# First Community Bankshares Inc: Form 10-Q for the period ended Mar 31, 2016

- Company: [First Community Bankshares Inc](/companies/fcbc.md) (CIK 859070)
- Form: 10-Q
- Filed: 2016-05-06
- Accepted by EDGAR: May 6, 2016, 15:56 ET
- Period: 2016-03-31
- Accession: 0001193125-16-581949
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/859070/000119312516581949/d180562d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/859070/000119312516581949/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $2.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $2.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $6.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.34 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 17,892,531 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | $12.6m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Dividends paid | 3 months, 2016-01-01 to 2016-03-31 | $2.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2016-01-01 to 2016-03-31 | $8.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-03-31 | $39.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2016-03-31 | $2.47bn | us-gaap:Assets |
| Total liabilities | at 2016-03-31 | $2.13bn | us-gaap:Liabilities |
| Long-term debt | at 2016-03-31 | $115.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2016-03-31 | $337.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 54,839 characters.

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. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this Quarterly Report on Form 10-Q and our 2015 Annual Report on Form 10-K (the “2015 Form 10-K”).

### Cautionary Statement Regarding Forward-Looking Statements

We may make 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 our shareholders, and other communications that we make in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are based on various factors, many of which are beyond our control. 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 our financial performance to differ materially from that expressed in such forward-looking statements:

- the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;
- the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;
- inflation, interest rate, market and monetary fluctuations;
- our timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
- the willingness of customers to substitute competitors’ products and services for our products and services and vice versa;
- the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;
- the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system;
- further, future and proposed rules, including those that are part of the process outlined in the International Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” which are expected to require banking institutions to increase levels of capital;
- technological changes;
- the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
- the growth and profitability of our noninterest, or fee, income being less than expected;
- unanticipated regulatory or judicial proceedings;
- changes in consumer spending and saving habits; and
- our success at managing the risks involved in the foregoing.

We caution that the foregoing list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, our 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 filed with the Securities and Exchange Commission. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do 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 our Company. See Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of our 2015 Form 10-K.

### Corporate Overview

First Community Bancshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of Nevada in 1997. The Company provides commercial banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates forty-nine banking branch locations under the trade names First Community Bank in Virginia, West Virginia, and North Carolina and People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank offers wealth management and investment advice through its wholly-owned subsidiary First Community Wealth Management (“FCWM”)

and the Bank’s Trust Division, which reported combined assets under management of $755 million as of March 31, 2016. These assets are not our assets, but are managed under various fee-based arrangements as fiduciary or agent. The Company provides insurance services through its wholly owned, full-service insurance agency subsidiary Greenpoint Insurance Group, Inc. (“Greenpoint”). Greenpoint operates nine locations under the Greenpoint name and under the trade name First Community Insurance Services (“FCIS”) in North Carolina, Carr & Hyde Insurance and FCIS in Virginia, and FCIS in West Virginia. We reported total assets of $2.47 billion as of March 31, 2016. Our common stock is traded on the NASDAQ Global Select Market under the symbol “FCBC”.

Our primary source of earnings is from net interest income, the difference between interest earned on assets, such as loans and securities, and interest paid on liabilities, such as deposits and borrowings. Our net interest income 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, with additional funding provided by retail and wholesale repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”). We invest our funds primarily in loans to retail and commercial customers with additional investment in various securities.

### Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States and conform to general practices within the banking industry. Our financial position and results of operations require management to make judgments and estimates to develop the amounts reflected and disclosed in the consolidated financial statements. Different assumptions in the application of these estimates could result in material changes to our consolidated financial position and consolidated results of operations. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed to be reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or establishment of a valuation reserve, or an asset or liability needs to be recorded based upon 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 either on quoted market prices or, when available, are provided by third-party sources. When 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 critical accounting estimates are described in detail in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2015 Form 10-K.

### Performance Overview

Highlights of our results of operations for the three months ended March 31, 2016, and financial condition as of March 31, 2016, include the following:

- Net income available to common shareholders increased $231 thousand, or 3.95%, and diluted earnings per share increased $0.03 to $0.34 compared to the same quarter of the prior year.
- Normalized net interest margin increased 24 basis points to 3.74% compared to the same quarter of the prior year.
- The non-covered loan portfolio experienced significant growth, increasing $62.39 million, or 3.84%, compared with December 31, 2015, which resulted in a $1.19 million loan loss provision during the quarter.
- The Company’s book value per common share increased $0.20 to $19.15 compared with December 31, 2015.
- Asset quality improved as non-covered delinquent loans as a percentage of total non-covered loans decreased 31 basis points to 1.35% and non-covered nonperforming assets decreased $883 thousand compared to December 31, 2015.
- The Company repurchased 487,739 common shares during the quarter.
- The Company significantly exceeds regulatory “well capitalized” targets as of March 31, 2016.

### Results of Operations

#### Net Income

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

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

|  | Three Months Ended March 31, Increase (Decrease) 2016 | % Change 2015 | Three Months Ended |  |
| --- | ---: | ---: | ---: | ---: |
| Net income | $6,084 | $5,958 | $126 | 2.11% |
| Net income available to common shareholders | 6,084 | 5,853 | 231 | 3.95% |
| Basic earnings per common share | 0.34 | 0.31 | 0.03 | 9.68% |
| Diluted earings per common share | 0.34 | 0.31 | 0.03 | 9.68% |
| Return on average assets | 0.99% | 0.91% | 0.08% | 8.79% |
| Return on average common equity | 7.15% | 6.91% | 0.24% | 3.47% |

*Three-Month Comparison.* Net income increased in the first quarter of 2016 compared to the same quarter of the prior year due to a $1.07 million increase in noninterest income and a $272 thousand increase in net interest income offset by a $1.03 million increase in noninterest expense, a $92 thousand increase in income tax, and a $87 thousand increase in the provision for loan losses.

