner occupied				3,252				3,896				6,729				8,595				11,968
Owner occupied construction				-				-				-				262				453
Total consumer real estate loans				18,536				27,616				42,546				57,422				72,812
Consumer and other loans
Consumer loans				-				-				79				84				88
Total covered loans			$	18,815			$	27,948			$	56,994			$	83,035			$	122,240

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		December 31,
(Amounts in thousands)		2020				2019				2018				2017				2016
Commercial loans
Construction, development, and other land		$	25			$	28			$	35			$	39			$	4,570
Commercial and industrial			—				—				—				—				895
Multi-family residential			—				—				—				—				8
Single family non-owner occupied			185				199				238				284				962
Non-farm, non-residential			—				3				6				9				7,512
Agricultural			—				—				—				—				25
Farmland			—				—				—				—				397
Total commercial loans			210				230				279				332				14,369
Consumer real estate loans
Home equity lines			7,094				9,853				15,284				23,720				35,817
Single family owner occupied			2,376				2,778				3,252				3,896				6,729
Owner occupied construction			—				—				—				—				—
Total consumer real estate loans			9,470				12,631				18,536				27,616				42,546
Consumer and other loans
Consumer loans			—				—				—				—				79
Total covered loans		$	9,680			$	12,861			$	18,815			$	27,948			$	56,994

 

The following table presents the percentage of loans to total loans in the non-covered portfolio, by loan class, as of the dates indicated:

 

		December 31,																				December 31,
		2018				2017				2016				2015				2014				2020				2019				2018				2017				2016
Commercial loans
Construction, development, and other land			3.61	%			3.36	%			3.17	%			3.01	%			2.64	%			2.04	%			2.31	%			3.61	%			3.36	%			3.17	%
Commercial and industrial			5.97	%			5.15	%			5.13	%			5.48	%			5.30	%			7.95	%			6.80	%			5.97	%			5.15	%			5.13	%
Multi-family residential			6.09	%			7.00	%			7.47	%			5.85	%			6.22	%			5.29	%			5.80	%			6.09	%			7.00	%			7.47	%
Single family non-owner occupied			7.98	%			7.92	%			7.96	%			9.20	%			8.63	%			8.62	%			7.76	%			7.98	%			7.92	%			7.96	%
Non-farm, non-residential			34.95	%			34.46	%			33.34	%			29.90	%			30.24	%			33.75	%			34.62	%			34.95	%			34.46	%			33.34	%
Agricultural			0.49	%			0.39	%			0.34	%			0.18	%			0.10	%			0.45	%			0.56	%			0.49	%			0.39	%			0.34	%
Farmland			1.08	%			1.43	%			1.77	%			1.70	%			1.88	%			0.91	%			1.10	%			1.08	%			1.43	%			1.77	%
Total commercial loans			60.17	%			59.71	%			59.18	%			55.32	%			55.01	%			59.01	%			58.95	%			60.17	%			59.71	%			59.18	%
Consumer real estate loans
Home equity lines			5.32	%			5.77	%			5.92	%			6.62	%			7.08	%			4.11	%			5.24	%			5.32	%			5.77	%			5.92	%
Single family owner occupied			29.09	%			28.09	%			27.89	%			30.50	%			30.98	%			30.26	%			29.52	%			29.09	%			28.09	%			27.89	%
Owner occupied construction			1.04	%			2.19	%			2.48	%			2.68	%			2.09	%			0.81	%			0.83	%			1.04	%			2.19	%			2.48	%
Total consumer real estate loans			35.45	%			36.05	%			36.29	%			39.80	%			40.15	%			35.18	%			35.59	%			35.45	%			36.05	%			36.29	%
Consumer and other loans
Consumer loans			4.08	%			3.96	%			4.31	%			4.43	%			4.42	%			5.54	%			5.25	%			4.08	%			3.96	%			4.31	%
Other			0.30	%			0.28	%			0.22	%			0.45	%			0.42	%			0.27	%			0.21	%			0.30	%			0.28	%			0.22	%
Total consumer and other loans			4.38	%			4.24	%			4.53	%			4.88	%			4.84	%			5.81	%			5.46	%			4.38	%			4.24	%			4.53	%
Total non-covered loans			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%

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The following table presents the percentage of loans to total loans in the covered portfolio, by loan class, as of the dates indicated:

 

		December 31,																				December 31,
		2018				2017				2016				2015				2014				2020				2019				2018				2017				2016
Commercial loans
Construction, development, and other land			0.19	%			0.14	%			8.02	%			7.59	%			10.72	%			0.26	%			0.22	%			0.19	%			0.14	%			8.02	%
Commercial and industrial			0.00	%			0.00	%			1.57	%			1.41	%			2.18	%			0.00	%			0.00	%			0.00	%			0.00	%			1.57	%
Multi-family residential			0.00	%			0.00	%			0.01	%			0.77	%			1.30	%			0.00	%			0.00	%			0.00	%			0.00	%			0.01	%
Single family non-owner occupied			1.26	%			1.02	%			1.69	%			3.22	%			4.84	%			1.91	%			1.55	%			1.26	%			1.02	%			1.69	%
Non-farm, non-residential			0.03	%			0.03	%			13.18	%			16.94	%			20.71	%			0.00	%			0.02	%			0.03	%			0.03	%			13.18	%
Agricultural			0.00	%			0.00	%			0.04	%			0.04	%			0.03	%			0.00	%			0.00	%			0.00	%			0.00	%			0.04	%
Farmland			0.00	%			0.00	%			0.70	%			0.77	%			0.59	%			0.00	%			0.00	%			0.00	%			0.00	%			0.70	%
Total commercial loans			1.48	%			1.19	%			25.21	%			30.74	%			40.37	%			2.17	%			1.79	%			1.48	%			1.19	%			25.21	%
Consumer real estate loans
Home equity lines			81.23	%			84.87	%			62.84	%			58.49	%			49.40	%			73.28	%			76.61	%			81.23	%			84.87	%			62.84	%
Single family owner occupied			17.29	%			13.94	%			11.81	%			10.35	%			9.79	%			24.55	%			21.60	%			17.29	%			13.94	%			11.81	%
Owner occupied construction			0.00	%			0.00	%			0.00	%			0.32	%			0.37	%			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%
Total consumer real estate loans			98.52	%			98.81	%			74.65	%			69.16	%			59.56	%			97.83	%			98.21	%			98.52	%			98.81	%			74.65	%
Consumer and other loans
Consumer loans			0.00	%			0.00	%			0.14	%			0.10	%			0.07	%			0.00	%			0.00	%			0.00	%			0.00	%			0.14	%
Total covered loans			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%

 

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The following table presents the maturities and rate sensitivities of the non-covered loan portfolio as of December 31, 2018:2020:

 

(Amounts in thousands)		Due in One Year or Less				Due After One Year Through Five Years				Due After Five Years				Total				Due in One Year or Less				Due After One Year Through Five Years				Due After Five Years				Total
Commercial loans	Commercial loans
Construction, development, and other land(1)		$	9,638			$	30,519			$	23,351			$	63,508
Construction, development, and other land(1)																		$	8,954			$	8,533			$	27,162			$	44,649
Commercial and industrial			24,631				49,157				31,075				104,863				18,539				117,394				37,091				173,024
Multi-family residential			9,149				13,440				84,423				107,012				3,197				19,411				92,553				115,161
Single family non-owner occupied			8,627				20,354				111,116				140,097				8,900				21,630				157,068				187,598
Non-farm, non-residential			59,475				152,601				401,801				613,877				54,172				169,001				511,620				734,793
Agricultural			853				5,186				2,506				8,545				1,615				7,174				960				9,749
Farmland			3,640				4,687				10,578				18,905				2,329				6,414				11,018				19,761
Total commercial loans			116,013				275,944				664,850				1,056,807				97,706				349,557				837,472				1,284,735
Consumer real estate loans	Consumer real estate loans
Home equity lines			4,232				11,999				77,235				93,466				5,263				11,912				72,257				89,432
Single family owner occupied			3,969				21,263				485,731				510,963				2,734				21,836				634,108				658,678
Owner occupied construction			2,391				473				15,307				18,171				270				764				16,686				17,720
Total consumer real estate loans			10,592				33,735				578,273				622,600				8,267				34,512				723,051				765,830
Consumer and other loans	Consumer and other loans
Consumer loans			9,455				54,983				7,114				71,552				9,770				87,023				23,580				120,373
Other			1,695				1,581				2,034				5,310				6,014				—				—				6,014
Total consumer and other loans			11,150				56,564				9,148				76,862				15,784				87,023				23,580				126,387
Total non-covered loans		$	137,755			$	366,243			$	1,252,271			$	1,756,269			$	121,757			$	471,092			$	1,584,103			$	2,176,952
Rate sensitivities	Rate sensitivities
Predetermined interest rate		$	99,963			$	322,401			$	454,648			$	877,012			$	77,371			$	434,895			$	862,277			$	1,374,543
Floating or adjustable interest rate			37,792				43,842				797,623				879,257				44,385				36,197				721,827				802,409
Total non-covered loans		$	137,755			$	366,243			$	1,252,271			$	1,756,269			$	121,756			$	471,092			$	1,584,104			$	2,176,952

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(1)		Construction loans with maturities due after five years include construction to permanent loans that have not converted to principal and interest payments.

 

The following table presents the maturities and rate sensitivities of the covered loan portfolio as of December 31, 2018:2020:

 

(Amounts in thousands)		Due in One Year or Less				Due After One Year Through Five Years				Due After Five Years				Total				Due in One Year or Less				Due After One Year Through Five Years				Due After Five Years				Total
Commercial loans
Construction, development, and other land		$	-			$	35			$	-			$	35			$	—			$	25			$	—			$	25
Single family non-owner occupied			3				212				23				238				168				17				—				185
Non-farm, non-residential			-				6				-				6				—				—				—				—
Total commercial loans			3				253				23				279				168				42				—				210
Consumer real estate loans
Home equity lines			607				7,810				6,867				15,284				792				4,553				1,749				7,094
Single family owner occupied			43				363				2,846				3,252				8				202				2,166				2,376
Total consumer real estate loans			650				8,173				9,713				18,536				800				4,755				3,915				9,470
Total covered loans		$	653			$	8,426			$	9,736			$	18,815			$	968			$	4,797			$	3,915			$	9,680
Rate sensitivities
Predetermined interest rate		$	46			$	563			$	2,786			$	3,395			$	222			$	703			$	2,192			$	3,117
Floating or adjustable interest rate			607				7,863				6,950				15,420				746				4,094				1,723				6,563
Total covered loans		$	653			$	8,426			$	9,736			$	18,815			$	968			$	4,797			$	3,915			$	9,680

 

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Risk Elements

 

We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.00 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.

 

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5, “Credit Quality,” to the Consolidated Financial Statements in Item 8 of this report.

 

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

 

		December 31,																				December 31,
(Amounts in thousands)		2018				2017				2016				2015				2014				2020				2019				2018				2017				2016
Non-covered nonperforming
Nonaccrual loans		$	19,583			$	18,997			$	15,854			$	17,847			$	10,556			$	21,706			$	16,113			$	19,583			$	18,997			$	15,854
Accruing loans past due 90 days or more			58				1				-				-				-				295				144				58				1				—
TDRs(1)			161				120				114				73				2,726
TDRs(1)																							187				720				161				120				114
Total non-covered nonperforming loans			19,802				19,118				15,968				17,920				13,282				22,188				16,977				19,802				19,118				15,968
Non-covered OREO			3,806				2,409				5,109				4,873				6,638				2,083				3,969				3,806				2,409				5,109
Total non-covered nonperforming assets		$	23,608			$	21,527			$	21,077			$	22,793			$	19,920			$	24,271			$	20,946			$	23,608			$	21,527			$	21,077
Covered nonperforming
Nonaccrual loans		$	322			$	342			$	608			$	647			$	2,438			$	297			$	244			$	322			$	342			$	608
Total covered nonperforming loans			322				342				608				647				2,438				297				244				322				342				608
Covered OREO			32				105				276				4,034				6,324				—				—				32				105				276
Total covered nonperforming assets		$	354			$	447			$	884			$	4,681			$	8,762			$	297			$	244			$	354			$	447			$	884
Total nonperforming
Nonaccrual loans		$	19,905			$	19,339			$	16,462			$	18,494			$	12,994			$	22,003			$	16,357			$	19,905			$	19,339			$	16,462
Accruing loans past due 90 days or more			58				1				-				-				-				295				144				58				1				—
TDRs(1)			161				120				114				73				2,726
TDRs(1)																							187				720				161				120				114
Total nonperforming loans			20,124				19,460				16,576				18,567				15,720				22,485				17,221				20,124				19,460				16,576
OREO			3,838				2,514				5,385				8,907				12,962				2,083				3,969				3,838				2,514				5,385
Total nonperforming assets		$	23,962			$	21,974			$	21,961			$	27,474			$	28,682			$	24,568			$	21,190			$	23,962			$	21,974			$	21,961
Additional Information
Performing TDRs(2)		$	6,266			$	7,614			$	12,838			$	13,889			$	11,808
Total TDRs(3)			6,427				7,734				12,952				13,962				14,534
Performing TDRs(2)																						$	10,061			$	5,855			$	6,266			$	7,614			$	12,838
Total TDRs(3)																							10,248				6,575				6,427				7,734				12,952
Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans			1,175				1,217				1,414				1,645				1,171				—				1,068				1,175				1,217				1,414
Actual interest income recorded on restructured and nonperforming loans			264				222				424				608				597				473				277				264				222				424
Non-covered ratios
Nonperforming loans to total loans			1.13	%			1.07	%			0.89	%			1.10	%			0.85	%			1.02	%			0.81	%			1.13	%			1.07	%			0.89	%
Nonperforming assets to total assets			1.06	%			0.91	%			0.90	%			0.96	%			0.80	%			0.81	%			0.75	%			1.06	%			0.91	%			0.90	%
Non-PCI allowance to nonperforming loans			92.25	%			100.83	%			112.32	%			112.61	%			151.85	%			118.00	%			108.53	%			92.25	%			100.83	%			112.32	%
Non-PCI allowance to total loans			1.04	%			1.08	%			1.00	%			1.24	%			1.29	%			1.20	%			0.88	%			1.04	%			1.08	%			1.00	%
Total ratios
Nonperforming loans to total loans			1.13	%			1.07	%			0.89	%			1.09	%			0.93	%			1.03	%			0.81	%			1.13	%			1.07	%			0.89	%
Nonperforming assets to total assets			1.07	%			0.92	%			0.92	%			1.12	%			1.10	%			0.82	%			0.76	%			1.07	%			0.92	%			0.92	%
Allowance for loan losses to nonperforming loans			90.77	%			99.05	%			108.28	%			108.97	%			128.67	%			116.44	%			106.99	%			90.77	%			99.05	%			108.28	%
Allowance for loan losses to total loans			1.03	%			1.06	%			0.97	%			1.19	%			1.20	%			1.20	%			0.87	%			1.03	%			1.06	%			0.97	%

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(1)		TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.18 million, $95 thousand, $898 thousand, $169 thousand, $224 thousand, $923 thousand, and $306$224 thousand for the five years ended December 31, 2018.2020.  They are included in nonaccrual loans.
(2)		TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $637 thousand, $2.25 million, $1.68 million, $1.76 million, and $1.06 million $416 thousand,for the five years ended December 31, 2020.  They are included in nonaccrual loans.
(3)		Total accruing TDRs exclude nonaccrual TDRs of $1.81million, $2.34 million, $2.58 million, $1.93 million, and $248 thousand$1.28 million for the five years ended December 31, 2018.2020.  They are included in nonaccrual loans.
(3)		Total TDRs exclude nonaccrual TDRs of $2.58 million, $1.93 million, $1.28 million, $1.34 million, and $554 thousand for the five years ended December 31, 2018.

 

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Non-covered nonperforming assets as of December 31, 2018,2020, increased $2.08$3.33 million, or 9.67%15.87%, from December 31, 2017,2019, primarily due to a $1.40an increase of  $5.59 million, or 57.99%34.71%, increasein non-covered nonaccrual loans offset by a $1.89 million, or 47.52% decrease in non-covered OREO, and a $586$533 thousand, or 3.08%74.03%, increasedecrease in non-covered, nonaccrual loans.non-performing troubled debt restructurings.  Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 2522 properties with an average holding period of 716 months as of December 31, 2018.2020. The net loss on the sale of OREO was $316 thousand in 2020, $1.25 million in 2019, and $1.33 million in 2018, $937 thousand in 2017, and $1.15 million in 2016.2018. The following table presents the changes in OREO during the periods indicated:

 

		Year Ended December 31,																								Year Ended December 31,
		2018												2017												2020												2019
		Non-covered				Covered				Total				Non-covered				Covered				Total				Non-covered				Covered				Total				Non-covered				Covered				Total
(Amounts in thousands)
Beginning balance		$	2,409			$	105			$	2,514			$	5,109			$	276			$	5,385			$	3,969			$	—			$	3,969			$	3,806			$	32			$	3,838
Acquired																											—				—				—				1,962				—				1,962
Additions			5,686				-				5,686				2,204				79				2,283				695				—				695				3,030				131				3,161
Disposals			(3,506	)			(69	)			(3,575	)			(4,165	)			(218	)			(4,383	)			(2,139	)			—				(2,139	)			(3,837	)			(152	)			(3,989	)
Valuation adjustments			(783	)			(4	)			(787	)			(739	)			(32	)			(771	)			(442	)			—				(442	)			(992	)			(11	)			(1,003	)
Ending balance		$	3,806			$	32			$	3,838			$	2,409			$	105			$	2,514			$	2,083			$	—			$	2,083			$	3,969			$	—			$	3,969

 

As of December 31, 2018,2020, non-covered nonaccrual loans were largely attributed to single family owner occupied (51.78%(36.67%) and non-farm, non-residential (20.53%(29.22%) loans. As of December 31, 2018,2020, approximately $1.53$6.09 million, or 7.80%28.06%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

 

Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Total TDRs as of December 31, 2018, decreased $655 thousand,2020, increased $3.15 million, or 6.78%35.27%, to $9.01$12.06 million from December 31, 2017.2019. Nonperforming accruing TDRs as of December 31, 2018, increased $412020, decreased $533 thousand, or 34.17%74.03%, to $161$187 thousand from December 31, 2017.2019. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 2.51%1.82% as of December 31, 2018,2020, compared to 1.55%13.69% as of December 31, 2017.2019. Specific reserves on TDRs totaled $568$233 thousand as of December 31, 2020, compared to $353 thousand as of December 31, 2018, compared to $642 thousand as of December 31, 2017.2019. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.

 

The Coronavirus Aid, Relief and Economic Security ("CARES") Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.

Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.

Commercial Loans Modified Under CARES Act 

The following table details the balance of commercial loans modified for short-term payment deferral under provision of the CARES Act as of the dates indicated.

		December 31, 2020							September 30, 2020							June 30, 2020
						Percent							Percent							Percent
(unaudited, in thousands)		Balance				Modified			Balance				Modified			Balance				Modified
Construction, development, and other land		$	1,409			3.15	%		$	3,753			8.88	%		$	14,377			27.33	%
Commercial and industrial			1,363			0.79	%			6,700			3.61	%			25,584			13.88	%
Multi-family residential			351			0.30	%			5,919			5.61	%			22,021			20.82	%
Single family non-owner occupied			1,683			0.90	%			7,049			3.65	%			39,135			20.75	%
Commercial Real Estate - Hotel/Motel			17,465			17.42	%			48,225			46.69	%			92,940			89.75	%
Commercial Real Estate - Retail Strip Centers			—			—				4,432			6.45	%			19,740			38.17	%
Commercial Real Estate - Other			3,968			0.69	%			22,912			3.92	%			116,871			20.58	%
Agricultural			33			0.34	%			1,322			12.93	%			3,464			33.29	%
Farmland			266			1.35	%			2,223			9.56	%			5,865			24.79	%
Total commercial modifications		$	26,538			2.07	%		$	102,535			7.78	%		$	339,997			26.39	%

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $29.89$35.72 million as of December 31, 2018, a decrease2020, an increase of $825$97 thousand, or 2.69%0.27%, compared to $30.71$35.62 million as of December 31, 2017.2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.70%1.64% as of December 31, 2018,2020, which includes past due loans (0.59%(0.64%) and nonaccrual loans (1.11%(1.00%), compared to 1.71%1.69% as of December 31, 2017.2019.

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Allowance for Loan Losses

 

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates. As of December 31, 2018,2020, our qualitative risk factors reflect a stableincreased risk of possible loan losses due to consistent asset quality metrics and relatively stable business and economic conditions in our primary market areas.the effects of the COVID-19 pandemic. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of December 31, 2018;2020; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see “Allowance for Loan Losses” in the “Critical Accounting Policies” section above and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

The allowance for loan losses as of December 31, 2018, decreased $1.01 million,2020, increased $7.76, or 5.23%42.10%, from December 31, 2017,2019, primarily due the increased potential for loan defaults and losses related to a $1.11 million decrease in specific reserves on impaired loans combined with a $97 thousand increase in general reserves.the COVID-19 pandemic.  The non-PCI allowance as a percent of non-covered loans totaled 1.04%1.20% as of December 31, 2018,2020, compared to 1.08%0.88% as of December 31, 2017.2019. PCI loans were aggregated into fivefifteen loan pools as of December 31, 20182020 and 2017; Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial, and Peoples residential. The cash flow analysis identified no impaired PCIfive loan pools as of December 31, 2018 or 2017.in 2019. The Highlands transaction added ten additional pools to the five existing pools from 2019. Effective January 1, 2020, the Company collapsed the PCI loans and discounts for Peoples and Waccamaw acquired loans into the non-PCI loan portfolio.  The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and Home Equity Lines, Commercial Land and Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner Occupied, Commercial and Industrial, and Consumer.  Net charge-offs increased $1.96$1.50 million, or 43.89% in 20182020 compared to 2017, largely due to the charge off of one impaired loan relationship totaling $1.34 million in the single family owner occupied segment that was fully reserved.2019.

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

 

		Year Ended December 31,
		2018				2017				2016				2015				2014
(Amounts in thousands)
Beginning balance		$	19,276			$	17,948			$	20,233			$	20,227			$	24,077
Removal of loans transferred(1)			-				-				-				-				(682	)
Provision for loan losses charged to operations, non-PCI loans			2,393				2,783				1,296				2,166				420
(Recovery of) provision for loan losses charged to operations, PCI loans			-				(12	)			(41	)			25				(275	)
Recovery of loan losses recorded through the FDIC indemnification asset			-				-				(1	)			(29	)			(422	)
Charge-offs
Commercial loans
Construction, development, and other land			100				427				254				256				1,238
Commercial and industrial			566				224				144				93				459
Multi-family residential			16				9				64				-				35
Single family non-owner occupied			88				52				237				87				488
Non-farm, non-residential			119				142				1,684				773				832
Agricultural			68				-				-				-				-
Farmland			279				68				9				73				-
Consumer real estate loans
Home equity lines			285				13				1,073				92				451
Single family owner occupied			1,720				675				508				812				988
Owner occupied construction			-				11				31				2				305
Consumer and other loans
Consumer loans			1,666				1,322				1,172				1,557				1,685
Total charge-offs			4,907				2,943				5,176				3,745				6,481
Recoveries
Commercial loans
Construction, development, and other land			210				306				282				135				84
Commercial and industrial(2)			200				160				484				173				1,736
Multi-family residential			17				9				15				-				10
Single family non-owner occupied			98				180				79				92				331
Non-farm, non-residential			191				146				59				74				239
Agricultural			7				-				-				-				-
Consumer real estate loans
Home equity lines			216				201				137				402				514
Single family owner occupied			238				108				182				258				76
Owner occupied construction			-				105				39				18				-
Consumer and other
Consumer loans			328				285				360				437				600
Total recoveries			1,505				1,500				1,637				1,589				3,590
Net charge-offs			3,402				1,443				3,539				2,156				2,891
Ending balance		$	18,267			$	19,276			$	17,948			$	20,233			$	20,227
Net charge-offs to average non-covered loans			0.19	%			0.08	%			0.21	%			0.14	%			0.18	%
Net charge-offs to average total loans			0.19	%			0.08	%			0.20	%			0.13	%			0.17	%

(1)		Loans transferred in branch divestitures
(2)		Includes a $1.60 million recovery in 2014 related to the positive resolution of a sizable problem credit

		December 31,
		2020				2019				2018				2017				2016
(Amounts in thousands)
Beginning balance		$	18,425			$	18,267			$	19,276			$	17,948			$	20,233
Provision for loan losses charged to operations, non-PCI loans			12,668				3,571				2,393				2,783				1,296
(Recovery of) provision for loan losses charged to operations, PCI loans			—				—				—				(12	)			(41	)
Recovery of loan losses recorded through the FDIC indemnification asset			—				—				—				—				(1	)
Charge-offs
Commercial loans
Construction, development, and other land			349				353				100				427				254
Commercial and industrial			856				549				566				224				144
Multi-family residential			295				310				16				9				64
Single family non-owner occupied			442				64				88				52				237
Non-farm, non-residential			650				1,015				119				142				1,684
Agricultural			160				52				68				—				—
Farmland			17				205				279				68				9
Consumer real estate loans
Home equity lines			145				474				285				13				1,073
Single family owner occupied			413				1,316				1,720				675				508
Owner occupied construction			—				—				—				11				31
Consumer and other loans
Consumer loans			3,296				1,923				1,666				1,322				1,172
Total charge-offs			6,623				6,261				4,907				2,943				5,176
Recoveries
Commercial loans
Construction, development, and other land			266				146				210				306				282
Commercial and industrial			177				99				200				160				484
Multi-family residential			39				3				17				9				15
Single family non-owner occupied			37				12				98				180				79
Non-farm, non-residential			95				546				191				146				59
Agricultural			11				1				7				—				—
Farmland			5				66				—				—				—
Consumer real estate loans
Home equity lines			262				401				216				201				137
Single family owner occupied			142				1,045				238				108				182
Owner occupied construction			—				42				—				105				39
Consumer and other
Consumer loans			678				487				328				285				360
Total recoveries			1,712				2,848				1,505				1,500				1,637
Net charge-offs			4,911				3,413				3,402				1,443				3,539
Ending balance		$	26,182			$	18,425			$	18,267			$	19,276			$	17,948
Net charge-offs to average non-covered loans			0.23	%			0.20	%			0.19	%			0.08	%			0.21	%
Net charge-offs to average total loans			0.23	%			0.20	%			0.19	%			0.08	%			0.20	%

 

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The following table presents the allowance for loan losses, excluding PCI loans, by loan class, as of the dates indicated:

 

		December 31,																				December 31,
(Amounts in thousands)		2018				2017				2016				2015				2014				2020				2019				2018				2017				2016
Commercial loans																														��
Construction, development, and other land		$	417			$	830			$	889			$	1,119			$	1,151			$	528			$	245			$	417			$	830			$	889
Commercial and industrial			663				762				495				504				689				1,024				699				663				762				495
Multi-family residential			1,192				1,094				1,157				1,535				1,917				1,417				969				1,192				1,094				1,157
Single family non-owner occupied			1,442				1,976				2,752				3,369				3,228				1,861				1,323				1,442				1,976				2,752
Non-farm, non-residential			6,530				6,597				6,185				6,393				5,805				9,417				6,653				6,530				6,597				6,185
Agricultural			85				51				43				22				13				218				145				85				51				43
Farmland			170				362				169				190				206				196				201				170				362				169
Consumer real estate loans
Home equity lines			748				803				895				1,091				1,330				799				673				748				803				895
Single family owner occupied			5,853				5,710				4,364				4,969				4,935				7,957				5,528				5,853				5,710				4,364
Owner occupied construction			131				297				228				297				225				195				124				131				297				228
Consumer and other loans
Consumer loans			1,036				794				759				690				670				2,570				1,865				1,036				794				759
Total allowance, excluding PCI loans		$	18,267			$	19,276			$	17,936			$	20,179			$	20,169			$	26,182			$	18,425			$	18,267			$	19,276			$	17,936

 

The following table presents the

There was no allowance related to PCI allowance for loan losses, by loan pool,loans as of the dates indicated:

December 31, 2020, nor for December 31, 2019, 2018, or 2017.  As of December 31, 2016 there was an allowance of $12 thousand related to PCI loans.

