FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2021 September (Form 10-Q)

fcbc20210930_10q.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-19297

FIRST COMMUNITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

55-0694814

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

P.O. Box 989

Bluefield, Virginia

24605-0989

(Address of principal executive offices)

(Zip Code)

(276) 326-9000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12 (b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock ($1.00 par value)	FCBC	NASDAQ Global Select

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☑ No

As of November 2, 2021, there were 17,017,060 shares outstanding of the registrant’s Common Stock, $1.00 par value.

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FIRST COMMUNITY BANKSHARES, INC.
FORM 10-Q
INDEX

PART I.	FINANCIAL INFORMATION		Page

Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)	9
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		53
Item 4.	Controls and Procedures		53

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		53
Item 1A.	Risk Factors		53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 3.	Defaults Upon Senior Securities		54
Item 4.	Mine Safety Disclosures		54
Item 5.	Other Information		54
Item 6.	Exhibits		56

Signatures			58

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

●

the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company’s business;

●

the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

●

the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

●

inflation, interest rate, market and monetary fluctuations;

●

timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

●

the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa;

●

the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

●

the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system;

●

technological changes;

	●	the cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;
	●	the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

●

the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

●

the growth and profitability of noninterest, or fee, income being less than expected;

●

unanticipated regulatory or judicial proceedings;

●

changes in consumer spending and saving habits; and

●

the Company’s success at managing the risks mentioned above.

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	*September 30,*			*December 31,*
	*2021*			2020⁽¹⁾
(Amounts in thousands, except share and per share data)	(Unaudited)
Assets
Cash and due from banks	$	49,367		$	58,404
Federal funds sold		582,285			395,756
Interest-bearing deposits in banks		3,355			2,401
Total cash and cash equivalents		635,007			456,561
Debt securities available for sale		77,440			83,358
Loans held for investment, net of unearned income (includes covered loans of $9,680, December 31, 2020) ⁽²⁾		2,152,103			2,186,632
Allowance for credit losses ⁽³⁾		(29,877	)		(26,182	)
Loans held for investment, net		2,122,226			2,160,450
Premises and equipment, net		52,842			57,700
Other real estate owned		1,240			2,083
Interest receivable		8,146			9,052
Goodwill		129,565			129,565
Other intangible assets		5,987			7,069
Other assets		107,258			105,298
Total assets	$	3,139,711		$	3,011,136

Liabilities
Deposits
Noninterest-bearing	$	820,147		$	772,795
Interest-bearing		1,853,699			1,773,452
Total deposits		2,673,846			2,546,247
Securities sold under agreements to repurchase		1,106			964
Interest, taxes, and other liabilities		37,395			37,195
Total liabilities		2,712,347			2,584,406

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; 24,134,311 shares issued and 17,071,052 outstanding at September 30, 2021; 24,319,076 shares issued and 17,722,507 outstanding at December 31, 2020		17,071			17,723
Additional paid-in capital		154,086			173,345
Retained earnings		258,860			237,585
Accumulated other comprehensive loss		(2,653	)		(1,923	)
Total stockholders' equity		427,364			426,730
Total liabilities and stockholders' equity	$	3,139,711		$	3,011,136

(1) Derived from audited financial statements
(2) Effective September 28, 2021, the Company terminated its remaining loss share agreement with the FDIC. The termination eliminates the FDIC guarantee on particular loan losses.
(3) Effective January 1, 2021, the Company adopted the current expected credit loss methodology ("CECL"), prior to January 1, 2021, the Company utilized the incurred credit loss methodology.
See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
(Amounts in thousands, except share and per share data)	*2021*			*2020*			*2021*			*2020*
Interest income
Interest and fees on loans	$	25,119		$	27,297		$	77,596		$	82,346
Interest on securities -- taxable		200			190			557			808
Interest on securities -- tax-exempt		245			419			818			1,432
Interest on deposits in banks		225			89			507			704
Total interest income		25,789			27,995			79,478			85,290
Interest expense
Interest on deposits		642			1,161			2,235			4,431
Interest on short-term borrowings		1			-			1			4
Total interest expense		643			1,161			2,236			4,435
Net interest income		25,146			26,834			77,242			80,855
(Recovery of) provision for credit losses		(1,394	)		4,703			(7,625	)		12,034
Net interest income after provision for loan losses		26,540			22,131			84,867			68,821
Noninterest income
Wealth management		974			909			2,913			2,607
Service charges on deposits		3,599			3,250			9,728			9,541
Other service charges and fees		3,143			2,748			9,331			7,596
Net gain on sale of securities		-			-			-			385
Net FDIC indemnification asset amortization		-			(383	)		(1,226	)		(1,352	)
Other operating income		1,004			1,114			4,340			3,323
Total noninterest income		8,720			7,638			25,086			22,100
Noninterest expense
Salaries and employee benefits		10,646			10,485			31,746			32,886
Occupancy expense		1,155			1,228			3,545			3,818
Furniture and equipment expense		1,385			1,412			4,209			4,112
Service fees		1,530			1,581			4,378			4,433
Advertising and public relations		536			430			1,487			1,417
Professional fees		313			408			1,069			948
Amortization of intangibles		365			365			1,082			1,086
FDIC premiums and assessments		216			191			619			224
Merger expenses		-			-			-			1,893
Other operating expense		2,690			3,071			8,882			8,931
Total noninterest expense		18,836			19,171			57,017			59,748
Income before income taxes		16,424			10,598			52,936			31,173
Income tax expense		3,816			2,332			12,323			6,797
Net income	$	12,608		$	8,266		$	40,613		$	24,376

Earnings per common share
Basic	$	0.73		$	0.47		$	2.32		$	1.37
Diluted		0.73			0.47			2.32			1.37
Weighted average shares outstanding
Basic		17,221,244			17,710,283			17,457,477			17,803,369
Diluted		17,279,576			17,732,428			17,511,900			17,836,963

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2021*			*2020*			*2021*			*2020*
(Amounts in thousands)
Net income	$	12,608		$	8,266		$	40,613		$	24,376
Other comprehensive income, before tax
Available-for-sale debt securities:
Change in net unrealized (losses) gains on debt securities without other-than-temporary impairment		(207	)		(268	)		(1,007	)		873
Reclassification adjustment for net (gains) recognized in net income		-			-			-			(385	)
Net unrealized (losses) gains on available-for-sale debt securities		(207	)		(268	)		(1,007	)		488
Employee benefit plans:
Net actuarial (loss)		-			(1	)		(206	)		(446	)
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income		96			97			289			290
Net unrealized gains (losses) on employee benefit plans		96			96			83			(156	)
Other comprehensive (loss) income, before tax		(111	)		(172	)		(924	)		332
Income tax (benefit) expense		(23	)		(36	)		(194	)		70
Other comprehensive (loss) income, net of tax		(88	)		(136	)		(730	)		262
Total comprehensive income	$	12,520		$	8,130		$	39,883		$	24,638

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

THREE MONTHS ENDED

September 30, 2021 and 2020

												*Accumulated*
						*Additional*						*Other*
(Amounts in thousands,	*Preferred*		*Common*			*Paid-in*			*Retained*			*Comprehensive*
except share and per share data)	*Stock*		*Stock*			*Capital*			*Earnings*			*Income (Loss)*			*Total*

Balance July, 1 2020	$	-	$	17,710		$	172,601		$	226,627		$	(1,108	)	$	415,830
Net income		-		-			-			8,266			-			8,266
Other comprehensive income		-		-			-			-			(136	)		(136	)
Common dividends declared -- $0.25 per share		-		-			-			(4,429	)		-			(4,429	)
Equity-based compensation expense		-		1			262			-			-			263
Issuance of common stock to 401(k) plan -- 6,237 shares		-		6			117			-			-			123
Balance September 30, 2020	$	-	$	17,717		$	172,980		$	230,464		$	(1,244	)	$	419,917

Balance July, 1 2021	$	-	$	17,335		$	161,853		$	250,911		$	(2,565	)	$	427,534
Net income		-		-			-			12,608			-			12,608
Other comprehensive income		-		-			-			-			(88	)		(88	)
Common dividends declared -- $0.27 per share		-		-			-			(4,659	)		-			(4,659	)
Equity-based compensation expense		-		-			37			-			-			37
Common stock options exercised -- 9,371 shares		-		10			268			-			-			278
Issuance of common stock to 401(k) plan -- 3,967 shares		-		4			116			-			-			120
Repurchase of common shares -- 277,386 shares at $30.52 per share		-		(278	)		(8,188	)		-			-			(8,466	)
Balance September 30, 2021	$	-	$	17,071		$	154,086		$	258,860		$	(2,653	)	$	427,364

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Nine Months Ended

September 30, 2021 and 2020

												*Accumulated*
						*Additional*						*Other*
(Amounts in thousands,	*Preferred*		*Common*			*Paid-in*			*Retained*			*Comprehensive*
except share and per share data)	*Stock*		*Stock*			*Capital*			*Earnings*			*Income (Loss)*			*Total*

Balance January 1, 2020	$	-	$	18,377		$	192,413		$	219,535		$	(1,506	)	$	428,819
Net income		-		-			-			24,376			-			24,376
Other comprehensive income		-		-			-			-			262			262
Common dividends declared -- $0.75 per share		-		-			-			(13,447	)		-			(13,447	)
Equity-based compensation expense		-		57			1,311			-			-			1,368
Issuance of common stock to 401(k) plan -- 18,148 shares		-		18			393			-			-			411
Repurchase of common shares -- 734,653 shares at $29.77 per share		-		(735	)		(21,137	)		-			-			(21,872	)
Balance September 30, 2020	$	-	$	17,717		$	172,980		$	230,464		$	(1,244	)	$	419,917

Balance January 1, 2021	$	-	$	17,723		$	173,345		$	237,585		$	(1,923	)	$	426,730
Cumulative effect of adoption of ASU 2016-13		-		-			-			(5,870	)		-			(5,870	)
Net income		-		-			-			40,613			-			40,613
Other comprehensive income		-		-			-			-			(730	)		(730	)
Common dividends declared -- $0.77 per share		-		-			-			(13,468	)		-			(13,468	)
Equity-based compensation expense		-		42			816			-			-			858
Common stock options exercised -- 19,773 shares		-		20			268			-			-			288
Issuance of common stock to 401(k) plan -- 13,118 shares		-		13			360			-			-			373
Repurchase of common shares -- 726,686 shares at $29.49 per share		-		(727	)		(20,703	)		-			-			(21,430	)
Balance September 30, 2021	$	-	$	17,071		$	154,086		$	258,860		$	(2,653	)	$	427,364

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	*Nine Months Ended*
	*September 30,*
(Amounts in thousands)	*2021*			*2020*
Operating activities
Net income	$	40,613		$	24,376
Adjustments to reconcile net income to net cash provided by operating activities
(Recovery of) provision for credit losses		(7,625	)		12,034
Depreciation and amortization of premises and equipment		3,346			3,328
Amortization of premiums on investments, net		307			1,387
Amortization of FDIC indemnification asset, net		1,226			1,352
Amortization of intangible assets		1,082			1,086
Accretion on acquired loans		(3,599	)		(5,221	)
Equity-based compensation expense		858			1,368
Issuance of common stock to 401(k) plan		373			411
Loss on sale of premises and equipment, net		518			9
Loss on sale of other real estate owned		135			299
Gain on sale of securities		-			(385	)
Increase (decrease) in accrued interest receivable		906			(2,474	)
Decrease in other operating activities		(1,547	)		(5,542	)
Net cash provided by operating activities		36,593			32,028
Investing activities
Proceeds from sale of securities available for sale		370			51,027
Proceeds from maturities, prepayments, and calls of securities available for sale		20,813			29,614
Payments to acquire securities available for sale		(16,578	)		(2,553	)
Proceeds from repayment (origination) of loans, net		41,185			(78,663	)
Proceeds from (purchase of) FHLB stock, net		1,012			(12	)
Payments to the FDIC		-			(67	)
Proceeds from sale of premises and equipment		2,578			1,435
Payments to acquire premises and equipment		(2,454	)		(2,474	)
Proceeds from sale of other real estate owned		1,796			1,997
Net cash provided by investing activities		48,722			304
Financing activities
Increase in noninterest-bearing deposits, net		47,352			122,409
Increase in interest-bearing deposits, net		80,247			39,918
Proceeds from (repayments) of securities sold under agreements to repurchase, net		142			(645	)
Repayments of FHLB and other borrowings, net		-			(40	)
Proceeds from stock options exercised		288			-
Payments for repurchase of common stock		(21,430	)		(21,872	)
Payments of common dividends		(13,468	)		(13,447	)
Net cash provided by (used in) financing activities		93,131			126,323
Net increase in cash and cash equivalents		178,446			158,655
Cash and cash equivalents at beginning of period		456,561			217,009
Cash and cash equivalents at end of period	$	635,007		$	375,664

Supplemental disclosure -- cash flow information
Cash paid for interest	$	2,508		$	4,334
Cash paid for income taxes		11,989			5,607

Supplemental transactions -- noncash items
Transfer of loans to other real estate owned		1,147			695
Loans originated to finance other real estate owned		59			265
(Increase) decrease in accumulated other comprehensive loss		(730	)		262

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

General

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The reincorporation was completed on October 2, 2018. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community 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. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2021. The condensed consolidated balance sheet as of December 31, 2020, has been derived from the audited consolidated financial statements.

