EDGAR 10-K Filing

Company CIK: 859070
Filing Year: 2024
Filename: 859070_10-K_2024_0001437749-24-007150.json

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ITEM 1. BUSINESS
Item 1.
Business.
General
First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and reincorporated under the laws of the Commonwealth of Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank 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 operate 53 branches across the states of Virginia, West Virginia, North Carolina, and Tennessee. We’re committed to the passionate pursuit of excellence in community banking and we’ve set our sights on being the bank of choice, employer of choice, and investment of choice in the communities in which we operate.
Our mission is to:
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understand and anticipate customer and community financial needs and preferences by learning from our customers and engaging with our communities;
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help our customers and communities achieve their financial goals and objectives by providing workable solutions delivered in a professional manner by friendly, knowledgeable people and convenient, reliable systems;
● recruit, retain, and develop talented and resourceful employees by providing competitive compensation and benefits; offering first-rate continuing education; and fostering a team environment that empowers employees, encourages growth, and recognizes and rewards achievement; and
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allocate shareholder resources by pursuing those investments and business opportunities that provide a superior risk-assessed return.
Our operations are guided by a strategic plan that focuses on organic growth supplemented by strategic acquisitions of complementary financial institutions.
Employees and Human Capital Resources
As of December 31, 2023, we had 616 full-time employees and 29 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and customized corporate training engagements.
The safety, health and wellness of our employees is a top priority. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance and keeping increases in the employee portion of health care premiums as small as possible and sponsoring various wellness programs.
Employee retention helps us operate efficiently and achieve one of our business objectives, which is building financial partnerships. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our current 401(k) plan and a former employee stock ownership plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our employees.
Market Area
As of December 31, 2023, we operated 53 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment, Community Banking. Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals and businesses across a variety of industries such as education; 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 competitive pressures with our relationship style of banking, competitive pricing, and cost efficiencies.
Supervision and Regulation
Overview
We are subject to extensive examination, supervision, and regulation under applicable federal and state laws by 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 Board. 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 Federal Reserve Bank of Richmond ("FRB") 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 Simplification 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 Inflation Reduction Act of 2022 (the “IRA”) imposed a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022, by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.
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 "Basel III Capital Rules").
Since fully phased in on January 1, 2019, Basel III Capital Rules require the Company and the Bank to maintain the following:
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A minimum ratio of Common Equity Tier 1 ("CET1") to risk-weighted assets of at least 4.50%, plus a 2.50% "capital conservation buffer" that is composed entirely of CET1 capital (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.00%);
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A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.50%);
● A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.00%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.50%); and
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A minimum leverage ratio of 4.00%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").
Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).
Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1.
Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.
Management believes that the Company and the Bank's current capital levels exceed the required capital amounts to the considered well-capitalized and also meet the fully phased-in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III Capital Rules as of December 31, 2023. For additional information, see Note 20, "Regulatory Requirements and Restrictions," to the Consolidated Financial Statements in Part II, Item 8 of this 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, 2023. 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:
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6.5% CET1 to risk-weighted assets
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8.0% Tier 1 capital to risk-weighted assets
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10.0% Total capital to risk-weighted assets
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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. 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 Federal Reserve 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 require 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. In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. The increased assessment is expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC's amended restoration plan.
The Volcker Rule
A provision in the Dodd-Frank Act, known as the Volker Rule, 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. The Volcker Rule, which became effective in July 2015 and the implementing regulations of which were amended in 2019 and were subject to further amendment 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.
On October 24, 2023, the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency ("OCC") issued a final rule to strengthen and modernize the CRA regulations. The final rule is intended, among other things, to adapt to changes in the banking industry, including the expanded role of mobile and online banking, and to tailor performance standards to account for differences in bank size and business models. The final rule introduces new tests under which the performance of banks with over $2 billion in assets will be assessed. The new rule also includes data collection and reporting requirements, some of which are applicable only to banks with over $10 billion in assets. The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. We received a “Satisfactory” CRA rating in our most recently completed federal 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.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including NASDAQ, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. The NASDAQ's listing standards pursuant to the SEC's rule became effective on October 2, 2023. The Company adopted a compensation recovery policy pursuant to the NASDAQ listing standards on October 24, 2023. The policy is included as Exhibit 97.1 to this Form 10-K.
Anti-Tying Restrictions
The Bank and its affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company.
Consumer Protection and Privacy
We are subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include the Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collections Practices 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. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. As a bank with less than $10 billion in assets, the Bank is subject to these federal consumer financial laws, but continues to be examined for compliance by the Federal Reserve, its primary federal banking regulator, not the CFPB.
Cybersecurity
Various federal and state laws and regulations contain extensive data privacy and cybersecurity provisions, and the regulatory framework for data privacy and cybersecurity is rapidly evolving. The FRB, FDIC, and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. In addition, various U.S. regulators, including the FRB and the SEC, have increased their focus on cyber security through guidance, examinations, and regulations.
At the federal level, the GLB Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such personal information except as provided in the financial institution’s policies and procedures.
In addition, in November 2021, the FRB, OCC, and FDIC adopted a new regulation that, among other things, requires a banking organization to notify its primary federal regulators within 36 hours after identifying a “computer-security incident” that the banking organization believes in good faith could materially disrupt or degrade its business or operations in a manner that would, among other things, jeopardize the viability of its operations, result in customers being unable to access their deposit and other accounts, result in a material loss of revenue, profit or franchise value, or pose a threat to the financial stability of the U.S.
In 2023, the SEC issued a final rule that requires disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy and governance. Under this rule, banking organizations that are SEC registrants must generally disclose information about a material cybersecurity incident within four business days of determining it is material with periodic updates as to the status of the incident in subsequent filings as necessary.
See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity and Item 1C. Cybersecurity for a further discussion of risk management strategies and governance processes related to cybersecurity.
Bank Secrecy Act and Anti-Money Laundering
The Bank is subject to the requirements of the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA PATRIOT Act”) of 2001. The USA PATRIOT Act broadened existing anti-money laundering legislation by imposing new compliance and due diligence obligations focused on detecting and reporting money laundering transactions. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of our customers. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
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.
Climate-Related and Other ESG Developments
In recent years, federal, state and international lawmakers and regulators have increased their focus on financial institutions' and other companies' risk oversight, disclosures and practices in connection with climate change and other environmental, social and governance (“ESG”) matters. For example, in March 2022, the SEC issued a proposed rule on the enhancement and standardization of climate-related disclosures for investors. The proposed rule would require public issuers, including us, to significantly expand the scope of climate-related disclosures in their SEC filings. The SEC has also announced plans to propose rules to require enhanced disclosure regarding human capital management and board diversity for public issuers.
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.

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors.
The risk factors described below discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included, or incorporated by reference, in this report before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be an exhaustive list of all risks we face.
Risks Related to the Economic Environment
The current economic environment poses significant challenges.
Our financial performance is generally highly dependent on the business environment in the markets in which 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, interest rates, or employee costs; 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 and inflationary 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.
Regulatory Risks
We operate in a highly regulated industry subject to examination, supervision, enforcement, and other legal actions by various federal and state governmental authorities, laws, and judicial and administrative decisions.
Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these statutes, regulations, and regulatory policies, including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial services and products offered, or allow non-banks to offer competing financial services and products. Failure to follow laws, regulations, and policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of operations.
The Bank’s ability to pay dividends is subject to regulatory limitations that may affect the Company’s ability to pay expenses and dividends to shareholders.
The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity, and the payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank’s dividend payment is governed by various statutes and regulations. For additional information, see “Payment of Dividends” in Item 1 of this report. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, including our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.
Market and Interest Rate Risk
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.
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 Company's 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 a credit loss for the decline in fair value in the future. Additional credit loss provision may materially affect our financial condition and earnings. For additional information, see Note 1, “Basis of Presentation and Significant Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Part II, Item 8 of this report.
The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and net interest margin will decrease if we offer interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Credit Risk
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset/liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining probable loan losses are inadequate, the allowance for credit 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 credit 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 Credit Losses" in the "Critical Accounting Policies" section in Part II, Item 7 and Note 1, "Basis of Presentation and Significant Accounting Policies," 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, 2023, commercial business and real estate loans totaled $1.66 billion, or 64.59%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $15.74 million and largest outstanding commercial real estate loan was $14.71 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, 2023, commercial construction loans totaled $105.95 million, or 4.12% our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $20.59 million. Losses from our commercial loan portfolio could have a material adverse effect on our financial condition and results of operations.
Operational Risks
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.
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. Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as we and other regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely. As of December 31, 2023, approximately 18.37% of our deposits were uninsured and we rely on these deposits for liquidity. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations.
We may require additional capital in the future that may not be available when needed.
We may need to raise additional capital to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB’s Discount Window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital will be available, on acceptable terms or at all, in the future.
We 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” in the “Critical Accounting Policies” section in Part II, Item 7 and Note 1, “Basis of Presentation and Significant Accounting Policies,” and Note 8, “Goodwill and Other Intangible Assets,” 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.
Our operational capabilities depend on internal and third-party systems which could fail, be breached or otherwise be compromised.
We rely on electronic communications and information systems, including those provided by third-party service providers, to conduct our business operations. Risks associated with our reliance on internal and third-party technology include cybersecurity incidents, operational failures and service interruptions, misconduct by our employees or those of third parties, and reputational damages. First Community Bank cannot be certain that we will receive timely notification from our third parties of cyberattacks or other cybersecurity breaches affecting their systems. Like other financial institutions, First Community Bank experiences malicious cyber activity directed at our vendors and other service providers. There is no guarantee that the measures the Company takes will provide absolute security or recoverability given that the techniques used in cyberattacks are complex and frequently change and are difficult to anticipate. Our employees and third parties may expose the Company to risk as a result of human error, misconduct, malfeasance, or a failure or breach of systems and infrastructure. For example, the Company’s ability to conduct business may be adversely affected by any significant disruptions, including to third parties service providers. Our third-party service providers 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 face cybersecurity risks which could result in the disclosure of confidential information, adversely affect the Company’s operations, cause reputational damage, and create significant legal and financial exposure.
First Community Bank and its customers, regulators, and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to and are likely to continue to be the target of cyberattacks, such as denial of service attacks, hacking, malware or ransomware intrusion, data corruption attempts, terrorist activities, or identity theft. Cyberattacks may expose security vulnerabilities in the Company’s systems or the systems of third parties or other security measures that could result in the unauthorized gathering, monitoring, misuse, release, loss, or destruction of confidential, proprietary, or sensitive information. A cyberattack could also damage the Company’s systems by introducing material disruptions to the Company’s or the Company’s customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance the Company’s protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Company’s systems and implement controls, processes, policies and other protective measures, the Company may not be able to anticipate all security breaches, nor may the Company be able to implement sufficient preventive measures against such security breaches, which may result in material losses or other adverse consequences.
Even the most advanced internal control environment may be vulnerable to compromise. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently and may not be recognized until launched or well after a breach has occurred. In addition, the existence of cyberattacks or security breaches at third-party vendors with access to the Company’s data may not be disclosed to the Company in a timely manner.
A successful penetration or circumvention of system security could cause serious negative consequences, including loss of customers and business opportunities; costs associated with maintaining business relationships after an attack or breach; significant disruption to the Company’s operations and business; misappropriation, exposure or destruction of the Company’s confidential information, intellectual property, funds and those of the Company’s customers; damage to the Company’s or the Company’s customers’ or third parties’ computers or systems; or a violation of applicable privacy laws and other laws. This could result in litigation exposure, regulatory fines, penalties, loss of confidence in the Company’s security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, which could adversely impact the Company’s results of operations, liquidity, and financial condition. In addition, the Company may not have adequate insurance coverage to compensate for losses from a cybersecurity event.
We continue to encounter technological change and must effectively anticipate and implement new 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 institutions to meet rapidly evolving customer demands. Our future success depends, in large 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 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:
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actual or expected variations in quarterly results of operations;
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recommendations by securities analysts;
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operating and stock price performance of comparable companies, as deemed by investors;
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news reports relating to trends, concerns, and other issues in the financial services industry;
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perceptions in the marketplace about our Company or competitors;
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new technology used, or services offered, by competitors;
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significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or competitors;
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failure to integrate acquisitions or realize expected benefits from acquisitions;
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changes in government regulations; and
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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.
General Risks
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:
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potential exposure to unknown or contingent liabilities of the target company;
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exposure to potential asset quality issues of the target company;
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difficulty, expense, and delays of integrating the operations and personnel of the target company;
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potential disruption to our business;
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potential diversion of management’s time and attention;
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loss of key employees and customers of the target company;
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difficulty in estimating the value of the target company;
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potential changes in banking or tax laws or regulations that may affect the target company;
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unexpected costs and delays;
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the target company’s performance does not meet our growth and profitability expectations;
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limited experience in new markets or product areas;
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increased time, expenses, and personnel as a result of strain on our infrastructure, staff, internal controls, and management; and
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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 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 are subject to environmental, social and governance ("ESG") risks that could adversely affect the Company's results of operations, reputation, and the market price of its securities.
The Company is subject to a variety of risks arising from ESG matters. ESG matters include environmental and climate change activism, diversity activism, and racial and social justice issues. Such matters may involve our personnel, customers, or third parties with whom we do business. Risks arising from ESG matters may adversely affect, among other things, the Company’s reputation and the market price of our securities. Further, the Company may be exposed to negative publicity based on the identity and activities of our shareholders, those to whom we lend and with which we otherwise do business, and the public’s view of the approach and requirements of our state or federal regulators, customers, and business partners with respect to ESG matters. Any such negative publicity could arise through traditional media or electronic social media platforms. The Company’s relationships and reputation with its existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on the Company’s ability to attract and retain customers and employees and could have a negative impact on the market price for our securities.
Certain investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations with respect to ESG matters when making investment decisions. Certain investors are beginning to incorporate the business risks of ESG regulation and activism and the adequacy of companies’ responses to these into their investment decisions. These shifts in investing priorities may result in adverse effects on the market price of the Company’s securities.
The U.S. Congress, state legislatures and federal and state regulatory agencies, as well as certain stock exchanges, continue to propose numerous initiatives related to ESG matters. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting practices, and credit portfolio concentrations management practices. The lack of empirical data surrounding the credit and other financial risks posed by ESG regulation and activism render it impossible to predict how specifically ESG matters may impact the Company’s financial condition and results of operations.
Specifically, environmental activism may adversely impact the economic viability of many of the Company’s deposit and loan customers in our West Virginia and southwestern Virginia markets. We have customers who operate in carbon-intensive industries like coal, oil and gas that are exposed to climate activism risks and those risks created by a transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies. Further, the effects of climate change activism may negatively impact regional and local economic activity, which could impact the economies of the communities the Company serves and in which we operate. The Company’s business, reputation and ability to attract and retain employees and customers may also be harmed if our response to ESG activism is perceived to be excessive or insufficient.
Federal and state banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as a tool to effect ESG activism, both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of ESG matters. Given that ESG matters could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from activism, the Company faces increasing focus on our resilience to ESG risks. Ongoing legislative or regulatory uncertainties and changes regarding ESG risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2.
Properties.
We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2023, the Bank provided financial services through a network of branch locations in West Virginia (17 branches), Virginia (23 branches), North Carolina (11 branches), and Tennessee (2 branches). We own all of the branch locations with the exception of two branch locations which are leased; one location in West Virginia and the other in North Carolina. As of December 31, 2023, 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 7, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings.
We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome of each 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures.
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of March 1, 2024, there were 3,619 record holders and 18,470,596 outstanding shares of our common stock.
Purchases of Equity Securities
We repurchased 768,079 shares of our common stock in 2023, 706,117 shares of our common stock in 2022, and 949,386 shares in 2021.
The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Number of Shares that May Yet be Purchased Under the Plan(1)
October 1-31, 2023
138,100
$ 30.65
138,100
2,553,900
November 1-30, 2023
42,900
33.96
42,900
2,511,000
December 1-31, 2023
8,500
34.12
8,500
2,502,500
Total
189,500
$ 31.55
189,500
(1)
In September 2023, the Board of Directors approved a repurchase plan to repurchase 2,700,000 shares and terminated the share repurchase plan adopted in January, 2021. The 2021 plan would have expired December 2023. The timing, price, and quantity of purchases under the repurchase plan are at the discretion of management and the repurchase plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances.
Stock Performance Graph
The following graph, compiled by S&P Global Market Intelligence (“S&P Global”), compares the cumulative total shareholder return on our common stock for the five years ended December 31, 2023, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and S&P Global’s Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 47 bank holding companies with total assets between $1 billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink sheets. The cumulative returns assume that $100 was originally invested on December 31, 2018, and that all dividends are reinvested.
Year Ended December 31,
First Community Bankshares, Inc.
100.00
101.42
73.86
118.56
124.63
141.73
S&P 500 Index
100.00
131.49
155.68
200.37
164.08
207.21
NASDAQ Composite Index
100.00
136.69
198.10
242.03
163.28
236.17
S&P Global Asset & Regional Peer Group(1)
100.00
120.00
96.19
137.45
130.50
128.73
(1) Includes the following institutions: American National Bankshares Inc.; Auburn National Bancorporation, Inc.; BankFirst Capital Corporation; BayFirst Financial Corp.; Burke & Herbert Financial Services Corp.; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carter Bankshares, Inc.; Chesapeake Financial Shares, Inc.; Citizens Bancorp Investment, Inc.; Citizens Holding Company; CoastalSouth Bancshares, Inc.; Colony Bankcorp, Inc.; Dogwood State Bank; Eagle Financial Services, Inc.; F&M Bank Corp.; FineMark Holdings, Inc.; First Community Bankshares, Inc.; First Community Corporation; First National Corporation; First US Bancshares, Inc.; Freedom Financial Holdings, Inc.; FVCBankcorp, Inc.; HomeTrust Bancshares, Inc.; John Marshall Bancorp, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; Morris State Bancshares, Inc.; Mountain Commerce Bancorp, Inc.; MVB Financial Corp.; National Bankshares, Inc.; NewtekOne, Inc.; Oakworth Capital, Inc.; Old Point Financial Corporation; Peoples Bancorp of North Carolina, Inc.; Primis Financial Corp.; Skyline Bankshares, Inc.; South Atlantic Bancshares, Inc.; Southern First Bancshares, Inc.; Southern States Bancshares, Inc.; Summit Financial Group, Inc.; United Bancorporation of Alabama, Inc.; USCB Financial Holdings, Inc.; Uwharrie Capital Corp.; Virginia National Bankshares Corporation; White River Bancshares, Co.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report.
Executive Overview
First Community Bankshares, Inc. 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 150 year-old Virginia-chartered banking institution. 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. As of December 31, 2023, the Bank operated 53 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 supplemented by 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, 2023, the Trust Division and FCWM managed and administered $1.49 billion in combined assets under various fee-based arrangements as fiduciary or agent.
On April 21, 2023, the Company completed the acquisition of Surrey Bancorp. Total assets of $466.25 million were acquired in the transaction. In addition the Company issued 2.99 million common shares in the transaction. The purchase transaction created $14.38 million in goodwill and $12.7 million in other intangible assets. The Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank on September 16, 2022, which resulted in a gain of $1.66 million. The Company had no acquisition and divestiture activity during 2021. 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 Significant 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 as the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.
Allowance for Credit Losses or "ACL"
The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 - "Basis of Presentation - Significant Accounting Policies" in this Annual Report on Form 10-K for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 - "Allowance for Credit Losses" in this Annual Report on Form 10-K, “Allowance for Credit Losses” in this MD&A.
The Company uses a number of economic variables to estimate the allowance for credit losses, with the most significant driver being a forecast of the national unemployment rate. In the December 31, 2023, estimate, the Company assumed an unemployment forecast range of 4.0% to 4.3%, compared to the range of 3.9% to 4.8% utilized in the December 31, 2022, estimate. Based on a sensitivity analysis as of December 31, 2023, an increase of 1% in the unemployment forecast would result in an increase in the allowance for credit losses of approximately 9.00%.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Acquisition and divestiture activities are included in the Company’s consolidated results of operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred.
Goodwill
Goodwill is tested for impairment annually, on October 31st, or more frequently if events or circumstances indicate there may be impairment. We have one reporting unit, 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 determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2023, which resulted in no goodwill impairment. For additional information, see Note 8, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.
