UNITED STATES | ||||||||||||
SECURITIES AND EXCHANGE COMMISSION | ||||||||||||
WASHINGTON, D.C. 20549 | ||||||||||||
FORM 10-Q | ||||||||||||
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||||
For the quarterly period endedSeptember 30, 2020 | ||||||||||||
or | ||||||||||||
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||||
Commission file number: 000-19297 |
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(Exact name of registrant as specified in its charter) |
| 55-0694814 | |||||||||||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||||||
P.O. Box 989 Bluefield, Virginia | 24605-0989 | |||||||||||
(Address of principal executive offices) |
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| (Zip Code) |
(276) 326-9000 | ||||||||||||
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Securities registered pursuant to Section 12 (b) of the Act: | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock ($1.00 par value) | FCBC | NASDAQ Global Select |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ||||||||||||
☑ Yes ☐ No | ||||||||||||
Indicate by check mark whether the registrant has submitted electronically | ||||||||||||
☑ Yes ☐ No | ||||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, | ||||||||||||
Large accelerated filer ☐ | Accelerated filer ☑ | |||||||||||
Non-accelerated filer ☐ | Smaller reporting company ☐ | |||||||||||
Emerging growth company ☐ | ||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | ||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | ||||||||||||
☐ Yes ☑ No | ||||||||||||
As of October 27, |
FORM 10-Q | |||
PART I. |
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Item 1. | |||
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II. | |||
Item 1. |
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Item 1A. |
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Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the Company’sCompany’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:
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● | the effects of the COVID-19 pandemic, including the negative impacts and |
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● | the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System; |
● | inflation, interest rate, market and monetary fluctuations; |
● | timely development of competitive new products and services and the acceptance of these products and services by new and |
● | the willingness of customers to substitute |
● | the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance, and the impact of |
● | the impact of the U.S. Department of the Treasury and federal banking |
● | further, future, and proposed rules, including those that are part of the process outlined in the Basel Committee on Banking |
● | technological changes; |
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● | the |
● | unanticipated regulatory or judicial proceedings; |
● | changes in consumer spending and saving habits; and |
● | the |
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This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. 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 II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
FINANCIAL INFORMATION |
Item 1.Financial StatementsStatements
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September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016(1) | 2020 | 2019(1) | |||||||||||||
(Amounts in thousands, except share and per share data) | (Unaudited) | (Unaudited) | ||||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 37,050 | $ | 36,645 | $ | 49,895 | $ | 66,818 | ||||||||
Federal funds sold | 67,124 | 38,717 | 323,355 | 148,000 | ||||||||||||
Interest-bearing deposits in banks | 945 | 945 | 2,414 | 2,191 | ||||||||||||
Total cash and cash equivalents | 105,119 | 76,307 | 375,664 | 217,009 | ||||||||||||
Securities available for sale | 174,424 | 165,579 | ||||||||||||||
Securities held to maturity | 25,182 | 47,133 | ||||||||||||||
Loans held for investment, net of unearned income | ||||||||||||||||
Non-covered | 1,806,434 | 1,795,954 | ||||||||||||||
Covered | 31,287 | 56,994 | ||||||||||||||
Less: allowance for loan losses | (19,206 | ) | (17,948 | ) | ||||||||||||
Debt securities available for sale | 90,972 | 169,574 | ||||||||||||||
Loans held for sale | 0 | 263 | ||||||||||||||
Loans held for investment, net of unearned income (includes covered loans of $10,744 and $12,861, respectively) | 2,194,995 | 2,114,460 | ||||||||||||||
Allowance for loan losses | (27,277 | ) | (18,425 | ) | ||||||||||||
Loans held for investment, net | 1,818,515 | 1,835,000 | 2,167,718 | 2,096,035 | ||||||||||||
FDIC indemnification asset | 7,465 | 12,173 | 1,598 | 2,883 | ||||||||||||
Premises and equipment, net | 48,949 | 50,085 | 60,488 | 62,824 | ||||||||||||
Other real estate owned, non-covered | 3,543 | 5,109 | ||||||||||||||
Other real estate owned, covered | 54 | 276 | ||||||||||||||
Other real estate owned | 2,103 | 3,969 | ||||||||||||||
Interest receivable | 5,156 | 5,553 | 9,151 | 6,677 | ||||||||||||
Goodwill | 95,779 | 95,779 | 129,565 | 129,565 | ||||||||||||
Other intangible assets | 6,417 | 7,207 | 7,433 | 8,519 | ||||||||||||
Other assets | 84,177 | 86,197 | 103,236 | 101,529 | ||||||||||||
Total assets | $ | 2,374,780 | $ | 2,386,398 | $ | 2,947,928 | $ | 2,798,847 | ||||||||
Liabilities | ||||||||||||||||
Deposits | �� | |||||||||||||||
Noninterest-bearing | $ | 452,940 | $ | 427,705 | $ | 750,277 | $ | 627,868 | ||||||||
Interest-bearing | 1,410,880 | 1,413,633 | 1,741,962 | 1,702,044 | ||||||||||||
Total deposits | 1,863,820 | 1,841,338 | 2,492,239 | 2,329,912 | ||||||||||||
Securities sold under agreements to repurchase | 83,783 | 98,005 | 956 | 1,601 | ||||||||||||
FHLB borrowings | 50,000 | 65,000 | ||||||||||||||
Other borrowings | - | 15,708 | ||||||||||||||
Interest, taxes, and other liabilities | 24,540 | 27,290 | 34,816 | 38,515 | ||||||||||||
Total liabilities | 2,022,143 | 2,047,341 | 2,528,011 | 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 | - | - | 0 | 0 | ||||||||||||
Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 shares issued at September 30, 2017, and December 31, 2016; 4,395,277 and 4,387,571 shares in treasury at September 30, 2017, and December 31, 2016, respectively | 21,382 | 21,382 | ||||||||||||||
Common stock, $1 par value; 50,000,000 shares authorized; 24,313,091 shares issued and 17,716,522 outstanding at September 30, 2020; 24,238,907 shares issued and 18,376,991 outstanding at December 31, 2019 | 17,717 | 18,377 | ||||||||||||||
Additional paid-in capital | 228,510 | 228,142 | 172,980 | 192,413 | ||||||||||||
Retained earnings | 182,145 | 170,377 | 230,464 | 219,535 | ||||||||||||
Treasury stock, at cost | (79,333 | ) | (78,833 | ) | ||||||||||||
Accumulated other comprehensive loss | (67 | ) | (2,011 | ) | (1,244 | ) | (1,506 | ) | ||||||||
Total stockholders' equity | 352,637 | 339,057 | 419,917 | 428,819 | ||||||||||||
Total liabilities and stockholders' equity | $ | 2,374,780 | $ | 2,386,398 | $ | 2,947,928 | $ | 2,798,847 | ||||||||
(1) Derived from audited financial statements |
(1) Derived from audited financial statements | |||||
See Notes to Condensed Consolidated Financial Statements. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Amounts in thousands, except share and per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 27,297 | $ | 22,068 | $ | 82,346 | $ | 66,968 | ||||||||
Interest on securities -- taxable | 190 | 261 | 808 | 916 | ||||||||||||
Interest on securities -- tax-exempt | 419 | 596 | 1,432 | 1,930 | ||||||||||||
Interest on deposits in banks | 89 | 680 | 704 | 1,784 | ||||||||||||
Total interest income | 27,995 | 23,605 | 85,290 | 71,598 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 1,161 | 1,383 | 4,431 | 4,080 | ||||||||||||
Interest on short-term borrowings | 0 | 1 | 4 | 122 | ||||||||||||
Total interest expense | 1,161 | 1,384 | 4,435 | 4,202 | ||||||||||||
Net interest income | 26,834 | 22,221 | 80,855 | 67,396 | ||||||||||||
Provision for loan losses | 4,703 | 675 | 12,034 | 3,480 | ||||||||||||
Net interest income after provision for loan losses | 22,131 | 21,546 | 68,821 | 63,916 | ||||||||||||
Noninterest income | ||||||||||||||||
Wealth management | 909 | 952 | 2,607 | 2,581 | ||||||||||||
Service charges on deposits | 3,250 | 3,785 | 9,541 | 10,892 | ||||||||||||
Other service charges and fees | 2,748 | 2,007 | 7,596 | 6,185 | ||||||||||||
Net (loss) gain on sale of securities | 0 | 0 | 385 | (43 | ) | |||||||||||
Net FDIC indemnification asset amortization | (383 | ) | (719 | ) | (1,352 | ) | (1,787 | ) | ||||||||
Litigation settlements | 0 | 900 | 0 | 4,600 | ||||||||||||
Other operating income | 1,114 | 709 | 3,323 | 1,935 | ||||||||||||
Total noninterest income | 7,638 | 7,634 | 22,100 | 24,363 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and employee benefits | 10,485 | 9,334 | 32,886 | 27,653 | ||||||||||||
Occupancy expense | 1,228 | 1,042 | 3,818 | 3,277 | ||||||||||||
Furniture and equipment expense | 1,412 | 1,183 | 4,112 | 3,278 | ||||||||||||
Service fees | 1,581 | 1,466 | 4,433 | 3,727 | ||||||||||||
Advertising and public relations | 430 | 795 | 1,417 | 1,832 | ||||||||||||
Professional fees | 408 | 548 | 948 | 1,290 | ||||||||||||
Amortization of intangibles | 365 | 251 | 1,086 | 746 | ||||||||||||
FDIC premiums and assessments | 191 | 0 | 224 | 318 | ||||||||||||
Merger expenses | 0 | 592 | 1,893 | 592 | ||||||||||||
Other operating expense | 3,071 | 2,233 | 8,931 | 8,167 | ||||||||||||
Total noninterest expense | 19,171 | 17,444 | 59,748 | 50,880 | ||||||||||||
Income before income taxes | 10,598 | 11,736 | 31,173 | 37,399 | ||||||||||||
Income tax expense | 2,332 | 2,580 | 6,797 | 8,161 | ||||||||||||
Net income | $ | 8,266 | $ | 9,156 | $ | 24,376 | $ | 29,238 | ||||||||
Earnings per common share | ||||||||||||||||
Basic | $ | 0.47 | $ | 0.59 | $ | 1.37 | $ | 1.86 | ||||||||
Diluted | 0.47 | 0.58 | 1.37 | 1.85 | ||||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 17,710,283 | 15,603,992 | 17,803,369 | 15,717,678 | ||||||||||||
Diluted | 17,732,428 | 15,664,587 | 17,836,963 | 15,785,484 |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Amounts in thousands, except share and per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 22,694 | $ | 21,952 | $ | 67,435 | $ | 65,762 | ||||||||
Interest on securities -- taxable | 341 | 738 | 1,157 | 2,729 | ||||||||||||
Interest on securities -- tax-exempt | 739 | 905 | 2,299 | 2,762 | ||||||||||||
Interest on deposits in banks | 275 | 26 | 655 | 55 | ||||||||||||
Total interest income | 24,049 | 23,621 | 71,546 | 71,308 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 1,275 | 1,133 | 3,674 | 3,334 | ||||||||||||
Interest on short-term borrowings | 213 | 548 | 634 | 1,613 | ||||||||||||
Interest on long-term debt | 511 | 819 | 1,753 | 2,438 | ||||||||||||
Total interest expense | 1,999 | 2,500 | 6,061 | 7,385 | ||||||||||||
Net interest income | 22,050 | 21,121 | 65,485 | 63,923 | ||||||||||||
Provision for (recovery of) loan losses | 730 | (1,154 | ) | 2,156 | 755 | |||||||||||
Net interest income after provision for loan losses | 21,320 | 22,275 | 63,329 | 63,168 | ||||||||||||
Noninterest income | ||||||||||||||||
Wealth management | 758 | 653 | 2,339 | 2,147 | ||||||||||||
Service charges on deposits | 3,605 | 3,494 | 10,078 | 10,146 | ||||||||||||
Other service charges and fees | 2,141 | 2,024 | 6,387 | 6,088 | ||||||||||||
Insurance commissions | 306 | 1,592 | 1,004 | 5,383 | ||||||||||||
Impairment losses on securities | - | (4,635 | ) | - | (4,646 | ) | ||||||||||
Portion of loss recognized in other comprehensive income | - | - | - | - | ||||||||||||
Net impairment losses recognized in earnings | - | (4,635 | ) | - | (4,646 | ) | ||||||||||
Net loss on sale of securities | - | 25 | (657 | ) | (53 | ) | ||||||||||
Net FDIC indemnification asset amortization | (268 | ) | (1,369 | ) | (3,186 | ) | (3,856 | ) | ||||||||
Net gain on divestitures | - | 3,065 | - | 3,065 | ||||||||||||
Other operating income | 593 | 1,046 | 2,336 | 2,554 | ||||||||||||
Total noninterest income | 7,135 | 5,895 | 18,301 | 20,828 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and employee benefits | 9,137 | 9,828 | 27,178 | 30,501 | ||||||||||||
Occupancy expense | 1,082 | 1,249 | 3,671 | 4,139 | ||||||||||||
Furniture and equipment expense | 1,133 | 1,066 | 3,311 | 3,271 | ||||||||||||
Amortization of intangibles | 266 | 316 | 790 | 871 | ||||||||||||
FDIC premiums and assessments | 227 | 363 | 698 | 1,109 | ||||||||||||
Merger, acquisition, and divestiture expense | - | 226 | - | 675 | ||||||||||||
Other operating expense | 5,064 | 5,509 | 15,802 | 15,527 | ||||||||||||
Total noninterest expense | 16,909 | 18,557 | 51,450 | 56,093 | ||||||||||||
Income before income taxes | 11,546 | 9,613 | 30,180 | 27,903 | ||||||||||||
Income tax expense | 3,894 | 3,230 | 9,908 | 9,181 | ||||||||||||
Net income | 7,652 | 6,383 | 20,272 | 18,722 | ||||||||||||
Dividends on preferred stock | - | - | - | - | ||||||||||||
Net income available to common shareholders | $ | 7,652 | $ | 6,383 | $ | 20,272 | $ | 18,722 | ||||||||
Earnings per common share | ||||||||||||||||
Basic | $ | 0.45 | $ | 0.37 | $ | 1.19 | $ | 1.07 | ||||||||
Diluted | 0.45 | 0.37 | 1.19 | 1.07 | ||||||||||||
Cash dividends per common share | 0.18 | 0.16 | 0.50 | 0.44 | ||||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 17,005,654 | 17,031,074 | 17,005,350 | 17,433,406 | ||||||||||||
Diluted | 17,082,729 | 17,083,526 | 17,076,958 | 17,475,211 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net income | $ | 8,266 | $ | 9,156 | $ | 24,376 | $ | 29,238 | ||||||||
Other comprehensive income, before tax | ||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Change in net unrealized (losses) gains on debt securities without other-than-temporary impairment | (268 | ) | 28 | 873 | 1,578 | |||||||||||
Reclassification adjustment for net (gains) losses recognized in net income | 0 | 0 | (385 | ) | 43 | |||||||||||
Net unrealized (losses) gains on available-for-sale debt securities | (268 | ) | 28 | 488 | 1,621 | |||||||||||
Employee benefit plans: | ||||||||||||||||
Net actuarial (loss) gain | (1 | ) | 1 | (446 | ) | (405 | ) | |||||||||
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income | 97 | 67 | 290 | 207 | ||||||||||||
Net unrealized gains (losses) on employee benefit plans | 96 | 68 | (156 | ) | (198 | ) | ||||||||||
Other comprehensive (loss) income, before tax | (172 | ) | 96 | 332 | 1,423 | |||||||||||
Income tax expense | (36 | ) | 20 | 70 | 299 | |||||||||||
Other comprehensive (loss) income, net of tax | (136 | ) | 76 | 262 | 1,124 | |||||||||||
Total comprehensive income | $ | 8,130 | $ | 9,232 | $ | 24,638 | $ | 30,362 |
See Notes to Condensed Consolidated Financial Statements. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net income | $ | 7,652 | $ | 6,383 | $ | 20,272 | $ | 18,722 | ||||||||
Other comprehensive income, before tax | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
Change in net unrealized (losses) gains on securities without other-than-temporary impairment | (169 | ) | 744 | 2,127 | 4,141 | |||||||||||
Reclassification adjustment for net losses recognized in net income | - | (25 | ) | 657 | 53 | |||||||||||
Reclassification adjustment for other-than-temporary impairment losses recognized in net income | - | 4,635 | - | 4,646 | ||||||||||||
Net unrealized (losses) gains on available-for-sale securities | (169 | ) | 5,354 | 2,784 | 8,840 | |||||||||||
Employee benefit plans: | ||||||||||||||||
Net actuarial (loss) gain | (1 | ) | (2 | ) | 133 | (56 | ) | |||||||||
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income | 65 | 69 | 194 | 205 | ||||||||||||
Net unrealized gains on employee benefit plans | 64 | 67 | 327 | 149 | ||||||||||||
Other comprehensive (loss) income, before tax | (105 | ) | 5,421 | 3,111 | 8,989 | |||||||||||
Income tax (benefit) expense | (39 | ) | 2,034 | 1,167 | 3,372 | |||||||||||
Other comprehensive (loss) income, net of tax | (66 | ) | 3,387 | 1,944 | 5,617 | |||||||||||
Total comprehensive income | $ | 7,586 | $ | 9,770 | $ | 22,216 | $ | 24,339 |
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) | ||||||||||||||
THREE MONTHS ENDED | ||||||||||||||
September 30, 2020 and 2019 |
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | |||||||||||||||||||||||
(Amounts in thousands, | Stock | Stock | Capital | Earnings | Stock | Income (Loss) | Total | |||||||||||||||||||||
except share and per share data) | ||||||||||||||||||||||||||||
Balance January 1, 2016 | $ | - | $ | 21,382 | $ | 227,692 | $ | 155,647 | $ | (56,457 | ) | $ | (5,247 | ) | $ | 343,017 | ||||||||||||
Net income | - | - | - | 18,722 | - | - | 18,722 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 5,617 | 5,617 | |||||||||||||||||||||
Common dividends declared -- $0.44 per share | - | - | - | (7,680 | ) | - | - | (7,680 | ) | |||||||||||||||||||
Equity-based compensation expense | - | - | 144 | - | - | - | 144 | |||||||||||||||||||||
Common stock options exercised -- 11,730 shares | - | - | (23 | ) | - | 205 | - | 182 | ||||||||||||||||||||
Restricted stock awards -- 15,587 shares | - | - | 26 | - | 270 | - | 296 | |||||||||||||||||||||
Issuance of treasury stock to 401(k) plan -- 16,290 shares | - | - | 45 | - | 287 | - | 332 | |||||||||||||||||||||
Purchase of treasury shares -- 1,152,776 shares at $20.00 per share | - | - | - | - | (23,094 | ) | - | (23,094 | ) | |||||||||||||||||||
Balance September 30, 2016 | $ | - | $ | 21,382 | $ | 227,884 | $ | 166,689 | $ | (78,789 | ) | $ | 370 | $ | 337,536 | |||||||||||||
�� | ||||||||||||||||||||||||||||
Balance January 1, 2017 | $ | - | $ | 21,382 | $ | 228,142 | $ | 170,377 | $ | (78,833 | ) | $ | (2,011 | ) | $ | 339,057 | ||||||||||||
Net income | - | - | - | 20,272 | - | - | 20,272 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 1,944 | 1,944 | |||||||||||||||||||||
Common dividends declared -- $0.50 per share | - | - | - | (8,504 | ) | - | - | (8,504 | ) | |||||||||||||||||||
Equity-based compensation expense | - | - | 290 | - | - | - | 290 | |||||||||||||||||||||
Common stock options exercised -- 8,036 shares | - | - | 6 | - | 145 | - | 151 | |||||||||||||||||||||
Restricted stock awards -- 21,542 shares | - | - | (40 | ) | - | 387 | - | 347 | ||||||||||||||||||||
Issuance of treasury stock to 401(k) plan -- 12,834 shares | - | - | 112 | - | 231 | - | 343 | |||||||||||||||||||||
Purchase of treasury shares -- 50,118 shares at $25.16 per share | - | - | - | - | (1,263 | ) | - | (1,263 | ) | |||||||||||||||||||
Balance September 30, 2017 | $ | - | $ | 21,382 | $ | 228,510 | $ | 182,145 | $ | (79,333 | ) | $ | (67 | ) | $ | 352,637 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
(Amounts in thousands, | Preferred | Common | Paid-in | Retained | Comprehensive | |||||||||||||||||||
except share and per share data) | Stock | Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||||
Balance July 1, 2019 | $ | - | $ | 15,633 | $ | 109,816 | $ | 208,618 | $ | (381 | ) | $ | 333,686 | |||||||||||
Net income | - | - | - | 9,156 | - | 9,156 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 76 | 76 | ||||||||||||||||||
Common dividends declared -- $0.25 per share | - | - | - | (3,908 | ) | - | (3,908 | ) | ||||||||||||||||
Equity-based compensation expense | - | 0 | 216 | - | - | 216 | ||||||||||||||||||
Common stock options exercised -- 3,407 shares | - | 4 | 37 | - | - | 41 | ||||||||||||||||||
Issuance of common stock to 401(k) plan -- 3,010 shares | - | 4 | 95 | - | - | 99 | ||||||||||||||||||
Repurchase of common shares -- 60,500 shares at $33.11 per share | - | (61 | ) | (1,942 | ) | - | - | (2,003 | ) | |||||||||||||||
Balance September 30, 2019 | $ | - | $ | 15,580 | $ | 108,222 | $ | 213,866 | $ | (305 | ) | $ | 337,363 | |||||||||||
Balance July 1, 2020 | $ | - | $ | 17,710 | $ | 172,601 | $ | 226,627 | $ | (1,108 | ) | $ | 415,830 | |||||||||||
Net income | - | - | - | 8,266 | - | 8,266 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | (136 | ) | (136 | ) | ||||||||||||||||
Common dividends declared -- $0.25 per share | - | - | - | (4,429 | ) | - | (4,429 | ) | ||||||||||||||||
Equity-based compensation expense | - | 1 | 262 | - | - | 263 | ||||||||||||||||||
Issuance of common stock to 401(k) plan -- 6,237 shares | - | 6 | 117 | - | - | 123 | ||||||||||||||||||
Balance September 30, 2020 | $ | 0 | $ | 17,717 | $ | 172,980 | $ | 230,464 | $ | (1,244 | ) | $ | 419,917 |
See Notes to Condensed Consolidated Financial Statements. |
| ||||
CONDENSED CONSOLIDATED STATEMENTS OF | ||||
nine MONTHS ENDED | ||||
September 30, 2020 and 2019 |
Nine Months Ended | ||||||||
September 30, | ||||||||
(Amounts in thousands) | 2017 | 2016 | ||||||
Operating activities | ||||||||
Net income | $ | 20,272 | $ | 18,722 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 2,156 | 755 | ||||||
Depreciation and amortization of property, plant, and equipment | 2,688 | 2,707 | ||||||
Amortization of premiums on investments, net | 63 | 2,758 | ||||||
Amortization of FDIC indemnification asset, net | 3,186 | 3,856 | ||||||
Amortization of intangible assets | 790 | 871 | ||||||
Accretion on acquired loans | (4,257 | ) | (3,893 | ) | ||||
Gain on divestiture, net | - | (3,065 | ) | |||||
Equity-based compensation expense | 290 | 144 | ||||||
Restricted stock awards | 347 | 296 | ||||||
Issuance of treasury stock to 401(k) plan | 343 | 332 | ||||||
Loss on sale of property, plant, and equipment, net | 13 | 271 | ||||||
Loss on sale of other real estate | 940 | 1,487 | ||||||
Loss on sale of securities | 657 | 53 | ||||||
Net impairment losses recognized in earnings | - | 4,646 | ||||||
Decrease in accrued interest receivable | 397 | 509 | ||||||
(Increase) decrease in other operating activities | (2,008 | ) | 4,341 | |||||
Net cash provided by operating activities | 25,877 | 34,790 | ||||||
Investing activities | ||||||||
Proceeds from sale of securities available for sale | 12,273 | 70,530 | ||||||
Proceeds from maturities, prepayments, and calls of securities available for sale | 18,022 | 77,395 | ||||||
Proceeds from maturities and calls of securities held to maturity | 21,840 | 190 | ||||||
Payments to acquire securities available for sale | (36,966 | ) | (1,174 | ) | ||||
Proceeds from (originations of) loans, net | 17,304 | (138,984 | ) | |||||
Proceeds from (payments for) FHLB stock, net | 694 | (933 | ) | |||||
Cash proceeds from mergers, acquisitions, and divestitures, net | - | 24,816 | ||||||
Proceeds from the FDIC | 1,701 | 3,639 | ||||||
Payments to acquire property, plant, and equipment, net | (1,999 | ) | (448 | ) | ||||
Proceeds from sale of other real estate | 2,130 | 4,541 | ||||||
Net cash provided by investing activities | 34,999 | 39,572 | ||||||
Financing activities | ||||||||
Increase in noninterest-bearing deposits, net | 25,235 | 28,322 | ||||||
Decrease in interest-bearing deposits, net | (2,753 | ) | (62,819 | ) | ||||
Repayments of securities sold under agreements to repurchase, net | (14,222 | ) | (20,082 | ) | ||||
(Repayments of) proceeds from FHLB and other borrowings, net | (30,708 | ) | 24,951 | |||||
Proceeds from stock options exercised | 151 | 182 | ||||||
Payments for repurchase of treasury stock | (1,263 | ) | (23,094 | ) | ||||
Payments of common dividends | (8,504 | ) | (7,680 | ) | ||||
Net cash used in financing activities | (32,064 | ) | (60,220 | ) | ||||
Net increase in cash and cash equivalents | 28,812 | 14,142 | ||||||
Cash and cash equivalents at beginning of period | 76,307 | 51,787 | ||||||
Cash and cash equivalents at end of period | $ | 105,119 | $ | 65,929 | ||||
Supplemental disclosure -- cash flow information | ||||||||
Cash paid for interest | $ | 6,257 | $ | 7,394 | ||||
Cash paid for income taxes | 12,942 | 6,488 | ||||||
Supplemental transactions -- noncash items | ||||||||
Transfer of loans to other real estate | 1,282 | 3,652 | ||||||
Loans originated to finance other real estate | - | 42 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
(Amounts in thousands, | Preferred | Common | Paid-in | Retained | Comprehensive | |||||||||||||||||||
except share and per share data) | Stock | Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||||
Balance January 1, 2019 | $ | 0 | $ | 16,007 | $ | 122,486 | $ | 195,793 | $ | (1,429 | ) | $ | 332,857 | |||||||||||
Net income | - | - | - | 29,238 | - | 29,238 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 1,124 | 1,124 | ||||||||||||||||||
Common dividends declared -- $0.71 per share | - | - | - | (11,165 | ) | - | (11,165 | ) | ||||||||||||||||
Equity-based compensation expense | - | 42 | 1,180 | - | - | 1,222 | ||||||||||||||||||
Common stock options exercised -- 7,752 shares | - | 8 | 116 | - | - | 124 | ||||||||||||||||||
Issuance of common stock to 401(k) plan -- 9,663 shares | - | 10 | 315 | - | - | 325 | ||||||||||||||||||
Repurchase of common shares -- 487,400 shares at $33.57 per share | - | (487 | ) | (15,875 | ) | - | - | (16,362 | ) | |||||||||||||||
Balance September 30, 2019 | $ | - | $ | 15,580 | $ | 108,222 | $ | 213,866 | $ | (305 | ) | $ | 337,363 | |||||||||||
Balance January 1, 2020 | $ | - | $ | 18,377 | $ | 192,413 | $ | 219,535 | $ | (1,506 | ) | $ | 428,819 | |||||||||||
Net income | - | - | - | 24,376 | - | 24,376 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 262 | 262 | ||||||||||||||||||
Common dividends declared -- $0.75 per share | - | - | - | (13,447 | ) | - | (13,447 | ) | ||||||||||||||||
Equity-based compensation expense | - | 57 | 1,311 | - | - | 1,368 | ||||||||||||||||||
Issuance of common stock to 401(k) plan -- 18,148 shares | - | 18 | 393 | - | - | 411 | ||||||||||||||||||
Repurchase of common shares -- 734,653 shares at $29.77 per share | 0 | (735 | ) | (21,137 | ) | 0 | 0 | (21,872 | ) | |||||||||||||||
Balance September 30, 2020 | $ | 0 | $ | 17,717 | $ | 172,980 | $ | 230,464 | $ | (1,244 | ) | $ | 419,917 |
See Notes to Condensed Consolidated Financial Statements. |
Nine Months Ended | ||||||||
September 30, | ||||||||
(Amounts in thousands) | 2020 | 2019 | ||||||
Operating activities | ||||||||
Net income | $ | 24,376 | $ | 29,238 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 12,034 | 3,480 | ||||||
Depreciation and amortization of premises and equipment | 3,328 | 2,491 | ||||||
Amortization of premiums on investments, net | 1,387 | 171 | ||||||
Amortization of FDIC indemnification asset, net | 1,352 | 1,787 | ||||||
Amortization of intangible assets | 1,086 | 746 | ||||||
Accretion on acquired loans | (5,221 | ) | (2,720 | ) | ||||
Equity-based compensation expense | 1,368 | 1,222 | ||||||
Issuance of common stock to 401(k) plan | 411 | 325 | ||||||
Loss (gain) on sale of premises and equipment, net | 9 | (104 | ) | |||||
Loss on sale of other real estate owned | 299 | 791 | ||||||
(Gain) Loss on sale of securities | (385 | ) | 43 | |||||
(Increase) decrease in accrued interest receivable | (2,474 | ) | 639 | |||||
(Increase) decrease in other operating activities | (5,542 | ) | 1,527 | |||||
Net cash provided by operating activities | 32,028 | 39,636 | ||||||
Investing activities | ||||||||
Proceeds from sale of securities available for sale | 51,027 | 13,897 | ||||||
Proceeds from maturities, prepayments, and calls of securities available for sale | 29,614 | 29,555 | ||||||
Proceeds from maturities and calls of securities held to maturity | 0 | 25,000 | ||||||
Payments to acquire securities available for sale | (2,553 | ) | (4,453 | ) | ||||
(Originations of) proceeds from repayment of loans, net | (78,663 | ) | 78,036 | |||||
(Purchase of) proceeds from FHLB stock, net | (12 | ) | 129 | |||||
Payments to the FDIC | (67 | ) | (137 | ) | ||||
Proceeds from sale of premises and equipment | 1,435 | 1,038 | ||||||
Payments to acquire premises and equipment | (2,474 | ) | (6,225 | ) | ||||
Proceeds from sale of other real estate owned | 1,997 | 2,917 | ||||||
Net cash provided by investing activities | 304 | 139,757 | ||||||
Financing activities | ||||||||
Increase in noninterest-bearing deposits, net | 122,409 | 12,928 | ||||||
Increase (decrease) in interest-bearing deposits, net | 39,918 | (31,826 | ) | |||||
Repayments of securities sold under agreements to repurchase, net | (645 | ) | (27,507 | ) | ||||
Repayments of FHLB and other borrowings, net | (40 | ) | 0 | |||||
Proceeds from stock options exercised | 0 | 124 | ||||||
Payments for repurchase of common stock | (21,872 | ) | (16,362 | ) | ||||
Payments of common dividends | (13,447 | ) | (11,165 | ) | ||||
Net cash provided by (used in) financing activities | 126,323 | (73,808 | ) | |||||
Net increase in cash and cash equivalents | 158,655 | 105,585 | ||||||
Cash and cash equivalents at beginning of period | 217,009 | 76,873 | ||||||
Cash and cash equivalents at end of period | $ | 375,664 | $ | 182,458 | ||||
Supplemental disclosure -- cash flow information | ||||||||
Cash paid for interest | $ | 4,334 | $ | 4,308 | ||||
Cash paid for income taxes | 5,607 | 7,083 | ||||||
Supplemental transactions -- noncash items | ||||||||
Transfer of loans to other real estate owned | 695 | 2,883 | ||||||
Loans originated to finance other real estate owned | 265 | 484 | ||||||
Decrease in accumulated other comprehensive loss | 262 | 1,124 |
See Notes to Condensed Consolidated Financial Statements. |
NOTES TO CONDENSEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
General
First Community Bancshares,Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of Nevadathe Commonwealth of Virginia in 1997.2018. The Company’s is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank provides insurance services through its wholly owned subsidiary First Community Insurance Services (“FCIS”) and offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares,Bankshares, Inc. and its subsidiaries as a consolidated entity.