#### Net Interest Income

Net interest income comprised 72.76% of total net interest and noninterest income in the first quarter of 2016 compared to 75.30% in the same quarter of the prior year. Net interest income is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 35%. We believe this measure to be 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 following table presents our average consolidated balance sheets, as of the dates indicated, and the net interest analysis, on a FTE basis, in the periods indicated:

*(Amounts in thousands)*

| Assets Earning assets | Three Months Ended March 31, 2016 Average Balance | Interest(1) | Average Yield/ Rate(1) | 2015 Average Balance | Interest(1) | Average Yield/ Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans(2) | $1,730,401 | $21,599 | 5.02% | $1,678,118 | $21,954 | 5.31% |
| Securities available for sale | 354,582 | 2,268 | 2.57% | 331,044 | 2,413 | 2.96% |
| Securities held to maturity | 72,512 | 194 | 1.08% | 65,923 | 186 | 1.14% |
| Interest-bearing deposits | 15,591 | 20 | 0.52% | 208,867 | 133 | 0.26% |
| Total earning assets | 2,173,086 | 24,081 | 4.45% | 2,283,952 | 24,686 | 4.38% |
| Other assets | 297,156 |  |  | 318,856 |  |  |
| Total assets | $2,470,242 |  |  | $2,602,808 |  |  |
| **Liabilities and stockholders’ equity** |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Demand deposits | $342,524 | $57 | 0.07% | $351,742 | $52 | 0.06% |
| Savings deposits | 535,769 | 66 | 0.05% | 526,697 | 105 | 0.08% |
| Time deposits | 533,635 | 991 | 0.75% | 698,030 | 1,573 | 0.91% |
| Total interest-bearing deposits | 1,411,928 | 1,114 | 0.32% | 1,576,469 | 1,730 | 0.45% |
| Borrowings |  |  |  |  |  |  |
| Federal funds purchased | 3,424 | 5 | 0.59% | — | — | — |
| Retail repurchase agreements | 77,993 | 13 | 0.07% | 67,853 | 20 | 0.12% |
| Wholesale repurchase agreements | 50,000 | 468 | 3.76% | 50,000 | 463 | 3.76% |
| FHLB advances and other borrowings | 108,013 | 839 | 3.12% | 106,621 | 1,046 | 3.98% |
| Total borrowings | 239,430 | 1,325 | 2.23% | 224,474 | 1,529 | 2.76% |
| Total interest-bearing liabilities | 1,651,358 | 2,439 | 0.59% | 1,800,943 | 3,259 | 0.73% |
| Noninterest-bearing demand deposits | 448,849 |  |  | 427,313 |  |  |
| Other liabilities | 27,784 |  |  | 21,329 |  |  |
| Total liabilities | 2,127,991 |  |  | 2,249,585 |  |  |
| Stockholders’ equity | 342,251 |  |  | 353,223 |  |  |
| Total liabilities and stockholders’ equity | $2,470,242 |  |  | $2,602,808 |  |  |
| Net interest income, FTE |  | $21,642 |  |  | $21,427 |  |
| Net interest rate spread |  |  | 3.87% |  |  | 3.65% |
| Net interest margin |  |  | 4.01% |  |  | 3.80% |

(1) Fully taxable equivalent (“FTE”) basis based on the federal statutory rate of 35%.

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

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

*(Amounts in thousands)*

| Interest earned on(1) | Three Months Ended March 31, 2016 Compared to 2015 Dollar Increase (Decrease) due to Volume | Rate | Rate/ Volume | Total |
| --- | ---: | ---: | ---: | ---: |
| Loans(2) | $684 | $(1,191) | $152 | $(355) |
| Securities available-for-sale | 172 | (316) | (1) | (145) |
| Securities held-to-maturity | 19 | (11) | — | 8 |
| Interest-bearing deposits with other banks | (123) | 134 | (124) | (113) |
| Total interest earning assets | 752 | (1,384) | 27 | (605) |
| Interest paid on(1) |  |  |  |  |
| Demand deposits | (1) | 6 | — | 5 |
| Savings deposits | 2 | (41) | — | (39) |
| Time deposits | (370) | (290) | 78 | (582) |
| Federal funds purchased | — | — | 5 | 5 |
| Retail repurchase agreements | 3 | (9) | (1) | (7) |
| Wholesale repurchase agreements | — | 1 | 4 | 5 |
| FHLB advances and other borrowings | 14 | (227) | 6 | (207) |
| Total interest-bearing liabilities | (352) | (560) | 92 | (820) |
| Change in net interest income(1) | $1,104 | $(824) | $(65) | $215 |

(1) FTE basis based on the federal statutory rate of 35%.

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

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

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net interest income, GAAP | $21,111 | $20,839 |
| FTE adjustment(1) | 531 | 588 |
| Net interest income, FTE(1) | $21,642 | $21,427 |

(1) FTE basis is based on the federal statutory rate of 35%.