Reclassifications

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

Significant Accounting Policies

The Company’s significant accounting policies are included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2020 Form 10-K.

Allowance for Credit Losses (“ACL”)

On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments. The Company applied the ASU’s provisions using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021. The cumulative-effect adjustment was a decrease to retained earnings net of tax of $5.87 million. The Company is not required to restate comparative prior periods presented in the financial statements utilizing this method; but will present comparative prior periods disclosures using the previous accounting guidance for the allowance for loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

ACL – Investment Securities

The Company no longer evaluates securities for other-than-temporary impairment (“OTTI”), as ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter, 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 September 30, 2021 the accrued interest receivable for investment securities available for sale was $353 thousand.

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The Company’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. The Company does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Nonpayment of the amortized cost basis is not expected to be zero solely on the basis of the current value of collateral securing the security but, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate change since purchase, volatility of the security’s fair value and historical loss information for financial assets securitized with similar collateral. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Bank (“FHLB”), Federal Farm Credit Banks (“FFCB”) and Small Business Administration (“SBA”). All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. These securities are included in Government-Sponsored Entities Debt and Mortgage-Backed Securities line items in the Investment Securities footnote. Municipal securities and all other securities that do not have a zero expected credit loss will be evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.

ACL – Loans

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. 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 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).

For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses.

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. Management 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 either using a statistical regression modeling methodology.

Management 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.

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. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending polices 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.

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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 other than Troubled Debt Restructurings, otherwise referred to herein as “TDRs,” 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.

Management measures expected credit losses over the contractual term of the loans. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. The effects of a TDR are recorded when an individual asset is specifically identified as a reasonably-expected TDR. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower’s application for a modification (i.e. the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology to calculate the effect of the concession provided to the borrower in TDR within the ACL.

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.

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. As of September 30, 2021 the accrued interest receivable for loans was $7.77 million.

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. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of September 30, 2021 the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $678 thousand. The current adjustment to the ACL for unfunded commitments would be recognized through the provision for credit losses in the Statement of Income.

Risks and Uncertainties

COVID-19 Virus Developments –

During 2020 and continuing into 2021, government reaction to the novel coronavirus (“COVID-19”) pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services. As COVID-19 events unfolded during 2020 and 2021, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions.

Significant progress has been made to combat the outbreak of COVID-19; however, the global pandemic has adversely impacted a broad range of industries in which the Company's customers operate and could still impair their ability to fulfill their financial obligations to the Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as of September 30, 2021, if there is a resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company's future operations, the Company is disclosing potentially material items of which it is aware.

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Lending operations and accommodations to borrowers

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

In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other legislative and regulatory actions may materially impact the Company. The Company has participated in the Paycheck Protection Program (“PPP”), administered by the SBA, in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year or a five-year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through September 30, 2021 the Company processed a total of 1,429 loans with original principal balances totaling $92.58 million through both the first and second rounds of the PPP, with $60.99 million originated in the first round and $31.59 million originated in the second round. As of September 30, 2021 $56.74 million or 93.03%, of the Company's first round PPP loan balances have been forgiven by the SBA. As of September 30, 2021 28.22%, or $8.91 million of the second round PPP loans have been forgiven.

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

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

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Recent Accounting Standards

Standards Adopted in 2021

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. Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326. Comparative prior period disclosures will be presented using the guidance for the allowance for loan losses. 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			(5,871	)	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.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The Company adopted this ASU as of January 1, 2021, and it did not have a material effect on the Company's financial statements.

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

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Note 2. Debt Securities

There was no allowance for credit losses for investments as of September 30, 2021; therefore, it is not presented in the table below. The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

	*September 30, 2021*
	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Agency securities	$	491	$	-	$	(3	)	$	488
Municipal securities		31,866		240		-			32,106
Corporate notes		4,883		-		(3	)		4,880
Mortgage-backed Agency securities		39,808		743		(585	)		39,966
Total	$	77,048	$	983	$	(591	)	$	77,440

	*December 31, 2020*
	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Agency securities	$	555	$	—	$	(4	)	$	551
Municipal securities		43,950		509		—			44,459
Mortgage-backed Agency securities		37,453		992		(97	)		38,348
Total	$	81,958	$	1,501	$	(101	)	$	83,358

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

	*September 30, 2021*
	*Amortized*
(Amounts in thousands)	*Cost*		*Fair Value*
Available-for-sale debt securities
Due within one year	$	5,618	$	5,617
Due after one year but within five years		20,293		20,416
Due after five years but within ten years		11,329		11,441
		37,240		37,474
Mortgage-backed Agency securities		39,808		39,966
Total debt securities available for sale	$	77,048	$	77,440

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

	*September 30, 2021*
	*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	$	-	$	-		$	480	$	(3	)	$	480	$	(3	)
Corporate notes		4,880		(3	)		-		-			4,880		(3	)
Mortgage-backed Agency securities		16,792		(493	)		2,017		(92	)		18,809		(585	)
Total	$	21,672	$	(496	)	$	2,497	$	(95	)	$	24,169	$	(591	)

	*December 31, 2020*
	*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	$	—	$	—		$	544	$	(4	)	$	544	$	(4	)
Municipal securities		—		—			—		—			—		—
Mortgage-backed Agency securities		11,018		(97	)		—		—			11,018		(97	)
Total	$	11,018	$	(97	)	$	544	$	(4	)	$	11,562	$	(101	)

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There were 15 individual debt securities in an unrealized loss position as of September 30, 2021, and the combined depreciation in value represented 0.76% of the debt securities portfolio. There were 6 individual debt securities in an unrealized loss position as of December 31, 2020, and their combined depreciation in value represented 0.12% of the debt securities portfolio.

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. All debt securities available for sale in an unrealized loss position as of September 30, 2021 continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.

Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2021*		*2020*		*2021*		*2020*
(Amounts in thousands)
Gross realized gains	$	-	$	-	$	-	$	419
Gross realized losses		-		-		-		(34	)
Net Gain (Loss) on sale of securities	$	-	$	-	$	-	$	385

The carrying amount of securities pledged for various purposes totaled $23.80 million as of September 30, 2021, and $36.56 million as of December 31, 2020.

Note 3. Loans

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.65 million as of September 30, 2021, and $1.13 million as of December 31, 2020. Deferred loan fees, net of loan costs, totaled $5.40 million as of September 30, 2021, and $5.58 million as of December 31, 2020. For information about off-balance sheet financing, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed 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 current period September 30, 2021, to include net deferred loan fees of $5.40 million and unamortized discount total related to loans acquired of $6.18 million. Accrued interest receivable (AIR) of $7.77 million is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

The comparative periods in the table below reflect the loan portfolio prior to the adoption of ASU 2016-13. Prior periods were reported as shown in the below tables, with the acquired loans being net of unearned income and of related discounts, which includes the credit discount on the acquired credit impaired loans.

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Included in total loans December 31, 2020, were covered loans generally reimbursable by the FDIC at the applicable loss share percentage of 80%. Covered loan balances totaled $9.68 million at year-end 2020. The Company terminated its remaining loss share agreement with the FDIC effective, September 28, 2021 associated with Waccamaw Bank. The termination eliminates the FDIC guarantee on particular loan losses and removes future responsibility related to the agreement. The following table presents loans, net of unearned income, within the portfolio by loan class, as of the dates indicated:

	*September 30, 2021*					*December 31, 2020*
(Amounts in thousands)	*Amount*		*Percent*			*Amount*		*Percent*
Loans held for investment
Commercial loans
Construction, development, and other land	$	56,466		2.62	%	$	44,674		2.04	%
Commercial and industrial		133,923		6.22	%		173,024		7.91	%
Multi-family residential		100,444		4.67	%		115,161		5.27	%
Single family non-owner occupied		196,946		9.15	%		187,783		8.59	%
Non-farm, non-residential		711,861		33.08	%		734,793		33.60	%
Agricultural		9,784		0.45	%		9,749		0.45	%
Farmland		17,614		0.82	%		19,761		0.90	%
Total commercial loans		1,227,038		57.01	%		1,284,945		58.76	%
Consumer real estate loans
Home equity lines		83,079		3.86	%		96,526		4.41	%
Single family owner occupied		684,930		31.83	%		661,054		30.24	%
Owner occupied construction		25,551		1.19	%		17,720		0.81	%
Total consumer real estate loans		793,560		36.88	%		775,300		35.46	%
Consumer and other loans
Consumer loans		126,578		5.88	%		120,373		5.50	%
Other		4,927		0.23	%		6,014		0.28	%
Total consumer and other loans		131,505		6.11	%		126,387		5.78	%
Total loans held for investment, net of unearned income	$	2,152,103		100.00	%	$	2,186,632		100.00	%

The Company began participating as a Small Business Administration Paycheck Protection Program lender during the second quarter of 2020. At September 30, 2021, the PPP loans had a current balance of $26.93 million, compared to $57.06 million at December 31, 2020, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, totaled $4.34 million at September 30, 2021, and $2.3 million at December 31, 2020. During the third quarter of 2021, the Company recorded amortization of net deferred loan origination fees of $708 thousand on PPP loans and $2.24 million in amortization for the nine month period of 2021, compared with $287 thousand and $479 thousand for 2020 for the third quarter and nine-month period, respectively. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.

Prior to the adoption of ASU 2016-13, the Company identified certain purchased loans as impaired when fair values were established at acquisition and grouped those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company estimated cash flows to be collected on PCI loans and discounted those cash flows at a market rate of interest. Effective January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio. The only remaining PCI pools were those loans acquired in the Highlands acquisition on December 31, 2019.

The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:

	*December 31, 2020*
	*Recorded*		*Unpaid Principal*
(Amounts in thousands)	*Investment*		*Balance*
PCI Loans, by acquisition
Peoples	$	-	$	-
Waccamaw		-		-
Highlands		39,662		47,514
Other acquired		-		-
Total PCI Loans	$	39,662	$	47,514

The following table presents the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated:

	*Peoples*			*Waccamaw*			*Highlands*			*Total*
(Amounts in thousands)
Balance January 1, 2020	$	1,890		$	12,574		$	8,152		$	22,616
Accretion		-			-			(1,952	)		(1,952	)
Reclassifications (to) from nonaccretable difference⁽¹⁾		-			-			-			-
Other changes, net		(1,890	)		(12,574	)		-			(14,464	)
Balance September 30, 2020	$	-		$	-		$	6,200		$	6,200

(1) Represents changes attributable to expected loss assumptions

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Note 4. 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 table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Included in total loans December 31, 2020, were covered loans generally reimbursable by the FDIC at the applicable loss share percentage of 80%. Covered loan balances totaled $9.68 million year-end 2020.

	*September 30, 2021*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Commercial loans
Construction, development, and other land	$	54,228	$	1,151	$	1,087	$	-	$	-	$	56,466
Commercial and industrial		127,972		1,270		4,681		-		-		133,923
Multi-family residential		92,782		6,115		1,547		-		-		100,444
Single family non-owner occupied		182,006		4,931		9,999		10		-		196,946
Non-farm, non-residential		653,550		39,020		19,291		-		-		711,861
Agricultural		9,006		149		629		-		-		9,784
Farmland		13,032		1,069		3,513		-		-		17,614
Consumer real estate loans
Home equity lines		78,975		1,049		3,055		-		-		83,079
Single family owner occupied		650,705		2,535		31,690		-		-		684,930
Owner occupied construction		25,268		-		283		-		-		25,551
Consumer and other loans
Consumer loans		124,805		17		1,756		-		-		126,578
Other		4,927		-		-		-		-		4,927
Total loans	$	2,017,256	$	57,306	$	77,531	$	10	$	-	$	2,152,103

	*December 31, 2020*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*

Commercial loans
Construction, development, and other land	$	36,934	$	4,975	$	2,765	$	-	$	-	$	44,674
Commercial and industrial		160,625		7,065		5,519		-		-		173,209
Multi-family residential		103,291		8,586		3,284		-		-		115,161
Single family non-owner occupied		165,146		9,602		12,838		12		-		187,598
Non-farm, non-residential		568,438		125,907		40,448		-		-		734,793
Agricultural		7,724		1,686		339		-		-		9,749
Farmland		13,527		2,597		3,637		-		-		19,761
Consumer real estate loans												-
Home equity lines		91,712		1,488		3,326		-		-		96,526
Single family owner occupied		623,860		3,859		33,335		-		-		661,054
Owner occupied construction		17,232		201		287		-		-		17,720
Consumer and other loans												-
Consumer loans		118,134		28		2,211		-		-		120,373
Other		6,014		-		-		-		-		6,014
Total loans	$	1,912,637	$	165,994	$	107,989	$	12	$	-	$	2,186,632

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The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated.