Principles of Consolidation
The Company’sCompany’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, and insurance services.management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.
The condensed consolidated balance sheet as of December 31, 2016, has been derived from the audited consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 20162019 (the “2016“2019 Form 10-K”10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2017.13, 2020. The condensed consolidated balance sheet as of December 31, 2019, has been derived from the audited consolidated financial statements.
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to the current year’syear’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.
Use of Estimates
Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, the Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.
Significant Accounting Policies
A complete and detailed description of the Company’sThe Company’s significant accounting policies isare included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 20162019 Form 10-K.10-K.
Risks and Uncertainties
Recent COVID-19 Virus Developments –
During the firstnine months 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 the firstnine months of 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 September 30, 2020, the Company has modified or deferred payments on a total of 3,362 loans totaling $426.45 million in principal. As of September 30, 2020, commercial and consumer loans currently in deferral decreased to $102.54 million and $13.09 million, respectively. Included in the September 30, 2020 deferral amounts are re-deferrals for approximately $69.32 million commercial loans and approximately $5.09 million in consumer mortgage and installment loans. 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.
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 September 30, 2020 the Company processed 803 loans with original principal balances totaling $62.74 million through the PPP.
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 Adopted in 2020
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 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 on March 12, 2020. The update is not expected to have any material effect on the Company’s financial statements when and as changes are made to various assets and liabilities for reference rates.
Standards Not Yet Adopted
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” This ASU removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The update should be applied prospectively. The Company early adopted ASU 2017-04 in the first quarter of 2017. The adoption of the standard did not have an effect on the Company’s financial statements.
In January 2017, June 2016, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” This ASU requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. The Company adopted ASU 2017-03 in the first quarter of 2017. The adoption of the standard resulted in enhanced disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on the Company’s financial statements and disclosures. See “Standards Not Yet Adopted” below.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance eliminates additional paid-in capital pools for equity-based awards and requires that the related income tax effects of awards be recognized in the income statement. The guidance also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis and elected to account for forfeitures of share-based awards as they occur. Excess tax benefits on share-based awards in the statements of cash flows in prior periods have not been adjusted. The adoption of the standard did not have a material effect on the Company’s financial statements.
Standards Not Yet Adopted
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU intends to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of hedge accounting guidance. ASU 2017-12 will be effective for the Company for fiscal years beginning after December 15, 2018.The Company expects to adopt ASU 2017-12 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2017-09 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In 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 held at a premium. ASU 2017-08 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017-08 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In 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. ASU 2017-07 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2017-07 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In 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. ASU 2016-18 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2016-18 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In August 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. ASU 2016-15 will be effective for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted. The update should be applied on a retrospective basis, if practicable. The Company expects to adopt ASU 2016-15 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.
In June 2016, the FASB issued ASU 2016-13,-13, “Financial Instruments – Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments.” This ASU intends to improve financial reporting by requiring timelierpurportedly requires earlier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU also 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 andforecasts. It further 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’sorganization’s portfolio. In addition, the updateASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The CARES Act was passed by the United States Congress and signed into law by the President of the United States at the end of March 2020. The CARES Act states that “Notwithstanding any other provision of law, no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with the Financial Accounting Standards Board Accounting Standards Update No.2016-13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses, during the period beginning on March 27, 2020 and ending on the earlier of: (1) the date on which the national emergency concerning the novel coronavirus disease (COVID-19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or (2) December 31, 2020. The Company has elected to “not comply with” ASU 2016-13 will be2016-13 for the period specified in the CARES Act and any subsequent controlling legislation or regulation. In preparation for expiration of the period specified in the CARES Act, the Company has selected loss estimation methodologies for its allowance for credit losses, performed testing on the chosen methodologies, and determined a qualitative adjustment methodology that aligns with the requirements of the new standard. The Company has also subjected the model to third party validation. Based upon the aforesaid preparatory measures, upon expiration of the period specified in the CARES Act and any subsequent controlling legislation or regulation, the Company anticipates recording a cumulative-effect adjustment to retained earnings of approximately $5.61 million in connection with adoption of the new standard, consisting of tax-effected increases in the allowance for credit losses associated with the Company’s legacy loan portfolio prior to the addition of Highlands Bankshares, Inc. and the portfolio of purchased performing loans associated with Highlands of approximately $2.89 million and $4.44 million, respectively. The Company also anticipates making an approximate $7.04 million adjustment as of January 1, 2020, to the opening balance of the allowance for credit losses associated with the required gross-up of purchased credit deteriorated loans from the Highlands transaction.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for the Company forfiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early2020. Early adoption is permitted, including adoption in any interim period for fiscal years beginning after December 15, 2018.which financial statements have not yet been issued. 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 Companyupdate is evaluating the impact of the standard.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. ASU 2016-02 will be effective for the Company for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt ASU 2016-02 in the first quarter of 2019. The Company leases certain banking offices under lease agreements it classifies as operating leases. The Company is evaluating the impact of the standard and expects an increase in assets and liabilities; however, the Company does not expect the guidance expected to have aany material effect on itsthe Company’s financial statements.
The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements. Note 2. Acquisitions Highlands Bankshares, Inc. On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands”) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, 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 was consummated the close of business December 31, 2019. 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. 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) Highlands Adjustments the Company Assets Cash and cash equivalents Securities available for sale Loans held for sale Loans held for investment, net of allowance and mark ( a ) Premises and equipment ( b ) Other real estate Other assets ( c ) Intangible assets ( d ) Total assets LIABILITIES Deposits: Noninterest-bearing Interest-bearing ( e ) Total deposits Long term debt Other liabilities ( f ) Total liabilities Net identifiable assets acquired over (under) liabilities assumed Goodwill Net assets acquired over liabilities assumed Consideration: First Community Bankshares, Inc. common Purchase price per share of the Company's common stock Fair value of Company common stock issued Cash paid for fractional shares Fair Value of total consideration transferred 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 ("ALLL") 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. Comparative and Pro Forma Financial Information for Acquisitions As the merger date was the close of business, December 31, 2019, Highlands had no earnings contribution to the September 30, 2019 consolidated statement of income for the Company. 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, 2019. These results combine the historical results of Highlands in the Company’s consolidated statement of income and, while certain adjustments were made for the 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, 2019. Residual merger-related costs of $1.89 million incurred by the Company during the nine months ended September 30, 2020, have been excluded from the proforma information below. There were no residual merger expenses incurred for the third quarter of 2020. No adjustments have been made to the pro formas to eliminate the provision for loan losses for the quarter and year ended September 30, 2019 of Highlands in the amounts of $548 thousand and $1.49 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 Three months ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2020 2019 2020 2019 Total revenues (net interest income plus noninterest income) Net adjusted income available to the common shareholder Note The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated: September 30, 2017 September 30, 2020 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value (Amounts in thousands) U.S. Treasury securities U.S. Agency securities Municipal securities Single issue trust preferred securities Mortgage-backed Agency securities Equity securities Total securities available for sale Total December 31, 2016 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 Municipal securities Single issue trust preferred securities Mortgage-backed Agency securities Equity securities Total securities available for sale Total The September 30, 2017 Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Amounts in thousands) U.S. Agency securities Corporate securities Total securities held to maturity December 31, 2016 Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Amounts in thousands) U.S. Agency securities Corporate securities Total securities held to maturity September 30, 2017 September 30, 2020 Amortized Amortized (Amounts in thousands) Cost Fair Value Cost Fair Value Available-for-sale securities Available-for-sale debt securities Due within one year Due after one year but within five years Due after five years but within ten years Due after ten years Mortgage-backed securities Equity securities Total securities available for sale Held-to-maturity securities Due within one year Due after one year but within five years Due after five years but within ten years Due after ten years Total securities held to maturity Total debt securities available for sale The following tables present the fair values and unrealized losses for available-for-sale debt securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated: September 30, 2017 September 30, 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 Municipal securities Single issue trust preferred securities U.S. Agency securities Mortgage-backed Agency securities Total December 31, 2016 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (Amounts in thousands) Municipal securities Single issue trust preferred securities Mortgage-backed Agency securities Total December 31, 2019 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (Amounts in thousands) U.S. Agency securities Mortgage-backed Agency securities Total There were December 31, 2016 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (Amounts in thousands) Corporate securities Total The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated: Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2017 2016 2017 2016 2020 2019 2020 2019 (Amounts in thousands) Gross realized gains Gross realized losses Net gain (loss) on sale of securities Net Gain (Loss) on sale of securities The carrying amount of securities pledged for various purposes totaled Note The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are those loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled The following table presents September 30, 2017 December 31, 2016 September 30, 2020 December 31, 2019 (Amounts in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Non-covered loans held for investment Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Total commercial loans Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Total consumer real estate loans Consumer and other loans Consumer loans Other Total consumer and other loans Total non-covered loans Total covered loans Total loans held for investment, net of unearned income Loans held for sale 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 September 30, 2020, the PPP loans had a current balance of $61.00 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 September 30, 2020, were also recorded. During the third quarter of 2020, the Company recorded amortization of net deferred loan origination fees of $287 thousand on PPP loans and $479 thousand in amortization for the nine month period. 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. The following table presents the covered loan portfolio, by loan class, as of the dates indicated: September 30, 2017 December 31, 2016 September 30, 2020 December 31, 2019 (Amounts in thousands) Covered loans Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Total commercial loans Consumer real estate loans Home equity lines Single family owner occupied Total consumer real estate loans Consumer and other loans Consumer loans Total covered loans The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. 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: September 30, 2020 December 31, 2019 September 30, 2017 December 31, 2016 Unpaid Principal Unpaid Principal (Amounts in thousands) Recorded Investment Unpaid Principal Balance Recorded Investment Unpaid Principal Balance Recorded Investment Balance Recorded Investment Balance PCI Loans, by acquisition Peoples Waccamaw Highlands Other acquired Total PCI Loans 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 Balance January 1, 2019 Accretion Reclassifications (to) from nonaccretable difference(1) Other changes, net Balance September 30, 2019 Balance January 1, 2020 Accretion Reclassifications from nonaccretable difference(1) Other changes, net Balance September 30, 2016 Balance January 1, 2017 Accretion Reclassifications from nonaccretable difference(1) Other changes, net Balance September 30, 2017 (1) Represents changes attributable to expected loss assumptions Balance September 30, 2020 (1) Represents changes attributable to expected loss assumptions Note 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: ● ● 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 ● 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 ● Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses ● Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future. The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately. September 30, 2017 September 30, 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 Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Other Total non-covered loans Covered loans Commercial loans Construction, development, and other land Single family non-owner occupied Non-farm, non-residential Consumer real estate loans Home equity lines Single family owner occupied Total covered loans Total loans December 31, 2016 Special (Amounts in thousands) Pass Mention Substandard Doubtful Loss Total Non-covered loans Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Other Total non-covered loans Covered loans Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Consumer and other loans Consumer loans Total covered loans Total loans December 31, 2019 Special (Amounts in thousands) Pass Mention Substandard Doubtful Loss Total Non-covered loans Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Other Total non-covered loans Covered loans Commercial loans Construction, development, and other land Single family non-owner occupied Non-farm, non-residential Consumer real estate loans Home equity lines Single family owner occupied Total covered loans Total loans The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed impaired. The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the dates indicated: September 30, 2017 December 31, 2016 September 30, 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 Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Total impaired loans with no allowance Impaired loans with a related allowance Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Farmland Consumer real estate loans Home equity lines Single family owner occupied Consumer and other loans Consumer loans Total impaired loans with an allowance Total impaired loans(1) (1) The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Amounts in thousands) Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Impaired loans with no related allowance: Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Total impaired loans with no related allowance Impaired loans with a related allowance: Commercial loans Construction, development, and other land Commercial and industrial Single family non-owner occupied Non-farm, non-residential Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Total impaired loans with a related allowance Total impaired loans September 30, 2017 December 31, 2016 (Amounts in thousands, except impaired loan pools) Unpaid principal balance Recorded investment Allowance for loan losses related to PCI loan pools Impaired PCI loan pools Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Amounts in thousands) Interest income recognized Average recorded investment Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Average Average Average Average Interest Income Recorded Interest Income Recorded Interest Income Recorded Interest Income Recorded (Amounts in thousands) Recognized Investment Recognized Investment Recognized Investment Recognized Investment Impaired loans with no related allowance: Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Total impaired loans with no related allowance Impaired loans with a related allowance: Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Total impaired loans with a related allowance Total impaired loans 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: September 30, 2017 December 31, 2016 September 30, 2020 December 31, 2019 (Amounts in thousands) Non-covered Covered Total Non-covered Covered Total Non-covered Covered Total Non-covered Covered Total Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Total nonaccrual loans 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. September 30, 2017 September 30, 2020 30 - 59 Days 60 - 89 Days 90+ Days Total Current Total 30 - 59 Days 60 - 89 Days 90+ Days Total Current Total (Amounts in thousands) Past Due Past Due Past Due Past Due Loans Loans Past Due Past Due Past Due Past Due Loans Loans Non-covered loans Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Other Total non-covered loans Covered loans Commercial loans Construction, development, and other land Single family non-owner occupied Non-farm, non-residential Consumer real estate loans Home equity lines Single family owner occupied Total covered loans Total loans December 31, 2016 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 Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Other Total non-covered loans Covered loans Commercial loans Construction, development, and other land Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Total covered loans Total loans 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 Commercial and industrial Multi-family residential Single family non-owner occupied Non-farm, non-residential Agricultural Farmland Consumer real estate loans Home equity lines Single family owner occupied Owner occupied construction Consumer and other loans Consumer loans Other Total non-covered loans Covered loans Commercial loans Construction, development, and other land Single family non-owner occupied Non-farm, non-residential Consumer real estate loans Home equity lines Single family owner occupied Total covered loans Total loans 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 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 September 30, 2020, the Company had modified a total of 3,362 loans with principal balances totaling $426.45 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 September, 30, 2020, current commercial and consumer loan deferrals were $102.54 million and $13.09 million, respectively. The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated: September 30, 2017 December 31, 2016 September 30, 2020 December 31, 2019 (Amounts in thousands) (Amounts in thousands) Nonaccrual(1) Accruing Total Nonaccrual(1) Accruing Total Nonaccrual(1) Accruing Total Nonaccrual(1) Accruing Total Commercial loans Commercial loans Construction, development, and other land Commercial and industrial Single family non-owner occupied Single family non-owner occupied Non-farm, non-residential Non-farm, non-residential Consumer real estate loans Consumer real estate loans Home equity lines Home equity lines Single family owner occupied Single family owner occupied Owner occupied construction Owner occupied construction Consumer and other loans Consumer loans Total TDRs Total TDRs Allowance for loan losses related to TDRs Allowance for loan losses related to TDRs Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above. The following table presents interest income recognized on TDRs for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 2020 2019 2020 2019 (Amounts in thousands) (Amounts in thousands) Interest income recognized Interest income recognized The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods Three Months Ended September 30, 2020 2019 Three Months Ended September 30, Post-modification Post-modification 2017 2016 Total Pre-modification Recorded Total Pre-modification Recorded (Amounts in thousands) Total Contracts Pre-modification Recorded Investment Post-modification Recorded Investment Total Contracts Pre-modification Recorded Investment Post-modification Recorded Investment Contracts Recorded Investment Investment(1) Contracts Recorded Investment Investment(1) Below market interest rate and extended payment term Single family non-owner occupied Single family owner occupied Total below market interest rate and extended payment term Payment deferral Commercial and industrial Non-farm, non-residential Single family owner occupied Total principal deferral Total Nine Months Ended September 30, 2017 2016 (Amounts in thousands) Total Contracts Pre-modification Recorded Investment Post-modification Recorded Investment Total Contracts Pre-modification Recorded Investment Post-modification Recorded Investment Below market interest rate and extended payment term Single family owner occupied Total Represents the loan balance immediately following modification Nine Months Ended September 30, 2020 2019 Post-modification Post-modification Total Pre-modification Recorded Total Pre-modification Recorded (Amounts in thousands) Contracts Recorded Investment Investment(1) Contracts Recorded Investment Investment(1) Below market interest rate Single family non-owner occupied Total below market interest rate Below market interest rate and extended payment term Single family non-owner occupied Total below market interest rate and extended payment term Payment deferral Construction, development, and other land Commercial and industrial Single family non-owner occupied Non-farm, non-residential Single family owner occupied Home equity lines Total principal deferral Total Represents the loan balance immediately following modification Payment defaults on loans modified as TDRs In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement $ 25,879 $ 0 $ 25,879 53,732 0 53,732 263 0 263 438,896 (11,429 ) 427,467 16,722 (2,317 ) 14,405 1,963 0 1,963 25,556 2,250 27,806 0 4,490 4,490 $ 563,011 $ (7,006 ) $ 556,005 $ 155,714 $ 0 $ 155,714 346,028 1,261 347,289 501,742 1,261 503,003 40 0 40 2,938 198 3,136 504,720 1,459 506,179 58,291 (8,465 ) 49,826 0 36,821 36,821 $ 58,291 $ 28,356 $ 86,647 2,792,729 $ 31.02 86,631 16 $ 86,647 11 $ 34,472 $ 36,627 $ 102,955 $ 111,615 $ 8,266 $ 10,225 $ 25,864 $ 33,063 23. Investment Debt Securities $ 36,973 $ - $ (9 ) $ 36,964 1,254 21 - 1,275 $ 576 $ 0 $ (4 ) $ 572 102,347 2,648 (88 ) 104,907 55,036 631 0 55,667 9,363 - (401 ) 8,962 22,518 72 (347 ) 22,243 33,776 999 (42 ) 34,733 55 18 - 73 $ 172,510 $ 2,759 $ (845 ) $ 174,424 $ 89,388 $ 1,630 $ (46 ) $ 90,972 $ 1,342 $ 3 $ - $ 1,345 $ 5,038 $ 0 $ (4 ) $ 5,034 111,659 2,258 (586 ) 113,331 85,992 886 0 86,878 22,104 - (2,165 ) 19,939 31,290 66 (465 ) 30,891 77,448 380 (166 ) 77,662 55 18 - 73 $ 166,450 $ 2,345 $ (3,216 ) $ 165,579 $ 168,478 $ 1,266 $ (170 ) $ 169,574 following tables present the amortized cost and fair value of held-to-maturity securities, including gross unrealized gains and losses, as of the dates indicated: $ 17,949 $ 31 $ - $ 17,980 7,233 13 - 7,246 $ 25,182 $ 44 $ - $ 25,226 $ 36,741 $ 124 $ - $ 36,865 10,392 11 (2 ) 10,401 $ 47,133 $ 135 $ (2 ) $ 47,266 The following table presents the amortized cost and aggregate fair value of available-for-sale securities and held-to-maturitydebt securities by contractual maturity, as of the date indicated. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties. $ 37,288 $ 37,279 $ 0 $ 0 5,617 5,734 28,495 28,749 96,693 98,602 27,117 27,490 10,339 10,493 0 0 149,937 152,108 55,612 56,239 22,518 22,243 33,776 34,733 55 73 $ 172,510 $ 174,424 $ - $ - 25,182 25,226 - - - - $ 25,182 $ 25,226 $ 89,388 $ 90,972 $ 36,963 $ (9 ) $ - $ - $ 36,963 $ (9 ) 9,421 (52 ) 1,427 (36 ) 10,848 (88 ) - - 8,962 (401 ) 8,962 (401 ) $ 0 $ 0 $ 565 $ (4 ) $ 565 $ (4 ) 7,898 (59 ) 8,281 (288 ) 16,179 (347 ) 3,405 (42 ) 0 0 3,405 (42 ) $ 54,282 $ (120 ) $ 18,670 $ (725 ) $ 72,952 $ (845 ) $ 3,405 $ (42 ) $ 565 $ (4 ) $ 3,970 $ (46 ) $ 24,252 $ (527 ) $ 715 $ (59 ) $ 24,967 $ (586 ) - - 19,939 (2,165 ) 19,939 (2,165 ) 12,834 (166 ) 11,851 (299 ) 24,685 (465 ) $ 37,086 $ (693 ) $ 32,505 $ (2,523 ) $ 69,591 $ (3,216 ) $ 975 $ (4 ) $ 0 $ 0 $ 975 $ (4 ) 8,020 (48 ) 8,319 (118 ) 16,339 (166 ) $ 8,995 $ (52 ) $ 8,319 $ (118 ) $ 17,314 $ (170 ) no unrealized losses for held-to-maturity securities as of September 30, 2017. The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the date indicated: $ 3,533 $ (2 ) $ - $ - $ 3,533 $ (2 ) $ 3,533 $ (2 ) $ - $ - $ 3,533 $ (2 ) There were 453 individual debt securities in an unrealized loss position as of September 30, 2017,2020, and theirthe combined depreciation in value represented 0.42%0.05% of the investmentdebt securities portfolio. There were 8217 individual debt securities in an unrealized loss position as of December 31, 2016,2019, and their combined depreciation in value represented 1.51%0.10% of the investmentdebt securities portfolio.both debt and equity securities is a decline in fair value below book value and the severity and duration of the decline. For debt securities, theThe credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the three and nine months ended September 30, 2017,2020 and 2019, the Company incurred no0 OTTI charges on debt securities. During the three and nine months ended September 30, 2016, the Company incurred OTTI charges on debt securities owned 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. For equity securities, the OTTI is recognized as a charge to noninterest income. During the three and nine months ended September 30, 2017, the Company incurred no OTTI charges related to equity securities. During the three months ended September 30, 2016, the Company incurred no OTTI charges related to equity holdings. During the nine months ended September 30, 2016, the Company incurred OTTI charges related to certain equity holdings of $11 thousand. $ - $ 203 $ - $ 344 $ 0 0 $ 419 $ 67 - (178 ) (657 ) (397 ) 0 0 (34 ) (110 ) $ - $ 25 $ (657 ) $ (53 ) $ 0 $ 0 $ 385 $ (43 ) $99.69$36.17 million as of September 30, 2017,2020, and $139.75$27.87 million as of December 31, 2016.2019.34. Loans$1.45$1.67 million as of September 30, 2017,2020, and $1.41$2.20 million as of December 31, 2016.2019. Deferred loan fees, net of loan costs, totaled $4.48$7.47 million as of September 30, 2017,2020, and $5.34$4.60 million as of December 31, 2016.2019. For information about off-balance sheet financing, see Note 14,15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.14loans,loans, net of unearned income, withwithin the non-covered portfolio by loan class, as of the dates indicated: $ 72,952 3.97 % $ 56,948 3.07 % $ 46,785 2.13 % $ 48,659 2.30 % 90,184 4.91 % 92,204 4.98 % 179,714 8.19 % 142,962 6.76 % 125,997 6.86 % 134,228 7.24 % 105,647 4.81 % 121,840 5.76 % 143,213 7.79 % 142,965 7.72 % 189,265 8.62 % 163,181 7.72 % 613,380 33.38 % 598,674 32.31 % 748,815 34.11 % 727,261 34.39 % 6,096 0.33 % 6,003 0.32 % 10,362 0.47 % 11,756 0.56 % 27,897 1.52 % 31,729 1.71 % 22,973 1.05 % 23,155 1.10 % 1,079,719 58.76 % 1,062,751 57.35 % 1,303,561 59.38 % 1,238,814 58.59 % 102,888 5.60 % 106,361 5.74 % 94,056 4.29 % 110,078 5.21 % 501,242 27.27 % 500,891 27.03 % 644,598 29.37 % 620,697 29.35 % 47,034 2.56 % 44,535 2.41 % 17,460 0.79 % 17,241 0.82 % 651,164 35.43 % 651,787 35.18 % 756,114 34.45 % 748,016 35.38 % 70,695 3.85 % 77,445 4.18 % 118,738 5.41 % 110,027 5.20 % 4,856 0.26 % 3,971 0.21 % 5,838 0.27 % 4,742 0.22 % 75,551 4.11 % 81,416 4.39 % 124,576 5.68 % 114,769 5.42 % 1,806,434 98.30 % 1,795,954 96.92 % 2,184,251 99.51 % 2,101,599 99.39 % 31,287 1.70 % 56,994 3.08 % 10,744 0.49 % 12,861 0.61 % $ 1,837,721 100.00 % $ 1,852,948 100.00 % $ 2,194,995 100.00 % $ 2,114,460 100.00 % $ 0 $ 263 $ 40 $ 4,570 $ 27 $ 28 - 895 - 8 292 962 188 199 10 7,512 0 3 - 25 - 397 342 14,369 215 230 26,850 35,817 8,079 9,853 4,095 6,729 2,450 2,778 30,945 42,546 10,529 12,631 - 79 $ 31,287 $ 56,994 $ 10,744 $ 12,861 $ 5,179 $ 8,328 $ 5,576 $ 9,397 $ 0 $ 0 $ 5,071 $ 6,431 14,903 34,420 21,758 45,030 0 0 2,708 14,277 43,527 53,295 53,116 64,096 1,011 1,037 1,095 1,121 0 0 352 378 $ 21,093 $ 43,785 $ 28,429 $ 55,548 $ 43,527 $ 53,295 $ 61,247 $ 85,182 $ 3,589 $ 26,109 $ 29,698 $ 2,590 $ 14,639 $ 0 $ 17,229 (734 ) (2,761 ) 0 (3,495 ) 14 1,200 0 1,214 167 141 0 308 $ 2,037 $ 13,219 $ 0 $ 15,256 $ 1,890 $ 12,574 $ 8,152 $ 22,616 (982 ) (4,408 ) (5,390 ) 0 0 (1,952 ) (1,952 ) 231 848 1,079 0 0 0 0 1,774 4 1,778 (1,890 ) (12,574 ) 0 (14,464 ) $ 4,612 $ 22,553 $ 27,165 $ 4,392 $ 21,834 $ 26,226 (969 ) (4,690 ) (5,659 ) 782 2,525 3,307 (375 ) (311 ) (686 ) $ 3,830 $ 19,358 $ 23,188 $ 0 $ 0 $ 6,200 $ 6,200 45. Credit Quality ●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. management’smanagement’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen. 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. 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. 16 $ 69,257 $ 2,791 $ 904 $ - $ - $ 72,952 $ 35,889 $ 8,419 $ 2,477 $ 0 $ 0 $ 46,785 85,368 1,844 2,972 - - 90,184 153,153 19,369 7,192 0 0 179,714 119,399 5,882 716 - - 125,997 81,528 20,937 3,182 0 0 105,647 132,000 6,839 4,374 - - 143,213 143,235 32,649 13,368 13 0 189,265 593,809 11,126 8,243 202 - 613,380 507,094 201,975 39,746 0 0 748,815 5,743 235 118 - - 6,096 6,804 3,216 342 0 0 10,362 25,097 153 2,647 - - 27,897 13,281 5,139 4,553 0 0 22,973 - 100,375 850 1,663 - - 102,888 89,729 1,317 3,010 0 0 94,056 471,378 5,705 24,159 - - 501,242 607,616 3,815 33,167 0 0 644,598 46,802 - 232 - - 47,034 16,684 202 574 0 0 17,460 - 70,459 27 209 - - 70,695 116,786 197 1,755 0 0 118,738 4,856 - - - - 4,856 5,838 0 0 0 0 5,838 1,724,543 35,452 46,237 202 - 1,806,434 1,777,637 297,235 109,366 13 0 2,184,251 - 39 1 - - 40 0 27 0 0 0 27 271 - 21 - - 292 155 33 0 0 0 188 - - 10 - - 10 - 12,242 13,840 768 - - 26,850 7,365 386 328 0 0 8,079 3,136 425 534 - - 4,095 1,832 269 349 0 0 2,450 15,649 14,304 1,334 - - 31,287 9,352 715 677 0 0 10,744 $ 1,740,192 $ 49,756 $ 47,571 $ 202 $ - $ 1,837,721 $ 1,786,989 $ 297,950 $ 110,043 $ 13 $ 0 $ 2,194,995 17 $ 55,188 $ 980 $ 780 $ - $ - $ 56,948 87,581 3,483 1,137 - 3 92,204 126,468 6,992 768 - - 134,228 131,934 5,466 5,565 - - 142,965 579,134 10,236 9,102 202 - 598,674 5,839 164 - - - 6,003 28,887 1,223 1,619 - - 31,729 104,033 871 1,457 - - 106,361 475,402 4,636 20,381 472 - 500,891 43,833 - 702 - - 44,535 77,218 11 216 - - 77,445 3,971 - - - - 3,971 1,719,488 34,062 41,727 674 3 1,795,954 2,768 803 999 - - 4,570 882 - 13 - - 895 - - 8 - - 8 796 63 103 - - 962 6,423 537 552 - - 7,512 25 - - - - 25 132 - 265 - - 397 14,283 20,763 771 - - 35,817 4,601 928 1,200 - - 6,729 79 - - - - 79 29,989 23,094 3,911 - - 56,994 $ 1,749,477 $ 57,156 $ 45,638 $ 674 $ 3 $ 1,852,948 $ 45,781 $ 2,079 $ 799 $ 0 $ 0 $ 48,659 135,651 4,327 2,984 0 0 142,962 118,045 2,468 1,327 0 0 121,840 149,916 7,489 5,776 0 0 163,181 683,481 27,160 16,620 0 0 727,261 11,299 122 335 0 0 11,756 17,609 4,107 1,439 0 0 23,155 106,246 2,014 1,818 0 0 110,078 580,580 17,001 23,116 0 0 620,697 16,341 179 721 0 0 17,241 108,065 1,341 621 0 0 110,027 4,742 0 0 0 0 4,742 1,977,756 68,287 55,556 0 0 2,101,599 0 28 0 0 0 28 199 0 0 0 0 199 0 0 3 0 0 3 7,177 2,327 349 0 0 9,853 2,111 275 392 0 0 2,778 9,487 2,630 744 0 0 12,861 $ 1,987,243 $ 70,917 $ 56,300 $ 0 $ 0 $ 2,114,460 18 $ 662 $ 999 $ - $ 33 $ 35 $ - $ 869 $ 1,097 $ - $ 552 $ 768 $ - 146 1,093 - 346 383 - 3,242 3,302 - 576 599 - 381 836 - 294 369 - 923 1,009 - 1,254 1,661 - 2,485 3,891 - 3,084 3,334 - 5,011 5,663 - 2,652 3,176 - 3,905 6,239 - 3,829 4,534 - 7,712 8,362 - 4,158 4,762 - 118 122 - - - - 267 275 - 158 164 - 990 1,037 - 1,161 1,188 - 1,517 1,591 - 1,437 1,500 - 1,624 1,766 - 913 968 - 1,540 1,697 - 1,372 1,477 - 16,768 18,932 - 11,779 12,630 - 16,100 18,467 - 15,588 17,835 - 233 233 - 573 589 - 503 511 - 648 648 - 61 63 - 62 103 - 413 424 - 290 294 - 27,373 35,211 - 22,074 24,133 - 38,097 42,398 - 28,685 32,884 - - - - - - - 2,400 2,400 262 - - - 0 0 0 0 0 0 944 1,278 222 0 0 0 771 772 69 351 351 31 0 0 0 0 0 0 865 874 325 - - - 1,779 1,970 565 1,241 1,227 292 410 418 50 430 430 18 0 0 0 0 0 0 - - - - - - 0 0 0 0 0 0 3,771 3,779 754 4,118 4,174 770 1,418 1,522 239 1,246 1,246 353 0 0 0 0 0 0 8,217 8,243 1,460 4,899 4,955 819 4,141 4,770 1,026 2,487 2,473 645 $ 35,590 $ 43,454 $ 1,460 $ 26,973 $ 29,088 $ 819 $ 42,238 $ 47,168 $ 1,026 $ 31,172 $ 35,357 $ 645 (1)IncludesTotal recorded investment of impaired loans include loans totaling $20.07$33.48 million as of September 30, 2017,2020, and $16.89$24.64 million as of December 31, 2016,2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairmentimpairment.19 $ 32 $ 907 $ 22 $ 600 $ 32 $ 309 $ 22 $ 447 5 754 6 1,029 8 468 10 738 - 509 15 562 3 474 15 309 11 3,304 91 3,498 88 3,313 107 3,035 68 5,244 65 8,930 93 3,766 307 10,186 4 127 - - 4 127 - - 17 1,003 5 204 17 1,004 9 186 15 1,683 6 1,157 35 1,259 21 1,318 137 17,478 91 13,175 317 15,209 254 12,436 1 235 2 585 6 234 7 470 1 62 2 63 3 52 2 45 291 31,306 305 29,803 606 26,215 754 29,170 - - - - - 143 - - 50 2,516 - - 103 1,727 - - 8 778 5 682 21 488 18 572 - 872 45 4,658 15 964 215 5,108 - 413 - - - 275 - - - - - - - 139 - - 24 3,814 24 4,130 92 4,527 91 4,547 - - - - - 1 - 115 82 8,393 74 9,470 231 8,264 324 10,342 $ 373 $ 39,699 $ 379 $ 39,273 $ 837 $ 34,479 $ 1,078 $ 39,512 The following tables provide information on impaired PCI loan pools as of and for the dates indicated: $ - $ 1,086 - 1,085 - 12 - 1 $ - $ 12 $ 20 $ 130 - 1,139 705 2,195 $ 6 $ 882 $ 5 $ 570 $ 21 $ 1,021 $ 17 $ 720 46 3,315 2 66 135 2,845 7 277 9 967 5 1,269 38 685 21 1,385 54 5,090 41 2,958 126 4,798 97 3,063 79 7,786 20 4,590 206 7,115 84 4,832 4 272 9 223 7 247 11 108 12 1,526 19 1,536 48 1,640 45 1,474 13 1,588 17 1,463 29 1,569 31 1,452 120 16,328 176 16,593 410 17,044 454 16,123 2 542 3 224 12 470 7 223 8 420 6 319 19 445 10 187 353 38,716 303 29,811 1,051 37,879 784 29,844 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 944 0 0 0 943 0 0 0 0 0 0 0 0 0 0 8 1,789 20 1,254 22 1,670 28 602 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 1,423 (30 ) 1,253 27 1,480 35 2,177 0 0 0 0 0 0 0 0 11 4,156 (10 ) 2,507 49 4,093 63 2,779 $ 364 $ 42,872 $ 293 $ 32,318 $ 1,100 $ 41,972 $ 847 $ 32,623 20 $ 126 $ - $ 126 $ 72 $ 32 $ 104 $ 285 $ 0 $ 285 $ 211 $ 0 $ 211 118 - 118 332 13 345 1,765 0 1,765 530 0 530 330 - 330 294 - 294 1,536 0 1,536 1,144 0 1,144 1,626 20 1,646 1,242 24 1,266 3,289 0 3,289 1,286 0 1,286 3,352 - 3,352 3,295 30 3,325 6,612 0 6,612 3,400 0 3,400 118 - 118 - - - 267 0 267 158 0 158 870 - 870 1,591 - 1,591 814 0 814 713 0 713 828 350 1,178 705 400 1,105 951 313 1,264 753 220 973 11,517 50 11,567 7,924 109 8,033 8,012 20 8,032 7,259 24 7,283 - - - 336 - 336 536 0 536 428 0 428 57 - 57 63 - 63 357 0 357 231 0 231 $ 18,942 $ 420 $ 19,362 $ 15,854 $ 608 $ 16,462 $ 24,424 $ 333 $ 24,757 $ 16,113 $ 244 $ 16,357 21There were no non-coveredNon-covered accruing loans contractually past due 90 days or more totaled $43 thousand as of September 30, 2017, or 2020, compared to $144 thousand as of December 31, 2016.2019. $ 25 $ - $ - $ 25 $ 72,927 $ 72,952 $ - $ - $ 285 $ 285 $ 46,500 $ 46,785 226 36 47 309 89,875 90,184 1,280 163 1,061 2,504 177,210 179,714 341 185 - 526 125,471 125,997 810 334 1,202 2,346 103,301 105,647 405 186 861 1,452 141,761 143,213 842 636 2,255 3,733 185,532 189,265 523 17 2,623 3,163 610,217 613,380 608 1,856 3,619 6,083 742,732 748,815 6 - - 6 6,090 6,096 1 16 84 101 10,261 10,362 849 410 343 1,602 26,295 27,897 125 0 737 862 22,111 22,973 242 105 298 645 102,243 102,888 509 248 443 1,200 92,856 94,056 3,133 1,414 6,199 10,746 490,496 501,242 2,894 1,286 3,533 7,713 636,885 644,598 330 - - 330 46,704 47,034 71 91 394 556 16,904 17,460 360 62 38 460 70,235 70,695 1,679 436 187 2,302 116,436 118,738 - - - - 4,856 4,856 - - - - 5,838 5,838 6,440 2,415 10,409 19,264 1,787,170 1,806,434 8,819 5,066 13,800 27,685 2,156,566 2,184,251 - - - - 40 40 0 0 0 0 27 27 72 - - 72 220 292 0 0 0 0 188 188 - - - - 10 10 0 0 0 0 0 0 291 - 118 409 26,441 26,850 123 0 263 386 7,693 8,079 - - 28 28 4,067 4,095 20 0 0 20 2,430 2,450 363 - 146 509 30,778 31,287 143 0 263 406 10,338 10,744 $ 6,803 $ 2,415 $ 10,555 $ 19,773 $ 1,817,948 $ 1,837,721 $ 8,962 $ 5,066 $ 14,063 $ 28,091 $ 2,166,904 $ 2,194,995 22 $ 33 $ 5 $ 17 $ 55 $ 56,893 $ 56,948 174 30 149 353 91,851 92,204 163 - 281 444 133,784 134,228 1,302 159 835 2,296 140,669 142,965 1,235 332 2,169 3,736 594,938 598,674 - 5 - 5 5,998 6,003 224 343 565 1,132 30,597 31,729 78 136 658 872 105,489 106,361 4,777 2,408 3,311 10,496 490,395 500,891 342 336 - 678 43,857 44,535 371 90 15 476 76,969 77,445 - - - - 3,971 3,971 8,699 3,844 8,000 20,543 1,775,411 1,795,954 434 - 32 466 4,104 4,570 - - - - 895 895 - - - - 8 8 24 - - 24 938 962 32 - - 32 7,480 7,512 - - - - 25 25 - - - - 397 397 108 146 62 316 35,501 35,817 58 - 39 97 6,632 6,729 - - - - - - - - - - 79 79 656 146 133 935 56,059 56,994 $ 9,355 $ 3,990 $ 8,133 $ 21,478 $ 1,831,470 $ 1,852,948 $ 63 $ 65 $ 211 $ 339 $ 48,320 $ 48,659 1,913 238 507 2,658 140,304 142,962 375 0 1,144 1,519 120,321 121,840 754 267 661 1,682 161,499 163,181 917 1,949 3,027 5,893 721,368 727,261 86 164 0 250 11,506 11,756 856 349 664 1,869 21,286 23,155 1,436 165 503 2,104 107,974 110,078 7,728 2,390 3,766 13,884 606,813 620,697 207 0 428 635 16,606 17,241 1,735 439 202 2,376 107,651 110,027 22 0 0 22 4,720 4,742 16,092 6,026 11,113 33,231 2,068,368 2,101,599 0 0 0 0 28 28 0 0 0 0 199 199 0 0 0 0 3 3 144 28 0 172 9,681 9,853 0 50 0 50 2,728 2,778 144 78 0 222 12,639 12,861 $ 16,236 $ 6,104 $ 11,113 $ 33,453 $ 2,081,007 $ 2,114,460 $250$500 thousand are evaluated for a specific reserve based on either the collateral or net present valuecash flow 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 troubledtrouble debt restructurings (“TDRs”("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 September 30, 2017,2020, or December 31, 2016.2019.23 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0 1,342 1,342 0 0 0 $ 33 $ 875 $ 908 $ 38 $ 892 $ 930 538 1,274 1,812 552 595 1,147 - 295 295 - 4,160 4,160 0 2,419 2,419 0 307 307 - 148 148 - 158 158 0 81 81 0 115 115 1,484 6,690 8,174 905 7,503 8,408 1,535 5,573 7,108 1,790 5,305 7,095 - 234 234 341 239 580 0 217 217 0 221 221 0 30 30 0 32 32 $ 1,517 $ 8,242 $ 9,759 $ 1,284 $ 12,952 $ 14,236 $ 2,073 $ 10,936 $ 13,009 $ 2,342 $ 6,575 $ 8,917 $ 707 $ 670 $ 347 $ 353 (1)(1) $ 74 $ 143 $ 159 $ 296 $ 122 $ 56 $ 372 $ 203 indicated. The post-modification recorded investment represents the loan balance immediately following modification.indicated: - - - 0 0 0 1 $ 42 $ 42 - $ - $ - 0 0 0 - - - 0 0 0 0 0 0 - - - 0 0 0 - - - 0 0 0 1 33 29 0 0 0 1 33 29 1 $ 42 $ 42 - $ - $ - 0 $ 0 $ 0 1 $ 33 $ 29 3 $ 141 $ 141 1 $ 115 $ 115 3 $ 141 $ 141 1 $ 115 $ 115 (1)
1 50 50 - $ - $ - 1 50 50 - - - - - - 2 221 218 Single family owner occupied - - - 2 488 480 - - - 4 709 698 1 63 63 - - - 3 1,708 1,708 - - - 1 529 529 - - - 3 2,115 2,115 - - - 3 742 726 1 33 29 - - - 0 0 0 11 5,157 5,141 1 33 29 12 $ 5,207 $ 5,191 5 $ 742 $ 727 (1) There were no paymentthat were restructured within the previous 12 months as of September 30, 2017 or 2016.
The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||||
(Amounts in thousands) | ||||||||||
Non-covered OREO | $ | 3,543 | $ | 5,109 | ||||||
Covered OREO | 54 | 276 | ||||||||
Total OREO | $ | 3,597 | $ | 5,385 | ||||||
Non-covered OREO secured by residential real estate | $ | 971 | $ | 1,746 | ||||||
Residential real estate loans in the foreclosure process(1) | 10,025 | 2,539 |
September 30, 2020 | December 31, 2019 | |||||||
(Amounts in thousands) | ||||||||
OREO | $ | 2,103 | $ | 3,969 | ||||
OREO secured by residential real estate | $ | 767 | $ | 2,232 | ||||
Residential real estate loans in the foreclosure process(1) | 2,938 | 1,539 |
(1) | ||||||
| The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction |
Note 56. Allowance for Loan Losses
The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated:indicated. There was no allowance related to PCI loans as of September 30, 2020.
Three Months Ended September 30, 2017 | ||||||||||||||||
(Amounts in thousands) | Commercial | Consumer Real Estate | Consumer and Other | Total Allowance | ||||||||||||
Allowance, excluding PCI | ||||||||||||||||
Beginning balance | $ | 12,283 | $ | 5,802 | $ | 793 | $ | 18,878 | ||||||||
Provision for loan losses charged to operations | 358 | 75 | 305 | 738 | ||||||||||||
Charge-offs | (207 | ) | (137 | ) | (373 | ) | (717 | ) | ||||||||
Recoveries | 170 | 67 | 70 | 307 | ||||||||||||
Net charge-offs | (37 | ) | (70 | ) | (303 | ) | (410 | ) | ||||||||
Ending balance | $ | 12,604 | $ | 5,807 | $ | 795 | $ | 19,206 | ||||||||
PCI allowance | ||||||||||||||||
Beginning balance | $ | - | $ | 8 | $ | - | $ | 8 | ||||||||
Recovery of loan losses | - | (8 | ) | - | (8 | ) | ||||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | ||||||||||||
Recovery of loan losses charged to operations | - | (8 | ) | - | (8 | ) | ||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | ||||||||||||
Ending balance | $ | - | $ | - | $ | - | $ | - | ||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 12,283 | $ | 5,810 | $ | 793 | $ | 18,886 | ||||||||
Provision for loan losses | 358 | 67 | 305 | 730 | ||||||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | ||||||||||||
Provision for loan losses charged to operations | 358 | 67 | 305 | 730 | ||||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | ||||||||||||
Charge-offs | (207 | ) | (137 | ) | (373 | ) | (717 | ) | ||||||||
Recoveries | 170 | 67 | 70 | 307 | ||||||||||||
Net charge-offs | (37 | ) | (70 | ) | (303 | ) | (410 | ) | ||||||||
Ending balance | $ | 12,604 | $ | 5,807 | $ | 795 | $ | 19,206 |
Three Months Ended September 30, 2020 | ||||||||||||||||
Consumer Real | Consumer and | Total | ||||||||||||||
(Amounts in thousands) | Commercial | Estate | Other | Allowance | ||||||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 13,909 | $ | 7,294 | $ | 2,555 | $ | 23,758 | ||||||||
Provision for (recovery of) loan losses charged to operations | 1,972 | 1,975 | 756 | 4,703 | ||||||||||||
Charge-offs | (501 | ) | (188 | ) | (874 | ) | (1,563 | ) | ||||||||
Recoveries | 169 | 38 | 172 | 379 | ||||||||||||
Net charge-offs | (332 | ) | (150 | ) | (702 | ) | (1,184 | ) | ||||||||
Ending balance | $ | 15,549 | $ | 9,119 | $ | 2,609 | $ | 27,277 |
Three Months Ended September 30, 2019 | ||||||||||||||||
Consumer Real | Consumer and | Total | ||||||||||||||
(Amounts in thousands) | Commercial | Estate | Other | Allowance | ||||||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 10,215 | $ | 6,881 | $ | 1,444 | $ | 18,540 | ||||||||
Provision for (Recovery of) loan losses charged to operations | 203 | (338 | ) | 810 | 675 | |||||||||||
Charge-offs | (159 | ) | (253 | ) | (552 | ) | (964 | ) | ||||||||
Recoveries | 40 | 96 | 106 | 242 | ||||||||||||
Net (charge-offs) recoveries | (119 | ) | (157 | ) | (446 | ) | (722 | ) | ||||||||
Ending balance | $ | 10,299 | $ | 6,386 | $ | 1,808 | $ | 18,493 |
Three Months Ended September 30, 2016 | ||||||||||||||||
(Amounts in thousands) | Commercial | Consumer Real Estate | Consumer and Other | Total Allowance | ||||||||||||
Allowance, excluding PCI | ||||||||||||||||
Beginning balance | $ | 13,689 | $ | 6,625 | $ | 773 | $ | 21,087 | ||||||||
(Recovery of) provision for loan losses charged to operations | (726 | ) | (575 | ) | 147 | (1,154 | ) | |||||||||
Charge-offs | (272 | ) | (207 | ) | (293 | ) | (772 | ) | ||||||||
Recoveries | 295 | 89 | 76 | 460 | ||||||||||||
Net recoveries (charge-offs) | 23 | (118 | ) | (217 | ) | (312 | ) | |||||||||
Ending balance | $ | 12,986 | $ | 5,932 | $ | 703 | $ | 19,621 | ||||||||
PCI allowance | ||||||||||||||||
Beginning balance | $ | - | $ | 12 | $ | - | $ | 12 | ||||||||
Recovery of loan losses | - | - | - | - | ||||||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | ||||||||||||
Recovery of loan losses charged to operations | - | - | - | - | ||||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | ||||||||||||
Ending balance | $ | - | $ | 12 | $ | - | $ | 12 | ||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 13,689 | $ | 6,637 | $ | 773 | $ | 21,099 | ||||||||
(Recovery of) provision for loan losses | (726 | ) | (575 | ) | 147 | (1,154 | ) | |||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | ||||||||||||
(Recovery of) provision for loan losses charged to operations | (726 | ) | (575 | ) | 147 | (1,154 | ) | |||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | ||||||||||||
Charge-offs | (272 | ) | (207 | ) | (293 | ) | (772 | ) | ||||||||
Recoveries | 295 | 89 | 76 | 460 | ||||||||||||
Net recoveries (charge-offs) | 23 | (118 | ) | (217 | ) | (312 | ) | |||||||||
Ending balance | $ | 12,986 | $ | 5,944 | $ | 703 | $ | 19,633 |
Nine Months Ended September 30, 2020 | ||||||||||||||||
Consumer Real | Consumer and | Total | ||||||||||||||
(Amounts in thousands) | Commercial | Estate | Other | Allowance | ||||||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 10,235 | $ | 6,325 | $ | 1,865 | $ | 18,425 | ||||||||
Provision for loan losses charged to operations | 6,577 | 2,899 | 2,558 | 12,034 | ||||||||||||
Charge-offs | (1,647 | ) | (430 | ) | (2,352 | ) | (4,429 | ) | ||||||||
Recoveries | 384 | 325 | 538 | 1,247 | ||||||||||||
Net (charge-offs) recoveries | (1,263 | ) | (105 | ) | (1,814 | ) | (3,182 | ) | ||||||||
Ending balance | $ | 15,549 | $ | 9,119 | $ | 2,609 | $ | 27,277 |
Nine Months Ended September 30, 2019 | ||||||||||||||||
Consumer Real | Consumer and | Total | ||||||||||||||
(Amounts in thousands) | Commercial | Estate | Other | Allowance | ||||||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 10,499 | $ | 6,732 | $ | 1,036 | $ | 18,267 | ||||||||
Provision for loan losses charged to operations | 1,359 | 411 | 1,710 | 3,480 | ||||||||||||
Charge-offs | (2,165 | ) | (1,203 | ) | (1,332 | ) | (4,700 | ) | ||||||||
Recoveries | 606 | 446 | 394 | 1,446 | ||||||||||||
Net (charge-offs) recoveries | (1,559 | ) | (757 | ) | (938 | ) | (3,254 | ) | ||||||||
Ending balance | $ | 10,299 | $ | 6,386 | $ | 1,808 | $ | 18,493 |
Nine Months Ended September 30, 2017 | ||||||||||||||||
(Amounts in thousands) | Commercial | Consumer Real Estate | Consumer and Other | Total Allowance | ||||||||||||
Allowance, excluding PCI | ||||||||||||||||
Beginning balance | $ | 11,690 | $ | 5,487 | $ | 759 | $ | 17,936 | ||||||||
Provision for loan losses charged to operations | 822 | 561 | 785 | 2,168 | ||||||||||||
Charge-offs | (493 | ) | (535 | ) | (948 | ) | (1,976 | ) | ||||||||
Recoveries | 585 | 294 | 199 | 1,078 | ||||||||||||
Net recoveries (charge-offs) | 92 | (241 | ) | (749 | ) | (898 | ) | |||||||||
Ending balance | $ | 12,604 | $ | 5,807 | $ | 795 | $ | 19,206 | ||||||||
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 | 822 | 549 | 785 | 2,156 | ||||||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | ||||||||||||
Provision for loan losses charged to operations | 822 | 549 | 785 | 2,156 | ||||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | ||||||||||||
Charge-offs | (493 | ) | (535 | ) | (948 | ) | (1,976 | ) | ||||||||
Recoveries | 585 | 294 | 199 | 1,078 | ||||||||||||
Net recoveries (charge-offs) | 92 | (241 | ) | (749 | ) | (898 | ) | |||||||||
Ending balance | $ | 12,604 | $ | 5,807 | $ | 795 | $ | 19,206 |
Nine Months Ended September 30, 2016 | ||||||||||||||||
(Amounts in thousands) | Commercial | Consumer Real Estate | Consumer and Other | Total Allowance | ||||||||||||
Allowance, excluding PCI | ||||||||||||||||
Beginning balance | $ | 13,133 | $ | 6,356 | $ | 690 | $ | 20,179 | ||||||||
(Recovery of) provision for loan losses charged to operations | (200 | ) | 436 | 560 | 796 | |||||||||||
Charge-offs | (747 | ) | (1,135 | ) | (809 | ) | (2,691 | ) | ||||||||
Recoveries | 800 | 275 | 262 | 1,337 | ||||||||||||
Net recoveries (charge-offs) | 53 | (860 | ) | (547 | ) | (1,354 | ) | |||||||||
Ending balance | $ | 12,986 | $ | 5,932 | $ | 703 | $ | 19,621 | ||||||||
PCI allowance | ||||||||||||||||
Beginning balance | $ | - | $ | 54 | $ | - | $ | 54 | ||||||||
Recovery of loan losses | - | (42 | ) | - | (42 | ) | ||||||||||
Benefit attributable to the FDIC indemnification asset | - | 1 | - | 1 | ||||||||||||
Recovery of loan losses charged to operations | - | (41 | ) | - | (41 | ) | ||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | (1 | ) | - | (1 | ) | ||||||||||
Ending balance | $ | - | $ | 12 | $ | - | $ | 12 | ||||||||
Total allowance | ||||||||||||||||
Beginning balance | $ | 13,133 | $ | 6,410 | $ | 690 | $ | 20,233 | ||||||||
(Recovery of) provision for loan losses | (200 | ) | 394 | 560 | 754 | |||||||||||
Benefit attributable to the FDIC indemnification asset | - | 1 | - | 1 | ||||||||||||
(Recovery of) provision for loan losses charged to operations | (200 | ) | 395 | 560 | 755 | |||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | (1 | ) | - | (1 | ) | ||||||||||
Charge-offs | (747 | ) | (1,135 | ) | (809 | ) | (2,691 | ) | ||||||||
Recoveries | 800 | 275 | 262 | 1,337 | ||||||||||||
Net recoveries (charge-offs) | 53 | (860 | ) | (547 | ) | (1,354 | ) | |||||||||
Ending balance | $ | 12,986 | $ | 5,944 | $ | 703 | $ | 19,633 |
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:
September 30, 2020 | ||||||||||||||||||||||||||||||||
Loans Individually | Allowance for Loans | Loans Collectively | Allowance for Loans | |||||||||||||||||||||||||||||
September 30, 2017 | Evaluated for | Individually | Evaluated for | Collectively | ||||||||||||||||||||||||||||