		December 31,
(Amounts in thousands)		2018				2017				2016				2015				2014
Commercial loans
Waccamaw commercial		$	-			$	-			$	-			$	-			$	37
Consumer real estate loans
Waccamaw residential			-				-				-				1				-
Peoples residential			-				-				12				53				21
Total PCI allowance		$	-			$	-			$	12			$	54			$	58

Deposits

 

Total deposits as of December 31, 2018, decreased $74.142020, increased $216.34 million, or 3.84%9.29%, compared to December 31, 2017.2019. Time deposits, which consist of certificates of deposit and individual retirement accounts, decreased $51.89$95.00 million; savings deposits, which consist of money market accounts and savings accounts, decreased $13.98increased $65.73 million; and interest-bearing demand deposits decreased $13.69increased $100.68 million while noninterest-bearing demand deposits increased $5.41$144.93 million as of December 31, 2018,2020, compared to December 31, 2017.2019.  We attribute the significant increase in demand deposits to the unprecedented level of stimulus payments from the Federal Government in response to the pandemic.  We had no material deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of December 31, 20182020 or 2017.2019.

 

The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2018:2020:

 

(Amounts in thousands)
Three months or less		$	10,522			$	22,487
Over three through six months			6,242				24,516
Over six through twelve months			25,318				32,584
Over twelve months			131,696				74,197
		$	173,778			$	153,784

 

Borrowings

 

Total borrowings as of December 31, 2018,2020, decreased $50.72 million,$637 thousand, or 63.33%39.79%, compared to December 31, 2017, primarily due to the prepayment2019. Total borrowings for 2020 were comprised entirely of our remaining $50.00 million FHLB convertible advance. Short-termshort-term borrowings, which consist of retail repurchase agreements, decreased $716 thousand, or 14.08%, and theagreements.  The weighted average rate increased 518 basis points to 0.12%0.32% as of December 31, 2018,2020, compared to December 31, 2017.2019.

 

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The following table presents the balances and weighted average rates paid on short-term borrowings for the periods indicated:

 

		Year Ended December 31,																								Year Ended December 31,
		2018								2017								2016								2020								2019								2018
		Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate
(Amounts in thousands)
Year-end balance		$	4,370				0.13	%		$	5,086				0.11	%		$	73,005				0.07	%		$	964				0.23	%		$	1,601				0.16	%		$	4,370				0.13	%
Average annual balance(1)			4,010				0.12	%			47,717				0.07	%			108,620				0.21	%
Maximum month-end balance(1)			29,305								90,968								182,554
Average annual balance(1)																											1,181				0.32	%			2,471				0.14	%			4,010				0.12	%
Maximum month-end balance(1)																											2,348								28,508								29,305

(1)  Includes federal funds purchased and short-term FHLB advances that were repaid prior to year end

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Long-term borrowings consisted of a $40 thousand amortizing advance with the FHLB of Atlanta that was assumed in the Highlands transaction. That small borrowing was repaid early in 2020. In the first quarter of 2019, the Company’s remaining wholesale repurchase agreement that totaledof $25.00 million with a weighted average rate of 3.18% as of December 31, 2018 and 2017.matured. During 2018, the prepayment of the FHLB advance resulted in a prepayment penalty of $1.10 million. The prepayment was funded with cash and equivalents on hand, as well as proceeds from the sale of single issue trust preferred investment securities, and is anticipated to resultresulted in annualized net pre-tax savings of approximately $800 thousand. On January 9, 2017, the Company redeemed all of its trust preferred securities resulting in a decrease in subordinated debt of $15.46 million.

 

Liquidity and Capital Resources

 

Liquidity

 

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

 

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of December 31, 2018,2020, the Company’s cash reserves totaled $13.73 $10.09 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. There was no outstanding balance on the line of credit as of December 31, 2018.2020. The Company’s cash reserves and investments provide adequate working capital to meet obligations, projected dividends to shareholders, and anticipated debt repayments for the next twelve months.

 

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of December 31, 2018,2020, our unencumbered cash totaled $76.87$456.56 million, unused borrowing capacity from the FHLB totaled $402.74$292.92 million, available credit from the FRB Discount Window totaled $5.99$6.08 million, available lines from correspondent banks totaled $90.00$85.00 million, and unpledged available-for-sale securities totaled $114.87$46.79 million.

 

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Cash Flows

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands)
Net cash provided by operating activities		$	49,499			$	36,370			$	43,088			$	45,844			$	56,655			$	49,499
Net cash provided by investing activities			49,398				67,796				110,210				17,798				171,377				49,398
Net cash used in financing activities			(179,975	)			(22,522	)			(128,778	)			175,910				(87,896	)			(179,975	)
Net (decrease) increase in cash and cash equivalents			(81,078	)			81,644				24,520
Net increase (decrease) in cash and cash equivalents															239,552				140,136				(81,078	)
Cash and cash equivalents, beginning balance			157,951				76,307				51,787				217,009				76,873				157,951
Cash and cash equivalents, ending balance		$	76,873			$	157,951			$	76,307			$	456,561			$	217,009			$	76,873

 

20182020 Compared to 20172019. Cash and cash equivalents decreased $81.08increased $239.55 million compared to ana increase of $81.64$140.14 million in the prior year. The decreaseincrease was primarily due to a $157.45 million increase in net cash used in financing activities due to a net decrease in deposit accounts, the repayment of FHLB borrowings, an increase in cash dividends, and an increase in the repurchase of treasury stock. Net cash provided by investing activities decreased $18.40 million largely due to the purchase of available for sale securities. Net cash provided by operating activities increased $13.13 million primarily due to an increase in net income.both interest-bearing and noninterest-bearing deposits for a total of $216.34 million.  The increase in deposits was largely due to the significant inflow of unprecedented government stimulus in response to the COVID-19 pandemic and changes in consumer spending.

 

20172019 Compared to 20162018. Cash and cash equivalents increased $81.64$140.14 million compared to an increasea decrease of $24.52$81.08 million in the prior year. The increase was primarily due to a $106.26$121.98 million reductionincrease in net cash used in financinginvesting activities as we increased deposit accountsdue to a net decrease in funds used to purchase investment securities and significantly reduced FHLB and other borrowings.an increase in loan proceeds received. Net cash provided by investingfinancing activities decreased $42.41increased $92.08 million largely due to a reduction in the net decrease in proceeds from salesdeposits year over year, and maturitiesa net decrease in the repayment of investment securities, which were partially offset by less loan origination activity.borrowings. Net cash provided by operating activities experiencedincreased $7.16 million primarily due to an increase in net income and a slight decrease of $6.72 million.in accretion income on acquired loans.

 

Capital Resources

 

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of December 31, 2018,2020, decreased $17.86$2.09 million, or 5.09%0.49%, to $332.86$426.73 million from $350.71$428.82 million as of December 31, 2017.2019.  The change in stockholders’ equityCompany earned $35.93 million, which was largely due to the repurchase of 1,060,312offset by repurchasing 734,653 shares of our common stock totaling $34.41$21.87 million and declaring dividends declared on our common stock of $21.09 million, which included a one-time special dividend totaling $8.13 million, offset by net income of $36.34$17.88 million. Accumulated other comprehensive loss increased $589 thousand to $1.43 million as of December 31, 2018, compared to December 31, 2017, primarily due to net unrealized losses on securities. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders' equity in the calculation of capital ratios. Our book value per common share increased $0.16$0.75 to $20.79$24.08 as of December 31, 2018,2020, from $20.63$23.33 as of December 31, 2017.2019.

 

Capital Adequacy Requirements

 

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III, became effective on January 1, 2015, subject to a four-year phase-in period. Basel III’s capital conservation buffer became effective on January 1, 2016, at 0.625%, and was phased in over a four-year period (increased an additional 0.625% each year until it reached 2.5% on January 1, 2019).III.  Our current required capital ratios are as follows:

 

●

4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 6.375%7.00% including the capital conservation buffer)

●

6.0% Tier 1 capital to risk-weighted assets (effectively 7.875%8.50% including the capital conservation buffer)

●

8.0% Total capital to risk-weighted assets (effectively 9.875%10.50% including the capital conservation buffer)

●

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

 

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

 

	December 31,						December 31,
	2018		2017		2016		2020				2019				2018
The Company
Common equity Tier 1 ratio	13.72%		13.98%		13.88%			14.28	%			14.31	%			13.72	%
Tier 1 risk-based capital ratio	13.72%		13.98%		14.74%			14.28	%			14.31	%			13.72	%
Total risk-based capital ratio	14.79%		15.06%		15.79%			15.53	%			15.21	%			14.79	%
Tier 1 leverage ratio	10.95%		11.06%		11.07%			10.24	%			14.01	%			10.95	%
The Bank
Common equity Tier 1 ratio	12.55%		12.47%		12.93%			13.57	%			12.87	%			12.55	%
Tier 1 risk-based capital ratio	12.55%		12.47%		12.93%			13.57	%			12.87	%			12.55	%
Total risk-based capital ratio	13.62%		13.55%		13.98%			14.82	%			13.78	%			13.62	%
Tier 1 leverage ratio	9.98%		9.84%		9.71%			9.73	%			12.61	%			9.98	%

 

The Bank’s risk-based capital ratios as of December 31, 2018, remained relatively flat compared to December 31, 2017; however, the Company’s risk-based capital ratios decreased primarily due to the one-time special dividend to common shareholders and repurchase of common stock. Our risk-based capital ratios as of December 31, 2017, decreased from December 31, 2016, primarily due to an increase in risk-weighted assets. As of December 31, 2018,2020, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2018.2020. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 21, “Regulatory Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.

 

Commitments, Contingencies, and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We enter into certain contractual obligations in the normal course of business that require future cash payments. Management believes we have adequate resources to fund our outstanding commitments and the ability to adjust rates on certificates of deposit, in a changing interest rate environment; attract new deposits; and replace deposits with FHLB advances or other fund providers, if cost effective. The following table presents our contractual cash obligations, by payment date, as of December 31, 2018:2020:

 

		Less Than				One to				Three to				More than								Less Than				One to				Three to				More than
		One Year				Three Years				Five Years				Five Years				Total				One Year				Three Years				Five Years				Five Years				Total
(Amounts in thousands)
Deposits without a stated maturity(1)		$	1,414,459			$	-			$	-			$	-			$	1,414,459
Certificates of deposit(2)(3)			196,154				184,391				74,002				104				454,651
Deposits without a stated maturity(1)																						$	2,125,628			$	—			$	—			$	—			$	2,125,628
Certificates of deposit(2)(3)																							228,133				134,403				55,765				7,898				426,199
Securities sold under agreements to repurchase			25,122				-				-				-				25,122				964				—				—				—				964
Operating leases			160				194				194				597				1,145				154				250				218				362				984
Total contractual cash obligations		$	1,635,895			$	184,585			$	74,196			$	701			$	1,895,377			$	2,354,879			$	134,653			$	55,983			$	8,260			$	2,553,775

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(1)	Excludes interest
(2)	Includes interest on fixed and variable rate obligations (changes in market interest rates may materially affect the variable rate obligation to be paid, which is reflected using the rates in effect as of December 31, 2018)2020)
(3)	Excludes unamortized premiums and discounts

 

Off-Balance Sheet Arrangements

 

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

 

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The following table presents our off-balance sheet arrangements, by commitment expiration, as of December 31, 2018:2020:

 

		Less than				One to				Three to				More than								Less than				One to				Three to				More than
		One Year(1)				Three Years				Five Years				Five Years				Total				One Year(1)				Three Years				Five Years				Five Years				Total
(Amounts in thousands)
Commitments to extend credit		$	83,720			$	31,622			$	21,168			$	78,729			$	215,239			$	101,309			$	53,429			$	7,511			$	67,159			$	229,408
Financial letters of credit			124				230				10				-				364				80				160				50				—				290
Performance letters of credit(2)			59,270				89,860				-				-				149,130
Performance letters of credit(2)																							2,288				176,239				205				—				178,732
Total off-balance sheet risk		$	143,114			$	121,712			$	21,178			$	78,729			$	364,733			$	103,677			$	229,828			$	7,766			$	67,159			$	408,430

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(1)	Lines of credit with no stated maturity date are included in the less than one year expiration category.
(2)	Includes FHLB letters of credit

 

The reserve for the risk inherent in unfunded lending commitments totaled $66 thousand as of December 31, 20182020 and 2017.2019. For additional information, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.

 

Market Risk and Interest Rate Sensitivity

 

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

 

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

 

During 2018,2020, the Federal Open Market Committee raiseddecreased the benchmark federal funds rate 100150 basis points to a range of 2250 to 25025 basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. Due to the current target Fed Funds rate as of December 31, 2020, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.

 

		Year Ended December 31,
		2018								2017								Year Ended December 31,
		Change in				Percent				Change in				Percent				2020								2019
Increase (Decrease) in Basis Points		Net Interest Income				Change				Net Interest Income				Change				Change in Net Interest Income				Percent Change				Change in Net Interest Income				Percent Change
(Dollars in thousands)
300		$	(1,215	)			-1.3	%		$	3,759				4.3	%		$	8,429				8.5	%		$	171				0.2	%
200			(545	)			-0.6	%			2,756				3.2	%			5,912				6.0	%			428				0.4	%
100			(135	)			-0.1	%			1,535				1.8	%			3,130				3.2	%			426				0.4	%
(100)			(3,322	)			-3.7	%			(4,405	)			-5.1	%			(4,749	)			-4.8	%			(4,631	)			-4.3	%
(200)																			N/A				N/A				(8,571	)			-8.0	%

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We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of December 31, 2018,2020, we feel our exposure to interest rate risk was within our defined policy limitsadequately mitigated for the scenarios presented.

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The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of December 31, 2018,2020, we maintained interest rate swap agreements with notional amounts totaling $5.48$16.70 million to modify our exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. The total of the fair value of the swap agreements on the balance sheet, which are accounted for as fair value hedges, was recorded as a derivative assetliability totaling $12$1.13 million as of December 31, 2020, and a derivative liability totaling $510 thousand as of December 31, 2018, and a derivative liability totaling $90 thousand as of December 31, 2017.2019. For additional information, see Note 12, “Derivative Instruments and Hedging Activities,” to the Consolidated Financial Statements in Item 8 of this report.

 

Inflation and Changing Prices

 

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

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

 

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 7 of this report.

 

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Item8.

Financial Statements and Supplementary Data.

Financial Statements and Supplementary Data.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

		Page
Consolidated Balance Sheets as of December 31, 20182020 and 20172019	47
Consolidated Statements of Income for the years ended December 31, 2018, 2017,2020, 2019, and 20162018	48
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017,2020, 2019, and 20162018	49
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017,2020, 2019, and 20162018	50
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017,2020, 2019, and 20162018	51
Notes to Consolidated Financial Statements	52
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements	99 102
Management’s Assessment of Internal Control Over Financial Reporting	100 104
Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting	101 105

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

 

		December 31,								December 31,
(Amounts in thousands, except share and per share data)		2018				2017				2020				2019
Assets
Cash and due from banks		$	40,421			$	37,115			$	58,404			$	66,818
Federal funds sold			35,457				119,891				395,756				148,000
Interest-bearing deposits in banks			995				945				2,401				2,191
Total cash and cash equivalents			76,873				157,951				456,561				217,009
Debt securities available for sale			153,116				165,525				83,358				169,574
Debt securities held to maturity			25,013				25,149
Loans held for investment, net of unearned income (includes covered loans of $18,815 and $27,948, respectively)			1,775,084				1,817,184
Loans held for sale											0				263
Loans held for investment, net of unearned income (includes covered loans of $9,680 and $12,861, respectively)											2,186,632				2,114,460
Allowance for loan losses			(18,267	)			(19,276	)			(26,182	)			(18,425	)
Loans held for investment, net			1,756,817				1,797,908				2,160,450				2,096,035
FDIC indemnification asset			5,108				7,161				1,223				2,883
Premises and equipment, net			45,785				48,126				57,700				62,824
Other real estate owned (includes covered OREO of $32 and $105, respectively)			3,838				2,514
Other real estate owned											2,083				3,969
Interest receivable			5,481				5,778				9,052				6,677
Goodwill			92,744				95,779				129,565				129,565
Other intangible assets			5,026				6,151				7,069				8,519
Other assets			74,573				76,418				104,075				101,529
Total assets		$	2,244,374			$	2,388,460			$	3,011,136			$	2,798,847
Liabilities
Noninterest-bearing deposits		$	459,550			$	454,143			$	772,795			$	627,868
Interest-bearing deposits			1,396,200				1,475,748				1,773,452				1,702,044
Total deposits			1,855,750				1,929,891				2,546,247				2,329,912
Securities sold under agreements to repurchase			29,370				30,086				964				1,601
FHLB borrowings			-				50,000
Interest, taxes, and other liabilities			26,397				27,769				37,195				38,515
Total liabilities			1,911,517				2,037,746				2,584,406				2,370,028
Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding			-				-
Common stock, $1 par value; 50,000,000 shares authorized; 16,007,263 shares issued and outstanding at December 31, 2018; 21,381,779 shares issued and 4,383,553 shares in treasury at December 31, 2017			16,007				21,382
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding											0				0
Common stock, $1 par value; 50,000,000 shares authorized; 24,319,076 issued and 17,722,507 outstanding at December 31, 2020; 24,238,907 shares issued and 18,376,991 shares outstanding at December 31, 2019.											17,723				18,377
Additional paid-in capital			122,486				228,750				173,345				192,413
Retained earnings			195,793				180,543				237,585				219,535
Treasury stock			-				(79,121	)
Accumulated other comprehensive loss			(1,429	)			(840	)			(1,923	)			(1,506	)
Total stockholders' equity			332,857				350,714				426,730				428,819
Total liabilities and stockholders' equity		$	2,244,374			$	2,388,460			$	3,011,136			$	2,798,847

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

	Year Ended December 31,										Year Ended December 31,
(Amounts in thousands, except share and per share data)	2018			2017			2016				2020				2019				2018
Interest income
Interest and fees on loans	$	91,671		$	89,749		$	87,718			$	110,447			$	88,805			$	91,671
Interest on securities -- taxable		2,258			1,522			3,229				1,004				1,219				2,258
Interest on securities -- tax-exempt		2,828			3,029			3,624				1,785				2,497				2,828
Interest on deposits in banks		1,537			1,008			153				800				2,447				1,537
Total interest income		98,294			95,308			94,724				114,036				94,968				98,294
Interest expense
Interest on deposits		5,144			4,987			4,479				5,460				5,392				5,144
Interest on short-term borrowings		811			850			2,101				4				123				811
Interest on long-term debt		1,494			2,253			3,264				0				0				1,494
Total interest expense		7,449			8,090			9,844				5,464				5,515				7,449
Net interest income		90,845			87,218			84,880				108,572				89,453				90,845
Provision for loan losses		2,393			2,771			1,255				12,668				3,571				2,393
Net interest income after provision for loan losses		88,452			84,447			83,625				95,904				85,882				88,452
Noninterest income
Wealth management		3,262			3,150			2,828				3,417				3,423				3,262
Service charges on deposits		14,733			13,803			13,588				13,019				14,594				14,733
Other service charges and fees		7,733			6,944			6,570				10,333				8,281				7,733
Insurance commissions		966			1,347			5,442				0				0				966
Impairment losses on securities		-			-			(4,646	)
Portion of loss recognized in other comprehensive income		-			-			-
Net impairment losses recognized in earnings		-			-			(4,646	)
Net (loss) gain on sale of securities		(618	)		(661	)		335
Net gain (loss) on sale of securities												385				(43	)			(618	)
Net FDIC indemnification asset amortization		(2,181	)		(3,517	)		(5,474	)			(1,690	)			(2,377	)			(2,181	)
Net gain on divestitures		-			-			3,682
Litigation settlements												0				6,995				0
Other operating income		2,548			3,502			3,209				4,369				2,804				2,548
Total noninterest income		26,443			24,568			25,534				29,833				33,677				26,443
Noninterest expense
Salaries and employee benefits		36,690			35,774			39,389				44,005				37,148				36,690
Occupancy expense		4,542			4,775			5,297				5,043				4,334				4,542
Furniture and equipment expense		3,980			4,425			4,341				5,558				4,457				3,980
Service fees		3,860			3,348			3,641				5,665				4,448				3,860
Advertising and public relations		2,011			2,206			1,532				1,951				2,310				2,011
Professional fees		1,430			2,567			1,501				1,224				1,698				1,430
Amortization of intangibles		1,039			1,056			1,136				1,450				997				1,039
FDIC premiums and assessments		906			910			1,383				426				318				906
Loss on extinguishment of debt		1,096			-			-				0				0				1,096
Goodwill impairment		1,492			-			-				0				0				1,492
Merger, acquisition, and divestiture expense		-			-			730
Merger expense												1,893				2,124				0
Other operating expense		12,727			11,841			12,264				12,410				11,929				12,727
Total noninterest expense		69,773			66,902			71,214				79,625				69,763				69,773
Income before income taxes		45,122			42,113			37,945				46,112				49,796				45,122
Income tax expense		8,782			20,628			12,819				10,186				10,994				8,782
Net income	$	36,340		$	21,485		$	25,126			$	35,926			$	38,802			$	36,340
Earnings per common share
Basic	$	2.19		$	1.26		$	1.45			$	2.02			$	2.47			$	2.19
Diluted		2.18			1.26			1.45				2.02				2.46				2.18
Cash dividends per common share		1.26			0.68			0.60				1.00				0.96				0.78
Special cash divided per common share												0				0				0.48
Weighted average shares outstanding
Basic		16,587,504			17,002,116			17,319,689				17,781,748				15,690,812				16,587,504
Diluted		16,666,385			17,077,842			17,365,524				17,815,380				15,756,093				16,666,385

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Year Ended December 31,												Year Ended December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands)
Net income		$	36,340			$	21,485			$	25,126			$	35,926			$	38,802			$	36,340
Other comprehensive income, before tax
Available-for-sale debt securities:
Change in net unrealized (losses) gains on securities without other-than-temporary impairment			(2,213	)			1,445				1,035
Reclassification adjustment for net loss (gain) recognized in net income			618				661				(335	)
Reclassification adjustment for other-than-temporary impairment losses recognized in net income			-				-				4,646
Net unrealized (losses) gains on available-for-sale debt securities			(1,595	)			2,106				5,346
Change in net unrealized gains (losses) on securities without other-than-temporary impairment															689				1,414				(2,213	)
Reclassification adjustment for net (gain) loss recognized in net income															(385	)			43				618
Net unrealized gains (losses) on available-for-sale debt securities															304				1,457				(1,595	)
Employee benefit plans:
Net actuarial (loss) gain			565				48				(367	)			(1,217	)			(1,570	)			565
Plan change			-				(258	)			(69	)			0				(262	)			0
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income			285				259				273				386				278				285
Net unrealized gains (losses) on employee benefit plans			850				49				(163	)
Net unrealized (losses) gains on employee benefit plans															(831	)			(1,554	)			850
Other comprehensive (loss) income, before tax			(745	)			2,155				5,183				(527	)			(97	)			(745	)
Income tax expense (benefit)			156				(740	)			(1,947	)
Income tax expense															110				20				156
Other comprehensive (loss) income, net of tax			(589	)			1,415				3,236				(417	)			(77	)			(589	)
Total comprehensive income		$	35,751			$	22,900			$	28,362			$	35,509			$	38,725			$	35,751

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

																						Accumulated																												Accumulated
										Additional												Other																Additional												Other
		Preferred				Common				Paid-in				Retained				Treasury				Comprehensive								Preferred				Common				Paid-in				Retained				Treasury				Comprehensive
(Amounts in thousands,		Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Total
except share and per share data)
Balance January 1, 2016		$	-			$	21,382			$	227,692			$	155,647			$	(56,457	)		$	(5,247	)		$	343,017
Net income			-				-				-				25,126				-				-				25,126
Other comprehensive income			-				-				-				-				-				3,236				3,236
Common dividends declared -- $0.60 per share			-				-				-				(10,396	)			-				-				(10,396	)
Equity-based compensation expense			-				-				241				-				290				-				531
Common stock options exercised -- 43,463 shares			-				-				146				-				775				-				921
Issuance of treasury stock to 401(k) plan -- 18,218 shares			-				-				63				-				321				-				384
Purchase of treasury shares -- 1,182,294 shares at $20.06 per share			-				-				-				-				(23,762	)			-				(23,762	)
Balance December 31, 2016		$	-			$	21,382			$	228,142			$	170,377			$	(78,833	)		$	(2,011	)		$	339,057
Balance January 1, 2017		$	-			$	21,382			$	228,142			$	170,377			$	(78,833	)		$	(2,011	)		$	339,057
Net income			-				-				-				21,485				-				-				21,485
Other comprehensive income			-				-				-				-				-				1,415				1,415
Reclassification of certain tax effects			-				-				-				244				-				(244	)			-
Common dividends declared -- $0.68 per share			-				-				-				(11,563	)			-				-				(11,563	)
Equity-based compensation expense			-				-				382				-				408				-				790
Common stock options exercised -- 16,185 shares			-				-				86				-				292				-				378
Issuance of treasury stock to 401(k) plan -- 15,254 shares			-				-				140				-				275				-				415
Purchase of treasury shares -- 50,118 shares at $25.16 per share			-				-				-				-				(1,263	)			-				(1,263	)
Balance December 31, 2017		$	-			$	21,382			$	228,750			$	180,543			$	(79,121	)		$	(840	)		$	350,714
(Amounts in thousands, except share and per share data)																														Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Total
Balance January 1, 2018		$	-			$	21,382			$	228,750			$	180,543			$	(79,121	)		$	(840	)		$	350,714			$	0			$	21,382			$	228,750			$	180,543			$	(79,121	)		$	(840	)		$	350,714
Net income			-				-				-				36,340				-				-				36,340				0				0				—				36,340				0				0				36,340
Other comprehensive loss			-				-				-				-				-				(589	)			(589	)
Common dividends declared -- $0.78 per share			-				-				-				(12,966	)			-				-				(12,966	)
Special common dividend declared -- $0.48 per share			-				-				-				(8,124	)			-				-				(8,124	)
Other comprehensive income																															0				0				—				0				0				(589	)			(589	)
Common dividends declared -- $0.78 per share																															0				0				—				(12,966	)			0				0				(12,966	)
Special common dividend declared -- $0.48 per share																															0				0				—				(8,124	)			0				0				(8,124	)
Equity-based compensation expense			-				-				535				-				623				-				1,158				0				0				535				0				623				0				1,158
Common stock options exercised -- 24,186 shares			-				-				(84	)			-				468				-				384				0				0				(84	)			0				468				0				384
Issuance of treasury stock to 401(k) plan -- 11,331 shares			-				-				138				-				214				-				352				0				0				138				0				214				0				352
Purchase of treasury shares -- 1,060,312 shares at $32.45 per share			-				-				-				-				(34,412	)			-				(34,412	)
Purchase of treasury shares -- 1,060,312 shares at $32.45 per share																															0				0				—				0				(34,412	)			0				(34,412	)
Reclassification of treasury stock			-				(5,375	)			(106,853	)			-				112,228				-				-				0				(5,375	)			(106,853	)			0				112,228				0				0
Balance December 31, 2018		$	-			$	16,007			$	122,486			$	195,793			$	-			$	(1,429	)		$	332,857			$	0			$	16,007			$	122,486			$	195,793			$	0			$	(1,429	)		$	332,857
Balance January 1, 2019																														$	0			$	16,007			$	122,486			$	195,793			$	0			$	(1,429	)		$	332,857
Net income																															0				0				—				38,802				0				0				38,802
Other comprehensive loss																															0				0				—				0				0				(77	)			(77	)
Common dividends declared -- $0.96 per share																															0				0				—				(15,060	)			0				0				(15,060	)
Equity-based compensation expense																															0				44				1,437				0				0				0				1,481
Common stock options exercised -- 8,459 shares																															0				8				128				0				0				0				136
Issuance of stock to 401(k) plan -- 12,407 shares																															0				12				399				0				0				0				411
Repurchase of common shares -- 487,400 shares at $33.57 per share																															0				(487	)			(15,875	)			0				0				0				(16,362	)
Highlands Bankshares, Inc. acquisition																															0				2,793				83,838				0				0				0				86,631
Balance December 31, 2019																														$	0			$	18,377			$	192,413			$	219,535			$	0			$	(1,506	)		$	428,819
Balance January 1, 2020																														$	0			$	18,377			$	192,413			$	219,535			$	0			$	(1,506	)		$	428,819
Net income																															0				0				—				35,926				0				0				35,926
Other comprehensive loss																															0				0				—				0				0				(417	)			(417	)
Common dividends declared -- $1.00 per share																															0				0				—				(17,876	)			0				0				(17,876	)
Equity-based compensation expense																															0				58				1,585				0				0				0				1,643
Issuance of stock to 401(k) plan -- 22,693 shares																															0				23				484				0				0				0				507
Repurchase of common shares -- 734,653 shares at $29.77 per share																															0				(735	)			(21,137	)			0				0				0				(21,872	)
Balance December 31, 2020																														$	0			$	17,723			$	173,345			$	237,585			$	0			$	(1,923	)		$	426,730

