# First Community Bankshares Inc: Form 10-K for the period ended Dec 31, 2019

- Company: [First Community Bankshares Inc](/companies/fcbc.md) (CIK 859070)
- Form: 10-K
- Filed: 2020-03-13
- Accepted by EDGAR: Mar 13, 2020, 14:00 ET
- Period: 2019-12-31
- Accession: 0001437749-20-005120
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/859070/000143774920005120/fcbc20191231_10k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/859070/000143774920005120/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2019-10-01 to 2019-12-31 | $1.3m | us-gaap:InterestExpense |
| Interest expense | 12 months, 2019-01-01 to 2019-12-31 | $5.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-10-01 to 2019-12-31 | $2.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 12 months, 2019-01-01 to 2019-12-31 | $11.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-10-01 to 2019-12-31 | $9.6m | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2019-01-01 to 2019-12-31 | $38.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.61 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 12 months, 2019-01-01 to 2019-12-31 | $2.46 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.61 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 12 months, 2019-01-01 to 2019-12-31 | $2.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-10-01 to 2019-12-31 | 15,670,047 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 12 months, 2019-01-01 to 2019-12-31 | 15,756,093 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 12 months, 2019-01-01 to 2019-12-31 | $56.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 12 months, 2019-01-01 to 2019-12-31 | $8.4m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 12 months, 2019-01-01 to 2019-12-31 | $15.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 12 months, 2019-01-01 to 2019-12-31 | $16.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-12-31 | $217.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-12-31 | $2.80bn | us-gaap:Assets |
| Total liabilities | at 2019-12-31 | $2.37bn | us-gaap:Liabilities |
| Shareholders' equity | at 2019-12-31 | $428.8m | us-gaap:StockholdersEquity |

## Business

As filed, 38,688 characters.

### General

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

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

- demand deposit accounts, savings and money market accounts, certificates of deposit, and individual retirement arrangements;
- commercial, consumer, and real estate mortgage loans and lines of credit;
- various credit card, debit card, and automated teller machine card services;
- corporate and personal trust services; and
- investment management services.

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

### Employees

As of December 31, 2019, we had 527 full-time equivalent employees. In addition, the December 31, 2019, closing of the Highlands Bankshares, Inc. acquisition added 135 employees. Our employees are not represented by collective bargaining agreements and we consider employee relations to be excellent.

### Market Area

As of December 31, 2019, we operated 58 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment, Community Banking. 14 of those locations were Highlands branches. Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals and businesses across a variety of industries such as education, government, and health services; retail trade; construction; manufacturing; tourism; coal mining and gas extraction; and transportation.

### Competition

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

### Supervision and Regulation

### Overview

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

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

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

#### First Community Bankshares, Inc.

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

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

#### First Community Bank

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

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

### Permitted Activities under the BHC Act

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

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

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

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

### Capital Requirements

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

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

- 4.5% CET1 to risk-weighted assets
- 6.0% Tier 1 capital (CET1 plus additional Tier 1 capital) to risk-weighted assets
- 8.0% Total capital (Tier 1 plus Tier 2 capital) to risk-weighted assets
- 4.0% Tier 1 leverage ratio

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

After fully phased in on January 1, 2019, Basel III Capital Rules required an additional capital conservation buffer of 2.5% of CET1, effectively resulting in the following minimum ratios:

- 7.0% CET1 to risk-weighted assets
- 8.5% Tier 1 capital to risk-weighted assets
- 10.5% Total capital to risk-weighted assets

Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories, in the aggregate, exceed 15% of CET1.

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

Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

In August 2018, the Federal Reserve issued an interim final rule, which expanded the applicability of the Small Bank Holding Company Policy Statement through an increase in the size limitation for qualifying bank holding companies from $1 billion to $3 billion in total consolidated assets. As a result, the Company qualifies under the Small Bank Holding Company Policy Statement for exemption from the Federal Reserve’s consolidated risk-based capital requirements at the holding company level. Management believes that the Company and the Bank would meet all capital adequacy requirements under Basel III Capital Rules on a fully phased-in basis, as of December 31, 2019.

Beginning in the first quarter of 2020, a qualifying community banking organization may elect to use the community bank leverage ratio (“CBLR”) framework to eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advance approaches banking organization. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the FDICIA. A qualifying community banking organization may opt into and out of the CBLR framework by completing the associated reporting requirements on its call report.

### Prompt Corrective Action

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

The Bank was classified as well-capitalized under prompt corrective action regulations as of December 31, 2019. In order to be considered a well-capitalized institution under Basel III Capital Rules, an organization must not be subject to any written agreement, order, capital directive, or prompt corrective action directive and must maintain the following minimum capital ratios:

- 6.5% CET1 to risk-weighted assets
- 8.0% Tier 1 capital to risk-weighted assets
- 10.0% Total capital to risk-weighted assets
- 5.0% Tier 1 leverage ratio

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

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

### Safety and Soundness Standards

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

### Payment of Dividends

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

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

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

### Source of Strength

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

### Transactions with Affiliates

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

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

### Deposit Insurance and Assessments

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

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

### The Volcker Rule

The Dodd-Frank Act amended the BHC Act to prohibit depository institutions and their affiliates from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with hedge funds or private equity funds, known as the Volcker Rule. The Volcker Rule, which became effective in July 2015 and the implementing regulations of which were amended in 2019 and are subject to further amendment expected in 2020, does not significantly impact the operations of the Company and its subsidiaries, as we do not have any engagement in the businesses prohibited by the Volcker Rule.

### Community Reinvestment Act

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

### Incentive Compensation

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

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

### Anti-Tying Restrictions

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

### Consumer Protection and Privacy

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

The Consumer Financial Protection Bureau (“CFPB”) is a federal agency with broad authority to implement, examine, and enforce compliance with federal consumer protection laws that relate to credit card, deposit, mortgage, and other consumer financial products and services. The CFPB may enforce actions to prevent and remedy unfair, deceptive, or abusive acts and practices related to consumer financial products and services. The agency has authority to impose new disclosure requirements for any consumer financial product or service. The CFPB may impose a civil penalty or injunction against an entity in violation of federal consumer financial laws.

### Cybersecurity

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

### Bank Secrecy Act and Anti-Money Laundering

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

### Office of Foreign Assets Control Regulation

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

### Sarbanes-Oxley Act

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

### Available Information

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

## Risk factors

As filed, 40,101 characters.

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

### Risks Related to Our Business

### The current economic environment poses significant challenges.

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

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

Additionally, the emergence of widespread health emergencies or pandemics, such as the potential spread of the coronavirus ("Covid-19"), could lead to regional quarantines, business shutdowns, labor shortages, disruptions to supply chains, and overall economic instability. Events such as these may become more common in the future and could cause significant damage such as disrupt power and communication services, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing the repayment of our loans, which could result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.

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

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

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

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

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

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

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

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

### Liquidity risk could impair our ability to fund operations.

Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity. Company specific factors such as a decline in our credit rating, an increase in the cost of capital from financial capital markets, a decrease in business activity due to adverse regulatory action or other company specific event, or a decrease in depositor or investor confidence may impair our access to funding with acceptable terms adequate to finance our activities. General factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a decrease in business activity due to political or environmental events may impair our access to liquidity.

### We are subject to interest rate risk.

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

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

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR”) – benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans), announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting he transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results of operations.

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

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

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

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

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

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

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

Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer loans and repayment is usually dependent on cash flows from the borrower’s business or the property securing the loan. Our commercial business loans are primarily made to small business and middle market customers. As of December 31, 2019, commercial business and real estate loans totaled $1.19 billion, or 56.28%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $6.05 million and largest outstanding commercial real estate loan was $11.13 million. Commercial construction loans generally have a higher risk of loss due to the assumptions used to estimate the value of property at completion and the cost of the project, including interest. If the assumptions and estimates are inaccurate, the value of completed property may fall below the related loan amount. As of December 31, 2019, commercial construction loans totaled $49.00 million, or 2.30% of our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $2.39 million. Losses from our commercial loan portfolio could have a material adverse effect on our financial condition and results of operations.