(Amounts in thousands) | Loans Individually Evaluated for Impairment | Allowance for Loans Individually Evaluated | Loans Collectively Evaluated for Impairment | Allowance for Loans Collectively Evaluated | Impairment | Evaluated | Impairment | Evaluated | ||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Construction, development, and other land | $ | - | $ | - | $ | 72,293 | $ | 1,099 | $ | 0 | $ | 0 | $ | 45,517 | $ | 630 | ||||||||||||||||
Commercial and industrial | 2,400 | 262 | 87,782 | 478 | 767 | 0 | 177,396 | 1,102 | ||||||||||||||||||||||||
Multi-family residential | 254 | - | 125,743 | 1,133 | 944 | 222 | 103,087 | 1,299 | ||||||||||||||||||||||||
Single family non-owner occupied | 1,103 | 69 | 140,150 | 2,308 | 1,054 | 0 | 183,088 | 1,974 | ||||||||||||||||||||||||
Non-farm, non-residential | 2,561 | 325 | 606,773 | 6,706 | 3,774 | 565 | 726,741 | 9,360 | ||||||||||||||||||||||||
Agricultural | - | - | 6,096 | 44 | 0 | 0 | 10,341 | 174 | ||||||||||||||||||||||||
Farmland | 940 | 50 | 26,957 | 130 | 0 | 0 | 19,940 | 225 | ||||||||||||||||||||||||
Total commercial loans | 7,258 | 706 | 1,065,794 | 11,898 | 6,539 | 787 | 1,266,110 | 14,764 | ||||||||||||||||||||||||
Consumer real estate loans | ||||||||||||||||||||||||||||||||
Home equity lines | - | - | 116,468 | 825 | 0 | 0 | 101,276 | 871 | ||||||||||||||||||||||||
Single family owner occupied | 8,259 | 754 | 496,264 | 3,852 | 2,259 | 239 | 634,021 | 7,815 | ||||||||||||||||||||||||
Owner occupied construction | - | - | 47,034 | 376 | 0 | 0 | 17,460 | 194 | ||||||||||||||||||||||||
Total consumer real estate loans | 8,259 | 754 | 659,766 | 5,053 | 2,259 | 239 | 752,757 | 8,880 | ||||||||||||||||||||||||
Consumer and other loans | ||||||||||||||||||||||||||||||||
Consumer loans | - | - | 70,695 | 795 | 0 | 0 | 117,965 | 2,607 | ||||||||||||||||||||||||
Other | - | - | 4,856 | - | 0 | 0 | 5,838 | 0 | ||||||||||||||||||||||||
Total consumer and other loans | - | - | 75,551 | 795 | 0 | 0 | 123,803 | 2,607 | ||||||||||||||||||||||||
Total loans, excluding PCI loans | $ | 15,517 | $ | 1,460 | $ | 1,801,111 | $ | 17,746 | $ | 8,798 | $ | 1,026 | $ | 2,142,670 | $ | 26,251 |
December 31, 2019 | ||||||||||||||||||||||||||||||||
Loans Individually | Allowance for Loans | Loans Collectively | Allowance for Loans | |||||||||||||||||||||||||||||
December 31, 2016 | Evaluated for | Individually | Evaluated for | Collectively | ||||||||||||||||||||||||||||
(Amounts in thousands) | Loans Individually Evaluated for Impairment | Allowance for Loans Individually Evaluated | Loans Collectively Evaluated for Impairment | Allowance for Loans Collectively Evaluated | Impairment | Evaluated | Impairment | Evaluated | ||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Construction, development, and other land | $ | - | $ | - | $ | 60,281 | $ | 889 | $ | 0 | $ | 0 | $ | 30,334 | $ | 245 | ||||||||||||||||
Commercial and industrial | - | - | 93,099 | 495 | 0 | 0 | 95,659 | 699 | ||||||||||||||||||||||||
Multi-family residential | 281 | - | 133,947 | 1,157 | 944 | 0 | 98,201 | 969 | ||||||||||||||||||||||||
Single family non-owner occupied | 1,910 | 31 | 139,711 | 2,721 | 0 | 0 | 128,520 | 1,323 | ||||||||||||||||||||||||
Non-farm, non-residential | 1,454 | - | 600,915 | 6,185 | 2,575 | 292 | 591,520 | 6,361 | ||||||||||||||||||||||||
Agricultural | - | - | 6,028 | 43 | 0 | 0 | 9,458 | 145 | ||||||||||||||||||||||||
Farmland | 981 | 18 | 31,145 | 151 | 0 | 0 | 16,146 | 201 | ||||||||||||||||||||||||
Total commercial loans | 4,626 | 49 | 1,065,126 | 11,641 | 3,519 | 292 | 969,838 | 9,943 | ||||||||||||||||||||||||
Consumer real estate loans | ||||||||||||||||||||||||||||||||
Home equity lines | - | - | 122,000 | 895 | 0 | 0 | 91,999 | 673 | ||||||||||||||||||||||||
Single family owner occupied | 5,120 | 770 | 501,617 | 3,594 | 3,016 | 353 | 490,712 | 5,175 | ||||||||||||||||||||||||
Owner occupied construction | 336 | - | 44,199 | 228 | 0 | 0 | 16,144 | 124 | ||||||||||||||||||||||||
Total consumer real estate loans | 5,456 | 770 | 667,816 | 4,717 | 3,016 | 353 | 598,855 | 5,972 | ||||||||||||||||||||||||
Consumer and other loans | ||||||||||||||||||||||||||||||||
Consumer loans | - | - | 77,524 | 759 | 0 | 0 | 99,199 | 1,865 | ||||||||||||||||||||||||
Other | - | - | 3,971 | - | 0 | 0 | 4,742 | 0 | ||||||||||||||||||||||||
Total consumer and other loans | - | - | 81,495 | 759 | 0 | 0 | 103,941 | 1,865 | ||||||||||||||||||||||||
Total loans, excluding PCI loans | $ | 10,082 | $ | 819 | $ | 1,814,437 | $ | 17,117 | $ | 6,535 | $ | 645 | $ | 1,672,634 | $ | 17,780 |
The following table presents the recorded investment in PCI loans and the allowance for loan losses on PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated:
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||
Allowance for Loan | Allowance for Loan | ||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | Recorded | Pools With | Recorded | Pools With | ||||||||||||||||||||||||||||
(Amounts in thousands) | (Amounts in thousands) | Recorded Investment | Allowance for Loan Pools With Impairment | Recorded Investment | Allowance for Loan Pools With Impairment | Investment | Impairment | Investment | Impairment | ||||||||||||||||||||||||
Commercial loans | Commercial loans | ||||||||||||||||||||||||||||||||
Waccamaw commercial | Waccamaw commercial | $ | 452 | $ | - | $ | 260 | $ | - | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
Peoples commercial | Peoples commercial | 4,159 | - | 4,491 | - | 0 | 0 | 4,371 | 0 | ||||||||||||||||||||||||
Highlands: | |||||||||||||||||||||||||||||||||
1-4 family, senior-commercial | 5,311 | 0 | 4,564 | 0 | |||||||||||||||||||||||||||||
Construction & land development | 1,295 | 0 | 1,956 | 0 | |||||||||||||||||||||||||||||
Farmland and other agricultural | 3,054 | 0 | 3,722 | 0 | |||||||||||||||||||||||||||||
Multifamily | 1,616 | 0 | 1,663 | 0 | |||||||||||||||||||||||||||||
Commercial real estate | 18,300 | 0 | 21,710 | 0 | |||||||||||||||||||||||||||||
Commercial and industrial | 1,551 | 0 | 2,829 | 0 | |||||||||||||||||||||||||||||
Other | Other | 1,011 | - | 1,095 | - | 0 | 0 | 352 | 0 | ||||||||||||||||||||||||
Total commercial loans | Total commercial loans | 5,622 | - | 5,846 | - | 31,127 | 0 | 41,167 | 0 | ||||||||||||||||||||||||
Consumer real estate loans | Consumer real estate loans | ||||||||||||||||||||||||||||||||
Waccamaw serviced home equity lines | Waccamaw serviced home equity lines | 13,270 | - | 20,178 | - | 0 | 0 | 2,121 | 0 | ||||||||||||||||||||||||
Waccamaw residential | Waccamaw residential | 1,181 | - | 1,320 | - | 0 | 0 | 587 | 0 | ||||||||||||||||||||||||
Highlands: | - | - | - | - | |||||||||||||||||||||||||||||
1-4 family, junior and HELOCS | 859 | 0 | 2,157 | 0 | |||||||||||||||||||||||||||||
1-4 family, senior-consumer | 10,768 | 0 | 13,174 | 0 | |||||||||||||||||||||||||||||
Consumer | 773 | 0 | 1,341 | 0 | |||||||||||||||||||||||||||||
Peoples residential | Peoples residential | 1,020 | - | 1,085 | 12 | 0 | 0 | 700 | 0 | ||||||||||||||||||||||||
Total consumer real estate loans | Total consumer real estate loans | 15,471 | - | 22,583 | 12 | 12,400 | 0 | 20,080 | 0 | ||||||||||||||||||||||||
Total PCI loans | Total PCI loans | $ | 21,093 | $ | - | $ | 28,429 | $ | 12 | $ | 43,527 | $ | 0 | $ | 61,247 | $ | 0 |
Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of September 30, 2017.2020.
Note 67. FDIC Indemnification Asset
In connection with the FDIC-assistedFDIC-assisted acquisition of Waccamaw Bank in 2012, the Company entered into loss share agreements with the FDIC that covered $31.29 million of loans and $54 thousand of OREO as of September 30, 2017, compared to $56.99 million of loans and $276 thousand of OREO as of December 31, 2016. Under the loss share agreements,in which the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to thesethose covered assets. Loss share coverage for commercial loans expired June 30, 2017, for commercial loans, with recoveries continuing until ending June 30, 2019. 2020. Loss share coverage on single family loans will expire June 30, 2022, for single family loans. 2022. The Company’s condensed 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 duringand total covered loans and OREO for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Beginning balance | $ | 8,159 | $ | 16,431 | $ | 12,173 | $ | 20,844 | ||||||||
Decrease in estimated losses on covered loans | - | - | - | (1 | ) | |||||||||||
Increase in estimated losses on covered OREO | 4 | 277 | 71 | 851 | ||||||||||||
Reimbursable expenses from the FDIC | 47 | 60 | 108 | 134 | ||||||||||||
Net amortization | (268 | ) | (1,369 | ) | (3,186 | ) | (3,856 | ) | ||||||||
Reimbursements from the FDIC | (477 | ) | (1,067 | ) | (1,701 | ) | (3,640 | ) | ||||||||
Ending balance | $ | 7,465 | $ | 14,332 | $ | 7,465 | $ | 14,332 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Beginning balance | $ | 1,943 | $ | 4,020 | $ | 2,883 | $ | 5,108 | ||||||||
Reimbursable expenses to the FDIC | 0 | 0 | 0 | 0 | ||||||||||||
Net amortization | (383 | ) | (719 | ) | (1,352 | ) | (1,787 | ) | ||||||||
Payments to the FDIC | 38 | 157 | 67 | 137 | ||||||||||||
Ending balance | $ | 1,598 | $ | 3,458 | $ | 1,598 | $ | 3,458 |
Note 78. Deposits
The following table presents the components of deposits as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2020 | December 31, 2019 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Noninterest-bearing demand deposits | $ | 452,940 | $ | 427,705 | $ | 750,277 | $ | 627,868 | ||||||||
Interest-bearing deposits: | ||||||||||||||||
Interest-bearing demand deposits | 393,244 | 378,339 | 576,731 | 497,470 | ||||||||||||
Money market accounts | 172,266 | 196,997 | 241,843 | 235,712 | ||||||||||||
Savings deposits | 337,934 | 326,263 | 486,506 | 453,240 | ||||||||||||
Certificates of deposit | 381,625 | 382,503 | 307,267 | 372,821 | ||||||||||||
Individual retirement accounts | 125,811 | 129,531 | 129,615 | 142,801 | ||||||||||||
Total interest-bearing deposits | 1,410,880 | 1,413,633 | 1,741,962 | 1,702,044 | ||||||||||||
Total deposits | $ | 1,863,820 | $ | 1,841,338 | $ | 2,492,239 | $ | 2,329,912 |
Note 89. Leases
Operating leases are recorded as a right of use (“ROU”) asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. 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 arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. 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 condensed statements of income.
The Company’s current operating leases relate primarily to bank branches. The Company’s ROU asset was $852 thousand as of September 30, 2020 compared to $917 thousand as of December 31, 2019. The operating lease liability as of September 30, 2020 was $920 compared to $1.01 million as of December 31, 2019. The Company’s total operating leases have remaining terms of 2-9 years; compared with 2-10 years as of December 31, 2019. The September 30, 2020 weighted average discount rate of 3.22% did not change from December 31, 2019.
Future minimum lease payments as of the dates indicated are as follows:
Year | September 30, 2020 | |||
(Amounts in thousands) | ||||
2021 | $ | 154 | ||
2022 | 140 | |||
2023 | 119 | |||
2024 | 119 | |||
2025 and thereafter | 490 | |||
Total lease payments | 1,022 | |||
Less: Interest | (102 | ) | ||
Present value of lease liabilities | $ | 920 |
Year | December 31, 2019 | |||
(Amounts in thousands) | ||||
2020 | $ | 154 | ||
2021 | 154 | |||
2022 | 131 | |||
2023 | 119 | |||
2024 and thereafter | 580 | |||
Total lease payments | 1,138 | |||
Less: Interest | (129 | ) | ||
Present value of lease liabilities | $ | 1,009 |
Note 10. Borrowings
The following table presents the components of borrowings as of the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||||||||||
(Amounts in thousands) | Balance | Weighted Average Rate | Balance | Weighted Average Rate | ||||||||||||
Short-term borrowings | ||||||||||||||||
Retail repurchase agreements | $ | 58,783 | 0.07 | % | $ | 73,005 | 0.07 | % | ||||||||
Long-term borrowings | ||||||||||||||||
Wholesale repurchase agreements | 25,000 | 3.18 | % | 25,000 | 3.18 | % | ||||||||||
Long-term FHLB advances | 50,000 | 4.00 | % | 65,000 | 4.04 | % | ||||||||||
Other borrowings | ||||||||||||||||
Subordinated debt | - | - | 15,464 | 3.65 | % | |||||||||||
Other debt | - | 244 | ||||||||||||||
Total borrowings | $ | 133,783 | $ | 178,713 |
September 30, 2020 | December 31, 2019 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
(Amounts in thousands) | Balance | Average Rate | Balance | Average Rate | ||||||||||||
Retail repurchase agreements | $ | 956 | 0.14 | % | $ | 1,601 | 0.14 | % |
The following schedule presentsRepurchase agreements are secured by certain securities that remain under the contractual and weighted average maturitiesCompany’s control during the terms of long-term borrowings, by year, asthe agreements.
As of September 30, 2017:2020, the Company had no long-term borrowings.
Wholesale Repurchase Agreements | FHLB Borrowings | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
2017 | $ | - | $ | - | $ | - | ||||||
2018 | - | - | - | |||||||||
2019 | 25,000 | - | 25,000 | |||||||||
2020 | - | - | - | |||||||||
2021 | - | 50,000 | 50,000 | |||||||||
2022 and thereafter | - | - | - | |||||||||
Total long-term borrowings | $ | 25,000 | $ | 50,000 | $ | 75,000 | ||||||
Weighted average maturity (in years) | 1.41 | 3.27 | 2.65 |
The FHLB may redeem callable advances at quarterly intervals, which could substantially shorten the advances’ lives. If called, the advance may be paid in full or converted into another FHLB credit product. Prepayment of an advance may result in substantial penalties based on the differential between the contractual note and current advance rate for similar maturities. The Company pledged certain loans to secure FHLB advances and letters of credit totaling $934.90 million as of September 30, 2017. Unused borrowing capacity with the FHLB totaled $446.30$322.82 million, net of FHLB letters of credit of $113.71$169.64 million, as of September 30, 2017. The FHLB letters2020. As of credit provide an attractive alternative to pledging securities for public unit deposits.
Investment securitiesSeptember 30, 2020, the Company pledged $891.45 million in qualifying loans to secure repurchase agreements remain under the Company’s control during the agreements’ terms. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of September 30, 2017:
U.S. Treasury Securities | U.S. Agency Securities | Municipal Securities | Mortgage-backed Agency Securities | Total | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
Overnight and continuous | $ | 5,240 | $ | 12,874 | $ | 37,953 | $ | 2,639 | $ | 58,706 | ||||||||||
Up to 30 days | - | - | - | - | - | |||||||||||||||
30 - 90 days | - | - | - | - | - | |||||||||||||||
Greater than 90 days | 9,000 | 3,400 | - | 12,677 | 25,077 | |||||||||||||||
$ | 14,240 | $ | 16,274 | $ | 37,953 | $ | 15,316 | $ | 83,783 |
The Company issued $15.46 million of junior subordinated debentures (“Debentures”) to FCBI Capital Trust (the “Trust”), an unconsolidated subsidiary, in October 2003 with an interest rate of three-month London InterBank Offered Rate (“LIBOR”) plus 2.95% and a 30-year term ending in October 2033. The Trust purchased the Debentures through the issuance of trust preferred securities, which had substantially identical terms as the Debentures. Net proceeds from the offering were contributed as capital to the Bank to support further growth. During the first quarter of 2017, the Company redeemed all $15.46 million of its trust preferred securities issued through the Trust.FHLB borrowing capacity.
In addition, theThe 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 2018. 2021. There was no0 outstanding balance on the line as of September 30, 2017,2020 or December 31, 2016.2019.
Note 911. Derivative Instruments and Hedging Activities
As of September 30, 2017, the Company’s derivative instruments consisted of interest rate swaps. Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.
The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’sloan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify and are designated as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period.
The Company’s interest rate swap agreements include a ten-year, $1.28 million notional swap entered into in August 2017; a fourteen-year, $1.20 million notional swap entered into in March 2015; and a fifteen-year, $4.37 million notional swap entered into in February 2014. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of September 30, 2017.2020. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:
September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | Notional or | Fair Value | Notional or | Fair Value | |||||||||||||||||||||||||||||||||||||||||||
Notional or | Fair Value | Notional or | Fair Value | Contractual | Derivative | Derivative | Contractual | Derivative | Derivativ | |||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Contractual Amount | Derivative Assets | Derivative Liabilities | Contractual Amount | Derivative Assets | Derivative Liabilities | Amount | Assets | Liabilities | Amount | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 5,892 | $ | - | $ | 151 | $ | 4,835 | $ | - | $ | 167 | $ | 16,889 | $ | 0 | $ | 1,261 | $ | 17,432 | $ | 0 | $ | 510 | ||||||||||||||||||||||||
Total derivatives | $ | 5,892 | $ | - | $ | 151 | $ | 4,835 | $ | - | $ | 167 | $ | 16,889 | $ | 0 | $ | 1,261 | $ | 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:
Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | Income Statement Location | 2020 | 2019 | 2020 | 2019 | Income Statement Location | ||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 23 | $ | 31 | $ | 64 | $ | 86 | Interest and fees on loans | $ | 80 | $ | 1 | $ | 172 | $ | 1 | Interest and fees on loans | ||||||||||||||||
Total derivative expense | $ | 23 | $ | 31 | $ | 64 | $ | 86 | $ | 80 | $ | 1 | $ | 172 | $ | 1 |
Note 102. Employee Benefit Plans
The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’sCompany’s unfunded Benefit Plans include the Supplemental Executive Retention Plan and the Directors’ Supplemental Retirement Plan. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | Income Statement Location | |||||||||||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||||||||||||||
Service cost | $ | 57 | $ | 46 | $ | 173 | $ | 138 | $ | 77 | $ | 80 | $ | 232 | $ | 240 | Salaries and employee benefits | ||||||||||||||||
Interest cost | 93 | 95 | 279 | 286 | 88 | 101 | 266 | 303 | Other expense | ||||||||||||||||||||||||
Amortization of prior service cost | 57 | 57 | 171 | 170 | 51 | 65 | 151 | 193 | Other expense | ||||||||||||||||||||||||
Amortization of losses | 8 | 12 | 23 | 35 | 46 | 5 | 139 | 16 | Other expense | ||||||||||||||||||||||||
Net periodic cost | $ | 215 | $ | 210 | $ | 646 | $ | 629 | $ | 262 | $ | 251 | $ | 788 | $ | 752 |
Note 13. Earnings per Share
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Amounts in thousands, except share and per share data) | ||||||||||||||||
Net income | $ | 8,266 | $ | 9,156 | $ | 24,376 | $ | 29,238 | ||||||||
Weighted average common shares outstanding, basic | 17,710,283 | 15,603,992 | 17,803,369 | 15,717,678 | ||||||||||||
Dilutive effect of potential common shares | ||||||||||||||||
Stock options | 16,163 | 52,360 | 23,711 | 55,898 | ||||||||||||
Restricted stock | 5,982 | 8,235 | 9,883 | 11,908 | ||||||||||||
Total dilutive effect of potential common shares | 22,145 | 60,595 | 33,594 | 67,806 | ||||||||||||
Weighted average common shares outstanding, diluted | 17,732,428 | 15,664,587 | 17,836,963 | 15,785,484 | ||||||||||||
Basic earnings per common share | $ | 0.47 | $ | 0.59 | $ | 1.37 | $ | 1.86 | ||||||||
Diluted earnings per common share | 0.47 | 0.58 | 1.37 | 1.85 | ||||||||||||
Antidilutive potential common shares | ||||||||||||||||
Stock options | 78,016 | 0 | 61,241 | 0 | ||||||||||||
Restricted stock | 26,012 | 0 | 27,874 | 0 | ||||||||||||
Total potential antidilutive shares | 104,028 | 0 | 89,115 | 0 |
Note 114. Accumulated Other Comprehensive Income (Loss)
The following tablestables present the activitychanges in accumulated other comprehensive income (loss) (“AOCI”), net of tax and by component, during the periods indicated:
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
Unrealized Gains | ||||||||||||||||||||||||
Three Months Ended September 30, 2017 | (Losses) on Available- | |||||||||||||||||||||||
Unrealized Gains (Losses) on Available-for-Sale Securities | Employee Benefit Plans | Total | for-Sale Securities | Employee Benefit Plans | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Beginning balance | $ | 1,302 | $ | (1,303 | ) | $ | (1 | ) | $ | 1,464 | $ | (2,572 | ) | $ | (1,108 | ) | ||||||||
Other comprehensive loss before reclassifications | (106 | ) | (1 | ) | (107 | ) | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications | (213 | ) | 1 | (212 | ) | |||||||||||||||||||
Reclassified from AOCI | - | 41 | 41 | 0 | 76 | 76 | ||||||||||||||||||
Other comprehensive (loss) income, net | (106 | ) | 40 | (66 | ) | (213 | ) | 77 | (136 | ) | ||||||||||||||
Ending balance | $ | 1,196 | $ | (1,263 | ) | $ | (67 | ) | $ | 1,251 | $ | (2,495 | ) | $ | (1,244 | ) |
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
Unrealized Gains | ||||||||||||||||||||||||
Three Months Ended September 30, 2016 | (Losses) on Available- | |||||||||||||||||||||||
Unrealized Gains (Losses) on Available-for-Sale Securities | Employee Benefit Plans | Total | for-Sale Securities | Employee Benefit Plans | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Beginning balance | $ | (1,706 | ) | $ | (1,311 | ) | $ | (3,017 | ) | $ | 973 | $ | (1,354 | ) | $ | (381 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 465 | (2 | ) | 463 | 23 | (2 | ) | 21 | ||||||||||||||||
Reclassified from AOCI | 2,881 | 43 | 2,924 | 0 | 55 | 55 | ||||||||||||||||||
Other comprehensive income, net | 3,346 | 41 | 3,387 | 23 | 53 | 76 | ||||||||||||||||||
Ending balance | $ | 1,640 | $ | (1,270 | ) | $ | 370 | $ | 996 | $ | (1,301 | ) | $ | (305 | ) |
Nine Months Ended September 30, 2020 | ||||||||||||
Unrealized Gains | ||||||||||||
(Losses) on Available- | ||||||||||||
for-Sale Securities | Employee Benefit Plans | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
Beginning balance | $ | 866 | $ | (2,372 | ) | $ | (1,506 | ) | ||||
Other comprehensive income (loss) before reclassifications | 689 | (352 | ) | 337 | ||||||||
Reclassified from AOCI | (304 | ) | 229 | (75 | ) | |||||||
Other comprehensive income (loss), net | 385 | (123 | ) | 262 | ||||||||
Ending balance | $ | 1,251 | $ | (2,495 | ) | $ | (1,244 | ) |
Nine Months Ended September 30, 2019 | ||||||||||||
Unrealized Gains | ||||||||||||
(Losses) on Available- | ||||||||||||
for-Sale Securities | Employee Benefit Plans | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
Beginning balance | $ | (285 | ) | $ | (1,144 | ) | $ | (1,429 | ) | |||
Other comprehensive income (loss) | ||||||||||||
before reclassifications | 1,247 | (322 | ) | 925 | ||||||||
Reclassified from AOCI | 34 | 165 | 199 | |||||||||
Other comprehensive income (loss), net | 1,281 | (157 | ) | 1,124 | ||||||||
Ending balance | $ | 996 | $ | (1,301 | ) | $ | (305 | ) |
Nine Months Ended September 30, 2017 | ||||||||||||
Unrealized Gains (Losses) on Available-for-Sale Securities | Employee Benefit Plans | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
Beginning balance | $ | (544 | ) | $ | (1,467 | ) | $ | (2,011 | ) | |||
Other comprehensive income before reclassifications | 1,329 | 83 | 1,412 | |||||||||
Reclassified from AOCI | 411 | 121 | 532 | |||||||||
Other comprehensive income, net | 1,740 | 204 | 1,944 | |||||||||
Ending balance | $ | 1,196 | $ | (1,263 | ) | $ | (67 | ) |
Nine Months Ended September 30, 2016 | ||||||||||||
Unrealized Gains (Losses) on Available-for-Sale Securities | Employee Benefit Plans | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
Beginning balance | $ | (3,885 | ) | $ | (1,362 | ) | $ | (5,247 | ) | |||
Other comprehensive income (loss) before reclassifications | 2,588 | (36 | ) | 2,552 | ||||||||
Reclassified from AOCI | 2,937 | 128 | 3,065 | |||||||||
Other comprehensive income, net | 5,525 | 92 | 5,617 | |||||||||
Ending balance | $ | 1,640 | $ | (1,270 | ) | $ | 370 |
The following table presents reclassifications out of AOCI,, by component, during the periods indicated:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 30, | September 30, | Income Statement | September 30, | September 30, | Income Statement | ||||||||||||||||||||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | Line Item Affected | 2020 | 2019 | 2020 | 2019 | Line Item Affected | |||||||||||||||||||||||||||
Available-for-sale securities | |||||||||||||||||||||||||||||||||||||
Loss (gain) recognized | $ | - | $ | (25 | ) | $ | 657 | $ | 53 | Net gain (loss) on sale of securities | |||||||||||||||||||||||||||
Credit-related OTTI recognized | - | 4,635 | - | 4,646 | Net impairment losses recognized in earnings | ||||||||||||||||||||||||||||||||
Gain recognized | $ | 0 | $ | 0 | $ | (385 | ) | $ | 43 | Net loss on sale of securities | |||||||||||||||||||||||||||
Reclassified out of AOCI, before tax | - | 4,610 | 657 | 4,699 | Income before income taxes | 0 | 0 | (385 | ) | 43 | Income before income taxes | ||||||||||||||||||||||||||
Income tax expense | - | 1,729 | 246 | 1,762 | Income tax expense | 0 | 0 | (81 | ) | 9 | Income tax expense | ||||||||||||||||||||||||||
Reclassified out of AOCI, net of tax | - | 2,881 | 411 | 2,937 | Net income | 0 | 0 | (304 | ) | 34 | Net income | ||||||||||||||||||||||||||
Employee benefit plans | |||||||||||||||||||||||||||||||||||||
Amortization of prior service cost | 57 | 57 | 171 | 170 | (1) | $ | 51 | $ | 65 | $ | 150 | $ | 193 | (1) | |||||||||||||||||||||||
Amortization of net actuarial benefit cost | 8 | 12 | 23 | 35 | (1) | 46 | 5 | 140 | 16 | (1) | |||||||||||||||||||||||||||
Reclassified out of AOCI, before tax | 65 | 69 | 194 | 205 | Income before income taxes | 97 | 70 | 290 | 209 | Income before income taxes | |||||||||||||||||||||||||||
Income tax expense | 24 | 26 | 73 | 77 | Income tax expense | 21 | 15 | 61 | 44 | Income tax expense | |||||||||||||||||||||||||||
Reclassified out of AOCI, net of tax | 41 | 43 | 121 | 128 | Net income | 76 | 55 | 229 | 165 | Net income | |||||||||||||||||||||||||||
Total reclassified out of AOCI, net of tax | $ | 41 | $ | 2,924 | $ | 532 | $ | 3,065 | Net income | $ | 76 | $ | 55 | $ | (75 | ) | $ | 199 | Net income |
| Amortization is included in net periodic pension cost. See Note |
Note 125. Fair Value
Financial Instruments Measured at Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:
● | Level 1– Observable, unadjusted quoted prices in active markets |
● | Level 2– Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability |
● | Level 3– Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions |
The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.