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Statements of Cash Flows

 

		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands)		2018				2017				2016				2020				2019				2018
Operating activities
Net income		$	36,340			$	21,485			$	25,126			$	35,926			$	38,802			$	36,340
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			2,393				2,771				1,255				12,668				3,571				2,393
Depreciation and amortization of premises and equipment			2,912				3,560				3,563				4,458				3,448				2,912
Amortization of premiums on investments, net			40				172				1,066				1,468				195				40
Amortization of FDIC indemnification asset, net			2,181				3,517				5,474				1,690				2,377				2,181
Amortization of intangible assets			1,039				1,056				1,136				1,450				997				1,039
Goodwill impairment			1,492				-				-				0				0				1,492
Accretion on acquired loans			(6,391	)			(5,417	)			(4,766	)			(7,991	)			(3,231	)			(6,391	)
Gain on divestiture, net			-				-				(3,682	)
Equity-based compensation expense			1,158				790				531				1,643				1,481				1,158
Issuance of treasury stock to 401(k) plan			352				415				384
(Gain) loss on sale of premises and equipment, net			(25	)			(1	)			238
Loss on sale of other real estate owned			1,313				791				1,495
Loss (gain) on sale of securities			618				661				(335	)
Net impairment losses recognized in earnings			-				-				4,646
Issuance of common stock to 401(k) plan															507				411				352
Gain on sale of premises and equipment, net															(59	)			(75	)			(25	)
Provision expense and loss on sale of other real estate owned															319				1,253				1,313
(Gain) loss on sale of securities															(385	)			43				618
Writedowns of property, plant & equipment															812				380				1,007
Loss on extinguishment of debt			1,096				-				-				0				0				1,096
Decrease in other operating activities			4,981				6,570				6,957
(Increase) decrease in other operating activities															(6,662	)			7,003				3,974
Net cash provided by operating activities			49,499				36,370				43,088				45,844				56,655				49,499
Investing activities
Proceeds from sale of securities available for sale			8,937				13,664				104,928				51,027				13,898				8,937
Proceeds from maturities, prepayments, and calls of securities available for sale			68,765				37,155				99,906				44,676				32,863				68,765
Proceeds from maturities and calls of securities held to maturity			-				21,840				25,190				0				25,000				0
Payments to acquire securities available for sale			(67,355	)			(49,406	)			(1,174	)			(10,267	)			(8,255	)			(67,355	)
Proceeds from (originations of) loans, net			39,512				37,455				(159,243	)
(Originations of) proceeds from repayments loans, net															(69,259	)			85,233				39,512
Proceeds from bank owned life insurance			458				2,639				-				0				0				458
(Redemption of) proceeds from FHLB stock, net			(2,122	)			694				130
(Redemption of) payments for FHLB stock, net															(12	)			129				(2,122	)
Cash proceeds from mergers, acquisitions, and divestitures, net			10				-				29,716				0				25,863				10
(Payments to) proceeds from the FDIC			(151	)			1,689				4,403
Payments to the FDIC															(30	)			(152	)			(151	)
Proceeds from sale of premises and equipment			955				57				1,092				2,861				1,955				955
Payments to acquire premises and equipment			(2,551	)			(2,354	)			(1,885	)			(3,195	)			(8,411	)			(2,551	)
Proceeds from sale of other real estate owned			2,940				4,363				7,147				1,997				3,254				2,940
Net cash provided by investing activities			49,398				67,796				110,210				17,798				171,377				49,398
Financing activities
Increase (decrease) in noninterest-bearing deposits, net			5,407				26,438				(17,482	)
(Decrease) increase in interest-bearing deposits, net			(79,548	)			62,115				(37,576	)
Increase in noninterest-bearing deposits, net															144,927				12,604				5,407
Increase (decrease) in interest-bearing deposits, net															71,408				(41,445	)			(79,548	)
Repayments of securities sold under agreements to repurchase, net			(716	)			(67,919	)			(40,609	)			(637	)			(27,769	)			(716	)
Repayments of FHLB and other borrowings, net			(50,000	)			(30,708	)			(48	)			(40	)			0				(50,000	)
Proceeds from stock options exercised			384				378				921				0				136				384
Excess tax benefit from equity-based compensation			-				-				174
Payments for repurchase of treasury stock			(34,412	)			(1,263	)			(23,762	)
Payments of common dividends			(21,090	)			(11,563	)			(10,396	)
Net cash used in financing activities			(179,975	)			(22,522	)			(128,778	)
Net (decrease) increase in cash and cash equivalents			(81,078	)			81,644				24,520
Payments for repurchase of common stock															(21,872	)			(16,362	)			(34,412	)
Payments of common stock dividends															(17,876	)			(15,060	)			(21,090	)
Net cash provided by (used in) financing activities															175,910				(87,896	)			(179,975	)
Net increase (decrease) in cash and cash equivalents															239,552				140,136				(81,078	)
Cash and cash equivalents at beginning of period			157,951				76,307				51,787				217,009				76,873				157,951
Cash and cash equivalents at end of period		$	76,873			$	157,951			$	76,307			$	456,561			$	217,009			$	76,873
Supplemental disclosure -- cash flow information
Cash paid for interest		$	7,935			$	8,267			$	9,845			$	5,500			$	5,661			$	7,935
Cash paid for income taxes			7,610				15,852				6,588				9,074				8,057				7,610
Supplemental transactions -- non-cash items
Transfer of loans to other real estate			5,686				2,283				5,162				695				3,160				5,686
Loans originated to finance other real estate			164				-				57				266				484				164
Increase (decrease) in accumulated other comprehensive loss			589				(1,171	)			(3,236	)
Increase in accumulated other comprehensive loss															417				77				589
Non-cash sales price related to divestitures			1,603				-				-				0				0				1,603
Acquisitions:
Fair value of assets acquired															0				556,005				0
Fair value of liabilities assumed															0				506,179				0
Net assets acquired															0				49,826				0
Common stock issued in acquisition															0				86,631				0

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporatedreincorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located at One Community Place,in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

 

Principles of Consolidation

 

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

 

The Company maintains investments in variable interest entities (“VIEs”). VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is required if a reporting entity is the primary beneficiary of the VIE. The Company periodically reviews its VIEs and has determined that it is not the primary beneficiary of any VIE; therefore, the assets and liabilities of these entities are not consolidated into the financial statements.

 

Reclassification

 

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow. In accordance with the reincorporation, the Company reclassified cumulative treasury stock resulting in a $5.38 million reduction of common stock at par value and a $106.85 million reduction of additional paid in capital at the excess cost of the treasury stock over par value. Virginia code provides that reacquired shares return to the status of authorized but unissued; therefore, the concept of treasury shares is eliminated.

 

Use of Estimates

 

Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, the allowance for loan losses and goodwill and other intangible assets, and income taxes.asset. For additional information, see “Critical Accounting Policies” in Part II, Item 7 of this report.

 

Summary of Significant Accounting Policies

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value hierarchy ranks the inputs used in measuring fair value as follows:

 

●

Level 1 – Observable, unadjusted quoted prices in active markets

●

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

●

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

 

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

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank (“FRB”), and correspondent banks that are available for immediate withdrawal.

Investment Securities

 

Management classifies debt securities as held-to-maturity or available-for-sale based on the intent and ability to hold the securities to maturity. Debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Debt securities not classified as held to maturity are classified as available-for-sale securities and carried at estimated fair value. Available-for-sale securities consist of securities the Company intends to hold for indefinite periods of time including securities to be used as part of the Company’s asset/liability management strategy and securities that may be sold in response to changes in interest rates, prepayment risk, or other similar factors. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income (“AOCI”), net of income taxes, in stockholders’ equity. Gains or losses on calls, maturities, or sales of investment securities are recorded based on the specific identification method and included in noninterest income. Premiums and discounts are amortized or accreted over the life of a security into interest income.

 

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”) using inputs from independent third parties to determine the fair value of investment securities, which are reviewed and corroborated by management. Unrealized losses are evaluated to determine whether the impairment is temporary or other-than-temporary in nature. For debt securities, management considers its intent to sell the securities, the evidence available to determine if it is more likely than not that the securities will have to be sold before recovery of amortized cost, and the probable credit losses. Probable credit losses are evaluated using the present value of expected future cash flows; the severity and duration of the impairment; the issuer’s financial condition and near-term prospects to service the debt; the cause of the decline, such as adverse conditions related to the issuer, the industry, or economic environment; the payment structure of the debt; the issuer’s failure to make scheduled interest or principal payments; and any change in the issuer’s credit rating by rating agencies. If the present value of expected future cash flows discounted at the security's effective yield is less than the net book value, the difference is recognized as a credit-related OTTI in noninterest income. If management does not intend to sell and if we are not likely to be required to sell the security, the OTTI is separated into an amount representing the credit loss, which is recognized as a charge to noninterest income, and the amount representing all other factors, which is recognized in other comprehensive income (“OCI”).

Other Investments

 

As a condition of membership in the FHLB and the FRB, the Company is required to hold a minimum level of stock in the FHLB of Atlanta and the FRB of Richmond. These securities are carried at cost and periodically reviewed for impairment. The total investment in FHLB and FRB stock, which is included in other assets, was $7.78$10.80 million as of December 31, 2018,2020, and $9.90$8.90 million as of December 31, 2017.2019.

 

The Company owns certain long-term equity investments without readily determinable fair values, including certain tax credit limited partnerships and various limited liability companies that manage real estate investments, facilitate tax credits, and provide title insurance and other related financial services. These investments are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The total carrying value in these investments, which is included other assets, totaled $602 thousand$3.93 million as of December 31, 2018,2020, and $823 thousand$3.68 million as of December 31, 2017.2019.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Business Combinations

 

The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Acquisition and divestiture activities are included in the Company’s consolidated results of operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred. For additional information, see “Purchased Credit Impaired Loans” and “Intangible Assets” below.

 

Loans Held for Investment

 

Loans classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. Loans held for investment are carried at the principal amount outstanding, net of unearned income and any necessary write-downs to reduce individual loans to net realizable value. Interest income on performing loans is recognized as interest income at the contractual rate of interest. Loan origination fees, including loan commitment and underwriting fees, are reduced by direct costs associated with loan processing, including salaries, legal review, and appraisal fees. Net deferred loan fees are deferred and amortized over the life of the related loan or commitment period.

 

Purchased Performing Loans. Purchased loans that are deemed to be performing at the acquisition date are accounted for using the contractual cash flow method of accounting, which results in the loans being recorded at fair value with a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated contractual lives of the loans. No allowance for loan losses is recorded at acquisition for purchased loans because the fair values of the acquired loans incorporate credit risk assumptions.

 

Purchased Credit Impaired (“PCI”) Loans. When purchased loans exhibit evidence of credit deterioration after the acquisition date, and it is probable at acquisition the Company will not collect all contractually required principal and interest payments, the loans are referred to as PCI loans. PCI loans are accounted for using Topic 310-30310-30 of the FASB ASC. PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Per the guidance, the Company groups PCI loans that have common risk characteristics into loan pools. Evidence of credit quality deterioration at acquisition may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans identified as credit impaired. If contractually required payments at acquisition exceed cash flows expected to be collected, the excess is the non-accretable difference, which is available to absorb credit losses on those loans or pools of loans. If the cash flows expected at acquisition exceed the estimated fair values, the excess is the accretable yield, which is recognized in interest income over the remaining lives of those loans or pools of loans when there is a reasonable expectation about the amount and timing of such cash flows.

 

Impaired Loans and Nonperforming Assets. The Company maintains an active and robust problem credit identification system through its ongoing credit review function. When a credit is identified as exhibiting characteristics of weakening, the Company assesses the credit for potential impairment. Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management. Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. Interest income realized on impaired loans in nonaccrual status, if any, is recognized upon receipt. The accrual of interest, which is based on the daily amount of principal outstanding, on impaired loans is generally continued unless the loan becomes delinquent 90 days or more.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Loans are considered past due when either principal or interest payments become contractually delinquent by 30 days or more. The Company’s policy is to discontinue the accrual of interest, if warranted, on loans based on the payment status, evaluation of the related collateral, and the financial strength of the borrower. Loans that are 90 days or more past due are placed on nonaccrual status. Management may elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, interest accrued and not collected in the current year is reversed from income, and interest accrued and not collected from prior years is charged to the allowance for loan losses. Nonaccrual loans may be returned to accrual status when all principal and interest amounts contractually due, including past due payments, are brought current; the ability of the borrower to repay the obligation is reasonably assured; and there is generally a period of at least six months of repayment performance by the borrower in accordance with the contractual terms.

 

Seriously delinquent loans are evaluated for loss mitigation options. Closed-end retail loans are generally charged off against the allowance for loan losses when the loans become 120 days past due. Open-end retail loans and residential real estate secured loans are generally charged off when the loans become 180 days past due. Unsecured loans are generally charged off when the loans become 90 days past due. All other loans are charged off against the allowance for loan losses after collection attempts have been exhausted, which generally is within 120 days. Recoveries of loans previously charged off are credited to the allowance for loan losses in the period received.

 

Loans are considered troubled debt restructurings (“TDRs”) when the Company grants concessions, for legal or economic reasons, to borrowers experiencing financial difficulty that would not otherwise be considered. The Company generally makes concessions in interest rates, loan terms, and/or amortization terms. All TDRs $250$500 thousand or greater are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs under $250$500 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the date of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

 

Other real estate owned (“OREO”) acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The fair value is generally based on current third-partythird-party appraisals. When a property is transferred into OREO, any excess of the loan balance over the net realizable fair value is charged against the allowance for loan losses. Operating expenses, gains, and losses on the sale of OREO are included in other noninterest expense in the Company’s consolidated statements of income after any fair value write-downs are recorded as valuation adjustments.

Allowance for Loan Losses

 

Management performsWe review our allowance for loan losses quarterly assessmentsto determine if it is sufficient to absorb probable loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While management uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for loan losses. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The provision is calculated and charged to earnings to bring the allowance to a level that, through a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses in the portfolio. The Company’snear term; however, the amount of the change cannot reasonably be estimated.

Our allowance for loan losses isconsists of specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans that have been segmented into commercial, consumer real estate, and consumer and other loans with each segment divided intoloan classes with similar risk characteristics such as the type of loan and collateral. General reserve allocations are based on management’s judgments of qualitative and quantitative factors that include, but are not 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 nonaccruals. Historical loss rates for loans classified as special mention and substandard within each loan class in the commercial loan segment are adjusted by an additional qualitative factor.  Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. No allowance for loan losses includes specific allocations related to significant individualis carried over or established at acquisition for purchased loans and credit relationships and general reserves related to loans not individually evaluated. Loans not individually evaluated are grouped into pools based on similar risk characteristics. A loan that becomes adversely classified or graded is moved into a group of adversely classified or graded loans with similar risk characteristics for evaluation.acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date.

PCI Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The Company estimatesestimated cash flows to be collected on PCI loans and discounts those cash flowsare discounted at a market rate of interest. If cash flows for PCI loans are expectedManagement believed the allowance was adequate to decline, generally a provision forabsorb probable loan losses is charged to earnings, resultinginherent in an increasethe loan portfolio as of December 31, 2020. For additional information, see Note 6, “Allowance for Loan Losses,” to the allowance for loan losses. If cash flows for PCI loans are expected to improve, any previously established allowance is first reversed to the extentConsolidated Financial Statements in Item 8 of prior charges and then interest income is increased using the prospective yield adjustment over the remaining life of the loan, or pool of loans. Any provision established for PCI loans covered under the FDIC loss share agreements is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are made to various portfolio segments, the allowance for loan losses is available for use against any loan loss management deems appropriate, excluding reserves allocated to specific loans and PCI loan pools.this report.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FDIC Indemnification Asset

 

The FDIC indemnification asset represents the carrying amount of the right to receive payments from the FDIC for losses incurred on certain loans and OREO purchased from the FDIC that are covered by loss share agreements. The FDIC indemnification asset is measured separately from related covered assets because it is not contractually embedded in the assets or transferable should the assets be disposed. Under the acquisition method of accounting, the FDIC indemnification asset is recorded at fair value using projected cash flows based on expected reimbursements and applicable loss share percentages as outlined in the loss share agreements. The expected reimbursements do not include reimbursable amounts related to future covered expenditures. The cash flows are discounted to reflect the timing and receipt of reimbursements from the FDIC. The discount is accreted through noninterest income over future periods. Post-acquisition adjustments to the indemnification asset are measured on the same basis as the underlying covered assets. Increases in the cash flows of covered loans reduce the FDIC indemnification asset balance, which is recognized as amortization through noninterest income over the shorter of the remaining life of the FDIC indemnification asset or the underlying loans. Decreases in the cash flows of covered loans increase the FDIC indemnification asset balance, which is recognized as accretion through noninterest income. Certain expenses related to covered assets are reimbursable from the FDIC through monthly and quarterly claims. Estimated reimbursements from the FDIC are netted against covered expenses in the consolidated statements of income.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Premises and Equipment

 

Premises, equipment, and capital leases are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and equipment; 3 to 5 years for computer software, hardware, and data handling equipment; and 7 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 2010 years and most contain options to renew with increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

 

Intangible Assets

 

Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired that is allocated to the appropriate reporting unit when acquired. Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that are amortized using the straight-line method.

 

Goodwill is tested for impairment annually, on October 31^st, or more frequently if events or circumstances indicate there may be impairment, using eitherimpairment.  We have one reporting unit, Community Banking.  If we elect to perform a qualitative or quantitative assessment, to determinewe evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of aour reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment, it evaluates economic, industry, and company-specific factors in assessing the fair value of its reporting unit. If the Company concludeswe conclude that it is more likely than not that the fair value of aour reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further restingtesting is required. The quantitative test consists of comparing the fair value of aour reporting unit to its carrying amount, including goodwill. If the fair value of aour reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of aour reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference, but limiteddifference. We performed a quantitative assessment for the annual test on October 31, 2020, which resulted in no goodwill impairment.

Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value.  The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method).  The Company engaged an independent valuation specialist to assist with goodwill impairment testing utilizing both the market and  DCF methods.  The resulting fair values from the aforementioned methods were appropriately weighted to determine the final fair value of our reporting unit.

Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples.  The selection of the multiples considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline companies.  Among other factors considered, are the level and expected growth in return on tangible equity relative to the amountguideline companies selected, implied control premiums, recent transaction prices, as well as data in comparable macroeconomic environments. 

Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate.  The cash flows for the forecasted period are estimated based on management’s most recent projections available as of goodwill allocatedthe testing date, given consideration to thatminimum equity capital requirements.  The projections include macroeconomic variables developed at the same time.  The terminal growth rate is selected based on management’s long-term expectation for the reporting unit.  Other identifiable intangible assets are evaluated forThe discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.

At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment if events or changesof goodwill.  While the inherent risk related to uncertainty is embedded in circumstances indicate a possible impairment.the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and uncertainties related to the pandemic.  Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the valuation.  If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment charges in the future. 

 

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and recognized as short-term borrowings in the Company’s consolidated balance sheets. Securities, generally U.S. government and federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the secured party. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided as appropriate.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Instruments

 

The Company primarily uses derivative instruments 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. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract such as interest rates, equity security prices, currencies, commodity prices, or credit spreads. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount, such as interest rate swaps or currency forwards, or to purchase or sell other financial instruments at specified terms on a specified date, such as options to buy or sell securities or currencies. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. The recognition of changes in the fair value of a derivative instrument varies depending on the intended use of the derivative and the resulting designation. The Company accounts for hedges of customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. All derivative instruments are reported at fair value in the consolidated balance sheets.

Equity-Based Compensation

 

The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. The Black-Scholes-Merton valuation model is used to estimate the fair value of stock options at the grant date while the fair value of restricted stock awards is based on the market price of the Company’s common stock on the grant date. The Black-Scholes-Merton model incorporates the following assumptions: the expected volatility is based on the weekly historical volatility of the Company’s common stock price over the expected term of the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the U.S. Department of the Treasury’s (“Treasury”) yield curve on the grant date with a term comparable to the grant; and the dividend yield is based on the Company’s dividend yield using the most recent dividend rate paid per share and trading price of the Company’s common stock. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Revenue Recognition

Accounting Standards Codification Topic 606 (“ASC 606”), “Revenue from Contracts with Customers,” establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The great majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and derivatives and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are discussed below, are presented in the Company’s consolidated statements of income as components of noninterest income.

 

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Service charges on deposits and other service charges and fees. Service charges on deposits and other service charges and fees represent general service fees for account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees.

 

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

Advertising Expenses

 

Advertising costs are generally expensed as incurred. The Company may establish accruals for expected advertising expenses in the course of a fiscal year.

Income Taxes

 

Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company includes interest and penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percent of pre-tax income, may vary significantly from statutory rates due to tax credits and permanent differences. 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 adjusted through the provision for income taxes as changes in tax laws or rates are enacted.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Per Share Results

 

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. Under the treasury stock method of accounting, potential common stock may be issued for stock options, non-vested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.

Risks and Uncertainties

Recent COVID-19 Virus Developments –

During the year of 2020, government reaction to the novel coronavirus (“COVID-19”) pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services.

Company Response to COVID-19 –

As COVID-19 events unfolded during 2020, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In particular, the Company took the following actions, among others:

•

Implemented its board-approved pandemic business continuity plan

•

Appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-19

•

Modified branch operations:

o

Branch lobbies remain available, but on a limited appointment-only basis

o

Most transactions conducted via drive-throughs

o

Increased emphasis on digital banking platforms

•

Implemented physical separation of critical operational workforce for Bank and non-Bank financial services subsidiaries

•

Expanded paid time off and health benefits for employees

•

Implemented work from home strategy for appropriate staff:

	○	Many of the Company's non-branch, operational essential employees remain working remotely
	o	Geographically separated work locations of Bank and Company CEO’s and most other executive management team members

o

Suspended non-essential work-related travel

•

Implemented a pay differential for employees continuing to work at branch or back office locations which ended May 31, 2020

•

Adopted self-monitoring and quarantining procedures

•

Implemented enhanced facility cleaning protocols

•

Redeployed staff to critical customer service operations to expedite loan payment deferral requests, Paycheck Protection Program lending efforts, and other operations

Potential Effects of COVID-19 – 

The adverse impact of COVID-19 to the economy has impaired some of the Company’s customers’ ability to fulfill their financial obligations to the Company, reducing interest income on loans or increasing loan losses. In keeping with Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the Company continues to work with COVID-19 affected borrowers to defer loan payments, interest, and fees. Through December 31,2020, the Company has modified or deferred payments on a total of 3,625 loans totaling $458.17 million in principal.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.  Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.

The general economic slowdown caused by COVID-19 in local economies in communities served by the Company has affected loan demand and consumption of financial services, generally, reducing interest income, service fees, and the demand for other profitable financial services provided by the Company.

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In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other legislative and regulatory actions may materially impact the Company. The Company is participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through December 31,2020 the Company processed 803 loans with original principal balances totaling $62.74 million through the PPP.  As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA.

COVID-19 could cause a sustained decline in the Company’s stock price or the occurrence of an event that could, under certain circumstances, create the impairment of goodwill. In the event the Company deems all or a portion of its goodwill to be impaired, the Company could record a non-cash charge to earnings for the amount of such impairment. Such a charge would have no impact on tangible or regulatory capital.

To date, the Company has identified no material, unmitigated operational or internal control challenges or risks and anticipates no significant challenges to its ability to maintain systems and controls as a result of the actions taken to prevent the spread of COVID-19. In addition, the Company currently faces no material resource constraints arising due to implementation of the business continuity plan.

It is impossible to predict the full extent to which COVID-19 and the resulting measures to prevent its spread will affect the Company’s operations. Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID-19, the Company’s management believes its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.

Recent Accounting Standards

 

Standards to be Adopted in 20192021

In July 2018, June 2016, the FASB issued ASU 2018-09, “Codification Improvements.2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  This ASU makes changesrequires an entity to utilize a variety of topicsnew impairment model known as the current expected credit loss (“CECL”) model to clarify, correct errors in, or make minor improvements toestimate its lifetime “expected credit loss” and record an allowance for credit losses (“ACL”) that, when deducted from the Accounting Standards Codification. The majorityamortized cost basis of the amendmentsfinancial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses for loans, investment securities portfolio, and purchased financial assets with credit deterioration.  We do not expect this standard to have a material impact on our investment securities portfolio at implementation.  This ASU 2018-09also will berequire enhanced disclosures.  The new guidance was effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The CARES Act, as amended, allowed certain relief on the implementation of the ASU, and the Company adopted the new standard as of January 1, 2021, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company currently estimates that our ACL under CECL will total approximately $39.29 million and the allowance for unfunded commitments will approximate $576 thousand.  The estimated decline in stockholders' equity, net of tax, approximated $5.87 million. 

This estimate is influenced by the composition, characteristics and quality of our loan portfolio, as well as the economic conditions and forecasts as of each reporting period.  These economic conditions and forecasts could be significantly different in future periods.  The impact of the change in the allowance on our results of operations in a provision for credit losses will depend on the current period net charge-offs, level of loan originations, and change in mix of the loan portfolio.

Standards Adopted in 2020

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)".  This ASU provides for the simplification of the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  After adoption, an entity should measure impairment of goodwill in a reporting unit when the carrying amount exceeds its fair value by the difference in these amounts.  This ASU was effective for fiscal years beginning after December 15, 2018. 2019.  The Company adopted this ASU 2018-09 in the first quarter of 2019. effective January 1, 2020.  The adoption of the standardASU did not have aany material effect on the Company’sCompany's consolidated financial statements.