Non-GAAP Financial Measures
In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent (“FTE”) basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.
We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21%. The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Net interest income, GAAP
$ 127,684
$ 112,663
$ 102,474
FTE adjustment(1)
Net interest income, FTE
$ 128,138
$ 113,114
$ 102,913
Net interest margin, GAAP
4.43 %
3.90 %
3.65 %
FTE adjustment(1)
0.02 %
0.02 %
0.02 %
Net interest margin, FTE
4.44 %
3.92 %
3.67 %
(1)
FTE basis of 21%.
Performance Overview
Highlights of our results of operations in 2023, and financial condition as of December 31, 2023, include the following:
●
Annual net income for 2023 of $48.02 million, or $2.72 per diluted common share, was an increase of $1.36 million, or 2.91%, compared to 2022.
● Net interest income increased $15.02 million compared to 2022, as increases in benchmark interest rates have improved net interest margin.
● Interest and fees on loans increased $22.16 million from the same period of 2022 and is attributable to both an increase in yield and an increase in average balance compared to the yield and average balance of the prior year. The Company acquired Surrey Bancorp on April 21, 2023, adding approximately $239.08 million in loans. Interest income on deposits in banks decreased $1.28 million to $2.48 million, primarily due to a significant decrease in the average balance compared to 2022.
● Net interest margin of 4.44% is an increase of 52 basis points over the same period of 2022. The yield on earning assets increased 79 basis points primarily driven by increased earnings on loans.
● Provision for credit losses increased $1.41 million and is primarily attributable to $1.61 million in day two provision for the Surrey portfolio.
● Net income was negatively impacted by a $3.00 million accrual for estimated litigation expenses. In addition, $2.39 million in merger related expenses were recognized in 2023 in relation to the Surrey acquisition.
● Annualized return on average assets ("ROA") was 1.48% for the twelve months of 2023 compared to 1.45% for the same period of 2022. Annualized return on average common equity ("ROE") was 10.02% for the twelve months of 2023 compared to 11.04%, for the same period of 2022.
● The Company completed the strategic acquisition of Surrey Bancorp, on April 21, 2023. Total assets of $466.25 million were acquired in the transaction increasing the Company's consolidated assets to $3.39 billion. In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in capital of $71.35 million. The purchase transaction created $14.38 million in goodwill and $12.70 million in other intangible assets. Other major balance sheet components increased in the transaction with $239.08 million acquired in loans and $403.64 million in deposits.
●
The Company’s loan portfolio increased by $172.10 million, or 7.17%, from December 31, 2022. Excluding the Surrey transaction, the loan portfolio decreased approximately $66.98 million, or 2.79%.
● Deposits increased $43.51 million, or 1.62%, from year-end 2022. Excluding the Surrey transaction, deposits decreased approximately $360.13 million, or 13.44%, from December 31, 2022.
● Non-performing loans to total loans increased to 0.76% of total loans when compared to year-end 2022. Net charge-offs for the year ended December 31, 2023, were $4.81 million, or 0.19% of annualized average loans, compared to net charge-offs of $3.87 million, or 0.17% of annualized average loans, for the same period in 2022.
● The allowance for credit losses to total loans was 1.41% at December 31, 2023, compared to 1.27% for the same period of 2022.
● The accumulated other comprehensive loss of $10.95 million at December 31, 2023, decreased $4.77 million compared to the accumulated other comprehensive loss of $15.71 million at December 31, 2022.
● The Company repurchased 768,079 common shares during 2023 for a total cost of $23.04 million. The Company recently announced a new 2.7 million share repurchase program that replaced the remainder of the prior program.
●
Book value per share at December 31, 2023, was $27.20, an increase of $1.19 from year-end 2022.
Results of Operations
Net Income
The following table presents the changes in net income and related information for the periods indicated:
2023 Compared to 2022
2022 Compared to 2021
Year Ended December 31,
Increase
%
Increase
%
(Amounts in thousands, except per share data)
(Decrease)
Change
(Decrease)
Change
Net income
$ 48,020
$ 46,662
$ 51,168
$ 1,358
2.91 %
$ (4,506 )
(8.81 )%
Basic earnings per common share
2.67
2.82
2.95
(0.15 )
(5.32 )%
(0.13 )
(4.41 )%
Diluted earnings per common share
2.72
2.82
2.94
(0.10 )
(3.55 )%
(0.12 )
(4.08 )%
Return on average assets
1.48 %
1.45 %
1.63 %
0.03 %
2.07 %
(0.18 )%
(11.04 )%
Return on average common equity
10.02 %
11.04 %
11.96 %
(1.02 )%
(9.24 )%
(0.92 )%
(7.69 )%
2023 Compared to 2022. Pre-tax income increased $1.82 million compared to 2022. The increase was primarily attributable to an increase in net interest income of $15.02 million. Net interest income totaled $127.68 million compared to $112.66 million in 2022. The increase in net interest income was offset by an increase in the provision for credit losses of $1.41 million and an increase in noninterest expense of $12.06 million. The increase in provision for credit losses was primarily due to $1.61 million recorded for the day two provision for the acquisition of the Surrey loan portfolio. The increase in noninterest expense included a $3.00 million accrual for estimated litigation expenses, an increase in salaries and benefits costs of $2.70 million, and an increase of $1.80 million in merger expenses. Both the merger expense and the increase in salaries and benefits were primarily due to the acquisition of Surrey Bancorp.
2022 Compared to 2021. Pre-tax income decreased $6.37 million, or 9.58%, primarily due to an increase of $15.04 million in provision for credit losses offset by an increase in net interest income of $10.19 million. The increase in provision for credit losses of $15.04 million was attributable to a return to normalized provisions that include forecasts for higher unemployment rates and weaker macroeconomic trends as compared with prior year recoveries of pandemic-related provisioning. The increase in net interest income of $10.19 million was primarily due to increases in both interest on securities and interest and fees on loans. The increases were primarily driven by significant growth in both portfolios. Interest on deposits in banks increased as well and was primarily driven by rate increases in the FOMC's target federal funds rate throughout 2022.
Net Interest Income
Net interest income, our largest contributor to earnings, is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. For additional information, see “Non-GAAP Financial Measures” above. The following table presents the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:
Year Ended December 31,
(Amounts in thousands)
Average Balance
Interest(1)
Average Yield/ Rate(1)
Average Balance
Interest(1)
Average Yield/ Rate(1)
Average Balance
Interest(1)
Average Yield/ Rate(1)
Assets
Earning assets
Loans(2)(3)
$ 2,538,361
$ 127,019
5.00 %
$ 2,298,503
$ 104,830
4.56 %
$ 2,153,099
$ 102,996
4.78 %
Securities available for sale
298,389
8,115
2.72 %
256,221
6,172
2.41 %
81,049
2,008
2.48 %
Interest-bearing deposits
46,601
2,485
5.33 %
330,785
3,767
1.14 %
570,040
0.13 %
Total earning assets
2,883,351
$ 137,619
4.77 %
2,885,509
$ 114,769
3.98 %
2,804,188
$ 105,749
3.77 %
Other assets
369,700
328,635
330,640
Total assets
$ 3,253,051
$ 3,214,144
$ 3,134,828
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits
$ 686,534
$
0.06 %
$ 683,502
$
0.02 %
$ 646,999
$
0.02 %
Savings deposits
847,397
6,781
0.80 %
880,171
0.03 %
816,845
0.03 %
Time deposits
267,957
2,155
0.80 %
322,158
1,235
0.38 %
387,249
2,427
0.63 %
Total interest-bearing deposits
1,801,888
9,341
0.52 %
1,885,831
1,653
0.09 %
1,851,093
2,835
0.15 %
Borrowings
Federal funds purchased
2,715
5.12 %
-
-
-
-
-
-
Retail repurchase agreements
1,528
0.06 %
2,239
0.07 %
1,194
0.07 %
Total borrowings
4,243
3.30 %
2,239
0.07 %
1,194
0.07 %
Total interest-bearing liabilities
1,806,131
9,481
0.52 %
1,888,070
1,655
0.09 %
1,852,287
2,836
0.15 %
Noninterest-bearing demand deposits
926,378
864,224
816,638
Other liabilities
41,477
39,363
38,151
Total liabilities
2,773,986
2,791,657
2,707,076
Stockholders' equity
479,065
422,487
427,752
Total liabilities and equity
$ 3,253,051
$ 3,214,144
$ 3,134,828
Net interest income, FTE(1)
$ 128,138
$ 113,114
$ 102,913
Net interest rate spread, FTE(1)
4.25 %
3.89 %
3.62 %
Net interest margin, FTE(1)
4.44 %
3.92 %
3.67 %
(1)
FTE basis based on the federal statutory rate of 21%.
(2)
Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.
(3)
Interest on loans include non-cash purchase accounting accretion of $2.74 million in 2023, $2.62 million in 2022, and $4.66 million in 2021.
The following table presents the impact to net interest income on a FTE basis due to changes in volume (average volume times the prior year’s average rate), rate (average rate times the prior year’s average volume), and rate/volume (average volume times the change in average rate), for the periods indicated:
Year Ended
Year Ended
December 31, 2023 Compared to 2022
December 31, 2022 Compared to 2021
Dollar Increase (Decrease) due to
Dollar Increase (Decrease) due to
Rate/
Rate/
(Amounts in thousands)
Volume
Rate
Volume
Total
Volume
Rate
Volume
Total
Interest earned on(1):
Loans
$ 10,939
$ 10,187
$ 1,063
$ 22,189
$ 6,956
$ (4,798 )
$ (324 )
$ 1,834
Securities available for sale
1,016
1,943
4,340
(56 )
(120 )
4,164
Interest-bearing deposits with other banks
(3,236 )
13,872
(11,918 )
(1,282 )
(313 )
5,747
(2,412 )
3,022
Total interest-earning assets
8,719
24,855
(10,724 )
22,850
10,983
(2,856 )
9,020
Interest paid on(1):
Demand deposits
-
(21 )
(1 )
(15 )
Savings deposits
(11 )
6,737
(251 )
6,475
-
Time deposits
(208 )
1,356
(228 )
(408 )
(942 )
(1,192 )
Federal funds purchased
-
-
-
-
-
-
Retail repurchase agreements
-
(1 )
-
(1 )
-
-
Total interest-bearing liabilities
(219 )
8,383
(338 )
7,826
(379 )
(960 )
(1,181 )
Change in net interest income(1)
$ 8,938
$ 16,472
$ (10,386 )
$ 15,024
$ 11,362
$ 1,853
$ (3,014 )
$ 10,201
(1)
FTE basis based on the federal statutory rate of 21%.
2023 Compared to 2022. Net interest income comprised 77.32% of total net interest and noninterest income in 2023 compared to 75.19% in 2022. Net interest income increased $15.02 million, or 13.33%, and increased $15.02 million, or 13.28%, on a FTE basis. The FTE net interest margin increased 52 basis points and the FTE net interest spread increased36 basis points. The increase was primarily driven by increases in both average balances and rates for loans and securities available for sale. The average balance for loans increased $239.86 million, while the yield increased 44 basis points resulting in a tax effected increase in interest on loans of $22.19 million compared to 2022. The average balance for securities available for sale increased $42.17 million and the yield increased 31 basis points resulting in a tax effected increase to interest on securities available for sale of $1.94 million compared to 2022.
Average earning assets decreased $2.16 million, or 0.07%, primarily due to a decrease in interest-bearing deposits with banks of $284.18 million, or 85.91%. This decrease was offset by an increase in average loans and average securities available for sale as noted above. The yield on earning assets increased 79 basis points, or 19.85%, primarily due to significant increase in benchmark rates as compared to the same period of 2022. The average loan to deposit ratio increased to 93.04% from 83.58% in 2022. Non-cash accretion increased $125 thousand, or 4.77% to $2.74 million. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 9 basis points for both 2023 and 2022.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $81.94 million, or 4.34%, primarily due to a decrease in deposits. Time deposits decreased $54.20 million, or 16.82%, and savings deposits decreased $32.77 million, or 3.72%. Interest-bearing demand deposits increased $3.03 million or 0.44%. The yield on interest-bearings liabilities increased 43 basis points and is primarily due to increases in benchmark rates throughout 2022 and 2023.
2022 Compared to 2021. Net interest income comprised 75.19% of total net interest and noninterest income in 2022 compared to 74.92% in 2021. Net interest income increased $10.19 million, or 9.94%, and increased $10.20 million, or 9.91%, on a FTE basis. The FTE net interest margin increased 25 basis points and the FTE net interest spread increased 27 basis points. The increase in net interest margin was primarily driven by an increase in yield on earning assets of 21 basis points, specifically, interest on deposits in banks. The increased yield on interest on deposits in banks was primarily driven by rate increases in the FOMC's target federal funds rate throughout 2022.
Average earning assets increased $81.32 million, or 2.90%, primarily due to an increase in average securities available for sale of $175.17 million, or 216.13%, and average loans of $145.40 million, or 6.75%. The increases were offset by a decrease in average interest-bearing deposits in banks of $239.26 million, or 41.97%. The yield on earning assets increased 21 basis points primarily due to an increase in yield on interest on deposits in banks of 101 basis points to 1.14% compared to 0.13% in 2021. The increase in yield was primarily driven by rate increases in the FOMC's target federal funds rate throughout 2022. The average loan to deposit ratio increased to 83.58% from 80.71% in 2022. Non-cash accretion income related to PCD loans decreased $2.04 million, or 43.77%, to $2.62 million due to reduced balances in the PCD portfolios. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 9 basis points compared to 17 basis points in 2021.
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $35.78 million, or 1.93%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 6 basis points. Average interest-bearing deposits increased $34.74 million, or 1.88%, with increases of $63.33 million, or 7.75%, in average savings deposits, $36.50 million, or 5.64%, in average interest-bearing demand deposits, offset by a decrease of $65.09 million, or 16.81%, in average time deposits.
Provision for Credit Losses
2023 Compared to 2022. The provision charged to operations increased $1.41 million compared to the prior year. The provision expense of $7.99 million was comprised of $8.44 million related to provision expense for loans and a recovery of provision of $450 thousand for unfunded loan commitments. Provision for credit losses for loans of $8.44 million was recorded compared to the provision of $6.57 million recorded in 2022. The increase in provision is commensurate with changes in economic forecasts and growth in the loan portfolio associated with the acquisition of Surrey Bancorp on April 21, 2023. $1.61 million of the provision is attributable to day two provision for the Surrey portfolio. As noted above a recovery of provision for loan commitments was recorded in 2023 of $450 thousand and was recorded in provision for credit losses. A provision expense of $518 thousand was recorded for unfunded loan commitments in 2022 and was recorded in other operating expense.
2022 Compared to 2021. The provision charged to operations increased $15.04 million, or 177.58%. The increase was attributable to growth of the loan portfolio throughout 2022 and an economic forecast that projects higher unemployment rates and weaker macroeconomic trends. The prior year included recoveries of pandemic-related provisioning.
Noninterest Income
The following table presents the components of, and changes in, noninterest income for the periods indicated:
2023 Compared to 2022
2022 Compared to 2021
Year Ended December 31,
Increase
%
Increase
%
(Decrease)
Change
(Decrease)
Change
(Amounts in thousands)
Wealth management
$ 4,179
$ 3,855
$ 3,853
$
8.40 %
$
0.05 %
Service charges on deposits
13,996
14,213
13,446
(217 )
-1.53 %
5.70 %
Other service charges and fees
13,647
12,308
12,422
1,339
10.88 %
(114 )
-0.92 %
Net gain on sale of securities
(21 )
-
-
(21 )
-
-
-
Net FDIC indemnification asset amortization
-
-
(1,226 )
-
-
1,226
-100.00 %
Gain on divestiture
-
1,658
-
(1,658 )
-100.00 %
1,658
-
Other operating income
5,651
5,148
5,806
9.77 %
(658 )
-11.33 %
Total noninterest income
$ 37,452
$ 37,182
$ 34,301
$
0.73 %
$ 2,881
8.40 %
2023 Compared to 2022. Noninterest income comprised 22.68% of total net interest and noninterest income in 2023 compared to 24.81% in 2022. Noninterest income increased $270 thousand, or 0.73%. The increase was primarily the result of an increase in other service charges and fees of $1.34 million, or 10.88%. The increase in other services charges was primarily driven by an increase in interchange income. Wealth management income increased $324 thousand, or 8.40%. These increases to noninterest income were offset by the 2022 gain recorded for the divestiture of the Emporia, Virginia branch of $1.66 million.
2022 Compared to 2021. Noninterest income comprised 24.81% of total net interest and noninterest income in 2022 compared to 25.08% in 2021. Noninterest income increased $2.88 million, or 8.40%, primarily due to the $1.66 million gain recognized from the sale of the Company's Emporia, Virginia, branch to Benchmark Community Bank in the third quarter of 2022. Also contributing to the increase was $1.23 million in net FDIC indemnification asset amortization recognized in 2021, as the asset became fully amortized in 2021. Service charges on deposits increased $767 thousand, or 5.70%, and is attributable to increased customer activity compared to the activity levels experienced during the pandemic lock-downs. Other operating income decreased $658 thousand, or 11.33%, and is primarily attributable to the 2021 recovered amount of $1.00 million of an acquired loan from a failed bank acquisition that had been written down prior to acquisition.
Noninterest Expense
The following table presents the components of, and changes in, noninterest expense for the periods indicated:
2023 Compared to 2022
2022 Compared to 2021
Year Ended December 31,
Increase
%
Increase
%
(Decrease)
Change
(Decrease)
Change
(Amounts in thousands)
Salaries and employee benefits
$ 49,887
$ 47,183
44,239
$ 2,704
5.73 %
$ 2,944
6.65 %
Occupancy expense
4,967
4,818
4,913
3.09 %
(95 )
-1.93 %
Furniture and equipment expense
5,878
6,001
5,627
(123 )
-2.05 %
6.65 %
Service fees
8,908
7,606
6,324
1,302
17.12 %
1,282
20.27 %
Advertising and public relations
3,300
2,409
2,076
36.99 %
16.04 %
Professional fees
1,567
1,303
1,524
20.26 %
(221 )
-14.50 %
Amortization of intangibles
1,731
1,446
1,446
19.71 %
-
0.00 %
FDIC premiums and assessments
1,511
1,126
34.19 %
35.34 %
Merger expense
2,393
-
1,797
301.51 %
-
Divestiture expense
-
-
(153 )
-100.00 %
-
Litigation expense
3,000
-
-
3,000
-
-
-
Other operating expense
12,035
10,475
11,737
1,560
14.89 %
(1,262 )
-10.75 %
Total noninterest expense
$ 95,177
$ 83,116
$ 78,718
$ 12,061
14.51 %
$ 4,398
5.59 %
2023 Compared to 2022. Non interest expense increased $12.06 million, or 14.51%, compared to 2022. The Company recorded $3.00 million in estimated litigation expenses in the fourth quarter of 2023. Other increases occurred in salaries and employee benefits of $2.70 million, or 5.73%, other operating expense of $1.56 million, or 14.89%, service fees of $1.30 million or 17.12%, and advertising and public relations of $891 thousand, or 36.99%. In addition, the Company recorded merger expenses of $2.39 million in 2023 related to the Surrey Bancorp acquisition. The related cost for the addition of Surrey branches and staff was a primary driver in the increase to noninterest expense.
2022 Compared to 2021. Noninterest expense increased $4.40 million, or 5.59%. The increase was primarily due to an increase in salaries and employee benefits of $2.94 million, or 6.65%, and service fees of $1.28 million, or 20.27%. The increase in salaries and benefits is due to wage increases implemented in the first quarter of 2022 as part of the Company's strategic initiative to enhance Human Capital Management, which included an increased minimum wage. Service fees increased due to an increase in core processing expense. In addition, the Company recorded merger and divestiture expenses related to the announced Surrey Bancorp acquisition and the divestiture of the Company's Emporia Virginia branch of $596 thousand and $153 thousand, respectively. These increases to expense were offset primarily by a decrease in other operating expense of $1.26 million, or 10.75%. The decrease is primarily attributable to the 2021 write-down of bank property of $781 thousand.
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.
2023 Compared to 2022. Income tax expense increased $459 thousand, or 3.40% and was primarily due to the increase in pre-tax income. The effective tax rate increased slightly to 22.51% in 2023 compared to 22.43% in 2022.