The interest earned and the average yield on loans include accretion income from acquired loan portfolios. The following table presents our average consolidated balance sheets, as of the dates indicated, and net interest analysis, on a FTE basis excluding the impact of non-cash purchase accounting accretion, in the periods indicated:

*(Amounts in thousands)*

| Earning assets | Three Months Ended March 31, 2016 Interest(1) | Average Yield/ Rate(1) | 2015 Interest(1) | Average Yield/ Rate(1) |
| --- | ---: | ---: | ---: | ---: |
| Loans(2) | $21,599 | 5.02% | $21,954 | 5.31% |
| Accretion income | 2,252 |  | 2,839 |  |
| Less: cash accretion income | 805 |  | 1,096 |  |
| Non-cash accretion income | 1,447 |  | 1,743 |  |
| Loans, normalized(3) | 20,152 | 4.68% | 20,211 | 4.88% |
| Other earning assets | 2,482 | 2.26% | 2,732 | 1.83% |
| Total earning assets | 22,634 | 4.19% | 22,943 | 4.07% |
| Total interest-bearing liabilities | 2,439 | 0.59% | 3,259 | 0.73% |
| Net interest income, FTE(3) | $20,195 |  | $19,684 |  |
| Net interest rate spread, normalized(3) |  | 3.60% |  | 3.34% |
| Net interest margin, normalized(3) |  | 3.74% |  | 3.50% |

(1) FTE basis based on the federal statutory rate of 35%.

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

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

*Three-Month Comparison*. Net interest income on a FTE basis increased $215 thousand, or 1.00%, and net interest income on a GAAP basis increased $272 thousand, or 1.31%. in the first quarter of 2016 compared to the same quarter of the prior year. Normalized net interest income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to purchased credit impaired (“PCI”) loans. The normalized net interest margin increased 24 basis points compared to an increase of 21 basis points on a GAAP basis in the first quarter of 2016 compared to the same quarter of the prior year. The normalized net interest spread increased 26 basis points compared to an increase of 21 basis points on a GAAP basis.

Average earning assets decreased $110.87 million, or 4.85%, during the first quarter of 2016 compared to the same quarter of the prior year primarily due to decreases in interest-bearing deposits with other banks. The normalized yield on earning assets increased 12 basis points compared to an increase of 7 basis points on a GAAP basis, which was largely due to the decrease in non-cash accretion income. The normalized yield on loans decreased 20 basis points compared to a decrease of 29 basis points on a GAAP basis. Non-cash accretion income decreased $296 thousand, or 16.98%, during the first quarter of 2016 compared to the same quarter of the prior year. We expect accretion income to continue to decline in future periods due to acquired portfolio attrition.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $149.59 million, or 8.31%, during the first quarter of 2016 compared to the same quarter of the prior year primarily due to the decline in average interest-bearing time deposit balances. The yield on interest-bearing liabilities decreased 14 basis points, which was largely due to a decrease in the average balance and rate of time deposits. Average interest-bearing deposits decreased $164.54 million, or 10.44%, which was driven by a $164.40 million, or 23.55%, decrease in average time deposits and a $9.22 million, or 2.62%, decrease in interest-bearing demand deposits offset by a $9.07 million, or 1.72%, increase in savings deposits, which include money market and savings accounts. Average borrowings increased $14.96 million, or 6.66%, which was driven by a $10.14 million, or 14.94%, increase in average retail repurchase agreements.

#### Provision for Loan Losses

*Three-Month Comparison*. The provision for loan losses is added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level management determines necessary to absorb probable losses in the existing loan portfolio. The provision charged to operations increased $87 thousand, or 7.91%, during the first quarter of 2016 compared to the same quarter of the prior year, which included a $136 thousand increase in the non-PCI provision and a $49 thousand decrease in the PCI provision. The provision charged to operations included a $9 thousand benefit attributed to the Federal Deposit Insurance Corporation (“FDIC”) indemnification asset to reflect the indemnified portion of the post-acquisition exposure during the first quarter of 2016 compared to a $46 thousand benefit during the same quarter of the prior year. See “Allowance for Loan Losses” in the “Financial Condition” section below.

#### Noninterest Income

Noninterest income, all revenues not included in interest and fee income related to earning assets, comprised 27.24% of total net interest and noninterest income in the first quarter of 2016 compared to 24.70% in the same quarter of the prior year. The following table presents the components of, and changes in, noninterest income in the periods indicated:

*(Amounts in thousands)*

|  | Three Months Ended March 31, Increase 2016 | 2015 | Three Months Ended (Decrease) | % Change |
| --- | ---: | ---: | ---: | ---: |
| Wealth management | $684 | $666 | $18 | 2.70% |
| Service charges on deposits | 3,291 | 2,903 | 388 | 13.37% |
| Other service charges and fees | 2,010 | 2,008 | 2 | 0.10% |
| Insurance commissions | 2,191 | 2,127 | 64 | 3.01% |
| Net gain (loss) on sale of securities | 1 | (23) | 24 | -104.35% |
| Net FDIC indemnification asset amortization | (1,159) | (1,565) | 406 | -25.94% |
| Other operating income | 885 | 720 | 165 | 22.92% |
| Total noninterest income | $7,903 | $6,836 | $1,067 | 15.61% |

*Three-Month Comparison.* Noninterest income increased $1.07 million, or 15.61%, in the first quarter of 2016 compared to the same quarter of the prior year. The increase in wealth management revenues, which include fees and commissions for trust and investment advisory services, was due to FCWM. Service charges on deposits and other service charges and fees increased primarily from an increase in monthly service charges on checking accounts. Insurance commissions increased largely due to an increase in commissions from the sale of life and health policies. We realized a net gain of $1 thousand on the sale of securities during the first quarter of 2016. See Note 3, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. Net negative amortization related to the FDIC indemnification asset decreased as a result of improved loss estimates and payoffs in the covered loan portfolio associated with the acquisition of Waccamaw Bank (“Waccamaw”). Other operating income increased primarily due to a $364 thousand gain on the sale of previously closed branches offset by property, plant, and equipment writedowns totaling $174 thousand.