 

In August 2017, 2018, the FASB issued ASU 2017-12, “Derivatives2018-13, "Fair Value Measurement (Topic 820):  Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement."  The amendments remove, modify, and Hedging (Topic 815): Targeted Improvementsadd certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement "Conceptual Framework for Financial Reporting--Chapter 8:  Notes to Accounting for Hedging Activities.”Financial Statements."  This ASU intends to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of hedge accounting guidance. ASU 2017-12 will beupdate is effective for the Company forfiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2019.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)--Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary".  This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.  LIBOR (London Inter-bank Offered Rate) and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally.  With global capital markets expected to move away from LIBOR and other inter-bank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.  The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  This ASU is effective March 12, 2020 through December 31, 2022.  The Company adopted this ASU 2017-12 in the first quarter of 2019. on March 12, 2020.  The adoption of the standard did updates is not expected to have aany material effect on the Company’sCompany's financial statements.statements when and as changes are made to various assets and liabilities for reference rates.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which updates narrow aspects of the guidance issued in ASU 2016-02. ASU 2016-02 will be effective for the Company for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of 2019 and elected practical expedients where it would not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The Company leases certain banking offices under lease agreements classified as operating leases and recognized a right-of-use asset and related lease liability of $915 thousand as of January 1, 2019.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Standards Not Yet Adopted in 2018

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Reform Act”) and requires certain new disclosures. The Company elected to early adopt ASU 2018-02 in the first quarter of 2018 on a retrospective basis. The effect of the adoption of the standard was a decrease in AOCI of $244 thousand with the offset to retained earnings as recorded in the Company’s consolidated balance sheet and statement of changes in stockholders’ equity for the year ended December 31, 2017.

In May 2017, 2019, the FASB issued ASU 2017-09, “Compensation – Stock Compensation2019-12, “Income Taxes (Topic 718): Scope of Modification Accounting.”740), Simplifying the Accounting for Income Taxes”. This ASU clarifies when to accountsimplifies the accounting for a changeincome taxes by removing certain exceptions to the terms or conditions of a share-based payment award as a modification. Underapproach for intraperiod tax allocation, the new guidance, modification accountingmethodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changeeffective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in terms or conditions.any interim period for which financial statements have not yet been issued. The Company adopted ASU 2017-09 in the first quarter of 2018. The adoption of the standard did update is not expected to have aany material effect on the Company’s financial statements.

 

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

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. The Company adopted ASU 2017-07 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements. In accordance with the standard, the Company reclassified the non-service components of the net periodic benefit costs from salaries and employee benefits to other expense on a retrospective basis, which totaled $543 thousand in 2017 and $523 thousand in 2016.

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

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The update should be applied on a retrospective basis, if practicable. The Company adopted ASU 2016-15 in the first quarter of 2018. The adoption of the standard did not have a material effect on the Company’s financial statements. In accordance with the standard, the Company reclassified proceeds from bank owned life insurance from operating activities to investing activities on a retrospective basis, which totaled $2.64 million in 2017.

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” deferring the effective date of ASU 2014-09 for the Company until fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The Company adopted Topic 606, and related updates, in the first quarter of 2018 using the modified retrospective method. The Company’s primary source of revenue is interest income, which is excluded from the scope of this guidance; however, the Company evaluated the impact on other income; which includes fees for services, commissions on sales, and various deposit service charges; revenue contracts; and disclosures and determined that no cumulative-effect adjustment to retained earnings was necessary. The adoption of the standard did not have a material effect on the Company’s financial statements. In accordance with the standard, the Company reclassified interchange expense, which was previously a component of noninterest expense, to net against interchange income on a retrospective basis, which totaled $1.68 million in 2017 and $1.53 million in 2016.

Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU intends to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2016-13 in the first quarter of 2020 and recognize a cumulative adjustment to retained earnings as of the beginning of the year of adoption. The Company has established a working group to prepare for, and implement changes related to, the standard and has engaged a third-party vendor solution to assist in the application of the standard. The Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, but expects that the impact of adoption could be significantly influenced by the composition, characteristics, and quality of the Company’s loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. The adoption of the standard could result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in shareholders’ equity and regulatory capital, differences in the timing of recognizing changes to the allowance for credit losses, expanded disclosures about the allowance for credit losses, and the Company’s internal control over financial reporting related to the allowance for credit losses.

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2. Acquisitions and Divestitures

 

The following are business combinations and divestitures which have occurred over the past three years:

Highlands Bankshares, Inc.

On December 31,2019, the Company acquired Highlands Bankshares, Inc. (���Highlands”) of Abingdon, Virginia. Under the terms of the acquisition, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock.  The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.

		As recorded by				Fair Value					As recorded by
(Amounts in thousands, except share data)		Highlands				Adjustments					the Company
Assets
Cash and cash equivalents		$	25,879			$	0				$	25,879
Securities available for sale			53,732				0					53,732
Loans held for sale			263				0					263
Loans held for investment, net of allowance and mark			438,896				(11,429	)	( a )			427,467
Premises and equipment			16,722				(2,317	)	( b )			14,405
Other real estate			1,963				0					1,963
Other assets			25,556				2,250		( c )			27,806
Intangible assets			0				4,490		( d )			4,490
Total assets		$	563,011			$	(7,006	)			$	556,005
LIABILITIES
Deposits:
Noninterest-bearing		$	155,714			$	0				$	155,714
Interest-bearing			346,028				1,261		( e )			347,289
Total deposits			501,742				1,261					503,003
Long term debt			40				0					40
Other liabilities			2,938				198		( f )			3,136
Total liabilities			504,720				1,459					506,179
Net identifiable assets acquired over (under) liabilities assumed			58,291				(8,465	)				49,826
Goodwill			0				36,821					36,821
Net assets acquired over liabilities assumed		$	58,291			$	28,356				$	86,647
Consideration:
First Community Bankshares, Inc. common												2,792,729
Purchase price per share of the Company's common stock											$	31.02
Fair Value of Company common stock issued											$	86,631
Cash paid for fractional shares												16
Fair Value of total consideration transferred											$	86,647

Explanation of fair value adjustments:

( a ) - Adjustment reflects the fair value adjustments of $(14.70) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses and deferred loan fees of $3.27 million recorded by Highlands.

( b ) - Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.

( c ) - Adjustment to record the deferred tax asset related to the fair value adjustments.

( d ) - Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

( e ) - Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.

( f ) - Adjustment reflects the fair value adjustment for death benefits payable of $320 thousand, the fair value adjustment for lease liability of $(37) thousand and the fair value adjustment to the reserve for unfunded commitments of $(85) thousand.

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The following table presents the componentscarrying amount of net cash receivedacquired loans at December 31, 2019, which consist of loans with no credit deterioration, or performing loans, and loans with credit deterioration, or impaired loans.

		December 31, 2019
		Purchased				Purchased
(Amounts in thousands)		Performing				Impaired				Total
Commercial loans
Construction, development, and other land		$	15,763			$	1,956			$	17,719
Commercial and industrial			44,474				2,829				47,303
Multi-family residential			21,032				1,663				22,695
Single family non-owner occupied			29,357				4,564				33,921
Non-farm, non-residential			107,489				21,710				129,199
Agricultural			2,298				0				2,298
Farmland			3,287				3,722				7,009
Total commercial loans			223,700				36,444				260,144
Consumer real estate loans
Home equity lines			23,654				2,157				25,811
Single family owner occupied			116,413				13,174				129,587
Owner occupied construction			1,097				0				1,097
Total consumer real estate loans			141,164				15,331				156,495
Consumer and other loans
Consumer loans			9,487				1,341				10,828
Loans acquired at fair value		$	374,351			$	53,116			$	427,467

Comparative and Pro Forma Financial Information for Acquisitions in or paid2020

As the merger date was the close of business, December 31, 2019, Highlands had no earnings contribution to the 2019 consolidated statement of income for acquisitionsthe Company.  Merger-related expenses of $2.12 million were recorded in the consolidated statement of income and divestitures, an investing activityinclude incremental costs related to the closing of the acquisition, including legal, investment banker costs, and other costs.

The following table discloses the impact of the merger.  The table also presents certain pro forma information as if Highlands had been acquired on January 1, 2018.  These results combine the historical results of Highlands in the Company’s consolidated statementsstatement of cash flows,income and, while certain adjustments were made for the periods indicated:estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018.

 

Merger-related costs of $1.89 million incurred by the Company for the year ended December 31, 2020, and merger-related costs incurred by both the Company and Highlands of $7.16 million for the year ended 2019 have been excluded from the proforma information below. No adjustments have been made to the pro formas to eliminate the provision for loan losses for the years ended December 31, 2019 and 2018 of Highlands in the amount of $738,000 and $1.84 million, respectively.  The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisitions which are not reflected in the pro forma amounts below: 

		ProForma				ProForma
		Year Ended				Year Ended
(Dollars in thousands)		December 31, 2019				December 31, 2018
Total revenues (net interest income plus noninterest income)		$	150,618			$	145,656
Net adjusted income available to the common shareholder		$	43,463			$	42,470

		Year Ended December 31,
(Amounts in thousands)		2018				2017				2016
Acquisitions
Fair value of assets and liabilities acquired:
Loans		$	-			$	-			$	149,122
Premises and equipment			-				-				4,829
Other assets			-				-				448
Other intangible assets			-				-				3,842
Deposits			-				-				(134,307	)
Other liabilities			-		��		-				(75	)
Purchase price in excess of net assets acquired			-				-				2,446
Total purchase price			-				-				26,305
Non-cash purchase price			-				-				-
Cash acquired			-				-				-
Net cash paid in acquisitions			-				-				26,305
Divestitures
Book value of assets sold			(1,685	)			-				(165,742	)
Book value of liabilities sold			37				-				111,198
Sales price in excess of net liabilities assumed			-				-				(3,682	)
Total sales price			(1,648	)			-				(58,226	)
Cash sold			35				-				-
Non-cash sales price			1,603				-				-
Amount due remaining on books			-				-				2,205
Net cash received in divestitures			(10	)			-				(56,021	)
Net cash received in acquisitions and divestitures		$	(10	)		$	-			$	(29,716	)

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bankers Insurance, LLC

 

On October 1, 2018, the Company completed the sale of its remaining insurance agency assets to Bankers Insurance, LLC (“BI”) of Glen Allen, Virginia, in exchange for an equity interest in BI. The sale strategically allows the Company to continue offering insurance products to its customers through a larger, more diversified insurance agency. In connection with the divestiture, the Company recognized a one-timeone-time goodwill impairment charge of $1.49 million during the third quarter of 2018. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment.

 

Ascension Insurance Agency, Inc.

On October 1, 2016, the Company completed the sale of Greenpoint Insurance Group, Inc. (“Greenpoint”) to Ascension Insurance Agency, Inc. for $7.11 million, including earn-out payments of $2.21 million to be received over three years if certain operating targets are met. The divestiture consisted of two North Carolina offices operating as Greenpoint and two Virginia offices operating under the trade name Carr & Hyde Insurance. The transaction did not impact the Company’s in-branch insurance offices operating as FCIS in West Virginia and Virginia. The Company recorded a net gain of $617 thousand in connection with the divestiture and eliminated $6.49 million in goodwill and other intangible assets. The Company incurred expenses related to the divestiture of $46 thousand in 2016.

First Bank

On July 15, 2016, the Company completed a branch exchange with First Bank, North Carolina, pursuant to which the Bank exchanged a portion of its North Carolina branch network for First Bank’s Virginia branch network. Under the agreements, the Bank simultaneously sold six branches in the Winston-Salem and Mooresville areas of North Carolina and acquired seven branches in Southwestern Virginia. The branch acquisition complements the Company’s 2014 acquisition of seven branches from Bank of America by expanding the Company’s existing presence in Southwest Virginia and affords the opportunity to realize certain operating cost savings.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the branch exchange, the Company acquired total assets of $160.69 million, including total loans of $149.12 million and goodwill and other intangibles of $6.29 million, and total liabilities of $134.38 million, including total deposits of $134.31 million. The Company did not acquire any PCI loans. The consideration transferred included the net fair value of divested assets and a purchase premium of $3.84 million. The Company divested total assets of $162.17 million, including loans of $155.54 million and goodwill and other intangibles of $2.33 million, and total liabilities of $111.05 million, including deposits of $111.02 million, and received a deposit premium of $4.07 million. In connection with the divestiture, the Company recorded a net gain of $3.07 million. The Company incurred expenses related to the First Bank transaction of $684 thousand in 2016.

		Year Ended December 31,
(Amounts in thousands)		2020				2019				2018
Divestitures
Book value of assets sold			0				0				(1,685	)
Book value of liabilities sold			0				0				37
Sales price in excess of net liabilities assumed			0				0				0
Total sales price			0				0				(1,648	)
Cash sold			0				0				35
Non-cash sales price			0				0				1,603
Amount due remaining on books			0				0				0
Net cash received in divestitures			0				0				(10	)
Net cash received in acquisitions and divestitures		$	—			$	—			$	—

 

 

Note Note 3. Debt Securities

 

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

 

		December 31, 2018																December 31, 2020
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	1,108			$	5			$	-			$	1,113			$	555			$	0			$	(4	)		$	551
U.S. Treasury securities			19,970				-				(10	)			19,960
Municipal securities			96,886				912				(509	)			97,289				43,950				509				0				44,459
Mortgage-backed Agency securities			35,513				14				(773	)			34,754				37,453				992				(97	)			38,348
Total		$	153,477			$	931			$	(1,292	)		$	153,116			$	81,958			$	1,501			$	(101	)		$	83,358

 

		December 31, 2017																December 31, 2019
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	11,289			$	17			$	(10	)		$	11,296			$	5,038			$	0			$	(4	)		$	5,034
U.S. Treasury securities			19,987				-				(16	)			19,971
Municipal securities			101,552				2,203				(107	)			103,648				85,992				886				0				86,878
Single issue trust preferred securities			9,367				-				(483	)			8,884
Mortgage-backed Agency securities			22,095				46				(415	)			21,726				77,448				380				(166	)			77,662
Total		$	164,290			$	2,266			$	(1,031	)		$	165,525			$	168,478			$	1,266			$	(170	)		$	169,574

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the amortized cost and fair value of available-for-sale debt securities, by contractual maturity, as of December 31, 2018.2020. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)		U.S. Agency Securities				U.S. Treasury Securities				Municipal Securities				Total				U.S. Agency Securities				Municipal Securities				Total
Amortized cost maturity:
One year or less		$	-			$	19,970			$	-			$	19,970			$	0			$	0			$	0
After one year through five years			-				-				14,447				14,447				0				24,485				24,485
After five years through ten years			1,108				-				82,439				83,547				555				19,465				20,020
After ten years			-				-				-				-				0				0				0
Amortized cost		$	1,108			$	19,970			$	96,886				117,964			$	555			$	43,950				44,505
Mortgage-backed securities															35,513												37,453
Total amortized cost														$	153,477											$	81,958
Fair value maturity:
One year or less		$	-			$	19,960			$	-			$	19,960			$	0			$	0			$	0
After one year through five years			-				-				14,595				14,595				0				24,703				24,703
After five years through ten years			1,113				-				82,694				83,807				551				19,756				20,307
After ten years			-				-				-				-				0				0				0
Fair value		$	1,113			$	19,960			$	97,289				118,362			$	551			$	44,459				45,010
Mortgage-backed securities															34,754												38,348
Total fair value														$	153,116											$	83,358

 

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

 

		December 31, 2018
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	17,887			$	-			$	(20	)		$	17,867
Corporate securities			7,126				-				(3	)			7,123
Total		$	25,013			$	-			$	(23	)		$	24,990

		December 31, 2017
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	17,937			$	-			$	(49	)		$	17,888
Corporate securities			7,212				-				(16	)			7,196
Total		$	25,149			$	-			$	(65	)		$	25,084

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the amortized cost and fair value of held-to-maturity debt securities, by contractual maturity, as of December 31, 2018. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)		U.S. Agency Securities				Corporate Notes				Total
Amortized cost maturity:
One year or less		$	17,887			$	7,126			$	25,013
After one year through five years			-				-				-
After five years through ten years			-				-				-
After ten years			-				-				-
Total amortized cost		$	17,887			$	7,126			$	25,013
Fair value maturity:
One year or less		$	17,867			$	7,123			$	24,990
After one year through five years			-				-				-
After five years through ten years			-				-				-
After ten years			-				-				-
Total fair value		$	17,867			$	7,123			$	24,990

The following tables present the geographic composition of municipal securities, by state, where the largest volume of these securities are held in the Company’s portfolio. The tables also present the amortized cost and fair value of the municipal securities, including gross unrealized gains and losses, as of the dates indicated.

		December 31, 2018
		Percent of Municipal Portfolio				Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
(Amounts in thousands)
Minnesota			9.93	%		$	9,586			$	88			$	(15	)		$	9,659
New York			9.40	%			9,063				78				-				9,141
Wisconsin			9.14	%			8,914				36				(53	)			8,897
Ohio			8.78	%			8,541				47				(43	)			8,545
Massachusetts			8.46	%			8,165				93				(27	)			8,231
Texas			7.55	%			7,378				55				(91	)			7,342
Connecticut			5.93	%			5,715				53				-				5,768
Iowa			5.20	%			5,138				10				(90	)			5,058
New Jersey			4.74	%			4,521				87				-				4,608
Other			30.88	%			29,865				365				(190	)			30,040
Total			100.00	%		$	96,886			$	912			$	(509	)		$	97,289

		December 31, 2017
		Percent of Municipal Portfolio				Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
(Amounts in thousands)
New York			10.64	%		$	10,804			$	223			$	-			$	11,027
Minnesota			10.12	%			10,280				211				(1	)			10,490
Wisconsin			8.74	%			8,913				147				-				9,060
Massachusetts			8.57	%			8,691				208				(14	)			8,885
Ohio			8.36	%			8,551				123				(13	)			8,661
Texas			7.22	%			7,388				122				(21	)			7,489
Connecticut			6.82	%			6,929				142				-				7,071
Iowa			5.27	%			5,463				30				(35	)			5,458
New Jersey			4.67	%			4,670				167				-				4,837
Other			29.59	%			29,863				830				(23	)			30,670
Total			100.00	%		$	101,552			$	2,203			$	(107	)		$	103,648

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		December 31, 2018																								December 31, 2020
		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
		Value				Losses				Value				Losses				Value				Losses				Value				Losses				Value				Losses				Value				Losses
(Amounts in thousands)
U.S. Treasury securities		$	19,960			$	(10	)		$	-			$	-			$	19,960			$	(10	)
U.S. Agency securities																										$	0	��		$	0			$	544			$	(4	)		$	544			$	(4	)
Municipal securities			7,116				(62	)			18,081				(447	)			25,197				(509	)			0				0				0				0				0				0
Mortgage-backed Agency securities			15,762				(99	)			15,344				(674	)			31,106				(773	)			11,018				(97	)			0				0				11,018				(97	)
Total		$	42,838			$	(171	)		$	33,425			$	(1,121	)		$	76,263			$	(1,292	)		$	11,018			$	(97	)		$	544			$	(4	)		$	11,562			$	(101	)

 

		December 31, 2017																								December 31, 2019
		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
		Value				Losses				Value				Losses				Value				Losses				Value				Losses				Value				Losses				Value				Losses
(Amounts in thousands)
U.S. Agency securities		$	10,054			$	(10	)		$	-			$	-			$	10,054			$	(10	)		$	975			$	(4	)		$	0			$	0			$	975			$	(4	)
U.S. Treasury securities			19,972				(16	)			-				-				19,972				(16	)
Municipal securities			8,047				(55	)			2,314				(52	)			10,361				(107	)			0				0				0				0				0				0
Single issue trust preferred securities			-				-				8,884				(483	)			8,884				(483	)
Mortgage-backed Agency securities			4,276				(25	)			14,069				(390	)			18,345				(415	)			8,020				(48	)			8,319				(118	)			16,339				(166	)
Total		$	42,349			$	(106	)		$	25,267			$	(925	)		$	67,616			$	(1,031	)		$	8,995			$	(52	)		$	8,319			$	(118	)		$	17,314			$	(170	)

 

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

		December 31, 2018
		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
(Amounts in thousands)
U.S. Agency securities		$	-			$	-			$	17,867			$	(20	)		$	17,867			$	(20	)
Corporate securities			-				-				7,123				(3	)			7,123				(3	)
Total		$	-			$	-			$	24,990			$	(23	)		$	24,990			$	(23	)

		December 31, 2017
		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
(Amounts in thousands)
U.S. Agency securities		$	17,888			$	(49	)		$	-			$	-			$	17,888			$	(49	)
Corporate securities			7,196				(16	)			-				-				7,196				(16	)
Total		$	25,084			$	(65	)		$	-			$	-			$	25,084			$	(65	)

 

There were 906 individual debt securities in an unrealized loss position as of December 31, 2018,2020, and their combined depreciation in value represented 0.74%0.12% of the debt securities portfolio. These securities included 61 securities1 security in a continuous unrealized loss position for 12 months or longer that the Company does not intend to sell, and that it has determined is not more likely than not going to be required to sell, prior to maturity or recovery. There were 4517 individual debt securities in an unrealized loss position as of December 31, 2017,2019, and their combined depreciation in value represented 0.57%0.10% of the debt securities portfolio.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company reviews its investment portfolio quarterly for indications of OTTI. The initial indicator of OTTI for debt securities is a decline in fair value below book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in OCI. The Company incurred no credit-related OTTI charges on debt securities in 2018 or 2017. In 2016 the Company incurred credit-related OTTI charges on debt securities of $4.64 million related to the Company’s change in intent to hold certain securities to recovery. The intent was changed to sell specific trust preferred securities in the Company’s investment portfolio primarily to reduce credit concentrations with two issuers. Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current economic factors. The following table presents the changes in credit-related losses recognized in earnings on debt securities where a portion of the impairment was recognized in OCI during the periods indicated:

		Year Ended December 31,
		2018				2017				2016
(Amounts in thousands)
Beginning balance		$	-			$	-			$	-
Additions for credit losses on securities not previously recognized			-				-				4,646
Additions for credit losses on securities previously recognized			-				-				-
Reduction for securities sold/realized losses			-				-				(4,646	)
Ending balance		$	-			$	-			$	-

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands)
Gross realized gains		$	-			$	-			$	757			$	419			$	67			$	0
Gross realized losses			(618	)			(661	)			(422	)			(34	)			(110	)			(618	)
Net (loss) gain on sale of securities		$	(618	)		$	(661	)		$	335
Net gain (loss) on sale of securities														$	385			$	(43	)		$	(618	)

 

The carrying amount of securities pledged for various purposes totaled $38.25$36.56 million as of December 31, 2018,2020, and $51.34$27.87 million as of December 31, 2017.2019.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Loans

 

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are those loans acquired in FDIC assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled $1.79$1.13 million as of December 31, 2018,2020, and $1.71$2.20 million as of December 31, 2017.2019. Deferred loan fees were $5.58 million as of December 31, 2020, and $4.60 million as of December 31, 2018, and $4.44 million as of December 31, 2017.2019. For information about off-balance sheet financing, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements of this report.

 

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

 

		December 31,
		2020								2019
(Amounts in thousands)		Amount				Percent				Amount				Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land		$	44,649				2.04	%		$	48,659				2.30	%
Commercial and industrial			173,024				7.91	%			142,962				6.76	%
Multi-family residential			115,161				5.27	%			121,840				5.76	%
Single family non-owner occupied			187,598				8.58	%			163,181				7.72	%
Non-farm, non-residential			734,793				33.60	%			727,261				34.39	%
Agricultural			9,749				0.45	%			11,756				0.56	%
Farmland			19,761				0.90	%			23,155				1.10	%
Total commercial loans			1,284,735				58.75	%			1,238,814				58.59	%
Consumer real estate loans
Home equity lines			89,432				4.09	%			110,078				5.21	%
Single family owner occupied			658,678				30.12	%			620,697				29.35	%
Owner occupied construction			17,720				0.81	%			17,241				0.82	%
Total consumer real estate loans			765,830				35.02	%			748,016				35.38	%
Consumer and other loans
Consumer loans			120,373				5.50	%			110,027				5.20	%
Other			6,014				0.28	%			4,742				0.22	%
Total consumer and other loans			126,387				5.78	%			114,769				5.42	%
Total non-covered loans			2,176,952				99.56	%			2,101,599				99.39	%
Total covered loans			9,680				0.44	%			12,861				0.61	%
Total loans held for investment, net of unearned income		$	2,186,632				100.00	%		$	2,114,460				100.00	%
Loans held for Sale		$	0			$	—			$	263			$	—

		December 31,
		2018								2017
(Amounts in thousands)		Amount				Percent				Amount				Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land		$	63,508				3.58	%		$	60,017				3.30	%
Commercial and industrial			104,863				5.91	%			92,188				5.07	%
Multi-family residential			107,012				6.03	%			125,202				6.89	%
Single family non-owner occupied			140,097				7.89	%			141,670				7.80	%
Non-farm, non-residential			613,877				34.58	%			616,633				33.93	%
Agricultural			8,545				0.48	%			7,035				0.39	%
Farmland			18,905				1.07	%			25,649				1.41	%
Total commercial loans			1,056,807				59.54	%			1,068,394				58.79	%
Consumer real estate loans
Home equity lines			93,466				5.27	%			103,205				5.68	%
Single family owner occupied			510,963				28.78	%			502,686				27.66	%
Owner occupied construction			18,171				1.02	%			39,178				2.16	%
Total consumer real estate loans			622,600				35.07	%			645,069				35.50	%
Consumer and other loans
Consumer loans			71,552				4.03	%			70,772				3.89	%
Other			5,310				0.30	%			5,001				0.28	%
Total consumer and other loans			76,862				4.33	%			75,773				4.17	%
Total non-covered loans			1,756,269				98.94	%			1,789,236				98.46	%
Total covered loans			18,815				1.06	%			27,948				1.54	%
Total loans held for investment, net of unearned income		$	1,775,084				100.00	%		$	1,817,184				100.00	%

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

Commercial and industrial loan balances grew significantly compared to December 31, 2019. The Company began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender during the second quarter of 2020. At December 31,2020, the PPP loans had a current balance of $57.06 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $2.30 million at December 31,2020, were also recorded. During 2020, the Company recorded amortization of net deferred loan origination fees of $868 thousand on PPP loans. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA. 