Assets and Liabilities Reported at Fair Value on a Recurring Basis
Available-for-Sale Debt Securities. SecuritiesDebt 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. The Company also uses Level 1 inputs to value equity securities that are traded in active markets. 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, single issue trust preferred securities, corporate securities, mortgage-backedmunicipal securities, and certain equity securities that are not actively traded.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 that are subject to a fair value hedge are reported at fair value using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality.derived from third-party models. Loans related todesignated in fair value hedges are recorded at fair value on a recurring basis.
Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.
The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
September 30, 2017 | September 30, 2020 | |||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 36,964 | $ | - | $ | 36,964 | $ | - | ||||||||||||||||||||||||
Available-for-sale debt securities | ||||||||||||||||||||||||||||||||
U.S. Agency securities | 1,275 | - | 1,275 | - | $ | 572 | $ | 0 | $ | 572 | $ | 0 | ||||||||||||||||||||
Municipal securities | 104,907 | - | 104,907 | - | 55,667 | 0 | 55,667 | 0 | ||||||||||||||||||||||||
Single issue trust preferred securities | 8,962 | - | 8,962 | - | ||||||||||||||||||||||||||||
Mortgage-backed Agency securities | 22,243 | - | 22,243 | - | 34,733 | 0 | 34,733 | 0 | ||||||||||||||||||||||||
Total available-for-sale debt securities | 90,972 | 0 | 90,972 | 0 | ||||||||||||||||||||||||||||
Equity securities | 73 | 55 | 18 | - | 55 | 55 | 0 | 0 | ||||||||||||||||||||||||
Total available-for-sale securities | 174,424 | 55 | 174,369 | - | ||||||||||||||||||||||||||||
Fair value loans | 5,758 | - | 5,758 | - | 15,628 | 0 | 0 | 15,628 | ||||||||||||||||||||||||
Deferred compensation assets | 3,330 | 3,330 | - | - | 3,752 | 3,752 | 0 | 0 | ||||||||||||||||||||||||
Deferred compensation liabilities | 3,330 | 3,330 | - | - | 3,752 | 3,752 | 0 | 0 | ||||||||||||||||||||||||
IRLCs | - | - | - | - | ||||||||||||||||||||||||||||
Derivative liabilities | 151 | - | 151 | - | 1,261 | 0 | 1,261 | 0 |
December 31, 2016 | 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 | $ | 1,345 | $ | - | $ | 1,345 | $ | - | $ | 5,034 | $ | 0 | $ | 5,034 | $ | 0 | ||||||||||||||||
Municipal securities | 113,331 | - | 113,331 | - | 86,878 | 0 | 86,878 | 0 | ||||||||||||||||||||||||
Single issue trust preferred securities | 19,939 | - | 19,939 | - | ||||||||||||||||||||||||||||
Mortgage-backed Agency securities | 30,891 | - | 30,891 | - | 77,662 | 0 | 77,662 | 0 | ||||||||||||||||||||||||
Total available-for-sale debt securities | 169,574 | 0 | 169,574 | 0 | ||||||||||||||||||||||||||||
Equity securities | 73 | 55 | 18 | - | 55 | 55 | 0 | 0 | ||||||||||||||||||||||||
Total available-for-sale securities | 165,579 | 55 | 165,524 | - | ||||||||||||||||||||||||||||
Fair value loans | 4,701 | - | 4,701 | - | 16,922 | 0 | 0 | 16,922 | ||||||||||||||||||||||||
Deferred compensation assets | 3,224 | 3,224 | - | - | 3,990 | 3,990 | 0 | 0 | ||||||||||||||||||||||||
Deferred compensation liabilities | 3,224 | 3,224 | - | - | 3,990 | 3,990 | 0 | 0 | ||||||||||||||||||||||||
Derivative liabilities | 167 | - | 167 | - | 510 | 510 |
No changes in valuation techniques or transfers into or out
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’sCompany’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.
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:
September 30, 2017 | September 30, 2020 | |||||||||||||||||||||||||||||||
Total | Fair Value Measurements Using | Total | Fair Value Measurements Using | |||||||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||
Impaired loans, non-covered | $ | 6,757 | $ | - | $ | - | $ | 6,757 | $ | 3,114 | $ | 0 | $ | 0 | $ | 3,114 | ||||||||||||||||
OREO, non-covered | 2,293 | - | - | 2,293 | ||||||||||||||||||||||||||||
OREO, covered | 54 | - | - | 54 | ||||||||||||||||||||||||||||
OREO | 2,103 | 0 | 0 | 2,103 |
December 31, 2016 | December 31, 2019 | |||||||||||||||||||||||||||||||
Total | Fair Value Measurements Using | Total | Fair Value Measurements Using | |||||||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||
Impaired loans, non-covered | $ | 4,078 | $ | - | $ | - | $ | 4,078 | $ | 1,828 | $ | 0 | $ | 0 | $ | 1,828 | ||||||||||||||||
OREO, non-covered | 5,109 | - | - | 5,109 | ||||||||||||||||||||||||||||
OREO, covered | 265 | - | - | 265 | ||||||||||||||||||||||||||||
OREO | 3,969 | 0 | 0 | 3,969 |
Quantitative Information about Level 3 Fair Value Measurements
The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:
Valuation | Unobservable | Discount Range (Weighted Average) | |||||||||||||||||
Technique | Input | September 30, 2017 | December 31, 2016 | ||||||||||||||||
Impaired loans, non-covered | Discounted appraisals(1) | Appraisal adjustments(2) | 2% | to | 63% | (18%) | 3% | to | 39% | (17%) | |||||||||
OREO, non-covered | Discounted appraisals(1) | Appraisal adjustments(2) | 10% | to | 62% | (28%) | 0% | to | 88% | (30%) | |||||||||
OREO, covered | Discounted appraisals(1) | Appraisal adjustments(2) | 0% | to | 65% | (56%) | 0% | to | 44% | (40%) |
Valuation | Unobservable | Discount Range (Weighted Average) | |||||||||||
Technique | Input | September 30, 2020 | December 31, 2019 | ||||||||||
| Discounted appraisals(1) | Appraisal adjustments(2) | 3% to 42% (25%) | 22% to 36% (26%) | |||||||||
OREO | Discounted appraisals(1) | Appraisal adjustments(2) | 0% to 77% (24%) | 15% to 100% (8%) |
(1) | Fair value is generally based on appraisals of the underlying collateral. | |
| Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments. |
Fair Value of Financial Instruments
The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of valuation methodologies used for instruments not previously discussed is as follows:
Cash and Cash Equivalents. Cash and cash equivalents are reportedfair value is estimated at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.
Held-to-Maturity Securities. Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.
FDIC Indemnification Asset. The FDIC indemnification asset is reported at fair value is estimated using discounted future cash flows that apply current discount rates.
Accrued Interest Receivable/Payable. Accrued interest receivable/payable fair value is reportedestimated at theirits carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.
Deposits and Securities Sold Under Agreements to Repurchase. Deposits without a stated maturity, such as demand, interest-bearing demand, and savings, are reported at their carrying amount, the amount payable on demand as of the reporting date, which is considered a reasonable estimate of fair value. Deposits and repurchase agreements with fixed maturities and rates are reportedestimated at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.
FHLB and Other Borrowings. FHLB and other borrowings are reportedestimated at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities. Trust preferred obligations are reported at fair value using current credit spreads in the market for similar issues.
Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 14,16, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.
The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
September 30, 2017 | September 30, 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 | $ | 105,119 | $ | 105,119 | $ | 105,119 | $ | - | $ | - | $ | 375,664 | $ | 375,664 | $ | 375,664 | $ | 0 | $ | 0 | ||||||||||||||||||||
Securities available for sale | 174,424 | 174,424 | 55 | 174,369 | - | |||||||||||||||||||||||||||||||||||
Securities held to maturity | 25,182 | 25,226 | - | 25,226 | - | |||||||||||||||||||||||||||||||||||
Debt securities available for sale | 90,972 | 90,972 | 0 | 90,972 | 0 | |||||||||||||||||||||||||||||||||||
Equity securities | 55 | 55 | 55 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Loans held for investment, net of allowance | 1,818,515 | 1,792,719 | - | 5,758 | 1,786,961 | 2,167,718 | 2,123,823 | 0 | 0 | 2,123,823 | ||||||||||||||||||||||||||||||
FDIC indemnification asset | 7,465 | 4,548 | - | - | 4,548 | 1,598 | 666 | 0 | 0 | 666 | ||||||||||||||||||||||||||||||
Interest receivable | 5,156 | 5,156 | - | 5,156 | - | 9,151 | 9,151 | 0 | 9,151 | 0 | ||||||||||||||||||||||||||||||
Deferred compensation assets | 3,330 | 3,330 | 3,330 | - | - | 3,752 | 3,752 | 3,752 | 0 | 0 | ||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Demand deposits | 452,940 | 452,940 | - | 452,940 | - | |||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | 393,244 | 393,244 | - | 393,244 | - | |||||||||||||||||||||||||||||||||||
Savings deposits | 510,200 | 510,200 | - | 510,200 | - | |||||||||||||||||||||||||||||||||||
Time deposits | 507,436 | 503,332 | - | 503,332 | - | 436,882 | 440,283 | 0 | 440,283 | 0 | ||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 83,783 | 84,315 | - | 84,315 | - | 956 | 956 | 0 | 956 | 0 | ||||||||||||||||||||||||||||||
Interest payable | 1,085 | 1,085 | - | 1,085 | - | 719 | 719 | 0 | 719 | 0 | ||||||||||||||||||||||||||||||
FHLB and other borrowings | 50,000 | 53,402 | - | 53,402 | - | |||||||||||||||||||||||||||||||||||
Derivative financial liabilities | 151 | 151 | - | 151 | - | 1,261 | 1,261 | 0 | 1,261 | 0 | ||||||||||||||||||||||||||||||
Deferred compensation liabilities | 3,330 | 3,330 | 3,330 | - | - | 3,752 | 3,752 | 3,752 | 0 | 0 |
December 31, 2019 | ||||||||||||||||||||
Carrying | Fair Value Measurements Using | |||||||||||||||||||
(Amounts in thousands) | Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 217,009 | $ | 217,009 | $ | 217,009 | $ | 0 | $ | 0 | ||||||||||
Debt securities available for sale | 169,574 | 169,574 | 0 | 169,574 | 0 | |||||||||||||||
Equity securities | 55 | 55 | 55 | 0 | 0 | |||||||||||||||
Loans held for sale | 263 | 263 | 0 | 0 | 263 | |||||||||||||||
Loans held for investment, net of allowance | 2,096,035 | 2,068,257 | 0 | 0 | 2,068,257 | |||||||||||||||
FDIC indemnification asset | 2,883 | 1,201 | 0 | 0 | 1,201 | |||||||||||||||
Interest receivable | 6,677 | 6,677 | 0 | 6,677 | 0 | |||||||||||||||
Deferred compensation assets | 3,990 | 3,990 | 3,990 | 0 | 0 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Time deposits | 515,622 | 512,134 | 0 | 512,134 | 0 | |||||||||||||||
Securities sold under agreements to repurchase | 1,601 | 1,601 | 0 | 1,601 | 0 | |||||||||||||||
Interest payable | 472 | 472 | 0 | 472 | 0 | |||||||||||||||
Derivative liabilities | 510 | 510 | 0 | 510 | 0 | |||||||||||||||
Deferred compensation liabilities | 3,990 | 3,990 | 3,990 | 0 | 0 |
December 31, 2016 | ||||||||||||||||||||
Carrying | Fair Value Measurements Using | |||||||||||||||||||
(Amounts in thousands) | Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 76,307 | $ | 76,307 | $ | 76,307 | $ | - | $ | - | ||||||||||
Securities available for sale | 165,579 | 165,579 | 55 | 165,524 | - | |||||||||||||||
Securities held to maturity | 47,133 | 47,266 | - | 47,266 | - | |||||||||||||||
Loans held for investment, net of allowance | 1,835,000 | 1,805,999 | - | 4,701 | 1,801,298 | |||||||||||||||
FDIC indemnification asset | 12,173 | 8,112 | - | - | 8,112 | |||||||||||||||
Interest receivable | 5,553 | 5,553 | - | 5,553 | - | |||||||||||||||
Deferred compensation assets | 3,224 | 3,224 | 3,224 | - | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Demand deposits | 427,705 | 427,705 | - | 427,705 | - | |||||||||||||||
Interest-bearing demand deposits | 378,339 | 378,339 | - | 378,339 | - | |||||||||||||||
Savings deposits | 523,260 | 523,260 | - | 523,260 | - | |||||||||||||||
Time deposits | 512,034 | 507,917 | - | 507,917 | - | |||||||||||||||
Securities sold under agreements to repurchase | 98,005 | 98,879 | - | 98,879 | - | |||||||||||||||
Interest payable | 1,280 | 1,280 | - | 1,280 | - | |||||||||||||||
FHLB and other borrowings | 80,708 | 83,551 | - | 83,551 | - | |||||||||||||||
Derivative financial liabilities | 167 | 167 | - | 167 | - | |||||||||||||||
Deferred compensation liabilities | 3,224 | 3,224 | 3,224 | - | - |
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Amounts in thousands, except share and per share data) | ||||||||||||||||
Net income | $ | 7,652 | $ | 6,383 | $ | 20,272 | $ | 18,722 | ||||||||
Dividends on preferred stock | - | - | - | - | ||||||||||||
Net income available to common shareholders | $ | 7,652 | $ | 6,383 | $ | 20,272 | $ | 18,722 | ||||||||
Weighted average common shares outstanding, basic | 17,005,654 | 17,031,074 | 17,005,350 | 17,433,406 | ||||||||||||
Dilutive effect of potential common shares | ||||||||||||||||
Stock options | 49,739 | 38,746 | 50,140 | 31,856 | ||||||||||||
Restricted stock | 27,336 | 13,706 | 21,468 | 9,949 | ||||||||||||
Total dilutive effect of potential common shares | 77,075 | 52,452 | 71,608 | 41,805 | ||||||||||||
Weighted average common shares outstanding, diluted | 17,082,729 | 17,083,526 | 17,076,958 | 17,475,211 | ||||||||||||
Basic earnings per common share | $ | 0.45 | $ | 0.37 | $ | 1.19 | $ | 1.07 | ||||||||
Diluted earnings per common share | 0.45 | 0.37 | 1.19 | 1.07 | ||||||||||||
Antidilutive potential common shares | ||||||||||||||||
Stock options | 71,592 | 127,789 | 75,868 | 127,789 | ||||||||||||
Total potential antidilutive shares | 71,592 | 127,789 | 75,868 | 127,789 |
Note 146. Litigation, Commitments, and Contingencies
Litigation
In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.
Commitments and Contingencies
The Company is a party to financial instruments with off-balance 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-balanceon 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’scustomer’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:
September 30, 2017 | December 31, 2016 | September 30, 2020 | December 31, 2019 | ||||||||||||||
(Amounts in thousands) | (Amounts in thousands) | ||||||||||||||||
Commitments to extend credit | Commitments to extend credit | $ | 245,978 | $ | 261,801 | $ | 219,297 | $ | 228,716 | ||||||||
Standby letters of credit and financial guarantees(1) | Standby letters of credit and financial guarantees(1) | 118,318 | 83,900 | 173,925 | 167,612 | ||||||||||||
Total off-balance sheet risk | Total off-balance sheet risk | 364,296 | 345,701 | $ | 393,222 | $ | 396,328 | ||||||||||
Reserve for unfunded commitments | Reserve for unfunded commitments | $ | 66 | $ | 326 | $ | 66 | $ | 66 |
(1) | |||||
|
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 20162019 (the “2016“2019 Form 10-K”). 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 Bancshares,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 September 30, 2017,2020, the Bank operated 4452 branches as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, as People’s Community Bank, a Division of First Community Bank, in Tennessee. As of September 30, 2020, full-time equivalent employees, calculated using the number of hours worked, totaled 630. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.
The Bank offers commercial and personal insurance services through its wholly owned subsidiary First Community Insurance Services (“FCIS”). Revenues are primarily derived from commissions paid by issuing companies on the sale of policies. As of September 30, 2017, FCIS operated 6 in-branch locations in Virginia and West Virginia. The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“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 investment advisory fees and commissions on assets under management and investment advisory fees.administration. As of September 30, 2017,2020, the Trust Division and FCWM managed $936 millionand administered $1.13 billion in combined assets under various fee-based arrangements as fiduciary or agent.
Our acquisitionRecent Events
In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China, and divestiturequickly spread across most of the earth, including the United States. In March 2020, President Trump declared a National Public Health Emergency. Government responses to the COVID-19 pandemic severely restricted the level of economic activity in the Company’s markets during the nine monthsSpring and early Summer of 2020. While the financial services industry has been designated an essential business in each of the states in which the Company operates, many of the Company’s customers are non-essential businesses, or are employed by non-essential businesses, and have been adversely affected by government shutdowns.
The Company’s business, financial condition, and results of operations generally rely upon the ability of borrowers to repay their loans, the value of collateral underlying secured loans, and demand for loans and other financial products and services. Each of these conditions depends highly on the business environment in the primary markets where the Company operates and in the United States as a whole. The COVID-19 pandemic has, and will continue to have, a significant impact on the Company’s business and operations.
To date, the COVID-19 pandemic has impacted trade, travel, employee productivity, unemployment, consumer spending, and other economic activities which has resulted in less economic activity, lower equity market valuations, significant volatility and disruption in financial markets, which have all adversely affected the Company’s business volume, financial condition and results of operations. However, the impact of the COVID-19 pandemic is fluid and continues to evolve. The ultimate extent to which the COVID-19 pandemic will impact the Company’s business, financial condition, and results of operations is currently uncertain and will depend on various developments, including the duration and scope of the pandemic, governmental, regulatory and private sector responses to the pandemic, the pandemic’s depth of impact on national and local economies, financial market reactions, responses of the Company’s customers, employees and vendors, and other factors.
In order to implement and exercise social distancing, on March 20, 2020, the Company began limiting access to branch lobbies and conducting most business through drive-through tellers and through electronic and online means. To support the health and well-being of employees, a significant amount of the Company's non-customer facing, operational workforce is currently working remotely, and the Company temporarily implemented pay differential for employees not working remotely, which ended when states and localities began their phased re-opening plans. To support and assist loan customers and/or comply with guidance from regulatory authorities, the Company has deferred loan payments for many consumer and commercial customers, suspended residential property foreclosures, evictions, and involuntary automobile repossessions, and is offering fee waivers, payment deferrals, and other extraordinary assistance for automobile, mortgage, small business and personal lending customers. Future regulatory or governmental actions may require these and other types of customer-assistance measures.
In order to help our customers in these unprecedented times, the Company modified or deferred payments on a total of 3,362 loans totaling $426.45 million in principal through September 30, 2017,2020. At September 30, 2020, loans currently in deferral amounted to $115.63 million. Included in the September 30, 2020, amounts are re-deferrals for approximately $69.32 million commercial loans and year endedapproximately $5.09 million in consumer mortgage and installment loans. Deferred interest and fees for these loans will continue to accrue. 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. The accrued interest for these loans total $1.10 million as of September 30, 2020. To date, the Company has not experienced an increase in borrowers drawing on lines of credit. Management currently believes the hotel/motel and retail loan portfolios to be at the greatest risk.
The Company is also participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist both existing customers and non-customers. Through September 30, 2020, the Company processed 803 loans with original principal balances totaling $62.74 million through the SBA’s PPP.
Management and the Board of Directors are closely monitoring the impact of the COVID-19 pandemic on results of operations and financial condition. The Company recorded a provision for loan losses of $12.03 million for the first nine months of 2020 which is significantly higher than in the recent previous periods. Management expects the provisions for loan losses for periods ending after September 30, 2020, to be materially impacted by the COVID-19 pandemic.
Acquisitions and Divestitures
On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands” ) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, 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 was consummated at the close of business December 31, 2016, included2019. The transaction combined two traditional Southwestern Virginia community banks who serve the saleHighlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.
The Highlands transaction was accounted for using the acquisition method of Greenpoint Insurance Agency Inc.accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on October 1, 2016,the acquisition date. Fair values are preliminary and subject to refinement up to a year after the simultaneous saleclosing date of six branches to and purchase of seven branches from First Bank on July 15, 2016.the acquisition.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and conform to general practices within the banking industry. Our financial position and results of operations may require management to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve, or when an asset or liability needs recorded based on the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices, when available, or third-party sources. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.
Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2020, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements in Part II, Item 8 of our 20162019 Form 10-K and our10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 20162019 Form 10-K.
Performance Overview
Highlights of our results of operations for the three and nine months ended September 30, 2017,2020, and financial condition as of September 30, 2017,2020, include the following:
● |
|
● | Current quarter earnings include a loan loss provision of |
● | Despite the significant increase in loan loss provision, return on average assets remained strong at 1.11% for the third quarter and 1.14% for the nine month period. |
|
Results of Operations
Net Income
The following table presents the changes in net income and related information for the periods indicated:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands, except per | September 30, | Increase | September 30, | Increase | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
share data) | 2020 | 2019 | (Decrease) | % Change | 2020 | 2019 | (Decrease) | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Increase |
| September 30, | Increase |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands, except | 2017 | 2016 | (Decrease) | % Change | 2017 | 2016 | (Decrease) | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
per share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | $ | 7,652 | $ | 6,383 | $ | 1,269 | 19.88 | % | $ | 20,272 | $ | 18,722 | $ | 1,550 | 8.28 | % | $ | 8,266 | $ | 9,156 | $ | (890 | ) | -9.72 | % | $ | 24,376 | $ | 29,238 | $ | (4,862 | ) | -16.63 | % | ||||||||||||||||||||||||||||||
Net income available to common shareholders | 7,652 | 6,383 | 1,269 | 19.88 | % | 20,272 | 18,722 | 1,550 | 8.28 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per common share | 0.45 | 0.37 | 0.08 | 21.62 | % | 1.19 | 1.07 | 0.12 | 11.21 | % | 0.47 | 0.59 | (0.12 | ) | -20.34 | % | 1.37 | 1.86 | (0.49 | ) | -26.34 | % | ||||||||||||||||||||||||||||||||||||||||||
Diluted earnings per common share | 0.45 | 0.37 | 0.08 | 21.62 | % | 1.19 | 1.07 | 0.12 | 11.21 | % | 0.47 | 0.58 | (0.11 | ) | -18.97 | % | 1.37 | 1.85 | (0.48 | ) | -25.95 | % | ||||||||||||||||||||||||||||||||||||||||||
Return on average assets | 1.29 | % | 1.03 | % | 0.26 | % | 25.24 | % | 1.14 | % | 1.01 | % | 0.13 | % | 12.87 | % | 1.11 | % | 1.65 | % | -0.54 | % | -32.73 | % | 1.14 | % | 1.76 | % | -0.62 | % | -35.23 | % | ||||||||||||||||||||||||||||||||
Return on average common equity | 8.61 | % | 7.58 | % | 1.03 | % | 13.59 | % | 7.80 | % | 7.40 | % | 0.40 | % | 5.41 | % | 7.83 | % | 10.80 | % | -2.97 | % | -27.50 | % | 7.76 | % | 11.70 | % | -3.94 | % | -33.68 | % |
Three-Month Comparison. Net income increaseddecreased $890 thousand in the third quarter of 20172020 largely due to a decrease in noninterest expense and increases in noninterest and net interest income. These changes were offset by increases$4.03 million increase in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown. Additional decreases resulted from increases in salaries and employee benefits of $1.15 million in 2020 reflective of the addition of Highlands and a one-time litigation settlement of $900 thousand included in the third quarter results from 2019. These decreases were offset by an increase of $4.61 million in net interest income tax.that is reflective of the addition of Highlands in 2020 and $592 thousand in merger expenses recognized in the third quarter of 2019 .