Excluding the impact from sales of securities and branches, net FDIC indemnification asset amortization, and property writedowns, noninterest income increased $447 thousand, or 5.31%, to $8.87 million in the first quarter of 2016, compared to $8.42 million in the same quarter of the prior year.

#### Noninterest Expense

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

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2016 | 2015 | Three Months Ended Increase (Decrease) | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $10,475 | $9,693 | $782 | 8.07% |
| Occupancy expense | 1,531 | 1,534 | (3) | -0.20% |
| Furniture and equipment expense | 1,096 | 1,237 | (141) | -11.40% |
| Amortization of intangibles | 278 | 277 | 1 | 0.36% |
| FDIC premiums and assessments | 374 | 415 | (41) | -9.88% |
| Merger, acquisition, and divestiture expense | 39 | 86 | (47) | -54.65% |
| Other operating expense | 5,021 | 4,538 | 483 | 10.64% |
| Total noninterest expense | $18,814 | $17,780 | $1,034 | 5.82% |

*Three-Month Comparison*. Noninterest expense increased $1.03 million, or 5.82%, in the first quarter of 2016 compared to the same quarter of the prior year. Full-time equivalent employees, calculated using the number of hours worked, decreased to 660 as of March 31, 2016, from 669 as of March 31, 2015, primarily due to the sale of an insurance agency in 2015 and discontinuing secondary mortgage operations. Occupancy, furniture, and equipment expense decreased $144 thousand, or 5.20%, in the first quarter of 2016 compared to the same quarter of the prior year due to branch closures. We incurred expenses totaling $39 thousand related to the pending branch exchange with First Bank during the first quarter of 2016. The increase in other operating expense was primarily due to a $384 thousand increase in the net loss on sales and expenses related to other real estate owned (“OREO”) to $711 thousand compared to the same quarter of the prior year.

#### Income Tax Expense

*Three-Month Comparison*. The Company’s effective tax rate, income tax as a percent of pretax income, may vary significantly from statutory rates due to permanent differences, which are items of income and expense excluded by law from the calculation of taxable income. Our most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies, which are both exempt from federal income tax. Income tax expense increased $92 thousand, or 3.24%, and the effective rate increased 24 basis points to 32.50% in the first quarter of 2016 compared to the same quarter of the prior year. The increase in the effective rate was largely due to an increase in taxable revenues as a percent of operating earnings.

### Financial Condition

Total assets as of March 31, 2016, increased $8.01 million, or 0.33%, to $2.47 billion compared with $2.46 billion as of December 31, 2015. Total liabilities as of March 31, 2016, increased $13.40 million, or 0.63%, to $2.13 billion compared with $2.12 billion as of December 31, 2015.

Total stockholders’ equity as of March 31, 2016, decreased $5.39 million, or 1.57%, to $337.63 million compared to $343.02 million as of December 31, 2015. The change in stockholders’ equity was largely due to net income of $6.08 million, the repurchase of 487,739 shares of our common stock totaling $8.87 million, and dividends declared on our common stock of $2.51 million. Our book value per common share was $19.15 as of March 31, 2016, an increase of $0.20, or 1.06%, compared with $18.95 as of December 31, 2015.

#### Cash and Cash Equivalents

Cash and cash equivalents as of March 31, 2016, decreased $12.20 million, or 23.56%, compared to December 31, 2015, primarily due to funding our non-covered loan portfolio growth and repurchasing common stock. Interest-bearing deposits in banks are primarily comprised of excess liquidity kept at correspondent banks bearing overnight market rates.

#### 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 securities as of March 31, 2016, decreased $27.70 million, or 7.57%, compared to December 31, 2015, primarily due to the sale of certain mortgage-backed Agency securities. The market value of securities available for sale as a percentage of amortized cost was 97.99% as of March 31, 2016, compared to 98.33% as of December 31, 2015.

Held-to-maturity securities as of March 31, 2016, experienced a slight decrease of $56 thousand, or 0.08%, compared to December 31, 2015. The market value of securities held to maturity as a percentage of amortized cost was 100.63% as of March 31, 2016, compared to 99.93% as of December 31, 2015.

Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no credit-related OTTI charges in earnings associated with debt securities for the three months ended March 31, 2016 or 2015. We recognized no OTTI charges in earnings associated with equity securities for the three months ended March 31, 2016 or 2015. See Note 3, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

#### Loans Held for Investment

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of March 31, 2016, increased $55.89 million, or 3.27%, compared to December 31, 2015. Non-covered loans increased $62.39 million, or 3.84%, due to increased loan demand in the non-farm, non-residential segment of the loan portfolio during the first quarter of 2016. Covered loans decreased $6.50 million, or 7.82%, due to continued runoff in the covered Waccamaw portfolio. See Note 4, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report. Average loans increased $52.28 million, or 3.12%, for the quarter ended March 31, 2016, compared to the full year of 2015. The average loan to deposit ratio for the quarter ended March 31, 2016, was 92.99%, compared to 89.98% for the full year of 2015.