 

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

		December 31,
(Amounts in thousands)		2020				2019
Covered loans
Commercial loans
Construction, development, and other land		$	25			$	28
Single family non-owner occupied			185				199
Non-farm, non-residential			0				3
Total commercial loans			210				230
Consumer real estate loans
Home equity lines			7,094				9,853
Single family owner occupied			2,376				2,778
Total consumer real estate loans			9,470				12,631
Total covered loans		$	9,680			$	12,861

 

		December 31,
(Amounts in thousands)		2018				2017
Covered loans
Commercial loans
Construction, development, and other land		$	35			$	39
Single family non-owner occupied			238				284
Non-farm, non-residential			6				9
Total commercial loans			279				332
Consumer real estate loans
Home equity lines			15,284				23,720
Single family owner occupied			3,252				3,896
Total consumer real estate loans			18,536				27,616
Total covered loans		$	18,815			$	27,948

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those PCI loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest.   Effective January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio.  The only remaining PCI pools are those loans acquired in the Highlands acquisition on December 31, 2019.  The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:

 

		December 31,
		2020								2019
(Amounts in thousands)		Recorded Investment				Unpaid Principal Balance				Recorded Investment				Unpaid Principal Balance
PCI Loans, by acquisition
Peoples		$	0			$	0			$	5,071			$	6,431
Waccamaw			0				0				2,708				14,277
Highlands			39,662				47,514				53,116				64,096
Other acquired			0				0				352				378
Total PCI Loans		$	39,662			$	47,514			$	61,247			$	85,182

		December 31,
		2018								2017
(Amounts in thousands)		Recorded Investment				Unpaid Principal Balance				Recorded Investment				Unpaid Principal Balance
PCI Loans, by acquisition
Peoples		$	5,330			$	7,272			$	5,278			$	8,111
Waccamaw			5,805				19,602				12,176				31,335
Other acquired			868				894				986				1,012
Total PCI Loans		$	12,003			$	27,768			$	18,440			$	40,458

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Highlands acquisition added $8.15 million in accretable yield. The total fair value of the Highlands PCI loans was $53.12 million at the time of the acquisition. The gross contractual cash flows for the Highlands PCI loans was $76.45 million. The following table presents the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated:

 

		Peoples				Waccamaw				Total				Peoples				Waccamaw				Highlands				Total
(Amounts in thousands)
Balance January 1, 2016		$	3,589			$	26,109			$	29,698
Accretion			(1,237	)			(5,380	)			(6,617	)
Reclassifications from nonaccretable difference(1)			287				1,620				1,907
Other changes, net			1,753				(515	)			1,238
Balance December 31, 2016		$	4,392			$	21,834			$	26,226
Balance January 1, 2017		$	4,392			$	21,834			$	26,226
Accretion			(1,379	)			(5,664	)			(7,043	)
Reclassifications from nonaccretable difference(1)			825				3,378				4,203
Other changes, net			(450	)			(83	)			(533	)
Balance December 31, 2017		$	3,388			$	19,465			$	22,853
Balance January 1, 2018		$	3,388			$	19,465			$	22,853			$	3,388			$	19,465			$	0			$	22,853
Accretion			(1,263	)			(6,269	)			(7,532	)			(1,263	)			(6,269	)			0				(7,532	)
Reclassifications from nonaccretable difference(1)			8				1,770				1,778
Reclassifications from nonaccretable difference(1)															8				1,770				0				1,778
Other changes, net			457				(327	)			130				457				(327	)			0				130
Balance December 31, 2018		$	2,590			$	14,639			$	17,229			$	2,590			$	14,639			$	0			$	17,229
Balance January 1, 2019														$	2,590			$	14,639			$	0			$	17,229
Accretion															(950	)			(3,317	)			0				(4,267	)
Reclassifications from nonaccretable difference(1)															17				1,440				0				1,457
Other changes, net															233				(188	)			0				45
Balance December 31, 2019														$	1,890			$	12,574			$	0			$	14,464
Balance January 1, 2020														$	1,890			$	12,574			$	0			$	14,464
Additions															0				0				8,152				8,152
Accretion															0				0				(2,497	)			(2,497	)
Other changes, net															(1,890	)			(12,574	)			0				(14,464	)
Balance Balance at December 31, 2020														$	0			$	0			$	5,655			$	5,655

---

(1)(1)

RespresentsRepresents changes attributable to expected loss assumptions

 

 

Note 5. Credit Quality

 

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

 

●

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

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

●

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

●

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

●

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

●

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

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		December 31, 2018																								December 31, 2020
						Special																								Special
(Amounts in thousands)		Pass				Mention				Substandard				Doubtful				Loss				Total				Pass				Mention				Substandard				Doubtful				Loss				Total
Non-covered loans
Commercial loans
Construction, development, and other land		$	61,877			$	661			$	970			$	-			$	-			$	63,508			$	36,934			$	4,950			$	2,765			$	0			$	0			$	44,649
Commercial and industrial			102,044				2,166				653				-				-				104,863				160,474				7,031				5,519				0				0				173,024
Multi-family residential			104,183				1,087				1,742				-				-				107,012				103,291				8,586				3,284				0				0				115,161
Single family non-owner occupied			131,443				4,395				4,259				-				-				140,097				165,146				9,602				12,838				12				0				187,598
Non-farm, non-residential			595,659				8,166				9,906				146				-				613,877				568,438				125,907				40,448				0				0				734,793
Agricultural			8,328				131				86				-				-				8,545				7,724				1,686				339				0				0				9,749
Farmland			16,898				538				1,469				-				-				18,905				13,527				2,597				3,637				0				0				19,761
Consumer real estate loans																																															—
Home equity lines			91,194				649				1,623				-				-				93,466				85,316				1,112				3,004				0				0				89,432
Single family owner occupied			482,794				4,355				23,814				-				-				510,963				622,082				3,594				33,002				0				0				658,678
Owner occupied construction			17,872				-				299				-				-				18,171				17,232				201				287				0				0				17,720
Consumer and other loans																																															—
Consumer loans			71,240				4				308				-				-				71,552				118,134				28				2,211				0				0				120,373
Other			5,310				-				-				-				-				5,310				6,014				0				0				0				0				6,014
Total non-covered loans			1,688,842				22,152				45,129				146				-				1,756,269				1,904,312				165,294				107,334				12				0				2,176,952
Covered loans
Commercial loans
Construction, development, and other land			-				35				-				-				-				35				0				25				0				0				0				25
Single family non-owner occupied			223				-				15				-				-				238				151				34				0				0				0				185
Non-farm, non-residential			-				-				6				-				-				6
Consumer real estate loans
Home equity lines			9,511				5,244				529				-				-				15,284				6,396				376				322				0				0				7,094
Single family owner occupied			2,507				355				390				-				-				3,252				1,778				265				333				0				0				2,376
Total covered loans			12,241				5,634				940				-				-				18,815				8,325				700				655				0				0				9,680
Total loans		$	1,701,083			$	27,786			$	46,069			$	146			$	-			$	1,775,084			$	1,912,637			$	165,994			$	107,989			$	12			$	0			$	2,186,632

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2017
						Special
(Amounts in thousands)		Pass				Mention				Substandard				Doubtful				Loss				Total
Non-covered loans
Commercial loans
Construction, development, and other land		$	57,768			$	1,367			$	882			$	-			$	-			$	60,017
Commercial and industrial			87,181				3,721				1,286				-				-				92,188
Multi-family residential			118,509				5,663				1,030				-				-				125,202
Single family non-owner occupied			130,689				7,271				3,710				-				-				141,670
Non-farm, non-residential			596,616				12,493				7,351				173				-				616,633
Agricultural			6,639				294				102				-				-				7,035
Farmland			22,875				210				2,564				-				-				25,649
Consumer real estate loans
Home equity lines			100,833				618				1,754				-				-				103,205
Single family owner occupied			471,382				5,480				25,824				-				-				502,686
Owner occupied construction			38,947				-				231				-				-				39,178
Consumer and other loans
Consumer loans			70,448				13				311				-				-				70,772
Other			5,001				-				-				-				-				5,001
Total non-covered loans			1,706,888				37,130				45,045				173				-				1,789,236
Covered loans
Commercial loans
Construction, development, and other land			1				38				-				-				-				39
Single family non-owner occupied			265				-				19				-				-				284
Non-farm, non-residential			-				-				9				-				-				9
Consumer real estate loans
Home equity lines			11,338				11,685				697				-				-				23,720
Single family owner occupied			2,996				411				489				-				-				3,896
Total covered loans			14,600				12,134				1,214				-				-				27,948
Total loans		$	1,721,488			$	49,264			$	46,259			$	173			$	-			$	1,817,184

		December 31, 2019
						Special
(Amounts in thousands)		Pass				Mention				Substandard				Doubtful				Loss				Total
Non-covered loans
Commercial loans
Construction, development, and other land		$	45,781			$	2,079			$	799			$	0			$	0			$	48,659
Commercial and industrial			135,651				4,327				2,984				0				0				142,962
Multi-family residential			118,045				2,468				1,327				0				0				121,840
Single family non-owner occupied			149,916				7,489				5,776				0				0				163,181
Non-farm, non-residential			683,481				27,160				16,620				0				0				727,261
Agricultural			11,299				122				335				0				0				11,756
Farmland			17,609				4,107				1,439				0				0				23,155
Consumer real estate loans
Home equity lines			106,246				2,014				1,818				0				0				110,078
Single family owner occupied			580,580				17,001				23,116				0				0				620,697
Owner occupied construction			16,341				179				721				0				0				17,241
Consumer and other loans
Consumer loans			108,065				1,341				621				0				0				110,027
Other			4,742				0				0				0				0				4,742
Total non-covered loans			1,977,756				68,287				55,556				0				0				2,101,599
Covered loans
Commercial loans
Construction, development, and other land			0				28				0				0				0				28
Single family non-owner occupied			199				0				0				0				0				199
Non-farm, non-residential			0				0				3				0				0				3
Consumer real estate loans
Home equity lines			7,177				2,327				349				0				0				9,853
Single family owner occupied			2,111				275				392				0				0				2,778
Total covered loans			9,487				2,630				744				0				0				12,861
Total loans		$	1,987,243			$	70,917			$	56,300			$	0			$	0			$	2,114,460

  

The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed impaired.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the dates indicated:

 

		December 31, 2018												December 31, 2017												December 31, 2020												December 31, 2019
						Unpaid												Unpaid												Unpaid												Unpaid
		Recorded				Principal				Related				Recorded				Principal				Related				Recorded				Principal				Related				Recorded				Principal				Related
(Amounts in thousands)		Investment				Balance				Allowance				Investment				Balance				Allowance				Investment				Balance				Allowance				Investment				Balance				Allowance
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land		$	824			$	840			$	-			$	727			$	988			$	-			$	616			$	891			$	—			$	552			$	768			$	—
Commercial and industrial			386				416				-				315				1,142				-				2,341				2,392				—				576				599				—
Multi-family residential			1,127				1,274				-				499				1,010				-				946				1,593				—				1,254				1,661				—
Single family non-owner occupied			2,761				3,095				-				2,042				3,521				-				4,816				5,785				—				2,652				3,176				—
Non-farm, non-residential			4,154				4,494				-				3,022				5,955				-				8,238				9,467				—				4,158				4,762				—
Agricultural			86				96				-				102				107				-				218				226				—				158				164				—
Farmland			1,464				1,547				-				395				414				-				1,228				1,311				—				1,437				1,500				—
Consumer real estate loans
Home equity lines			1,315				1,451				-				1,621				1,770				-				1,604				1,772				—				1,372				1,477				—
Single family owner occupied			15,451				18,390				-				16,633				18,964				-				16,778				19,361				—				15,588				17,835				—
Owner occupied construction			225				225				-				231				231				-				216				216				—				648				648				—
Consumer and other loans
Consumer loans			145				156				-				141				144				-				818				833				—				290				294				—
Total impaired loans with no allowance			27,938				31,984				-				25,728				34,246				-				37,819				43,847				—				28,685				32,884				—
Impaired loans with a related allowance
Commercial loans
Commercial and industrial			-				-				-				343				343				270
Multi-family residential			534				536				230				-				-				-
Single family non-owner occupied			-				-				-				446				446				62
Non-farm, non-residential			840				842				235				262				263				15				1,068				1,121				319				1,241				1,227				292
Farmland			-				-				-				936				974				233
Consumer real estate loans
Home equity lines			65				68				65				-				-				-
Single family owner occupied			3,631				3,683				922				5,586				5,606				1,978				338				338				108				1,246				1,246				353
Total impaired loans with an allowance			5,070				5,129				1,452				7,573				7,632				2,558				1,406				1,459				427				2,487				2,473				645
Total impaired loans(1)		$	33,008			$	37,113			$	1,452			$	33,301			$	41,878			$	2,558
Total impaired loans(1)																										$	39,225			$	45,306			$	427			$	31,172			$	35,357			$	645

---

(1)(1)

Total impaired loans include loans totaling $25.27$31.18 million as of December 31, 2018,2020, and $20.13$24.64 million as of December 31, 2017,2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment. During the first quarter of 2018, the Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from $250 thousand to $500 thousand or greater.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		Year Ended December 31,																								Year Ended December 31,
		2018								2017								2016								2020								2019								2018
(Amounts in thousands)		Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land		$	26			$	921			$	56			$	455			$	22			$	344			$	25			$	935			$	22			$	704			$	26			$	921
Commercial and industrial			19				383				14				556				16				646				155				2,749				34				363				19				383
Multi-family residential			47				910				53				523				21				308				19				808				24				1,356				47				910
Single family non-owner occupied			123				2,652				106				3,214				178				3,076				189				4,890				123				2,979				123				2,652
Non-farm, non-residential			133				4,828				122				4,052				307				8,573				295				7,450				123				4,683				133				4,828
Agricultural			-				164				5				124				-				-				9				241				9				121				0				164
Farmland			64				1,172				17				853				55				437				63				1,569				55				1,469				64				1,172
Consumer real estate loans
Home equity lines			44				1,637				50				1,365				30				1,223				51				1,594				46				1,439				44				1,637
Single family owner occupied			503				15,423				488				15,758				343				12,330				578				17,044				599				16,058				503				15,423
Owner occupied construction			8				244				8				234				9				497				10				407				29				308				8				244
Consumer and other loans
Consumer loans			9				161				9				75				5				60				42				543				13				213				9				161
Total impaired loans with no related allowance			976				28,495				928				27,209				986				27,494				1,436				38,230				1,077				29,693				976				28,495
Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land			-				-				-				107				-				-
Commercial and industrial			-				-				103				1,376				-				-
Multi-family residential			2				270				-				-				-				-				0				707				0				0				2				270
Single family non-owner occupied			7				110				27				479				23				518				0				0				0				0				7				110
Non-farm, non-residential			2				809				15				789				215				3,831				17				1,524				48				766				2				809
Farmland			-				307				22				442				14				108				0				0				0				0				0				307
Consumer real estate loans
Home equity lines			3				68				-				104				-				-				0				0				0				0				3				68
Single family owner occupied			158				5,296				161				4,805				118				4,452				29				1,196				46				1,947				158				5,296
Owner occupied construction			-				-				-				-				-				87
Total impaired loans with a related allowance			172				6,860				328				8,102				370				8,996				46				3,427				94				2,713				172				6,860
Total impaired loans		$	1,148			$	35,355			$	1,256			$	35,311			$	1,356			$	36,490			$	1,482			$	41,657			$	1,171			$	32,406			$	1,148			$	35,355

 

There were no impaired0 PCI loan pools that became impaired subsequent to the acquisition of the loans as of December 31, 20182020 or 2017. The following tables provide information on impaired PCI loan pools for the dates indicated:2019. 

 

		Year Ended December 31,
		2018				2017				2016
(Amounts in thousands)
Interest income recognized		$	-			$	20			$	142
Average recorded investment			-				528				1,929

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		December 31, 2020												December 31, 2019
(Amounts in thousands)		Non-covered				Covered				Total				Non-covered				Covered				Total
Commercial loans
Construction, development, and other land		$	244			$	0			$	244			$	211			$	0			$	211
Commercial and industrial			895				0				895				530				0				530
Multi-family residential			946				0				946				1,144				0				1,144
Single family non-owner occupied			2,990				0				2,990				1,286				0				1,286
Non-farm, non-residential			6,343				0				6,343				3,400				0				3,400
Agricultural			217				0				217				158				0				158
Farmland			489				0				489				713				0				713
Consumer real estate loans
Home equity lines			841				281				1,122				753				220				973
Single family owner occupied			7,960				16				7,976				7,259				24				7,283
Owner occupied construction			0				0				0				428				0				428
Consumer and other loans
Consumer loans			781				0				781				231				0				231
Total nonaccrual loans		$	21,706			$	297			$	22,003			$	16,113			$	244			$	16,357

		December 31, 2018												December 31, 2017
(Amounts in thousands)		Non-covered				Covered				Total				Non-covered				Covered				Total
Commercial loans
Construction, development, and other land		$	413			$	-			$	413			$	-			$	-			$	-
Commercial and industrial			428				-				428				211				-				211
Multi-family residential			1,395				-				1,395				498				-				498
Single family non-owner occupied			1,696				15				1,711				851				19				870
Non-farm, non-residential			4,020				-				4,020				2,448				-				2,448
Agricultural			86				-				86				102				-				102
Farmland			711				-				711				805				-				805
Consumer real estate loans
Home equity lines			614				271				885				882				306				1,188
Single family owner occupied			10,141				36				10,177				13,108				17				13,125
Consumer and other loans
Consumer loans			79				-				79				92				-				92
Total nonaccrual loans		$	19,583			$	322			$	19,905			$	18,997			$	342			$	19,339

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $58$295 thousand as of December 31, 2018,2020, and $1$144 thousand as of December 31, 2017.2019.

		December 31, 2020
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total
(Amounts in thousands)		Past Due				Past Due				Past Due				Past Due				Loans				Loans
Non-covered loans
Commercial loans
Construction, development, and other land		$	1,039			$	—			$	235			$	1,274			$	43,375			$	44,649
Commercial and industrial			669				230				700				1,599				171,425				173,024
Multi-family residential			103				0				946				1,049				114,112				115,161
Single family non-owner occupied			925				488				2,144				3,557				184,041				187,598
Non-farm, non-residential			601				296				3,368				4,265				730,528				734,793
Agricultural			70				189				88				347				9,402				9,749
Farmland			43				0				457				500				19,261				19,761
Consumer real estate loans
Home equity lines			574				380				171				1,125				88,307				89,432
Single family owner occupied			5,283				2,265				3,891				11,439				647,239				658,678
Owner occupied construction			82				0				0				82				17,638				17,720
Consumer and other loans
Consumer loans			2,637				746				651				4,034				116,339				120,373
Other			—				—				—				—				6,014				6,014
Total non-covered loans			12,026				4,594				12,651				29,271				2,147,681				2,176,952
Covered loans
Commercial loans
Construction, development, and other land			0				0				0				0				25				25
Single family non-owner occupied			0				0				0				0				185				185
Consumer real estate loans
Home equity lines			75				0				254				329				6,765				7,094
Single family owner occupied			34				0				0				34				2,342				2,376
Total covered loans			109				0				254				363				9,317				9,680
Total loans		$	12,135			$	4,594			$	12,905			$	29,634			$	2,156,998			$	2,186,632

 

		December 31, 2018
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total
(Amounts in thousands)		Past Due				Past Due				Past Due				Past Due				Loans				Loans
Non-covered loans
Commercial loans
Construction, development, and other land		$	111			$	-			$	407			$	518			$	62,990			$	63,508
Commercial and industrial			306				-				262				568				104,295				104,863
Multi-family residential			113				-				1,274				1,387				105,625				107,012
Single family non-owner occupied			514				1,115				992				2,621				137,476				140,097
Non-farm, non-residential			1,332				540				2,398				4,270				609,607				613,877
Agricultural			109				-				-				109				8,436				8,545
Farmland			640				-				392				1,032				17,873				18,905
Consumer real estate loans
Home equity lines			408				209				334				951				92,515				93,466
Single family owner occupied			5,006				3,495				4,445				12,946				498,017				510,963
Owner occupied construction			-				-				-				-				18,171				18,171
Consumer and other loans
Consumer loans			507				200				59				766				70,786				71,552
Other			-				-				-				-				5,310				5,310
Total non-covered loans			9,046				5,559				10,563				25,168				1,731,101				1,756,269
Covered loans
Commercial loans
Construction, development, and other land			-				-				-				-				35				35
Single family non-owner occupied			15				-				-				15				223				238
Non-farm, non-residential			-				-				-				-				6				6
Consumer real estate loans
Home equity lines			176				38				91				305				14,979				15,284
Single family owner occupied			166				-				-				166				3,086				3,252
Total covered loans			357				38				91				486				18,329				18,815
Total loans		$	9,403			$	5,597			$	10,654			$	25,654			$	1,749,430			$	1,775,084

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2017
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total
(Amounts in thousands)		Past Due				Past Due				Past Due				Past Due				Loans				Loans
Non-covered loans
Commercial loans
Construction, development, and other land		$	20			$	365			$	-			$	385			$	59,632			$	60,017
Commercial and industrial			232				40				142				414				91,774				92,188
Multi-family residential			544				-				185				729				124,473				125,202
Single family non-owner occupied			223				302				331				856				140,814				141,670
Non-farm, non-residential			2,433				383				1,536				4,352				612,281				616,633
Agricultural			123				-				-				123				6,912				7,035
Farmland			113				-				692				805				24,844				25,649
Consumer real estate loans
Home equity lines			226				198				485				909				102,296				103,205
Single family owner occupied			6,959				2,418				8,186				17,563				485,123				502,686
Owner occupied construction			326				79				-				405				38,773				39,178
Consumer and other loans
Consumer loans			439				97				17				553				70,219				70,772
Other			-				-				-				-				5,001				5,001
Total non-covered loans			11,638				3,882				11,574				27,094				1,762,142				1,789,236
Covered loans
Commercial loans
Construction, development, and other land			-				-				-				-				39				39
Single family non-owner occupied			-				-				-				-				284				284
Non-farm, non-residential			-				-				-				-				9				9
Consumer real estate loans
Home equity lines			402				-				173				575				23,145				23,720
Single family owner occupied			70				-				-				70				3,826				3,896
Total covered loans			472				-				173				645				27,303				27,948
Total loans		$	12,110			$	3,882			$	11,747			$	27,739			$	1,789,445			$	1,817,184

		December 31, 2019
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total
(Amounts in thousands)		Past Due				Past Due				Past Due				Past Due				Loans				Loans
Non-covered loans
Commercial loans
Construction, development, and other land		$	63			$	65			$	211			$	339			$	48,320			$	48,659
Commercial and industrial			1,913				238				507				2,658				140,304				142,962
Multi-family residential			375				0				1,144				1,519				120,321				121,840
Single family non-owner occupied			754				267				661				1,682				161,499				163,181
Non-farm, non-residential			917				1,949				3,027				5,893				721,368				727,261
Agricultural			86				164				0				250				11,506				11,756
Farmland			856				349				664				1,869				21,286				23,155
Consumer real estate loans
Home equity lines			1,436				165				503				2,104				107,974				110,078
Single family owner occupied			7,728				2,390				3,766				13,884				606,813				620,697
Owner occupied construction			207				0				428				635				16,606				17,241
Consumer and other loans
Consumer loans			1,735				439				202				2,376				107,651				110,027
Other			22				0				0				22				4,720				4,742
Total non-covered loans			16,092				6,026				11,113				33,231				2,068,368				2,101,599
Covered loans
Commercial loans
Construction, development, and other land			0				0				0				0				28				28
Single family non-owner occupied			0				0				0				0				199				199
Non-farm, non-residential			0				0				0				0				3				3
Consumer real estate loans
Home equity lines			144				28				0				172				9,681				9,853
Single family owner occupied			0				50				0				50				2,728				2,778
Total covered loans			144				78				0				222				12,639				12,861
Total loans		$	16,236			$	6,104			$	11,113			$	33,453			$	2,081,007			$	2,114,460

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of $250$500 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $250$500 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally not considered TDRs as long as the loans remain in the assigned loan pool. No covered loans were recorded as TDRs as of December 31, 20182020 or 2017. 2019.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through December 31,2020, the Company had modified a total of 3,625 loans with principal balances totaling $458.17 million related to COVID-19 relief.  Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act.  The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		December 31,																								December 31,
		2018												2017												2020												2019
(Amounts in thousands)		Nonaccrual(1)				Accruing				Total				Nonaccrual(1)				Accruing				Total				Nonaccrual(1)				Accruing				Total				Nonaccrual(1)				Accruing				Total
Commercial loans
Commercial and industrial																										$	0			$	1,326			$	1,326			$	0			$	0			$	0
Single family non-owner occupied		$	640			$	309			$	949			$	364			$	528			$	892				1,585				1,265				2,850				552				595				1,147
Non-farm, non-residential			-				314				314				-				295				295				0				2,407				2,407				0				307				307
Consumer real estate loans
Home equity lines			-				127				127				-				145				145				0				77				77				0				115				115
Single family owner occupied			1,941				5,417				7,358				1,565				6,496				8,061				229				4,927				5,156				1,790				5,305				7,095
Owner occupied construction			-				225				225				-				233				233				0				216				216				0				221				221
Consumer and other loans
Consumer loans			-				35				35				-				37				37				0				30				30				0				32				32
Total TDRs		$	2,581			$	6,427			$	9,008			$	1,929			$	7,734			$	9,663			$	1,814			$	10,248			$	12,062			$	2,342			$	6,575			$	8,917
Allowance for loan losses related to TDRs										$	568											$	642											$	0											$	353

---

(1)(1)

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

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands)
Interest income recognized		$	264			$	222			$	424			$	473			$	277			$	264

 

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

 

		Year Ended December 31,
		2020												2019
(Amounts in thousands)		Total Contracts				Pre-modification Recorded Investment				Post modification Recorded Investment(1)				Total Contracts				Pre-modification Recorded Investment				Post modification Recorded Investment(1)
Below market interest rate
Single family owner occupied			1			$	50			$	50				0			$	0			$	0
Below market interest rate and extended payment term
Single family owner occupied			—				—				—				6				887				871
Principal deferral
Construction, development, and other land development			3				1,708				1,708				0				0				0
Non-farm, non-residential			3				2,115				2,115				—				—				—
Home equity			0				0				0				1				5				2
Single family owner occupied			5				1,085				1,054				3				331				279
Total principal deferral			11				4,908				4,877				4				336				281
Total			12			$	4,958			$	4,927				10			$	1,223			$	1,152

		Year Ended December 31,
		2018												2017
(Amounts in thousands)		Total Contracts				Pre-modification Recorded Investment				Post-modification Recorded Investment(1)				Total Contracts				Pre-modification Recorded Investment				Post-modification Recorded Investment(1)
Below market interest rate
Single family owner occupied			1			$	11			$	11				-			$	-			$	-
Below market interest rate and extended payment term
Single family owner occupied			1				41				41				5				207				207
Consumer loans			-				-				-				1				36				36
Total			2			$	52			$	52				6			$	243			$	243

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FIRST COMMUNITY BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Represents the loan balance immediately following modification

 

The following table presents loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a payment default during the periods indicated:indicated

 

		Year Ended December 31,																Year Ended December 31,
		2018								2017								2020								2019
		Total				Recorded				Total				Recorded				Total				Recorded				Total				Recorded
		Contracts				Investment				Contracts				Investment				Contracts				Investment				Contracts				Investment
(Amounts in thousands)
Single family owner occupied			1			$	521				1			$	14				1			$	53				0			$	0
Total			1			$	521				1			$	14				1			$	53				0			$	0

 

The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

 

		December 31, 2018				December 31, 2017				December 31, 2020				December 31, 2019
(Amounts in thousands)
Non-covered OREO		$	3,806			$	2,409			$	2,083			$	3,969
Covered OREO			32				105
Total OREO		$	3,838			$	2,514			$	2,083			$	3,969
Non-covered OREO secured by residential real estate		$	2,303			$	2,209			$	769			$	2,232
Residential real estate loans in the foreclosure process(1)			6,349				9,921
Residential real estate loans in the foreclosure process(1)											4,141				1,539

---

(1)(1)

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

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 6. Allowance for Loan Losses

 

The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI loans as of December 31, 20182020 or 2017.2019.