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

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

### Potential acquisitions may disrupt our business and dilute stockholder value.

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

- potential exposure to unknown or contingent liabilities of the target company;
- exposure to potential asset quality issues of the target company;
- difficulty, expense, and delays of integrating the operations and personnel of the target company;
- potential disruption to our business;
- potential diversion of management’s time and attention;
- loss of key employees and customers of the target company;
- difficulty in estimating the value of the target company;
- potential changes in banking or tax laws or regulations that may affect the target company;
- unexpected costs and delays;
- the target company’s performance does not meet our growth and profitability expectations;
- limited experience in new markets or product areas;
- increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and
- potential short-term decreases in profitability.

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

### Attractive acquisition opportunities may not be available in the future.

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

### We may experience future goodwill impairment.

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

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

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

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

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

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

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

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

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

### Our internal controls and procedures may fail or be circumvented.

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

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

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

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

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

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

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

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

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

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

### Risks Related to Our Common Stock

### The market price of our common stock may be volatile.

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

- actual or expected variations in quarterly results of operations;
- recommendations by securities analysts;
- operating and stock price performance of comparable companies, as deemed by investors;
- news reports relating to trends, concerns, and other issues in the financial services industry;
- perceptions in the marketplace about our Company or competitors;
- new technology used, or services offered, by competitors;
- significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or competitors;
- failure to integrate acquisitions or realize expected benefits from acquisitions;
- changes in government regulations; and
- geopolitical conditions, such as acts or threats of terrorism or military action.

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

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

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

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

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

## Properties

As filed, 898 characters.

We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2019, the Bank provided financial services through a network of 58 branch locations in West Virginia (18 branches), Virginia (26 branches), North Carolina (7 branches), and Tennessee (7 branches). We own 57 of those branches and lease the remaining branch. Our wealth management office is leased. As of December 31, 2019, there were no mortgages or liens against any properties. We believe that our properties are suitable and adequate to serve as financial services facilities. A list of all branch and ATM locations is available on our website at www.firstcommunitybank.com. Information contained on our website is not part of this report. For additional information, see Note 8, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

## Legal proceedings

As filed, 367 characters.

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

## Management's discussion and analysis

As filed, 87,307 characters.

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

### Executive Overview

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of December 31, 2019, the Bank operated 58 branches in Virginia, West Virginia, North Carolina and Tennessee. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees. As of December 31, 2019, the Trust Division and FCWM managed and administered $1.12 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Our acquisition and divestiture activity during the last three years includes the December 31, 2019, close of the acquisition of Highlands Bankshares, Inc. (“Highlands”), headquartered in Abingdon, Virginia with total assets of $563 million. The completion of the transaction resulted in total consolidated assets increasing to $2.80 billion. Activity in prior years include the completion of our Agreement and Plan of Reincorporation and Merger changing our corporate domicile from Nevada to Virginia on October 2, 2018, as well as the sale of our remaining insurance agency assets to Bankers Insurance, LLC on October 1, 2018. For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.

### Critical Accounting Policies

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

### Allowance for Loan Losses

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

Our allowance for loan losses consists of reserves assigned to specific loans and credit relationships and general reserves assigned to loans not separately identified that have been segmented into groups with similar risk characteristics using our internal risk grades. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. Factors considered in this evaluation include, but are not limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. Individually significant loans require additional analysis that may include the borrower’s underlying cash flow and capacity for debt repayment, specific business conditions, and value of secondary sources of repayment; consequently, this analysis may result in the identification of weakness and a corresponding need for a specific reserve. No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2019. For additional information, see Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

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

### Goodwill and Other Intangible Assets

We test goodwill for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a qualitative or quantitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We have one reporting unit, which is consistent with our sole operating segment, Community Banking. If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in assessing the fair value of our reporting unit. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference, but limited to the amount of goodwill allocated to the reporting unit. Other identifiable intangible assets are evaluated for impairment if events or changes in circumstances indicate a possible impairment. For additional information, see Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.

### Business Combinations

We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codifications (ASC) 805, Business Combinations (ASC 805). We recognize the full fair value of the assets acquired and liabilities assumed and immediately expense transaction costs. There is no separate recognition of the acquired ALLL on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the of the net tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (bargain purchase gain) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of acquisition.

### Non-GAAP Financial Measures

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

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

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 | 2018 | 2017 |
| --- | ---: | ---: | ---: |
| Net interest income, GAAP | $89,453 | $90,845 | $87,218 |
| FTE adjustment(1) | 849 | 899 | 1,914 |
| Net interest income, FTE | $90,302 | $91,744 | $89,132 |
| Net interest margin, GAAP | 4.54% | 4.37% | 4.14% |
| FTE adjustment(1) | 0.05% | 0.04% | 0.09% |
| Net interest margin, FTE | 4.59% | 4.41% | 4.23% |

(1) FTE basis of 21% for 2019 and 2018; and 35% for 2017

### Performance Overview

Highlights of our results of operations in 2019, and financial condition as of December 31, 2019, include the following:

- At the close of business on December 31, 2019, the Company closed the acquisition of Highlands Bankshares, Inc., headquartered in Abingdon, Virginia, with total assets of $563 million. The completion of the transaction increased total consolidated assets to $2.80 billion.
- For the full year, the Company earned $38.80 million, or $2.46 per diluted share, an increase of $2.46 million, or 6.77% over 2018.
- Compared to last year, return on average assets increased 0.19% to 1.75% and return on average equity increased 0.90% to 11.54%.
- Net interest margin increased 18 basis points to 4.59% compared to the year 2018.
- The Company received $7.00 million in litigation settlements for the year.
- The Company incurred $2.12 million in pre-tax merger expenses related to the Highlands acquisition for the year.
- Book value per common share increased $2.54 to $23.33 compared to December 31, 2018.
- The Company repurchased 487,400 common shares for approximately $16.36 million.

### Results of Operations

#### Net Income

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

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

|  | Year Ended December 31, 2019 | 2018 | 2017 | 2019 Compared to 2018 Increase% (Decrease) | Change | 2018 Compared to 2017 Increase% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net income | $38,802 | $36,340 | $21,485 | $2,462 | 6.77% | $14,855 | 69.14% |
| Net income available to common shareholders | 38,802 | 36,340 | 21,485 | 2,462 | 6.77% | 14,855 | 69.14% |
| Basic earnings per common share | 2.47 | 2.19 | 1.26 | 0.28 | 12.79% | 0.93 | 73.81% |
| Diluted earnings per common share | 2.46 | 2.18 | 1.26 | 0.28 | 12.84% | 0.92 | 73.02% |
| Return on average assets | 1.75% | 1.56% | 0.91% | 0.19% | 12.18% | 0.65% | 71.43% |
| Return on average common equity | 11.54% | 10.64% | 6.14% | 0.90% | 8.46% | 4.50% | 73.29% |