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

*(Amounts in thousands)*

| Non-covered loans held for investment Commercial loans | March 31, 2016 Amount | Percent | December 31, 2015 Amount | Percent | March 31, 2015 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $52,529 | 2.98% | $48,896 | 2.86% | $39,628 | 2.37% |
| Commercial and industrial | 92,397 | 5.24% | 88,903 | 5.21% | 78,482 | 4.70% |
| Multi-family residential | 111,388 | 6.32% | 95,026 | 5.57% | 97,295 | 5.82% |
| Single family non-owner occupied | 151,595 | 8.60% | 149,351 | 8.75% | 137,436 | 8.22% |
| Non-farm, non-residential | 521,471 | 29.59% | 485,460 | 28.45% | 463,035 | 27.71% |
| Agricultural | 3,650 | 0.21% | 2,911 | 0.17% | 1,671 | 0.10% |
| Farmland | 27,013 | 1.53% | 27,540 | 1.61% | 28,644 | 1.71% |
| Total commercial loans | 960,043 | 54.47% | 898,087 | 52.62% | 846,191 | 50.63% |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 106,444 | 6.04% | 107,367 | 6.29% | 109,158 | 6.53% |
| Single family owner occupied | 497,530 | 28.23% | 495,209 | 29.02% | 491,317 | 29.40% |
| Owner occupied construction | 40,892 | 2.32% | 43,505 | 2.55% | 35,324 | 2.12% |
| Total consumer real estate loans | 644,866 | 36.59% | 646,081 | 37.86% | 635,799 | 38.05% |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 73,531 | 4.17% | 72,000 | 4.22% | 69,084 | 4.13% |
| Other | 7,451 | 0.43% | 7,338 | 0.43% | 7,236 | 0.44% |
| Total consumer and other loans | 80,982 | 4.60% | 79,338 | 4.65% | 76,320 | 4.57% |
| Total non-covered loans | 1,685,891 | 95.66% | 1,623,506 | 95.13% | 1,558,310 | 93.25% |
| Total covered loans | 76,538 | 4.34% | 83,035 | 4.87% | 112,724 | 6.75% |
| Total loans held for investment, net unearned income | 1,762,429 | 100.00% | 1,706,541 | 100.00% | 1,671,034 | 100.00% |
| Less: allowance for loan losses | 20,467 |  | 20,233 |  | 20,252 |  |
| Total loans held for investment, net of unearned income and allowance | $1,741,962 |  | $1,686,308 |  | $1,650,782 |  |
| Loans held for sale | $— |  | $— |  | $1,174 |  |

45

The following table presents covered loans disaggregated by class as of the periods indicated:

*(Amounts in thousands)*

| Commercial loans | March 31, 2016 Amount | Percent | December 31, 2015 Amount | Percent | March 31, 2015 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $6,129 | 8.01% | $6,303 | 7.59% | $10,410 | 9.23% |
| Commercial and industrial | 1,020 | 1.33% | 1,170 | 1.41% | 2,371 | 2.10% |
| Multi-family residential | 100 | 0.13% | 640 | 0.77% | 678 | 0.60% |
| Single family non-owner occupied | 2,258 | 2.95% | 2,674 | 3.22% | 4,846 | 4.30% |
| Non-farm, non-residential | 12,439 | 16.25% | 14,065 | 16.94% | 24,672 | 21.89% |
| Agricultural | 34 | 0.04% | 34 | 0.04% | 42 | 0.04% |
| Farmland | 632 | 0.83% | 643 | 0.77% | 697 | 0.62% |
| Total commercial loans | 22,612 | 29.54% | 25,529 | 30.74% | 43,716 | 38.78% |
| Consumer real estate loans |  |  |  |  |  |  |
| Home equity lines | 45,745 | 59.77% | 48,565 | 58.49% | 57,415 | 50.93% |
| Single family owner occupied | 7,837 | 10.24% | 8,595 | 10.35% | 10,994 | 9.75% |
| Owner occupied construction | 262 | 0.34% | 262 | 0.32% | 512 | 0.46% |
| Total consumer real estate loans | 53,844 | 70.35% | 57,422 | 69.16% | 68,921 | 61.14% |
| Consumer and other loans |  |  |  |  |  |  |
| Consumer loans | 82 | 0.11% | 84 | 0.10% | 87 | 0.08% |
| Total covered loans | $76,538 | 100.00% | $83,035 | 100.00% | $112,724 | 100.00% |

#### Risk Elements

We seek to mitigate credit by adhering to specific underwriting practices and by ongoing monitoring of our loan portfolio. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.0 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.

Nonperforming assets consist of loans accounted for on a nonaccrual basis, accruing 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. See Note 5, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The following table summarizes the components of nonperforming assets and presents additional details for nonperforming and restructured loans as of the periods indicated:

*(Amounts in thousands)*

| Non-covered nonperforming | March 31, 2016 | December 31, 2015 | March 31, 2015 |
| --- | ---: | ---: | ---: |
| Nonaccrual loans | $16,196 | $17,847 | $15,387 |
| Accruing loans past due 90 days or more | 243 | — | — |
| TDRs(1) | 158 | 73 | — |
| Total nonperforming loans | 16,597 | 17,920 | 15,387 |
| Non-covered OREO | 5,313 | 4,873 | 7,032 |
| Total non-covered nonperforming assets | $21,910 | $22,793 | $22,419 |
| **Covered nonperforming** |  |  |  |
| Nonaccrual loans | $1,955 | $647 | $2,780 |
| Accruing loans past due 90 days or more | — | — | 60 |
| Total nonperforming loans | 1,955 | 647 | 2,840 |
| Covered OREO | 2,279 | 4,034 | 5,834 |
| Total covered nonperforming assets | $4,234 | $4,681 | $8,674 |
| **Total nonperforming** |  |  |  |
| Nonaccrual loans | $18,151 | $18,494 | $18,167 |
| Accruing loans past due 90 days or more | 243 | — | 60 |
| TDRs(1) | 158 | 73 | — |
| Total nonperforming loans | 18,552 | 18,567 | 18,227 |
| OREO | 7,592 | 8,907 | 12,866 |
| Total nonperforming assets | $26,144 | $27,474 | $31,093 |
| **Additional Information** |  |  |  |
| Performing TDRs(2) | $13,474 | $13,889 | $14,025 |
| Total TDRs(3) | 13,632 | 13,962 | 14,025 |
| **Non-covered ratios** |  |  |  |
| Nonperforming loans to total loans | 0.98% | 1.10% | 0.99% |
| Nonperforming assets to total assets | 0.92% | 0.96% | 0.91% |
| Non-PCI allowance to nonperforming loans | 123.17% | 112.61% | 130.88% |
| Non-PCI allowance to total loans | 1.21% | 1.24% | 1.29% |
| **Total ratios** |  |  |  |
| Nonperforming loans to total loans | 1.05% | 1.09% | 1.09% |
| Nonperforming assets to total assets | 1.06% | 1.12% | 1.20% |
| Allowance for loan losses to nonperforming loans | 110.32% | 108.97% | 111.11% |
| Allowance for loan losses to total loans | 1.16% | 1.19% | 1.21% |

(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $825 thousand and $923 thousand for the periods ended March 31, 2016, and December 31, 2015, respectively.

(2) TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $377 thousand, $416 thousand, and $706 thousand for the periods ended March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

(3) Total TDRs exclude nonaccrual TDRs of $1.20 million, $1.34 million, and $706 thousand for the periods ended March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

Non-covered nonperforming loans as a percent of total non-covered loans totaled 0.98% as of March 31, 2016, 1.10% as of December 31, 2015, and 0.99% as of March 31, 2015. Non-covered nonperforming assets as a percent of total non-covered assets totaled 0.92% as of March 31, 2016, 0.96% as of December 31, 2015, and 0.91% as of March 31, 2015.

Non-covered nonaccrual loans as of March 31, 2016, decreased $1.65 million, or 9.25%, from December 31, 2015, and increased $809 thousand, or 5.26%, from March 31, 2015. As of March 31, 2016, non-covered nonaccrual loans were largely attributed to single family owner occupied loans (42.84%) and non-farm, non-residential loans (39.82%). There were no non-covered nonaccrual loans attributed to performing loans acquired in business combinations as of March 31, 2016. 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 upon management’s estimate of loss at ultimate resolution.

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, as of March 31, 2016, decreased $5.14 million, or 18.44%, to $22.74 million from December 31, 2015, and $3.18 million, or 12.28%, from March 31, 2015. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.35% as of March 31, 2016, which included loans past due (0.39%) and nonaccrual loans (0.96%).

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, and/or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of March 31, 2016, decreased $330 thousand, or 2.36%, to $13.63 million from December 31, 2015, and decreased $393 thousand, or 2.80%, from March 31, 2015. Nonperforming accruing TDRs as of March 31, 2016, increased $85 thousand from December 31, 2015, and $158 thousand from March 31, 2015. Accruing nonperforming TDRs as a percent of total accruing TDRs totaled 1.16% as of March 31, 2016 and 0.52% as of December 31, 2015. There were no accruing nonperforming TDRs as of March 31, 2015. Specific reserves on TDRs totaled $590 thousand as of March 31, 2016, and December 31, 2015, and $482 thousand as of March 31, 2015.

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, increased $440 thousand, or 9.03%, as of March 31, 2016, from December 31, 2015, and decreased $1.72 million, or 24.45%, from March 31, 2015. As of March 31, 2016, non-covered OREO consisted of 43 properties with an average holding period of 7 months. The net loss on the sale of OREO totaled $662 thousand in the first quarter of 2016 compared to $177 thousand in the same quarter of the prior year. The following table details activity within OREO for the periods indicated:

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2016 Non-covered | Covered | Total | 2015 Non-covered | Covered | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning balance | $4,873 | $4,034 | $8,907 | $6,638 | $6,324 | $12,962 |
| Additions | 1,995 | — | 1,995 | 924 | 230 | 1,154 |
| Disposals | (1,146) | (1,571) | (2,717) | (382) | (207) | (589) |
| Valuation adjustments | (409) | (184) | (593) | (148) | (513) | (661) |
| Ending balance | $5,313 | $2,279 | $7,592 | $7,032 | $5,834 | $12,866 |

#### 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.

Management performs quarterly assessments to determine the appropriate level of the allowance for loan losses. The allowance for loan losses includes specific allocations related to significant individual loans and credit relationships and general reserves related to loans not individually evaluated. Loans not individually evaluated are grouped into pools based on similar risk characteristics. Management’s general reserve allocations are based on judgments of qualitative and quantitative factors about macro and micro economic conditions reflected in the loan portfolio and the economy. As of March 31, 2016, our qualitative risk factors continued to reflect a reduced risk of loan losses due to stable asset quality metrics offset by a slight increase in the risk of loan losses due to credit concentrations. Loans acquired in business combinations that are deemed impaired at acquisition are grouped into pools and evaluated separately from the non-PCI portfolio. As of March 31, 2016, our PCI loans were aggregated into the following loan pools: Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial, and Peoples residential. There were five PCI loan pools as of March 31, 2016, and six PCI loan pools as of December 31, 2015, and March 31, 2015. The cash flow analysis performed for the PCI loan pools identified two impaired pools as of March 31, 2016, December 31, 2015, and March 31, 2015. The PCI loan provision is offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion of the post-acquisition exposure. See “Critical Accounting Estimates” above, as well as “Significant Accounting Policies” in Note 1, “Basis of Presentation,” and Note 6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The allowance for loan losses as of March 31, 2016, increased $234 thousand, or 1.16%, from December 31, 2015, due to a $264 thousand, or 1.31%, increase in the non-PCI allowance offset by a $30 thousand, or 55.56%, decrease in the PCI allowance. The non-PCI allowance as a percent of non-covered loans totaled 1.21% as of March 31, 2016, 1.24% at December 31, 2015, and 1.29% at March 31, 2015. A $9 thousand provision for loan losses was recorded through the FDIC indemnification asset in the first quarter of 2016, compared to a $46 thousand provision during the same quarter of the prior year. Net charge-offs decreased $159 thousand, or 14.18%, in the first quarter of 2016 compared to the same quarter of the prior year. The following table presents activity in our allowance for loan losses for the periods indicated:

*(Amounts in thousands)*

|  | Three Months Ended March 31, 2016 Non-PCI Portfolio | PCI Portfolio | Total | 2015 Non-PCI Portfolio | PCI Portfolio | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning balance | $20,179 | $54 | $20,233 | $20,169 | $58 | $20,227 |
| Provision for (recovery of) loan losses | 1,226 | (30) | 1,196 | 1,090 | 56 | 1,146 |
| Benefit attributable to the FDIC indemnification asset | — | (9) | (9) | — | (46) | (46) |
| Provision for (recovery of) loan losses charged to operations | 1,226 | (39) | 1,187 | 1,090 | 10 | 1,100 |
| Provision for loan losses recorded through the FDIC indemnification asset | — | 9 | 9 | — | 46 | 46 |
| Charge-offs | (1,228) | — | (1,228) | (1,578) | — | (1,578) |
| Recoveries | 266 | — | 266 | 457 | — | 457 |
| Net charge-offs | (962) | — | (962) | (1,121) | — | (1,121) |
| Ending balance | $20,443 | $24 | $20,467 | $20,138 | $114 | $20,252 |

The loan portfolio continues to be monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. As of March 31, 2016, management considered the allowance to be adequate based upon analysis of the portfolio; however, no assurance can be made that additions to the allowance will not be required in future periods.

#### Deposits

Total deposits as of March 31, 2016, increased $1.41 million, or 0.08%, compared to December 31, 2015. Noninterest-bearing deposits increased $1.83 million and savings deposits, which include money market accounts and savings accounts, increased $23.50 million. Interest-bearing deposits decreased $3.55 million and time deposits decreased $20.37 million.

#### Borrowings

Total borrowings as of March 31, 2016, increased $14.05 million, or 6.40%, compared to December 31, 2015. Short-term borrowings generally consist of federal funds purchased and retail repurchase agreements. The balance of federal funds purchased increased to $18.00 million and the weighted average contractual rate was 0.51% as of March 31, 2016, compared to no federal funds purchased as of December 31, 2015. The balance of retail repurchase agreements decreased $3.95 million, or 4.46%, and the weighted average rate decreased 6 basis points to 0.07%, as of March 31, 2016, compared to December 31, 2015.

Long-term borrowings generally consist of wholesale repurchase agreements; FHLB borrowings, including convertible and callable advances; subordinated debt; and other obligations. The balance and weighted average contractual rate of wholesale repurchase agreements remained constant at $50.00 million and 3.71%, respectively, as of March 31, 2016, compared to December 31, 2015. As of March 31, 2016, wholesale repurchase agreements had contractual maturities between nine months and three years. The balance and weighted average contractual rate of FHLB borrowings remained constants at $65.00 million and 4.04%, respectively, as of March 31, 2016, compared to December 31, 2015. As of March 31, 2016, FHLB borrowings had contractual maturities between one and five years. Subordinated debt consists of $15.46 million of junior subordinated debentures (“Debentures”) that were issued by the Company in October 2003 through the Trust with an interest rate of three-month London InterBank Offered Rate (“LIBOR”) plus 2.95%. The Debentures mature in October 2033 and are currently callable at the option of the Company.

The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution that carries an interest rate of one-month LIBOR plus 2.00% and matures in April 2016. There was no outstanding balance on the line of credit as of March 31, 2016, or December 31, 2015.

### Liquidity and Capital Resources

#### Liquidity

Liquidity is a measure of our ability to raise sufficient cash, or convert assets to cash, to meet our financial obligations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) that is designed to detect potential liquidity issues to protect 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”) and 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.

As of March 31, 2016, we maintained liquidity in the form of unencumbered cash on hand and deposits with other financial institutions of $39.59 million, availability on federal funds lines with correspondent banks of $95.00 million, availability from the Federal Reserve Bank discount window of $9.09 million, unused borrowing capacity with the FHLB of $382.36 million, and unpledged available-for-sale securities of $115.93 million. Cash on hand and deposits with other financial institutions and lines of credit with correspondent banks and the Federal Reserve Bank are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Our approved lines of credit with correspondent banks are available as backup liquidity sources. Unused borrowing capacity with the FHLB is reported net of letters of credit held to secure public unit deposits. As of March 31, 2016, we provided letters of credit to public depositors with the FHLB totaling $22.69 million. Available-for-sale securities represent a secondary source of liquidity upon conversion to a liquid asset.