Nine-Month Comparison. Net income increaseddecreased $4.86 million in the first nine months of 20172020 due to a decrease in noninterest expense and an$8.55 million increase in net interest income. These changes were offset by a decrease in noninterest income and increases in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown as noted above. Additional decreases resulted from an increase in salaries and employee benefits of $5.23 million which was reflective of the addition of Highlands as well as expenses arising from the implementation of a pay differential related to COVID-19 which ended May 31, 2020. Also contributing to the decrease, were litigation settlements received of $4.60 million received in 2019. These decreases were offset by an increase of $13.46 million in net interest income tax.that is reflective of the of Highlands acquisition.
Net Interest Income
Net interest income, our largest contributor to earnings, is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. For additional information, see “Non-GAAP Financial Measures” below.
The following tablestables present the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:
Three Months Ended September 30, | |||||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||||
Average | Average Yield/ | Average | Average Yield/ | ||||||||||||||||||||||
(Amounts in thousands) | Balance | Interest(1) | Rate(1) | Balance | Interest(1) | Rate(1) | |||||||||||||||||||
Assets | |||||||||||||||||||||||||
Earning assets | |||||||||||||||||||||||||
Loans(2) | $ | 1,843,612 | $ | 22,765 | 4.90 | % | $ | 1,820,899 | $ | 21,974 | 4.80 | % | |||||||||||||
Securities available for sale | 157,038 | 1,373 | 3.47 | % | 266,162 | 1,941 | 2.90 | % | |||||||||||||||||
Securities held to maturity | 25,199 | 106 | 1.67 | % | 72,210 | 189 | 1.04 | % | |||||||||||||||||
Interest-bearing deposits | 73,802 | 275 | 1.48 | % | 19,025 | 26 | 0.54 | % | |||||||||||||||||
Total earning assets | 2,099,651 | 24,519 | 4.63 | % | 2,178,296 | 24,130 | 4.41 | % | |||||||||||||||||
Other assets | 258,763 | 282,310 | |||||||||||||||||||||||
Total assets | $ | 2,358,414 | $ | 2,460,606 | |||||||||||||||||||||
Liabilities and stockholders' equity | |||||||||||||||||||||||||
Interest-bearing deposits | |||||||||||||||||||||||||
Demand deposits | $ | 384,594 | $ | 89 | 0.09 | % | $ | 337,893 | $ | 60 | 0.07 | % | |||||||||||||
Savings deposits | 518,355 | 43 | 0.03 | % | 523,503 | 62 | 0.05 | % | |||||||||||||||||
Time deposits | 509,251 | 1,143 | 0.89 | % | 529,344 | 1,011 | 0.76 | % | |||||||||||||||||
Total interest-bearing deposits | 1,412,200 | 1,275 | 0.36 | % | 1,390,740 | 1,133 | 0.32 | % | |||||||||||||||||
Borrowings | |||||||||||||||||||||||||
Federal funds purchased | - | - | - | 3,696 | 6 | 0.65 | % | ||||||||||||||||||
Retail repurchase agreements | 58,194 | 10 | 0.07 | % | 64,385 | 12 | 0.07 | % | |||||||||||||||||
Wholesale repurchase agreements | 25,000 | 203 | 3.22 | % | 50,000 | 473 | 3.76 | % | |||||||||||||||||
FHLB advances and other borrowings | 50,000 | 511 | 4.05 | % | 133,838 | 876 | 2.60 | % | |||||||||||||||||
Total borrowings | 133,194 | 724 | 2.16 | % | 251,919 | 1,367 | 2.16 | % | |||||||||||||||||
Total interest-bearing liabilities | 1,545,394 | 1,999 | 0.51 | % | 1,642,659 | 2,500 | 0.61 | % | |||||||||||||||||
Noninterest-bearing demand deposits | 440,227 | 462,588 | |||||||||||||||||||||||
Other liabilities | 20,101 | 20,462 | |||||||||||||||||||||||
Total liabilities | 2,005,722 | 2,125,709 | |||||||||||||||||||||||
Stockholders' equity | 352,692 | 334,897 | |||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,358,414 | $ | 2,460,606 | |||||||||||||||||||||
Net interest income, FTE | $ | 22,520 | $ | 21,630 | |||||||||||||||||||||
Net interest rate spread | 4.12 | % | 3.80 | % | |||||||||||||||||||||
Net interest margin | 4.25 | % | 3.95 | % |
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited) |
Three Months Ended September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Average Yield/ | Average | Average Yield/ | |||||||||||||||||||||
(Amounts in thousands) | Balance | Interest(1) | Rate(1) | Balance | Interest(1) | Rate(1) | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Earning assets | ||||||||||||||||||||||||
Loans(2)(3) | $ | 2,171,023 | $ | 27,331 | 5.01 | % | $ | 1,706,936 | $ | 22,106 | 5.14 | % | ||||||||||||
Securities available for sale | 93,263 | 720 | 3.07 | % | 118,450 | 1,015 | 3.40 | % | ||||||||||||||||
Interest-bearing deposits | 352,144 | 90 | 0.10 | % | 122,891 | 680 | 2.20 | % | ||||||||||||||||
Total earning assets | 2,616,430 | 28,141 | 4.28 | % | 1,948,277 | 23,801 | 4.85 | % | ||||||||||||||||
Other assets | 344,285 | 250,142 | ||||||||||||||||||||||
Total assets | $ | 2,960,715 | $ | 2,198,419 | ||||||||||||||||||||
Liabilities and stockholders' equity | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Demand deposits | $ | 580,165 | $ | 73 | 0.05 | % | $ | 450,650 | $ | 78 | 0.07 | % | ||||||||||||
Savings deposits | 720,657 | 136 | 0.08 | % | 500,600 | 222 | 0.18 | % | ||||||||||||||||
Time deposits | 448,275 | 951 | 0.84 | % | 413,012 | 1,083 | 1.04 | % | ||||||||||||||||
Total interest-bearing deposits | 1,749,097 | 1,160 | 0.26 | % | 1,364,262 | 1,383 | 0.40 | % | ||||||||||||||||
Borrowings | ||||||||||||||||||||||||
Retail repurchase agreements | 969 | 1 | 0.14 | % | 2,107 | 1 | 0.17 | % | ||||||||||||||||
Total borrowings | 969 | 1 | 0.14 | % | 2,107 | 1 | 0.17 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,750,066 | 1,161 | 0.26 | % | 1,366,369 | 1,384 | 0.40 | % | ||||||||||||||||
Noninterest-bearing demand deposits | 754,147 | 466,253 | ||||||||||||||||||||||
Other liabilities | 36,379 | 29,449 | ||||||||||||||||||||||
Total liabilities | 2,540,592 | 1,862,071 | ||||||||||||||||||||||
Stockholders' equity | 420,123 | 336,348 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,960,715 | $ | 2,198,419 | ||||||||||||||||||||
Net interest income, FTE(1) | $ | 26,980 | $ | 22,417 | ||||||||||||||||||||
Net interest rate spread | 4.02 | % | 4.44 | % | ||||||||||||||||||||
Net interest margin, FTE(1) | 4.10 | % | 4.56 | % |
(1) |
|
(2) | Nonaccrual loans are included in the average |
(3) | Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.77 million and $566 thousand for the three months ended September 30, 2020 and 2019, respectively. |
Nine Months Ended September 30, | |||||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||||
Average | Average Yield/ | Average | Average Yield/ | ||||||||||||||||||||||
(Amounts in thousands) | Balance | Interest(1) | Rate(1) | Balance | Interest(1) | Rate(1) | |||||||||||||||||||
Assets | |||||||||||||||||||||||||
Earning assets | |||||||||||||||||||||||||
Loans(2) | $ | 1,841,981 | $ | 67,645 | 4.91 | % | $ | 1,775,744 | $ | 65,836 | 4.95 | % | |||||||||||||
Securities available for sale | 162,198 | 4,312 | 3.55 | % | 318,891 | 6,403 | 2.68 | % | |||||||||||||||||
Securities held to maturity | 35,578 | 382 | 1.44 | % | 72,350 | 575 | 1.06 | % | |||||||||||||||||
Interest-bearing deposits | 66,069 | 655 | 1.33 | % | 13,288 | 55 | 0.55 | % | |||||||||||||||||
Total earning assets | 2,105,826 | 72,994 | 4.63 | % | 2,180,273 | 72,869 | 4.47 | % | |||||||||||||||||
Other assets | 264,333 | 287,784 | |||||||||||||||||||||||
Total assets | $ | 2,370,159 | $ | 2,468,057 | |||||||||||||||||||||
Liabilities and stockholders' equity | |||||||||||||||||||||||||
Interest-bearing deposits | |||||||||||||||||||||||||
Demand deposits | $ | 384,265 | $ | 301 | 0.10 | % | $ | 339,920 | $ | 177 | 0.07 | % | |||||||||||||
Savings deposits | 523,219 | 114 | 0.03 | % | 533,799 | 191 | 0.05 | % | |||||||||||||||||
Time deposits | 513,072 | 3,259 | 0.85 | % | 527,056 | 2,966 | 0.75 | % | |||||||||||||||||
Total interest-bearing deposits | 1,420,556 | 3,674 | 0.35 | % | 1,400,775 | 3,334 | 0.32 | % | |||||||||||||||||
Borrowings | |||||||||||||||||||||||||
Federal funds purchased | 2 | - | 0.00 | % | 5,393 | 26 | 0.64 | % | |||||||||||||||||
Retail repurchase agreements | 61,951 | 31 | 0.07 | % | 69,347 | 37 | 0.07 | % | |||||||||||||||||
Wholesale repurchase agreements | 25,000 | 602 | 3.22 | % | 50,000 | 1,410 | 3.77 | % | |||||||||||||||||
FHLB advances and other borrowings | 57,357 | 1,754 | 4.09 | % | 124,803 | 2,578 | 2.76 | % | |||||||||||||||||
Total borrowings | 144,310 | 2,387 | 2.21 | % | 249,543 | 4,051 | 2.17 | % | |||||||||||||||||
Total interest-bearing liabilities | 1,564,866 | 6,061 | 0.52 | % | 1,650,318 | 7,385 | 0.60 | % | |||||||||||||||||
Noninterest-bearing demand deposits | 435,825 | 457,250 | |||||||||||||||||||||||
Other liabilities | 21,905 | 22,581 | |||||||||||||||||||||||
Total liabilities | 2,022,596 | 2,130,149 | |||||||||||||||||||||||
Stockholders' equity | 347,563 | 337,908 | |||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,370,159 | $ | 2,468,057 | |||||||||||||||||||||
Net interest income, FTE | $ | 66,933 | $ | 65,484 | |||||||||||||||||||||
Net interest rate spread | 4.11 | % | 3.87 | % | |||||||||||||||||||||
Net interest margin | 4.25 | % | 4.01 | % |
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited) |
Nine Months Ended September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Average Yield/ | Average | Average Yield/ | |||||||||||||||||||||
(Amounts in thousands) | Balance | Interest(1) | Rate(1) | Balance | Interest(1) | Rate(1) | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Earning assets | ||||||||||||||||||||||||
Loans(2)(3) | $ | 2,127,383 | $ | 82,476 | 5.18 | % | $ | 1,730,940 | $ | 67,114 | 5.18 | % | ||||||||||||
Securities available for sale | 110,852 | 2,619 | 3.16 | % | 130,029 | 3,314 | 3.41 | % | ||||||||||||||||
Securities held to maturity | - | - | - | 4,071 | 45 | 1.48 | % | |||||||||||||||||
Interest-bearing deposits | 270,106 | 706 | 0.34 | % | 101,364 | 1,784 | 2.34 | % | ||||||||||||||||
Total earning assets | 2,508,341 | 85,801 | 4.57 | % | 1,966,404 | 72,257 | 4.91 | % | ||||||||||||||||
Other assets | 351,589 | 248,801 | ||||||||||||||||||||||
Total assets | $ | 2,859,930 | $ | 2,215,205 | ||||||||||||||||||||
Liabilities and stockholders' equity | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Demand deposits | $ | 543,539 | $ | 261 | 0.06 | % | $ | 450,653 | $ | 192 | 0.06 | % | ||||||||||||
Savings deposits | 702,604 | 790 | 0.15 | % | 502,241 | 589 | 0.16 | % | ||||||||||||||||
Time deposits | 466,126 | 3,380 | 0.97 | % | 426,885 | 3,299 | 1.03 | % | ||||||||||||||||
Total interest-bearing deposits | 1,712,269 | 4,431 | 0.35 | % | 1,379,779 | 4,080 | 0.40 | % | ||||||||||||||||
Borrowings | ||||||||||||||||||||||||
Retail repurchase agreements | 1,218 | 3 | 0.32 | % | 2,792 | 3 | 0.13 | % | ||||||||||||||||
Wholesale repurchase agreements | - | - | - | 5,037 | 119 | 3.17 | % | |||||||||||||||||
FHLB advances and other borrowings | 48 | 1 | 2.23 | % | - | - | - | |||||||||||||||||
Total borrowings | 1,266 | 4 | 0.42 | % | 7,829 | 122 | 2.08 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,713,535 | 4,435 | 0.35 | % | 1,387,608 | 4,202 | 0.40 | % | ||||||||||||||||
Noninterest-bearing demand deposits | 688,891 | 464,958 | ||||||||||||||||||||||
Other liabilities | 38,001 | 28,651 | ||||||||||||||||||||||
Total liabilities | 2,440,427 | 1,881,217 | ||||||||||||||||||||||
Stockholders' equity | 419,503 | 333,988 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,859,930 | $ | 2,215,205 | ||||||||||||||||||||
Net interest income, FTE(1) | $ | 81,366 | $ | 68,055 | ||||||||||||||||||||
Net interest rate spread | 4.22 | % | 4.51 | % | ||||||||||||||||||||
Net interest margin, FTE(1) | 4.33 | % | 4.63 | % |
(1) |
|
(2) | Nonaccrual loans are included in the average |
(3) | Interest on loans includes non-cash purchase accounting accretion of $5.22 million and $2.72 million for the nine months ended September 30, 2020 and 2019, respectively. |
The following table presents the impact to net interest income on a FTE basis due to changes in volume (average(change in average volume times the prior year’syear’s average rate), rate (average rate times the prior year’s average volume), and rate/volume (average volume times the change in average rate), for the periods indicated:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 Compared to 2016 | September 30, 2017 Compared to 2016 | September 30, 2020 Compared to 2019 | September 30, 2020 Compared to 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 816 | $ | 1,336 | $ | (1,361 | ) | $ | 791 | $ | 2,456 | $ | (563 | ) | $ | (84 | ) | $ | 1,809 | $ | 5,994 | $ | (557 | ) | $ | (212 | ) | $ | 5,225 | $ | 15,371 | $ | (23 | ) | $ | 14 | $ | 15,362 | ||||||||||||||||||||||||||
Securities available-for-sale | (2,368 | ) | 1,130 | 670 | (568 | ) | (3,146 | ) | 2,081 | (1,026 | ) | (2,091 | ) | (215 | ) | (98 | ) | 18 | (295 | ) | (489 | ) | (82 | ) | (124 | ) | (695 | ) | ||||||||||||||||||||||||||||||||||||
Securities held-to-maturity | (366 | ) | 339 | (56 | ) | (83 | ) | (292 | ) | 202 | (103 | ) | (193 | ) | - | - | - | - | (45 | ) | - | - | (45 | ) | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits with other banks | 223 | 133 | (107 | ) | 249 | 218 | 77 | 305 | 600 | 1,265 | (647 | ) | (1,208 | ) | (590 | ) | 2,957 | (511 | ) | (3,524 | ) | (1,078 | ) | |||||||||||||||||||||||||||||||||||||||||
Total interest earning assets | (1,695 | ) | 2,938 | (854 | ) | 389 | (764 | ) | 1,797 | (908 | ) | 125 | 7,044 | (1,302 | ) | (1,402 | ) | 4,340 | 17,794 | (616 | ) | (3,634 | ) | 13,544 | ||||||||||||||||||||||||||||||||||||||||
Interest paid on | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 25 | 53 | (49 | ) | 29 | 23 | 89 | 12 | 124 | 22 | (21 | ) | (6 | ) | (5 | ) | 40 | 8 | 21 | 69 | ||||||||||||||||||||||||||||||||||||||||||||
Savings deposits | (2 | ) | (56 | ) | 39 | (19 | ) | (4 | ) | (75 | ) | 2 | (77 | ) | 97 | (127 | ) | (56 | ) | (86 | ) | 235 | (8 | ) | (26 | ) | 201 | |||||||||||||||||||||||||||||||||||||
Time deposits | (114 | ) | 517 | (271 | ) | 132 | (79 | ) | 385 | (13 | ) | 293 | 92 | (204 | ) | (20 | ) | (132 | ) | 303 | (69 | ) | (153 | ) | 81 | |||||||||||||||||||||||||||||||||||||||
Federal funds purchased | (18 | ) | (18 | ) | 30 | (6 | ) | (26 | ) | - | - | (26 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Retail repurchase agreements | (3 | ) | (3 | ) | 4 | (2 | ) | (4 | ) | (2 | ) | - | (6 | ) | - | - | - | - | (2 | ) | 1 | 1 | - | |||||||||||||||||||||||||||||||||||||||||
Wholesale repurchase agreements | (704 | ) | (203 | ) | 637 | (270 | ) | (705 | ) | (205 | ) | 102 | (808 | ) | - | - | - | - | (119 | ) | - | - | (119 | ) | ||||||||||||||||||||||||||||||||||||||||
FHLB advances and other borrowings | (1,633 | ) | 1,452 | (184 | ) | (365 | ) | (1,393 | ) | 1,241 | (672 | ) | (824 | ) | - | - | - | - | - | - | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | (2,449 | ) | 1,742 | 206 | (501 | ) | (2,188 | ) | 1,433 | (569 | ) | (1,324 | ) | 211 | (352 | ) | (82 | ) | (223 | ) | 457 | (68 | ) | (156 | ) | 233 | ||||||||||||||||||||||||||||||||||||||
Change in net interest income(1) | $ | 754 | $ | 1,196 | $ | (1,060 | ) | $ | 890 | $ | 1,424 | $ | 364 | $ | (339 | ) | $ | 1,449 | $ | 6,833 | $ | (950 | ) | $ | (1,320 | ) | $ | 4,563 | $ | 17,337 | $ | (548 | ) | $ | (3,478 | ) | $ | 13,311 |
(1) | FTE basis based on the federal statutory rate of | ||||||||||||||||
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The following tables present the net interest analysis on a FTE basis excluding the impact of non-cash purchase accounting accretion from acquired loan portfolios for the periods indicated:
Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(Amounts in thousands) | Interest(1) | Average Yield/ Rate(1) | Interest(1) | Average Yield/ Rate(1) | ||||||||||||
Earning assets | ||||||||||||||||
Loans(2) | $ | 22,765 | 4.90 | % | $ | 21,974 | 4.80 | % | ||||||||
Accretion income | 1,925 | 1,683 | ||||||||||||||
Less: cash accretion income | 548 | 699 | ||||||||||||||
Non-cash accretion income | 1,377 | 984 | ||||||||||||||
Loans, normalized(3) | 21,388 | 4.60 | % | 20,990 | 4.59 | % | ||||||||||
Other earning assets | 1,754 | 2.72 | % | 2,156 | 2.40 | % | ||||||||||
Total earning assets | 23,142 | 4.37 | % | 23,146 | 4.23 | % | ||||||||||
Total interest-bearing liabilities | 1,999 | 0.51 | % | 2,500 | 0.61 | % | ||||||||||
Net interest income, FTE(3) | $ | 21,143 | $ | 20,646 | ||||||||||||
Net interest rate spread, normalized(3) | 3.86 | % | 3.62 | % | ||||||||||||
Net interest margin, normalized(3) | 4.00 | % | 3.77 | % |
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Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(Amounts in thousands) | Interest(1) | Average Yield/ Rate(1) | Interest(1) | Average Yield/ Rate(1) | ||||||||||||
Earning assets | ||||||||||||||||
Loans(2) | $ | 67,645 | 4.91 | % | $ | 65,836 | 4.95 | % | ||||||||
Accretion income | 6,243 | 6,183 | ||||||||||||||
Less: cash accretion income | 1,986 | 2,290 | ||||||||||||||
Non-cash accretion income | 4,257 | 3,893 | ||||||||||||||
Loans, normalized(3) | 63,388 | 4.60 | % | 61,943 | 4.66 | % | ||||||||||
Other earning assets | 5,349 | 2.71 | % | 7,033 | 2.32 | % | ||||||||||
Total earning assets | 68,737 | 4.36 | % | 68,976 | 4.23 | % | ||||||||||
Total interest-bearing liabilities | 6,061 | 0.52 | % | 7,385 | 0.60 | % | ||||||||||
Net interest income, FTE(3) | $ | 62,676 | $ | 61,591 | ||||||||||||
Net interest rate spread, normalized(3) | 3.84 | % | 3.63 | % | ||||||||||||
Net interest margin, normalized(3) | 3.98 | % | 3.77 | % |
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Three-Month Comparison. Net interest income comprised 75.55%77.84% of total net interest and noninterest income in the third quarter of 20172020 compared to 78.18%74.43% in the same quarter of 2016.2019. Net interest income on a GAAP basis increased $929 thousand,$4.61 million, or 4.40%20.76%, and net interest income on a FTE basis increased $890 thousand, or 4.11%. Normalized net interest income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans. For additional information, see “Non-GAAP Financial Measures” below. Normalized net interest margin increased 23 basis points compared to an increase of 30 basis points$4.56 million, or 20.36%, on a FTE basis. NormalizedThe net interest margin on a FTE basis decreased 46 basis points and the net interest spread increased 24 basis points compared to an increase of 32 basis points on a FTE basis.basis decreased 42 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.
Average earning assets decreased $78.65increased $668.15 million, or 3.61%34.29%, primarily due to a decreasean increase in investment securities offset byaverage loans as well as an increase in interest-bearing deposits. Average loans increased $464.09 million which was primarily due to the addition of Highlands. The yield on earning assets decreased 57 basis points or 11.75%, primarily due to the historically low rate environment. The average loan growthto deposit ratio decreased to 86.73% from 93.25% in the same quarter of 2019. Non-cash accretion income increased $1.20 million, or 211.84%, due to the addition of loans from the Highlands acquisition.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $383.70 million, or 28.08%, primarily due to an increase in interest-bearing deposits. The normalized yield on earning assets increasedinterest-bearing liabilities decreased 14 basis pointspoints. Average interest-bearing deposits increased $384.84 million, or 28.21%, which was driven by the December 31, 2019 Highlands acquisition with increases in average savings deposits of $220.06 million, or 43.96%, interest-bearing demand of $129.52 million, or 28.74%, and time deposits of $35.26 million, or 8.54%
Nine-Month Comparison. Net interest income comprised 78.53% of total net interest and noninterest income for the first nine months of 2020 compared to 73.45% in the same period of 2019. Net interest income on a GAAP basis increased $13.46 million, or 19.97%, compared to an increase of 22$13.31 million, or 19.56%, on a FTE basis. The net interest margin on a FTE basis decreased 30 basis points and the net interest spread on a GAAP basis.FTE basis decreased 29 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the historically low rate environment experienced over the past nine months.
Average earning assets increased $541.94 million, or 27.56%, primarily due to an increase in loans and overnight funds sold. The yield on earning assets decreased 34 basis points as the yields in interest-bearing deposits and the available-for-sale investment portfolio decreased. Average loans increased $22.71$396.44 million, or 1.25%22.90%, and the average loan to deposit ratio increaseddecreased to 99.52%88.60% from 98.25%. The normalized yield on loans increased 1 basis point compared to an increase93.83% in the same period of 10 basis points on a GAAP basis.2019. Non-cash accretion income increased $393 thousand,$2.50 million, or 39.94%.91.98%, due to the addition of loans from the Highlands acquisition.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $97.27increased $325.93 million, or 5.92%23.49%, primarily due to a declinean increase in average borrowings.interest-bearing deposits. The yield on interest-bearing liabilities decreased 105 basis points largely driven by a decrease in the average balance of borrowings.or 12.50%. Average borrowings decreased $118.73$6.56 million, or 47.13%83.83%, largely due to an $83.84 million, or 62.64%, decrease in average FHLB advances and other borrowings, a $25.00 million, or 50.00%, decrease in average wholesale repurchase agreements of $5.04 million. The decrease resulted from the payoff of a $6.19$25 million or 9.62%, decreasewholesale repurchase agreement in average retail repurchase agreements, and a $3.70 million decrease in average federal funds purchased.the first quarter of 2019. Average interest-bearing deposits increased $21.46$332.49 million, or 1.54%24.10%, which was driven by a $46.70the December 2019 acquisition of Highlands, resulting in increases of $200.36 million or 13.82%, increase in averagesavings, $92.89 million in interest-bearing demand, deposits offset by a $20.09and $39.24 million or 3.80%, decrease in average time deposits, and a $5.15 million, or 0.98%, decrease in average savings deposits, which include money market and savings accounts.deposits.
Nine-Month Comparison. Net interest income comprised 78.16% of total net interest and noninterest income in the first nine months of 2017 compared to 75.42% in the same period of 2016. Net interest income on a GAAP basis increased $1.56 million, or 2.44%, and net interest income on a FTE basis increased $1.45 million, or 2.21%. Normalized net interest margin increased 21 basis points compared to an increase of 24 basis points on a FTE basis. Normalized net interest spread increased 21 basis points compared to an increase of 24 basis points on a FTE basis.
Average earning assets decreased $74.45 million, or 3.41%, primarily due to a decrease in investment offset by loan growth and an increase in interest-bearing deposits. The normalized yield on earning assets increased 13 basis points compared to an increase of 16 basis points on a GAAP basis. Average loans increased $66.24 million, or 3.73%, and the average loan to deposit ratio increased to 99.22% from 95.57%. The normalized yield on loans decreased 6 basis points compared to a decrease of 4 basis points on a GAAP basis. Non-cash accretion income increased $364 thousand, or 9.35%, as the effect of accretion income continued to decline from acquired portfolio attrition.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $85.45 million, or 5.18%, 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 $105.23 million, or 42.17%, largely due to a $67.45 million, or 54.04%, decrease in average FHLB advances and other borrowings, a $25.00 million, or 50.00%, decrease in average wholesale repurchase agreements, a $7.40 million, or 10.67%, decrease in average retail repurchase agreements, and a $5.39 million, or 99.96%, decrease in average federal funds purchased. Average interest-bearing deposits increased $19.78 million, or 1.41%, which was driven by a $44.35 million, or 13.05%, increase in average interest-bearing demand deposits offset by a $13.98 million, or 2.65%, decrease in average time deposits, and a $10.58 million, or 1.98%, decrease in average savings deposits, which include money market and savings accounts.
Provision for Loan Losses
Three-Month Comparison. The provision charged to operations increased $1.88$4.03 million, or 596.74%, to $730 thousand$4.70 million in the third quarter of 20172020 compared to a recovery of $1.15 million in the same quarter of 2016, which2019. The increase in the provision was attributedprimarily due to the reversalimpact of $1.35 million in loan loss provisions related to loans divested in the First Bank transaction during the third quarter of 2016.coronavirus slowdown. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.