2022 Compared to 2021. Income tax expense decreased $1.87 million or 12.14%, and is primarily attributable to the decrease in pre-tax net income. The effective tax rate decreased to 22.43% in 2022 compared to 23.09% in 2021.
Financial Condition
Total assets as of December 31, 2023, increased $132.97 million, or 4.24%, to $3.27 billion from $3.14 billion as of December 31, 2022. Total liabilities increased $51.66 million, or 1.90%, and stockholders' equity increased $81.31 million, or 19.27%. The primary driver for the change in the balance sheet components was the acquisition of Surrey Bancorp on April 21, 2023. Total assets of $466.25 million were acquired in the transaction. In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in capital of $71.35 million. The purchase transaction created $14.38 million in goodwill and $12.7 million in other intangible assets.
Investment Securities
Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as collateral where required, and to make selective investments for Community Reinvestment Act purposes. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Available-for-sale debt securities as of December 31, 2023, decreased $19.39 million, or 6.46%, compared to December 31, 2022. The decrease was due to $83.59 million in maturities, prepayments, and calls, as well as sales of $38.98 million in securities available for sale. Included in the sale of securities was the entire portfolio of Surrey with an acquired fair value of $20.93 million comprised primarily of U.S. Treasury securities. A loss of $28 thousand was recognized in the sale of the portfolio. The decreases were offset by purchases of $74.10 million and $20.93 million in investments acquired in the Surrey acquisition. The market value of debt securities available for sale as a percentage of amortized cost was 95.23% as of December 31, 2023, compared to 93.82% as of December 31, 2022. There were no held-to-maturity debt securities as of December 31, 2023, or 2022.
The following table provides information about our investment portfolio as of the dates indicated:
December 31,
(Amounts in years)
Average life
4.33
4.61
Average duration
2.36
2.84
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, 2023 or 2022.
Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. Based on the application of the new standard, and that all debt securities available for sale in an unrealized loss position as of December 31, 2023, continue to perform as scheduled, we do not believe that a provision for credit losses is necessary in 2023. We recognized no impairment charges in earnings associated with debt securities in 2022. For additional information, see Note 1, “Basis of Presentation and Significant 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. 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. 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 largely of loans to individuals within our market footprint for home equity loans and lines of credit and for the purpose of financing residential properties. 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, automobile, credit cards, personal lines of credit, 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, 2023, increased $172.10 million, or 7.17%, compared to December 31, 2022. primarily due to the Surrey acquisition with loans acquired totaling $239.08 million. The largest components of Surrey's portfolio included approximately $98.89 million in non-farm, non-residential loans, $61.47 million commercial and industrial loans, and $23.03 million in non-owner occupied single family loans. 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, 2023 or 2022. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.
The following table presents the maturities and rate sensitivities of the loan portfolio as of December 31, 2023:
(Amounts in thousands)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Through Fifteen Years
Due After Fifteen Years
Total
Commercial loans
Construction, development, and other land(1)
$ 13,206
$ 10,955
$ 56,076
$ 25,708
$ 105,945
Commercial and industrial
34,664
94,828
61,173
21,185
211,850
Multi-family residential
4,496
37,060
97,772
49,054
188,382
Single family non-owner occupied
4,556
13,712
79,076
127,551
224,895
Non-farm, non-residential
22,487
128,724
379,376
363,963
894,550
Agricultural
1,126
9,878
9,675
21,669
Farmland
1,258
1,811
8,850
2,283
14,202
Total commercial loans
81,793
296,968
691,998
590,734
1,661,493
Consumer real estate loans
Home equity lines
4,097
12,437
64,023
7,069
87,626
Single family owner occupied
17,367
163,912
513,897
696,140
Owner occupied construction
1,093
7,030
8,445
Total consumer real estate loans
5,339
29,848
229,028
527,996
792,211
Consumer and other loans
Consumer loans
4,299
91,825
19,145
1,822
117,091
Other
1,503
-
-
-
1,503
Total consumer and other loans
5,802
91,825
19,145
1,822
118,594
Total loans
$ 92,934
$ 418,641
$ 940,171
$ 1,120,552
$ 2,572,298
Rate sensitivities
Predetermined interest rate
$ 46,214
$ 359,624
$ 577,336
$ 657,642
$ 1,640,816
Floating or adjustable interest rate
46,720
59,017
362,835
462,910
931,482
Total loans
$ 92,934
$ 418,641
$ 940,171
$ 1,120,552
$ 2,572,298
(1)
Construction loans include construction to permanent loans that have not yet converted to principal and interest payments.
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. The Company has a loan review function independent of credit administration that performs a risk-based review of a sample of loans and loan relationships in the Company's commercial portfolio, and conducts analytical review of credit quality on the Company's non-commercial portfolios.
Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, modified loans past due 90 days or more, and other real estate owned ("OREO"). Prior to the adoption of ASU 2022-02, unseasoned troubled debt restructurings ("TDRs") were included in nonperforming assets. 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. 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:
December 31,
(Amounts in thousands)
Nonperforming
Nonaccrual loans
$ 19,356
$ 15,208
$ 20,768
$ 22,003
$ 16,357
Accruing loans past due 90 days or more
Modified loans past due 90 days or more (1)
-
-
-
-
-
TDRs'(2)(3)
-
1,346
1,367
Total non-covered nonperforming loans
19,460
16,696
22,222
22,485
17,221
OREO
1,015
2,083
3,969
Total nonperforming assets
$ 19,652
$ 17,399
$ 23,237
$ 24,568
$ 21,190
Additional Information
Total modified loans (1)
$ 2,046
$ -
$ -
$ -
$ -
Total Accruing TDRs (3)
-
7,112
8,652
10,248
6,575
Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans
1,129
1,586
1,068
Actual interest income recorded on restructured and nonperforming loans
Total ratios
Nonperforming loans to total loans
0.76 %
0.70 %
1.03 %
1.03 %
0.81 %
Nonperforming assets to total assets
0.60 %
0.55 %
0.73 %
0.82 %
0.76 %
Allowance for credit losses to nonperforming loans
185.97 %
183.01 %
125.36 %
116.44 %
106.99 %
Allowance for credit losses to total loans
1.41 %
1.27 %
1.29 %
1.20 %
0.87 %
(1) ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU adopted effective January 1, 2023.
(2)
TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.22 million, $1.80 million, $1.18 million, and $95 thousand for the four years ended December 31, 2022. They were included in nonaccrual loans as reported prior to the adoption of ASU 2022-02.
(3)
Total accruing TDRs exclude nonaccrual TDRs of $1.32 million, $2.52 million, $1.81 million, and $2.34 million for the four years ended December 31, 2022. They were included in nonaccrual loans as reported prior to the adoption of ASU 2022-02.
Nonperforming assets as of December 31, 2023, increased $2.25 million, or 12.95%, from December 31, 2022, with the largest increase due to an increase due to an increase in nonaccrual loans of $4.15 million. The increase was offset by a decrease of $1.35 million in nonaccrual TDRs that was reported in December 31, 2022. The adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, on January 1, 2023, eliminated the accounting guidance for troubled debt restructurings by creditors as provided in ASC 310-40, Receivables - Troubled Debt Restructuring by Creditors. Therefore, the guidance applied prior to January 1, 2023, is no longer applicable. OREO decreased $511 thousand, or 72.69% and accruing loans past due 90 days or more decreased $38 thousand from 2022. As of December 31, 2023, nonaccrual loans were largely attributed to single family owner occupied (48.38%), non-farm, non-residential real estate (12.63%), and consumer loans (9.85%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for credit losses based on management's estimate of loss at ultimate resolution.
Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $33.93 million as of December 31, 2023, a increase of $4.25 million, or 14.32%, compared to $29.68 million as of December 31, 2022. Delinquent loans as a percent of total loans totaled 1.32% as of December 31, 2023, which includes past due loans 0.57% and nonaccrual loans 0.75%, compared to 1.24% as of December 31, 2022.
When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. As noted above, ASU 2022-02, eliminated and replaced the accounting guidance for borrowers experiencing financial difficulties previously applied under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors. ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, discloses loans for borrowers experiencing financial difficulty as modified loans. Total loans modified as of December 31, 2023, were $2.05 million.
OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 6 properties with an average holding period of 10 months as of December 31, 2023. The net loss on the sale of OREO was $84 thousand in 2023, $453 thousand in 2022, and $231 thousand in 2021. The following table presents the changes in OREO during the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Beginning balance
$
$ 1,015
Additions
Disposals
(798 )
(533 )
Valuation adjustments
(104 )
(484 )
Ending balance
$
$
Allowance for Credit Losses (ACL)
The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s measurement of credit losses policy adheres to GAAP as well as interagency guidance. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.
For collectively evaluated loans, the Company in general uses two modeling approaches to estimate expected credit losses. The Company projects the contractual run-off of its portfolio at the segment level and incorporates a prepayment assumption in order to estimate exposure at default. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.
In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure historical credit loss experience with similar risk characteristics within the segments. For the majority of segment models for collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology or simple loss rate modeling methodology.
Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e. formulaic model results). Each period, the Company considers qualitative factors that are relevant within the qualitative framework. For further discussion of our Allowance for Credit Losses - See Note 1 - "Basis of Presentation - Significant Accounting Policies".
With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loan losses from an incurred loss method to a life of loan method. See Note 1 - "Basis of Presentation and Significant Accounting Policies" for further details. As of December 31, 2023, the balance of the ACL for loans was $36.19 million, or 1.41% of total loans. The ACL at December 31, 2023, increased $5.63 million from the balance of $30.56 million recorded December 31, 2022. This increase included a provision of $7.99 million and net charge-offs for the twelve months of $4.81 million. The increase in provision for the twelve months ended December 31, 2023, included a day two provision of $1.61 million for Surrey loans. In addition, $2.01 million was added to the reserve for Surrey's purchased credit deteriorated loans.
At December 31, 2023, the Company also had an allowance for unfunded commitments of $746 thousand which was recorded in Other Liabilities on the Balance Sheet. During 2023, there was a recovery of provision for credit losses on unfunded commitments of $450 thousand which was recorded in provision expense on the Statement of Income. During 2022, the provision for credit losses on unfunded commitments was $518 thousand and was recorded in other expense on the Statement of Income.
Management considered the allowance adequate as of December 31, 2023; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see “Allowance for Credit Losses or ("ACL")” 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 following table presents net charge-offs, by loan class, and the ratio to average loans during the periods indicated:
December 31,
(Amounts in thousands)
Net (charge-offs) recoveries
Average Loans
Ratio of Net (charge-offs) recoveries to average loans
Net (charge-offs) recoveries
Average Loans
Ratio of Net (charge-offs) recoveries to average loans
Net (charge-offs) recoveries
Average Loans
Ratio of Net (charge-offs) recoveries to average loans
Commercial loans
Construction, development, and other land
$
$ 108,437
0.47 %
$
$ 88,204
0.06 %
$ (108 )
$ 47,285
-0.23 %
Commercial and industrial
(8 )
216,618
0.00 %
169,101
0.50 %
(639 )
173,206
-0.37 %
Multi-family residential
163,797
0.01 %
124,229
0.08 %
102,175
0.30 %
Single family non-owner occupied
220,316
0.01 %
193,455
0.10 %
185,752
0.03 %
Non-farm, non-residential
863,078
0.05 %
754,518
0.11 %
(696 )
724,444
-0.10 %
Agricultural
(30 )
18,982
-0.16 %
(70 )
10,407
-0.67 %
(157 )
9,441
-1.66 %
Farmland
13,856
0.21 %
12,290
0.31 %
(56 )
16,799
-0.33 %
Total commercial loans
1,605,084
0.06 %
2,007
1,352,204
0.15 %
(1,296 )
1,259,102
-0.10 %
Consumer real estate loans
Home equity lines
77,348
0.16 %
72,511
0.09 %
82,861
0.48 %
Single family owner occupied
(15 )
704,217
0.00 %
702,384
0.00 %
657,741
0.02 %
Owner occupied construction
-
16,778
0.00 %
-
23,898
0.00 %
-
27,529
0.00 %
Total consumer real estate loans
798,343
0.01 %
798,793
0.01 %
768,131
0.07 %
Consumer and other loans
Consumer loans
(5,889 )
134,934
-4.36 %
(5,960 )
147,506
-4.04 %
(2,193 )
125,866
-1.74 %
Total
$ (4,813 )
$ 2,538,361
-0.19 %
$ (3,873 )
$ 2,298,503
-0.17 %
$ (2,960 )
$ 2,153,099
0.14 %
The following table presents the allowance for loan losses, by loan class, as of the dates indicated:
December 31,
(Amounts in thousands)
Balance
Percentage of Total Allowance
Balance
Percentage of Total Allowance
Commercial loans
Construction, development, and other land
$ 3,549
4.12 %
$ 3,197
4.88 %
Commercial and industrial
3,997
8.24 %
2,561
6.27 %
Multi-family residential
1,191
7.32 %
6.17 %
Single family non-owner occupied
2,581
8.74 %
2,169
8.59 %
Non-farm, non-residential
9,837
34.78 %
8,117
32.82 %
Agricultural
0.84 %
0.50 %
Farmland
0.55 %
0.49 %
Consumer real estate loans
Home equity lines
1,588
3.41 %
1,053
3.15 %
Single family owner occupied
7,989
27.06 %
7,744
30.61 %
Owner occupied construction
0.33 %
0.43 %
Consumer and other loans
Consumer loans
4,646
4.61 %
4,412
6.09 %
Total allowance
$ 36,189
100.00 %
$ 30,556
100.00 %
Deposits
Total deposits as of December 31, 2023, increased $43.51 million, or 1.62%, compared to December 31, 2022. The increase was primarily attributable to the acquisition of Surrey Bancorp. The Company acquired $403.64 million in deposits in the transaction: acquiring $158.39 million in demand accounts, $99.32 million in interest-bearing demand, $102.70 million in savings, and $43.23 million in time deposit accounts. Excluding the Surrey acquisition, deposits decreased $360.13 million with decreases occurring in savings of $103.35 million, demand deposits of $98.64 million, interest-bearing demand of $84.95 million, and time deposits of $73,18 million. Deposit attrition related to Surrey post-merger totaled $70.77 million, with attrition of $36.97 million in interest-bearing demand, $13.65 million in time deposits, $13.18 million in demand, and $6.96 million in savings. We had no deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of December 31, 2023 or 2022.
The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2023:
(Amounts in thousands)
Three months or less
$ 4,069
Over three through six months
Over six through twelve months
2,643
Over twelve months
11,006
$ 18,592
Borrowings
Total borrowings as of December 31, 2023, decreased $755 thousand, or 40.29%, compared to December 31, 2022. Total borrowings for 2023 were comprised entirely of short-term borrowings, which consist of retail repurchase agreements. The weighted average rate of 0.06% as of December 31, 2023, decreased one basis point from the weighted average rate of 0.07% as of December 31, 2022.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure that draws together all sources and uses of liquidity. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.
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 of December 31, 2023, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Company.
In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to the Consolidated Financial Statements in Item 8 of this report for the expected timing of such payments as of December 31, 2023. These include payments related to (i) operating leases (Note - 7 Premises, Equipment, and Leases ), (ii) time deposits with stated maturity dates (Note 9 - Deposits), and (iii) commitments to extend credit and standby letters of credit (Note - 19 Litigation, Commitments, and Contingencies).
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, 2023, the Company’s cash reserves and short-term investment securities totaled $14.68 million and $22.47 million, respectively. The Company’s cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders 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 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, 2023, our unencumbered cash totaled $116.42 million, unused borrowing capacity from the FHLB totaled $342.81 million, available credit from the FRB Discount Window totaled $123.81 million, available lines from correspondent banks totaled $100.00 million, and unpledged available-for-sale securities totaled $135.88 million.
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, 2023, increased $81.31 million, or 19.27%, to $503.29 million from $421.99 million as of December 31, 2022. The change in stockholders' equity was largely due to the acquisition of Surrey Bancorp. The Company issued 2.99 million shares of common stock in the transaction resulting in an increase to capital of $71.35 million. In addition, the Company earned $48.02 million, which was offset by repurchasing 768,079 shares of our common stock totaling $23.04 million and dividends on our common stock of $21.09 million. Our book value per common share increased $1.19 to $27.20 as of December 31, 2023, from $26.01 as of December 31, 2022.
Capital Adequacy Requirements
Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III. Our current minimum 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:
December 31,
The Company
Common equity Tier 1 ratio
14.69 %
13.37 %
14.39 %
Tier 1 risk-based capital ratio
14.69 %
13.37 %
14.39 %
Total risk-based capital ratio
15.94 %
14.62 %
15.65 %
Tier 1 leverage ratio
11.52 %
10.17 %
9.65 %
The Bank
Common equity Tier 1 ratio
12.97 %
11.69 %
13.37 %
Tier 1 risk-based capital ratio
12.97 %
11.69 %
13.37 %
Total risk-based capital ratio
14.22 %
12.94 %
14.62 %
Tier 1 leverage ratio
10.07 %
8.79 %
8.94 %
As of December 31, 2023, 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, as of December 31, 2023. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 20, “Regulatory Requirements and Restrictions,” 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.
At December 31, 2023, the Federal Open Market Committee set the benchmark federal funds rate at a range of 5.25% - 5.50% 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. In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.
December 31,
Increase (Decrease) in Basis Points
Change in Net Interest Income
Percent Change
Change in Net Interest Income
Percent Change
(Dollars in thousands)
$ 3,285
2.6 %
1,043
0.8 %
2,446
1.9 %
0.5 %
1,606
1.3 %
0.2 %
0.6 %
0.6 %
(100)
(3,858 )
-3.0 %
(5,644 )
-4.5 %
(200)
(9,527 )
-7.5 %
(12,849 )
-10.4 %
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, 2023, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 7 of this report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and on Management’s Assessment of Internal Control on Financial Reporting
Management’s Assessment of Internal Control Over Financial Reporting
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Amounts in thousands, except share and per share data)
Assets
Cash and due from banks
$ 77,563 $ 63,044
Federal funds sold
37,312 105,636
Interest-bearing deposits in banks
1,545 2,166
Total cash and cash equivalents
116,420 170,846
Debt securities available for sale, at fair value
280,961 300,349
Loans held for investment, net of unearned income
2,572,298 2,400,197
Allowance for credit losses
(36,189 ) (30,556 )
Loans held for investment, net
2,536,109 2,369,641
Premises and equipment, net
50,680 47,340
Other real estate owned
192 703
Interest receivable
10,881 9,279
Goodwill
143,946 129,565
Other intangible assets
15,145 4,176
Other assets
114,211 103,673
Total assets
$ 3,268,545 $ 3,135,572
Liabilities
Noninterest-bearing deposits
$ 931,920 $ 872,168
Interest-bearing deposits
1,790,405 1,806,647
Total deposits
2,722,325 2,678,815
Securities sold under agreements to repurchase
1,119 1,874
Interest, taxes, and other liabilities
41,807 32,898
Total liabilities
2,765,251 2,713,587
Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding
- -
Common stock, $1 par value; 50,000,000 shares authorized; 27,522,547 issued and 18,502,396 outstanding at December 31, 2023; 24,477,471 shares issued and 16,225,399 shares outstanding at December 31, 2022
18,502 16,225
Additional paid-in capital
175,841 128,508
Retained earnings
319,902 292,971
Accumulated other comprehensive loss
(10,951 ) (15,719 )
Total stockholders' equity
503,294 421,985
Total liabilities and stockholders' equity
$ 3,268,545 $ 3,135,572
See Notes to Consolidated Financial Statements.