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

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

#### Net Interest Income

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

*(Amounts in thousands)*

| Assets Earning assets | Year Ended December 31, 2019 Average Balance | Interest(1) | Average Yield/ Rate(1) | 2018 Average Balance | Interest(1) | Average Yield/ Rate(1) | 2017 Average Balance | Interest(1) | Average Yield/ Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans(2)(3) | $1,722,419 | $88,990 | 5.17% | $1,795,391 | $91,819 | 5.11% | $1,837,092 | $90,032 | 4.90% |
| Securities available for sale | 126,732 | 4,334 | 3.42% | 176,766 | 5,419 | 3.07% | 164,489 | 5,695 | 3.46% |
| Securities held to maturity | 3,045 | 45 | 1.48% | 25,081 | 418 | 1.67% | 32,954 | 487 | 1.48% |
| Interest-bearing deposits | 116,119 | 2,447 | 2.10% | 81,520 | 1,537 | 1.89% | 73,405 | 1,008 | 1.37% |
| Total earning assets | 1,968,315 | $95,816 | 4.87% | 2,078,758 | $99,193 | 4.77% | 2,107,940 | $97,222 | 4.61% |
| Other assets | 248,926 |  |  | 251,853 |  |  | 262,381 |  |  |
| Total assets | $2,217,241 |  |  | $2,330,611 |  |  | $2,370,321 |  |  |
| **Liabilities and stockholders' equity** |  |  |  |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |  |  |  |
| Demand deposits | $453,824 | $281 | 0.06% | $466,403 | $246 | 0.05% | $401,092 | $224 | 0.06% |
| Savings deposits | 504,081 | 823 | 0.16% | 508,353 | 382 | 0.08% | 520,430 | 336 | 0.06% |
| Time deposits | 418,450 | 4,288 | 1.02% | 471,335 | 4,516 | 0.96% | 510,411 | 4,427 | 0.87% |
| Total interest-bearing deposits | 1,376,355 | 5,392 | 0.39% | 1,446,091 | 5,144 | 0.36% | 1,431,933 | 4,987 | 0.35% |
| Borrowings |  |  |  |  |  |  |  |  |  |
| Federal funds purchased | - | - | - | - | - | - | 1 | - | 0.00% |
| Retail repurchase agreements | 2,471 | 4 | 0.14% | 4,010 | 5 | 0.12% | 47,716 | 32 | 0.07% |
| Wholesale repurchase agreements | 3,767 | 119 | 3.17% | 25,000 | 806 | 3.22% | 25,000 | 806 | 3.22% |
| FHLB advances and other borrowings | - | - | - | 36,849 | 1,494 | 4.05% | 55,502 | 2,265 | 4.08% |
| Total borrowings | 6,238 | 123 | 1.96% | 65,859 | 2,305 | 3.50% | 128,219 | 3,103 | 2.42% |
| Total interest-bearing liabilities | 1,382,593 | 5,515 | 0.40% | 1,511,950 | 7,449 | 0.49% | 1,560,152 | 8,090 | 0.52% |
| Noninterest-bearing demand deposits | 468,774 |  |  | 448,903 |  |  | 438,513 |  |  |
| Other liabilities | 29,736 |  |  | 28,239 |  |  | 21,955 |  |  |
| Total liabilities | 1,881,103 |  |  | 1,989,092 |  |  | 2,020,620 |  |  |
| Stockholders' equity | 336,138 |  |  | 341,519 |  |  | 349,701 |  |  |
| Total liabilities and equity | $2,217,241 |  |  | $2,330,611 |  |  | $2,370,321 |  |  |
| Net interest income, FTE(1) |  | $90,301 |  |  | $91,744 |  |  | $89,132 |  |
| Net interest rate spread, FTE(1) |  |  | 4.47% |  |  | 4.28% |  |  | 4.09% |
| Net interest margin, FTE(1) |  |  | 4.59% |  |  | 4.41% |  |  | 4.23% |

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

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

(3) Interest on loans include non-cash purchase accounting accretion of $3.23 million in 2019, $6.39 million in 2018, and $5.42 million in 2017.

26

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

*(Amounts in thousands)*

| Interest earned on(1): | Year Ended December 31, 2019 Compared to 2018 Dollar Increase (Decrease) due to Volume | Rate | Rate/ Volume | Total | Year Ended December 31, 2018 Compared to 2017 Dollar Increase (Decrease) due to Volume | Rate | Rate/ Volume | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $(3,729) | $1,077 | $(177) | $(2,829) | $(2,043) | $3,858 | $(28) | $1,787 |
| Securities available for sale | (1,536) | 619 | (168) | (1,085) | 425 | (642) | (59) | (276) |
| Securities held to maturity | (368) | (48) | 43 | (373) | (117) | 63 | (15) | (69) |
| Interest-bearing deposits with other banks | 654 | 171 | 85 | 910 | 111 | 382 | 36 | 529 |
| Total interest-earning assets | (4,979) | 1,819 | (217) | (3,377) | (1,624) | 3,661 | (66) | 1,971 |
| Interest paid on(1): |  |  |  |  |  |  |  |  |
| Demand deposits | (6) | 47 | (6) | 35 | 39 | (40) | 23 | 22 |
| Savings deposits | (3) | 407 | 37 | 441 | (7) | 104 | (51) | 46 |
| Time deposits | (508) | 283 | (3) | (228) | (340) | 459 | (30) | 89 |
| Federal funds purchased | - | - | - | - | - | - | - | - |
| Retail repurchase agreements | (2) | 1 | - | (1) | (31) | 24 | (20) | (27) |
| Wholesale repurchase agreements | (684) | (12) | 9 | (687) | - | - | - | - |
| FHLB advances and other borrowings | (1,492) | (1,492) | 1,490 | (1,494) | (761) | (17) | 7 | (771) |
| Total interest-bearing liabilities | (2,695) | (766) | 1,527 | (1,934) | (1,100) | 530 | (71) | (641) |
| Change in net interest income(1) | $(2,284) | $2,585 | $(1,744) | $(1,443) | $(524) | $3,131 | $5 | $2,612 |

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

*2019 Compared to 2018*. Net interest income comprised 72.65% of total net interest and noninterest income in 2019 compared to 77.45% in 2018. Net interest income decreased $1.39 million, or 1.53%, compared to a decrease of $1.44 million, or 1.57%, on a FTE basis. The FTE net interest margin increased 18 basis points and the FTE net interest spread increased 19 basis points.

Average earning assets decreased $110.44 million, or 5.31%, primarily due to a decrease in average loans and debt securities offset by an increase in interest-bearing deposits. The yield on earning assets increased 10 basis points as the yields on debt securities, and interest-bearing deposits increased. Average loans decreased $72.97 million, or 4.06%, and the average loan to deposit ratio decreased to 93.35% from 94.74%. Non-cash accretion income related to PCI loans decreased $3.16 million, or 49.46%, to $3.23 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 17 basis points compared to 30 basis points in the prior year.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $129.36 million, or 8.56%, primarily due to a decline in average interest-bearing deposits and average borrowings. The yield on interest-bearing liabilities decreased 9 basis points. Average borrowings decreased $59.62 million, or 90.53%, largely due to a $22.77 million, or 78.50%, decrease in average retail and wholesale repurchase agreements and a $36.85 million, or 100.00%, decrease in average FHLB advances. Average interest-bearing deposits decreased $69.74 million, or 4.82%, which was driven by a $52.89 million, or 11.22%, decrease in average time deposits, and a $12.58 million, or 2.70%, decrease in average interest-bearing demand deposits.

*2018 Compared to 2017*. Net interest income comprised 77.45% of total net interest and noninterest income in 2018 compared to 78.02% in 2017. Net interest income increased $3.63 million, or 4.16%, compared to an increase of $3.54 million, or 3.97%, on a FTE basis. The FTE net interest margin increased 18 basis points and the FTE net interest spread increased 19 basis points.

Average earning assets decreased $29.18 million, or 1.38%, primarily due to a decrease in average loans offset by an increase in available-for-sale securities and interest-bearing deposits. The yield on earning assets increased 16 basis points as the yields on loans, debt securities, and interest-bearing deposits increased. Average loans decreased $41.70 million, or 2.27%, and the average loan to deposit ratio decreased to 94.74% from 98.22%. Non-cash accretion income related to PCI loans increased $974 thousand, or 17.98%, to $6.39 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 30 basis points compared to 26 basis points in the prior year.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $48.20 million, or 3.09%, primarily due to a decline in average borrowings. The yield on interest-bearing liabilities decreased 3 basis points. Average borrowings decreased $62.36 million, or 48.64%, largely due to a $43.71 million, or 91.60%, decrease in average retail repurchase agreements and an $18.65 million, or 33.61%, decrease in average FHLB advances. Average interest-bearing deposits increased $14.16 million, or 0.99%, which was driven by a $65.31 million, or 16.28%, increase in average interest-bearing demand deposits offset by a $39.08 million, or 7.66%, decrease in average time deposits, and a $12.08 million, or 2.32%, decrease in average savings deposits, which include money market and savings accounts.

#### Provision for Loan Losses

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

*2018 Compared to 2017*. The provision charged to operations decreased $378 thousand, or 13.64%, to $2.39 million, which was largely attributed to a decrease in the loan portfolio and continued good credit quality.