Nine-Month Comparison. The provision charged to operations increased $1.40$8.55 million, or 245.80%, to $2.16$12.03 million infor the first nine months of 20172020 compared to the same period of 2016, which was attributed2019. The provision net of year to date net charge-offs of $3.18 million had the reversaleffect of $1.35 million inincreasing loan loss provisions related to loans divestedreserves $8.85 million. For additional information, see “Allowance for Loan Losses” in the First Bank transaction during the third quarter of 2016.“Financial Condition” section below.
Noninterest Income
The following table presents the components of, and changes in, noninterest income for the periods indicated:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Increase | September 30, | Increase | September 30, | Increase | % | September 30, | Increase | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | (Decrease) | % Change | 2017 | 2016 | (Decrease) | % Change | 2020 | 2019 | (Decrease) | Change | 2020 | 2019 | (Decrease) | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Wealth management | $ | 758 | $ | 653 | $ | 105 | 16.08 | % | $ | 2,339 | $ | 2,147 | $ | 192 | 8.94 | % | $ | 909 | $ | 952 | $ | (43 | ) | -4.52 | % | $ | 2,607 | $ | 2,581 | $ | 26 | 1.01 | % | |||||||||||||||||||||||||||||||
Service charges on deposits | 3,605 | 3,494 | 111 | 3.18 | % | 10,078 | 10,146 | (68 | ) | -0.67 | % | 3,250 | 3,785 | (535 | ) | -14.13 | % | 9,541 | 10,892 | (1,351 | ) | -12.40 | % | |||||||||||||||||||||||||||||||||||||||||
Other service charges and fees | 2,141 | 2,024 | 117 | 5.78 | % | 6,387 | 6,088 | �� | 299 | 4.91 | % | 2,748 | 2,007 | 741 | 36.92 | % | 7,596 | 6,185 | 1,411 | 22.81 | % | |||||||||||||||||||||||||||||||||||||||||||
Insurance commissions | 306 | 1,592 | (1,286 | ) | -80.78 | % | 1,004 | 5,383 | (4,379 | ) | -81.35 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net impairment losses recognized in earnings | - | (4,635 | ) | 4,635 | -100.00 | % | - | (4,646 | ) | 4,646 | -100.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss on sale of securities | - | 25 | (25 | ) | -100.00 | % | (657 | ) | (53 | ) | (604 | ) | 1139.62 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net gain on sale of securities | - | - | - | - | 385 | (43 | ) | 428 | -995.35 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net FDIC indemnification asset amortization | (268 | ) | (1,369 | ) | 1,101 | -80.42 | % | (3,186 | ) | (3,856 | ) | 670 | -17.38 | % | (383 | ) | (719 | ) | 336 | -46.73 | % | (1,352 | ) | (1,787 | ) | 435 | -24.34 | % | ||||||||||||||||||||||||||||||||||||
Net gain on divestiture | - | 3,065 | (3,065 | ) | -100.00 | % | - | 3,065 | (3,065 | ) | -100.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income/litigation settlements | - | 900 | (900 | ) | -100.00 | % | - | 4,600 | (4,600 | ) | -100.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating income | 593 | 1,046 | (453 | ) | -43.31 | % | 2,336 | 2,554 | (218 | ) | -8.54 | % | 1,114 | 709 | 405 | 57.12 | % | 3,323 | 1,935 | 1,388 | 71.73 | % | ||||||||||||||||||||||||||||||||||||||||||
Total noninterest income | $ | 7,135 | $ | 5,895 | $ | 1,240 | 21.03 | % | $ | 18,301 | $ | 20,828 | $ | (2,527 | ) | -12.13 | % | $ | 7,638 | $ | 7,634 | $ | 4 | 0.05 | % | $ | 22,100 | $ | 24,363 | $ | (2,263 | ) | -9.29 | % |
Three-Month Comparison. Noninterest income comprised 24.45%22.16% of total net interest and noninterest income in the third quarter of 20172020 compared to 21.82%25.57% in the same quarter of 2016.2019. Noninterest income increased $1.24 million,$4 thousand, or 21.03%,0.05%. The increase was primarily due to increases in both net impairment losses recognizedinterchange income and other operating income for a combined total of $1.15 million. A decrease in the amortization of the FDIC indemnification asset of $336 thousand contributed to the increase in noninterest income as well. These increases were offset by litigation settlements received in the third quarter of 2016 and the decrease in net negative amortization related to the FDIC indemnification asset2019 of $900 thousand as loss share coverage expired June 30, 2017, for commercial loans. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. These changes were offset bywell as a decrease in insurance commissions resulting from the Greenpoint divestiture in the fourth quarterservice charges on deposits of 2016 and$535 thousand as a net gain on the divestitureresult of six bank branches to First Bank in the third quarter of 2016. Excluding the impact from impairment losses, sales of securities and branches, net FDIC indemnification asset amortization, and net gain on divestiture, noninterest income decreased $1.33 million, or 15.22%, to $7.40 million in the third quarter of 2017, from $8.73 million in the same quarter of 2016. The decrease was due primarily to a $1.29 million decrease in insurance commissions resulting from the Greenpoint divestiture.pandemic shutdowns.
Nine-Month Comparison. Noninterest income comprised 21.84%21.47% of total net interest and noninterest income infor the first nine months of 20172020 compared to 24.58%26.55% in the same period of 2016.2019. Noninterest income decreased $2.53$2.26 million, or 12.13%9.29%, primarily due to $4.60 million received from litigation settlements in 2019. In addition, service charges on deposits decreased $1.35 million primarily as a decrease in insurance commissions resulting fromresult of the Greenpoint divestiture in the fourth quarter of 2016second and a net gain on the divestiture of six bank branches to First Bank in the third quarter effects of 2016the pandemic shutdowns. These decreases were primarily offset by net impairment losses recognizedincreases in the third quarter of 2016. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. Net negative amortization related to the FDIC indemnification asset decreasedother service charges and fees and other operating income. Other service charges and fees increased $1.41 million, or 22.81%, primarily due to additional reserve provisions as loss share coverage expired June 30, 2017, for commercial loans. Excluding the impact from impairment losses, sales of securities and branches,an increase in net FDIC indemnification asset amortization, net gain on divestiture, and bank owned life insurance proceeds, noninterestinterchange income. Other Operating income decreased $4.19increased $1.39 million or 16.20%, to $21.69 million in the first nine months of 2017, from $25.88 million in the same period of 2016. The decrease71.73% and was due primarily to a $4.38 million decrease in insurance commissions resulting from the Greenpoint divestiture.
Noninterest Expense
The following table presents the components of, and changes in, noninterest expense for the periods indicated:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Increase | September 30, | Increase | % | September 30, | Increase | % | September 30, | Increase | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | (Decrease) | % Change | 2017 | 2016 | (Decrease) | Change | 2020 | 2019 | (Decrease) | Change | 2020 | 2019 | (Decrease) | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Salaries and employee benefits | $ | 9,137 | $ | 9,828 | $ | (691 | ) | -7.03 | % | $ | 27,178 | $ | 30,501 | $ | (3,323 | ) | -10.89 | % | $ | 10,485 | $ | 9,334 | $ | 1,151 | 12.33 | % | $ | 32,886 | $ | 27,653 | $ | 5,233 | 18.92 | % | ||||||||||||||||||||||||||||||
Occupancy expense | 1,082 | 1,249 | (167 | ) | -13.37 | % | 3,671 | 4,139 | (468 | ) | -11.31 | % | 1,228 | 1,042 | 186 | 17.85 | % | 3,818 | 3,277 | 541 | 16.51 | % | ||||||||||||||||||||||||||||||||||||||||||
Furniture and equipment expense | 1,133 | 1,066 | 67 | 6.29 | % | 3,311 | 3,271 | 40 | 1.22 | % | 1,412 | 1,183 | 229 | 19.36 | % | 4,112 | 3,278 | 834 | 25.44 | % | ||||||||||||||||||||||||||||||||||||||||||||
Service fees | 1,581 | 1,466 | 115 | 7.84 | % | 4,433 | 3,727 | 706 | 18.94 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Advertising and public relations | 430 | 795 | (365 | ) | -45.91 | % | 1,417 | 1,832 | (415 | ) | -22.65 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Professional fees | 408 | 548 | (140 | ) | -25.55 | % | 948 | 1,290 | (342 | ) | -26.51 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of intangibles | 266 | 316 | (50 | ) | -15.82 | % | 790 | 871 | (81 | ) | -9.30 | % | 365 | 251 | 114 | 45.42 | % | 1,086 | 746 | 340 | 45.58 | % | ||||||||||||||||||||||||||||||||||||||||||
FDIC premiums and assessments | 227 | 363 | (136 | ) | -37.47 | % | 698 | 1,109 | (411 | ) | -37.06 | % | 191 | - | 191 | - | 224 | 318 | (94 | ) | -29.56 | % | ||||||||||||||||||||||||||||||||||||||||||
Merger, acquisition, and divestiture expense | - | 226 | (226 | ) | -100.00 | % | - | 675 | (675 | ) | -100.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Merger expense | - | 592 | (592 | ) | -100.00 | % | 1,893 | 592 | 1,301 | 219.76 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating expense | 5,064 | 5,509 | (445 | ) | -8.08 | % | 15,802 | 15,527 | 275 | 1.77 | % | 3,071 | 2,233 | 838 | 37.53 | % | 8,931 | 8,167 | 764 | 9.35 | % | |||||||||||||||||||||||||||||||||||||||||||
Total noninterest expense | $ | 16,909 | $ | 18,557 | $ | (1,648 | ) | -8.88 | % | $ | 51,450 | $ | 56,093 | $ | (4,643 | ) | -8.28 | % | $ | 19,171 | $ | 17,444 | $ | 1,727 | 9.90 | % | $ | 59,748 | $ | 50,880 | $ | 8,868 | 17.43 | % |
Three-Month Comparison. Noninterest expense decreased $1.65increased $1.73 million, or 8.88%9.90%, in the third quarter of 20172020 compared to the same quarter of 2016, which2019. The increase was largely due to a decreasean increase in salaries and employee benefits. Salariesbenefits of $1.15 million primarily attributable to the addition of Highlands employees. Other increases also occurred in occupancy and employee benefits decreased as full-time equivalent employees, calculated using the numberfurniture and equipment expense, and other operating expense for a combined total of hours worked, decreased to 569 as of September 30, 2017, from 624 as of September 30, 2016,$1.25 million. The increases in these categories were primarily due to the First Bank and Greenpoint transactions that occurred during the second halfaddition of 2016. We incurred expenses totaling $226 thousand related to the branch exchange with First Bank during the third quarter of 2016. Occupancy, furniture, and equipment expense decreased $100 thousand, or 4.32%, due to branch closures and divestitures that occurred during the prior year. Other operating expense included a $421 thousand increase in legal fees, a $146 thousand increase in property writedowns, and a $369 thousand increaselocations acquired in the net loss on sales and expenses related to other real estate owned (“OREO”) to $647 thousand from $278 thousandHighlands transaction. Increases in the third quarter of 2016. These increases2020 were offset primarily by decreasesmerger expenses of $592 thousand that were incurred in office supplies expense, other service fees, nonemployee compensation, and consulting fees.the third quarter of 2019.
Nine-Month Comparison. Noninterest expense decreased $4.64increased $8.87 million, or 8.28%17.43%, in the first nine months of 20172020 compared to the same period of 2016,2019. The increase was primarily due to an increase in salaries and benefits of $5.23 million, or 18.92% which was largely due to a decreasethe addition of Highlands employees. In addition, the Company incurred $1.89 million in salaries and employee benefits. Salaries and employee benefits decreased primarily due to the First Bank and Greenpoint transactions that occurredresidual merger expenses during the second halffirst quarter of 2016. We incurred expenses totaling $675 thousand2020 related to the First Bank branch exchange during the first nine months of 2016.Highlands acquisition. Occupancy and furniture and equipment expense decreased $428 thousand, or 5.78%, due toincreased a combined total of $1.38 million and was primarily driven by the addition of branch closures and divestitures that occurred during the prior year. Other operating expense included a $467 thousand increase in legal fees which were offset by a $48 thousand decreaselocations acquired in the net loss on sales and expenses related to OREO to $1.19 million from $1.24 million in the first nine months of 2016.Highlands transaction.
IncomeIncome Tax Expense
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.
Three-Month Comparison. The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. Income tax expense increased $664decreased $248 thousand, or 20.56%9.61%, andprimarily due to the decrease in pre-tax earnings. The effective tax rate increased 13 basis points to 33.73%22.00% in the third quarter of 2017 compared to2020 from 21.98% in the same quarter of 2016. The increase in the effective tax rate was largely due to a decrease in tax-exempt revenue.2019.
Nine-Month Comparison. Income tax expense increased $727 thousand,decreased $1.36 million, or 7.92%16.71%, and the effective tax rate decreased 7 basis points to 32.83%21.80% in the first nine monthsthird quarter of 2017 compared to2020 from 21.82% in the same periodquarter of 2016. The decrease in the effective tax rate was largely due to an increase in tax-exempt revenue.2019.
Non-GAAP Financial Measures
In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-GAAP financial measuresmeasure presented in this report include net interest income on a FTE basis and normalizedincludes net interest income on a FTE basis. While we believe these non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions. The reconciliations of these measures to GAAP measures are presented below.
We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 35%21%. Normalized net interest incomeWhile we believe certain non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a FTE basis is aGAAP basis. Our non-GAAP measure that excludes non-cash loan accretion income relatedfinancial measures may not be comparable to PCI loans.those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.
The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net interest income, GAAP | $ | 22,050 | $ | 21,121 | $ | 65,485 | $ | 63,923 | ||||||||
FTE adjustment(1) | 470 | 509 | 1,448 | 1,561 | ||||||||||||
Net interest income, FTE | 22,520 | 21,630 | 66,933 | 65,484 | ||||||||||||
Less: non-cash accretion income(2) | 1,377 | 984 | 4,257 | 3,893 | ||||||||||||
Net interest income, normalized | $ | 21,143 | $ | 20,646 | $ | 62,676 | $ | 61,591 | ||||||||
Net interest margin, GAAP | 4.17 | % | 3.85 | % | 4.15 | % | 3.91 | % | ||||||||
FTE adjustment(1) | 0.08 | % | 0.08 | % | 0.10 | % | 0.09 | % | ||||||||
Net interest margin, FTE | 4.25 | % | 3.95 | % | 4.25 | % | 4.01 | % | ||||||||
Less: non-cash accretion income(2) | 0.25 | % | 0.18 | % | 0.27 | % | 0.24 | % | ||||||||
Net interest margin, normalized | 4.00 | % | 3.77 | % | 3.98 | % | 3.77 | % |
Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Amounts in thousands) Net interest income, GAAP FTE adjustment(1) Net interest income, FTE Net interest margin, GAAP FTE adjustment(1) Net interest margin, FTE (1) FTE basis of 21%. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Financial Condition
Total assets as of September 30, 2017, decreased $11.622020, increased $149.08 million, or 0.49%, to $2.37 billion5.33% from $2.39 billion as of December 31, 2016. Total2019. The increase in assets was primarily driven by a increase in overnight funds of $175.36 million, or 118.48%. In addition, total liabilities as of September 30, 2017, decreased $25.202020, increased $157.98 million, or 1.23%, to $2.02 billion6.67% from $2.05 billion as of December 31, 2016.2019. The increase in liabilities was primarily the result of an increase in total deposits of $162.33 million, or 6.97%.
Investment Securities
Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.
Available-for-sale debt securities as of September 30, 2017, increased $8.852020, decreased $78.60 million, or 5.34%46.35%, compared to December 31, 2016,2019. The decrease was primarily due to the purchase of U.S. Treasury securities offset by the maturity and sale of municipal, single-issue trust preferred, and mortgage-backed Agency securities.$51.03 million in securities in the first quarter. The market value of debt securities available for sale as a percentage of amortized cost was 101.11%101.77.% as of September 30, 2017,2020, compared to 99.48%100.65% as of December 31, 2016. Held-to-maturity securities as of September 30, 2017, decreased $21.95 million, or 46.57%, compared to December 31, 2016, primarily due to the maturity of U.S. Agency securities. The market value of securities held to maturity as a percentage of amortized cost was 100.17% as of September 30, 2017, compared to 100.28% as of December 31, 2016.2019.
Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities for the three and nine months ended September 30, 2017. We recognized credit-related OTTI charges in earnings associated with debt securities of $4.64 million during the three and nine months ended September 30, 2016, due to our change in intent to hold certain trust preferred securities to recovery. We recognized no OTTI charges in earnings associated with equity securities for the three and nine months ended September 30, 2017,2020 or the three months ended September 30, 2016. We recognized OTTI charges in earnings associated with certain equity securities of $11 thousand for the nine months ended September 30, 2016.2019. For additional information, see Note 2, “Investment“Debt Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.
Loans Held for Investment
LoansLoans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of September 30, 2017, decreased $15.232020, increased $80.54 million, or 0.82%3.81%, compared to December 31, 2016, primarily due to a $25.712019. Covered loans decreased $2.12 million, or 45.10%16.46%, decrease in covered loans as the covered Waccamaw portfolio continues to run off. The decrease was offset by a $10.48 million, or 0.58%, increase in non-covered loans driven by the commercial construction and non-farm, non-real estate commercial segments.pay down. For additional information, see Note 3,4, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.
The following table presents loans, net of unearned income,, with non-covered loans by loan class as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2016 | September 30, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||
Non-covered loans held for investment | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction, development, and other land | $ | 72,952 | 3.97 | % | $ | 56,948 | 3.07 | % | $ | 49,799 | 2.71 | % | $ | 46,785 | 2.13 | % | $ | 48,659 | 2.30 | % | $ | 61,350 | 3.62 | % | ||||||||||||||||||||||||
Commercial and industrial | 90,184 | 4.91 | % | 92,204 | 4.98 | % | 90,362 | 4.92 | % | 179,714 | 8.19 | % | 142,962 | 6.76 | % | 93,627 | 5.53 | % | ||||||||||||||||||||||||||||||
Multi-family residential | 125,997 | 6.86 | % | 134,228 | 7.24 | % | 127,468 | 6.94 | % | 105,647 | 4.81 | % | 121,840 | 5.76 | % | 96,274 | 5.68 | % | ||||||||||||||||||||||||||||||
Single family non-owner occupied | 143,213 | 7.79 | % | 142,965 | 7.72 | % | 144,023 | 7.84 | % | 189,265 | 8.62 | % | 163,181 | 7.72 | % | 135,298 | 7.99 | % | ||||||||||||||||||||||||||||||
Non-farm, non-residential | 613,380 | 33.38 | % | 598,674 | 32.31 | % | 596,015 | 32.46 | % | 748,815 | 34.11 | % | 727,261 | 34.39 | % | 584,897 | 34.52 | % | ||||||||||||||||||||||||||||||
Agricultural | 6,096 | 0.33 | % | 6,003 | 0.32 | % | 5,786 | 0.32 | % | 10,362 | 0.47 | % | 11,756 | 0.56 | % | 9,429 | 0.56 | % | ||||||||||||||||||||||||||||||
Farmland | 27,897 | 1.52 | % | 31,729 | 1.71 | % | 31,974 | 1.74 | % | 22,973 | 1.05 | % | 23,155 | 1.10 | % | 16,728 | 0.99 | % | ||||||||||||||||||||||||||||||
Total commercial loans | 1,079,719 | 58.76 | % | 1,062,751 | 57.35 | % | 1,045,427 | 56.93 | % | 1,303,561 | 59.38 | % | 1,238,814 | 58.59 | % | 997,603 | 58.89 | % | ||||||||||||||||||||||||||||||
Consumer real estate loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Home equity lines | 102,888 | 5.60 | % | 106,361 | 5.74 | % | 108,108 | 5.89 | % | 94,056 | 4.29 | % | 110,078 | 5.21 | % | 86,349 | 5.10 | % | ||||||||||||||||||||||||||||||
Single family owner occupied | 501,242 | 27.27 | % | 500,891 | 27.03 | % | 497,695 | 27.10 | % | 644,598 | 29.37 | % | 620,697 | 29.35 | % | 484,567 | 28.60 | % | ||||||||||||||||||||||||||||||
Owner occupied construction | 47,034 | 2.56 | % | 44,535 | 2.41 | % | 43,925 | 2.39 | % | 17,460 | 0.79 | % | 17,241 | 0.82 | % | 14,872 | 0.87 | % | ||||||||||||||||||||||||||||||
Total consumer real estate loans | 651,164 | 35.43 | % | 651,787 | 35.18 | % | 649,728 | 35.38 | % | 756,114 | 34.45 | % | 748,016 | 35.38 | % | 585,788 | 34.57 | % | ||||||||||||||||||||||||||||||
Consumer and other loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | 70,695 | 3.85 | % | 77,445 | 4.18 | % | 76,363 | 4.16 | % | 118,738 | 5.41 | % | 110,027 | 5.20 | % | 92,027 | 5.43 | % | ||||||||||||||||||||||||||||||
Other | 4,856 | 0.26 | % | 3,971 | 0.21 | % | 3,029 | 0.16 | % | 5,838 | 0.27 | % | 4,742 | 0.22 | % | 4,540 | 0.27 | % | ||||||||||||||||||||||||||||||
Total consumer and other loans | 75,551 | 4.11 | % | 81,416 | 4.39 | % | 79,392 | 4.32 | % | 124,576 | 5.68 | % | 114,769 | 5.42 | % | 96,567 | 5.70 | % | ||||||||||||||||||||||||||||||
Total non-covered loans | 1,806,434 | 98.30 | % | 1,795,954 | 96.92 | % | 1,774,547 | 96.63 | % | 2,184,251 | 99.51 | % | 2,101,599 | 99.39 | % | 1,679,958 | 99.15 | % | ||||||||||||||||||||||||||||||
Total covered loans | 31,287 | 1.70 | % | 56,994 | 3.08 | % | 61,837 | 3.37 | % | 10,744 | 0.49 | % | 12,861 | 0.61 | % | 14,158 | 0.84 | % | ||||||||||||||||||||||||||||||
Total loans held for investment, net of unearned income | 1,837,721 | 100.00 | % | 1,852,948 | 100.00 | % | 1,836,384 | 100.00 | % | 2,194,995 | 100.00 | % | 2,114,460 | 100.00 | % | 1,694,116 | 99.99 | % | ||||||||||||||||||||||||||||||
Less: allowance for loan losses | 19,206 | 17,948 | 19,633 | 27,277 | 18,425 | 18,493 | ||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment, net of unearned income and allowance | $ | 1,818,515 | $ | 1,835,000 | $ | 1,816,751 | $ | 2,167,718 | $ | 2,096,035 | $ | 1,675,623 | ||||||||||||||||||||||||||||||||||||
Loans held for sale | $ | - | $ | 263 | $ | - |
Commercial and industrial loan balances grew significantly compared to December 31, 2019. During the second quarter, we began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender. At September 30, 2020, the PPP loans had a current balance of $61.00 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 September 30, 2020, were also recorded. During the third quarter of 2020, we recorded amortization of net deferred loan origination fees of $286 thousand on PPP loans, while year to date we recorded amortization of $479 thousand. 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.
The following table presents covered loans,, by loan class, as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2016 | September 30, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction, development, and other land | $ | 40 | 0.13 | % | $ | 4,570 | 8.02 | % | $ | 4,699 | 7.60 | % | $ | 27 | 0.25 | % | $ | 28 | 0.22 | % | $ | 30 | 0.21 | % | ||||||||||||||||||||||||
Commercial and industrial | - | 0.00 | % | 895 | 1.57 | % | 941 | 1.52 | % | |||||||||||||||||||||||||||||||||||||||
Multi-family residential | - | 0.00 | % | 8 | 0.01 | % | 43 | 0.07 | % | |||||||||||||||||||||||||||||||||||||||
Single family non-owner occupied | 292 | 0.93 | % | 962 | 1.69 | % | 1,328 | 2.15 | % | 188 | 1.75 | % | 199 | 1.55 | % | 216 | 1.53 | % | ||||||||||||||||||||||||||||||
Non-farm, non-residential | 10 | 0.03 | % | 7,512 | 13.18 | % | 8,312 | 13.44 | % | - | 0.00 | % | 3 | 0.02 | % | 4 | 0.03 | % | ||||||||||||||||||||||||||||||
Agricultural | - | 0.00 | % | 25 | �� | 0.04 | % | 26 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||
Farmland | - | 0.00 | % | 397 | 0.70 | % | 412 | 0.67 | % | |||||||||||||||||||||||||||||||||||||||
Total commercial loans | 342 | 1.09 | % | 14,369 | 25.21 | % | 15,761 | 25.49 | % | 215 | 2.00 | % | 230 | 1.79 | % | 250 | 1.77 | % | ||||||||||||||||||||||||||||||
Consumer real estate loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Home equity lines | 26,850 | 85.82 | % | 35,817 | 62.84 | % | 38,737 | 62.64 | % | 8,079 | 75.20 | % | 9,853 | 76.61 | % | 11,031 | 77.91 | % | ||||||||||||||||||||||||||||||
Single family owner occupied | 4,095 | 13.09 | % | 6,729 | 11.81 | % | 7,058 | 11.41 | % | 2,450 | 22.80 | % | 2,778 | 21.60 | % | 2,877 | 20.32 | % | ||||||||||||||||||||||||||||||
Owner occupied construction | - | 0.00 | % | - | 0.00 | % | 201 | 0.33 | % | |||||||||||||||||||||||||||||||||||||||
Total consumer real estate loans | 30,945 | 98.91 | % | 42,546 | 74.65 | % | 45,996 | 74.38 | % | 10,529 | 98.00 | % | 12,631 | 98.21 | % | 13,908 | 98.23 | % | ||||||||||||||||||||||||||||||
Consumer and other loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | - | 0.00 | % | 79 | 0.14 | % | 80 | 0.13 | % | |||||||||||||||||||||||||||||||||||||||
Total covered loans | $ | 31,287 | 100.00 | % | $ | 56,994 | 100.00 | % | $ | 61,837 | 100.00 | % | $ | 10,744 | 100.00 | % | $ | 12,861 | 100.00 | % | $ | 14,158 | 100.00 | % |
RCommercial Loans Modified Under CARES Act
The following table details the balance of commercial loans modified for short-term payment deferral under provisions of the CARES Act as of the dates indicated.
September 30, 2020 | June 30, 2020 | |||||||||||||
Percent | Percent | |||||||||||||
(unaudited, in thousands) | Balance | Modified | Balance | Modified | ||||||||||
Construction, development, and other land | $ | 3,753 | 8.88 | % | $ | 14,377 | 27.33 | % | ||||||
Commercial and industrial | 6,700 | 3.61 | % | 25,584 | 13.88 | % | ||||||||
Multi-family residential | 5,919 | 5.61 | % | 22,021 | 20.82 | % | ||||||||
Single family non-owner occupied | 7,049 | 3.65 | % | 39,135 | 20.75 | % | ||||||||
Commercial Real Estate - Hotel/Motel | 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 | 22,912 | 3.92 | % | 116,871 | 20.58 | % | ||||||||
Agricultural | 1,322 | 12.93 | % | 3,464 | 33.29 | % | ||||||||
Farmland | 2,223 | 9.56 | % | 5,865 | 24.79 | % | ||||||||
Total commercial modifications | $ | 102,535 | 7.78 | % | $ | 339,997 | 26.39 | % |
iskRisk Elements
We seek to mitigate credit risk by adhering tofollowing specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.0$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 4,5, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.