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
(Amounts in thousands, except share and per share data)
Interest income
Interest and fees on loans
$ 126,727
$ 104,570
$ 102,832
Interest on securities -- taxable
7,345
5,271
Interest on securities -- tax-exempt
1,037
Interest on deposits in banks
2,482
3,763
Total interest income
137,165
114,319
105,310
Interest expense
Interest on deposits
9,341
1,654
2,835
Interest on short-term borrowings
Total interest expense
9,481
1,656
2,836
Net interest income
127,684
112,663
102,474
Provision for (recovery of) credit losses
7,985
6,572
(8,471 )
Net interest income after provision for loan losses
119,699
106,091
110,945
Noninterest income
Wealth management
4,179
3,855
3,853
Service charges on deposits
13,996
14,213
13,446
Other service charges and fees
13,647
12,308
12,422
Net loss on sale of securities
(21 )
-
-
Net FDIC indemnification asset amortization
-
-
(1,226 )
Gain on divestitures
-
1,658
-
Other operating income
5,651
5,148
5,806
Total noninterest income
37,452
37,182
34,301
Noninterest expense
Salaries and employee benefits
49,887
47,183
44,239
Occupancy expense
4,967
4,818
4,913
Furniture and equipment expense
5,878
6,001
5,627
Service fees
8,908
7,606
6,324
Advertising and public relations
3,300
2,409
2,076
Professional fees
1,567
1,303
1,524
Amortization of intangibles
1,731
1,446
1,446
FDIC premiums and assessments
1,511
1,126
Merger expense
2,393
-
Divestiture expense
-
-
Litigation expense
3,000
-
-
Other operating expense
12,035
10,475
11,737
Total noninterest expense
95,177
83,116
78,718
Income before income taxes
61,974
60,157
66,528
Income tax expense
13,954
13,495
15,360
Net income
$ 48,020
$ 46,662
$ 51,168
Earnings per common share
Basic
$ 2.67
$ 2.82
$ 2.95
Diluted
2.72
2.82
2.94
Cash dividends per common share
1.16
1.12
1.04
Weighted average shares outstanding
Basic
17,996,373
16,519,848
17,335,615
Diluted
18,027,151
16,562,257
17,402,936
See Notes to Consolidated Financial Statements.
FIRST COMMUNITY BANKSHARES, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(Amounts in thousands)
Net income
$ 48,020
$ 46,662
$ 51,168
Other comprehensive income, before tax
Available-for-sale debt securities:
Net unrealized gains (losses) on securities
5,669
(19,793 )
(1,381 )
Reclassification adjustment for net loss recognized in net income
-
-
Net unrealized gains on available-for-sale debt securities
5,690
(19,793 )
(1,381 )
Employee benefit plans:
Net actuarial gain
1,718
1,472
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income
Net unrealized gains on employee benefit plans
1,853
1,858
Other comprehensive income (loss), before tax
6,034
(17,940 )
Income tax (expense) benefit
(1,266 )
3,767
(100 )
Other comprehensive income (loss), net of tax
4,768
(14,173 )
Total comprehensive income
$ 52,788
$ 32,489
$ 51,545
See Notes to Consolidated Financial Statements.
FIRST COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Preferred
Common
Additional
Other
Stock
Preferred
Stock
Common
Paid-in
Retained
Comprehensive
(Amounts in thousands, except share and per share data)
Outstanding
Stock
Outstanding
Stock
Capital
Earnings
Income (Loss)
Total
Balance January 1, 2021
- $ - 17,722,507 $ 17,723 $ 173,345 $ 237,585 $ (1,923 ) $ 426,730
Cumulative effect of adoption of ASU 2016-13
- - - - - (5,870 ) - (5,870 )
Net income
- - - - - 51,168 - 51,168
Other comprehensive income
- - - - - - 377 377
Common dividends declared -- $1.04 per share
- - - - - (18,059 ) - (18,059 )
Equity-based compensation expense
- - 48,388 48 1,233 - - 1,281
Common stock options exercised
- - 39,995 40 498 - - 538
Issuance of stock to 401(k) plan
- - 16,716 16 476 - - 492
Repurchase of common shares -- at $30.42 per share
- - (949,386 ) (949 ) (27,933 ) - - (28,882 )
Balance December 31, 2021
- $ - 16,878,220 $ 16,878 $ 147,619 $ 264,824 $ (1,546 ) $ 427,775
Balance January 1, 2022
- $ - 16,878,220 $ 16,878 $ 147,619 $ 264,824 $ (1,546 ) $ 427,775
Net income
- - - - - 46,662 - 46,662
Other comprehensive loss
- - - - - - (14,173 ) (14,173 )
Common dividends declared -- $1.12 per share
- - - - - (18,515 ) - (18,515 )
Equity-based compensation expense
- - 25,137 25 693 - - 718
Common stock options exercised
- - 7,575 8 164 - - 172
Issuance of stock to 401(k) plan
- - 20,584 20 637 - - 657
Repurchase of common shares -- at $30.18 per share
- - (706,117 ) (706 ) (20,605 ) - - (21,311 )
Balance December 31, 2022
- $ - 16,225,399 $ 16,225 $ 128,508 $ 292,971 $ (15,719 ) $ 421,985
Balance January 1, 2023
- $ - 16,225,399 $ 16,225 $ 128,508 $ 292,971 $ (15,719 ) $ 421,985
Issuance of common stock pursuant to acquisition
- - 2,996,786 2,997 68,357 $ - $ - 71,354
Net income
- - - - - 48,020 - 48,020
Other comprehensive income
- - - - - - 4,768 4,768
Common dividends declared -- $1.16 per share
- - - - - (21,089 ) - (21,089 )
Equity-based compensation expense
- - 24,312 25 572 - - 597
Common stock options exercised
- - 4,288 4 87 - - 91
Issuance of stock to 401(k) plan
- - 19,690 20 586 - - 606
Repurchase of common shares -- at $29.99 per share
- - (768,079 ) (769 ) (22,269 ) - - (23,038 )
Balance December 31, 2023
- $ - 18,502,396 $ 18,502 $ 175,841 $ 319,902 $ (10,951 ) $ 503,294
See Notes to Consolidated Financial Statements.
FIRST COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
(Amounts in thousands)
Operating activities
Net income
$ 48,020
$ 46,662
$ 51,168
Adjustments to reconcile net income to net cash provided by operating activities
Provision for (recovery of) credit losses
7,985
6,572
(8,471 )
Depreciation and amortization of premises and equipment
3,954
4,154
4,471
(Accretion)/amortization of discounts/premiums on investments, net
(2,471 )
(261 )
Amortization of intangible assets
1,731
1,446
1,446
Accretion on acquired loans
(2,743 )
(2,618 )
(4,656 )
Gain on divestiture
-
(1,658 )
-
Equity-based compensation expense
1,281
Issuance of common stock to 401(k) plan
(Gain) loss on sale of premises and equipment, net
(189 )
(772 )
Provision expense and loss on sale of other real estate owned
Loss on sale of securities
-
-
Decrease in other operating activities
4,233
3,671
1,300
Net cash provided by operating activities
61,828
59,024
48,215
Investing activities
Proceeds from sale of available for sale securities
38,979
-
Proceeds from maturities, prepayments, and calls of securities available for sale
83,586
25,748
27,256
Payments to acquire securities available for sale
(74,103 )
(269,337 )
(22,394 )
Proceeds from repayments (originations of) loans, net
64,538
(236,620 )
27,467
Proceeds from bank owned life insurance
-
1,763
-
(Payments for) redemption of FHLB stock, net
(877 )
(240 )
1,012
Net cash provided by (used in) acquisitions and divestitures
176,684
(59,039 )
-
Proceeds from sale of premises and equipment
1,827
1,542
2,616
Payments to acquire premises and equipment
(2,770 )
(1,160 )
(3,038 )
Proceeds from sale of other real estate owned
2,061
Net cash provided by (used in) investing activities
288,662
(536,779 )
35,350
Financing activities
(Decrease) increase in noninterest-bearing deposits, net
(98,637 )
47,769
69,988
(Decrease) increase in interest-bearing deposits, net
(261,488 )
(37,291 )
113,156
(Payments for) proceeds from in securities sold under agreements to repurchase, net
(755 )
-
Repayments of FHLB and other borrowings, net
-
-
Proceeds from stock options exercised
Payments for repurchase of common stock
(23,038 )
(21,311 )
(28,882 )
Payments of common stock dividends
(21,089 )
(18,515 )
(18,059 )
Net cash (used in) provided by financing activities
(404,916 )
(28,838 )
137,313
Net (decrease) increase in cash and cash equivalents
(54,426 )
(506,593 )
220,878
Cash and cash equivalents at beginning of period
170,846
677,439
456,561
Cash and cash equivalents at end of period
$ 116,420
$ 170,846
$ 677,439
Supplemental disclosure -- cash flow information
Cash paid for interest
$ 9,084
$ 2,114
$ 3,141
Cash paid for income taxes
11,783
7,590
14,399
Supplemental transactions -- non-cash items
Transfer of loans to other real estate
1,283
Loans originated to finance other real estate
-
Change in accumulated other comprehensive income/(loss)
4,768
(14,173 )
Acquisitions:
Fair value of assets acquired
466,247
-
-
Fair value of liabilities assumed
409,258
-
-
Net assets acquired
71,370
-
-
Common stock issued in acquisition
71,354
-
-
See Notes to Consolidated Financial Statements.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
First Community Bankshares, Inc. (the “Company”) is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.
Principles of Consolidation
The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management.
The Company maintains investments in variable interest entities (“VIEs”). VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is required if a reporting entity is the primary beneficiary of the VIE. The Company periodically reviews its VIEs and has determined that it is not the primary beneficiary of any VIE; therefore, the assets and liabilities of these entities are not consolidated into the financial statements.
Reclassification
Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.
Use of Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Summary of Significant Accounting Policies
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value hierarchy ranks the inputs used in measuring fair value as follows:
●
Level 1 - Observable, unadjusted quoted prices in active markets
●
Level 2 - Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability
●
Level 3 - Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions
The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank ("FHLB"), the Federal Reserve Bank of Richmond ("FRB"), and correspondent banks that are available for immediate withdrawal.
Investment Securities
Management classifies debt securities as held-to-maturity or available-for-sale based on the intent and ability to hold the securities to maturity. Debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Debt securities not classified as held to maturity are classified as available-for-sale securities and carried at estimated fair value. Available-for-sale securities consist of securities the Company intends to hold for indefinite periods of time including securities to be used as part of the Company’s asset/liability management strategy and securities that may be sold for a variety of reasons. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income (“AOCI”), net of income taxes, in stockholders’ equity. Gains or losses on calls, maturities, or sales of investment securities are recorded based on the specific identification method and included in noninterest income. Premiums are amortized to first call date and discounts are accreted over the life of a security into interest income.
Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. The Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.
The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities. Nor does the Company record an allowance for credit losses on accrued interest receivable. As of December 31, 2023, the accrued interest receivable for investment securities available for sale was $ 1.25 million compared to $1.34 million as of December 31, 2022.
Other Investments
As a condition of membership in the FHLB and the Federal Reserve, the Company is required to hold a minimum level of stock in the FHLB of Atlanta and the FRB of Richmond. These securities are carried at cost and periodically reviewed for impairment. The total investment in FHLB and FRB stock, which is included in other assets, was $13.04 million as of December 31, 2023, and $10.02 million as of December 31, 2022.
The Company owns certain long-term equity investments without readily determinable fair values, including certain tax credit limited partnerships and various limited liability companies that manage real estate investments, facilitate tax credits, and provide title insurance and other related financial services. These investments are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The total carrying value in these investments, which is included other assets, totaled $3.70 million as of December 31, 2023, and $3.78 million as of December 31, 2022.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Acquisition and divestiture activities are included in the Company’s consolidated results of operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred. For additional information, see “Purchased Credit Deteriorated Loans” and “Intangible Assets” below.
Loans Held for Investment
Loans classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. Loans held for investment are carried at the principal amount outstanding, net of unearned income and any necessary write-downs to reduce individual loans to net realizable value. Interest income on performing loans is recognized as interest income at the contractual rate of interest. Loan origination fees, including loan commitment and underwriting fees, are reduced by direct costs associated with loan processing, including salaries, legal review, and appraisal fees. Net deferred loan fees are deferred and amortized over the life of the related loan or commitment period.
Purchased Performing Loans. Purchased loans that are deemed to be performing at the acquisition date are accounted for using the contractual cash flow method of accounting, which results in the loans being recorded at fair value with a credit discount. The fair value discount or premium is accreted or amortized, as the case may be, as an adjustment to yield over the estimated contractual lives of the loans.
Purchased Credit Deteriorated (“PCD”) Loans. Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s acquired purchased credit impaired loans were treated as PCD loans.
Individually Evaluated Loans and Nonperforming Assets. The Company maintains an active and robust problem credit identification system through its ongoing credit review function. When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $500,000 for individually-evaluated loans. Generally, individually-evaluated loans are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset. The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. The accrual of interest, which is based on the daily amount of principal outstanding, on individually evaluated loans is generally continued unless the loan becomes delinquent 90 days or more.
Loans are considered past due when either principal or interest payments become contractually delinquent by 30 days or more. The Company’s policy is to discontinue the accrual of interest, if warranted, on loans based on the payment status, evaluation of the related collateral, and the financial strength of the borrower. Loans that are 90 days or more past due are placed on nonaccrual status. Management may elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, interest accrued and not collected in the current year is reversed from income, and interest accrued and not collected from prior years is charged to the allowance for credit losses. Nonaccrual loans may be returned to accrual status when all principal and interest amounts contractually due, including past due payments, are brought current; the ability of the borrower to repay the obligation is reasonably assured; and there is generally a period of at least six months of repayment performance by the borrower in accordance with the contractual terms.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Seriously delinquent loans are evaluated for loss mitigation options. Closed-end retail loans are generally charged off against the allowance for credit losses when the loans become 120 days past due. Open-end retail loans and residential real estate secured loans are generally charged off when the loans become 180 days past due. Unsecured loans are generally charged off when the loans become 90 days past due. All other loans are charged off against the allowance for credit losses after collection attempts have been exhausted, which generally is within 120 days. Recoveries of loans previously charged off are credited to the allowance for credit losses in the period received.
Effective January 1, 2023, the Company adopted Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The allowance for credit losses incorporates an estimate of lifetime credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the the time of the modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time.
Other real estate owned (“OREO”) acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The fair value is generally based on current third-party appraisals. When a property is transferred into OREO, any excess of the loan balance over the net realizable fair value is charged against the allowance for credit losses. Operating expenses, gains, and losses on the sale of OREO are included in other noninterest expense in the Company’s consolidated statements of income after any fair value write-downs are recorded as valuation adjustments.
Allowance for Credit Losses (ACL)
The Company reviews our allowance for credit losses quarterly to determine if it is sufficient to absorb expected credit losses in the portfolio. This determination requires management to make significant estimates and assumptions. While the Company 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 credit losses in the near term; however, the amount of the change cannot reasonably be estimated.
The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption through retained earnings and subsequent adjustments will be made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.
A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. The Company considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgement and reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.
The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit (“HELOC”), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).
Risk characteristics of residential real estate loans which include loans secured by Single family properties, HELOC, and Owner occupied construction loans are dependent upon individual borrowers who are affected by changes in general economic conditions, real estate valuations, and the demand for housing. Commercial and Industrial, Multi-family residential, Non-farm/non-residential, Agricultural, and Loans secured by Farmland are similar in that they are generally dependent upon the borrower's internal cash flow from operations to service the debt and changes in general economic conditions. Commercial construction, Development, and other land loans, Consumer, and Other consumer loans (open pool) are similar in that they are dependent on changes in general economic conditions.
For collectively evaluated loans, the Company uses a combination of discounted cash flow and open pool to estimate expected credit losses. During 2022, the Company changed third party model providers which necessitated a change from remaining life to open pool for the portfolios noted above. The change in method was not quantitatively significant. In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. The Company reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver using a statistical regression modeling methodology.
The Company considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, The Company considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending policies and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company’s credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.
When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $500,000 for individually-evaluated loans. Generally, individually-evaluated loans are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.
When loans are acquired they are identified as either purchased credit deteriorated ("PCD") or non-PCD. PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date. The ACL for PCD assets is recognized within the business combination accounting with no initial impact to net income. Changes is estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.
Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the "discount" on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances. The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated credit losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans.
As previously noted, effective January 1, 2023, the Company adopted Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The allowance for credit losses incorporates an estimate of lifetime credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the the time of the modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time.
The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. The Company has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of December 31, 2023, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $746 thousand compared to $1.20 million as of December 31, 2022. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans. The current adjustment to the ACL for unfunded commitments is recognized through provision for credit losses in the Statement of Income. Prior to 2023, the current adjustment to the ACL for unfunded commitments was recognized through other operating expense in the Statement of Income. For additional information, see Note 6, “Allowance for Credit Losses,” to the Consolidated Financial Statements in Item 8 of this report.
Premises and Equipment
Premises, equipment, and leases are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and equipment; 3 to 5 years for computer software, hardware, and data handling equipment; and 7 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 10 years and most contain options to renew with increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.
Intangible Assets
Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired that is allocated to the appropriate reporting unit when acquired. Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that are amortized using the straight-line method.
An interim analysis of Goodwill is performed quarterly, and goodwill is tested for impairment annually, on October 31st, or more frequently if events or circumstances indicate there may be impairment. We have one reporting unit, 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 determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference.
Management has concluded that there was no goodwill impairment for 2023 and 2022.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain key executives and personnel. The value recorded on the balance sheet is the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or amounts due that are probable at settlement.
Other Comprehensive Income
Other comprehensive income includes unrealized gains and losses on securities available-for-sale and changes in the funded status of the nonqualified domestic, noncontributory defined benefit plans which are recognized as separate components of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonable estimated. For additional information, see Note 19, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and recognized as short-term borrowings in the Company’s consolidated balance sheets. Securities, generally U.S. government and federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the secured party. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided as appropriate.
Derivative Instruments
The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract such as interest rates, equity security prices, currencies, commodity prices, or credit spreads. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount, such as interest rate swaps or currency forwards, or to purchase or sell other financial instruments at specified terms on a specified date, such as options to buy or sell securities or currencies. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.
If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. The recognition of changes in the fair value of a derivative instrument varies depending on the intended use of the derivative and the resulting designation. The Company accounts for hedges of customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. All derivative instruments are reported at fair value in the consolidated balance sheets.
Equity-Based Compensation
The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. The Black-Scholes-Merton valuation model is used to estimate the fair value of stock options at the grant date while the fair value of restricted stock awards is based on the market price of the Company’s common stock on the grant date. The Black-Scholes-Merton model incorporates the following assumptions: the expected volatility is based on the weekly historical volatility of the Company’s common stock price over the expected term of the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the U.S. Department of the Treasury’s (“Treasury”) yield curve on the grant date with a term comparable to the grant; and the dividend yield is based on the Company’s dividend yield using the most recent dividend rate paid per share and trading price of the Company’s common stock. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Revenue Recognition
Wealth management. Wealth management income represents monthly fees due from wealth management customers in consideration for managing and administrating the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when the performance obligation is completed each month, which is generally the time that payment is received. Income also includes fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that are referred to the third party. These fees are paid to the Company by the third party on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied.
Service charges on deposits and other service charges and fees.
Service charges on deposits and other service charges and fees represent general service fees for account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Expenses
Advertising costs are generally expensed as incurred. The Company may establish accruals for incurred advertising expenses in the course of a fiscal year.
Income Taxes
Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company includes interest and penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percent of pre-tax income, may vary significantly from statutory rates due to tax credits and permanent differences. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are adjusted through the provision for income taxes as changes in tax laws or rates are enacted.
Per Share Results
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. Under the treasury stock method of accounting, potential common stock may be issued for stock options, non-vested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.
Recent Accounting Standards
Standards Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires earlier recording of credit losses on loans and other financial assets held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses in investments in debt securities and purchased financial assets with credit deterioration. The Company adopted the new standard as of January 1, 2021. The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard. This standard did not have a material impact on our investment securities portfolio at implementation. Related to the implementation of the standard, the Company recorded an additional ACL for loans of $13.11 million, deferred tax assets of $1.81 million, and additional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings, net of tax, of $5.87 million. See the table below for the impact of ASU 2016-13 on the Company’s consolidated balance sheet.
January 1, 2021
As Reported
Pre-
Impact of
Under
ASU 2016-13
ASU 2016-13
ASU 2016-13
Adoption
Adoption
Assets:
Non-covered loans held for investment
Allowance for credit losses on debt securities
Investment securities - available for sale
$ 83,358 $ 83,358 $ - A
Loans
Non-acquired loans and acquired performing loans
2,146,972 2,146,972 -
Acquired purchased deteriorated loans
45,535 39,660 5,875 B
Allowance for credit losses on loans
(39,289 ) (26,182 ) (13,107 ) C
Deferred tax asset
19,306 17,493 1,813 D
Accrued interest receivable - loans
9,109 9,052 57 B
Liabilities
Allowance for credit losses on off-balance sheet
credit exposures
575 66 509 E
Equity:
Retained earnings
231,714 237,585 (5,870 ) F
A. Per our analysis no ACL was necessary for investment securities available for sale.
B. Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.
C. Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Includes additional reserve related to purchased deteriorated loans of $5.88 million.
D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.
E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.
F. Net adjustment to retained earnings related to the adoption of ASU 2016-13.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2022, the Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326). Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provided accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. We adopted this standard, effective January 1, 2023. The updated guidance had no material impact on our Consolidated Financial Statements.
The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements.
Note 2. Acquisitions and Divestitures
On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch (the "Emporia Branch Sale") to Benchmark Community Bank ("Benchmark"). The sale included the branch real estate, certain personal property, and all deposits associated with the branch. There were no loans included in the transaction. Benchmark paid a deposit premium of two percent for certain deposits. In addition, Benchmark paid $1.50 million for branch real estate and certain personal property. Total deposits acquired by Benchmark totaled $61.05 million. The deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. The Company recognized a gain of $1.66 million from the Emporia Branch Sale.
On November 18, 2022, the Company and NC-based Surrey Bancorp ("Surrey"), parent company of Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. Under the terms of the agreement and plan of merger, each share of Surrey common stock immediately converted into the right to receive 0.7159 shares of the Company's common stock. The transaction was consummated on April 21, 2023. The total purchase price for the transaction was $71.37 million.
The Surrey transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition. The Company incurred a total of $2.99 million in merger expenses related to the Surrey transaction, $596 thousand was recorded in the last quarter of 2022 and $2.39 million in the first nine months of 2023. These costs were primarily related to data conversion, investment banking fees, and legal fees.
Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the fair value of the liabilities assumed. The Surrey acquisition resulted in the Company recognizing $14.38 million in goodwill. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. Core deposit intangibles for the Surrey transaction totaled $12.70 million.
When loans are acquired they are identified as either purchased credit deteriorated PCD or non-PCD. PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date. The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise. Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances. The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated credit losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans. The fair value of purchased loans with credit deterioration was $101.42 million on the date of acquisition with the gross contractual amount totaling $111.22 million. The Company estimates that $2.01 million of contractual cash flows specific to the purchased loans with credit deterioration will not be collected. Non purchased credit deteriorated loans acquired had a fair value of $137.55 million with a gross contractual value of $143.55 million.
As recorded by
Fair Value
As recorded by
(Amounts in thousands, except share data)
Surrey
Adjustments
the Company
Assets
Cash and cash equivalents
$ 176,700
$ -
$ 176,700
Securities available for sale
22,027
(1,093 ) ( a )
20,934
Loans held for investment, net of allowance and mark
251,944
(12,864 ) ( b )
239,080
Premises and equipment
5,501
( c )
6,275
Other assets
10,787
(229 ) ( d ), ( e )
10,558
Intangible assets
-
12,700
( f )
12,700
Total assets
$ 466,959
$ (712 )
$ 466,247
LIABILITIES
Deposits:
Noninterest-bearing
$ 158,389
$ -
$ 158,389
Interest-bearing
246,460
(1,214 ) ( g )
245,246
Total deposits
404,849
(1,214 )
403,635
Long term debt
-
-
-
Other liabilities
6,004
(381 ) ( h )
5,623
Total liabilities
410,853
(1,595 )
409,258
Net identifiable assets acquired over (under) liabilities assumed
56,106
56,989
Goodwill
-
14,381
14,381
Net assets acquired over liabilities assumed
$ 56,106
$ 15,264
$ 71,370
Consideration:
First Community Bankshares, Inc. common
2,996,786
Purchase price per share of the Company's common stock
$ 23.81
Fair Value of Company common stock issued
71,354
Cash paid for fractional shares
Fair Value of total consideration transferred
$ 71,370
Explanation of fair value adjustments;
(a) Adjustment reflects the fair value adjustment based on the Company's evaluation of the acquired investment portfolio.
(b) Adjustment reflects the fair value adjustments of $(15.80) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for credit losses and deferred loan fees of $2.94 million as recorded by Surrey.
(c) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.
(d) Adjustment reflects the fair value adjustment based on the Company's evaluation of stocks with other banks of $47 thousand.
(e) Adjustment to record the deferred tax asset related to the fair value adjustments $(177) thousand.
(f) Adjustment to record the core deposit intangible on the acquired deposit accounts.
(g) Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.
(h) Adjustment to reclass deferred tax asset $(99) thousand, goodwill $(282) thousand, federal income tax payable $(389) thousand, and state income tax payable $8 thousand.
Comparative and Pro Forma Financial Information for Acquisitions
The following table presents supplemental pro forma information as if the acquisition had occurred at the beginning of 2022. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising form the transaction, depreciation and expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.
No adjustments have been made to the pro formas to eliminate the recovery of provision for credit losses by Surrey for the period ended December 31, 2022 in the amount of $1.27 million. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition.
ProForma
ProForma
Year Ended
Year Ended
(Dollars in thousands)
December 31, 2023
December 31, 2022
Total revenues (net interest income plus noninterest income)
$ 165,136
$ 170,206
Net adjusted income available to the common shareholder
$ 50,282
$ 55,415
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Debt Securities
The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:
December 31, 2023
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(Amounts in thousands)
U.S. Agency securities
$ 5,750 $ - $ (1 ) $ 5,749
U.S. Treasury securities
146,653 16 (843 ) 145,826
Municipal securities
19,528 11 (162 ) 19,377
Corporate Notes
28,566 - (1,485 ) 27,081
Mortgage-backed Agency securities
94,548 2 (11,622 ) 82,928
Total
$ 295,045 $ 29 $ (14,113 ) $ 280,961
December 31, 2022
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(Amounts in thousands)
U.S. Agency securities
$ 1,500 $ - $ (15 ) $ 1,485
U.S. Treasury securities
161,617 - (4,353 ) 157,264
Municipal securities
23,480 21 (192 ) 23,309
Mortgage-backed Agency securities
37,046 - (2,189 ) 34,857
Total
96,480 3 (13,049 ) 83,434
$ 320,123 $ 24 $ (19,798 ) $ 300,349
The following table presents the amortized cost and fair value of available-for-sale debt securities, by contractual maturity, as of December 31, 2023. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
(Amounts in thousands)
U.S. Agency Securities
U.S. Treasury Securities
Municipal Securities
Corporate Notes
Total
Amortized cost maturity:
One year or less
$ 5,750 $ 146,653 $ 5,118 $ - $ 157,521
After one year through five years
- - 14,410 28,566 42,976
After five years through ten years
- - - - -
After ten years
- - - - -
Amortized cost
$ 5,750 $ 146,653 $ 19,528 $ 28,566 200,497
Mortgage-backed securities
94,548
Total amortized cost
$ 295,045
Fair value maturity:
One year or less
$ 5,749 $ 145,826 $ 5,116 $ - $ 156,691
After one year through five years
- - 14,261 27,081 41,342
After five years through ten years
- - - - -
After ten years
- - - - -
Fair value
$ 5,749 $ 145,826 $ 19,377 $ 27,081 198,033
Mortgage-backed securities
82,928
Total fair value
$ 280,961
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the fair values and unrealized losses for available-for-sale debt securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated:
December 31, 2023
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
(Amounts in thousands)
U.S. Agency securities
$ 5,749 $ (1 ) $ - $ - $ 5,749 $ (1 )
U.S. Treasury securities
11,417 (14 ) 129,108 (829 ) 140,525 (843 )
Municipal securities
4,742 (20 ) 5,484 (142 ) 10,226 (162 )
Corporate Notes
- - 27,081 (1,485 ) 27,081 (1,485 )
Mortgage-backed Agency securities
3,421 (10 ) 78,319 (11,612 ) 81,740 (11,622 )
Total
$ 25,329 $ (45 ) $ 239,992 $ (14,068 ) $ 265,321 $ (14,113 )
December 31, 2022
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
(Amounts in thousands)
U.S. Agency securities
$ 1,485 $ (15 ) $ - $ - $ 1,485 $ (15 )
U.S. Treasury securities
157,264 (4,353 ) - - 157,264 (4,353 )
Municipal securities
12,347 (192 ) - - 12,347 (192 )
Corporate Notes
32,368 (2,172 ) 2,489 (17 ) 34,857 (2,189 )
Mortgage-backed Agency securities
64,993 (8,824 ) 18,305 (4,225 ) 83,298 (13,049 )
Total
$ 268,457 $ (15,556 ) $ 20,794 $ (4,242 ) $ 289,251 $ (19,798 )
There were 112 individual debt securities in an unrealized loss position as of December 31, 2023, and their combined depreciation in value represented 5.02% of the debt securities portfolio. There were 113 individual debt securities in an unrealized loss position as of December 31, 2022, and their combined depreciation in value represented 6.59 % of the debt securities portfolio.
Approximately $38.98 million in securities available for sale have been sold in 2023. Gross gains and gross losses were $30 thousand and $51 thousand, respectively for December 31, 2023. There were no sales of available for sale debt securities in 2022. The carrying amount of securities pledged for various purposes totaled $145.09 million as of December 31, 2023, and $22.43 million as of December 31, 2022.
In determining whether or not a security is impaired, we consider the severity of the loss as well as our intent to hold the securities to maturity or the recovery of the cost basis. Unrealized losses have not been recognized into income as the decline in fair value is largely due to changes in interest rates and other market conditions. Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.
U. S. Agency securities
The Company has one U.S. Agency security as of December 31, 2023, with an amortized cost of $5.75 million. The security is issued by the Federal Home Loan Bank. The security is guaranteed of full and timely payments by the issuing agency. Based on management's analysis and judgement, there was no credit loss attributable to the U.S. Agency security at December 31, 2023.
U.S. Treasury securities
U.S. Treasury securities are backed by the full faith and credit of the United States government. At December 31, 2023, the total amortized cost of available for sale U. S. Treasury securities was $146.65 million. Based on management's analysis and judgement, there were no credit losses attributable to U.S. Treasury securities at December 31, 2023.
Municipal securities
Municipal securities are securities issued by various municipalities in the United States. At December 31, 2023, the total amortized cost of available for sale Municipal securities was $19.53 million. The majority of the portfolio was rated AA or higher, with no securities rated below investment grade at year-end. Based on management's analysis and judgement, there were no credit losses attributable to Municipal securities at December 31, 2023.
Corporate Notes
Corporate notes are debt obligations issued by public or private corporations. As of December 31, 2023, the total amortized cost of available for sale Corporate notes was $28.57 million. The majority of the portfolio was rated AA or higher, with no securities rated below investment grade at year-end. Based on management's analysis and judgement, there were no credit losses attributable to Corporate note securities at December 31, 2023.
Mortgage-backed Agency securities
Mortgage-backed Agency securities within the Company's portfolio are issued by Ginnie Mae, Fannie Mae, and Freddie Mac. As of December 31, 2023, the total amortized cost of available for sale mortgage-backed Agency securities was $94.55 million. Each agency provides a guarantee of full and timely payments of principal and interest by the issuing agency. Based on management's analysis and judgement, there were no credit losses attributable to mortgage-backed Agency securities at December 31, 2023.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans
The Company groups loans into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.50 million as of December 31, 2023, and $1.80 million as of December 31, 2022. Deferred loan fees were $7.71 million as of December 31, 2023, and $8.81 million as of December 31, 2022. For information about off-balance sheet financing, see Note 19, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements of this report.
In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis for the periods indicated, to include net deferred loan fees of $7.71 million as of December 31, 2023, and $8.81 million as of December 31, 2022. Additionally, included is, the unamortized discount total related to loans acquired of $15.29 million as of December 31, 2023, and $3.80 million as of December 31, 2022. Accrued interest receivable (AIR) of $9.64 million as of December 31, 2023, and $7.94 million as of December 31, 2022 , is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.
The following table presents loans, net of unearned income by loan class, as of the dates indicated:
December 31,
(Amounts in thousands)
Amount
Percent
Amount
Percent
Commercial loans
Construction, development, and other land
$ 105,945
4.12 %
$ 117,174
4.88 %
Commercial and industrial
211,850
8.24 %
150,428
6.27 %
Multi-family residential
188,382
7.32 %
148,026
6.17 %
Single family non-owner occupied
224,895
8.74 %
206,121
8.59 %
Non-farm, non-residential
894,550
34.78 %
787,703
32.82 %
Agricultural
21,669
0.84 %
12,032
0.50 %
Farmland
14,202
0.55 %
11,779
0.49 %
Total commercial loans
1,661,493
64.59 %
1,433,263
59.72 %
Consumer real estate loans
Home equity lines
87,626
3.41 %
75,642
3.15 %
Single family owner occupied
696,140
27.06 %
734,540
30.61 %
Owner occupied construction
8,445
0.33 %
10,366
0.43 %
Total consumer real estate loans
792,211
30.80 %
820,548
34.19 %
Consumer and other loans
Consumer loans
117,091
4.55 %
144,582
6.02 %
Other
1,503
0.06 %
1,804
0.07 %
Total consumer and other loans
118,594
4.61 %
146,386
6.09 %
Total loans held for investment, net of unearned income
$ 2,572,298
100.00 %
$ 2,400,197
100.00 %
Note 5. Credit Quality
The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:
●
Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.
●
Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.
●
Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.
●
Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.
●
Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.
The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated.
December 31, 2023
Special
(Amounts in thousands)
Pass
Mention
Substandard
Doubtful
Loss
Total
Commercial loans
Construction, development, and other land
$ 103,573 $ 1,955 $ 417 $ - $ - $ 105,945
Commercial and industrial
207,034 2,097 2,719 - - 211,850
Multi-family residential
184,565 3,522 295 - - 188,382
Single family non-owner occupied
215,375 2,016 7,504 - - 224,895
Non-farm, non-residential
866,711 15,240 12,599 - - 894,550
Agricultural
15,944 3,878 1,847 - - 21,669
Farmland
12,480 484 1,238 - - 14,202
Consumer real estate loans
Home equity lines
83,769 546 3,311 - - 87,626
Single family owner occupied
669,878 2,360 23,902 - - 696,140
Owner occupied construction
8,445 - - - - 8,445
Consumer and other loans
Consumer loans
114,725 4 2,362 - - 117,091
Other
1,503 - - - - 1,503
Total loans
$ 2,484,002 $ 32,102 $ 56,194 $ - $ - $ 2,572,298
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Special
(Amounts in thousands)
Pass
Mention
Substandard
Doubtful
Loss
Total
Commercial loans
Construction, development, and other land
$ 115,972 $ 853 $ 349 $ - $ - $ 117,174
Commercial and industrial
147,543 920 1,965 - - 150,428
Multi-family residential
143,859 3,946 221 - - 148,026
Single family non-owner occupied
195,775 2,303 8,043 - - 206,121
Non-farm, non-residential
761,154 14,903 11,646 - - 787,703
Agricultural
11,722 47 263 - - 12,032
Farmland
9,868 573 1,338 - - 11,779
Consumer real estate loans
Home equity lines
72,927 288 2,427 - - 75,642
Single family owner occupied
706,952 1,958 25,630 - - 734,540
Owner occupied construction
10,204 - 162 - - 10,366
Consumer and other loans
Consumer loans
141,551 11 3,020 - - 144,582
Other
1,804 - - - - 1,804
Total loans
$ 2,319,331 $ 25,802 $ 55,064 $ - $ - $ 2,400,197
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the dates indicated:
(Amounts in thousands)
Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2023
Prior
Revolving
Total
Construction, development
and other land
Pass
$ 12,379 $ 54,752 $ 23,328 $ 4,121 $ 2,700 $ 3,874 $ 2,419 $ 103,573
Special Mention
1,737 - - 139 - 79 - 1,955
Substandard
- - - - 175 242 - 417
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total construction, development, and other land
$ 14,116 $ 54,752 $ 23,328 $ 4,260 $ 2,875 $ 4,195 $ 2,419 $ 105,945
Current period gross write-offs
$ - $ - $ - $ - $ 13 $ - $ - $ 13
Commercial and industrial
Pass
$ 53,619 $ 64,380 $ 19,477 $ 11,538 $ 5,717 $ 11,775 $ 40,528 $ 207,034
Special Mention
- 229 11 - 349 1,408 100 2,097
Substandard
51 744 276 86 926 636 - 2,719
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total commercial and industrial
$ 53,670 $ 65,353 $ 19,764 $ 11,624 $ 6,992 $ 13,819 $ 40,628 $ 211,850
Current period gross write-offs
$ 66 $ 168 $ 201 $ 51 $ 32 $ 66 $ - $ 584
Multi-family residential
Pass
$ 6,753 $ 67,484 $ 36,621 $ 30,021 $ 3,280 $ 36,982 $ 3,424 $ 184,565
Special Mention
- - - - - 3,522 - 3,522
Substandard
- - - - - 295 - 295
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total multi-family residential
$ 6,753 $ 67,484 $ 36,621 $ 30,021 $ 3,280 $ 40,799 $ 3,424 $ 188,382
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ - $ -
Non-farm, non-residential
Pass
$ 83,420 $ 234,607 $ 151,433 $ 114,974 $ 53,466 $ 217,034 $ 11,777 $ 866,711
Special Mention
65 583 2,590 819 - 11,132 51 15,240
Substandard
1,175 238 1,968 690 3,175 5,143 210 12,599
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total non-farm, non-residential
$ 84,660 $ 235,428 $ 155,991 $ 116,483 $ 56,641 $ 233,309 $ 12,038 $ 894,550
Current period gross write-offs
$ - $ 8 $ - $ - $ - $ 2 $ - $ 10
Agricultural
Pass
$ 5,004 $ 4,215 $ 2,352 $ 625 $ 674 $ 2,094 $ 980 $ 15,944
Special Mention
28 276 184 8 90 3,292 - 3,878
Substandard
157 166 50 28 1,188 258 - 1,847
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total agricultural
$ 5,189 $ 4,657 $ 2,586 $ 661 $ 1,952 $ 5,644 $ 980 $ 21,669
Current period gross write-offs
$ - $ 59 $ - $ 9 $ 14 $ 8 $ - $ 90
Farmland
Pass
$ 1,380 $ 1,237 $ 1,557 $ 912 $ 745 $ 5,766 $ 883 $ 12,480
Special Mention
- - 103 - - 381 - 484
Substandard
- - - - - 1,238 - 1,238
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total farmland
$ 1,380 $ 1,237 $ 1,660 $ 912 $ 745 $ 7,385 $ 883 $ 14,202
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ - $ -
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2023
Prior
Revolving
Total
Home equity lines
Pass
$ 9 $ 962 $ 86 $ 73 $ 68 $ 3,800 $ 78,771 $ 83,769
Special Mention
- - - - - 45 501 546
Substandard
- 12 - 27 102 1,853 1,317 3,311
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total home equity lines
$ 9 $ 974 $ 86 $ 100 $ 170 $ 5,698 $ 80,589 $ 87,626