(Amounts in thousands)	*Term Loans Amortized Cost Basis by Origination Year*
Balance at September 30, 2021	*2021*		*2020*		*2019*		*2018*		*2017*		*Prior*		*Revolving*		*Total*
Construction, development
and other land
Pass	$	28,542	$	9,501	$	3,687	$	3,908	$	1,564	$	6,672	$	354	$	54,228
Special Mention		-		245		-		136		684		50		36		1,151
Substandard		-		-		129		11		281		666		-		1,087
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total construction, development, and other land	$	28,542	$	9,746	$	3,816	$	4,055	$	2,529	$	7,388	$	390	$	56,466
Commercial and industrial
Pass	$	23,780	$	21,186	$	15,178	$	15,115	$	5,599	$	3,641	$	16,543	$	101,042
Special Mention		32		165		653		209		86		30		95		1,270
Substandard		187		196		833		390		1,242		1,316		517		4,681
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total commercial and industrial	$	23,999	$	21,547	$	16,664	$	15,714	$	6,927	$	4,987	$	17,155	$	106,993
Paycheck Protection Loans
Pass	$	22,680	$	4,250	$	-	$	-	$	-	$	-	$	-	$	26,930
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total Paycheck Protection Loans	$	22,680	$	4,250	$	-	$	-	$	-	$	-	$	-	$	26,930
Multi-family residential
Pass	$	8,908	$	25,468	$	4,774	$	1,960	$	4,972	$	45,766	$	934	$	92,782
Special Mention		5		-		-		-		2,663		3,447		-		6,115
Substandard		-		-		-		-		680		867		-		1,547
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total multi-family residential	$	8,913	$	25,468	$	4,774	$	1,960	$	8,315	$	50,080	$	934	$	100,444
Non-farm, non-residential
Pass	$	102,761	$	149,981	$	64,144	$	62,563	$	56,696	$	203,387	$	14,018	$	653,550
Special Mention		386		3,351		852		2,778		9,276		22,227		150		39,020
Substandard		1,115		689		2,989		2,856		4,804		6,611		227		19,291
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total non-farm, non-residential	$	104,262	$	154,021	$	67,985	$	68,197	$	70,776	$	232,225	$	14,395	$	711,861
Agricultural
Pass	$	4,326	$	1,825	$	1,152	$	612	$	379	$	278	$	434	$	9,006
Special Mention		44		29		26		8		32		10		-		149
Substandard		43		11		373		47		22		133		-		629
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total agricultural	$	4,413	$	1,865	$	1,551	$	667	$	433	$	421	$	434	$	9,784
Farmland
Pass	$	632	$	1,073	$	86	$	1,158	$	508	$	8,041	$	1,534	$	13,032
Special Mention		20		-		-		262		409		378		-		1,069
Substandard		-		10		970		155		265		2,113		-		3,513
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total farmland	$	652	$	1,083	$	1,056	$	1,575	$	1,182	$	10,532	$	1,534	$	17,614

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(Amounts in thousands)	*Term Loans Amortized Cost Basis by Origination Year*
Balance at September 30, 2021	*2021*		*2020*		*2019*		*2018*		*2017*		*Prior*		*Revolving*		*Total*
Home equity lines
Pass	$	199	$	1	$	-	$	26	$	-	$	5,259	$	73,490	$	78,975
Special Mention		-		-		-		124		-		100		825		1,049
Substandard		-		-		26		136		108		1,334		1,451		3,055
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total home equity lines	$	199	$	1	$	26	$	286	$	108	$	6,693	$	75,766	$	83,079
Single family Mortgage
Pass	$	184,220	$	228,685	$	66,797	$	48,592	$	43,567	$	259,661	$	1,189	$	832,711
Special Mention		395		523		956		372		1,058		4,162		-		7,466
Substandard		1,461		632		1,586		2,472		2,396		33,142		-		41,689
Doubtful		-		-		-		-		-		10		-		10
Loss		-		-		-		-		-		-		-		-
Total single family owner and non-owner occupied	$	186,076	$	229,840	$	69,339	$	51,436	$	47,021	$	296,975	$	1,189	$	881,876
Owner occupied construction
Pass	$	6,327	$	12,978	$	2,350	$	1,448	$	316	$	1,849	$	-	$	25,268
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		283		-		283
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total owner occupied construction	$	6,327	$	12,978	$	2,350	$	1,448	$	316	$	2,132	$	-	$	25,551
Consumer loans
Pass	$	53,230	$	36,762	$	20,291	$	5,842	$	2,273	$	9,108	$	2,226	$	129,732
Special Mention		-		-		16		-		-		-		1		17
Substandard		99		409		866		77		83		144		78		1,756
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total consumer loans	$	53,329	$	37,171	$	21,173	$	5,919	$	2,356	$	9,252	$	2,305	$	131,505

(Amounts in thousands)	*Term Loans Amortized Cost Basis by Origination Year*
Balance at September 30, 2021	*2021*		*2020*		*2019*		*2018*		*2017*		*Prior*		*Revolving*		*Total*
Total Loans
Pass	$	435,605	$	491,710	$	178,459	$	141,224	$	115,874	$	543,662	$	110,722	$	2,017,256
Special Mention		882		4,313		2,503		3,889		14,208		30,404		1,107		57,306
Substandard		2,905		1,947		7,772		6,144		9,881		46,609		2,273		77,531
Doubtful		-		-		-		-		-		10		-		10
Loss		-		-		-		-		-		-		-		-
Total loans	$	439,392	$	497,970	$	188,734	$	151,257	$	139,963	$	620,685	$	114,102	$	2,152,103

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Prior to the adoption of ASU 2016-13, the Company identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. When the Company determined that it was probable all principal and interest amounts due would not be collected in accordance with the contractual terms of the loan agreement, the loan was generally deemed impaired.

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the date indicated prior to the adoption of ASU 2016-13:

	*December 31, 2020*
			*Unpaid*
	*Recorded*		*Principal*		*Related*
(Amounts in thousands)	*Investment*		*Balance*		*Allowance*
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land	$	616	$	891	$	-
Commercial and industrial		2,341		2,392		-
Multi-family residential		946		1,593		-
Single family non-owner occupied		4,816		5,785		-
Non-farm, non-residential		8,238		9,467		-
Agricultural		218		226		-
Farmland		1,228		1,311		-
Consumer real estate loans
Home equity lines		1,604		1,772		-
Single family owner occupied		16,778		19,361		-
Owner occupied construction		216		216		-
Consumer and other loans
Consumer loans		818		833		-
Total impaired loans with no allowance		37,819		43,847		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		-		-		-
Multi-family residential		-		-		-
Single family non-owner occupied		-		-		-
Non-farm, non-residential		1,068		1,121		319
Farmland		-		-		-
Consumer real estate loans
Home equity lines		-		-		-
Single family owner occupied		338		338		108
Consumer and other loans
Consumer loans		-		-		-
Total impaired loans with an allowance		1,406		1,459		427
Total impaired loans(1)	$	39,225	$	45,306	$	427

(1)	Total recorded investment of impaired loans include loans totaling $31.18 million as of December 31, 2020, that do not meet the Company's evaluation threshold of $500 thousand for individual impairment and are therefore collectively evaluated for impairment.

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Prior to the adoption of ASU 2016-13, the Company presented the average recorded investment and interest income recognized on impaired loans, excluding PCI loans. The table below presents the information for the period indicated:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2020*				*2020*
			*Average*				*Average*
	*Interest Income*		*Recorded*		*Interest Income*		*Recorded*
(Amounts in thousands)	*Recognized*		*Investment*		*Recognized*		*Investment*
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	6	$	882	$	21	$	1,021
Commercial and industrial		46		3,315		135		2,845
Multi-family residential		9		967		38		685
Single family non-owner occupied		54		5,090		126		4,798
Non-farm, non-residential		79		7,786		206		7,115
Agricultural		4		272		7		247
Farmland		12		1,526		48		1,640
Consumer real estate loans
Home equity lines		13		1,588		29		1,569
Single family owner occupied		120		16,328		410		17,044
Owner occupied construction		2		542		12		470
Consumer and other loans
Consumer loans		8		420		19		445
Total impaired loans with no related allowance		353		38,716		1,051		37,879

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-		-		-
Commercial and industrial		-		-		-		-
Multi-family residential		-		944		-		943
Single family non-owner occupied		-		-		-		-
Non-farm, non-residential		8		1,789		22		1,670
Farmland		-		-		-		-
Consumer real estate loans
Home equity lines		-		-		-		-
Single family owner occupied		3		1,423		27		1,480
Owner occupied construction		-		-		-		-
Total impaired loans with a related allowance		11		4,156		49		4,093
Total impaired loans	$	364	$	42,872	$	1,100	$	41,972

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:

	*September 30, 2021*
(Amounts in thousands)	*No Allowance*		*With an Allowance*		*Total*
Commercial loans
Construction, development, and other land	$	385	$	-	$	385
Commercial and industrial		1,933		-		1,933
Multi-family residential		251		-		251
Single family non-owner occupied		2,759		-		2,759
Non-farm, non-residential		3,127		2,599		5,726
Agricultural		221		-		221
Farmland		222		-		222
Consumer real estate loans						-
Home equity lines		702		-		702
Single family owner occupied		9,086		-		9,086
Owner occupied construction		-		-		-
Consumer and other loans						-
Consumer loans		782		-		782
Total nonaccrual loans	$	19,468	$	2,599	$	22,067

During the three month period of 2021, $14 thousand in nonaccrual loan interest was recognized; for the nine month period of 2021 $38 thousand in nonaccrual loan interest was recognized.

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The following table presents nonaccrual loans prior to the adoption of ASU 2016-13. PCI loans were generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. Covered nonaccrual loans totaled $297 thousand at December 31, 2020; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the date indicated:



(Amounts in thousands)	*December 31, 2020*
Commercial loans
Construction, development, and other land	$	244
Commercial and industrial		895
Multi-family residential		946
Single family non-owner occupied		2,990
Non-farm, non-residential		6,343
Agricultural		217
Farmland		489
Consumer real estate loans
Home equity lines		1,122
Single family owner occupied		7,976
Owner occupied construction		-
Consumer and other loans
Consumer loans		781
Total nonaccrual loans	$	22,003

The following table 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.

	*September 30, 2021*
													*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	$	80	$	9	$	381	$	470	$	55,996	$	56,466	$	-
Commercial and industrial		534		197		1,309		2,040		131,883		133,923		-
Multi-family residential		-		98		35		133		100,311		100,444		-
Single family non-owner occupied		454		354		1,234		2,042		194,904		196,946		-
Non-farm, non-residential		1,199		1,577		2,430		5,206		706,655		711,861		-
Agricultural		31		19		181		231		9,553		9,784		-
Farmland		-		7		222		229		17,385		17,614		-
Consumer real estate loans
Home equity lines		555		87		452		1,094		81,985		83,079		-
Single family owner occupied		4,137		1,584		3,694		9,415		675,515		684,930		-
Owner occupied construction		-		-		-		-		25,551		25,551		-
Consumer and other loans
Consumer loans		2,753		761		363		3,877		122,701		126,578		5
Other		-		-		-		-		4,927		4,927		-
Total loans	$	9,743	$	4,693	$	10,301	$	24,737	$	2,127,366	$	2,152,103	$	5

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The following table presents the aging of past due loans, by loan class, as of the date indicated prior to the adoption of ASU 2016-13. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continued to accrue interest based on expected cash flows; therefore, PCI loans were not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $295 thousand as of December 31, 2020.

	*December 31, 2020*
	*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*
(Amounts in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*

Commercial loans
Construction, development, and other land	$	1,039	$	-	$	235	$	1,274	$	43,400	$	44,674
Commercial and industrial		669		230		700		1,599		171,425		173,024
Multi-family residential		103		-		946		1,049		114,112		115,161
Single family non-owner occupied		925		488		2,144		3,557		184,226		187,783
Non-farm, non-residential		601		296		3,368		4,265		730,528		734,793
Agricultural		70		189		88		347		9,402		9,749
Farmland		43		-		457		500		19,261		19,761
Consumer real estate loans
Home equity lines		649		380		425		1,454		95,072		96,526
Single family owner occupied		5,317		2,265		3,891		11,473		649,581		661,054
Owner occupied construction		82		-		-		82		17,638		17,720
Consumer and other loans
Consumer loans		2,637		746		651		4,034		116,339		120,373
Other		-		-		-		-		6,014		6,014
Total loans	$	12,135	$	4,594	$	12,905	$	29,634	$	2,156,998	$	2,186,632

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 probable, by type of collateral, and the extent to which they are collateralized during the period.