#### Noninterest Income

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

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 | 2018 | 2017 | 2019 Compared to 2018 Increase% (Decrease) | Change | 2018 Compared to 2017 Increase% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Wealth management | $3,423 | $3,262 | $3,150 | $161 | 4.94% | $112 | 3.56% |
| Service charges on deposits | 14,594 | 14,733 | 13,803 | (139) | -0.94% | 930 | 6.74% |
| Other service charges and fees | 8,281 | 7,733 | 6,944 | 548 | 7.09% | 789 | 11.36% |
| Insurance commissions | - | 966 | 1,347 | (966) | -100.00% | (381) | -28.29% |
| Net (loss) gain on sale of securities | (43) | (618) | (661) | 575 | -93.04% | 43 | -6.51% |
| Net FDIC indemnification asset amortization | (2,377) | (2,181) | (3,517) | (196) | 8.99% | 1,336 | -37.99% |
| Litigation income | 6,995 | - | - | 6,995 | - | - | - |
| Other operating income | 2,804 | 2,548 | 3,502 | 256 | 10.05% | (954) | -27.24% |
| Total noninterest income | $33,677 | $26,443 | $24,568 | $7,234 | 27.36% | $1,875 | 7.63% |

*2019 Compared to 2018*. Noninterest income comprised 27.35% of total net interest and noninterest income in 2019 compared to 22.55% in 2018. Noninterest income increased $7.23 million, or 27.36%, primarily due to the receipt of $7.00 million received in litigation settlements. Other service charges and fees increased $548 thousand, or 7.09%, primarily from an increase in net interchange income. Net securities losses decreased $575 thousand, or 93.04%. Other operating income increases were offset by a $966 thousand decrease in insurance commissions due to the divestiture of the Company’s remaining insurance agency assets in 2018.

*2018 Compared to 2017*. Noninterest income comprised 22.55% of total net interest and noninterest income in 2018 compared to 21.98% in 2017. Noninterest income increased $1.88 million, or 7.63%, primarily due to the decrease in net negative amortization related to the FDIC indemnification asset as loss share coverage expired June 30, 2017, for commercial loans. Service charges on deposits and other service charges and fees increased $1.72 million, or 8.29%, primarily from increases in checking account fees and net interchange income. Other operating income decreased primarily due to a $678 thousand decrease in death proceeds from bank owned life insurance.

#### Noninterest Expense

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

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 | 2018 | 2017 | 2019 Compared to 2018 Increase% (Decrease) | Change | 2018 Compared to 2017 Increase% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $37,148 | $36,690 | $35,774 | $458 | 1.25% | $916 | 2.56% |
| Occupancy expense | 4,334 | 4,542 | 4,775 | (208) | -4.58% | (233) | -4.88% |
| Furniture and equipment expense | 4,457 | 3,980 | 4,425 | 477 | 11.98% | (445) | -10.06% |
| Service fees | 4,448 | 3,860 | 3,348 | 588 | 15.23% | 512 | 15.29% |
| Advertising and public relations | 2,310 | 2,011 | 2,206 | 299 | 14.87% | (195) | -8.84% |
| Professional fees | 1,698 | 1,430 | 2,567 | 268 | 18.74% | (1,137) | -44.29% |
| Amortization of intangibles | 997 | 1,039 | 1,056 | (42) | -4.04% | (17) | -1.61% |
| FDIC premiums and assessments | 318 | 906 | 910 | (588) | -64.90% | (4) | -0.44% |
| Loss on extinguishment of debt | - | 1,096 | - | (1,096) | - | 1,096 | - |
| Merger, acquisition, and divestiture expense | 2,124 | - | - | 2,124 | - | - | - |
| Goodwill impairment | - | 1,492 | - | (1,492) | - | 1,492 | - |
| Other operating expense | 11,929 | 12,727 | 11,841 | (798) | -6.27% | 886 | 7.48% |
| Total noninterest expense | $69,763 | $69,773 | $66,902 | $(10) | -0.01% | $2,871 | 4.29% |

*2019 Compared to 2018*. Noninterest expense decreased $10 thousand, or 0.01%, which was largely due to one-time charges recognized in 2018 for goodwill impairment related to the divestiture of the Company’s remaining insurance agency assets of $1.49 million and the loss on extinguishment of the Company’s remaining FHLB debt of $1.10 million. In addition, other operating expense decreased $798 thousand due to property write-downs that occurred in 2018 and FDIC premiums decreased $588 thousand due to small bank assessment credits received from the FDIC. These decreases were offset by an increase in merger expenses of $2.12 million related to the Highlands acquisition as well as increases in service fees, furniture and equipment expense, and an increase in salaries and employee benefits totaling $1.52 million.

*2018 Compared to 2017*. Noninterest expense increased $2.87 million, or 4.29%, which was largely due to a one-time goodwill impairment charge related to the divestiture of the Company’s remaining insurance agency assets, the loss on extinguishment of the Company’s remaining FHLB debt, and an increase in salaries and employee benefits. These increases were offset by a decrease in professional fees, which were largely due to a reduction in legal fees. The increase in other operating expense included a $330 thousand increase in property write-downs and a $347 thousand increase in the net loss on sales and expenses related to other real estate owned (“OREO”) to $1.55 million in 2018 from $1.20 million in 2017.

#### Income 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. The Tax Reform Act enacted on December 22, 2017, reduced our federal statutory income tax rate from 35% to 21% beginning January 1, 2018.

*2019 Compared to 2018*. Income tax expense increased $2.21 million, or 25.19%, and the effective tax rate increased to 22.08% in 2019 compared to 19.46% in 2018. The lower effective rate in 2018 was primarily due to the enactment of the Tax Reform Act and the completion of the deferred tax asset revaluation, which resulted in a $1.67 million reduction in tax expense.

*2018 Compared to 2017*. Income tax expense decreased $11.85 million, or 57.43%, and the effective tax rate decreased to 19.46% in 2018 compared to 48.98% in 2017 primarily due to the decreased tax rate and deferred tax asset revaluation charge taken in 2017 as a result of the enactment of the Tax Reform Act.

### Financial Condition

Total assets as of December 31, 2019, increased $554.47 million, or 24.71%, to $2.80 billion from $2.24 billion as of December 31, 2018. The increase is primarily attributable to the December 31, 2019 acquisition of Highlands with total assets of $563 million. Total liabilities as of December 31, 2019, increased $458.51 million, or 23.99%, to $2.37 billion from $1.91 billion as of December 31, 2018. The increase is primarily attributable to the December 31, 2019 acquisition of Highlands as noted earlier.

#### Investment Securities

Our investment securities are used to generate interest income through the deployment 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 December 31, 2019, increased $16.46 million, or 10.75%, compared to December 31, 2018, and includes $53.7 million in investments securities acquired in the Highlands transaction. The market value of debt securities available for sale as a percentage of amortized cost was 100.65% as of December 31, 2019 compared to 99.76% as of December 31, 2018. There were no held-to-maturity debt securities as of December 31, 2019. The remaining debt securities in the held-to-maturity category in 2018 matured during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of debt securities as of the dates indicated:

*(Amounts in thousands)*

| Available for Sale | December 31, 2019 Amortized Cost | Fair Value | 2018 Amortized Cost | Fair Value | 2017 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. Agency securities | $5,038 | $5,034 | $1,108 | $1,113 | $11,289 | $11,296 |
| U.S. Treasury securities | - | - | 19,970 | 19,960 | 19,987 | 19,971 |
| Municipal securities | 85,992 | 86,878 | 96,886 | 97,289 | 101,552 | 103,648 |
| Single issue trust preferred securites | - | - | - | - | 9,367 | 8,884 |
| Mortgage-backed Agency securities | 77,448 | 77,662 | 35,513 | 34,754 | 22,095 | 21,726 |
| Total securities available for sale | $168,478 | $169,574 | $153,477 | $153,116 | $164,290 | $165,525 |
| Fair value to amortized cost |  | 100.65% |  | 99.76% |  | 100.75% |
| **Held to Maturity** |  |  |  |  |  |  |
| U.S. Agency securities | $- | $- | $17,887 | $17,867 | $17,937 | $17,888 |
| Corporate securities | - | - | 7,126 | 7,123 | 7,212 | 7,196 |
| Total securities held to maturity | $- | $- | $25,013 | $24,990 | $25,149 | $25,084 |
| Fair value to amortized cost |  |  |  | 99.91% |  | 99.74% |

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

| (Amounts in years) | December 31, 2019 Available for Sale | Held to Maturity | Total | 2018 Available for Sale | Held to Maturity | Total |
| --- | ---: | --- | ---: | ---: | ---: | ---: |
| Average life | 6.41 | N/A | 6.41 | 6.61 | 0.11 | 5.70 |
| Average duration | 5.30 | N/A | 5.30 | 5.37 | 0.11 | 4.64 |

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity as of December 31, 2019 or 2018.