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ 227 $ 227
Single family Mortgage
Pass
$ 50,826 $ 164,974 $ 221,352 $ 191,156 $ 44,974 $ 211,540 $ 431 $ 885,253
Special Mention
- - 465 98 108 3,705 - 4,376
Substandard
236 555 1,464 1,381 1,515 26,255 - 31,406
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total single family owner and non-owner occupied
$ 51,062 $ 165,529 $ 223,281 $ 192,635 $ 46,597 $ 241,500 $ 431 $ 921,035
Current period gross write-offs
$ - $ - $ 47 $ - $ - $ 194 $ - $ 241
Owner occupied construction
Pass
$ 3,620 $ 4,232 $ 240 $ - $ 21 $ 332 $ - $ 8,445
Special Mention
- - - - - - - -
Substandard
- - - - - - - -
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total owner occupied construction
$ 3,620 $ 4,232 $ 240 $ - $ 21 $ 332 $ - $ 8,445
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ - $ -
Consumer loans
Pass
$ 31,243 $ 43,675 $ 20,672 $ 7,710 $ 3,214 $ 1,026 $ 8,688 $ 116,228
Special Mention
- - 3 - - - 1 4
Substandard
338 820 590 198 157 212 47 2,362
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total consumer loans
$ 31,581 $ 44,495 $ 21,265 $ 7,908 $ 3,371 $ 1,238 $ 8,736 $ 118,594
Current period gross write-offs
$ 1,238 $ 3,594 $ 1,852 $ 518 $ 196 $ 77 $ 185 $ 7,660
(Amounts in thousands)
Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2023
Prior
Revolving
Total
Total Loans
Pass
$ 248,253 $ 640,518 $ 477,118 $ 361,130 $ 114,859 $ 494,223 $ 147,901 $ 2,484,002
Special Mention
1,830 1,088 3,356 1,064 547 23,564 653 32,102
Substandard
1,957 2,535 4,348 2,410 7,238 36,132 1,574 56,194
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total loans
$ 252,040 $ 644,141 $ 484,822 $ 364,604 $ 122,644 $ 553,919 $ 150,128 $ 2,572,298
Current period gross write-offs
$ 1,304 $ 3,829 $ 2,100 $ 578 $ 255 $ 347 $ 412 $ 8,825
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2022
Prior
Revolving
Total
Construction, development
and other land
Pass
$ 58,770 $ 39,995 $ 4,602 $ 3,050 $ 2,485 $ 5,608 $ 1,462 $ 115,972
Special Mention
- 225 - - 94 534 - 853
Substandard
- - 267 71 11 - - 349
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total construction, development, and other land
$ 58,770 $ 40,220 $ 4,869 $ 3,121 $ 2,590 $ 6,142 $ 1,462 $ 117,174
Commercial and industrial
Pass
$ 69,678 $ 23,746 $ 12,047 $ 7,729 $ 9,121 $ 8,890 $ 16,332 $ 147,543
Special Mention
227 20 21 367 185 1 99 920
Substandard
130 112 114 620 192 797 - 1,965
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total commercial and industrial
$ 70,035 $ 23,878 $ 12,182 $ 8,716 $ 9,498 $ 9,688 $ 16,431 $ 150,428
Multi-family residential
Pass
$ 45,261 $ 20,881 $ 31,087 $ 3,733 $ 1,328 $ 41,063 $ 506 $ 143,859
Special Mention
- - - - - 3,946 - 3,946
Substandard
- - - - - 221 - 221
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total multi-family residential
$ 45,261 $ 20,881 $ 31,087 $ 3,733 $ 1,328 $ 45,230 $ 506 $ 148,026
Non-farm, non-residential
Pass
$ 218,595 $ 145,675 $ 114,840 $ 52,575 $ 35,564 $ 185,448 $ 8,457 $ 761,154
Special Mention
- 1,927 852 1,193 2,708 8,076 147 14,903
Substandard
- 1,267 675 2,509 1,531 5,664 - 11,646
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total non-farm, non-residential
$ 218,595 $ 148,869 $ 116,367 $ 56,277 $ 39,803 $ 199,188 $ 8,604 $ 787,703
Agricultural
Pass
$ 6,244 $ 3,225 $ 1,003 $ 376 $ 154 $ 214 $ 506 $ 11,722
Special Mention
- 33 14 - - - - 47
Substandard
124 37 1 66 24 11 - 263
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total agricultural
$ 6,368 $ 3,295 $ 1,018 $ 442 $ 178 $ 225 $ 506 $ 12,032
Farmland
Pass
$ 646 $ 713 $ 796 $ 77 $ 869 $ 6,150 $ 617 $ 9,868
Special Mention
- 109 - - 222 242 - 573
Substandard
- - 12 - 253 1,073 - 1,338
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total farmland
$ 646 $ 822 $ 808 $ 77 $ 1,344 $ 7,465 $ 617 $ 11,779
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2022
Prior
Revolving
Total
Home equity lines
Pass
$ 1,960 $ 198 $ 241 $ - $ 24 $ 7,429 $ 63,075 $ 72,927
Special Mention
- - - - - 117 171 288
Substandard
- - 27 35 114 1,253 998 2,427
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total home equity lines
$ 1,960 $ 198 $ 268 $ 35 $ 138 $ 8,799 $ 64,244 $ 75,642
Single family Mortgage
Pass
$ 157,890 $ 237,363 $ 207,480 $ 48,795 $ 36,678 $ 214,148 $ 373 $ 902,727
Special Mention
- 376 90 363 262 3,170 - 4,261
Substandard
461 1,196 740 1,217 1,991 28,068 - 33,673
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total single family owner and non-owner occupied
$ 158,351 $ 238,935 $ 208,310 $ 50,375 $ 38,931 $ 245,386 $ 373 $ 940,661
Owner occupied construction
Pass
$ 6,357 $ 3,344 $ - $ 23 $ 11 $ 469 $ - $ 10,204
Special Mention
- - - - - - - -
Substandard
- - 162 - - - - 162
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total owner occupied construction
$ 6,357 $ 3,344 $ 162 $ 23 $ 11 $ 469 $ - $ 10,366
Consumer loans
Pass
$ 69,579 $ 37,603 $ 16,033 $ 7,640 $ 2,528 $ 2,040 $ 7,932 $ 143,355
Special Mention
- 5 - 6 - - - 11
Substandard
881 1,002 466 416 36 159 60 3,020
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total consumer loans
$ 70,460 $ 38,610 $ 16,499 $ 8,062 $ 2,564 $ 2,199 $ 7,992 $ 146,386
(Amounts in thousands)
Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2022
Prior
Revolving
Total
Total Loans
Pass
$ 634,980 $ 512,743 $ 388,129 $ 123,998 $ 88,762 $ 471,459 $ 99,260 $ 2,319,331
Special Mention
227 2,695 977 1,929 3,471 16,086 417 25,802
Substandard
1,596 3,614 2,464 4,934 4,152 37,246 1,058 55,064
Doubtful
- - - - - - - -
Loss
- - - - - - - -
Total loans
$ 636,803 $ 519,052 $ 391,570 $ 130,861 $ 96,385 $ 524,791 $ 100,735 $ 2,400,197
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generally places a loan on nonaccrual status when it is 90 days or more past due. The following table presents nonaccrual loans, by loan class, as of the dates indicated:
December 31, 2023
December 31, 2022
(Amounts in thousands)
No Allowance
With an Allowance
Total
No Allowance
With an Allowance
Total
Commercial loans
Construction, development, and other land
$ 172 $ - $ 172 $ 31 $ - $ 31
Commercial and industrial
1,438 - 1,438 438 - 438
Multi-family residential
183 - 183 220 - 220
Single family non-owner occupied
832 - 832 984 - 984
Non-farm, non-residential
1,271 1,173 2,444 1,771 - 1,771
Agricultural
1,558 - 1,558 9 - 9
Farmland
123 - 123 133 - 133
Consumer real estate loans
Home equity lines
1,335 - 1,335 400 - 400
Single family owner occupied
9,365 - 9,365 8,228 589 8,817
Owner occupied construction
- - - - - -
Consumer and other loans
Consumer loans
1,906 - 1,906 2,405 - 2,405
Total nonaccrual loans
$ 18,183 $ 1,173 $ 19,356 $ 14,619 $ 589 $ 15,208
In both 2023 and 2022 nonaccrual loan interest was recognized was immaterial.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables presents the aging of past due loans, by loan class, as of the date indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category.
December 31, 2023
Amortized Cost of
30 - 59 Days
60 - 89 Days
90+ Days
Total
Current
Total
>90 Days Accruing
(Amounts in thousands)
Past Due
Past Due
Past Due
Past Due
Loans
Loans
No Allowance
Commercial loans
Construction, development, and other land
$ 38 $ 6 $ 23 $ 67 $ 105,878 $ 105,945 $ -
Commercial and industrial
1,232 766 390 2,388 209,462 211,850 -
Multi-family residential
115 68 - 183 188,199 188,382 -
Single family non-owner occupied
777 455 232 1,464 223,431 224,895 -
Non-farm, non-residential
617 229 382 1,228 893,322 894,550 -
Agricultural
22 56 217 295 21,374 21,669 -
Farmland
15 - - 15 14,187 14,202 -
Consumer real estate loans
Home equity lines
639 343 534 1,516 86,110 87,626 -
Single family owner occupied
6,108 2,831 3,519 12,458 683,682 696,140 -
Owner occupied construction
- - - - 8,445 8,445 -
Consumer and other loans
Consumer loans
4,390 1,440 1,087 6,917 110,174 117,091 -
Other
- - - - 1,503 1,503 -
Total loans
$ 13,953 $ 6,194 $ 6,384 $ 26,531 $ 2,545,767 $ 2,572,298 $ -
December 31, 2022
Amortized Cost of
30 - 59 Days
60 - 89 Days
90+ Days
Total
Current
Total
>90 Days Accruing
(Amounts in thousands)
Past Due
Past Due
Past Due
Past Due
Loans
Loans
No Allowance
Commercial loans
Construction, development, and other land
$ 393 $ 8 $ 23 $ 424 $ 116,750 $ 117,174 $ -
Commercial and industrial
756 129 217 1,102 149,326 150,428 -
Multi-family residential
- - 83 83 147,943 148,026 -
Single family non-owner occupied
990 122 299 1,411 204,710 206,121 -
Non-farm, non-residential
646 52 548 1,246 786,457 787,703 -
Agricultural
36 135 9 180 11,852 12,032 -
Farmland
- - 133 133 11,646 11,779 -
Consumer real estate loans
Home equity lines
519 115 262 896 74,746 75,642 -
Single family owner occupied
5,951 2,322 3,166 11,439 723,101 734,540 -
Owner occupied construction
- - - - 10,366 10,366 -
Consumer and other loans
Consumer loans
4,282 1,960 1,459 7,701 136,881 144,582 -
Other
- - - - 1,804 1,804 -
Total loans
$ 13,573 $ 4,843 $ 6,199 $ 24,615 $ 2,375,582 $ 2,400,197 $ -
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASC 326 prescribes that when an entity determines foreclosure is probable, the expected credit loss is required to be measured based on the fair value of the collateral. As a practical expedient, an entity may use the fair value as of the reporting date when recording the net carrying amount of the asset. For the collateral dependent asset ("CDA") a credit loss expense is recorded for loan amounts in excess of fair value of the collateral. The table below summarizes collateral dependent loans, where foreclosure is possible, by type of collateral, and the extent to which they are collateralized during the periods.
December 31, 2023
December 31, 2022
(Amounts in thousands)
Balance
Collateral Coverage
Coverage Ratio
Balance
Collateral Coverage
Coverage Ratio
Commercial Real Estate
Other
$ 1,173 $ 825 70.33 % $ - $ - -
Consumer owner occupied
- - 589 574 97.45 %
Total collateral dependent loans
$ 1,173 $ 825 70.33 % $ 589 $ 574 97.45 %
The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Effective, January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2015-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. Presented below are the amortized cost basis and percentage of loan class for loan modifications made to borrowers experiencing financial difficulty by loan class, concession type, and financial effect as of the date indicated.
Payment Delays
Amortized Cost Basis
% of Total Class of
December 31, 2023
Financing Receivable
Financial Effect
(Amounts in thousands)
Non farm, non residential property
$ 662 0.07 % Deferred six months of interest to loan maturity.
Single family owner occupied
548 0.08 % Deferred $66 thousand in principal to loan maturity
Single family non owner occupied
89 0.04 % Deferred 6 months of interest to Loan Maturity.
Commercial & industrial
171 0.08 % Deferred $8 thousand in Principal to Loan Maturity.
Total
$ 1,470
Term Extensions
Amortized Cost Basis
% of Total Class of
December 31, 2023
Financing Receivable
Financial Effect
(Amounts in thousands)
Consumer
$ 6 0.01 % Extended term from 60 to 84 months
Total
$ 6
Principal Forgiveness
Amortized Cost Basis
% of Total Class of
December 31, 2023
Financing Receivable
Financial Effect
(Amounts in thousands)
Single family owner occupied
$ 5 0.00 % Reduced amortized cost basis by $13 thousand
Total
$ 5
Term Extension and Rate Reduction
Amortized Cost Basis
% of Total Class of
December 31, 2023
Financing Receivable
Financial Effect
(Amounts in thousands)
Single family owner occupied
$ 565 0.08 % Reduced interest income and extended time to recover principal.
Total
$ 565
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. As of December 31, 2023, there were no modified loans (or portions of a loan) deemed uncollectible.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last twelve months:
December 31, 2023
Payment Status (Amortized Cost Basis)
Current
30-89 Days Past Due
90+ Days Past Due
(Amounts in thousands)
Non farm, non residential property
$ 662 $ - $ -
Single family owner occupied
864 254 -
Single family non owner occupied
Commercial & industrial
Consumer
6 - -
Total
$ 1,792 $ 254 $ -
The Company did not retroactively adopt ASU 2022-02 January 1, 2023, as such the periods are not comparable. Prior to the adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures below is the presentation of loans modified as TDRs by loan class and accrual status, as of the dates indicated:
December 31,
(Amounts in thousands)
Nonaccrual(1)
Accruing
Total
Commercial loans
Commercial and industrial
$ - $ 374 $ 374
Single family non-owner occupied
142 838 980
Non-farm, non-residential
- 747 747
Consumer real estate loans
Home equity lines
- 55 55
Single family owner occupied
1,182 5,073 6,255
Owner occupied construction
- - -
Consumer and other loans
Consumer loans
- 25 25
Total TDRs
$ 1,324 $ 7,112 $ 8,436
Allowance for credit losses related to TDRs
$ -
(1)
Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.
The following table presents interest income recognized on TDRs for the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Interest income recognized
$ 383 $ 422
The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.
Year Ended December 31,
(Amounts in thousands)
Total Contracts
Pre-modification Recorded Investment
Post modification Recorded Investment(1)
Below market interest rate
Single family owner occupied
1 $ 31 $ 32
Below market interest rate and extended payment term
Single family non-owner occupied
- - -
Single family owner occupied
- - -
Total below market interest rate and extended payment term
- - -
Principal deferral
Single family non-owner occupied
- - -
Single family owner occupied
5 494 481
Total principal deferral
5 494 481
Total
6 $ 525 $ 513
(1)
Represents the loan balance immediately following modification
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no payment defaults for loans restructured within the previous 12 months for December 31, 2022.
The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:
December 31, 2023
December 31, 2022
(Amounts in thousands)
Total OREO
$ 192 $ 703
OREO secured by residential real estate
$ 192 $ 407
Residential real estate loans in the foreclosure process(1)
$ 1,895 $ 1,474
(1)
The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction
Note 6. Allowance for Credit Losses
The following tables present the changes in the allowance for credit losses, by loan segment, during the periods indicated.
Year Ended December 31, 2023
(Amounts in thousands)
Commercial
Consumer Real Estate
Consumer and Other
Total Allowance
Total allowance
Balance at beginning of year:
Allowance for credit losses - loans
$ 17,213 $ 8,931 $ 4,412 $ 30,556
Allowance for credit losses - loan commitments
1,018 156 22 1,196
Total allowance for credit losses beginning of year
18,231 9,087 4,434 31,752
Purchased credit deteriorated -Surrey acquisition
1,452 529 30 2,011
Provision for credit losses:
Provision for (recovery of) credit losses - loans
2,217 125 6,093 8,435
Provision for (recovery of) credit losses - loan commitments
(421 ) (35 ) 6 (450 )
Total provision for credit losses - loans and loan commitments
1,796 90 6,099 7,985
Charge-offs
(753 ) (412 ) (7,660 ) (8,825 )
Recoveries
1,721 520 1,771 4,012
Net (charge-offs) recoveries
968 108 (5,889 ) (4,813 )
Allowance for credit losses - loans
21,850 9,693 4,646 36,189
Allowance for credit losses - loan commitments
597 121 28 746
Ending balance
$ 22,447 $ 9,814 $ 4,674 $ 36,935
Year Ended December 31, 2022
(Amounts in thousands)
Commercial
Consumer Real Estate
Consumer and Other
Total Allowance
Total allowance
Balance at beginning of year:
Allowance for credit losses - loans
$ 14,775 $ 9,972 $ 3,111 $ 27,858
Allowance for credit losses - loan commitments
576 88 14 678
Total allowance for credit losses beginning of year
15,351 10,060 3,125 28,536
Provision for credit losses:
Provision for (recovery of) credit losses - loans
431 (1,121 ) 7,262 6,572
Provision for (recovery of) credit losses - loan commitments
442 68 8 518
Total provision for credit losses - loans and loan commitments
873 (1,053 ) 7,270 7,090
Charge-offs
(633 ) (427 ) (6,743 ) (7,803 )
Recoveries
2,640 507 782 3,929
Net (charge-offs) recoveries
2,007 80 (5,961 ) (3,874 )
Allowance for credit losses - loans
17,213 8,931 4,412 30,556
Allowance for credit losses - loan commitments
1,018 156 22 1,196
Ending balance
$ 18,231 $ 9,087 $ 4,434 $ 31,752
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Premises, Equipment, and Leases
Premises and Equipment
The following table presents the components of premises and equipment as of the dates indicated:
December 31,
(Amounts in thousands)
Land
$ 19,497 $ 19,460
Buildings and leasehold improvements
51,557 47,009
Equipment
42,810 40,552
Total premises and equipment
113,864 107,021
Accumulated depreciation and amortization
(63,184 ) (59,681 )
Total premises and equipment, net
$ 50,680 $ 47,340
There were no impairment charges related to certain long-term investments in land and buildings in 2023 or in 2022. Impairment charges of $781 thousand was recognized in 2021. Depreciation and amortization expense for premises and equipment was $3.95 million in 2023, $4.15 million in 2022, and $4.47 million in 2021.
Leases
Operating leases are recorded as a right of use (“ROU”) asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.
The Company’s current operating leases relate to two existing bank branches and one operating lease acquired in a prior bank acquisition. The acquired operating lease was for vacant land and will terminate in July of 2029. The Company's ROU asset was $594 thousand as of December 31, 2023, compared to $648 thousand as of December 31, 2022. The operating lease liability as of December 31, 2023, was $620 thousand compared to $670 thousand as of December 31, 2022. The Company’s total operating leases have remaining terms of 1 years to 5.5 years compared with 2 years to 6.5 years as of December 31, 2022. The December 31, 2023, weighted average discount was 3.24%, compared to 3.28% from December 31, 2022.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments as of the dates indicated are as follows:
Year
Amount
(Amounts in thousands)
$ 151
2028 and thereafter
Total lease payments
Less: Interest
(2 )
Present value of lease liabilities
$ 620
Lease expense which is included in occupancy expense on the Consolidated Statement of Income was $171 thousand in 2023, $175 thousand in 2022, and $182 thousand in 2021. The Company maintained no subleases as of December 31, 2023.
Note 8. Goodwill and Other Intangible Assets
Goodwill
The Company has one reporting unit for goodwill impairment testing purposes, Community Banking. The Company performed its annual assessment of goodwill as of October 31, 2023, and concluded that the carrying value of goodwill was not impaired. No events have occurred after the analysis to indicate potential impairment.
As of December 31, 2023, the Company's goodwill totaled $143.95 million. The Surrey acquisition resulted in the Company recognizing $14.38 million in goodwill in the transaction. The balance was $129.57 million for both 2022 and 2021.
(Amounts in thousands)
Balance January 1, 2021
$ 129,565
Acquisitions
-
Balance December 31, 2021
$ 129,565
Balance January 1, 2022
$ 129,565
Acquisitions
-
Balance December 31, 2022
$ 129,565
Balance January 1, 2023
$ 129,565
Acquisitions
14,381
Balance December 31, 2023
$ 143,946
Other Intangible Assets
As of December 31, 2023, the remaining lives of core deposit intangibles ranged from 1.50 years to 9 years with a weighted average remaining life of 8.42 years. The Surrey acquisition resulted in the Company recognizing $12.70 million in core deposit intangibles. The following table presents the components of other intangible assets as of the dates indicated:
December 31,
(Amounts in thousands)
Core deposit intangibles
$ 12,674 $ 12,674 $ 12,674
Acquisitions
12,700 - -
Accumulated amortization
(10,229 ) (8,498 ) (7,052 )
Total other intangible assets, net
$ 15,145 $ 4,176 $ 5,622
Amortization expense for other intangible assets was $1.73 million in 2023, and $1.45 million in both 2022, and 2021.