		*September 30, 2021*
(Amounts in thousands)	*Balance*		*Collateral Coverage*		%
Commercial Real Estate
Hotel	$	-	$	-		-
Office		-		-		-
Other		2,769		2,769		100.00	%
Retail		-		-		-
Multi-Family
Industrial		-		-		-
Office		-		-		-
Other		-		-		-
Commercial and industrial
Industrial		-		-		-
Other		-		-		-
Home equity loans		40		40		100.00	%
Consumer owner occupied		183		183		100.00	%
Consumer		-		-		-
Total collateral dependent loans	$	2,992	$	2,992		100.00	%

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2021, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

From March, 2020, through September 30, 2021, the Company modified a total of 3,958 loans with principal balances totaling $472.43 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of September 30, 2021, total COVID-19 loan deferrals stood at $4.71 million.

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

	*September 30, 2021*						*December 31, 2020*
(Amounts in thousands)	*Nonaccrual(1)*		*Accruing*		*Total*		*Nonaccrual(1)*		*Accruing*		*Total*
Commercial loans
Construction, development, and other land	$	-	$	213	$	213	$	-	$	-	$	-
Commercial and industrial		405		495		900		-		1,326		1,326
Single family non-owner occupied		871		356		1,227		1,585		1,265		2,850
Non-farm, non-residential		1,369		2,049		3,418		-		2,407		2,407
Consumer real estate loans
Home equity lines		-		69		69		-		77		77
Single family owner occupied		959		4,975		5,934		229		4,927		5,156
Owner occupied construction		-		-		-		-		216		216
Consumer and other loans
Consumer loans		-		28		28		-		30		30
Total TDRs	$	3,604	$	8,185	$	11,789	$	1,814	$	10,248	$	12,062

Allowance for credit losses related to TDRs					$	154					$	-

(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:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2021*		*2020*		*2021*		*2020*
(Amounts in thousands)
Interest income recognized	$	92	$	122	$	290	$	372

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:

	*Three Months Ended September 30,*
	*2021*						*2020*
					*Post-modification*						*Post-modification*
	*Total*		*Pre-modification*		*Recorded*		*Total*		*Pre-modification*		*Recorded*
(Amounts in thousands)	*Contracts*		*Recorded Investment*		*Investment(1)*		*Contracts*		*Recorded Investment*		*Investment(1)*
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		-		-		-
Single family owner occupied		2		302		283		-		-		-
Total below market interest rate and extended payment term		2		302		283		-		-		-
Payment deferral
Construction, development, and other land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Single family non-owner occupied		-		-		-		-		-		-
Non-farm, non-residential		-		-		-		-		-		-
Single family owner occupied		-		-		-		-		-		-
Total principal deferral		-		-		-		-		-		-
Total		2	$	302	$	283		-	$	-	$	-

(1)	Represents the loan balance immediately following modification

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	*Nine Months Ended September 30,*
	*2021*						*2020*
					*Post-modification*						*Post-modification*
	*Total*		*Pre-modification*		*Recorded*		*Total*		*Pre-modification*		*Recorded*
(Amounts in thousands)	*Contracts*		*Recorded Investment*		*Investment(1)*		*Contracts*		*Recorded Investment*		*Investment(1)*
Below market interest rate Single family non-owner occupied		-		-		-		1	$	50	$	50
Total below market interest rate		-		-		-		1		50		50
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		-		-		-
Single family owner occupied		2		302		283		-		-		-
Total below market interest rate and extended payment term		2		302		283		-		-		-
Payment deferral
Construction, development, and other land		-		-		-		1		63		63
Commercial and industrial		-		-		-		3		1,708		1,708
Single family non-owner occupied		-		-		-		1		529		529
Non-farm, non-residential		1		1,390		1,368		3		2,115		2,115
Single family owner occupied		-		-		-		3		742		726
Home equity lines		-		-		-		-		-		-
Total principal deferral		1		1,390		1,368		11		5,157		5,141
Total		3	$	1,692	$	1,651		12	$	5,207	$	5,191

(1)	Represents the loan balance immediately following modification

There was one payment default on loans modified as TDRs restructured within the previous 12 months for $1.37 million.as of September 30, 2021, and one loan for $100 thousand as of September 30, 2020

The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:

	September 30, 2021		December 31, 2020
(Amounts in thousands)
OREO	$	1,240	$	2,083

OREO secured by residential real estate	$	540	$	769
Residential real estate loans in the foreclosure process⁽¹⁾	$	3,114	$	4,141

(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

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Note 5. Allowance for Credit Losses

The following tables present the changes in the allowance for credit losses, by loan segment, during the periods indicated.

	*Three Months Ended September 30, 2021*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	17,704		$	11,055		$	3,098		$	31,857
Provision for (recovery of) loan losses charged to operations		(1,504	)		(317	)		427			(1,394	)
Charge-offs		(407	)		(195	)		(653	)		(1,255	)
Recoveries		285			179			205			669
Net charge-offs		(122	)		(16	)		(448	)		(586	)
Ending balance	$	16,078		$	10,722		$	3,077		$	29,877

	*Three Months Ended September 30, 2020*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	13,909		$	7,294		$	2,555		$	23,758
Provision for loan losses charged to operations		1,972			1,975			756			4,703
Charge-offs		(501	)		(188	)		(874	)		(1,563	)
Recoveries		169			38			172			379
Net charge-offs		(332	)		(150	)		(702	)		(1,184	)
Ending balance	$	15,549		$	9,119		$	2,609		$	27,277

	*Nine Months Ended September 30, 2021*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	14,661		$	8,951		$	2,570		$	26,182
Cumulative effect of adoption of ASU 2016-13		8,360			4,145			602			13,107
Provision for (recovery of) loan losses charged to operations		(6,286	)		(2,845	)		1,506			(7,625	)
Charge-offs		(2,366	)		(253	)		(2,268	)		(4,887	)
Recoveries		1,709			724			667			3,100
Net charge-offs		(657	)		471			(1,601	)		(1,787	)
Ending balance	$	16,078		$	10,722		$	3,077		$	29,877

	*Nine Months Ended September 30, 2020*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,235		$	6,325		$	1,865		$	18,425
Provision for loan losses charged to operations		6,577			2,899			2,558			12,034
Charge-offs		(1,647	)		(430	)		(2,352	)		(4,429	)
Recoveries		384			325			538			1,247
Net (charge-offs) recoveries		(1,263	)		(105	)		(1,814	)		(3,182	)
Ending balance	$	15,549		$	9,119		$	2,609		$	27,277

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The following table presents the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the date indicated prior to the adoption of ASU 2016-13:

	*December 31, 2020*
	*Loans Individually*		*Allowance for Loans*		*Loans Collectively*		*Allowance for Loans*
	*Evaluated for*		*Individually*		*Evaluated for*		*Collectively*
(Amounts in thousands)	*Impairment*		*Evaluated*		*Impairment*		*Evaluated*
Commercial loans
Construction, development, and other land	$	-	$	-	$	43,716	$	528
Commercial and industrial		724		-		171,486		1,024
Multi-family residential		695		-		112,852		1,417
Single family non-owner occupied		1,041		-		183,283		1,861
Non-farm, non-residential		3,916		319		714,160		9,097
Agricultural		-		-		9,728		218
Farmland		-		-		17,540		196
Total commercial loans		6,376		319		1,252,765		14,341
Consumer real estate loans
Home equity lines		-		-		95,765		799
Single family owner occupied		1,673		108		647,040		7,849
Owner occupied construction		-		-		17,567		195
Total consumer real estate loans		1,673		108		760,372		8,843
Consumer and other loans
Consumer loans		-		-		119,770		2,570
Other		-		-		6,014		-
Total consumer and other loans		-		-		125,784		2,570
Total loans, excluding PCI loans	$	8,049	$	427	$	2,138,921	$	25,754

The following table presents the recorded investment in PCI loans and the allowance for loan losses on PCI loans, by loan pool, as of the date indicated prior to the adoption of ASU 2016-13:

	*December 31, 2020*
			*Allowance for Loan*
	*Recorded*		*Pools With*
(Amounts in thousands)	*Investment*		*Impairment*
Commercial loans
Highlands:
Construction & land development	$	958	$	-
Farmland and other agricultural		2,242		-
Multifamily		1,614		-
Commercial real estate		20,176		-
Commercial and industrial		814		-
Total commercial loans		25,804		-
Consumer real estate loans
Highlands:
1-4 family, junior and HELOCS		761		-
1-4 family, senior-consumer		12,494		-
Consumer		603		-
Total consumer real estate loans		13,858		-
Total PCI loans	$	39,662	$	-

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Note 6. Deposits

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

	*September 30, 2021*		*December 31, 2020*
(Amounts in thousands)
Noninterest-bearing demand deposits	$	820,147	$	772,795
Interest-bearing deposits:
Interest-bearing demand deposits		650,610		598,148
Money market accounts		285,866		258,864
Savings deposits		545,634		495,821
Certificates of deposit		251,191		293,848
Individual retirement accounts		120,398		126,771
Total interest-bearing deposits		1,853,699		1,773,452
Total deposits	$	2,673,846	$	2,546,247

Note 7. Leases

Operating leases are recorded as a right of use (“ROU”) asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.

The Company’s current operating leases relate primarily to bank branches. The Company’s ROU asset was $763 thousand as of September 30, 2021 compared to $830 thousand as of December 31, 2020. The operating lease liability as of September 30, 2021 was $800 thousand compared to $891 thousand as of December 31, 2020. The Company’s total operating leases have remaining terms of 1-8 years; compared with 1-9 years as of December 31, 2020. The September 30, 2021 weighted average discount rate of 3.22% did not change from December 31, 2020.

Future minimum lease payments as of the dates indicated are as follows:

Year	*September 30, 2021*
(Amounts in thousands)
2022	$	139
2023		119
2024		119
2025		104
2026 and thereafter		387
Total lease payments		868
Less: Interest		(68	)
Present value of lease liabilities	$	800

Year	*December 31, 2020*
(Amounts in thousands)
2021	$	154
2022		131
2023		119
2024		117
2025 and thereafter		463
Total lease payments		984
Less: Interest		(93	)
Present value of lease liabilities	$	891

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Note 8. Borrowings

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

	*September 30, 2021*					*December 31, 2020*
			*Weighted*					*Weighted*
(Amounts in thousands)	*Balance*		*Average Rate*			*Balance*		*Average Rate*
Retail repurchase agreements	$	1,106		0.07	%	$	964		0.32	%

Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements.

As of September 30, 2021, the Company had no long-term borrowings.

Unused borrowing capacity with the FHLB totaled $291.99 million, net of FHLB letters of credit of $151.75 million, as of September 30, 2021. As of September 30, 2021, the Company pledged $752.46 million in qualifying loans to secure the FHLB borrowing capacity.

Note 9. 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 uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. In March 2020, the Company adopted ASU 2020-04, "Reference Rate Reform" which provided temporary guidance to ease the potential burden in accounting for reference rate reform. With global capital markets moving away from LIBOR, the guidance provided optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships that reference LIBOR. The migration from LIBOR is not expected to have any material effect on the Company's financial statements when and as changes are made to migrate from the reference 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 September 30, 2021. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.

The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

	*September 30, 2021*						*December 31, 2020*
	*Notional or*		*Fair Value*				*Notional or*		*Fair Value*
	*Contractual*		*Derivative*		*Derivative*		*Contractual*		*Derivative*		*Derivative*
(Amounts in thousands)	*Amount*		*Assets*		*Liabilities*		*Amount*		*Assets*		*Liabilities*
Derivatives designated as hedges
Interest rate swaps	$	4,486	$	-	$	292	$	4,772	$	-	$	465
Derivatives not designated as hedges
Interest rate swaps	$	7,949			$	730	$	11,928			$	666
Total derivatives	$	12,435	$	-	$	1,022	$	16,700	$	-	$	1,131

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

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
(Amounts in thousands)	*2021*		*2020*		*2021*		*2020*		*Income Statement Location*
Derivatives designated as hedges
Interest rate swaps	$	27	$	29	$	83	$	66	Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps	$	45	$	51	$	163	$	106	Interest and fees on loans
Total derivative expense	$	72	$	80	$	246	$	172

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Note 10. Employee Benefit Plans

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan and the Directors’ Supplemental Retirement Plan. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2021*		*2020*		*2021*		*2020*		*Income Statement Location*
(Amounts in thousands)
Service cost	$	88	$	77	$	264	$	232	Salaries and employee benefits
Interest cost		78		88		236		266	Other expense
Amortization of prior service cost		31		51		92		151	Other expense
Amortization of losses		65		46		197		139	Other expense
Net periodic cost	$	262	$	262	$	789	$	788

Note 11. Earnings per Share

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2021*		*2020*		*2021*		*2020*
(Amounts in thousands, except share and per share data)
Net income	$	12,608	$	8,266	$	40,613	$	24,376

Weighted average common shares outstanding, basic		17,221,244		17,710,283		17,457,477		17,803,369
Dilutive effect of potential common shares
Stock options		33,370		16,163		31,094		23,711
Unvested stock awards		24,962		5,982		23,329		9,883
Total dilutive effect of potential common shares		58,332		22,145		54,423		33,594
Weighted average common shares outstanding, diluted		17,279,576		17,732,428		17,511,900		17,836,963