The following table presents the components of nonperforming assets and related information as of the periods indicated:
September 30, 2017 | December 31, 2016 | September 30, 2016 | September 30, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Non-covered nonperforming | ||||||||||||||||||||||||
Nonaccrual loans | $ | 18,942 | $ | 15,854 | $ | 17,487 | $ | 24,423 | $ | 16,113 | $ | 16,701 | ||||||||||||
Accruing loans past due 90 days or more | - | - | 62 | 43 | 144 | 107 | ||||||||||||||||||
TDRs(1) | 141 | 114 | 115 | |||||||||||||||||||||
TDRs(1) | 456 | 720 | 668 | |||||||||||||||||||||
Total nonperforming loans | 19,083 | 15,968 | 17,664 | 24,922 | 16,977 | 17,476 | ||||||||||||||||||
Non-covered OREO | 3,543 | 5,109 | 4,052 | 2,103 | 3,969 | 2,528 | ||||||||||||||||||
Total non-covered nonperforming assets | $ | 22,626 | $ | 21,077 | $ | 21,716 | $ | 27,025 | $ | 20,946 | $ | 20,004 | ||||||||||||
Covered nonperforming | ||||||||||||||||||||||||
Nonaccrual loans | $ | 420 | $ | 608 | $ | 688 | $ | 333 | $ | 244 | $ | 243 | ||||||||||||
Total nonperforming loans | 420 | 608 | 688 | 333 | 244 | 243 | ||||||||||||||||||
Covered OREO | 54 | 276 | 2,437 | - | - | - | ||||||||||||||||||
Total covered nonperforming assets | $ | 474 | $ | 884 | $ | 3,125 | $ | 333 | $ | 244 | $ | 243 | ||||||||||||
Total nonperforming | ||||||||||||||||||||||||
Nonaccrual loans | $ | 19,362 | $ | 16,462 | $ | 18,175 | $ | 24,756 | $ | 16,357 | $ | 16,944 | ||||||||||||
Accruing loans past due 90 days or more | - | - | 62 | 43 | 144 | 107 | ||||||||||||||||||
TDRs(1) | 141 | 114 | 115 | |||||||||||||||||||||
TDRs(1) | 456 | 720 | 668 | |||||||||||||||||||||
Total nonperforming loans | 19,503 | 16,576 | 18,352 | 25,255 | 17,221 | 17,719 | ||||||||||||||||||
OREO | 3,597 | 5,385 | 6,489 | 2,103 | 3,969 | 2,528 | ||||||||||||||||||
Total nonperforming assets | $ | 23,100 | $ | 21,961 | $ | 24,841 | $ | 27,358 | $ | 21,190 | $ | 20,247 | ||||||||||||
Additional Information | ||||||||||||||||||||||||
Performing TDRs(2) | $ | 8,101 | $ | 12,838 | $ | 13,336 | ||||||||||||||||||
Total TDRs(3) | 8,242 | 12,952 | 13,451 | |||||||||||||||||||||
Performing TDRs(2) | $ | 10,480 | $ | 5,855 | $ | 5,635 | ||||||||||||||||||
Total Accruing TDRs(3) | 10,936 | 6,575 | 6,303 | |||||||||||||||||||||
Non-covered ratios | ||||||||||||||||||||||||
Nonperforming loans to total loans | 1.06 | % | 0.89 | % | 1.00 | % | 1.14 | % | 0.81 | % | 1.04 | % | ||||||||||||
Nonperforming assets to total assets | 0.97 | % | 0.90 | % | 0.91 | % | 0.92 | % | 0.75 | % | 0.91 | % | ||||||||||||
Non-PCI allowance to nonperforming loans | 100.64 | % | 112.32 | % | 111.08 | % | 109.45 | % | 108.53 | % | 105.82 | % | ||||||||||||
Non-PCI allowance to total loans | 1.06 | % | 1.00 | % | 1.11 | % | 1.25 | % | 0.88 | % | 1.10 | % | ||||||||||||
Total ratios | ||||||||||||||||||||||||
Nonperforming loans to total loans | 1.06 | % | 0.89 | % | 1.00 | % | 1.15 | % | 0.81 | % | 1.05 | % | ||||||||||||
Nonperforming assets to total assets | 0.97 | % | 0.92 | % | 1.01 | % | 0.93 | % | 0.76 | % | 0.92 | % | ||||||||||||
Allowance for loan losses to nonperforming loans | 98.48 | % | 108.28 | % | 106.98 | % | 108.01 | % | 106.99 | % | 104.37 | % | ||||||||||||
Allowance for loan losses to total loans | 1.05 | % | 0.97 | % | 1.07 | % | 1.24 | % | 0.87 | % | 1.09 | % |
(1) | TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of | ||||||
(2) | TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of | ||||||
(3) | Total accruing TDRs exclude nonaccrual TDRs of |
Non-coveredNon-covered nonperforming assets as of September 30, 2017,2020, increased $1.55$6.08 million, or 7.35%29.02%, from December 31, 2016,2019, primarily due to an increase in non-covered nonaccrual loans.loans acquired from Highlands Union Bank offset by a decrease in OREO of $1.87 million. Non-covered nonaccrual loans as of September 30, 2017,2020, increased $3.09$8.31 million, or 19.48%51.57%, from December 31, 2016.2019. As of September 30, 2017,2020, non-covered nonaccrual loans were largely attributed to single family owner occupied (60.80%(32.80%) and, non-farm, non-residential (17.70%(27.07%) loans., and single family non-owner occupied loans (13.47%). As of September 30, 2017,2020, approximately $833 thousand,$6.86 million or 4.40%28.09%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations.through the Highlands acquisition. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.
Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $25.10$33.90 million as of September 30, 2017, an increase2020, a decrease of $88 thousand,$1.72 million, or 0.35%4.84%, compared to $25.02$35.62 million as of December 31, 2016.2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.40%1.55% as of September 30, 2017,2020, which includes past due loans (0.34%(0.43%) and nonaccrual loans (1.06%(1.12%).
When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after ninesix months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of September 30, 2017, decreased $4.712020, increased $4.36 million, or 36.37%66.33%, to $8.24$10.94 million from December 31, 2016. Nonperforming2019. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of September 30, 2017,2020, increased $27 thousand, or 23.68%,$1.87 million to $141 thousand$2.77 million compared to December 31, 2016. Nonperforming2019. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 1.71%25.29% as of September 30, 2017,2020, compared to 0.88%13.69% as of December 31, 2016.2019. Specific reserves on TDRs totaled $707$347 thousand as of September 30, 2017,2020, compared to $670$353 thousand as of December 31, 2016.2019.
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 September 30, 2020, we had modified 3,362 loans for $426.45 million related to COVID-19 relief. 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.
The balance of non-accrual loans was higher at September 30, 2020, due mainly to the migration of three commercial real estate loans with a total balance of $2.58 million coupled with approximately $6.00 million in HUB loans since year-end. The loans were past due prior to the COVID-19 emergency declaration and payments continued to slow during the quarter. Additionally, the Bank suspended foreclosure and repossession activity at the end of March due to the COVID-19 pandemic and loans that would have normally been resolved through these processes remain in the portfolio at September 30, 2020.
Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $1.57$1.87 million, or 30.65%47.01%, as of September 30, 2017,2020, compared to December 31, 2016. Non-covered OREO2019, and consisted of 2622 properties with an average holding period of approximately 13 months as of September 30, 2017.months. The net lossgain on the sale of OREO totaled $522$32 thousand for the three months ended September 30, 2017,2020, compared to $184a net loss of $234 thousand for the same period of the prior year, and $943 thousandyear; the net loss on the sale of OREO for the nine months ended September 30, 2017,2020 totaled $296 thousand compared to $1.00 million$790 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Non-covered | Covered | Total | Non-covered | Covered | Total | Non-covered | Covered | Total | Non-covered | Covered | Total | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 5,109 | $ | 276 | $ | 5,385 | $ | 4,873 | $ | 4,034 | $ | 8,907 | $ | 3,969 | $ | - | $ | 3,969 | $ | 3,806 | $ | 32 | $ | 3,838 | ||||||||||||||||||||||||
Additions | 1,256 | 26 | 1,282 | 2,452 | 1,200 | 3,652 | 695 | - | 695 | 2,752 | 131 | 2,883 | ||||||||||||||||||||||||||||||||||||
Disposals | (2,169 | ) | (218 | ) | (2,387 | ) | (2,561 | ) | (2,131 | ) | (4,692 | ) | (2,139 | ) | - | (2,139 | ) | (3,388 | ) | (152 | ) | (3,540 | ) | |||||||||||||||||||||||||
Valuation adjustments | (653 | ) | (30 | ) | (683 | ) | (712 | ) | (666 | ) | (1,378 | ) | (422 | ) | - | (422 | ) | (642 | ) | (11 | ) | (653 | ) | |||||||||||||||||||||||||
Ending balance | $ | 3,543 | $ | 54 | $ | 3,597 | $ | 4,052 | $ | 2,437 | $ | 6,489 | $ | 2,103 | $ | - | $ | 2,103 | $ | 2,528 | $ | - | $ | 2,528 |
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, 2016,September 30, 2020, our qualitative risk factors reflectallowance reflects a stablehigher risk of loan losses due to consistent asset quality metrics and relatively stableuncertainty around the impact that the COVID-19 pandemic will have on business and economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of September 30, 2017;2020; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see Note 5,6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.
The allowance for loan losses as of September 30, 2017,2020, increased $1.26$8.85 million, or 7.01%48.04%, from December 31, 2016. The increase was largely attributed2019 due primarily to a $1.00 million increase in unallocated reserves combined with a $641 thousand increase in specific reserves on impaired loans.the increased potential for loan defaults and losses related to the COVID-19 pandemic. The non-PCI allowance as a percent of non-covered loans totaled 1.06%1.25% as of September 30, 2017,2020, compared to 1.00%0.88% as of December 31, 2016.2019. Effective January 1, 2020, the Company collapsed the PCI loans were aggregatedand discounts for Peoples and Waccamaw acquired loans into fivethe core loan pools as of September 30, 2017,portfolio. The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and December 31, 2016: Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial,Home Equity Lines, Commercial Land and Peoples residential. The cash flow analysis identified no impaired PCI loan pools as of September 30, 2017, compared to one impaired PCI loan pool with a cumulative impairment of $12 thousand as of December 31, 2016. We recorded a net charge-off of $410Development, 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 $462 thousand for the three months ended September 30, 2017,2020, compared to a net charge-off of $312 thousand in the same period of the prior year, largely due to an increase in recoveries in the commercial loan segment in 2016. We recorded a net charge-off of $898 thousand foryear. For the nine months ended September 30, 2017,2020, net charge-offs decreased $72 thousand, compared to a net charge-off of $1.35 million inwith the same period of the prior year, largely due to an overall reductionyear. The decrease in net charge-offs for commercial and consumer real estate loans offsetwas driven by an increase in recoveriesreduced losses in the commercialsingle-family owner occupied loan segment in 2016.pool.
The following table presents the changes in the allowance for loan losses by loan class, during the periods indicated:
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Non-PCI | Non-PCI | |||||||||||||||||||||||||||||||||||||||||||||
Non-PCI Portfolio | PCI Portfolio | Total | Non-PCI Portfolio | PCI Portfolio | Total | Portfolio | PCI Portfolio | Total | Portfolio | PCI Portfolio | Total | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 18,878 | $ | 8 | $ | 18,886 | $ | 21,087 | $ | 12 | $ | 21,099 | $ | 23,758 | $ | - | $ | 23,758 | $ | 18,540 | $ | - | $ | 18,540 | ||||||||||||||||||||||||
Provision for (recovery of) loan losses | 738 | (8 | ) | 730 | (1,154 | ) | - | (1,154 | ) | |||||||||||||||||||||||||||||||||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Provision for (recovery of) loan losses charged to operations | 738 | (8 | ) | 730 | (1,154 | ) | - | (1,154 | ) | 4,703 | - | 4,703 | 675 | - | 675 | |||||||||||||||||||||||||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Charge-offs | (717 | ) | - | (717 | ) | (772 | ) | - | (772 | ) | (1,563 | ) | - | (1,563 | ) | (964 | ) | - | (964 | ) | ||||||||||||||||||||||||||||
Recoveries | 307 | - | 307 | 460 | - | 460 | 379 | - | 379 | 242 | - | 242 | ||||||||||||||||||||||||||||||||||||
Net charge-offs | (410 | ) | - | (410 | ) | (312 | ) | - | (312 | ) | (1,184 | ) | - | (1,184 | ) | (722 | ) | - | (722 | ) | ||||||||||||||||||||||||||||
Ending balance | $ | 19,206 | $ | - | $ | 19,206 | $ | 19,621 | $ | 12 | $ | 19,633 | $ | 27,277 | $ | - | $ | 27,277 | $ | 18,493 | $ | - | $ | 18,493 |
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Non-PCI | Non-PCI | |||||||||||||||||||||||||||||||||||||||||||||
Non-PCI Portfolio | PCI Portfolio | Total | Non-PCI Portfolio | PCI Portfolio | Total | Portfolio | PCI Portfolio | Total | Portfolio | PCI Portfolio | Total | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 17,936 | $ | 12 | $ | 17,948 | $ | 20,179 | $ | 54 | $ | 20,233 | $ | 18,425 | $ | - | $ | 18,425 | $ | 18,267 | $ | - | $ | 18,267 | ||||||||||||||||||||||||
Provision for (recovery of) loan losses | 2,168 | (12 | ) | 2,156 | 796 | (42 | ) | 754 | ||||||||||||||||||||||||||||||||||||||||
Benefit attributable to the FDIC indemnification asset | - | - | - | - | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Provision for (recovery of) loan losses charged to operations | 2,168 | (12 | ) | 2,156 | 796 | (41 | ) | 755 | ||||||||||||||||||||||||||||||||||||||||
Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | - | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Provision for loan losses | ||||||||||||||||||||||||||||||||||||||||||||||||
charged to operations | 12,034 | - | 12,034 | 3,480 | - | 3,480 | ||||||||||||||||||||||||||||||||||||||||||
Charge-offs | (1,976 | ) | - | (1,976 | ) | (2,691 | ) | - | (2,691 | ) | (4,429 | ) | - | (4,429 | ) | (4,700 | ) | - | (4,700 | ) | ||||||||||||||||||||||||||||
Recoveries | 1,078 | - | 1,078 | 1,337 | - | 1,337 | 1,247 | - | 1,247 | 1,446 | - | 1,446 | ||||||||||||||||||||||||||||||||||||
Net charge-offs | (898 | ) | - | (898 | ) | (1,354 | ) | - | (1,354 | ) | (3,182 | ) | - | (3,182 | ) | (3,254 | ) | - | (3,254 | ) | ||||||||||||||||||||||||||||
Ending balance | $ | 19,206 | $ | - | $ | 19,206 | $ | 19,621 | $ | 12 | $ | 19,633 | $ | 27,277 | $ | - | $ | 27,277 | $ | 18,493 | $ | - | $ | 18,493 |
Deposits
Total deposits as of September 30, 2017,2020, increased $22.48$162.33 million, or 1.22%6.97%, compared to December 31, 2016. Noninterest-bearing2019. The increase was largely attributable to noninterest-bearing demand deposits which increased $25.24$122.41 million, or 19.50%. Interest-bearing demand and interest-bearing deposits increased $14.91 million while savings deposits which include money market accountsalso reflected growth with increases of $79.26 million, or 15.93% and savings accounts, decreased $13.06 million; and$39.40 million, or 5.72%, respectively. These increases were offset by a decrease in time deposits which include certificates of deposit and individual retirement accounts, decreased $4.60 as$78.74 million, or 15.27%. We attribute a significant amount of September 30, 2017, comparedthe increase in deposits to December 31, 2016.the unprecedented level of federal government stimulus during the second quarter of 2020.
Borrowings
Total borrowings as of September 30, 2017,2020, decreased $44.93 million, or 25.14%,$645 thousand, compared to December 31, 2016. Short-term borrowings consisted of retail repurchase agreements, which decreased $14.22 million, or 19.48%, while the weighted average rate remained constant at 0.07%, as of September 30, 2017, and December 31, 2016.
Long-term borrowings consisted of wholesale repurchase agreements and FHLB borrowings, including convertible and callable advances as of September 30, 2017. Wholesale repurchase agreements totaled $25.00 million with a weighted average rate of 3.18% as of September 30, 2017, and December 31, 2016. Long-term FHLB borrowings decreased $15.00 million, or 23.08%, to $50.00 million and the weighted average rate decreased 4 basis points to 4.00% as of September 30, 2017, compared to December 31, 2016. The decrease was due to a $15.00 million convertible advance with a 4.15% rate that matured on May 4, 2017. The Company redeemed all of its trust preferred securities on January 9, 2017, resulting in a decrease of $15.46 million in subordinated debt.2019.
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’sCompany’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 September 30, 2017,2020, the Company’s cash reserves and investment securities totaled $13.84$9.46 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 September 30, 2017. 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 September 30, 2017,2020, our unencumbered cash totaled $105.12$375.66 million, unused borrowing capacity from the FHLB totaled $446.30$322.82 million, available credit from the FRB Discount Window totaled $6.15$6.08 million, available lines from correspondent banks totaled $90.00$85.00 million, and unpledged available-for-sale securities totaled $73.74$54.80 million.
Cash Flows
The following table summarizes the components of cash flow for the periods indicated:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net cash provided by operating activities | $ | 25,877 | $ | 34,790 | $ | 32,028 | $ | 39,636 | ||||||||
Net cash provided by investing activities | 34,999 | 39,572 | 304 | 139,757 | ||||||||||||
Net cash used in financing activities | (32,064 | ) | (60,220 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 126,323 | (73,808 | ) | |||||||||||||
Net increase in cash and cash equivalents | 28,812 | 14,142 | 158,655 | 105,585 | ||||||||||||
Cash and cash equivalents at beginning of period | 76,307 | 51,787 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 105,119 | $ | 65,929 | ||||||||||||
Cash and cash equivalents, beginning balance | 217,009 | 76,873 | ||||||||||||||
Cash and cash equivalents, ending balance | $ | 375,664 | $ | 182,458 |
Cash and cash equivalents increased $28.81$158.66 million for the nine months ended September 30, 2017,2020, compared to an increase of $14.14$105.59 million for the same period of the prior year primarilyyear. The increase in cash and cash equivalents during 2020 was due to financing activities. Net cash used in financing activities decreased $28.16 million for the nine months ended September 30, 2017, comparedlargely to the same periodsignificant inflow of the prior year primarily due to a decline in interest-bearing deposit runoff and treasury stock repurchases offset by the maturity and repayment of FHLB and other borrowings. Net cash provided by operating activities decreased $8.91 million for the nine months ended September 30, 2017, compared to the same period of the prior year. Net cash provided by investing activities decreased $4.57 million for the nine months ended September 30, 2017, compared to the same period of the prior year, which was largely due to a decrease in loan originations offset by a decrease in proceedsnon-maturity deposits from sales and maturities of available-for-sale securities.unprecedented government stimulus.
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’stockholders’ equity as of September 30, 2017, increased $13.582020, decreased $8.90 million, or 4.01%2.08%, to $352.64$419.92 million from $339.06$428.82 million as of December 31, 2016.2019. The change in stockholders’ equity was largely due to net income of $20.27 million and other comprehensive income (“OCI”) of $1.94$24.38 million offset by the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared on our common stock of $8.50$13.45 million. Accumulated other comprehensive loss decreased $262 thousand to $1.24 million and repurchased treasury sharesas of $1.26 million. OCI wasSeptember 30, 2020, compared to December 31, 2019, primarily due to net unrealized gains on securities. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders'stockholders’ equity in the calculation of our capital ratios. We repurchased 50,118 shares of our common stock for $1.26 million in the first nine months of 2017. Our book value per common share increased $0.81,$0.37 or 4.06%,1.57% to $20.76$23.70 as of September 30, 2017,2020, from $19.95$23.33 as of December 31, 2016.2019.
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 will be phased in over a four-year period (increasing by an additional 0.625% each year until it reaches 2.5% on January 1, 2019).III. A description of the Basel III capital rules is included in Part I, Item 1 of the 20162019 Form 10-K. Our current required capital ratios are as follows:
● | 4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively |
● | 6.0% Tier 1 capital to risk-weighted assets (effectively |
● | 8.0% Total capital to risk-weighted assets (effectively |
● | 4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”) |
The following table presents our capital ratios as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2020 | December 31, 2019 | |||||||||||||
The Company | ||||||||||||||||
Company | Bank | Company | Bank | |||||||||||||
Common equity Tier 1 ratio | Common equity Tier 1 ratio | 13.90% | 13.88% | 13.89% | 13.21% | 14.31% | 12.87% | |||||||||
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | 13.90% | 14.74% | 13.89% | 13.21% | 14.31% | 12.87% | |||||||||
Total risk-based capital ratio | Total risk-based capital ratio | 14.96% | 15.79% | 15.14% | 14.46% | 15.21% | 13.78% | |||||||||
Tier 1 leverage ratio | Tier 1 leverage ratio | 11.18% | 11.07% | 10.06% | 9.57% | 14.01% | 12.61% | |||||||||
The Bank | ||||||||||||||||
Common equity Tier 1 ratio | 12.68% | 12.93% | ||||||||||||||
Tier 1 risk-based capital ratio | 12.68% | 12.93% | ||||||||||||||
Total risk-based capital ratio | 13.74% | 13.98% | ||||||||||||||
Tier 1 leverage ratio | 10.18% | 9.71% |
Our risk-based capital ratios as of September 30, 2020, decreased from December 31, 2019, due to a decrease in total capital. The decrease in total capital was primarily attributable to the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared of $13.45 million, offset by net income of $24.38 million. As of September 30, 2017,2020, 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 September 30, 2017.2020.
Off-Balance Sheet Arrangements
We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument.
The following table presents our off-balance sheet arrangements as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2020 | December 31, 2019 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Commitments to extend credit | $ | 245,978 | $ | 261,801 | $ | 219,297 | $ | 228,716 | ||||||||
Financial letters of credit | 550 | 4,756 | ||||||||||||||
Performance letters of credit(1) | 117,768 | 79,144 | ||||||||||||||
Standby letters of credit and financial guarantees (1) | 173,925 | 167,612 | ||||||||||||||
Total off-balance sheet risk | $ | 364,296 | $ | 345,701 | $ | 393,222 | $ | 396,328 | ||||||||
Reserve for unfunded commitments | $ | 66 | $ | 326 | $ | 66 | $ | 66 |
(1) | ||||
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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 simulation and internal simulationthird-party 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.
TheAs of September 30, 2020, the Federal Open Market Committee maintainedhad set the benchmark federal funds rate atto a range of 1000 to 12525 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. Due to the current target rate, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.
September 30, 2017 | December 31, 2016 | |||||||||||||||
Change in |
| Change in |
| |||||||||||||
Increase (Decrease) in Basis Points | Net Interest Income | Percent Change | Net Interest Income | Percent Change | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
300 | $ | 1,655 | 1.9 | % | $ | 526 | 0.6 | % | ||||||||
200 | 1,294 | 1.5 | % | 438 | 0.5 | % | ||||||||||
100 | 775 | 0.9 | % | 183 | 0.2 | % | ||||||||||
(100) | (4,039 | ) | -4.8 | % | (2,616 | ) | -3.1 | % |
We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of September 30, 2017, exposure to interest rate risk is within our defined policy limits.
The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of September 30, 2017, we maintained interest rate swap agreements with notional amounts totaling $5.89 million to modify our exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. The fair value of the swap agreements, which are accounted for as fair value hedges and recorded as derivative liabilities, totaled $151 thousand as of September 30, 2017, and $167 thousand as of December 31, 2016. For additional information, see Note 9, “Derivative Instruments and Hedging Activities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.
September 30, 2020 | December 31, 2019 | |||||||||||||||
Change in | Percent | Change in | Percent | |||||||||||||
Increase (Decrease) in Basis Points | Net Interest Income | Change | Net Interest Income | Change | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
300 | $ | 7,633 | 6.97 | % | $ | 171 | 0.20 | % | ||||||||
200 | 5,354 | 4.89 | % | 428 | 0.40 | % | ||||||||||
100 | 2,846 | 2.60 | % | 426 | 0.40 | % | ||||||||||
(100) | N/A | - | (4,631 | ) | -4.30 | % |
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’smanagement’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.
In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) at the end of 2021, the Company has broken the transition efforts into two phases. The first phase is adding additional language to new loans that allows the Company to replace LIBOR with an equivalent rate index and adjust the margin to ensure the resulting interest rate is the same as it previously was using LIBOR. Also included in the first phase, the Company will be transitioning from the LIBOR swap curve to alternative reference rates when repricing certain loans. The second phase is transitioning current variable loans tied to LIBOR or on a LIBOR swap curve. The Company is currently quantifying the dollar amount and number of loans that extend beyond 2021.
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 12 of this report.
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 September 30, 2017,2020, our disclosure controls and procedures were effective.
Disclosure controls and procedures are our Company’sCompany’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’smanagement’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 September 30, 2017,2020, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome of each matter with certainty, we believe that the resolution of these actions should not have a material adverse effect on our financial position, results of operations, or cash flows.
Risk Factors |
OurThe risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2019 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.Company. Individuals should carefully consider our risk factors and information included or incorporated by reference, in thisour annual report on Form 10-K for the year ended December 31, 2019 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, oursuch risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our 2016annual report on Form 10-K.10-K for the year ended December 31, 2019.
The Company is providing these additional risk factors to supplement the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.
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:
● | employees contracting COVID-19; |
● | reductions in our operating effectiveness as our employees work from home; |
● | increased cybersecurity risk due to the continuation of the work-from-home measures; |
● | a work stoppage, forced quarantine, or other interruption of our business; |
● | unavailability of key personnel necessary to conduct our business activities; |
● | effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls; |
● | sustained closures of our branch lobbies or the offices of our customers; |
● | declines in demand for loans and other banking services and products; |
● | reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic; |
● | unprecedented volatility in United States financial markets; |
● | volatile performance of our investment securities portfolio; |
● | decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for loan losses; |
● | declines in value of collateral for loans, including real estate collateral; |
● | declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and |
● | declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets. |
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 ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. 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.
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 of September 30, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.
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.
Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | Not Applicable |
(b) | Not Applicable |
(c) | Issuer Purchases of Equity Securities |
We repurchased 39,516no shares of our common stock during the third quarter of 20172020 compared to 171,225194,000 shares during the same quarter of the prior year.2019. We do not currently have a publicly announced plan to repurchase shares.
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) | |||||||||||||
July 1-31, 2017 | - | $ | - | - | 635,804 | |||||||||||
August 1-31, 2017 | 13,177 | 25.16 | 13,177 | 622,627 | ||||||||||||
September 1-30, 2017 | 26,339 | 25.57 | 26,339 | 604,723 | ||||||||||||
Total | 39,516 | $ | 25.43 | 39,516 |
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Defaults Upon |
None.None.
Mine Safety Disclosures |
None.None.
Other Information |
None.None.
Exhibits |
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2.2 | ||
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
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10.1.1** | ||
10.1.2** | ||
10.2** | ||
10.3** | ||
10.4** |
10.5** | ||
10.6** | ||
10.7** | ||
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10.9.1** | ||
10.9.2** | ||
10.9.3** | ||
10.9.4** | ||
10.9.5** | ||
10.10** | ||
10.11.1** | ||
10.11.2** | ||
10.12.1** | ||
10.12.2** | ||
10.13** |
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10.15** | ||
10.16** | ||
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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* | ||
101*** | Interactive data files pursuant to Rule 405 of Regulation | |
104* | The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments). |
* | Filed herewith |
** | Indicates a management contract or compensation plan or |
*** | Submitted electronically herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,, thereunto duly authorized, on the 3rd9th day of November, 2017.2020.
First Community (Registrant) | ||
/s/ William P. Stafford, II | ||
William P. Stafford, II | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ David D. Brown | ||
David D. Brown | ||
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(Principal Accounting Officer) |
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