The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 2023:
(Amounts in thousands)
$ 2,126
1,917
1,719
1,719
1,719
2029 and thereafter
5,945
Total estimated amortization expense
$ 15,145
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Deposits
The following table presents the components of deposits as of the dates indicated:
December 31,
(Amounts in thousands)
Noninterest-bearing demand deposits
$ 931,920 $ 872,168
Interest-bearing deposits
Interest-bearing demand deposits
693,979 679,609
Money market accounts
307,487 264,734
Savings deposits
535,566 578,974
Certificates of deposit
166,417 180,008
Individual retirement accounts
86,956 103,322
Total interest-bearing deposits
1,790,405 1,806,647
Total deposits
$ 2,722,325 $ 2,678,815
The following schedule presents the contractual maturities of time deposits, defined as certificates of deposits and individual retirement accounts, by year, as of December 31, 2023:
(Amounts in thousands)
$ 130,213
65,618
21,231
15,617
16,983
2029 and thereafter
3,711
Total contractual maturities
$ 253,373
Time deposits of $250 thousand or more totaled $18.59 million as of December 31, 2023, and $15.21 million as of December 31, 2022. The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2023:
(Amounts in thousands)
Three months or less
$ 4,069
Over three through six months
Over six through twelve months
2,643
Over twelve months
11,006
Total contractual maturities
$ 18,592
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Borrowings
The following table presents the components of borrowings as of the dates indicated:
December 31,
(Amounts in thousands)
Balance
Weighted Average Rate
Balance
Weighted Average Rate
Retail repurchase agreements
$ 1,119
0.06 %
$ 1,874
0.07 %
Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 2023:
Overnight and Continuous
Up to 30 Days
30 - 90 Days
Greater than 90 Days
Total
(Amounts in thousands)
Municipal securities
$
$ -
$ -
$ -
$
Mortgage-backed Agency securities
1,056
-
-
-
1,056
Total
$ 1,119
$ -
$ -
$ -
$ 1,119
As of December 31, 2023, unused borrowing capacity with the FHLB totaled $342.81 million, net of FHLB letters of credit of $126.37 million. The Company pledged $469.18 million in qualifying loans to secure the FHLB letters of credit, which provide an attractive alternative to pledging securities for public unit deposits.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Derivative Instruments and Hedging Activities
Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.
The Company has used interest rate swap contracts to modify its exposure to interest rate risk caused by changes in benchmark interest rates in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the Secured Overnight Financing Rate ("SOFR") plus a spread falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between the floating rate and the stated fixed rate. If SOFR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between the floating rate and the stated fixed rate.
Certain of the Company's interest rate swaps qualify as fair value hedging instruments. Therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of December 31, 2023.
Through July 2022, the Company had certain interest rate swaps that did not qualify as fair value hedges and the fair value changes in the derivative were recognized in earnings each period. On July 26, 2022, these swaps were terminated at a cost of $72 thousand.
The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:
December 31,
(Amounts in thousands)
Notional or Contractual Amount
Derivative Assets Derivative Liabilities
Notional or Contractual Amount
Derivative Assets Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps
$ 3,557 $ 136 $ - $ 3,983 $ 199 $ -
Derivatives not designated as hedges
Interest rate swaps
- - - - - -
Total derivatives
$ 3,557 $ 136 $ - $ 3,983 $ 199 $ -
The following table presents the interest component of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Income Statement Location
Derivatives designated as hedges
Interest rate swaps
$ (102 ) $ 35 $ 111 Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps
- 90 217 Interest and fees on loans
Total derivative expense
$ (102 ) $ 125 $ 328
Note 12. Employee Benefit Plans
Defined Benefit Plans
The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan (“SERP”) and the Directors’ Supplemental Retirement Plan (“Directors’ Plan”). The SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant’s projected final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The Directors’ Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant’s highest consecutive three-year average compensation. Benefits under the Directors’ Plan generally become payable at age 70. The SERP was frozen near the end of 2021; the Directors' Plan was fundamentally frozen at that time as well. The following table presents the changes in the aggregate actuarial benefit obligation for the two plans combined during the periods indicated:
December 31,
(Amounts in thousands)
Beginning balance
$ 9,488 $ 11,458
Effect of curtailment
- -
Service cost
- -
Interest cost
451 332
Actuarial gain
(306 ) (1,718 )
Benefits paid
(583 ) (584 )
Ending balance
$ 9,050 $ 9,488
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of net periodic pension cost, the effect on the consolidated statements of income, and the assumed discount rate for the periods indicated:
Year Ended December 31,
Income Statement Location
(Amounts in thousands)
Service cost
$ - $ - $ 352 Salaries and employee benefits
Interest cost
451 332 315 Other expense
Effect of curtailment
- - 289 Salaries and employee benefits
Amortization of prior service cost
- - 124 Other expense
Amortization of losses
38 135 264 Other expense
Net periodic cost
$ 489 $ 467 $ 1,344
Assumed discount rate
4.79 % 4.96 % 2.88 %
The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 2023:
(Amounts in thousands)
$ 745
2029 through 2033
3,479
Deferred Compensation Plan
The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods, commencing at retirement or death. There were no accrued benefits, which are based on the present values of expected payments and estimated life expectancies, as of December 31, 2023 or 2022. There was no deferred compensation plan expense in 2023, 2022, or 2021.
The Company maintains a deferred compensation plan, referred to as the WRAP, and is a voluntary, non-tax qualified deferred compensation plan available to certain employees, including executive officers. Under the plan, participants may defer a portion of their base and/or annual incentive compensation. The plan is intended to mirror the Corporation's qualified KSOP, and may include discretionary match that coincides with a match made to the KSOP to the extent participants cannot otherwise receive the full match in the KSOP. The balance as of December 31, 2023 and 2022 was $8.28 million and $5.14 million, respectively.
Employee Welfare Plan
The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits to all full-time employees who elect coverage under this program. A third-party administrator manages the health plan. Monthly employer and employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays claims. As of December 31, 2023, stop-loss insurance coverage generally limits the Company’s risk of loss to $200 thousand for individual claims and $5.88 million for aggregate claims. Health plan expenses were $4.16 million in 2023, $4.04 million in 2022, and $3.98 million in 2021.
Employee Stock Ownership and Savings Plan
The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”) that consists of a 401(k) savings feature that covers all employees that meet minimum eligibility requirements. The Company matches employee contributions at levels determined by the Board of Directors annually. These contributions are made in the first quarter following each plan year and employees must be employed on the last day of the plan year to be eligible. Matching contributions to qualified deferrals under the 401(k) savings component of the KSOP totaled $1.76 million in 2023, $1.82 million in 2022, and $1.71 million in 2021. The KSOP held 282,072 shares of the Company’s common stock as of December 31, 2023, 309,019 shares as of December 31, 2022, and 320,164 shares as of December 31, 2021.
Equity-Based Compensation Plans
The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors, and other individuals performing services for Company to focus on critical long-range objectives. The Company’s most current equity-based compensation plans include the 2022 Omnibus Equity Compensation Plan (the “2022 Plan”), which authorized 1,000,000 shares for potential grants of Non-Qualified Stock Options, Incentive Stock Options, Performance Shares, Performance Stock Units, Restricted Stock, Restricted Stock Units, and Performance Awards. The Company’s Compensation and Retirement Committee determines the vesting period for each grant; however, awards shall have a minimum vesting/exercise schedule of at least one year, except that a shorter vesting/exercise schedule may apply to not more than 5% of the shares authorized for issuance under the 2022 Plan.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation plans for the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Pre-tax compensation expense
$ 597 $ 718 $ 1,282
Excess tax (benefit) expense
- - (633 )
Stock Options
The following table presents stock option activity and related information for the year ended December 31, 2023:
(Amounts in thousands, except share and per share data)
Option Shares
Weighted Average Exercise Price Per Share
Weighted Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value
Outstanding, January 1, 2023
197,303 $ 29.61
Granted
- -
Exercised
(4,288 ) 21.25
Canceled/Expired
(6,751 ) 31.73
Outstanding, December 31, 2023
186,264 $ 29.72 6.37 $ 1,375
Exercisable, December 31, 2023
144,441 $ 28.77 6.13 $ 1,203
There were no options granted in 2023. There were 4,288 options exercised in 2023 and 7,575 were exercised in 2022. The intrinsic value of options exercised was $58 thousand in 2023, and $83 thousand in 2022. As of December 31, 2023, unrecognized compensation cost related to nonvested stock options totaled $80 thousand with an expected weighted average recognition period of 0.25 years. The actual compensation cost recognized might differ from this estimate due to various items, including new grants and changes in estimated forfeitures.
Restricted Stock and Stock Unit Awards
The following table presents restricted stock activity and related information for the year ended December 31, 2023:
Shares/Units
Weighted Average Grant-Date Fair Value
Nonvested, January 1, 2023
73,605 $ 30.87
Granted
69,964 26.33
Vested
(31,782 ) 24.04
Canceled
(2,794 ) 29.41
Nonvested, December 31, 2023
108,993 $ 29.98
As of December 31, 2023, unrecognized compensation cost related to nonvested restricted stock/unit awards totaled $2.47 million with an expected weighted average recognition period of 1.91 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and changes in estimated forfeitures.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Other Operating Income and Expense
The following table presents the components of other operating income and expense for the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Other operating income
Bank owned life insurance
$
$
$ 1,183
Net FDIC indemnification asset amortization
-
-
(1,226 )
Other(1)
4,822
4,187
4,623
Total other operating income
$ 5,651
$ 5,148
$ 4,580
Other operating expense
OREO expense and net loss
Telephone and data communications
1,326
1,658
1,720
Office supplies
Other(1)
9,994
7,766
9,134
Total other operating expense
$ 12,035
$ 10,475
$ 11,737
(1)
Components of other operating income or expense that do not exceed 1% of total income
Note 14. Income Taxes
Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following table presents the components of the income tax provision for the periods indicated:
Year Ended December 31,
(Amounts in thousands)
Current tax expense:
Federal
$ 11,055 $ 9,883 $ 8,546
State
1,553 1,648 1,563
Total current tax expense
12,608 11,531 10,109
Deferred tax expense:
Federal
1,166 1,800 4,677
State
180 164 574
Total deferred tax expense
1,346 1,964 5,251
Total income tax expense
$ 13,954 $ 13,495 $ 15,360
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The following table reconciles the Company’s income tax expense to the amount computed by applying the federal statutory tax rate to pre-tax income for the periods indicated:
Year Ended December 31,
Amount
Percent
Amount
Percent
Amount
Percent
(Amounts in thousands)
Federal income tax at the statutory rate
$ 13,014 21.00 % $ 12,633 21.00 % $ 13,971 21.00 %
State income tax, net of federal benefit
1,368 2.21 % 1,432 2.38 % 2,076 3.12 %
14,382 23.21 % 14,065 23.38 % 16,047 24.12 %
Increase (decrease) resulting from:
Tax-exempt interest income
(348 ) (0.56 )% (347 ) (0.58 )% (340 ) (0.51 )%
Excess tax benefits
(25 ) (0.04 )% (24 ) (0.04 )% (133 ) (0.20 )%
Bank owned life insurance
(167 ) (0.27 )% (68 ) (0.11 )% (225 ) (0.34 )%
Other items, net
112 0.17 % (131 ) (0.22 )% 11 0.02 %
Income tax at the effective tax rate
$ 13,954 22.51 % $ 13,495 22.43 % $ 15,360 23.09 %
Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the net deferred tax asset as of the dates indicated:
December 31,
(Amounts in thousands)
Deferred tax assets
Allowance for credit losses
$ 8,523 $ 7,283
Unrealized losses on available-for-sale securities
2,958 4,153
Unrealized asset losses
420 503
Purchase accounting
- 148
FDIC assisted transactions
346 588
Deferred loan fees
4,674 2,074
Deferred compensation assets
6,316 5,035
Federal net operating loss carryforward
266 1,223
Lease liability
146 160
Accrued litigation
824 -
Other
831 707
Total deferred tax assets
25,304 21,874
Deferred tax liabilities
Fixed assets
(939 ) (755 )
Intangible assets
(4,303 ) (857 )
Odd days interest deferral
(4,134 ) (4,010 )
Purchase accounting
(81 ) -
Right of use asset
(140 ) (155 )
Other
(869 ) (197 )
Total deferred tax liabilities
(10,466 ) (5,974 )
Net deferred tax asset
$ 14,838 $ 15,900
The Company had no unrecognized tax benefits or accrued interest or penalties as of December 31, 2023 or 2022. The Company had no deferred tax valuation allowance recorded as of December 31, 2023 or 2022, as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income. The Company and its subsidiaries are subject to U.S. federal income tax of the various states. The Company is no longer subject to examination by federal or state taxing authorities for years before 2020.
At December 31, 2023, the Company had Federal net operating loss carryforwards of approximately $1.27 million of which $796 thousand can be carried forward 20 years with expiration occurring no earlier than 2036, and $470 thousand that can be carried forward indefinitely. During 2023, the Company acquired $1.46 million of Federal net operating loss carryforwards and these will be utilized during the current year.
The Company has analyzed the tax positions taken, or expected to be taken in its tax returns, and concluded it has no liability related to uncertain tax positions.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Accumulated Other Comprehensive Income
The following table presents the changes in AOCI, net of tax and by component, during the periods indicated:
Unrealized Gains (Losses) on Available for-Sale Securities
Employee Benefit Plans Total
(Amounts in thousands)
Balance January 1, 2021
$ 1,106 $ (3,029 ) $ (1,923 )
Other comprehensive (loss) income before reclassifications
(1,091 ) 1,160 69
Reclassified from AOCI
- 308 308
Other comprehensive (loss) income, net
(1,091 ) 1,468 377
Balance December 31, 2021
$ 15 $ (1,561 ) $ (1,546 )
Balance January 1, 2022
$ 15 $ (1,561 ) $ (1,546 )
Other comprehensive (loss) income before reclassifications
(15,636 ) 1,357 (14,279 )
Reclassified from AOCI
- 106 106
Other comprehensive (loss) income, net
(15,636 ) 1,463 (14,173 )
Balance December 31, 2022
$ (15,621 ) $ (98 ) $ (15,719 )
Balance January 1, 2023
$ (15,621 ) $ (98 ) $ (15,719 )
Other comprehensive income before reclassifications
4,479 242 4,721
Reclassified from AOCI
16 31 47
Other comprehensive income, net
4,495 273 4,768
Balance December 31, 2023
$ (11,126 ) $ 175 $ (10,951 )
The following table presents reclassifications out of AOCI, by component, during the periods indicated:
Year Ended December 31,
Income Statement
(Amounts in thousands)
Line Item Affected
Available-for-sale securities
Loss recognized
$ 21 $ - $ - Net loss on sale of securities
Reclassified out of AOCI, before tax
21 - - Income before income taxes
Income tax benefit
(5 ) - - Income tax expense
Reclassified out of AOCI, net of tax
16 - - Net income
Employee benefit plans
Amortization of prior service cost
- - 124 Other operating expense
Amortization of net actuarial loss
38 135 264 Other operating expense
Reclassified out of AOCI, before tax
38 135 388 Income before income taxes
Income tax expense
(7 ) (29 ) (80 ) Income tax expense
Reclassified out of AOCI, net of tax
31 106 308 Net income
Total reclassified out of AOCI, net of tax
$ 47 $ 106 $ 308 Net income
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Fair Value
Financial Instruments Measured at Fair Value
The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.
Assets and Liabilities Reported at Fair Value on a Recurring Basis
Available-for-Sale Debt Securities. Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.
Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.
Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.
Loans Held for Investment. Loans held for investment are reported at fair value using the exit price notion, which is derived from third-party models. Loans related to fair value hedges are recorded at fair value on a recurring basis.
Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
December 31, 2023
Total
Fair Value Measurements Using
(Amounts in thousands)
Fair Value
Level 1
Level 2
Level 3
Available-for-sale debt securities
U.S. Agency securities
$ 5,749 $ - $ 5,749 $ -
U.S. Treasury securities
145,826 - 145,826 -
Municipal securities
19,377 - 19,377 -
Corporate Notes
27,081 - 27,081 -
Mortgage-backed Agency securities
82,928 - 82,928 -
Total available-for-sale debt securities
280,961 - 280,961 -
Equity securities
55 - 55 -
Fair value loans
3,421 - - 3,421
Derivative assets
136 - 136 -
Deferred compensation assets
6,729 6,729 - -
Deferred compensation liabilities
8,282 8,282 - -
December 31, 2022
Total
Fair Value Measurements Using
(Amounts in thousands)
Fair Value
Level 1
Level 2
Level 3
Available-for-sale debt securities
U.S. Agency securities
$ 1,485 $ - $ 1,485 $ -
U.S. Treasury securities
157,264 $ - 157,264 $ -
Municipal securities
23,309 - 23,309 -
Corporate Notes
34,857 - 34,857 -
Mortgage-backed Agency securities
83,434 - 83,434 -
Total available-for-sale debt securities
300,349 - 300,349 -
Equity securities
55 - 55 -
Fair value loans
3,784 - - 3,784
Derivative assets
199 - 199 -
Deferred compensation assets
5,142 5,142 - -
Deferred compensation liabilities
5,142 5,142 - -
Changes in Level 3 Fair Value Measurements
The following table presents the changes in Level 3 assets recorded at fair value on a recurring basis during the period indicated:
Assets
(Amounts in thousands)
Balance January 1, 2022
$ 13,106
Change due to termination of interest rate swaps not qualifying as fair value hedges
(8,489 )
Changes in fair value
(428 )
Changes due to principal reduction
(405 )
Balance December 31, 2022
$ 3,784
Balance January 1, 2023
$ 3,784
Changes in fair value
Changes due to principal reduction
(426 )
Balance December 31, 2023
$ 3,421
No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2023 or 2022.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired Loans. Prior to the adoption of ASU 2016-13, impaired loans were recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan's collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.
The Company maintains an active and robust problem credit identification system. The review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third-party valuation within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.
OREO. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.
The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
December 31, 2023
Total
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
(Amounts in thousands)
Collateral dependent assets with specific reserves
$ 825 $ - $ - $ 825
OREO
192 - - 192
December 31, 2022
Total
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
(Amounts in thousands)
Collateral dependent assets with specific reserves
$ 574 $ - $ - $ 574
OREO
703 - - 703
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quantitative Information about Level 3 Fair Value Measurements
The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:
Discount Range
Valuation
Unobservable
(Weighted Average)
Technique
Input
December 31, 2023
Collateral dependent assets with specific reserves
Discounted appraisals(1)
Appraisal adjustments(2)
42%
42 %
OREO
Discounted appraisals(1)
Appraisal adjustments(2)
20% to 100%
10 %
(1)
Fair value is generally based on appraisals of the underlying collateral.
(2)
Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
Discount Range
Valuation
Unobservable
(Weighted Average)
Technique
Input
December 31, 2022
Collateral dependent assets with specific reserves
Discounted appraisals(1)
Appraisal adjustments(2)
3% to 3% 3 %
OREO
Discounted appraisals(1)
Appraisal adjustments(2)
20% to 100% 69 %
(1)
Fair value is generally based on appraisals of the underlying collateral.