Basic earnings per common share	$	0.73	$	0.47	$	2.32	$	1.37
Diluted earnings per common share		0.73		0.47		2.32		1.37

Antidilutive potential common shares
Stock options		-		78,016		13,990		61,241
Unvested stock awards		-		26,012		214		27,874
Total potential antidilutive shares		-		104,028		14,204		89,115

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Note 12. Accumulated Other Comprehensive Income (Loss)

The following tables present the changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax and by component, during the periods indicated:

	*Three Months Ended September 30, 2021*
	*Unrealized Gains*
	*(Losses) on Available-*
	*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	474		$	(3,039	)	$	(2,565	)
Other comprehensive loss before reclassifications		(164	)		(1	)		(165	)
Reclassified from AOCI		-			77			77
Other comprehensive loss income, net		(164	)		76			(88	)
Ending balance	$	310		$	(2,963	)	$	(2,653	)

	*Three Months Ended September 30, 2020*
	*Unrealized Gains*
	*(Losses) on Available-*
	*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	1,464		$	(2,572	)	$	(1,108	)
Other comprehensive loss before reclassifications		(213	)		1			(212	)
Reclassified from AOCI		-			76			76
Other comprehensive income, net		(213	)		77			(136	)
Ending balance	$	1,251		$	(2,495	)	$	(1,244	)

	*Nine Months Ended September 30, 2021*
	*Unrealized Gains*
	*(Losses) on Available-*
	*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	1,106		$	(3,029	)	$	(1,923	)
Other comprehensive loss before reclassifications		(796	)		(163	)		(959	)
Reclassified from AOCI		-			229			229
Other comprehensive loss, net		(796	)		66			(730	)
Ending balance	$	310		$	(2,963	)	$	(2,653	)

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	*Nine Months Ended September 30, 2020*
	*Unrealized Gains*
	*(Losses) on Available-*
	*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	866		$	(2,372	)	$	(1,506	)
Other comprehensive income (loss)
before reclassifications		689			(352	)		337
Reclassified from AOCI		(304	)		229			(75	)
Other comprehensive income (loss), net		385			(123	)		262
Ending balance	$	1,251		$	(2,495	)	$	(1,244	)

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*					*Income Statement*
(Amounts in thousands)	*2021*		*2020*		*2021*		*2020*			*Line Item Affected*
Available-for-sale securities
Gain recognized	$	-	$	-	$	-	$	(385	)	Net loss on sale of securities
Reclassified out of AOCI, before tax		-		-		-		(385	)	Income before income taxes
Income tax expense		-		-		-		(81	)	Income tax expense
Reclassified out of AOCI, net of tax		-		-		-		(304	)	Net income
Employee benefit plans
Amortization of prior service cost	$	31	$	51	$	92	$	150		Salaries and employee benefits
Amortization of net actuarial benefit cost		65		46		197		140		Salaries and employee benefits
Reclassified out of AOCI, before tax		96		97		289		290		Income before income taxes
Income tax expense		20		21		61		61		Income tax expense
Reclassified out of AOCI, net of tax		76		76		228		229		Net income
Total reclassified out of AOCI, net of tax	$	76	$	76	$	228	$	(75	)	Net income

(1)	Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."

Note 13. Fair Value

Financial Instruments Measured at Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:

●

Level 1 – Observable, unadjusted quoted prices in active markets

●

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

●

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

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

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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 that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.

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

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

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

	*September 30, 2021*
	*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	$	488	$	-	$	488	$	-
Municipal securities		32,106		-		32,106		-
Corporate Notes		4,880				4,880
Mortgage-backed Agency securities		39,966		-		39,966		-
Total available-for-sale debt securities		77,440		-		77,440		-
Equity securities		55		-		55		-
Fair value loans		13,326		-		-		13,326
Deferred compensation assets		4,901		4,901		-		-
Deferred compensation liabilities		4,901		4,901		-		-
Derivative liabilities		1,022		-		1,022		-

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

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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 impairment 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:

	*September 30, 2021*
	*Total*		*Fair Value Measurements Using*
	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Collateral dependent assets with specific reserves	$	2,992	$	-	$	-	$	2,992
OREO	$	1,240	$	-	$	-	$	1,240

	*December 31, 2020*
	*Total*		*Fair Value Measurements Using*
	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Impaired loans, Pre-ASU 2016-13	$	979	$	-	$	-	$	979
OREO		2,083		-		-		2,083

Quantitative Information about Level 3 Fair Value Measurements

The following tables 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*	*September 30, 2021*

Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		0% to 30% (10%)
OREO	Discounted appraisals(1)	Appraisal adjustments(2)		0% to 87% (29%)

(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, 2020*

Impaired loans, non-covered	Discounted appraisals(1)	Appraisal adjustments(2)		22% to 38% (30%)
OREO	Discounted appraisals(1)	Appraisal adjustments(2)		8% to 77% (25%)

(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.

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Fair Value of Financial Instruments

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of valuation methodologies used for instruments not previously discussed is as follows:

Cash and Cash Equivalents. Cash and cash equivalents fair value is estimated at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Accrued Interest Receivable/Payable. Accrued interest receivable/payable fair value is estimated at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

Deposits and Securities Sold Under Agreements to Repurchase. Deposits and repurchase agreements with fixed maturities and rates are estimated at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.

FHLB and Other Borrowings. FHLB and other borrowings are estimated at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities.

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

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

	*September 30, 2021*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	635,007	$	635,007	$	635,007	$	-	$	-
Debt securities available for sale		77,440		77,440		-		77,440		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,122,226		2,086,930		-		-		2,086,930
Interest receivable		8,146		8,146		-		8,146		-
Deferred compensation assets		4,901		4,901		4,901		-		-

Liabilities
Time deposits		371,589		370,567		-		370,567		-
Securities sold under agreements to repurchase		1,106		1,106		-		1,106		-
Interest payable		345		345		-		345		-
Derivative financial liabilities		1,022		1,022		-		1,022		-
Deferred compensation liabilities		4,901		4,901		4,901		-		-

	*December 31, 2020*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	456,561	$	456,561	$	456,561	$	-	$	-
Debt securities available for sale		83,358		83,358		-		83,358		-
Equity securities		55		55		-		55		-
Loans held for sale		-		-		-		-		-
Loans held for investment, net of allowance		2,160,450		2,126,221		-		-		2,126,221
FDIC indemnification asset		1,223		509		-		-		509
Interest receivable		9,052		9,052		-		9,052		-
Deferred compensation assets		4,181		4,181		4,181		-		-

Liabilities
Time deposits		420,619		423,120		-		423,120		-
Securities sold under agreements to repurchase		964		964		-		964		-
Interest payable		582		582		-		582		-
Derivative liabilities		4,181		4,181		4,181		-		-
Deferred compensation liabilities		1,131		1,131		-		1,131		-

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Note 14. Litigation, Commitments, and Contingencies

Litigation

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

Commitments and Contingencies

The Company is a party to financial instruments with off balance 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:

	*September 30, 2021*		*December 31, 2020*
(Amounts in thousands)
Commitments to extend credit	$	270,105	$	229,408
Standby letters of credit and financial guarantees⁽¹⁾		154,610		179,022
Total off-balance sheet risk	$	424,715	$	408,430

Allowance for unfunded commitments	$	678	$	66

(1)	Includes FHLB letters of credit

ITEM 2. 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 and our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

Executive Overview

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of September 30, 2021, the Bank operated 49 branches as First Community Bank in Virginia, West Virginia, North Carolina and Tennessee. As of September 30, 2021, full-time equivalent employees, calculated using the number of hours worked, totaled 598. 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. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

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The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of September 30, 2021, the Trust Division and FCWM managed and administered $1.27 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Recent Events: COVID-19

Our business has been, and continues to be, impacted by the COVID-19 pandemic. As the pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including the ongoing impact to our customers, employees, and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). Although significant progress has been made to combat the outbreak of COVID-19 with the availability and distribution of COVID-19 vaccines and lock-down restrictions have been eased, we recognize that our business and consumer customers are continuing to experience varying degrees of financial distress, which we expect to continue, though to a lesser degree, throughout 2021. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID-19 pandemic, which may result in our customers' inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic appear to have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. We continue to monitor our customers in the energy, hotel/lodging, restaurants, entertainment, retail and commercial real estate businesses, which have been significantly impacted by the COVID-19 pandemic. We recognize that the industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID-19 pandemic.

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. The goal of these actions has been to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program "PPP". In addition to the general impact of COVID-19, certain provisions of legislative and regulatory relief efforts have had a material impact on the Company's operations and could continue to impact operations going forward.

The PPP loan program was extended and amended through additional legislation during 2020. The Consolidated Appropriations Act of 2021 was adopted in December, 2020, to provide additional COVID-19 relief and among other measures, extended weekly unemployment benefits, provided another round of economic stimulus payments to individuals and families, lengthened temporary suspensions and modifications of several bank-related provisions and provided more aid to small businesses. The 2021 Consolidated Appropriations Act reauthorized and appropriated up to $284.5 billion for the PPP for both first-time and second-time borrowers to receive loan disbursements for a period ending March 31, 2021, expanded the list of eligible PPP expenses and created a simplified loan forgiveness application for loans under $150 thousand.

President Biden has signed a number of executive orders relating to stimulus and relief measures. These orders include, among other things, (i) an extension, through March 31, 2021, of the moratorium on evictions and foreclosures on federally-backed mortgages, (ii) an extension, through September 30, 2021, of the deferral of federal student loan payments and interest and (iii) an extension, through June 30, 2021, of certain mortgage forbearance programs and guidelines.

On September 9, 2021, President Biden issued an Executive Order (EO) announcing a proposed new rule requiring all employers with at least 100 employees to ensure that their employees are fully vaccinated or require unvaccinated workers to get a negative COVID test at least weekly. The Department of Labor's Occupational Safety and Health Administration (OSHA) drafted an emergency regulation to carry out this mandate. OSHA has now released its Emergency Temporary Standard (ETS), as directed by President Biden’s EO, which establishes binding requirements related to COVID vaccination and/or testing for large employers (100 or more employees). This ETS appears to be applicable to the Company. The ETS is complex, but in some ways lacking in detail. Accordingly, implementation and enforcement will be difficult, time consuming, and extremely risky. Absent Court intervention, the ETS will become effective in 2 phases as follows:

By December 5, 2021:

●

Covered employers must develop a mandatory policy that either (1) requires vaccination for all employees or (2) allows employees who are not fully vaccinated to elect to undergo weekly testing and wear a face covering in the workplace. Policy must include not only these elements, but must also include, among other things, everything discussed in these bullet points with implementation and enforcement beginning by the specified effective dates (12/5 or 1/5).

	●	Covered employers must determine the vaccination status of each employee, obtain acceptable proof of vaccination, maintain records of each employee’s vaccination status, and maintain a roster of each employee’s vaccination status. The ETS requires proof of vaccination. In addition to normal protections for these records, there is an “availability of records” section in the ETS. Employers must “make available to an employee, or an employee representative, the aggregate number of fully vaccinated employees at a workplace along with the total number of employees at that workplace.”
	●	Covered employers must provide employees reasonable time, including up to four hours of paid time, to receive each vaccination dose, and reasonable time and paid sick leave to recover from side effects experienced following each dose.

	●	Covered employers must ensure that all unvaccinated employees wear a face covering when indoors or when occupying a vehicle with another person for work purposes. There are minimal exceptions. Other employees are voluntary unless otherwise required by a state or locality.
	●	Covered employers must provide employees the following in a language and at a literacy level the employee understands: (1) information about the requirements of the ETS and workplace policies and procedures established to implement the ETS; (2) the CDC document “Key Things to Know About COVID-19 Vaccines” (3) information about protections against retaliation and discrimination; and (4) information about the laws that provide for criminal penalties for knowingly supplying false statements or documentation.

By January 5, 2022:

●

Covered employers must require that all employees who are not fully vaccinated be tested for COVID at least weekly if in the workplace at least once a week or within 7 days before returning to work if away from the workplace for a week or longer.

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Compliance with the ETS will require extensive effort and resources by the Company over a very short period of time. All new policies and procedures will need to be compliant with both state and federal law. While this ETS is meant to pre-empt state law where inconsistent, additional state requirements, such as those from VOSH, will still apply (e.g. there is now a hospitalization/fatality reporting requirement to OSHA in addition to our VOSH reporting requirements). The expense and risks to the Company associated with complying with the ETS, and possession by the Company of employee personal healthcare information, could be significant. Otherwise, it is currently not possible to predict with certainty the additional impact the ETS will have on the Company, but potential results could include employee attrition. Lost employees could have an adverse effect on future operations, including the temporary need to close branches or other facilities, lost revenues, and additional operating costs, any of which could be material.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals. Among other things, the ARP Act provides (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the Small Business Administration (“SBA”) to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and makes $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026, non-taxable income, and (vii) funding to support state and local governments; K-12 schools and higher education; the Centers for Disease Control; public transit; rental assistance; child care; and airline industry workers.