The following table presents the amortized cost, fair value, and weighted-average yield of available-for-sale debt securities by contractual maturity, as of December 31, 2019. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

*(Amounts in thousands)*

| Amortized cost maturity: | Available-for-Sale Securities U.S. Agency Securities | U.S. Treasury Securities | Municipal Securities | Total | Tax Equivalent Purchase Yield(1) |
| --- | ---: | ---: | ---: | ---: | ---: |
| One year or less | $- | $- | $- | $- | - |
| After one year through five years | - | - | 28,739 | 28,739 | 3.80% |
| After five years through ten years | 1,941 | - | 48,941 | 50,882 | 3.56% |
| After ten years | 3,097 | - | 8,312 | 11,409 | 3.12% |
| Amortized cost | $5,038 | $- | $85,992 | 91,030 |  |
| Mortgage-backed securities |  |  |  | 77,448 | 2.71% |
| Total amortized cost |  |  |  | $168,478 |  |
| Tax equivalent purchase yield(1) | 2.92% | - | 3.62% | 3.58% |  |
| Average contractual maturity (in years) | 10.34 | - | 6.14 | 6.37 |  |
| Fair value maturity: |  |  |  |  |  |
| One year or less | $- | $- | $- | $- |  |
| After one year through five years | - | - | 29,049 | 29,049 |  |
| After five years through ten years | 1,937 | - | 49,517 | 51,454 |  |
| After ten years | 3,097 | - | 8,312 | 11,409 |  |
| Fair value | $5,034 | $- | $86,878 | 91,912 |  |
| Mortgage-backed securities |  |  |  | 77,662 |  |
| Total fair value |  |  |  | $169,574 |  |

(1) FTE basis of 21%

Investment securities are reviewed quarterly for indications of other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities in 2019 or 2018. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Item 8 of this report.

#### Loans Held for Investment

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

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

Total loans held for investment, net of unearned income, as of December 31, 2019, increased $339.38 million, or 19.12%, compared to December 31, 2018, primarily due to a $345.33 million, or 19.66%, increase in non-covered loans, which was driven by the acquisition of Highlands. Covered loans decreased $5.95 million, or 31.64%, as the Waccamaw Bank (“Waccamaw”) covered loan portfolio continues to pay down. We had no foreign loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans that represented 10% or more of outstanding loans, as of December 31, 2019 or 2018. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.

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

*(Amounts in thousands)*

| Non-covered loans held for investment Commercial loans | December 31, 2019 | 2018 | 2017 | 2016 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $48,659 | $63,508 | $60,017 | $56,948 | $48,896 |
| Commercial and industrial | 142,962 | 104,863 | 92,188 | 92,204 | 88,903 |
| Multi-family residential | 121,840 | 107,012 | 125,202 | 134,228 | 95,026 |
| Single family non-owner occupied | 163,181 | 140,097 | 141,670 | 142,965 | 149,351 |
| Non-farm, non-residential | 727,261 | 613,877 | 616,633 | 598,674 | 485,460 |
| Agricultural | 11,756 | 8,545 | 7,035 | 6,003 | 2,911 |
| Farmland | 23,155 | 18,905 | 25,649 | 31,729 | 27,540 |
| Total commercial loans | 1,238,814 | 1,056,807 | 1,068,394 | 1,062,751 | 898,087 |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 110,078 | 93,466 | 103,205 | 106,361 | 107,367 |
| Single family owner occupied | 620,697 | 510,963 | 502,686 | 500,891 | 495,209 |
| Owner occupied construction | 17,241 | 18,171 | 39,178 | 44,535 | 43,505 |
| Total consumer real estate loans | 748,016 | 622,600 | 645,069 | 651,787 | 646,081 |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | 110,027 | 71,552 | 70,772 | 77,445 | 72,000 |
| Other | 4,742 | 5,310 | 5,001 | 3,971 | 7,338 |
| Total consumer and other loans | 114,769 | 76,862 | 75,773 | 81,416 | 79,338 |
| Total non-covered loans | 2,101,599 | 1,756,269 | 1,789,236 | 1,795,954 | 1,623,506 |
| Total covered loans | 12,861 | 18,815 | 27,948 | 56,994 | 83,035 |
| Total loans held for investment, net of unearned income | 2,114,460 | 1,775,084 | 1,817,184 | 1,852,948 | 1,706,541 |
| Less: allowance for loan losses | 18,425 | 18,267 | 19,276 | 17,948 | 20,233 |
| Total loans held for investment, net of unearned income and allowance | $2,096,035 | $1,756,817 | $1,797,908 | $1,835,000 | $1,686,308 |
| Loans held for sale | $263 | $- | $- | $- | $- |

32

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

*(Amounts in thousands)*

| Commercial loans | December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $28 | $35 | $39 | $4,570 | $6,303 |
| Commercial and industrial | - | - | - | 895 | 1,170 |
| Multi-family residential | - | - | - | 8 | 640 |
| Single family non-owner occupied | 199 | 238 | 284 | 962 | 2,674 |
| Non-farm, non-residential | 3 | 6 | 9 | 7,512 | 14,065 |
| Agricultural | - | - | - | 25 | 34 |
| Farmland | - | - | - | 397 | 643 |
| Total commercial loans | 230 | 279 | 332 | 14,369 | 25,529 |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 9,853 | 15,284 | 23,720 | 35,817 | 48,565 |
| Single family owner occupied | 2,778 | 3,252 | 3,896 | 6,729 | 8,595 |
| Owner occupied construction | - | - | - | - | 262 |
| Total consumer real estate loans | 12,631 | 18,536 | 27,616 | 42,546 | 57,422 |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | - | - | - | 79 | 84 |
| Total covered loans | $12,861 | $18,815 | $27,948 | $56,994 | $83,035 |

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

| Commercial loans | December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | 2.31% | 3.61% | 3.36% | 3.17% | 3.01% |
| Commercial and industrial | 6.80% | 5.97% | 5.15% | 5.13% | 5.48% |
| Multi-family residential | 5.80% | 6.09% | 7.00% | 7.47% | 5.85% |
| Single family non-owner occupied | 7.76% | 7.98% | 7.92% | 7.96% | 9.20% |
| Non-farm, non-residential | 34.62% | 34.95% | 34.46% | 33.34% | 29.90% |
| Agricultural | 0.56% | 0.49% | 0.39% | 0.34% | 0.18% |
| Farmland | 1.10% | 1.08% | 1.43% | 1.77% | 1.70% |
| Total commercial loans | 58.95% | 60.17% | 59.71% | 59.18% | 55.32% |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 5.24% | 5.32% | 5.77% | 5.92% | 6.62% |
| Single family owner occupied | 29.52% | 29.09% | 28.09% | 27.89% | 30.50% |
| Owner occupied construction | 0.83% | 1.04% | 2.19% | 2.48% | 2.68% |
| Total consumer real estate loans | 35.59% | 35.45% | 36.05% | 36.29% | 39.80% |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | 5.25% | 4.08% | 3.96% | 4.31% | 4.43% |
| Other | 0.21% | 0.30% | 0.28% | 0.22% | 0.45% |
| Total consumer and other loans | 5.46% | 4.38% | 4.24% | 4.53% | 4.88% |
| Total non-covered loans | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% |

33

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

| Commercial loans | December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | 0.22% | 0.19% | 0.14% | 8.02% | 7.59% |
| Commercial and industrial | 0.00% | 0.00% | 0.00% | 1.57% | 1.41% |
| Multi-family residential | 0.00% | 0.00% | 0.00% | 0.01% | 0.77% |
| Single family non-owner occupied | 1.55% | 1.26% | 1.02% | 1.69% | 3.22% |
| Non-farm, non-residential | 0.02% | 0.03% | 0.03% | 13.18% | 16.94% |
| Agricultural | 0.00% | 0.00% | 0.00% | 0.04% | 0.04% |
| Farmland | 0.00% | 0.00% | 0.00% | 0.70% | 0.77% |
| Total commercial loans | 1.79% | 1.48% | 1.19% | 25.21% | 30.74% |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 76.61% | 81.23% | 84.87% | 62.84% | 58.49% |
| Single family owner occupied | 21.60% | 17.29% | 13.94% | 11.81% | 10.35% |
| Owner occupied construction | 0.00% | 0.00% | 0.00% | 0.00% | 0.32% |
| Total consumer real estate loans | 98.21% | 98.52% | 98.81% | 74.65% | 69.16% |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | 0.00% | 0.00% | 0.00% | 0.14% | 0.10% |
| Total covered loans | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% |