 

		Year Ended December 31, 2018																Year Ended December 31, 2020
(Amounts in thousands)		Commercial				Consumer Real Estate				Consumer and Other				Total Allowance				Commercial				Consumer Real Estate				Consumer and Other				Total Allowance
Beginning balance		$	11,672			$	6,810			$	794			$	19,276			$	10,235			$	6,325			$	1,865			$	18,425
(Recovery of) provision for loan losses charged to operations			(660	)			1,473				1,580				2,393
Provision for loan losses charged to operations																			6,583				2,760				3,325				12,668
Charge-offs			(1,236	)			(2,005	)			(1,666	)			(4,907	)			(2,769	)			(558	)			(3,296	)			(6,623	)
Recoveries			723				454				328				1,505				612				424				676				1,712
Net charge-offs			(513	)			(1,551	)			(1,338	)			(3,402	)			(2,157	)			(134	)			(2,620	)			(4,911	)
Ending balance		$	10,499			$	6,732			$	1,036			$	18,267			$	14,661			$	8,951			$	2,570			$	26,182

 

		Year Ended December 31, 2017																Year Ended December 31, 2019
(Amounts in thousands)		Commercial				Consumer Real Estate				Consumer and Other				Total Allowance				Commercial				Consumer Real Estate				Consumer and Other				Total Allowance
Allowance, excluding PCI
Beginning balance		$	11,690			$	5,487			$	759			$	17,936			$	10,499			$	6,732			$	1,036			$	18,267
Provision for loan losses charged to operations			103				1,608				1,072				2,783
Provision for (recovery of) loan losses charged to operations																			1,411				(105	)			2,265				3,571
Charge-offs			(922	)			(699	)			(1,322	)			(2,943	)			(2,548	)			(1,790	)			(1,923	)			(6,261	)
Recoveries			801				414				285				1,500				873				1,488				487				2,848
Net charge-offs			(121	)			(285	)			(1,037	)			(1,443	)			(1,675	)			(302	)			(1,436	)			(3,413	)
Ending balance		$	11,672			$	6,810			$	794			$	19,276			$	10,235			$	6,325			$	1,865			$	18,425
PCI allowance
Beginning balance		$	-			$	12			$	-			$	12
Recovery of loan losses			-				(12	)			-				(12	)
Benefit attributable to the FDIC indemnification asset			-				-				-				-
Recovery of loan losses charged to operations			-				(12	)			-				(12	)
Recovery of loan losses recorded through the FDIC indemnification asset			-				-				-				-
Ending balance		$	-			$	-			$	-			$	-
Total allowance
Beginning balance		$	11,690			$	5,499			$	759			$	17,948
Provision for loan losses			103				1,596				1,072				2,771
Benefit attributable to the FDIC indemnification asset			-				-				-				-
Provision for loan losses charged to operations			103				1,596				1,072				2,771
Recovery of loan losses recorded through the FDIC indemnification asset			-				-				-				-
Charge-offs			(922	)			(699	)			(1,322	)			(2,943	)
Recoveries			801				414				285				1,500
Net charge-offs			(121	)			(285	)			(1,037	)			(1,443	)
Ending balance		$	11,672			$	6,810			$	794			$	19,276

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		December 31, 2018																December 31, 2020
(Amounts in thousands)		Loans Individually Evaluated for Impairment				Allowance for Loans Individually Evaluated				Loans Collectively Evaluated for Impairment				Allowance for Loans Collectively Evaluated				Loans Individually Evaluated for Impairment				Allowance for Loans Individually Evaluated				Loans Collectively Evaluated for Impairment				Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land		$	-			$	-			$	63,039			$	417			$	0			$	0			$	43,716			$	528
Commercial and industrial			-				-				104,863				663				724				0				171,486				1,024
Multi-family residential			534				230				106,478				962				695				0				112,852				1,417
Single family non-owner occupied			-				-				138,451				1,442				1,041				0				183,283				1,861
Non-farm, non-residential			840				235				609,100				6,295				3,916				319				714,160				9,097
Agricultural			-				-				8,545				85				0				0				9,728				218
Farmland			-				-				18,905				170				0				0				17,540				196
Total commercial loans			1,374				465				1,049,381				10,034				6,376				319				1,252,765				14,341
Consumer real estate loans
Home equity lines			65				65				103,668				683				0				0				95,765				799
Single family owner occupied			3,631				922				509,929				4,931				1,673				108				647,040				7,849
Owner occupied construction			-				-				18,171				131				0				0				17,567				195
Total consumer real estate loans			3,696				987				631,768				5,745				1,673				108				760,372				8,843
Consumer and other loans
Consumer loans			-				-				71,552				1,036				0				0				119,770				2,570
Other			-				-				5,310				-				0				0				6,014				0
Total consumer and other loans			-				-				76,862				1,036				0				0				125,784				2,570
Total loans, excluding PCI loans		$	5,070			$	1,452			$	1,758,011			$	16,815			$	8,049			$	427			$	2,138,921			$	25,754

 

		December 31, 2017																December 31, 2019
(Amounts in thousands)		Loans Individually Evaluated for Impairment				Allowance for Loans Individually Evaluated				Loans Collectively Evaluated for Impairment				Allowance for Loans Collectively Evaluated				Loans Individually Evaluated for Impairment				Allowance for Loans Individually Evaluated				Loans Collectively Evaluated for Impairment				Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land		$	-			$	-			$	59,386			$	830			$	0			$	0			$	30,334			$	245
Commercial and industrial			343				270				91,845				492				0				0				95,659				699
Multi-family residential			-				-				125,202				1,094				944				0				98,201				969
Single family non-owner occupied			770				62				139,093				1,914				0				0				128,520				1,323
Non-farm, non-residential			1,367				15				611,477				6,582				2,575				292				591,520				6,361
Agricultural			-				-				7,035				51				0				0				9,458				145
Farmland			1,219				233				24,430				129				0				0				16,146				201
Total commercial loans			3,699				580				1,058,468				11,092				3,519				292				969,838				9,943
Consumer real estate loans
Home equity lines			-				-				115,807				803				0				0				91,999				673
Single family owner occupied			9,471				1,978				496,348				3,732				3,016				353				490,712				5,175
Owner occupied construction			-				-				39,178				297				0				0				16,144				124
Total consumer real estate loans			9,471				1,978				651,333				4,832				3,016				353				598,855				5,972
Consumer and other loans
Consumer loans			-				-				70,772				794				0				0				99,199				1,865
Other			-				-				5,001				-				0				0				4,742				0
Total consumer and other loans			-				-				75,773				794				0				0				103,941				1,865
Total loans, excluding PCI loans		$	13,170			$	2,558			$	1,785,574			$	16,718			$	6,535			$	645			$	1,672,634			$	17,780

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		December 31, 2018								December 31, 2017								December 31, 2020								December 31, 2019
(Amounts in thousands)		Recorded Investment				Allowance for Loan Pools With Impairment				Recorded Investment				Allowance for Loan Pools With Impairment				Recorded Investment				Allowance for Loan Pools With Impairment				Recorded Investment				Allowance for Loan Pools With Impairment
Commercial loans
Waccamaw commercial		$	-			$	-			$	64			$	-			$	0			$	0			$	0			$	0
Peoples commercial			4,405				-				4,279				-				0				0				4,371				0
Highlands:
1-4 family, senior-commercial																			0				0				4,564				0
Construction & land development																			958				0				1,956				0
Farmland and other agricultural																			2,242				0				3,722				0
Multifamily																			1,614				0				1,663				0
Commercial real estate-owner occupied																			16,717				0				13,024				0
Commercial real estate- non-owner occupied																			3,459				0				8,686				0
Commercial and industrial																			814				0				2,829				0
Other			868				-				986				-				0				0				352				0
Total commercial loans			5,273				-				5,329				-				25,804				0				41,167				0
Consumer real estate loans
Waccamaw serviced home equity lines			5,017				-				11,118				-				0				0				2,121				0
Waccamaw residential			788				-				994				-				0				0				587				0
Highlands:
1-4 family, junior and HELOCS																			761				0				2,157				0
1-4 family, senior-consumer																			12,494				0				13,174				0
Consumer																			603				0				1,341				0
Peoples residential			925				-				999				-				0				0				700				0
Total consumer real estate loans			6,730				-				13,111				-				13,858				0				20,080				0
Total PCI loans		$	12,003			$	-			$	18,440			$	-			$	39,662			$	0			$	61,247			$	0

 

Management believedbelieves the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2018.2020.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 7. FDIC Indemnification Asset

 

In connection with the FDIC-assisted acquisition of Waccamaw Bank in 2012, the Company entered into loss share agreements with the FDIC in which the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to those covered assets. Loss share coverage on commercial loans expired June 30, 2017, with recoveries continuing until June 30, 2019. 2020. Loss share coverage on single family loans will expire June 30, 2022. The Company’s consolidated statements of income include the expense on covered assets net of estimated reimbursements. The following table presents the changes in the FDIC indemnification asset and total covered loans and OREO for the periods indicated:

 

		Year Ended December 31,
		2018				2017
(Amounts in thousands)
Beginning balance		$	7,161			$	12,173
Increase in estimated losses on covered OREO			-				81
Reimbursable expenses (to) from the FDIC			(23	)			112
Net amortization			(2,181	)			(3,517	)
Payments to (reimbursements from) the FDIC			151				(1,688	)
Ending balance		$	5,108			$	7,161
Covered loans		$	18,815			$	27,948
Covered OREO			32				105

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Year Ended December 31,
		2020				2019
(Amounts in thousands)
Beginning balance		$	2,883			$	5,108
Net amortization			(1,690	)			(2,377	)
Payments to the FDIC			30				152
Ending balance		$	1,223			$	2,883
Covered loans		$	9,680			$	12,861

 

 

Note 8. Premises, Equipment, and Leases

 

Premises and Equipment

 

The following table presents the components of premises and equipment as of the dates indicated:

 

			December 31,								December 31,
			2018				2017				2020				2019
(Amounts in thousands)	(Amounts in thousands)
Land	Land		$	18,090			$	18,921			$	21,693			$	22,899
Buildings and leasehold improvements	Buildings and leasehold improvements			45,079				46,002				50,639				52,351
Equipment	Equipment			33,551				33,336				40,072				38,173
Total premises and equipment	Total premises and equipment			96,720				98,259				112,404				113,423
Accumulated depreciation and amortization	Accumulated depreciation and amortization			(50,935	)			(50,133	)			(54,704	)			(50,599	)
Total premises and equipment, net	Total premises and equipment, net		$	45,785			$	48,126			$	57,700			$	62,824

 

Impairment charges related to certain long-term investments in land and buildings totaled $812 thousand in 2020, $380 thousand in 2019, and $1.01 million in 2018 $677 thousand in 2017, and $364 thousand in 2016.. Depreciation and amortization expense for premises and equipment was $4.46 million in 2020, $3.45 million in 2019, and $2.91 million in 2018 $3.56 million in 2017, and $3.56 million in 2016..

 

Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”; the standard was adopted prospectively. The Company currently has entered into various noncancelabletwo operating leases for premisesthat are recorded as a right of use (“ROU”) asset and equipment.operating lease liability. The following schedule presentsright of use asset is recorded in other assets on the future minimumconsolidated balance sheet, while the lease liability is recorded in other liabilities. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments required under noncancelablearising from the lease. The current ROU asset and lease liability were recognized at the adoption date of January 1, 2019, based on the present value of the remaining lease payments using a discount rate that represented our incremental borrowing rate at the time of adoption. The lease expense which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income.

The Company’s current operating leases with initial orrelate primarily to bank branches. Two operating leases were acquired in the Highlands transaction; neither of which were for bank branches. One of the leases was terminated in the first quarter of 2020; while the other remaining Highlands’ lease will terminate in early 2022.No ROU was recorded in the transaction due to the ROU asset related to the lease that terminates in 2022 being impaired as of the acquisition date; a lease liability was recorded for $82 thousand. The Company’s total operating leases have remaining terms in excess of one year, by year, as1 – 9 years. As of December 31, 2018:2020, the Company’s ROU asset and lease liability were $830 thousand and $891 thousand, respectively. The weighted average discount rate was 3.22%.

 

(Amounts in thousands)
2019			$	160
2020				97
2021				97
2022				97
2023				97
2024 and thereafter				597
Total future minimum lease payments			$	1,145

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year		Amount
(Amounts in thousands)
2021		$	154
2022			131
2023			119
2024			117
2025 and thereafter			463
Total lease payments			984
Less: Interest			(93	)
Present value of lease liabilities		$	891

 

Lease expense was $180 thousand in 2020, $203 thousand in 2019, and $318 thousand in 2018 $582 thousand in 2017, and $784 thousand in 2016.. The Company maintained no subleases as of December 31, 2018.2020.

  

 

Note 9. Goodwill and Other Intangible Assets

 

Goodwill

 

The Company has one reporting unit for goodwill impairment testing purposes, Community Banking. Prior to October 2016, the Company maintained two reporting units, Community Banking and Insurance Services. The Insurance Services reporting unit consisted of the Company’s wholly owned subsidiary Greenpoint, which was sold in October 2016. In October 2018, the Company sold its remaining insurance agency assets to BI in exchange for an equity interest in BI. In connection with the divestiture, the Company recognized a one-timeone-time goodwill impairment charge of $1.49 million. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment. The Company performed its annual assessment of goodwill during the fourth quarter of 20182020 and concluded that the carrying value of goodwill was not impaired. No events have occurred after the analysis to indicate potential impairment.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the changes in goodwill, by reporting unit, during the periods indicated:

 

(Amounts in thousands)
Balance January 1, 2018		$	95,779
Dispositions			(1,543	)
Impairment Charges			(1,492	)
Balance December 31, 2018		$	92,744
Balance January 1, 2019		$	92,744
Acquisitions			36,821
Balance December 31, 2019		$	129,565
Balance January 1, 2020		$	129,565
Acquisitions and dispositions, net			0
Balance December 31, 2020		$	129,565

			Community Banking				Insurance Services				Total
(Amounts in thousands)
Balance January 1, 2016			$	91,455			$	9,031			$	100,486
Acquisitions and dispositions, net				1,290				(5,997	)			(4,707	)
Other (1)				3,034				(3,034	)			-
Balance December 31, 2016			$	95,779			$	-			$	95,779
Balance January 1, 2017			$	95,779							$	95,779
Acquisitions and dispositions, net				-								-
Balance December 31, 2017			$	95,779							$	95,779
Balance January 1, 2018			$	95,779							$	95,779
Acquisitions and dispositions, net				(1,543	)							(1,543	)
Impairment charges				(1,492	)							(1,492	)
Balance December 31, 2018			$	92,744							$	92,744

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FIRST COMMUNITY BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Represents the transfer of goodwill after the sale of Greenpoint to one reporting unit

Other Intangible Assets

 

As of December 31, 2018,2020, the remaining lives of core deposit intangibles ranged from 4 years to 710 years with a weighted average remaining life of 57 years. Other identifiable intangibles currently consist primarily of the value assigned to contractual rights arising from FCWM. The following table presents the components of other intangible assets as of the dates indicated:

 

		December 31,												December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands)
Core deposit intangibles		$	8,184			$	8,184			$	11,536			$	8,519			$	8,184			$	8,184
Acquisitions															0				4,490				0
Accumulated amortization			(3,158	)			(2,161	)			(4,515	)			(1,450	)			(4,155	)			(3,158	)
Core deposit intangibles, net			5,026				6,023				7,021				7,069				8,519				5,026
Other identifiable intangibles			535				879				3,508				0				0				535
Accumulated amortization			(535	)			(751	)			(3,322	)			0				0				(535	)
Other identifiable intangibles, net			-				128				186				0				0				0
Total other intangible assets, net		$	5,026			$	6,151			$	7,207			$	7,069			$	8,519			$	5,026

 

Amortization expense for other intangible assets was $1.45 million in 2020, $997 thousand in 2019, and $1.04 million in 2018 $1.06 million in 2017, and $1.14 million in 2016. .

The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2018:2020:

(Amounts in thousands)
2021		$	1,446
2022			1,446
2023			878
2024			856
2025			648
2026 and thereafter			1,795
Total estimated amortization expense		$	7,069

 

(Amounts in thousands)
2019		$	997
2020			997
2021			997
2022			997
2023			431
2024 and thereafter			607
Total estimated amortization expense		$	5,026

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 10. Deposits

 

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

 

		December 31,								December 31,
		2018				2017				2020				2019
(Amounts in thousands)
Noninterest-bearing demand deposits		$	459,550			$	454,143			$	772,795			$	627,868
Interest-bearing deposits
Interest-bearing demand deposits			451,721				465,407				598,148				497,470
Money market accounts			153,483				170,731				258,864				235,712
Savings deposits			345,335				342,064				495,821				453,240
Certificates of deposit			330,757				374,373				293,848				372,821
Individual retirement accounts			114,904				123,173				126,771				142,801
Total interest-bearing deposits			1,396,200				1,475,748				1,773,452				1,702,044
Total deposits		$	1,855,750			$	1,929,891			$	2,546,247			$	2,329,912

 

The following schedule presents the contractual maturities of time deposits, by year, as of December 31, 2018:2020:

 

(Amounts in thousands)	(Amounts in thousands)
2019			$	191,900
2020				121,264
2021	2021			59,213			$	225,521
2022	2022			47,480				86,293
2023	2023			25,721				45,797
2024 and thereafter				83
2024								24,440
2025								30,820
2026 and thereafter								7,748
Total contractual maturities	Total contractual maturities		$	445,661			$	420,619

 

Time deposits of $250$250 thousand or more totaled $43.84$35.93 million as of December 31, 2018,2020, and $48.50$53.49 million as of December 31, 2017.2019. The following schedule presents the contractual maturities of time deposits of $250$250 thousand or more as of December 31, 2018:2020:

(Amounts in thousands)
Three months or less		$	3,372
Over three through six months			6,605
Over six through twelve months			9,841
Over twelve months			16,112
Total contractual maturities		$	35,930

 

(Amounts in thousands)
Three months or less		$	3,605
Over three through six months			2,291
Over six through twelve months			7,527
Over twelve months			30,416
Total contractual maturities		$	43,839

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 11. Borrowings

 

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

 

		December 31,
		2018								2017
(Amounts in thousands)		Balance				Weighted Average Rate				Balance				Weighted Average Rate
Short-term borrowings
Retail repurchase agreements		$	4,370				0.12	%		$	5,086				0.07	%
Long-term borrowings
Wholesale repurchase agreements			25,000				3.18	%			25,000				3.18	%
FHLB advances			-								50,000				4.00	%
Total borrowings		$	29,370							$	80,086

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31,
		2020								2019
(Amounts in thousands)		Balance				Weighted Average Rate				Balance				Weighted Average Rate
Short-term borrowings
Retail repurchase agreements		$	964				0.32	%		$	1,601				0.14	%
Long-term borrowings
Wholesale repurchase agreements			0				0				0				0
Total borrowings		$	964							$	1,601

 

Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 2018:2020:

 

																						Overnight and Continuous				Up to 30 Days				30 - 90 Days				Greater than 90 Days				Total
		Overnight and Continuous				Up to 30 Days				30 - 90 Days				Greater than 90 Days				Total
(Amounts in thousands)
U.S. Agency securities		$	-			$	-			$	-			$	14,322			$	14,322			$	0			$	0			$	0			$	0			$	0
Municipal securities			3,047				-				-				833				3,880				542				0				0				0				542
Mortgage-backed Agency securities			1,323				-				-				9,845				11,168				422				0				0				0				422
Total		$	4,370			$	-			$	-			$	25,000			$	29,370			$	964			$	0			$	0			$	0			$	964

 

As of December 31, 2018, long-term borrowings consisted of aThe Company’s remaining wholesale repurchase agreement that matures in 2019 with a weighted average maturity of 0.15 years. During$25 million matured during the thirdfirst quarter of 2018,2019. The Company repaid the Company prepaid its remaining $50 million FHLB convertible advance and incurred a loss on the extinguishment of the debt of $1.10 million. The prepayment was fundedborrowing with cash and cash equivalents on hand, as well as the sale of the Company’s remaining single issue trust preferred investment securities.then current liquidity.

 

As of December 31, 2018,2020, unused borrowing capacity with the FHLB totaled $402.74$292.92 million, net of FHLB letters of credit of $144.38 million,$175.83 million. The Company pledged $874.17$840.63 million in qualifying loans to secure the FHLB letters of credit, which provide an attractive alternative to pledging securities for public unit deposits.

 

The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of one-monthone-month LIBOR plus 2.00% that matures in April 2019. 2021. There was no0 outstanding balance on the line as of December 31, 20182020 or 2017.2019.

 

 

Note 12. Derivative Instruments and Hedging Activities

 

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. TheCertain of the Company’s interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of December 31, 2018.2020. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.  The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

 

		December 31,
		2018												2017
(Amounts in thousands)		Notional or Contractual Amount				Derivative Assets				Derivative Liabilities				Notional or Contractual Amount				Derivative Assets				Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps		$	5,483			$	12			$	-			$	5,813			$	-			$	90
Total derivatives		$	5,483			$	12			$	-			$	5,813			$	-			$	90

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31,
		2020												2019
(Amounts in thousands)		Notional or Contractual Amount				Derivative Assets				Derivative Liabilities				Notional or Contractual Amount				Derivative Assets				Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps		$	4,772			$	0			$	465			$	5,136			$	0			$	217
Derivatives not designated as hedges
Interest rate swaps			11,928				0				666				12,296				0				293
Total derivatives		$	16,700			$	0			$	1,131			$	17,432			$	0			$	510

 

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

 

		Year Ended December 31,
(Amounts in thousands)		2018				2017				2016			Income Statement Location
Derivatives designated as hedges
Interest rate swaps		$	40			$	78			$	116		Interest and fees on loans
Total derivative expense		$	40			$	78			$	116

		Year Ended December 31,
(Amounts in thousands)		2020				2019				2018			Income Statement Location
Derivatives designated as hedges
Interest rate swaps		$	85			$	12			$	40		Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps			235				0				0		Interest and fees on loans
Total derivative expense		$	320			$	12			$	40

 

 

Note 13. Employee Benefit Plans

 

Defined Benefit Plans

 

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan (“SERP”) and the Directors’ Supplemental Retirement Plan (“Directors’ Plan”). The SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant’s projected final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The Directors’ Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant’s highest consecutive three-yearthree-year average compensation. Benefits under the Directors’ Plan generally become payable at age 70. The following table presents the changes in the aggregate actuarial benefit obligation during the periods indicated:

 

		December 31,
		2020				2019
(Amounts in thousands)
Beginning balance		$	11,312			$	9,265
Plan change			0				262
Service cost			310				320
Interest cost			355				404
Actuarial loss			1,217				1,570
Benefits paid			(615	)			(509	)
Ending balance		$	12,579			$	11,312

		December 31,
		2018				2017
(Amounts in thousands)
Beginning balance		$	9,635			$	9,181
Plan change			-				258
Service cost			245				231
Interest cost			358				372
Actuarial gain			(565	)			(48	)
Benefits paid			(408	)			(359	)
Ending balance		$	9,265			$	9,635

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the components of net periodic pension cost, the effect on the consolidated statements of income, and the assumed discount rate for the periods indicated:

 

		Year Ended December 31,
		2018				2017				2016			Income Statement Location
(Amounts in thousands)
Service cost		$	245			$	231			$	184		Salaries and employee benefits
Interest cost			358				372				382		Other expense
Amortization of prior service cost			228				228				226		Other expense
Amortization of losses			57				31				47		Other expense
Net periodic cost		$	888			$	862			$	839
Assumed discount rate			4.28	%			3.85	%			4.22	%

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Year Ended December 31,
		2020				2019				2018			Income Statement Location
(Amounts in thousands)
Service cost		$	310			$	320			$	245		Salaries and employee benefits
Interest cost			355				404				358		Other expense
Amortization of prior service cost			201				257				228		Other expense
Amortization of losses			186				20				57		Other expense
Net periodic cost		$	1,052			$	1,001			$	888
Assumed discount rate			2.53	%			3.10	%			4.28	%

 

The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 2018:2020:

 

(Amounts in thousands)
2019		$	478
2020			578
2021			635			$	664
2022			635				675
2023			634				675
2024 through 2028			3,391
2024							717
2025							707
2026 through 2030							3,694

 

Deferred Compensation Plan

 

The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods, commencing at retirement or death. There were no0 accrued benefits, which are based on the present values of expected payments and estimated life expectancies, as of December 31, 20182020 or 2017.2019. There was no0 deferred compensation plan expense in 2020,  2019 , or 2018 compared to $11 thousand in 2017 and $60 thousand in 2016..

 

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. A third-partythird-party administrator manages the health plan. Monthly employer and employee contributions are made to a tax-exempt employee benefits trust where the third-partythird-party administrator processes and pays claims. As of December 31, 2018,2020, stop-loss insurance coverage generally limits the Company’s risk of loss to $150$200 thousand for individual claims and $4.20$6.00 million for aggregate claims. Health plan expenses were $4.17 million in 2020, $3.97 million in 2019, and $3.72 million in 2018 $3.50 million in 2017, and $3.48 million in 2016..

 

Employee Stock Ownership and Savings Plan

 

The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”) that consists of a 401(k)401(k) savings feature that covers all employees that meet minimum eligibility requirements. The Company matches employee contributions at levels determined by the Board of Directors annually. These contributions are made in the first quarter following each plan year and employees must be employed on the last day of the plan year to be eligible. Matching contributions to qualified deferrals under the 401(k)401(k) savings component of the KSOP totaled $1.51 million in 2020, $1.10 million in 2019, and $1.06 million in 2018 $1.18 million in 2017, and $1.50 million in 2016.. The KSOP held 366,969 351,222 shares of the Company’s common stock as of December 31, 2018, 387,9352020, 346,833 shares as of December 31, 2017,2019, and 410,384366,969 shares as of December 31, 2016.2018.

Equity-Based Compensation Plans

 

The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors, and other individuals performing services for the Company to focus on critical long-range objectives. The Company’s equity-based compensation plans include the 2012 Omnibus Equity Compensation Plan (“(“2012 Plan”), 2004 Omnibus Stock Option Plan, 2001 Director’s Option Plan, 1999 Stock Option Plan, and various other plans obtained through acquisitions. As of December 31, 2018,2020, the 2012 Plan was the only plan available for the issuance of future grants. All plans issued or obtained before the 2012 Plan are frozen and no new grants may be issued; however, any options or awards unexercised and outstanding under those plans remain in effect per their respective terms. The 2012 Plan authorized 600,000 shares available for potential grants of incentive stock options, nonqualified stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, bonus stock, and stock awards. Grants issued under the 2012 Plan state the period of time the grant may be exercised, not to exceed more than ten years from the date granted. The Company’s Compensation and Retirement Committee determines the vesting period for each grant; however, if no vesting period is specified the vesting occurs in 25% increments on the firstfour anniversaries of the grant date.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation plans for the periods indicated:

 

			Year Ended December 31,												Year Ended December 31,
			2018				2017				2016				2020				2019				2018
(Amounts in thousands)	(Amounts in thousands)
Pre-tax compensation expense	Pre-tax compensation expense		$	1,158			$	790			$	531			$	1,643			$	1,481			$	1,158
Excess tax benefit	Excess tax benefit			95				17				174				0				0				95

 

Stock Options

 

The following table presents stock option activity and related information for the year ended December 31, 2018:2020:

 

						Weighted Average				Weighted Average				Aggregate
		Option				Exercise Price				Remaining Contractual				Intrinsic
(Amounts in thousands,		Shares				Per Share				Term (Years)				Value
except share and per share data)
Outstanding, January 1, 2018			200,704			$	20.14
Granted			-				-
Exercised			(24,186	)			15.89
Canceled			(20,263	)			19.72
Outstanding, December 31, 2018			156,255			$	20.85				5.6			$	1,662
Exercisable, December 31, 2018			103,090			$	20.23				4.6			$	1,160

(Amounts in thousands, except share and per share data)		Option Shares				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding, January 1, 2020			147,200			$	21.10
Granted			0				0
Exercised			0				0
Canceled/Expired			(32,921	)			26.44
Outstanding, December 31, 2020			114,279			$	19.56				4.52			$	432
Exercisable, December 31, 2020			114,279			$	19.56				4.52			$	432

 

The following table presents the total options granted and the weighted average assumptions used to estimate the fair value of those options during the periods indicated. There were no0 options granted in 2018.2020 or 2019.