(2)
Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
December 31, 2023
Carrying
Fair Value Measurements Using
(Amounts in thousands)
Amount
Fair Value
Level 1
Level 2
Level 3
Assets
Cash and cash equivalents
$ 116,420 $ 116,420 $ 116,420 $ - $ -
Debt securities available for sale
280,961 280,961 - 280,961 -
Equity securities
55 55 - 55 -
Loans held for investment, net of allowance
2,536,109 2,350,071 - - 2,350,071
Interest receivable
10,881 10,881 - 1,246 9,635
Deferred compensation assets
6,729 6,729 6,729 - -
Derivative assets
136 136 - 136 -
Liabilities
Time deposits
253,373 247,141 - 247,141 -
Securities sold under agreements to repurchase
1,119 1,119 - 1,119 -
Interest payable
556 556 - 556 -
Deferred compensation liabilities
8,282 8,282 8,282 - -
December 31, 2022
Carrying
Fair Value Measurements Using
(Amounts in thousands)
Amount
Fair Value
Level 1
Level 2
Level 3
Assets
Cash and cash equivalents
$ 170,846 $ 170,846 $ 170,846 $ - $ -
Debt securities available for sale
300,349 300,349 - 300,349 -
Equity securities
55 55 - 55 -
Loans held for investment, net of allowance
2,369,641 2,215,243 - - 2,215,243
Interest receivable
9,279 9,279 - 1,343 7,936
Deferred compensation assets
5,142 5,142 5,142 - -
Derivative assets
199 199 199
Liabilities
Time deposits
283,330 281,744 - 281,744 -
Securities sold under agreements to repurchase
1,874 1,874 - 1,874 -
Interest payable
159 159 - 159 -
Deferred compensation liabilities
5,142 5,142 5,142 - -
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Earnings per Share
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
Year Ended December 31,
(Amounts in thousands, except share and per share data)
Net income
$ 48,020
$ 46,662
$ 51,168
Adjustment to Net Income for Fair Value Changes to Restricted Stock Units (tax-effected)
1,100
-
-
Adjusted Net Income for diluted earnings per share
$ 49,120
$ 46,662
$ 51,168
Weighted average common shares outstanding, basic
17,996,373
16,519,848
17,335,615
Dilutive effect of potential common shares
Stock options
15,856
18,784
30,854
Restricted stock and units
14,922
23,625
36,467
Total dilutive effect of potential common shares
30,778
42,409
67,321
Weighted average common shares outstanding, diluted
18,027,151
16,562,257
17,402,936
Basic earnings per common share
$ 2.67
$ 2.82
$ 2.95
Diluted earnings per common share
2.72
2.82
2.94
Potential antidilutive common shares
Stock options
129,324
131,198
103,520
Restricted stock and units
32,706
-
Total potential antidilutive shares
162,030
131,198
104,150
Note 18. Related Party Transactions
Loans to principal officers, directors, and their affiliates were as follows:
Year Ended December 31,
(Amounts in thousands)
Beginning balance
$ 30,981 $ 33,740
New loans and advances
5,215 7,768
Loan repayments
(6,217 ) (15,979 )
Reclassifications(1)
(15 ) 5,452
Ending balance
$ 29,964 $ 30,981
(1) Changes related to the composition of the Company's directors, executive officers, and related insiders
Deposits from related parties totaled $15.19 million as of December 31, 2023, and $14.59 million as of December 31, 2022. Legal fees paid to related parties totaled $47 thousand in 2023, $41 thousand in 2022, and $80 thousand in 2021. There were no lease payments paid to related parties in 2023, 2022, or 2021. Other expense paid to related parties totaled $23 thousand in 2023, $53 thousand in 2022, and $104 thousand in 2021.
Note 19. Litigation, Commitments, and Contingencies
Litigation
The Company and its subsidiaries are currently involved in various legal proceedings in the normal course of business. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with all pending or threatened claims and litigation, utilizing the most recent information available. On a matter-by-matter basis, an accrual for loss is established for those matters which the Company believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments. Accordingly, management’s estimate will change from time to time, and actual losses may be more or less than the current estimate. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established.
On June 24, 2022, the Bank was sued in a putative class action lawsuit filed by two customers of the Bank in the United States District Court for the Northern District of West Virginia. (The lawsuit was subsequently transferred to the District Court for the Southern District of West Virginia.) The plaintiffs, individually and as putative class representatives, allege that the Bank breached its deposit account agreements and was unjustly enriched by collecting overdraft fees with respect to certain debit card transactions and the assessment of multiple nonsufficient funds fees as to items presented for payment against nonsufficient funds more than one time. No class has been certified and discovery is ongoing. The Bank disputes the allegations and has actively defended itself, but it is exploring settlement opportunities. We cannot provide assurance whether a settlement will be reached, the final terms or timing of any such settlement, or the negotiated amount of any settlement with respect to this matter.
Management currently estimates the range of reasonably possible loss with respect to this litigation matter is $1.50 to $3.50 million. As of December 31, 2023, First Community accrued a $3.00 million estimated liability related to this litigation matter. This accrual was based upon currently available information and is subject to adjustment to reflect any subsequent developments. Management is vigorously pursuing all applicable legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on the Company’s financial statements.
We are currently a defendant in other legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome of each matter with certainty, we believe that the resolution of these actions should not have a material adverse effect on our financial position, results of operations, or cash flows.
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments and Contingencies
The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.
Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.
The following table presents the off-balance sheet financial instruments as of the dates indicated:
December 31,
(Amounts in thousands)
Commitments to extend credit
$ 277,462 $ 278,926
Standby letters of credit and financial guarantees(1)
129,220 119,681
Total off-balance sheet risk
406,682 398,607
(1) Includes FHLB letters of credit
Note 20. Regulatory Requirements and Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s balance sheet assets and off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Company and the Bank are subject to various regulatory restrictions related to the payment of dividends, including requirements to maintain capital at or above regulatory minimums.
The current risk-based capital requirements, based on the international capital standards known as Basel III, requires the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to risk-weighted assets, and of Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”), as defined in the regulations. Basel III’s capital conservation buffer (“CCB”), which is intended to absorb losses during periods of economic stress, increased those minimum ratios by 2.5% on January 1, 2019).
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:
December 31, 2023
Actual
Minimum Basel III Requirement Minimum Basel III Requirement - with CCB Well Capitalized Requirement(1)
(Amounts in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
The Company
Common equity Tier 1 ratio
$ 355,157 14.69 % $ 108,761 4.50 % $ 169,184 7.00 % N/A N/A
Tier 1 risk-based capital ratio
355,157 14.69 % 145,015 6.00 % 205,438 8.50 % N/A N/A
Total risk-based capital ratio
385,369 15.94 % 193,353 8.00 % 253,776 10.50 % N/A N/A
Tier 1 Leverage ratio
355,157 11.52 % 123,278 4.00 % N/A N/A N/A N/A
The Bank
Common equity Tier 1 ratio
$ 312,593 12.97 % $ 108,461 4.50 % $ 168,718 7.00 % $ 156,667 6.50 %
Tier 1 risk-based capital ratio
312,593 12.97 % 144,615 6.00 % 204,872 8.50 % 192,820 8.00 %
Total risk-based capital ratio
342,805 14.22 % 192,820 8.00 % 253,077 10.50 % 241,026 10.00 %
Tier 1 Leverage ratio
312,593 10.07 % 124,181 4.00 % N/A N/A 155,226 5.00 %
(1)
Based on prompt corrective action provisions
December 31, 2022
Actual
Minimum Basel III Requirement Minimum Basel III Requirement - with CCB Well Capitalized Requirement(1)
(Amounts in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
The Company
Common equity Tier 1 ratio
$ 303,963 13.37 % $ 102,332 4.50 % $ 159,183 7.00 % N/A N/A
Tier 1 risk-based capital ratio
303,963 13.37 % 136,443 6.00 % 193,294 8.50 % N/A N/A
Total risk-based capital ratio
332,430 14.62 % 181,924 8.00 % 238,775 10.50 % N/A N/A
Tier 1 Leverage ratio
303,963 10.17 % 119,499 4.00 % N/A N/A N/A N/A
The Bank
Common equity Tier 1 ratio
$ 264,185 11.69 % $ 101,712 4.50 % $ 158,218 7.00 % $ 146,917 6.50 %
Tier 1 risk-based capital ratio
264,185 11.69 % 135,616 6.00 % 192,122 8.50 % 180,821 8.00 %
Total risk-based capital ratio
292,481 12.94 % 180,821 8.00 % 237,327 10.50 % 226,026 10.00 %
Tier 1 Leverage ratio
264,185 8.79 % 120,248 4.00 % N/A N/A 150,310 5.00 %
(1)
Based on prompt corrective action provisions
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Parent Company Financial Information
The following tables present condensed financial information for the parent company, First Community Bankshares, Inc., as of and for the dates indicated:
CONDENSED BALANCE SHEETS
December 31,
(Amounts in thousands)
Assets
Cash and due from banks
$ 14,681 $ 16,988
Securities available for sale
22,468 17,313
Investment in subsidiaries
460,731 382,286
Other assets
6,227 5,910
Total assets
$ 504,107 $ 422,497
Liabilities
Other liabilities
$ 813 $ 512
Total liabilities
813 512
Stockholders' equity
Common stock
18,502 16,225
Additional paid-in capital
175,841 128,508
Retained earnings
319,902 292,971
Accumulated other comprehensive loss
(10,951 ) (15,719 )
Total stockholders' equity
503,294 421,985
Total liabilities and stockholders' equity
$ 504,107 $ 422,497
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
(Amounts in thousands)
Cash dividends received from subsidiary bank
$ 45,700 $ 56,250 $ 53,200
Other income
1,397 222 8
Other operating expense
1,524 1,052 1,086
Income before income taxes and equity in undistributed net income of subsidiaries
45,573 55,420 52,122
Income tax benefit
(41 ) (224 ) (351 )
Income before equity in undistributed net income of subsidiaries
45,614 55,644 52,473
Equity in (dividends in excess) of undistributed net income of subsidiaries
2,406 (8,982 ) (1,305 )
Net income
$ 48,020 $ 46,662 $ 51,168
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(Amounts in thousands)
Operating activities
Net income
$ 48,020 $ 46,662 $ 51,168
Adjustments to reconcile net income to net cash provided by operating activities
Net change in other operating activities
(3,275 ) 8,442 253
Net cash provided by operating activities
44,745 55,104 51,421
Investing activities
Purchase of investment securities
(69,469 ) (19,372 ) -
Proceeds from maturities, calls, sales of investment securities
65,250 11,807 (9,919 )
Dividends in excess of undistributed net income of subsidiaries
- - 1,305
Net cash (used) provided by investing activities
(4,219 ) (7,565 ) (8,614 )
Financing activities
Proceeds from issuance of common stock
91 172 -
Payments for repurchase of common stock
(23,038 ) (21,311 ) (28,882 )
Payments of common dividends
(21,089 ) (18,515 ) (18,059 )
Net change in other financing activities
1,203 1,375 1,773
Net cash (used) provided by financing activities
(42,833 ) (38,279 ) (45,168 )
Cash and cash equivalents increase (decrease)
(2,307 ) 9,260 (2,361 )
Cash and cash equivalents at carrying value at beginning of period
16,988 7,728 10,089
Cash and cash equivalents at carrying value at end of period
$ 14,681 $ 16,988 $ 7,728
Note 22. Quarterly Financial Data (Unaudited)
The following tables present selected financial data for the periods indicated:
Year Ended December 31, 2023
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
(Amounts in thousands, except share and per share data)
Interest income
$ 30,189 $ 34,869 $ 36,105 $ 36,002
Interest expense
777 2,007 2,758 3,939
Net interest income
29,412 32,862 33,347 32,063
Provision for credit losses
1,742 4,105 1,109 1,029
Net interest income after provision
27,670 28,757 32,238 31,034
Noninterest income, excluding net loss on sale of securities
8,583 8,785 9,622 10,462
Noninterest expense
20,813 24,671 22,913 26,780
Income before income taxes
15,440 12,871 18,947 14,716
Income tax expense
3,658 3,057 4,307 2,932
Net income
$ 11,782 $ 9,814 $ 14,640 $ 11,784
Adjustment to Net Income for Fair Value Changes to Restricted Stock Units (tax-effected)
$ 20 $ 335 $ 215 $ 530
Adjusted Net Income for diluted earnings per share
$ 11,802 $ 10,149 $ 14,855 $ 12,314
Basic earnings per common share
$ 0.73 $ 0.53 $ 0.78 $ 0.64
Diluted earnings per common share
0.72 0.55 0.79 0.66
Dividends per common share
0.29 0.29 0.29 0.29
Weighted average basic shares outstanding
16,228,297 18,407,078 18,786,032 18,530,114
Weighted average diluted shares outstanding
16,289,489 18,431,598 18,831,836 18,575,226
FIRST COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2022
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
(Amounts in thousands, except share and per share data)
Interest income
$ 25,639 $ 27,970 $ 29,722 $ 30,988
Interest expense
486 423 380 367
Net interest income
25,153 27,547 29,342 30,621
Recovery of credit losses
1,961 510 685 3,416
Net interest income after provision
23,192 27,037 28,657 27,205
Noninterest income, excluding net loss on sale of securities
9,194 8,854 9,950 9,184
Noninterest expense
19,986 21,255 21,145 20,730
Income before income taxes
12,400 14,636 17,462 15,659
Income tax expense
2,885 3,423 4,111 3,076
Net income
$ 9,515 $ 11,213 $ 13,351 $ 12,583
Basic earnings per common share
$ 0.57 $ 0.67 $ 0.82 $ 0.78
Diluted earnings per common share
0.56 0.67 0.81 0.77
Dividends per common share
0.27 0.27 0.29 0.29
Weighted average basic shares outstanding
16,817,284 16,662,817 16,378,022 16,229,289
Weighted average diluted shares outstanding
16,864,515 16,682,615 16,413,202 16,281,922
Crowe LLP
Independent Member Crowe Global
- Report of Independent Registered Public Accounting Firm -
Stockholders and the Board of Directors of First Community Bankshares, Inc.
Bluefield, Virginia
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of First Community Bankshares, Inc. (the "Company") as of December 31, 2023, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flow for the year ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance and Provision for Credit Losses on Loans - Discounted Cash Flow
As more fully described in Notes 1, 4, 5 and 6 of the financial statements, the allowance for credit losses (the “ACL”) is an accounting estimate of the expected credit losses in the loans held for investment portfolio over the life of an exposure (or pool of exposures). Expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For collectively evaluated loans, the Company uses a combination of discounted cash flow model, which includes the use of probability of default and loss given default assumptions, and open pool model to estimate expected credit losses. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver using a statistical regression. In addition, the Company considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process.
We identified auditing the ACL’s discounted cash flow model as a critical audit matter because of the extent of auditor judgment applied and significant audit effort, with the need to use our valuation specialists, to evaluate the high degree of judgments made by management related to the determination of the probability of default and loss given default (“the significant model assumptions”) within the discounted cash flow method for certain collectively evaluated loan segments.
The primary procedures performed to address the critical audit matter included:
Testing the effectiveness of internal controls over:
●
The Company’s evaluation of the ACL calculation, including the reasonableness of the significant model assumptions and judgments within the discounted cash flow model.
●
The Company’s evaluation of the relevance and reliability of data used in the discounted cash flow model of the ACL calculation.
Substantively testing management’s estimate, which included:
●
Evaluation of the appropriateness of the ACL calculation, including the reasonableness of the significant model assumptions and the application of data within the significant model assumptions used in the discounted cash flow model, with assistance of our valuation specialists.
●
Evaluation of the relevance and reliability of data used to develop the discounted cash flow model of the ACL calculation.
/s/ Crowe LLP
We have served as the Company's auditor since 2023.
Washington, D.C.
March 8, 2024
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Community Bankshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of First Community Bankshares, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Elliott Davis, PLLC
We served as the Company's auditor from 2022 to 2023.
Charlotte, North Carolina
February 22, 2023
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
First Community Bankshares, Inc.
Bluefield, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of First Community Bankshares, Inc. (the “Company”) for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ FORVIS, LLP
We served as the Company’s auditor from 2006 to 2021.
Charlotte, North Carolina
March 3, 2022
- Management’s Assessment of Internal Control over Financial Reporting -
First Community Bankshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.
We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2023.
Crowe, LLP, independent registered public accounting firm, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. The Report of Independent Registered Public Accounting Firm, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, appears hereafter in Item 8 of this Annual Report on Form 10-K.
Dated this 8th day March of 2024.
/s/ William P. Stafford, II
/s/ David D. Brown
William P. Stafford, II
David D. Brown
Chief Executive Officer
Chief Financial Officer

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2023, 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, 2023, 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
Management's report on the Company's internal control over financial reporting and the attestation report of Crowe, LLP, the Company's independent registered public accounting firm, on internal control over financial reportings are under the headings “Management's Assessment of Internal Control over Financial Reporting,” and “Report of Independent Registered Public Accounting Firm,” in Item 8 of this report and are incorporated in this Item 9A by reference.

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ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information.
During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted, modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance.
Additional Information
Additional information required in this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 2024, (“2024 Annual Meeting”) under the headings “Proposal 1: Election of Directors,” “Director Nominees for the Class of 2026,” “Incumbent Directors,” “Non-Director Named Executive Officers,” and "Other Key Officers," and under the captions “Board Committees,” and “Delinquent Section 16(a) Reports.”
Our Standards of Conduct apply to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Standards of Conduct is available on the Investor Relations section of our website at www.firstcommunitybank.com. There have been no waivers of the Standards of Conduct for any officer.
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since the disclosure in our Proxy Statement filed with the SEC on April 13, 2023.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation.
The information required in this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting under the caption, “Board Committees,” and under the headings, “Compensation Discussion and Analysis,” “Director Compensation,” and "Pay Ratio Disclosure."

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information about compensation plans under which our equity securities are authorized for issuance as of December 31, 2023:
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3)
(a)
(b)
(c)
Equity compensation plans approved by security holders(1)
262,522
$ 33.55
876,901
Equity compensation plans not approved by security holders(2)
32,735
$ 23.58
-
Total
295,257
876,901
(1) Includes the 2022 Omnibus Equity Compensation Plan and 2012 Omnibus Equity Compensation Plan
(2) Includes the 1999 Stock Option Plan
(3) Shares are available for future issuance under the 2022 Omnibus Equity Compensation Plan.
Additional information required in this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting under the caption “Information on Stock Ownership.”

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required in this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting under the caption “Independence of Directors” and “Related Person/Party Transactions.”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accounting Fees and Services.
The Independent Registered Public Accounting Firm is Crowe LLP (PCAOB Firm ID No.173 ) located in Washington, District of Columbia. The information required by this item is incorporated by reference to our Proxy Statement for 2023 Annual Meeting under the heading, "Independent Registered Public Accounting Firm".
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits, Financial Statement Schedules.
(a)
Documents Filed as Part of this Report
(1)
Financial Statements
The financial statements required in this item are incorporated by reference to Item 8, “Financial Statements and Supplementary Data,” in Part II of this report.
(2)
Financial Statement Schedules
The schedules required in this item are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes.
(3)
Exhibits
Exhibit
No.
Exhibit
2.1
Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
2.2
Agreement and Plan of Merger between First Community Bankshares, Inc. and Surrey Bancorp, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed November 18, 2022
3.1
Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
3.2
Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018
4.1
Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018
4.2 Form of First Community Bankshares, Inc. Common Stock Certificate
10.1.1**
First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.1.2**
Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004
10.1.7** First Community Bankshares Executive Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 of the current Report on Form 8-K filed May 31, 2022
10.2**
First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002
10.3**
First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002
10.6**
First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012
10.7**
First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013
10.8**
First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.9.1**
First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.
10.9.2**
Amendment #1 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010
10.9.3**
Amendment #2 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013
10.9.4**
Amendment #3 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.9.5**
Amendment #4 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.9.6** Amendment #5 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.9.6 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.9.7** Amendment #6 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.9.7 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.10**
Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006
10.11.1**
First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.11.2**
Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.12.1**
First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.12.2**
Amendment #2 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.12.3** Amendment #3 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.12.3 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.12.4** Amendment #4 to the First Community Bankshares, Inc Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.12.4 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.13**
Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.15**
Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.16**
Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.17** First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan incorporated by reference to Exhibit 99.a of the Definitive Proxy Statement on Form DEF 14A dated April 26, 2022, filed on March 16, 2022.
21*
Subsidiaries of the Registrant
23.1*
Consent of Crowe, LLP Independent Registered Public Accounting Firm for First Community Bankshares, Inc.
23.2* Consent of Elliott Davis, LLC former Independent Registered Public Accounting Firm for First Community Bankshares, Inc.
23.3* Consent of FORVIS, LLP former Independent Registered Public Accounting Firm for First Community Bankshares, Inc.
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
97.1
First Community Bankshares, Inc. Compensation Recoupment Policy
101***
Inline interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2023 and 2022; (ii) Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022, and 2021; (iv) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2023, 2022, and 2021; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021; and (vi) Notes to Consolidated Financial Statements
The cover page of First Community Bankshares, Inc. Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL (included within the Exhibit 101 attachments).
*
Filed herewith
**
Indicates a management contract or compensation plan or agreement. These contracts, plans, or agreements were assumed by First Community Bankshares, Inc. in October 2018 in connection with First Community Bancshares, Inc., a Nevada corporation, merging with and into its wholly-owned subsidiary, First Community Bankshares, Inc., a Virginia corporation, pursuant to an Agreement and Plan of Reincorporation and Merger with First Community Bankshares, Inc. continuing as the surviving corporation.
***
Submitted electronically herewith