34

The following table presents the maturities and rate sensitivities of the non-covered loan portfolio as of December 31, 2019:

*(Amounts in thousands)*

| Commercial loans | Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years | Total |
| --- | ---: | ---: | ---: | ---: |
| Construction, development, and other land(1) | $10,791 | $11,576 | $26,292 | $48,659 |
| Commercial and industrial | 37,115 | 70,052 | 35,795 | 142,962 |
| Multi-family residential | 9,422 | 31,751 | 80,667 | 121,840 |
| Single family non-owner occupied | 8,817 | 35,408 | 118,956 | 163,181 |
| Non-farm, non-residential | 57,600 | 216,262 | 453,399 | 727,261 |
| Agricultural | 2,159 | 7,756 | 1,841 | 11,756 |
| Farmland | 3,056 | 8,732 | 11,367 | 23,155 |
| Total commercial loans | 128,960 | 381,537 | 728,317 | 1,238,814 |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 7,359 | 10,482 | 92,237 | 110,078 |
| Single family owner occupied | 11,872 | 1,096 | 607,729 | 620,697 |
| Owner occupied construction | 1,122 | 805 | 15,314 | 17,241 |
| Total consumer real estate loans | 20,353 | 12,383 | 715,280 | 748,016 |
| Consumer and other loans |  |  |  |  |
| Consumer loans | 14,903 | 74,178 | 20,946 | 110,027 |
| Other | 1,562 | 1,236 | 1,944 | 4,742 |
| Total consumer and other loans | 16,465 | 75,414 | 22,890 | 114,769 |
| Total non-covered loans | $165,778 | $469,334 | $1,466,487 | $2,101,599 |
| **Rate sensitivities** |  |  |  |  |
| Predetermined interest rate | $99,178 | $437,569 | $611,166 | $1,147,913 |
| Floating or adjustable interest rate | 54,582 | 43,783 | 855,321 | 953,686 |
| Total non-covered loans | $153,760 | $481,352 | $1,466,487 | $2,101,599 |

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

The following table presents the maturities and rate sensitivities of the covered loan portfolio as of December 31, 2019:

*(Amounts in thousands)*

| Commercial loans | Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years | Total |
| --- | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $- | $28 | $- | $28 |
| Single family non-owner occupied | 1 | 178 | 20 | 199 |
| Non-farm, non-residential | - | 3 | - | 3 |
| Total commercial loans | 1 | 209 | 20 | 230 |
| Consumer real estate loans |  |  |  |  |
| Home equity lines | 740 | 5,737 | 3,376 | 9,853 |
| Single family owner occupied | 48 | 268 | 2,462 | 2,778 |
| Total consumer real estate loans | 788 | 6,005 | 5,838 | 12,631 |
| Total covered loans | $789 | $6,214 | $5,858 | $12,861 |
| **Rate sensitivities** |  |  |  |  |
| Predetermined interest rate | $18 | $466 | $2,551 | $3,035 |
| Floating or adjustable interest rate | 765 | 5,779 | 3,282 | 9,826 |
| Total covered loans | $783 | $6,245 | $5,833 | $12,861 |

35

#### Risk Elements

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

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

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

*(Amounts in thousands)*

| Non-covered nonperforming | December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Nonaccrual loans | $16,113 | $19,583 | $18,997 | $15,854 | $17,847 |
| Accruing loans past due 90 days or more | 144 | 58 | 1 | - | - |
| TDRs(1) | 720 | 161 | 120 | 114 | 73 |
| Total non-covered nonperforming loans | 16,977 | 19,802 | 19,118 | 15,968 | 17,920 |
| Non-covered OREO | 3,969 | 3,806 | 2,409 | 5,109 | 4,873 |
| Total non-covered nonperforming assets | $20,946 | $23,608 | $21,527 | $21,077 | $22,793 |
| **Covered nonperforming** |  |  |  |  |  |
| Nonaccrual loans | $244 | $322 | $342 | $608 | $647 |
| Total covered nonperforming loans | 244 | 322 | 342 | 608 | 647 |
| Covered OREO | - | 32 | 105 | 276 | 4,034 |
| Total covered nonperforming assets | $244 | $354 | $447 | $884 | $4,681 |
| **Total nonperforming** |  |  |  |  |  |
| Nonaccrual loans | $16,357 | $19,905 | $19,339 | $16,462 | $18,494 |
| Accruing loans past due 90 days or more | 144 | 58 | 1 | - | - |
| TDRs(1) | 720 | 161 | 120 | 114 | 73 |
| Total nonperforming loans | 17,221 | 20,124 | 19,460 | 16,576 | 18,567 |
| OREO | 3,969 | 3,838 | 2,514 | 5,385 | 8,907 |
| Total nonperforming assets | $21,190 | $23,962 | $21,974 | $21,961 | $27,474 |
| **Additional Information** |  |  |  |  |  |
| Performing TDRs(2) | $5,855 | $6,266 | $7,614 | $12,838 | $13,889 |
| Total TDRs(3) | 6,575 | 6,427 | 7,734 | 12,952 | 13,962 |
| Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans | 1,068 | 1,175 | 1,217 | 1,414 | 1,645 |
| Actual interest income recorded on restructured and nonperforming loans | 277 | 264 | 222 | 424 | 608 |
| **Non-covered ratios** |  |  |  |  |  |
| Nonperforming loans to total loans | 0.81% | 1.13% | 1.07% | 0.89% | 1.10% |
| Nonperforming assets to total assets | 0.75% | 1.06% | 0.91% | 0.90% | 0.96% |
| Non-PCI allowance to nonperforming loans | 108.53% | 92.25% | 100.83% | 112.32% | 112.61% |
| Non-PCI allowance to total loans | 0.88% | 1.04% | 1.08% | 1.00% | 1.24% |
| **Total ratios** |  |  |  |  |  |
| Nonperforming loans to total loans | 0.81% | 1.13% | 1.07% | 0.89% | 1.09% |
| Nonperforming assets to total assets | 0.76% | 1.07% | 0.92% | 0.92% | 1.12% |
| Allowance for loan losses to nonperforming loans | 106.99% | 90.77% | 99.05% | 108.28% | 108.97% |
| Allowance for loan losses to total loans | 0.87% | 1.03% | 1.06% | 0.97% | 1.19% |

(1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $95 thousand, $898 thousand, $169 thousand, $224 thousand, and $923 thousand for the five years ended December 31, 2019.

(2) TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $2.25 million, $1.68 million, $1.76 million, $1.06 million, and $416 thousand for the five years ended December 31, 2019.

(3) Total accruing TDRs exclude nonaccrual TDRs of $2.34 million, $2.58 million, $1.93 million, $1.28 million, and $1.34 million for the five years ended December 31, 2019.

37

Non-covered nonperforming assets as of December 31, 2019, decreased $2.66 million, or 11.28%, from December 31, 2018, primarily due to a $3.47 million, or 17.72%, decrease in non-covered nonaccrual loans offset by a $559 thousand, or 347.20%, increase in non-covered, non-performing troubled debt restructurings. Non-covered OREO increased $163 thousand, or 4.28%, of which $1.96 million was acquired in the Highlands acquisition. Excluding the Highlands transaction OREO decreased $1.80 million. Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 30 properties with an average holding period of 7 months as of December 31, 2019. The net loss on the sale of OREO was $1.25 million in 2019, $1.33 million in 2018, and $937 thousand in 2017. The following table presents the changes in OREO during the periods indicated:

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 Non-covered | Covered | Total | 2018 Non-covered | Covered | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning balance | $3,806 | $32 | $3,838 | $2,409 | $105 | $2,514 |
| Acquired | 1,962 | - | 1,962 | - | - | - |
| Additions | 3,030 | 131 | 3,161 | 5,686 | - | 5,686 |
| Disposals | (3,837) | (152) | (3,989) | (3,506) | (69) | (3,575) |
| Valuation adjustments | (992) | (11) | (1,003) | (783) | (4) | (787) |
| Ending balance | $3,969 | $- | $3,969 | $3,806 | $32 | $3,838 |

As of December 31, 2019, non-covered nonaccrual loans were largely attributed to single family owner occupied (45.05%) and non-farm, non-residential (21.10%) loans. As of December 31, 2019, approximately $921 thousand, or 5.72%, of non-covered nonaccrual loans were attributed to performing loans acquired in business combinations. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Total TDRs as of December 31, 2019, decreased $91 thousand, or 1.01%, to $8.92 million from December 31, 2018. Nonperforming accruing TDRs as of December 31, 2019, increased $559 thousand, or 347.20%, to $720 thousand from December 31, 2018. Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 13.69% as of December 31, 2019, compared to 2.51% as of December 31, 2018. Specific reserves on TDRs totaled $353 thousand as of December 31, 2019, compared to $568 thousand as of December 31, 2018. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $35.62 million as of December 31, 2019, an increase of $5.74 million, or 19.19%, compared to $29.89 million as of December 31, 2018. Delinquencies associated with the acquired Highlands loan portfolio accounted for $8.73 million at December 31, 2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.69% as of December 31, 2019, which includes past due loans (0.93%) and nonaccrual loans (0.76%), compared to 1.69% as of December 31, 2018.