On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was enacted, extending the bankruptcy relief provisions enacted in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act of 2020 bill until March 27, 2022. These provisions provide financially distressed small businesses and individuals greater access to bankruptcy relief.

On March 30, 2021, the PPP Extension Act of 2021 was enacted, extending the Paycheck Protection Program from its previous expiration date of March 31, 2021 to June 30, 2021. Beginning June 1, 2021, the SBA may only process applications submitted prior to that date, and it may not accept any new loan applications. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.

The Company's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While it appears that epidemiological and macroeconomic conditions are trending in a positive direction as of September 30, 2021, if there is a resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company's future operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

In 2020, COVID-19 had a material impact on our allowance for credit losses. While we did not experience any significant charge-offs related to COVID-19, our allowance calculation and resulting provision for credit losses were significantly impacted by governmental reactions and forced shutdowns. On January 1, 2021, we adopted ASU 2016-13, ("CECL"), which had the effect of increasing our allowance for credit losses by $13.11 million largely due to the uncertainty around the impact of COVID-19 which adversely affected the economic forecasts that were utilized in the adoption. In the first nine months of 2021, the economic forecasts improved significantly and credit quality remained strong; with both factors contributing to a reversal of provision for credit losses of $7.63 million. However, should economic conditions or forecasts worsen and credit quality deteriorate, we could experience further increase in our required allowance for credit losses and record additional provision for credit. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company's fee income has been reduced due to COVID-19. Consumer spending behavior has proven to be very conservative during the pandemic resulting in a decrease in overdraft behavior that generates NSF and other fee income. However, as lock-down restrictions have either eased or been lifted, the Company is beginning to experience an upward trend in these fees. Recovering from a negative trend throughout the last half of 2020 and the first quarter of 2021, service charges on deposits increased $187 thousand or 1.96%, year to date from 2020, and there was an increase of $349 thousand in the third quarter of 2021, or 10.74%, compared to the same quarter of last year. Should the pandemic and the global response escalate further, it is possible that the Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.

The Company's interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of September 30, 2021, the Company carried $3.15 million of accrued income and fees on outstanding deferrals made to COVID-19 affected borrowers compared to $3.47 million at year-end 2020.

Capital and liquidity

As of September 30, 2021, the Company and Bank 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 that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of September 30, 2021. While we believe that we have sufficient capital, our reported and regulatory capital ratios could be adversely impacted by loan losses and other negative trends initiated by the pandemic. We rely on cash on hand as well as dividends from the Bank to pay dividends to our shareholders. If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay dividends to our shareholders.

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

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Asset valuation

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

Our processes, controls and business continuity plan

The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the pandemic declaration, the Company's Enterprise Risk Management team implemented its Board approved Business Continuity Plan. The Company appointed an internal pandemic preparedness task force comprised of the Company's management to address both operational and financial risks posed by COVID-19. Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company's preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations. At September 30, 2021, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods. In addition, employee availability has had limited impact on operations to date.

As of September 30, 2021, we do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

The CARES Act as amended included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2021, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act. Through September 30, 2021, we have modified a total of 3,958 commercial and consumer loans totaling $472.43 million. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of September 30, 2021, current COVID-19 loan deferrals stood at $4.71 million. It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, that extended the ability to provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on modified loans is unknown.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and conform to general practices within the banking industry. Our financial position and results of operations may require management to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve, or when an asset or liability needs recorded based on the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices, when available, or third-party sources. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.

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 Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5 — "Allowance for Credit Losses" in this Quarterly Report on Form 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A. Periods prior to the January 1, 2021, adoption of ASU 2016-13 follow prior accounting guidance for estimated loan losses and may not be comparable.

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2020 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2020 Form 10-K.

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Performance Overview

Highlights of our results of operations for the three and nine months ended September 30, 2021, and financial condition as of September 30, 2021, include the following:

●

Net income for the quarter increased $4.34 million to $12.61 million compared to the same quarter of 2020. The large increase in net income includes the reversal of $1.39 million in allowance for credit losses for the third quarter of 2021 compared to the $4.70 million in loan loss provision that was recorded in the third quarter of 2020. Net income for the nine month period ended September 30, 2021, increased $16.24 million compared to the same period of 2020. Similarly, for the nine month period, a reversal of $7.63 million in the allowance for credit losses accounts for 2021 compared to the $12.03 million in loan loss provision for the same period in 2020 accounts for a large part of the increase in net income over the same period in 2020. The decreases in credit loss provisioning are primarily due to significantly improved economic forecasts and GDP growth and solid credit quality metrics in the current year, and prior year provisioning driven by the pandemic.

●

On January 26, 2021, the Board of Directors approved a new plan to repurchase, on the open market at prevailing prices, up to 2.4 million shares of the Company's common stock through January 26, 2024. During the quarter, the Company repurchased 277,386 common shares for $8.46 million. Year-to-date the Company has repurchased 726,686 common shares for $21.43 million.

	●	The Company terminated its remaining loss share agreement with the FDIC and received a payment of $176 thousand in consideration. The termination eliminates the FDIC guarantee on particular loan losses associated with Waccamaw Bank and removes future responsibility related to the agreement.
	●	Diluted earnings per share increased $0.26 to $0.73 compared to the same quarter of 2020. Diluted earnings per share for the nine month period increased $0.95 to $2.32 compared to 2020.

	●	Annualized return on average equity increased to 11.65% compared to 7.83% over the same quarter of 2020, and annualized return on average equity for the first nine months increased to 12.70% compared to 7.76% from the same period last year.
	●	Annualized return on average assets increased to 1.59% compared to 1.11% over the same quarter of 2020, while year-to-date annualized return on average assets increased to 1.74% compared to 1.14% for the same period of 2020.
	●	Net charge-offs for the third quarter of 2021 were $586 thousand, or 0.11% annualized of average loans, and non-performing loans to total loans remains a very low 1.05%. The allowance for credit losses to total loans remains very strong at 1.39% of total loans.
	●	Book value per common share at September 30, 2021, was $25.03, an increase of $0.95 from year-end 2020.

Results of Operations

Net Income

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

	Three Months Ended												Nine Months Ended
(Amounts in thousands, except per	September 30,						Increase						September 30,						Increase
share data)	2021			2020			(Decrease)			% Change			2021			2020			(Decrease)			% Change

Net income	$	12,608		$	8,266		$	4,342			52.53	%	$	40,613		$	24,376		$	16,237			66.61	%

Basic earnings per common share		0.73			0.47			0.26			55.32	%		2.32			1.37			0.95			69.34	%
Diluted earnings per common share		0.73			0.47			0.26			55.32	%		2.32			1.37			0.95			69.34	%

Return on average assets		1.59	%		1.11	%		0.48	%		43.24	%		1.74	%		1.14	%		0.60	%		52.63	%
Return on average common equity		11.65	%		7.83	%		3.82	%		48.79	%		12.70	%		7.76	%		4.94	%		63.66	%

Three-Month Comparison. Net income increased $4.34 million in the third quarter of 2021 largely due to a $6.10 million decrease in the provision for credit losses as a result of recovering $1.39 million of credit loss provision to recognize the impact of significantly improving economic forecasts, GDP growth, and improving unemployment rates and to prior year provisioning driven by the pandemic. This increase was offset by a decrease in net interest income of $1.69 million, reflective of the current historic low rate environment.

Nine-Month Comparison. Net income increased $16.24 million in the first nine months of 2021 largely due to a $19.66 million decrease in the provision for credit losses as a result of recovering $7.63 million of credit loss provision to recognize the impact of significantly improving economic forecasts, GDP growth, and improving unemployment rates and to prior year provisioning driven by the pandemic. Additional increases were due to $1.89 million in residual merger expenses that were recognized in the first quarter of 2020. In addition, other service charges increased $1.74 million and the Company received $1.00 million for a recovery of an acquired loan from a failed bank acquisition that had been written down prior to acquisition, which is included in other operating income on the consolidated statement of income. These increases were offset by decreases of $3.61 million in net interest income, reflective of the current historic low rate environment, $781 thousand for the write-down in value of bank property, and $710 thousand in accelerated indemnification asset amortization to write the carrying value of the asset to zero in the second quarter of 2021 as the remaining loss share agreement with the FDIC associated with Waccamaw Bank was terminated in September of 2021.

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Net Interest Income

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

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Three Months Ended September 30,
	2021							2020
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest(1)		Rate(1)			Balance		Interest(1)		Rate(1)
Assets
Earning assets
Loans⁽²⁾⁽³⁾	$	2,149,647	$	25,161		4.64	%	$	2,171,023	$	27,331		5.01	%
Securities available for sale		79,995		509		2.52	%		93,263		720		3.07	%
Interest-bearing deposits		586,787		225		0.15	%		352,144		90		0.10	%
Total earning assets		2,816,429		25,895		3.65	%		2,616,430		28,141		4.28	%
Other assets		330,679							344,285
Total assets	$	3,147,108						$	2,960,715

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	651,237	$	27		0.02	%	$	580,165	$	73		0.05	%
Savings deposits		826,144		63		0.03	%		720,657		136		0.08	%
Time deposits		378,895		552		0.58	%		448,275		951		0.84	%
Total interest-bearing deposits		1,856,276		642		0.13	%		1,749,097		1,160		0.26	%
Borrowings
Retail repurchase agreements		1,040		1		0.07	%		969		1		0.14	%
Total borrowings		1,040		1		0.07	%		969		1		0.14	%
Total interest-bearing liabilities		1,857,316		643		0.14	%		1,750,066		1,161		0.26	%
Noninterest-bearing demand deposits		824,112							754,147
Other liabilities		36,419							36,379
Total liabilities		2,717,847							2,540,592
Stockholders' equity		429,261							420,123
Total liabilities and stockholders' equity	$	3,147,108						$	2,960,715
Net interest income, FTE⁽¹⁾			$	25,252						$	26,980
Net interest rate spread						3.51	%						4.02	%
Net interest margin, FTE⁽¹⁾						3.56	%						4.10	%

(1)	Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%.
(2)	Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.01 million and $1.77 million for the three months ended September 30, 2021 and 2020, respectively.

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AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Nine Months Ended September 30,
	2021							2020
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest(1)		Rate(1)			Balance		Interest(1)		Rate(1)
Assets
Earning assets
Loans(2)(3)	$	2,149,556	$	77,722		4.83	%	$	2,127,383	$	82,476		5.18	%
Securities available for sale		82,563		1,590		2.57	%		110,852		2,619		3.16	%
Interest-bearing deposits		555,435		509		0.12	%		270,106		706		0.34	%
Total earning assets		2,787,554		79,821		3.83	%		2,508,341		85,801		4.57	%
Other assets		331,239							351,589
Total assets	$	3,118,793						$	2,859,930

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	639,809	$	99		0.02	%	$	543,539	$	261		0.06	%
Savings deposits		807,863		217		0.04	%		702,604		790		0.15	%
Time deposits		395,465		1,919		0.65	%		466,126		3,380		0.97	%
Total interest-bearing deposits		1,843,137		2,235		0.15	%		1,712,269		4,431		0.35	%
Borrowings
Retail repurchase agreements		1,179		1		0.07	%		1,218		3		0.32	%
FHLB advances and other borrowings		-		-	N/M				48		1	2.23		%
Total borrowings		1,179		1		0.07	%		1,266		4		0.42	%
Total interest-bearing liabilities		1,844,316		2,236		0.16	%		1,713,535		4,435		0.35	%
Noninterest-bearing demand deposits		809,128							688,891
Other liabilities		37,871							38,001
Total liabilities		2,691,315							2,440,427
Stockholders' equity		427,478							419,503
Total liabilities and stockholders' equity	$	3,118,793						$	2,859,930
Net interest income, FTE(1)			$	77,585						$	81,366
Net interest rate spread						3.67	%						4.22	%
Net interest margin, FTE(1)						3.72	%						4.33	%

(1)	Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%.
(2)	Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash and accelerated purchase accounting accretion of $3.45 million and $5.22 million for the nine months ended September 30, 2021 and 2020, respectively.