 

		Year Ended December 31,
		2017				2016
Stock options granted			22,849				32,768
Grant-date fair value per share		$	5.79			$	4.01
Volatility			27.86	%			25.04	%
Risk-free rate			2.17	%			1.56	%
Expected dividend yield			2.99	%			3.09	%
Expected term (in years)			6.50				6.50

TheThere was 0 options exercised in 2020; the intrinsic value of options was exercised was $150 thousand in 2019, and $423 thousand in 2018 $84 thousand in 2017, and $434 thousand in 2016.. As of December 31, 2018, unrecognized compensation cost related to2020, there were 0 nonvested stock options totaled $65 thousand with an expected weighted average recognition period of 1.08 years.or unrecognized expense. The actual compensation cost recognized might differ from this estimate due to various items, including new grants and changes in estimated forfeitures.

 

Restricted Stock Awards

 

The following table presents restricted stock activity and related information for the year ended December 31, 2018:2020:

 

						Weighted Average
		Shares				Grant-Date Fair Value
Nonvested, January 1, 2018			43,606			$	23.49
Granted			41,339				30.08
Vested			(33,832	)			25.69
Canceled			-				-
Nonvested, December 31, 2018			51,113			$	27.37

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Shares				Weighted Average Grant-Date Fair Value
Nonvested, January 1, 2020			57,653			$	31.93
Granted			89,097				21.20
Vested			(57,962	)			25.28
Canceled			(3,873	)			29.92
Nonvested, December 31, 2020			84,915			$	25.31

 

As of December 31, 2018,2020, unrecognized compensation cost related to nonvested restricted stock awards totaled $927 thousand$1.38 million with an expected weighted average recognition period of 1.951.83 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and changes in estimated forfeitures.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 14. Other Operating Income and Expense

 

The following table presents the components of other operating income and expense for the periods indicated:

 

		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands)		2018				2017				2016				2020				2019				2018
Other operating income
Bank owned life insurance		$	687			$	1,365			$	955			$	814			$	916			$	687
Other(1)			1,861				2,137				2,254
Other(1)															3,555				1,888				1,861
Total other operating income		$	2,548			$	3,502			$	3,209			$	4,369			$	2,804			$	2,548
Other operating expense
OREO expense and net loss			1,549				1,202				1,420				414				1,494				1,549
Telephone and data communications			1,333				1,554				1,598				2,188				1,404				1,333
Office supplies			1,045				1,171				1,220				660				647				1,045
Other(1)			8,800				7,914				8,026
Other(1)															9,148				8,384				8,800
Total other operating expense		$	12,727			$	11,841			$	12,264			$	12,410			$	11,929			$	12,727

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(1)(1)

Components of other operating income or expense that do not exceed 1% of total income

 

 

Note 15. Income Taxes

The Tax Reform Act was enacted on December 22, 2017. Among other things, the new law establishes a new, flat corporate federal statutory income tax rate of 21%; eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year; limits the deduction for net interest expense incurred by U.S. corporations; allows businesses to immediately expense the cost of new investments in certain qualified depreciable assets for tax purposes; eliminates or reduces certain deductions related to meals and entertainment expenses; modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee; and limits the deductibility of deposit insurance premiums. The Tax Reform Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact the Company. As a result of the Tax Reform Act, the Company recognized additional tax expense totaling $6.55 million during the fourth quarter of 2017 related to the revaluation of our deferred tax balances, which included provisional estimates primarily related to certain purchase accounting, indemnification asset, intangible, and depreciation items. During the third quarter of 2018, the Company completed the deferred tax asset revaluation and recorded a $1.67 million reduction in tax expense.

 

Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following table presents the components of the income tax provision for the periods indicated:

 

		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands)		2018				2017				2016				2020				2019				2018
Current tax expense (benefit):
Current tax expense:
Federal		$	7,201			$	14,509			$	13,634			$	10,048			$	9,603			$	7,201
State			1,233				926				675				1,643				1,554				1,233
Total current tax expense			8,434				15,435				14,309				11,691				11,157				8,434
Deferred tax expense (benefit):
Federal			296				5,205				(1,480	)			(1,266	)			(152	)			296
State			52				(12	)			(10	)			(239	)			(11	)			52
Total deferred tax expense (benefit)			348				5,193				(1,490	)			(1,505	)			(163	)			348
Total income tax expense		$	8,782			$	20,628			$	12,819			$	10,186			$	10,994			$	8,782

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The following table reconciles the Company’s income tax expense to the amount computed by applying the federal statutory tax rate to pre-tax income for the periods indicated:

 

		Year Ended December 31,																								Year Ended December 31,
		2018								2017								2016								2020								2019								2018
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
(Amounts in thousands)
Federal income tax at the statutory rate		$	9,475				21.00	%		$	14,739				35.00	%		$	13,281				35.00	%		$	9,683				21.00	%		$	10,457				21.00	%		$	9,475				21.00	%
State income tax, net of federal benefit			1,016				2.25	%			692				1.64	%			598				1.58	%			1,109				3.12	%			1,220				3.12	%			1,016				2.25	%
			10,491				23.25	%			15,431				36.64	%			13,879				36.58	%			10,792				24.12	%			11,677				24.12	%			10,491				23.25	%
Increase (decrease) resulting from:
Tax-exempt interest income			(702	)			-1.56	%			(1,228	)			-2.92	%			(1,336	)			-3.52	%			(500	)			(1.51	)%			(637	)			(1.28	)%			(702	)			(1.56	)%
Nondeductible goodwill impairment and disposition			569				1.26	%			-				0.00	%			340				0.89	%			0				0.00	%			0				0.00	%			569				1.26	%
Bank owned life insurance			(144	)			-0.32	%			(478	)			-1.13	%			(335	)			-0.88	%			(139	)			(0.42	)%			(249	)			(0.50	)%			(144	)			(0.32	)%
Deferred tax revaluation			(1,669	)			-3.70	%			6,552				15.56	%			-				0.00	%			0				0.00	%			(98	)			(0.20	)%			(1,669	)			(3.70	)%
Other items, net			237				0.53	%			351				0.83	%			271				0.71	%			33				(0.10	)%			301				0.10	%			237				0.53	%
Income tax at the effective tax rate		$	8,782				19.46	%		$	20,628				48.98	%		$	12,819				33.78	%		$	10,186				22.09	%		$	10,994				22.24	%		$	8,782				19.46	%

 

Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the net deferred tax asset as of the dates indicated:

 

		December 31,								December 31,
(Amounts in thousands)		2018				2017				2020				2019
Deferred tax assets
Allowance for loan losses		$	4,275			$	4,511			$	6,128			$	4,312
Unrealized losses on available-for-sale securities			87				-
Unrealized asset losses			730				722				545				540
Purchase accounting			24				3,418				2,559				3,689
FDIC assisted transactions			1,510				4,131				1,685				1,597
Intangible assets			2,430				2,616				217				745
Deferred compensation assets			3,468				3,617				4,048				4,079
Federal net operating loss carryforward											4,093				4,279
Deferred loan fees			1,201				1,221				2,401				1,247
Other			491				450				1,816				1,746
Total deferred tax assets			14,216				20,686				23,492				22,234
Deferred tax liabilities
FDIC indemnification asset			1,195				8,525				286				675
Fixed assets			1,381				1,282				2,450				1,080
Unrealized gains on available-for-sale securities			-				259
Odd days interest deferral			1,614				233				1,482				1,912
Unrealized gains on available for sale securities											257				230
Other			460				819				287				399
Total deferred tax liabilities			4,650				11,118				4,762				4,296
Net deferred tax asset		$	9,566			$	9,568			$	18,730			$	17,938

 

The Company had no0 unrecognized tax benefits or accrued interest or penalties as of December 31, 20182020 or 2017.2019. The Company had no0 deferred tax valuation allowance recorded as of December 31, 20182020 or 2017,2019, as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state tax departments for the years ended December 31, 2015 2017 through 2017.2019.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   

 

Note 16. Accumulated Other Comprehensive Income

 

The following table presents the changes in AOCI, net of tax and by component, during the periods indicated:

 

		Unrealized Gains (Losses) on Available-for-Sale Securities				Employee Benefit Plans				Total				Unrealized Gains (Losses) on Available for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Balance January 1, 2016		$	(3,885	)		$	(1,362	)		$	(5,247	)
Balance January 1, 2018														$	975			$	(1,815	)		$	(840	)
Other comprehensive (loss) income before reclassifications															(1,748	)			446				(1,302	)
Reclassified from AOCI															488				225				713
Other comprehensive (loss) income, net															(1,260	)			671				(589	)
Balance December 31, 2018														$	(285	)		$	(1,144	)		$	(1,429	)
Balance January 1, 2019														$	(285	)		$	(1,144	)		$	(1,429	)
Other comprehensive income (loss) before reclassifications			647				(276	)			371				1,117				(1,448	)			(331	)
Reclassified from AOCI			2,694				171				2,865				34				220				254
Other comprehensive income (loss), net			3,341				(105	)			3,236				1,151				(1,228	)			(77	)
Balance December 31, 2016		$	(544	)		$	(1,467	)		$	(2,011	)
Balance December 31, 2019														$	866			$	(2,372	)		$	(1,506	)
Balance January 1, 2017		$	(544	)		$	(1,467	)		$	(2,011	)
Other comprehensive income (loss) before reclassifications			972				(132	)			840
Reclassified from AOCI			413				162				575
Other comprehensive income, net			1,385				30				1,415
Reclassification of certain tax effects			134				(378	)			(244	)
Balance December 31, 2017		$	975			$	(1,815	)		$	(840	)
Balance January 1, 2018		$	975			$	(1,815	)		$	(840	)
Balance January 1, 2020														$	866			$	(2,372	)		$	(1,506	)
Other comprehensive income (loss) before reclassifications			(1,748	)			446				(1,302	)			544				(961	)			(417	)
Reclassified from AOCI			488				225				713				(304	)			304				0
Other comprehensive income (loss), net			(1,260	)			671				(589	)			240				(657	)			(417	)
Balance December 31, 2018		$	(285	)		$	(1,144	)		$	(1,429	)
Balance December 31, 2020														$	1,106			$	(3,029	)		$	(1,923	)

 

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

 

		Year Ended December 31,											Income Statement
(Amounts in thousands)		2020				2019				2018			Line Item Affected
Available-for-sale securities
(Losses) gains recognized		$	(385	)		$	43			$	618		Net loss on sale of securities
Reclassified out of AOCI, before tax			(385	)			43				618		Income before income taxes
Income tax benefit			81				(9	)			(130	)	Income tax expense
Reclassified out of AOCI, net of tax			(304	)			34				488		Net income
Employee benefit plans
Amortization of prior service cost			201				257				228		Other operating expense
Amortization of net actuarial loss			185				21				57		Other operating expense
Reclassified out of AOCI, before tax			386				278				285		Income before income taxes
Income tax expense			(82	)			(58	)			(60	)	Income tax expense
Reclassified out of AOCI, net of tax			304				220				225		Net income
Total reclassified out of AOCI, net of tax		$	0			$	254			$	713		Net income

		Year Ended December 31,											Income Statement
(Amounts in thousands)		2018				2017				2016			Line Item Affected
Available-for-sale securities
(Gains) losses recognized		$	618			$	661			$	(335	)	Net gain (loss) on sale of securities
OTTI recognized			-				-				4,646		Net impairment losses recognized in earnings
Reclassified out of AOCI, before tax			618				661				4,311		Income before income taxes
Income tax expense			(130	)			(248	)			(1,617	)	Income tax expense
Reclassified out of AOCI, net of tax			488				413				2,694		Net income
Employee benefit plans
Amortization of prior service cost			228				228				226		Other operating expense
Amortization of net actuarial loss			57				31				47		Other operating expense
Reclassified out of AOCI, before tax			285				259				273		Income before income taxes
Income tax expense			(60	)			(97	)			(102	)	Income tax expense
Reclassified out of AOCI, net of tax			225				162				171		Net income
Total reclassified out of AOCI, net of tax		$	713			$	575			$	2,865		Net income

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 17. Fair Value

 

Financial Instruments Measured at Fair Value

 

The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liabilities Reported at Fair Value on a Recurring Basis

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

 

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

 

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

 

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

 

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

 

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		December 31, 2018
		Total				Fair Value Measurements Using
(Amounts in thousands)		Fair Value				Level 1				Level 2				Level 3
Available-for-sale debt securities
U.S. Agency securities		$	1,113			$	-			$	1,113			$	-
U.S. Treasury securities			19,960				-				19,960				-
Municipal securities			97,289				-				97,289				-
Mortgage-backed Agency securities			34,754				-				34,754				-
Total available-for-sale debt securities			153,116				-				153,116				-
Equity securities			55				55				-				-
Fair value loans			5,412				-				-				5,412
Deferred compensation assets			3,527				3,527				-				-
Derivative assets			12				-				12				-
Deferred compensation liabilities			3,527				3,527				-				-

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		December 31, 2020
		Total				Fair Value Measurements Using
(Amounts in thousands)		Fair Value				Level 1				Level 2				Level 3
Available-for-sale debt securities
U.S. Agency securities		$	551			$	0			$	551			$	0
Municipal securities			44,459				0				44,459				0
Mortgage-backed Agency securities			38,348				0				38,348				0
Total available-for-sale debt securities			83,358				0				83,358				0
Equity securities			55				0				55				0
Fair value loans			17,831				0				0				17,831
Deferred compensation assets			4,181				4,181				0				0
Deferred compensation liabilities			4,181				4,181				0				0
Derivative liabilities			1,131				0				1,131				0

 

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2017																December 31, 2019
		Total				Fair Value Measurements Using												Total				Fair Value Measurements Using
(Amounts in thousands)		Fair Value				Level 1				Level 2				Level 3				Fair Value				Level 1				Level 2				Level 3
Available-for-sale securities
Available-for-sale debt securities
U.S. Agency securities		$	11,296			$	-			$	11,296			$	-			$	5,034			$	0			$	5,034			$	0
U.S. Treasury securities			19,971				-				19,971				-
Municipal securities			103,648				-				103,648				-				86,878				0				86,878				0
Single issue trust preferred securities			8,884				-				8,884				-
Mortgage-backed Agency securities			21,726				-				21,726				-				77,662				0				77,662				0
Total available-for-sale debt securities																			169,574				0				169,574				0
Equity securities			55				55				-				-				55				0				55				0
Total available-for-sale securities			165,580				55				165,525				-
Fair value loans			5,739				-				5,739				-				17,942				0				0				17,942
Deferred compensation assets			4,002				4,002				-				-				3,990				3,990				0				0
Deferred compensation liabilities			4,002				4,002				-				-				3,990				3,990				0				0
Derivative liabilities			90				-				90				-				510				0				510				0

 

Changes in Level 3 Fair Value Measurements

 

The following table presents the changes in Level 3 assets recorded at fair value on a recurring basis during the period indicated:

 

		Assets				Assets
(Amounts in thousands)
Balance January 1, 2018		$	-
Transfer of certain loans into Level 3			5,739
Balance January 1, 2019						$	5,412
Transfer of certain loans into Level 3 (Highlands acquisition)							12,295
Changes in fair value			1				522
Changes due to principal reduction			(328	)			(287	)
Balance December 31, 2018		$	5,412
Balance December 31, 2019						$	17,942
Balance January 1, 2020						$	17,942
Changes in fair value							621
Changes due to principal reduction							(732	)
Balance December 31, 2020						$	17,831

 

 

In according with the adoption of ASU 2016-01, the Company began measuring the fair value of loans held for investment using an exit price notion in 2018. Prior to 2018, loans held for investment were reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality. As a result of using the exit price, certain loans were transferred from Level 2 into Level 3 of the fair value hierarchy during the year ended December 31, 2018. No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2018.2020.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

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

 

		December 31, 2020
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Impaired loans, non-covered		$	979			$	0			$	0			$	979
OREO, non-covered			2,083				0				0				2,083

		December 31, 2019
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Impaired loans, non-covered		$	1,828			$	0			$	0			$	1,828
OREO, non-covered			3,969				0				0				3,969

		December 31, 2018
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Impaired loans, non-covered		$	3,618			$	-			$	-			$	3,618
OREO, non-covered			3,806				-				-				3,806
OREO, covered			32				-				-				32

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FIRST COMMUNITY BANKSHARES, INC.

		December 31, 2017
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Impaired loans, non-covered		$	5,015			$	-			$	-			$	5,015
OREO, non-covered			2,359				-				-				2,359
OREO, covered			105				-				-				105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Quantitative Information about Level 3 Fair Value Measurements

 

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

 

Valuation

Unobservable

Discount Range (Weighted Average)

Valuation

Unobservable

Discount Range (Weighted Average)

Technique

Input

December 31, 2018

December 31, 2017

Technique

Input

December 31, 2020

December 31, 2019

Impaired loans, non-covered

Discounted appraisals(1)

Appraisal adjustments(2)

15%

to

100%

(29%)

6%

to

79%

(34%)

Discounted appraisals(1)

Appraisal adjustments(2)

22% to 38%

(30)%

22% to 36%

(26)%

OREO, non-covered

Discounted appraisals(1)

Appraisal adjustments(2)

1%

to

81%

(31%)

8%

to

47%

(32%)

Discounted appraisals(1)

Appraisal adjustments(2)

8% to 77%

(25)%

15% to 100%

(8)%

OREO, covered

Discounted appraisals(1)

Appraisal adjustments(2)

49%

to

49%

(49%)

0%

to

65%

(52%)

---

(1)(1)		Fair value is generally based on appraisals of the underlying collateral.
(2)(2)		Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		December 31, 2018																				December 31, 2020
		Carrying								Fair Value Measurements Using												Carrying								Fair Value Measurements Using
(Amounts in thousands)		Amount				Fair Value				Level 1				Level 2				Level 3				Amount				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	76,873			$	76,873			$	76,873			$	-			$	-			$	456,561			$	456,561			$	456,561			$	0			$	0
Debt securities available for sale			153,116				153,116				-				153,116				-				83,358				83,358				0				83,358				0
Debt securities held to maturity			25,013				24,990				-				24,990				-
Equity securities			55				55				55				-				-				55				55				0				55				0
Loans held for investment, net of allowance			1,756,817				1,720,114				-				-				1,720,114				2,160,450				2,126,221				0				0				2,126,221
FDIC indemnification asset			5,108				2,565				-				-				2,565				1,223				509				0				0				509
Interest receivable			5,481				5,481				-				5,481				-				9,052				9,052				0				9,052				0
Derivative financial assets			12				12				-				12				-
Deferred compensation assets			3,527				3,527				3,527				-				-				4,181				4,181				4,181				0				0
Liabilities
Time deposits			445,661				436,018				-				436,018				-				420,619				423,120				0				423,120				0
Securities sold under agreements to repurchase			29,370				29,389				-				29,389				-				964				964				0				964				0
Interest payable			618				618				-				618				-				582				582				0				582				0
Deferred compensation liabilities			3,527				3,527				3,527				-				-				4,181				4,181				4,181				0				0
Derivative liabilities																							1,131				1,131				0				1,131				0

 

		December 31, 2017																				December 31, 2019
		Carrying								Fair Value Measurements Using												Carrying								Fair Value Measurements Using
(Amounts in thousands)		Amount				Fair Value				Level 1				Level 2				Level 3				Amount				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	157,951			$	157,951			$	157,951			$	-			$	-			$	217,009			$	217,009			$	217,009			$	0			$	0
Debt securities available for sale			165,525				165,525				-				165,525				-				169,574				169,574				0				169,574				0
Debt securities held to maturity			25,149				25,084				-				25,084				-
Equity securities			55				55				55				-				-				55				55				0				55				0
Loans held for sale																							263				263				0				0				263
Loans held for investment, net of allowance			1,797,908				1,760,606				-				5,739				1,754,867				2,096,035				2,068,257				0				0				2,068,257
FDIC indemnification asset			7,161				3,927				-				-				3,927				2,883				1,201				0				0				1,201
Interest receivable			5,778				5,778				-				5,778				-				6,677				6,677				0				6,677				0
Deferred compensation assets			4,002				4,002				4,002				-				-				3,990				3,990				3,990				0				0
Liabilities
Demand deposits			454,143				454,143				-				454,143				-
Interest-bearing demand deposits			465,407				465,407				-				465,407				-
Savings deposits			512,795				512,795				-				512,795				-
Time deposits			497,546				490,628				-				490,628				-				515,622				512,134				0				512,134				0
Securities sold under agreements to repurchase			30,086				30,449				-				30,449				-				1,601				1,601				0				1,601				0
Interest payable			1,104				1,104				-				1,104				-				472				472				0				472				0
FHLB and other borrowings			50,000				52,702				-				52,702				-
Derivative financial liabilities			90				90				-				90				-
Deferred compensation liabilities			4,002				4,002				4,002				-				-				3,990				3,990				3,990				0				0
Derivative liabilities																							510				510				0				510				0

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 18. Earnings per Share

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands, except share and per share data)
Net income		$	36,340			$	21,485			$	25,126			$	35,926			$	38,802			$	36,340
Weighted average common shares outstanding, basic			16,587,504				17,002,116				17,319,689				17,781,748				15,690,812				16,587,504
Dilutive effect of potential common shares
Stock options			62,417				52,205				34,530				22,495				53,907				62,417
Restricted stock			16,464				23,521				11,305				11,137				11,374				16,464
Total dilutive effect of potential common shares			78,881				75,726				45,835				33,632				65,281				78,881
Weighted average common shares outstanding, diluted			16,666,385				17,077,842				17,365,524				17,815,380				15,756,093				16,666,385
Basic earnings per common share		$	2.19			$	1.26			$	1.45			$	2.02			$	2.47			$	2.19
Diluted earnings per common share			2.18				1.26				1.45				2.02				2.46				2.18
Antidilutive potential common shares
Stock options			19				64,081				107,592				58,166				25				19
Restricted stock			2,736				3,620				3,279				26,900				25,853				2,736
Total potential antidilutive shares			2,755				67,701				110,871				85,066				25,878				2,755

 

 

Note 19. Related Party Transactions

 

The Company engages in transactions with related parties in the normal course of business. Related parties include directors, executive officers, and principal shareholders and their immediate family members, business interests, and affiliates. All related party transactions are made on terms that are substantially the same as those prevailing at the time for similar transactions with unrelated parties, including interest rates and collateral. The following table presents the changes in loans with related parties during the periods indicated:

 

		Year Ended December 31,								Year Ended December 31,
		2018				2017				2020				2019
(Amounts in thousands)
Beginning balance		$	19,337			$	18,360			$	20,345			$	22,033
New loans and advances			7,142				942				4,821				3,958
Loan repayments			(4,676	)			(1,566	)			(5,023	)			(5,634	)
Reclassifications(1)			230				1,601
Reclassifications(1)											23				(12	)
Ending balance		$	22,033			$	19,337			$	20,166			$	20,345

---

(1) (1)

Changes related to the composition of the Company's directors, executive officers, and related insiders

 

Deposits withfrom related parties totaled $7.30 $8.04 million as of December 31, 2018,2020, and $7.13$7.29 million as of December 31, 2017.2019. Legal fees paid to related parties totaled $70 thousand in 2020, $150 thousand in 2019, and $67 thousand in 2018 $44 thousand in 2017, and $104 thousand in 2016.. There was nowere 0 lease expensepayments paid to related parties in 20202019 ,2018 compared to $49 thousand in 2017 and $95 thousand in 2016.. Other expense paid to related parties totaled $68 thousand in 2020, $7 thousand in 2019, and $4 thousand in 2018 $63 thousand in 2017, and $34 thousand in 2016. In addition, the Company repurchased 200,000 shares of its common stock from a related party in 2016 for $4.20 million, which represented the stock’s fair market value as of the date of the transaction..

 

 

Note 20. Litigation, Commitments, and Contingencies

 

Litigation

 

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

 

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

 

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

 

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

 

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

 

		December 31,								December 31,
		2018				2017				2020				2019
(Amounts in thousands)
Commitments to extend credit		$	215,239			$	243,147			$	229,408			$	228,716
Standby letters of credit and financial guarantees(1)			149,494				131,587
Standby letters of credit and financial guarantees(1)											179,022				167,612
Total off-balance sheet risk			364,733				374,734				408,430				396,328
Reserve for unfunded commitments		$	66			$	66			$	66			$	66

---

(1)

(1) Includes FHLB letters of credit

 

 

Note 21. Regulatory Requirements and Restrictions

 

The Company and the Bank are subject to various regulatory capital requirements administered by state and 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 consolidated 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 balance sheet assets and 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. In addition, the Company and the Bank are subject to various regulatory restrictions related to the payment of dividends, including requirements to maintain capital at or above regulatory minimums.

 

The current risk-based capital requirements, based on the international capital standards known as Basel III, requires the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to risk-weighted assets, and of Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”), as defined in the regulations. On January 1, 2016, Basel III’s capital conservation buffer (“CCB”), which is intended to absorb losses during periods of economic stress, became effective at 0.625%, and was phased in over a four-yearfour-year period (increased an additional 0.625% each year until it reached 2.5% on January 1, 2019).