#### 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, 2019, our qualitative risk factors reflect a stable risk of loan losses due to consistent asset quality metrics and relatively stable business and economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of December 31, 2019; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see “Allowance for Loan Losses” in the “Critical Accounting Policies” section above and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

The allowance for loan losses as of December 31, 2019, increased $158 thousand, or 0.86%, from December 31, 2018, due to an $807 thousand decrease in specific reserves on impaired loans combined with a $965 thousand increase in general reserves. The non-PCI allowance as a percent of non-covered loans totaled 0.88% as of December 31, 2019, compared to 1.04% as of December 31, 2018. PCI loans were aggregated into fifteen loan pools as of December 31, 2019 and five loan pools in 2018. The Highlands transaction added ten additional pools to the five existing pools from 2018. The existing pools from 2018 included: Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial, and Peoples residential. The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and Home Equity Lines, Commercial Land and Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner Occupied, Commercial and Industrial, and Consumer. The cash flow analysis identified no impaired PCI loan pools as of December 31, 2019 or 2018. Net charge-offs increased $11 thousand, or 0.32% in 2019 compared to 2018.

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

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Beginning balance | $18,267 | $19,276 | $17,948 | $20,233 | $20,227 |
| Provision for loan losses charged to operations, non-PCI loans | 3,571 | 2,393 | 2,783 | 1,296 | 2,166 |
| (Recovery of) provision for loan losses charged to operations, PCI loans | - | - | (12) | (41) | 25 |
| Recovery of loan losses recorded through the FDIC indemnification asset | - | - | - | (1) | (29) |
| Charge-offs |  |  |  |  |  |
| Commercial loans |  |  |  |  |  |
| Construction, development, and other land | 353 | 100 | 427 | 254 | 256 |
| Commercial and industrial | 549 | 566 | 224 | 144 | 93 |
| Multi-family residential | 310 | 16 | 9 | 64 | - |
| Single family non-owner occupied | 64 | 88 | 52 | 237 | 87 |
| Non-farm, non-residential | 1,015 | 119 | 142 | 1,684 | 773 |
| Agricultural | 52 | 68 | - | - | - |
| Farmland | 205 | 279 | 68 | 9 | 73 |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 474 | 285 | 13 | 1,073 | 92 |
| Single family owner occupied | 1,316 | 1,720 | 675 | 508 | 812 |
| Owner occupied construction | - | - | 11 | 31 | 2 |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | 1,923 | 1,666 | 1,322 | 1,172 | 1,557 |
| Total charge-offs | 6,261 | 4,907 | 2,943 | 5,176 | 3,745 |
| Recoveries |  |  |  |  |  |
| Commercial loans |  |  |  |  |  |
| Construction, development, and other land | 146 | 210 | 306 | 282 | 135 |
| Commercial and industrial | 99 | 200 | 160 | 484 | 173 |
| Multi-family residential | 3 | 17 | 9 | 15 | - |
| Single family non-owner occupied | 12 | 98 | 180 | 79 | 92 |
| Non-farm, non-residential | 546 | 191 | 146 | 59 | 74 |
| Agricultural | 1 | 7 | - | - | - |
| Farmland | 66 | - | - | - | - |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 401 | 216 | 201 | 137 | 402 |
| Single family owner occupied | 1,045 | 238 | 108 | 182 | 258 |
| Owner occupied construction | 42 | - | 105 | 39 | 18 |
| Consumer and other |  |  |  |  |  |
| Consumer loans | 487 | 328 | 285 | 360 | 437 |
| Total recoveries | 2,848 | 1,505 | 1,500 | 1,637 | 1,589 |
| Net charge-offs | 3,413 | 3,402 | 1,443 | 3,539 | 2,156 |
| Ending balance | $18,425 | $18,267 | $19,276 | $17,948 | $20,233 |
| Net charge-offs to average non-covered loans | 0.20% | 0.19% | 0.08% | 0.21% | 0.14% |
| Net charge-offs to average total loans | 0.20% | 0.19% | 0.08% | 0.20% | 0.13% |

39

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

*(Amounts in thousands)*

| Commercial loans | December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Construction, development, and other land | $245 | $417 | $830 | $889 | $1,119 |
| Commercial and industrial | 699 | 663 | 762 | 495 | 504 |
| Multi-family residential | 969 | 1,192 | 1,094 | 1,157 | 1,535 |
| Single family non-owner occupied | 1,323 | 1,442 | 1,976 | 2,752 | 3,369 |
| Non-farm, non-residential | 6,653 | 6,530 | 6,597 | 6,185 | 6,393 |
| Agricultural | 145 | 85 | 51 | 43 | 22 |
| Farmland | 201 | 170 | 362 | 169 | 190 |
| Consumer real estate loans |  |  |  |  |  |
| Home equity lines | 673 | 748 | 803 | 895 | 1,091 |
| Single family owner occupied | 5,528 | 5,853 | 5,710 | 4,364 | 4,969 |
| Owner occupied construction | 124 | 131 | 297 | 228 | 297 |
| Consumer and other loans |  |  |  |  |  |
| Consumer loans | 1,865 | 1,036 | 794 | 759 | 690 |
| Total allowance, excluding PCI loans | $18,425 | $18,267 | $19,276 | $17,936 | $20,179 |

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

*(Amounts in thousands)*

| Commercial loans | December 31, 2019 | 2018 | 2017 | 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Waccamaw commercial | $- | $- | $- | $- | $- |
| Consumer real estate loans |  |  |  |  |  |
| Waccamaw residential | - | - | - | - | 1 |
| Peoples residential | - | - | - | 12 | 53 |
| Total PCI allowance | $- | $- | $- | $12 | $54 |

#### Deposits

Total deposits as of December 31, 2019, increased $474.16 million, or 25.55%, compared to December 31, 2018. Time deposits, which consist of certificates of deposit and individual retirement accounts, increased $69.96 million; savings deposits, which consist of money market accounts and savings accounts, increased $190.13 million; interest-bearing demand deposits increased $45.75 million while noninterest-bearing demand deposits increased $168.32 million as of December 31, 2019, compared to December 31, 2018. The acquisition of Highlands added $501.74 million in deposits; $155.71 in non-interest bearing demand, $36.82 million in interest-bearing demand, $173.97 million in savings, and $135.24 million in time deposits. We had no material deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of December 31, 2019 or 2018.

The following schedule presents the contractual maturities of time deposits of $100 thousand or more as of December 31, 2019:

*(Amounts in thousands)*

|  |  |
| --- | ---: |
| Three months or less | $39,735 |
| Over three through six months | 29,339 |
| Over six through twelve months | 44,369 |
| Over twelve months | 90,243 |
|  | $203,686 |

#### Borrowings

Total borrowings as of December 31, 2019, decreased $27.73 million, or 94.41%, compared to December 31, 2018, primarily due to the maturity of the Company’s remaining wholesale repurchase agreement of $25.00 million in the first quarter of 2019. Short-term borrowings, which consist of retail repurchase agreements, decreased $2.77 million, or 63.36%, and the weighted average rate increased 2 basis points to 0.14% as of December 31, 2019, compared to December 31, 2018.