The following table presents the impact to net interest income on a FTE basis due to changes in volume (change in 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:

	Three Months Ended												Nine Months Ended
	September 30, 2021 Compared to 2020												September 30, 2021 Compared to 2020
	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	$	(801	)	$	(5,924	)	$	4,555		$	(2,170	)	$	859		$	(5,485	)	$	(128	)	$	(4,754	)
Securities available-for-sale		(305	)		(382	)		476			(211	)		(668	)		(482	)		121			(1,029	)
Interest-bearing deposits with other banks		179			131			(175	)		135			724			(439	)		(482	)		(197	)
Total interest earning assets		(927	)		(6,175	)		4,856			(2,246	)		915			(6,406	)		(489	)		(5,980	)

Interest paid on
Demand deposits		27			(146	)		73			(46	)		46			(177	)		(31	)		(162	)
Savings deposits		59			(242	)		110			(73	)		118			(601	)		(90	)		(573	)
Time deposits		(438	)		(896	)		935			(399	)		(512	)		(1,117	)		168			(1,461	)
Retail repurchase agreements		-			(1	)		1			-			-			(1	)		(1	)		(2	)
FHLB advances and other borrowings		-			-			-			-			(1	)		-			-			(1	)
Total interest-bearing liabilities		(352	)		(1,285	)		1,119			(518	)		(349	)		(1,896	)		46			(2,199	)

Change in net interest income(1)	$	(575	)	$	(4,890	)	$	3,737		$	(1,728	)	$	1,264		$	(4,510	)	$	(535	)	$	(3,781	)

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

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Three-Month Comparison. Net interest income comprised 74.25% of total net interest and noninterest income in the third quarter of 2021 compared to 77.84% in the same quarter of 2020. Net interest income on a GAAP basis decreased $1.69 million, or 6.29%, compared to a decrease of $1.73 million, or 6.40%, on a FTE basis. The net interest margin on a FTE basis decreased 54 basis points and the net interest spread on a FTE basis decreased 51 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment.

Average earning assets increased $200.00 million, or 7.64%, primarily due to an increase in overnight funds. Average interest-bearing deposits increased $234.64 million, or 66.63%. This increase is primarily due to unprecedented levels of federal government stimulus during the pandemic. Average loans decreased $21.38 million, or 0.98% primarily driven by payments received from the SBA for debt forgiveness of loans originated under the Small Business Administration Paycheck Protection Program. In addition securities available-for-sale decreased $13.27 million, or 14.23%. The decrease was primarily attributable to maturities and paydowns of securities in the portfolio. The yield on earning assets decreased 63 basis points or 14.72%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to 80.20% from 86.73% in the same quarter of 2020. Non-cash accretion income decreased $756 thousand, or 42.83%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $107.25 million, or 6.13%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 12 basis points. Average interest-bearing deposits increased $107.20 million, or 6.13%, which was driven by unprecedented levels of federal government stimulus during the pandemic. Savings deposits increased $105.49 million, or 14.64%, and interest-bearing demand deposits increased $71.07 million, or 12.25%. These increases were offset by a decrease in time deposits of $69.38 million, or 15.48%.

Nine-Month Comparison. Net interest income comprised 75.48% of total net interest and noninterest income in the first nine months of 2021 compared to 78.53% in the same period of 2020. Net interest income on a GAAP basis decreased $3.61 million, or 4.47%, compared to a decrease of $3.78 million, or 4.65%, on a FTE basis. The net interest margin on a FTE basis decreased 61 basis points and the net interest spread on a FTE basis decreased 55 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment.

Average earning assets increased $279.21 million, or 11.13%, primarily due to an increase in overnight funds and an increase in average loans. Average interest-bearing deposits increased $285.33 million or 105.64%. This increase is primarily due to unprecedented levels of federal government stimulus during the pandemic. Average loans increased $22.17 million, or 1.04%. These increases were offset by a decrease in securities available-for-sale of $28.29 million, or 25.52%. The decrease was primarily attributable to the sale of the Highlands portfolio in the first quarter of 2020. The yield on earning assets decreased 74 basis points or 16.19%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to 81.05% from 88.60% in the same period of 2020. Non-cash accretion income decreased $1.77 million, or 33.91%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $130.78 million, or 7.63%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 19 basis points. Average interest-bearing deposits increased $130.87 million, or 7.64%, which was driven by unprecedented levels of federal government stimulus during the pandemic. Savings deposits increased $105.26 million, or 14.98% and interest-bearing demand deposits increased $96.27 million, or 17.71%. These increases were offset by a decrease in time deposits of $70.66 million, or 15.16%.

Provision for Credit Losses

Three-Month Comparison. The provision charged to operations decreased $6.10 million, or 129.64%, in the third quarter of 2021 compared to the same quarter of 2020. The decrease is attributable to the reversal of $1.39 million in allowance for credit losses for the the current quarter compared to $4.70 million in loan loss provision that was recorded in the same quarter of 2020. The reversal in provision was due to significantly improved economic forecasts for unemployment, GDP growth, and home prices from those used for the same period in 2020.

Nine-Month Comparison. The provision charged to operations decreased $19.66 million, or 163.36%, in the first nine months of 2021 compared to the same period of 2020. The decrease is attributable to the reversal of $7.63 million in allowance for credit losses for the the current nine month period compared to $12.03 million in loan loss provision that was recorded in the same period of 2020. The reversal in provision was due to significantly improved economic forecasts for unemployment, GDP growth, and home prices from those used for the same period in 2020.

Noninterest Income

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

	Three Months Ended											Nine Months Ended
	September 30,					Increase			%			September 30,						Increase			%
	2021		2020			(Decrease)			Change			2021			2020			(Decrease)			Change
(Amounts in thousands)
Wealth management	$	974	$	909		$	65			7.15	%	$	2,913		$	2,607		$	306			11.74	%
Service charges on deposits		3,599		3,250			349			10.74	%		9,728			9,541			187			1.96	%
Other service charges and fees		3,143		2,748			395			14.37	%		9,331			7,596			1,735			22.84	%
Net gain on sale of securities		-		-			-			-			-			385			(385	)		-100.00	%
Net FDIC indemnification asset amortization		-		(383	)		383			-100.00	%		(1,226	)		(1,352	)		126			-9.32	%
Other operating income		1,004		1,114			(110	)		-9.87	%		4,340			3,323			1,017			30.60	%
Total noninterest income	$	8,720	$	7,638		$	1,082			14.17	%	$	25,086		$	22,100		$	2,986			13.51	%

Three-Month Comparison. Noninterest income comprised 25.75% of total net interest and noninterest income in the third quarter of 2021 compared to 22.16% in the same quarter of 2020. Noninterest income increased $1.08 million or 14.17%. Other service charges increased $395 thousand, or 14.37% and service charges on deposits increased $349 thousand, or 10.74% compared with the third quarter of 2020. Both increases are attributable to increased customer activity compared to the activity levels experienced during the pandemic lock-downs of 2020. Additionally, no FDIC indemnification asset amortization was recognized during the third quarter of 2021 as the asset was fully amortized in the second quarter of 2021. The remaining loss share agreement with the FDIC associated with Waccamaw Bank was terminated at the end of September 2021.

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Nine-Month Comparison. Noninterest income comprised 24.52% of total net interest and noninterest income in the first nine months of 2021 compared to 21.47% in the same period of 2020. Noninterest income increased $2.99 million, or 13.51%. The increase was primarily due to an increase in other services charges of $1.74 million, or 22.84%, due primarily to an increase in net interchange income of $1.59 million, compared to the nine month period in 2020. In addition, a recovered amount of $1.00 million was received and recorded in other operating income during the second quarter of 2021 for the recovery of an acquired loan from a failed bank acquisition that had been written down prior to acquisition. These increases were offset by a gain on the sale of securities of $385 thousand in the first quarter of 2020.

Noninterest Expense

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

	Three Months Ended										Nine Months Ended
	September 30,				Increase			%			September 30,				Increase			%
	2021		2020		(Decrease)			Change			2021		2020		(Decrease)			Change
(Amounts in thousands)
Salaries and employee benefits	$	10,646	$	10,485	$	161			1.54	%	$	31,746	$	32,886	$	(1,140	)		-3.47	%
Occupancy expense		1,155		1,228		(73	)		-5.94	%		3,545		3,818		(273	)		-7.15	%
Furniture and equipment expense		1,385		1,412		(27	)		-1.91	%		4,209		4,112		97			2.36	%
Service fees		1,530		1,581		(51	)		-3.24	%		4,378		4,433		(55	)		-1.24	%
Advertising and public relations		536		430		106			24.65	%		1,487		1,417		70			4.94	%
Professional fees		313		408		(95	)		-23.28	%		1,069		948		121			12.76	%
Amortization of intangibles		365		365		-			0.00	%		1,082		1,086		(4	)		-0.37	%
FDIC premiums and assessments		216		191		25			13.09	%		619		224		395			176.34	%
Merger expense		-		-		-			-			-		1,893		(1,893	)		-100.00	%
Other operating expense		2,690		3,071		(381	)		-12.41	%		8,882		8,931		(49	)		-0.55	%
Total noninterest expense	$	18,836	$	19,171	$	(335	)		-1.75	%	$	57,017	$	59,748	$	(2,731	)		-4.57	%

Three-Month Comparison. Noninterest expense decreased $335 thousand, or 1.75%, in the third quarter of 2021 compared to the same quarter of 2020. The decrease was largely due to 2020 charges of $230 thousand for an early contract termination and a decrease in communications charges of $222 thousand; both charges are included in other operating expense. Additional decreases occurred in professional fees of $95 thousand and $73 thousand in occupancy expense. These decreases were offset by increases in salaries and employee benefits of $161 thousand and advertising expense of $106 thousand.

Nine-Month Comparison. Noninterest expense decreased $2.73 million, or 4.57%, in the first nine months of 2021 compared to the same period of 2020. The decrease was largely due to $1.89 million in residual merger expenses recognized in the first quarter of 2020. In addition salaries and employee benefits decreased $1.14 million due to COVID-19 pay differentials implemented in 2020 as well as from branch closures. These decreases were offset by an increase in FDIC premiums and assessments of $395 thousand due to the small bank credit received from the FDIC in 2020.

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.

Three-Month Comparison. Income tax expense increased $1.48 million, or 63.64% and the effective tax rate increased to 23.23% in the third quarter of 2021 from 22.00% in the same quarter of 2020. The increases were primarily attributable to an increase in fully taxable income.

Nine-Month Comparison. Income tax expense increased $5.53 million, or 81.30% and the effective tax rate increased to 23.28% in the first nine months of 2021 from 21.80% in the same period of 2020. The increases were primarily attributable to an increase in fully taxable income.

Non-GAAP Financial Measures

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-GAAP financial measure presented in this report includes net interest income on a FTE basis. We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 21%. While we believe certain non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
(Amounts in thousands)
Net interest income, GAAP	$	25,146		$	26,834		$	77,242		$	80,855
FTE adjustment(1)		106			146			343			511
Net interest income, FTE		25,252			26,980			77,585			81,366

Net interest margin, GAAP		3.54	%		4.08	%		3.70	%		4.30	%
FTE adjustment(1)		0.02	%		0.02	%		0.02	%		0.03	%
Net interest margin, FTE		3.56	%		4.10	%		3.72	%		4.33	%

(1) FTE basis of 21%.

Financial Condition

Total assets as of September 30, 2021, increased $128.58 million, or 4.27% from December 31, 2020. The increase in assets was primarily driven by a increase in overnight funds of $186.53 million, or 47.13%. In addition, total liabilities as of September 30, 2021, increased $127.94 million, or 4.95% from December 31, 2020. The increase in liabilities was primarily the result of an increase in total deposits of $127.60 million, or 5.01%.

Investment Securities

Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.

Available-for-sale debt securities as of September 30, 2021, decreased $5.92 million, or 7.10%, compared to December 31, 2020. The market value of debt securities available for sale as a percentage of amortized cost was 100.51% as of September 30, 2021, compared to 101.71% as of December 31, 2020.

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. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. 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. All debt securities available for sale in an unrealized loss position as of September 30, 2021 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

Loans Held for Investment

Loans held for investment, which generates the 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. Effective September 28, 2021, the Company terminated its remaining loss share agreement with the FDIC associated with Waccamaw Bank and received a payment of $176 thousand in consideration. The termination eliminates the FDIC guarantee on particular loan losses associated with Waccamaw Bank and removes future responsibility related to the agreement. Prior to the termination, certain loans acquired in the FDIC-assisted transaction were covered under the loss share agreement and noted as (“covered loans”). Covered loans were $9.68 million, and $10.74 million at December 31, 2020, and September 30, 2020, respectively. Total loans held for investment, net of unearned income, as of September 30, 2021, decreased $34.53 million, or 1.58%, compared to December 31, 2020.