As a holding company, the Company does not conduct significant operations. The Company’s primary sources of liquidity are dividends received from the Bank and borrowings. Dividends paid by the Bank are subject to certain regulatory limitations. As of March 31, 2016, the Company’s liquid assets consisted of cash and investment securities totaling $10.89 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders for the next twelve months. The Company also maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution that carries an interest rate of one-month LIBOR plus 2.00% and matures in April 2016. There was no outstanding balance on the line of credit as of March 31, 2016.

#### 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. Basel III Capital Rules became effective on January 1, 2015, subject to a four-year phase-in period. The Company’s required initial minimum capital ratios under Basel III include:

- 4.5% Common equity Tier 1 capital to risk-weighted assets
- 6.0% Tier 1 capital to risk-weighted assets
- 8.0% Total capital to risk-weighted assets
- 4.0% Tier 1 leverage ratio

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

| Common equity Tier 1 ratio | March 31, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| First Community Bancshares, Inc. | 13.90% | 14.54% |
| First Community Bank | 13.32% | 13.60% |
| Tier 1 risk-based capital ratio |  |  |
| First Community Bancshares, Inc. | 13.90% | 14.73% |
| First Community Bank | 13.32% | 13.60% |
| Total risk-based capital ratio |  |  |
| First Community Bancshares, Inc. | 15.12% | 15.95% |
| First Community Bank | 14.56% | 14.82% |
| Tier 1 leverage ratio |  |  |
| First Community Bancshares, Inc. | 10.00% | 10.62% |
| First Community Bank | 9.52% | 9.77% |

Our regulatory capital ratios as of March 31, 2016, decreased from the prior period primarily due to the phase-in of certain Basel III Capital Rules related to common equity Tier 1 deductions and an increase in risk-weighted assets. As of March 31, 2016, our capital ratios were well in excess of the minimum standards and classified as “well capitalized” under regulatory capital adequacy standards applicable to that period. 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 March 31, 2016. A description of the Basel III Capital Rules is included in Part I, Item 1 of the Company’s 2015 Form 10-K.

#### 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:

*(Amounts in thousands)*

|  | March 31, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Commitments to extend credit | $242,581 | $235,302 |
| Financial letters of credit | 4,485 | 4,485 |
| Performance letters of credit | 3,071 | 3,280 |
| Total off-balance sheet risk | $250,137 | $243,067 |
| Reserve for unfunded commitments | $326 | $326 |

#### Impact of Inflation and Changing Prices

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

## Market risk

As filed, 5,393 characters.

Our profitability is largely dependent upon net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our Company, like other financial institutions, is subject to interest rate risk to the degree that interest-earning assets reprice differently than interest-bearing liabilities. We manage 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.

Net interest income, our primary component of operational revenue, is subject to variation due to changes in interest rate environments and unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components: repricing risk, basis risk, yield curve risk, and option risk. Repricing risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs when underlying rates on assets and liabilities change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences that occurs when the same instrument experiences unequal change in the spread between two or more rates for different maturities. Lastly, option risk occurs from embedded options, often put or call options, given or sold to holders of financial instruments.

To mitigate the effect of changes in the general level of interest rates, we manage repricing opportunities and thus, our interest rate sensitivity. We seek to control our interest rate risk exposure to insulate net interest income and net earnings from fluctuations in the general level of interest rates. To measure our exposure to interest rate risk, quarterly simulations of net interest income are performed using financial models that project net interest income through a range of possible interest rate environments, including rising, declining, most likely, and flat rate scenarios. We use a simulation model that captures all earning assets, interest-bearing liabilities, and off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook for a range of assumed interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each rate environment based on the current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-paying liabilities, and our estimate of yields earned on assets and rates paid on deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies. The earnings simulation model provides the best tool for managing interest rate risk available to us and the industry.

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios. In addition, the policy addresses exposure limits to changes in the economic value of equity per predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is within our defined policy limits.

The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income. The model simulates rate changes of plus 300 to minus 100 basis points from the base simulation and illustrates the prospective effects of hypothetical interest rate changes over a twelve-month period. This modeling technique, although useful, does not take into account all strategies that management might undertake in response to a sudden and sustained rate shock as depicted. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. As of March 31, 2016, the Federal Open Market Committee maintained a target range for federal funds of 25 to 50 basis points, rendering a complete downward shock of 200 basis points meaningless; thus, downward rate scenarios are limited to minus 100 basis points. In the downward rate shocks presented, benchmark interest rates are assumed to have floors near 0%.

| (Amounts in thousands, except basis points) Increase (Decrease) in Interest Rates in Basis Points | March 31, 2016 Change in Net Interest Income | Percent Change | December 31, 2015 Change in Net Interest Income | Percent Change |
| ---: | ---: | ---: | ---: | ---: |
| 300 | $776 | 0.9% | $(1,162) | -1.4% |
| 200 | 607 | 0.7% | (694) | -0.9% |
| 100 | 249 | 0.3% | (409) | -0.5% |
| (100) | (2,208) | -2.6% | (1,813) | -2.2% |

## Controls and procedures

As filed, 2,526 characters.

### 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 March 31, 2016, our disclosure controls and procedures were effective.

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

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

### Changes in Internal Control over Financial Reporting

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2016, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 873 characters.

A description of the Company’s risk factors is included in Part I, Item 1A, “Risk Factors,” of our 2015 Form 10-K. Our risk factors discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, our risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes from the risk factors previously disclosed in our 2015 Form 10-K.

Filed May 6, 2016.
Source: SEC EDGAR, the filing index for accession 0001193125-16-581949. Last ingested by Listed: Nov 14, 2026, 21:20 ET. No prices; not investment advice.