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

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 Amount | Rate | 2018 Amount | Rate | 2017 Amount | Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Year-end balance | $1,601 | 0.16% | $4,370 | 0.13% | $5,086 | 0.11% |
| Average annual balance(1) | 2,471 | 0.14% | 4,010 | 0.12% | 47,717 | 0.07% |
| Maximum month-end balance(1) | 28,508 |  | 29,305 |  | 90,968 |  |

(1) 2017 Includes federal funds purchased and short-term FHLB advances that were repaid prior to year end

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

### Liquidity and Capital Resources

### Liquidity

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

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of December 31, 2019, the Company’s cash reserves totaled $24.00 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. There was no outstanding balance on the line of credit as of December 31, 2019. The Company’s cash reserves and investments provide adequate working capital to meet obligations, projected dividends to shareholders, and anticipated debt repayments for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of December 31, 2019, our unencumbered cash totaled $217.01 million, unused borrowing capacity from the FHLB totaled $261.50 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $85.00 million, and unpledged available-for-sale securities totaled $141.70 million.

#### Cash Flows

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

*(Amounts in thousands)*

|  | Year Ended December 31, 2019 | 2018 | 2017 |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $56,655 | $49,499 | $36,370 |
| Net cash provided by investing activities | 171,377 | 49,398 | 67,796 |
| Net cash used in financing activities | (87,896) | (179,975) | (22,522) |
| Net increase (decrease) in cash and cash equivalents | 140,136 | (81,078) | 81,644 |
| Cash and cash equivalents, beginning balance | 76,873 | 157,951 | 76,307 |
| Cash and cash equivalents, ending balance | $217,009 | $76,873 | $157,951 |

*2019 Compared to 2018*. Cash and cash equivalents increased $140.14 million compared to a decrease of $81.08 million in the prior year. The increase was primarily due to a $121.98 million increase in net cash used in investing activities due to a net decrease in funds used to purchase investment securities and an increase in loan proceeds received. Net cash provided by financing activities increased $92.08 million largely due to a reduction in the net decrease in deposits year over year, and a net decrease in the repayment of borrowings. Net cash provided by operating activities increased $7.16 million primarily due to an increase in net income and a decrease in accretion income on aquired loans.

*2018 Compared to 2017*. Cash and cash equivalents decreased $81.08 million compared to an increase of $81.64 million in the prior year. The decrease was primarily due to a $157.45 million increase in net cash used in financing activities due to a net decrease in deposit accounts, the repayment of FHLB borrowings, an increase in cash dividends, and an increase in the repurchase of treasury stock. Net cash provided by investing activities decreased $18.40 million largely due to the purchase of available for sale securities. Net cash provided by operating activities increased $13.13 million primarily due to an increase in net income.

### Capital Resources

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of December 31, 2019, increased $95.96 million, or 28.83%, to $428.82 million from $332.86 million as of December 31, 2018. The change in stockholders’ equity was largely due to the acquisition of Highlands which added a combined total of $86.63 million in common stock and additional paid-in capital. Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding was converted into the right to receive 0.2703 shares of First Community common stock. The Company earned $38.80 million, which was offset by repurchasing 487,400 shares of our common stock totaling $16.36 million and declaring dividends on our common stock of $15.06 million. Our book value per common share increased $2.54 to $23.33 as of December 31, 2019, from $20.79 as of December 31, 2018.

#### Capital Adequacy Requirements

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

- 4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)
- 6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)
- 8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)
- 4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)

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

| The Company | December 31, 2019 | 2018 | 2017 |
| --- | ---: | ---: | ---: |
| Common equity Tier 1 ratio | 14.31% | 13.72% | 13.98% |
| Tier 1 risk-based capital ratio | 14.31% | 13.72% | 13.98% |
| Total risk-based capital ratio | 15.21% | 14.79% | 15.06% |
| Tier 1 leverage ratio | 14.01% | 10.95% | 11.06% |
| **The Bank** |  |  |  |
| Common equity Tier 1 ratio | 12.87% | 12.55% | 12.47% |
| Tier 1 risk-based capital ratio | 12.87% | 12.55% | 12.47% |
| Total risk-based capital ratio | 13.78% | 13.62% | 13.55% |
| Tier 1 leverage ratio | 12.61% | 9.98% | 9.84% |

As of December 31, 2019, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2019. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 21, “Regulatory Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.

### Commitments, Contingencies, and Off-Balance Sheet Arrangements

### Contractual Obligations

We enter into certain contractual obligations in the normal course of business that require future cash payments. Management believes we have adequate resources to fund our outstanding commitments and the ability to adjust rates on certificates of deposit, in a changing interest rate environment; attract new deposits; and replace deposits with FHLB advances or other fund providers, if cost effective. The following table presents our contractual cash obligations, by payment date, as of December 31, 2019:

*(Amounts in thousands)*

|  | Less Than One Year | One to Three Years | Three to Five Years | More than Five Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Deposits without a stated maturity(1) | $1,814,290 | $- | $- | $- | $1,814,290 |
| Certificates of deposit(2)(3) | 286,689 | 172,996 | 58,147 | 6,992 | 524,824 |
| Securities sold under agreements to repurchase | 1,601 | - | - | - | 1,601 |
| Long-term borrowings(2)(3) | 40 | - | - | - | 40 |
| Operating leases | 154 | 285 | 220 | 479 | 1,138 |
| Total contractual cash obligations | $2,102,774 | $173,281 | $58,367 | $7,471 | $2,341,893 |

(1) Excludes interest

(2) Includes interest on fixed and variable rate obligations (changes in market interest rates may materially affect the variable rate obligation to be paid, which is reflected using the rates in effect as of December 31, 2019)

(3) Excludes unamortized premiums and discounts

### Off-Balance Sheet Arrangements

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

The following table presents our off-balance sheet arrangements, by commitment expiration, as of December 31, 2019:

*(Amounts in thousands)*

|  | Less than One Year(1) | One to Three Years | Three to Five Years | More than Five Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commitments to extend credit | $98,254 | $54,975 | $11,698 | $63,789 | $228,716 |
| Financial letters of credit | 2,430 | 60 | - | - | 2,490 |
| Performance letters of credit(2) | 87,656 | 77,466 | - | - | 165,122 |
| Total off-balance sheet risk | $188,340 | $132,501 | $11,698 | $63,789 | $396,328 |

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

(2) Includes FHLB letters of credit

The reserve for the risk inherent in unfunded lending commitments totaled $66 thousand as of December 31, 2019 and 2018. For additional information, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.

### Market Risk and Interest Rate Sensitivity

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

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

During 2019, the Federal Open Market Committee decreased the benchmark federal funds rate 75 basis points to a range of 150 to 175 basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. Due to the current target rate, we do not reflect a decrease of more than 200 basis points from current rates in our analysis.

*(Dollars in thousands)*

| Increase (Decrease) in Basis Points | Year Ended December 31, 2019 Change in Net Interest Income | Percent Change | 2018 Change in Net Interest Income | Percent Change |
| ---: | ---: | ---: | ---: | ---: |
| 300 | $171 | 0.2% | $(1,215) | -1.3% |
| 200 | 428 | 0.4% | (545) | -0.6% |
| 100 | 426 | 0.4% | (135) | -0.1% |
| (100) | (4,631) | -4.3% | (3,322) | -3.7% |
| (200) | (8,571) | -8.0% | (3,322) | -3.7% |

44

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of December 31, 2019, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.

The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of December 31, 2019, we maintained interest rate swap agreements with notional amounts totaling $17.43 million to modify our exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. We acquired 5 swap agreements in the Highlands transaction with a notional amount of $12.30 million. The fair value liability for the acquired swaps was $292 thousand. The total of the fair value of the swap agreements on the balance sheet, which are accounted for as fair value hedges, was recorded as a derivative liability totaling $510 thousand as of December 31, 2019, and a derivative asset totaling $12 thousand as of December 31, 2018. For additional information, see Note 12, “Derivative Instruments and Hedging Activities,” to the Consolidated Financial Statements in Item 8 of this report.

### Inflation and Changing Prices

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

## Market risk

As filed, 139 characters.

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

## Controls and procedures

As filed, 2,829 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 December 31, 2019, our disclosure controls and procedures were effective.

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

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

### Changes in Internal Control over Financial Reporting

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

### Management's Report on Internal Controls over Financial Reporting

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

Filed Mar 13, 2020.
Source: SEC EDGAR, the filing index for accession 0001437749-20-005120. Last ingested by Listed: Nov 6, 2026, 14:30 ET. No prices; not investment advice.