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:

 

		December 31, 2018																																December 31, 2020
		Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - Fully Phased-In								Well Capitalized Requirement(1)								Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - with CCB								Well Capitalized Requirement(1)
(Amounts in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio
The Company
Common equity Tier 1 ratio		$	236,544				13.72	%		$	77,570				4.50	%		$	120,664				7.00	%			N/A				N/A			$	292,019				14.28	%		$	92,043				4.50	%		$	143,178				7.00	%			N/A				N/A
Tier 1 risk-based capital ratio			236,544				13.72	%			103,427				6.00	%			146,521				8.50	%			N/A				N/A				292,019				14.28	%			122,724				6.00	%			214,767				8.50	%			N/A				N/A
Total risk-based capital ratio			254,877				14.79	%			137,902				8.00	%			180,997				10.50	%			N/A				N/A				317,595				15.53	%			163,632				8.00	%			173,859				10.50	%			N/A				N/A
Tier 1 Leverage ratio			236,544				10.95	%			86,439				4.00	%			86,439				4.00	%			N/A				N/A				292,019				10.24	%			114,081				4.00	%			N/A				N/A				N/A				N/A
The Bank
Common equity Tier 1 ratio		$	215,424				12.55	%		$	77,223				4.50	%		$	120,124				7.00	%		$	111,544				6.50	%		$	277,449				13.57	%		$	92,017				4.50	%		$	143,137				7.00	%		$	132,913				6.50	%
Tier 1 risk-based capital ratio			215,424				12.55	%			102,964				6.00	%			145,865				8.50	%			137,285				8.00	%			277,449				13.57	%			122,689				6.00	%			173,809				8.50	%			163,585				8.00	%
Total risk-based capital ratio			233,757				13.62	%			137,285				8.00	%			180,186				10.50	%			171,606				10.00	%			303,018				14.82	%			163,585				8.00	%			214,706				10.50	%			204,482				10.00	%
Tier 1 Leverage ratio			215,424				9.98	%			86,376				4.00	%			86,376				4.00	%			107,970				5.00	%			277,449				9.73	%			114,058				4.00	%			N/A				N/A				142,572				5.00	%

---

(1)	Based on prompt corrective action provisions

		December 31, 2017
		Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - Fully Phased-In								Well Capitalized Requirement(1)
(Amounts in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio
The Company
Common equity Tier 1 ratio		$	251,052				13.98	%		$	80,816				4.50	%		$	125,713				7.00	%			N/A				N/A
Tier 1 risk-based capital ratio			251,052				13.98	%			107,754				6.00	%			152,652				8.50	%			N/A				N/A
Total risk-based capital ratio			270,394				15.06	%			143,672				8.00	%			188,570				10.50	%			N/A				N/A
Tier 1 Leverage ratio			251,052				11.06	%			90,822				4.00	%			90,822				4.00	%			N/A				N/A
The Bank
Common equity Tier 1 ratio		$	222,856				12.47	%		$	80,447				4.50	%		$	125,139				7.00	%		$	116,201				6.50	%
Tier 1 risk-based capital ratio			222,856				12.47	%			107,262				6.00	%			151,955				8.50	%			178,771				8.00	%
Total risk-based capital ratio			242,218				13.55	%			143,016				8.00	%			187,709				10.50	%			143,016				10.00	%
Tier 1 Leverage ratio			222,856				9.84	%			90,604				4.00	%			90,604				4.00	%			113,255				5.00	%

(1)(1)

Based on prompt corrective action provisions

		December 31, 2019
		Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - with CCB								Well Capitalized Requirement(1)
(Amounts in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio
The Company
Common equity Tier 1 ratio		$	292,241				14.31	%		$	91,926				4.50	%		$	142,996				7.00	%			N/A				N/A
Tier 1 risk-based capital ratio			292,241				14.31	%			122,568				6.00	%			173,637				8.50	%			N/A				N/A
Total risk-based capital ratio			310,732				15.21	%			163,423				8.00	%			214,493				10.50	%			N/A				N/A
Tier 1 Leverage ratio			292,241				14.01	%			83,408				4.00	%			N/A				N/A				N/A				N/A
The Bank
Common equity Tier 1 ratio		$	262,716				12.87	%		$	91,860				4.50	%		$	142,893				7.00	%		$	132,686				6.50	%
Tier 1 risk-based capital ratio			262,716				12.87	%			122,480				6.00	%			173,513				8.50	%			163,306				8.00	%
Total risk-based capital ratio			281,207				13.78	%			163,306				8.00	%			214,339				10.50	%			204,133				10.00	%
Tier 1 Leverage ratio			262,716				12.61	%			83,313				4.00	%			N/A				N/A				104,141				5.00	%

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(1)	Based on prompt corrective action provisions

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 22. Parent Company Financial Information

 

The following tables present condensed financial information for the parent company, First Community Bankshares, Inc., as of and for the dates indicated:

 

		CONDENSED BALANCE SHEETS								CONDENSED BALANCE SHEETS
		December 31,								December 31,
(Amounts in thousands)		2018				2017				2020				2019
Assets
Cash and due from banks		$	13,726			$	19,216			$	10,089			$	23,998
Loans to affiliates			184				184				0				184
Investment in subsidiaries			311,736				322,595				412,161				399,294
Other assets			7,717				9,010				5,089				5,888
Total assets		$	333,363			$	351,005			$	427,339			$	429,364
Liabilities
Other liabilities		$	506			$	291			$	609			$	545
Total liabilities			506				291				609				545
Stockholders' equity				��
Preferred stock			-				-
Common stock			16,007				21,382				17,723				18,377
Additional paid-in capital			122,486				228,750				173,345				192,413
Retained earnings			195,793				180,543				237,585				219,535
Treasury stock			-				(79,121	)
Accumulated other comprehensive loss			(1,429	)			(840	)			(1,923	)			(1,506	)
Total stockholders' equity			332,857				350,714				426,730				428,819
Total liabilities and stockholders' equity		$	333,363			$	351,005			$	427,339			$	429,364

 

		CONDENSED STATEMENTS OF INCOME												CONDENSED STATEMENTS OF INCOME
		Year Ended December 31,												Year Ended December 31,
		2018				2017				2016				2020				2019				2018
(Amounts in thousands)
Cash dividends received from subsidiary bank		$	48,000			$	22,720			$	32,000			$	23,710			$	38,500			$	48,000
Other income (expense)			306				352				(1,121	)
Other income															3				444				306
Other operating expense			2,293				2,044				2,097				1,446				1,420				2,293
Income before income taxes and equity in undistributed net income of subsidiaries			46,013				21,028				28,782				22,267				37,524				46,013
Income tax benefit			(595	)			(678	)			(1,287	)			(375	)			(276	)			(595	)
Income before equity in undistributed net income of subsidiaries			46,608				21,706				30,069				22,642				37,800				46,608
Dividends in excess of undistributed net income of subsidiaries			(10,268	)			(221	)			(4,943	)
Equity in (dividends in excess) of undistributed net income of subsidiaries															13,284				1,002				(10,268	)
Net income		$	36,340			$	21,485			$	25,126			$	35,926			$	38,802			$	36,340

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		CONDENSED STATEMENTS OF CASH FLOWS
		Year Ended December 31,
(Amounts in thousands)		2018				2017				2016
Operating activities
Net income		$	36,340			$	21,485			$	25,126
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale of securities			-				-				(65	)
Net change in other operating activities			1,509				656				397
Net cash provided by operating activities			37,849				22,141				25,458
Investing activities
Proceeds from sale of securities available for sale			-				-				8,660
Proceeds from divestitures			-				-				4,900
Return of capital from subsidiaries			-				-				3,654
Dividends in excess of undistributed net income of subsidiaries			10,268				221				4,943
Net change in other investing activities			-				-				(98	)
Net cash provided by investing activities			10,268				221				22,059
Financing activities
Repayments of long-term debt			-				(15,464	)			-
Proceeds from issuance of common stock			832				738				1,243
Payments for repurchase of treasury stock			(34,412	)			(1,263	)			(23,762	)
Payments of common dividends			(21,090	)			(11,563	)			(10,396	)
Net change in other financing activities			1,063				845				592
Net cash used in financing activities			(53,607	)			(26,707	)			(32,323	)
Net (decrease) increase in cash and cash equivalents			(5,490	)			(4,345	)			15,194
Cash and cash equivalents at beginning of period			19,216				23,561				8,367
Cash and cash equivalents at end of period		$	13,726			$	19,216			$	23,561

		CONDENSED STATEMENTS OF CASH FLOWS
		Year Ended December 31,
(Amounts in thousands)		2020				2019				2018
Operating activities
Net income		$	35,926			$	38,802			$	36,340
Adjustments to reconcile net income to net cash provided by operating activities
Net change in other operating activities			1,047				1,865				1,509
Net cash provided by operating activities			36,973				40,667				37,849
Investing activities
Dividends in excess of undistributed net income of subsidiaries			(13,284	)			(1,002	)			10,268
Net cash provided by investing activities			(13,284	)			(1,002	)			10,268
Financing activities
Proceeds from issuance of common stock			0				136				832
Payments for repurchase of common stock			(21,872	)			(16,362	)			(34,412	)
Payments of common dividends			(17,876	)			(15,060	)			(21,090	)
Net change in other financing activities			2,150				1,893				1,063
Net cash used in financing activities			(37,598	)			(29,393	)			(53,607	)
Net increase (decrease) in cash and cash equivalents			(13,909	)			10,272				(5,490	)
Cash and cash equivalents at beginning of period			23,998				13,726				19,216
Cash and cash equivalents at end of period		$	10,089			$	23,998			$	13,726

 

 

Note 23. Quarterly Financial Data (Unaudited)

 

The following tables present selected financial data for the periods indicated:

 

		Year Ended December 31, 2018																Year Ended December 31, 2020
		First				Second				Third				Fourth				First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter
(Amounts in thousands, except share and per share data)
Interest income		$	24,330			$	24,297			$	24,286			$	25,381			$	29,509			$	27,786			$	27,995			$	28,746
Interest expense			1,951				2,035				1,961				1,502				1,827				1,447				1,161				1,029
Net interest income			22,379				22,262				22,325				23,879				27,682				26,339				26,834				27,717
Provision for loan losses			495				495				495				908				3,500				3,831				4,703				634
Net interest income after provision			21,884				21,767				21,830				22,971				24,182				22,508				22,131				27,083
Noninterest income, excluding net loss on sale of securities			6,668				6,959				7,137				6,297				7,164				6,913				7,638				7,733
Net loss on sale of securities			-				-				(618	)			-				385				0				0				0
Noninterest expense			17,116				17,160				18,131				17,366				21,664				18,913				19,171				19,877
Income before income taxes			11,436				11,566				10,218				11,902				10,067				10,508				10,598				14,939
Income tax expense			2,568				2,500				1,118				2,596				2,195				2,270				2,332				3,389
Net income		$	8,868			$	9,066			$	9,100			$	9,306			$	7,872			$	8,238			$	8,266			$	11,550
Basic earnings per common share		$	0.52			$	0.54			$	0.55			$	0.58			$	0.44			$	0.47			$	0.47			$	0.65
Diluted earnings per common share			0.52				0.54				0.55				0.57				0.44				0.46				0.47				0.65
Dividends per common share			0.66				0.18				0.21				0.21				0.25				0.25				0.25				0.25
Weighted average basic shares outstanding			16,955,758				16,689,398				16,512,823				16,201,148				17,998,994				17,701,853				17,710,283				17,717,356
Weighted average diluted shares outstanding			17,047,638				16,788,615				16,612,416				16,280,404				18,050,071				17,728,300				17,732,428				17,751,805

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATEDCONSOLID

ATED FINANCIAL STATEMENTS

		Year Ended December 31, 2017
		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
(Amounts in thousands, except share and per share data)
Interest income		$	23,192			$	24,305			$	24,049			$	23,762
Interest expense			2,051				2,011				1,999				2,029
Net interest income			21,141				22,294				22,050				21,733
Provision for loan losses			492				934				730				615
Net interest income after provision			20,649				21,360				21,320				21,118
Noninterest income, excluding net loss on sale of securities			5,312				5,712				6,703				7,502
Net loss on sale of securities			-				(657	)			-				(4	)
Noninterest expense			16,704				17,038				16,477				16,683
Income before income taxes			9,257				9,377				11,546				11,933
Income tax expense			3,055				2,959				3,894				10,720
Net income		$	6,202			$	6,418			$	7,652			$	1,213
Basic earnings per common share		$	0.36			$	0.38			$	0.45			$	0.07
Diluted earnings per common share			0.36				0.38				0.45				0.07
Dividends per common share			0.16				0.16				0.18				0.18
Weighted average basic shares outstanding			16,998,125				17,012,189				17,005,654				16,992,519
Weighted average diluted shares outstanding			17,072,174				17,082,832				17,082,729				17,083,949

		Year Ended December 31, 2019
		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
(Amounts in thousands, except share and per share data)
Interest income		$	23,611			$	24,382			$	23,605			$	23,370
Interest expense			1,425				1,393				1,384				1,313
Net interest income			22,186				22,989				22,221				22,057
Provision for loan losses			1,220				1,585				675				91
Net interest income after provision			20,966				21,404				21,546				21,966
Noninterest income, excluding net loss on sale of securities			8,080				8,692				7,634				9,314
Net loss on sale of securities			0				(43	)			0				0
Noninterest expense			16,785				16,651				17,444				18,883
Income before income taxes			12,261				13,402				11,736				12,397
Income tax expense			2,630				2,951				2,580				2,833
Net income		$	9,631			$	10,451			$	9,156			$	9,564
Basic earnings per common share		$	0.61			$	0.67			$	0.59			$	0.61
Diluted earnings per common share			0.60				0.66				0.58				0.61
Dividends per common share			0.21				0.25				0.25				0.25
Weighted average basic shares outstanding			15,839,424				15,712,204				15,603,992				15,611,093
Weighted average diluted shares outstanding			15,920,950				15,775,320				15,664,587				15,670,047

 

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- Report of Independent Registered Public Accounting Firm -

 

Board of Directors and the Stockholders

First Community Bankshares, Inc. and Subsidiary

Bluefield, Virginia

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of First Community Bankshares, Inc. and Subsidiary (formerly named First Community Bancshares, Inc. and herein referred to as the “Company”(the "Company") as of December 31, 20182020 and 2017, and2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2018,2020, and the related notes (collectively referred to as the "consolidated financial"financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”("PCAOB"), the Company’sCompany's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2019,12, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

The allowance for loan losses (‘ALL’) was $26.2 million at December 31, 2020. As described in Note 1 to the consolidated financial statements, the Company’s allowance for loan losses is reviewed quarterly to determine if it is sufficient to absorb probable loan losses in the portfolio. The allowance for loan losses consists of specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans that have been segmented into loan classes with similar risk characteristics. General reserve allocations are based on management’s judgments of qualitative and quantitative factors that include, but are not limited to, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Specific reserves assigned to impaired loans and credit relationships are measured based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. 

We identified the Company’s estimate of the ALL as a critical audit matter. The principal considerations for our determination included the high degree of judgment and subjectivity in management’s identification and measurement of the qualitative factors within the general reserve. This required a high degree of judgment in selecting the auditor procedures to evaluate management’s estimate of the ALL, particularly as it relates to the identification and measurement of the qualitative factors.

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The primary procedures we performed to address this critical audit matter included:

●

We tested the design and operating effectiveness of the Company’s controls over the qualitative factors within the general reserve, including controls over the completeness and accuracy of data utilized in assessing the qualitative factors, management’s determination of the assumptions used to develop and adjust the qualitative factors, and the mathematical accuracy of the allowance calculation, including the application of the qualitative factors by loan class within the model.

●

We reconciled the loan portfolio data in the model to the Company’s core system by loan class.

●

We tested the appropriateness of management’s qualitative factors by evaluating the underlying data used to derive the qualitative factors.

●

We tested the mathematical accuracy of management’s calculation, including the mathematical application of the qualitative factors by loan class to adjust the historical loss factors.

●

We evaluated the reasonableness of the qualitative factor adjustments based on the underlying data, including the Company’s loan portfolio and economic trends.

●

We assessed relevant trends in credit quality and evaluated the relationship of the trends to the identification of relevant qualitative factors and directional consistency of the qualitative factors.

Goodwill Impairment Assessment

The Company's goodwill balance was $129.6 million at December 31, 2020.  As described in Note 1 to the consolidated financial statements, goodwill is allocated to the Company’s one reporting unit. Goodwill is tested for impairment annually, or more frequently if events or circumstances indicate there may be impairment. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or the Company elects to forego the qualitative assessment, a quantitative test is performed.  The quantitative analysis provides management with an estimated fair value of the reporting unit.  The determination of the fair value of the reporting unit requires management to make significant judgements and assumptions, including cash flows for the forecasted period, guideline public companies, the discount rate, implied control premiums, and other applicable assumptions.  

We identified the Company’s goodwill impairment assessment as a critical audit matter. Management makes estimates and assumptions at the reporting unit level regarding cash flows for the forecasted period, guideline public companies, the discount rate, and implied control premiums, which includes a high degree of judgment and subjectivity. Given these factors, auditing management’s estimates and assumptions required a higher degree of judgment and subjectivity. In addition, the extent of audit effort included the use of the firm’s internal valuation specialists to assist in evaluating the appropriateness of management’s judgments.

The primary procedures we performed to address this critical audit matter included:

●

We tested the design and operating effectiveness of controls relating to management’s goodwill impairment assessment process, including controls over management’s review of the significant inputs and assumptions utilized in determining the reporting unit fair value.

●

We evaluated the historical cash flows of the reporting unit as compared to the forecasted cash flows and assessed the reasonableness of the forecasted cash flow assumptions. We also considered evidence gathered in other areas of the audit and the potential impact that could have on the assumptions used within the calculation.

●

With the assistance of our internal valuation specialists, we evaluated the reasonableness of management’s valuation methods and primary assumptions utilized, including the discount rate and implied control premiums, in determining the reporting unit’s estimated fair value.

●

We evaluated subsequent events and transactions and considered whether they corroborated or contradicted the Company’s conclusion.

/s/ DIXON HUGHES GOODMAN LLP

We have served as the Company’s auditor since 2006.

/s/ Dixon Hughes Goodman LLP

Asheville, North Carolina

March 1, 2019 12, 2021

 

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- Management’s Assessment of Internal Control over Financial Reporting -

 

First Community Bankshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 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 in the Internal Control-Integrated Framework (2013) issued 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, 2018.2020.

 

Dixon Hughes Goodman LLP, independent registered public accounting firm, has issued an attestationa report on the effectiveness of the Company’s internal control over financial reporting as of  December 31, 2018.2020. 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, 2018,2020, appears hereafter in Item 8 of this Annual Report on  Form 10-K.

 

 

Dated this 1^st12th day of March  2019.2021.

 

 

/s/ William P. Stafford, II		/s/ David D. Brown
William P. Stafford, II		/s/ David D. Brown
William P. Stafford, IIChief Executive Officer		David D. Brown
Chief Executive Officer		Chief Financial Officer

 

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- Report of Independent Registered Public Accounting Firm -

 

Board of Directors and the Stockholders

First Community Bankshares, Inc. and Subsidiary

Bluefield, Virginia

Opinion on Internal Control Over Financial Reporting

We have audited First Community Bankshares, Inc. and Subsidiary (formerly named First Community Bancshares, Inc. and herein referred to as the(the “Company”)'s internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, First Community Bankshares, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control-Integrated Framework (2013) 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) (“PCAOB”), the consolidated financial statements of First Community Bankshares, Inc. and Subsidiary as of December 31, 20182020 and 20172019 and for each of the three years in the period ended December 31, 2018,2020, and our report dated March 1, 2019, expressed 12, 2021, expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

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 audits.audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

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.

 

/s/ Dixon Hughes GoodmanDIXON HUGHES GOODMAN LLP

 

Asheville, North Carolina

March 1, 201912, 2021

 

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Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2018,2020, our disclosure controls and procedures were effective.

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2018,2020, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Management's Report on Internal Controls over Financial Reporting

 

For additional information about the Company’s internal controls, see “Management's Assessment of Internal Control over Financial Reporting,” and “Report of Independent Registered Public Accounting Firm,” in Item 8 of this report.

 

Item 9B.

Other Information.

 

None.

 

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PART III

  

Item 10.	Directors, Executive Officers and Corporate Governance.

 

Board of Directors, First Community Bankshares, Inc.

 

W. C. Blankenship, Jr.William Davis Attorney at Law, Richardson & Davis, PLLC Samuel L. Elmore Retired Agent, State Farm InsuranceChief Credit Officer and Senior Vice President, First Community Bank; Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and Chief Executive Officer, Bank One; Past Vice President, Key Centurion Bancshares; Past President and Chief Operations Officer, Beckley National Bank; Director, Raleigh County Commission on Aging Richard S. Johnson Chairman, President, and Chief Executive Officer, The Wilton Companies; Director and Past Chairman, City of Richmond Economic Development Authority; Trustee Emeritus, University of Richmond		Gary R. Mills President, First Community Bankshares, Inc.; Chief Executive Officer and President, First Community Bank
C. William Davis Attorney at Law, Richardson & Davis, PLLC		M. Adam Sarver
Samuel L. Elmore		Member/Co-Manager, Main Street Builders, LLC, Eastern Door & Glass, LLC, Longview Properties LLC, and Clover Leaf Properties, LLC
Retired Chief Credit Officer and Senior Vice President, First Community Bank; Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and Chief Executive Officer, Bank One; Past Vice President, Key Centurion Bancshares; Past President and Chief Operations Officer, Beckley National Bank; Director, Raleigh County Commission on Aging		William P. Stafford, II Chief Executive Officer, First Community Bankshares, Inc.; Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC
		Harriet B. Price
Richard S. Johnson Chairman, President, and Chief Executive Officer, The Wilton Companies; Director and Past Chairman, City of Richmond Economic Development Authority; Trustee Emeritus, University of Richmond

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Executive Officers, First Community Bankshares, Inc.

William P. Stafford, II		David D. Brown
Chief Executive Officer		Chief Financial Officer, and SecretaryPrice-Williams Realty, Inc.
Executive Officers, First Community Bankshares, Inc
William P. Stafford, II Chief Executive Officer Gary R. Mills		E. Stephen Lilly
President Sarah W. Harmon General Counsel and Secretary		David D. Brown Chief Financial Officer Jason R. Belcher Chief Operating Officer and Executive Vice President

---

Board of Directors, First Community Bank

 

Board of Directors, First Community Bank
James H. Atkinson, Jr.		T. Vernon Foster
Retired Chief Executive Officer, Peoples Bank of Virginia   W. C. Blankenship, Jr.		President of J. La’Verne Print Communications; Past Director, TriStone Community Bank; Executive Director: MBA Programs, Career Management & Public Relations, University of Louisville, College of Business
See above
		Richard H. Jarrell
Robert L. Buzzo Retired Vice President and Secretary, First Community Bankshares, Inc.; Retired President Emeritus, First Community Bank		Chick-fil-A Franchise Owner; Director, Raleigh General Hospital Board of Trustees; Director, Beckley-Raleigh County Chamber of Commerce; Director, United Way of Southwest Virginia; Director, Raleigh County Board of Education
Samuel D. Campbell		Richard S. Johnson
Attorney at Law		(See above)
C. William Davis		Gary R. Mills
(See above)		(See above)
Samuel L. Elmore		M. Adam Sarver
(See above)		(See above)
S. Michael Feola		William P. Stafford, II
Retired Senior Vice President – Regional President, First Community Bank T. Vernon Foster President of J. La’Verne Print Communications; Past Director, TriStone Community Bank; Executive Director: MBA Programs, Career Management & Public Relations, University of Louisville, College of Business		Richard H. Jarrell Chick-fil-A Franchise Owner; Director, Raleigh General Hospital Board of Trustees; Director, Beckley-Raleigh County Chamber of Commerce; Director, United Way of Southwest Virginia; Director, Raleigh County Board of Education Richard S. Johnson (See above)
Gary R. Mills (See above) M. Adam Sarver (See above) William P. Stafford, II (See above) Frank C. Tinder
President, Tinder Enterprises, Inc. and Tinco Leasing Corporation; Realtor, Premier Realty

 

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Additional Information

 

Additional information required in this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2019April 27, 2021 (“20192021 Annual Meeting”) under the headings “Proposal 1: Election of Directors, 2021,” “Nominees for the Class of 2022,2023,” “Incumbent Directors,” “Non-Director Named Executive Officers,” “Corporate Governance,” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.Reports.”

 

Our Standards of Conduct apply to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Standards of Conduct is available on the Investor Relations section of our website at www.firstcommunitybank.com. There have been no waivers of the Standards of Conduct for any officer.

 

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since the disclosure in our Proxy Statement filed with the SEC on March 13, 2018.April 28, 2020.

 

Item 11.

Executive Compensation.

 

The information required in this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting under the headings “Board Committees,” “Compensation Discussion and Analysis,” and “Director Compensation.”

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table provides information about compensation plans under which our equity securities are authorized for issuance as of December 31, 2018:2020: 

 

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))(3)

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3)

(a)

(b)

(c)

(a)

(b)

(c)

Equity compensation plans approved by security holders(1)

72,193

$

19.41

347,285

Equity compensation plans not approved by security holders(2)

84,062

22.08

-

Equity compensation plans approved by security holders(1)

57,438

$

19.59

218,266

Equity compensation plans not approved by security holders(2)

56,841

19.54

—

Total

156,255

347,285

114,279

218,266

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(1) Includes the 2012 Omnibus Equity Compensation Plan and 2004 Omnibus Stock Option Plan

(2) Includes the 2001 Directors' Option Plan and 1999 Stock Option Plan

(3) Shares are available for future issuance under the 2012 Omnibus Equity Compensation Plan.

 

Additional information required in this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting under the heading “Information on Stock Ownership.”

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

The information required in this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting under the headings “Corporate Governance” and “Related Person/Party Transactions.”

 

Item 14.

Principal Accounting Fees and Services.

 

The information required in this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting under the heading “Independent Registered Public Accounting Firm.”

 

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PART IV

 

Item 15.

Exhibits, Financial Statement Schedules.

 

(a)	Documents Filed as Part of this Report

 

(1)

Financial Statements

The financial statements required in this item are incorporated by reference to Item 8, “Financial Statements and Supplementary Data,” in Part II of this report.

(1)(2)

Financial StatementsStatement Schedules

 

The schedules required in this item are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes.

The financial statements required in this item are incorporated by reference to Item 8, “Financial Statements and Supplementary Data,” in Part II of this report.

 

(2)(3)

Financial Statement SchedulesExhibits

 

The schedules required in this item are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes.

(3)

Exhibits

Exhibit No.

Exhibit

2.1

Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018

2.2	Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019

3.1

Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018

3.2

Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018

4.1		Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018
4.2		Form of First Community Bankshares, Inc. Common Stock Certificate incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018

10.1.1**

First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000

10.1.2**

Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004

10.2**

First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002

10.3**

First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002

10.4**

First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan, incorporated by reference to Annex B of the Definitive Proxy Statement on Form DEF 14A dated April 27, 2004, filed on March 15, 2004

10.5**

First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004

10.6**

First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012

10.7**

First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013

10.8**

First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000

10.9.1**

First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009; 2009.

10.9.2**	Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010; Amendment #2, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013; Amendment #3, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 27, 2016; and Amendment #4, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 20172010
10.9.2**		Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010

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10.9.3**

Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013

10.9.4**

Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016

10.9.5**

Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017

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10.10**

Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006

10.11.1**

First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017

10.11.2**

Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017

10.12.1**

First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016

10.12.2**

Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016

10.13**		Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.14**		Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly, incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K dated and filed on April 16, 2015

10.15**

Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015

10.16**		Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.17**		Employment Agreement between First Community Bank and Mark R. Evans, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009

21*

Subsidiaries of the Registrant

23*

Consent of Independent Public Accounting Firm

31.1*

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

31.2*

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

32*

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

101***		InteractiveInline interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 20182020 and 2017;2019; (ii) Consolidated Statements of Income for the years ended December 31, 2018, 2017,2020, 2019, and 2016;2018; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017,2020, 2019, and 2016;2018; (iv) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018, 2017,2020, 2019, and 2016;2018; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017,2020, 2019, and 2016;2018; and (vi) Notes to Consolidated Financial Statements
104	The cover page of First Community Bankshares, Inc. Annual Report on Form 10-K/A for the year ended December 31, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).

 

*

Filed herewith

**

Indicates a management contract or compensation plan or agreement. These contracts, plans, or agreements were assumed by First Community Bankshares, Inc. in October 2018 in connection with First Community Bancshares, Inc., a Nevada corporation, merging with and into its wholly-owned subsidiary, First Community Bankshares, Inc., a Virginia corporation, pursuant to an Agreement and Plan of Reincorporation and Merger with First Community Bankshares, Inc. continuing as the surviving corporation.

***

Submitted electronically herewith

 

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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 1^st12th day of March, 2019.2021.

 

First Community Bankshares, Inc.

(Registrant)

 

By:	/s/ William P. Stafford, II		By:	/s/ David D. Brown
	William P. Stafford, II			David D. Brown
	Chief Executive Officer (Principal Executive Officer)			Chief Financial Officer (Principal Financial Officer and 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.

 

Signature		Title		Date
/s/ William P. Stafford, II		Chairman and Chief Executive Officer and Director		March 1, 2019 12, 2021
William P. Stafford, II
/s/ David D. Brown		Chief Financial Officer		March 1, 2019 12, 2021
David D. Brown
/s/ C. William Davis		Director		March 1, 2019 12, 2021
C. William Davis
/s/ Richard S. Johnson		Director		March 1, 2019 12, 2021
Richard S. Johnson
/s/ Gary R. Mills		President and Director		March 1, 2019 12, 2021
Gary R. Mills
/s/ M. Adam Sarver		Director		March 12, 2021
M. Adam Sarver
/s/ Samuel L. Elmore		Director		March 12, 2021
Samuel L. Elmor
/s/ Harriet B. Price		Director		March 1, 2019 12, 2021
M. Adam SarverHarriet B. Price

 

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