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

	September 30, 2021					December 31, 2020					September 30, 2020
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Loans held for investment
Commercial loans
Construction, development, and other land	$	56,466		2.62	%	$	44,674		2.04	%	$	46,812		2.13	%
Commercial and industrial		133,923		6.22	%		173,024		7.91	%		179,714		8.19	%
Multi-family residential		100,444		4.67	%		115,161		5.27	%		105,647		4.81	%
Single family non-owner occupied		196,946		9.15	%		187,783		8.59	%		189,453		8.63	%
Non-farm, non-residential		711,861		33.08	%		734,793		33.60	%		748,815		34.11	%
Agricultural		9,784		0.45	%		9,749		0.45	%		10,362		0.47	%
Farmland		17,614		0.82	%		19,761		0.90	%		22,973		1.05	%
Total commercial loans		1,227,038		57.01	%		1,284,945		58.76	%		1,303,776		59.39	%
Consumer real estate loans
Home equity lines		83,079		3.86	%		96,526		4.41	%		102,135		4.65	%
Single family owner occupied		684,930		31.83	%		661,054		30.24	%		647,048		29.48	%
Owner occupied construction		25,551		1.19	%		17,720		0.81	%		17,460		0.80	%
Total consumer real estate loans		793,560		36.88	%		775,300		35.46	%		766,643		34.93	%
Consumer and other loans
Consumer loans		126,578		5.88	%		120,373		5.50	%		118,738		5.41	%
Other		4,927		0.23	%		6,014		0.28	%		5,838		0.26	%
Total consumer and other loans		131,505		6.11	%		126,387		5.78	%		124,576		5.67	%
Total loans held for investment, net of unearned income		2,152,103		100.00	%		2,186,632		100.00	%		2,194,995		100.00	%
Less: allowance for credit losses		29,877					26,182					27,277
Total loans held for investment, net of unearned income and allowance	$	2,122,226				$	2,160,450				$	2,167,718

Total loans decreased $34.53 million compared to December 31, 2020. The decrease was primarily attributable to a decrease in the total commercial loan category of $57.91 million; comprised of decreases of $39.10 in commercial and industrial, $22.93 in commercial real estate, and $14.72 million in multi-family. These decreases were offset by an increase in construction, development, and land of $11.79 million and an increase in single family non-owner occupied of $9.16 million. During the second quarter of 2020, we began participating as a Small Business Administration Paycheck Protection Program lender. The decrease in commercial loans from December 2020 to September 2021 is primarily attributable to $65.65 million received from the SBA for debt forgiveness. At September 30, 2021, the PPP loans had a current balance, which includes second round originations, of $26.93 million, and were included in commercial and industrial loan balances. Remaining deferred loan origination fees related to the PPP loans, net of deferred loan origination costs were also recorded, totaling $4.34 million at September 30, 2021, $2.30 million at December 31, 2020, and $2.30 million at September 30, 2020. During the third quarter of 2021, we recorded amortization of net deferred loan origination fees of $708 thousand on PPP loans; for the nine month period of 2021 we recorded amortization of net fees of $2.24 million. In 2020, amortization of net deferred loan origination fees on PPP loans totaled $287 thousand, while year to date totals totaled $479 thousand. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. The decreases in the both the commercial real estate and multi-family were primarily attributable payoffs of loans acquired in the Highlands Union Bank acquisition.

Loans Modified Under CARES Act

As of September 30, 2021, total COVID-19 loan deferrals stood at $4.71 million; down significantly from $115.63 million at September 30, 2020, and from $32.26 million at December 31, 2020. The September 30, 2021, total included $2.00 million in commercial loan deferrals. Commercial loan COVID-19 deferrals continue to decrease from $102.54 million at September 30, 2020 and year-end 2020 of $26.54 million.

Risk Elements

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

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Prior to the adoption of ASU 2016-13 ("CECL"), loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual.

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

	September 30, 2021			December 31, 2020			September 30, 2020
(Amounts in thousands)
Nonperforming
Nonaccrual loans	$	22,067		$	22,003		$	24,756
Accruing loans past due 90 days or more		5			295			43
TDRs(1)		584			187			456
Total nonperforming loans		22,656			22,485			25,255
OREO		1,240			2,083			2,103
Total nonperforming assets	$	23,896		$	24,568		$	27,358


Additional Information
Total Accruing TDRs(2)		8,185			10,248			10,936


Asset Quality Ratios:
Nonperforming loans to total loans		1.05	%		1.03	%		1.15	%
Nonperforming assets to total assets		0.76	%		0.82	%		0.93	%
Allowance for loan losses to nonperforming loans		131.87	%		116.44	%		108.01	%
Allowance for loan losses to total loans		1.39	%		1.20	%		1.24	%

(1)	TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $3.03 million, $1.18 million, and $1.57 million for the periods ended September 30, 2021, December 31, 2020, and September 30, 2020, respectively. They are included in nonaccrual loans.
(2)	Total accruing TDRs exclude nonaccrual TDRs of $3.60 million, $1.81 million, and $2.04 million for the periods ended September 30, 2021, December 31, 2020, and September 30, 2020, respectively. They are included in nonaccrual loans.

Nonperforming assets as of September 30, 2021, decreased $672 thousand, or 2.73%, from December 31, 2020, primarily due to a decrease in OREO of $843 thousand, or 40.47%, as well as a decrease in loans 90 days past due of $290 thousand, or 98.30%. These decreases were offset by an increase in non-performing TDRs of $397 thousand. As of September 30, 2021, nonaccrual loans were largely attributed to single family owner occupied (41.17%), non-farm, non-residential (25.95%), and single family non-owner occupied loans (12.50%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $31.36 million as of September 30, 2021, a decrease of $4.76 million, or 13.19%, compared to $36.12 million as of December 31, 2020. Delinquent loans as a percent of total loans totaled 1.46% as of September 30, 2021, which includes past due loans (0.43%) and nonaccrual loans (1.03%).

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When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of September 30, 2021, decreased $2.06 million, or 20.13%, to $8.19 million from December 31, 2020. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of September 30, 2021, increased $397 thousand compared to December 31, 2020. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 7.14% as of September 30, 2021, compared to 1.82% as of December 31, 2020. There was $154 thousand in specific reserves related to TDRs as of September 30, 2021, compared to $353 thousand as of December 31, 2020.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2021, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through September 30, 2021 we had modified a total of 3,958 loans for $472.43 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company has upgraded these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of September 30, 2021, current COVID-19 loan deferrals stood at $4.71 million, down significantly from $115.63 million at September 30, 2020, and from $32.26 million at December 31, 2020.

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $843 thousand, or 40.47%, as of September 30, 2021, compared to December 31, 2020, and consisted of 17 properties with an average holding period of approximately 12 months. The net loss on the sale of OREO totaled $135 thousand for the nine months ended September 30, 2021, compared to a net loss of $296 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

	Nine Months Ended September 30,

	2021			2020
(Amounts in thousands)
Beginning balance	$	2,083		$	3,969
Additions		1,147			695
Disposals		(1,738	)		(2,139	)
Valuation adjustments		(252	)		(422	)
Ending balance	$	1,240		$	2,103

Allowance for Credit Losses

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.

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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 loans from an incurred loss method to a life of loan method. See Note 1 – "Basis of Presentation - Significant Accounting Policies" for further details. As of September 30, 2021, the balance of the ACL for loans was $29.88 million, or 1.39% of total loans. The ACL at September 30, 2021, increased $5.68 million from the balance of $26.18 million recorded before the adoption of the new standard on January 1, 2021. This increase included a $13.11 million cumulative adjustment for the adoption of ASU 2016-13 offset by a reversal of provision of $7.63 million and net charge-offs for the nine months of $1.79 million. The reversal in provision for both the three months and nine months ended September 30, 2021, was due to significantly improved economic forecasts for unemployment, GDP growth, and home prices from those used at year-end 2020.

At September 30, 2021, the Company also had an allowance for unfunded commitments of $678 thousand which was recorded in Other Liabilities on the Balance Sheet. With the adoption of ASU 2016-13 effective January 1, 2021, the Company increased its allowance for credit losses on unfunded commitments by $509 thousand. During 2020, the provision for credit losses on unfunded commitments was $66 thousand which was recorded in the provision for credit losses on the Statement of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financial assets during 2021.

The following table presents the changes in the allowance for credit losses for loans during the periods indicated:


	Three Months Ended September 30,
	2021			2020

(Amounts in thousands)
Beginning balance	$	31,857		$	23,758
Provision for (recovery of) loan losses charged to operations		(1,394	)		4,703
Charge-offs		(1,255	)		(1,563	)
Recoveries		669			379
Net charge-offs		(586	)		(1,184	)
Ending balance	$	29,877		$	27,277

	Nine Months Ended September 30,

	2021			2020
(Amounts in thousands)
Beginning balance	$	26,182		$	18,425
Cumulative effect of adoption of ASU 2016-13		13,107			-
Provision for (recovery of) loan losses charged to operations		(7,625	)		12,034
Charge-offs		(4,887	)		(4,429	)
Recoveries		3,100			1,247
Net charge-offs		(1,787	)		(3,182	)
Ending balance	$	29,877		$	27,277

Deposits

Total deposits as of September 30, 2021, increased $127.60 million, or 5.01%, compared to December 31, 2020. The increase was largely attributable to savings and interest-bearing demand deposits which increased $76.82 million, or 10.18% and $52.46 million, or 8.77%, respectively. Noninterest-bearing demand deposits also reflected growth with an increase of $47.35 million, or 6.13%. These increases were offset by a decrease in time deposits of $49.03 million, or 11.66%. We attribute a significant amount of the increase in deposits to the unprecedented level of federal government stimulus during the first quarter of 2021.

Borrowings

Total borrowings as of September 30, 2021, increased $142 thousand, or 14.73%, compared to December 31, 2020.

Liquidity and Capital Resources

Liquidity

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

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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 September 30, 2021, the Company’s cash reserves totaled $11.49 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of September 30, 2021, our unencumbered cash totaled $635.01 million, unused borrowing capacity from the FHLB totaled $291.99 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $90.00 million, and unpledged available-for-sale securities totaled $53.63 million.

Cash Flows

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

	Nine Months Ended September 30,
	2021		2020
(Amounts in thousands)
Net cash provided by operating activities	$	36,593	$	32,028
Net cash provided by investing activities		48,722		304
Net cash provided by (used in) financing activities		93,131		126,323
Net increase in cash and cash equivalents		178,446		158,655
Cash and cash equivalents, beginning balance		456,561		217,009
Cash and cash equivalents, ending balance	$	635,007	$	375,664

Cash and cash equivalents increased $178.45 million for the nine months ended September 30, 2021, compared to an increase of $158.66 million for the same period of the prior year. The increase in cash and cash equivalents for the nine month period was due largely to proceeds received from the SBA for debt forgiveness for loans originated through the Small Business Administration's Paycheck Protection Lending program.

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 September 30, 2021, increased $634 thousand, or 0.15%, to $427.36 million from $426.73 million as of December 31, 2020. The change in stockholders’ equity was largely due to net income of $40.61 million offset by the repurchase of 726,686 shares of our common stock totaling $21.43 million and dividends declared on our common stock of $13.47 million and by the cumulative effect adjustment resulting from the adoption of ASU 2016-13 of $5.87 million, net of tax. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders’ equity in the calculation of our capital ratios. Our book value per common share increased $0.95, or 3.95%, to $25.03 as of September 30, 2021, from $24.08 as of December 31, 2020.

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. A description of the Basel III capital rules is included in Part I, Item 1 of the 2020 Form 10-K. Our current required capital ratios are as follows:

●

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

●

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

●

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

●

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

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

	September 30, 2021		December 31, 2020
	Company	Bank	Company	Bank

Common equity Tier 1 ratio	14.57%	13.55%	14.28%	13.57%
Tier 1 risk-based capital ratio	14.57%	13.55%	14.28%	13.57%
Total risk-based capital ratio	15.82%	14.80%	15.53%	14.82%
Tier 1 leverage ratio	9.78%	9.10%	10.24%	9.73%

Our risk-based capital ratios as of September 30, 2021, increased from December 31, 2020, due to a decrease in our risk-weighted assets. The decrease in risk-weighted assets was primarily due to the decrease in total loans from year-end 2020. As of September 30, 2021, 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 as of September 30, 2021.

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Off-Balance Sheet Arrangements

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

	September 30, 2021		December 31, 2020
(Amounts in thousands)
Commitments to extend credit	$	270,105	$	229,408
Standby letters of credit and financial guarantees (1)		154,610		179,022
Total off-balance sheet risk	$	424,715	$	408,430

Allowance for unfunded commitments	$	678	$	66

(1)	Includes FHLB letters of credit

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

As of September 30, 2021, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 0 to 25 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

	September 30, 2021					December 31, 2020
	Change in		Percent			Change in		Percent
Increase (Decrease) in Basis Points	Net Interest Income		Change			Net Interest Income		Change
(Dollars in thousands)
300	$	14,776		15.15	%	$	8,429		8.50	%
200		10,140		10.40	%		5,912		6.00	%
100		5,557		5.70	%		3,130		3.20	%

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Inflation and Changing Prices

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

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) at the end of 2021, the Company has developed a LIBOR transition plan. In 2018, the Company discontinued the use of LIBOR as a reference rate in new loan originations. Additionally, the Company has the ability to substitute an alternative referenced rate for most adjustable rate loans originated prior to 2018.

Item 3.

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 2 of this report.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of September 30, 2021, 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 September 30, 2021, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

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

ITEM 1A.

Risk Factors

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2020, 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 in our annual report on Form 10-K for the year ended December 31, 2020 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, such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2020.

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ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not Applicable

(b)	Not Applicable

(c)	Issuer Purchases of Equity Securities

We repurchased 277,386 shares of our common stock during the third quarter of 2021. No shares of our common stock were purchased during the same quarter of 2020.

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

July 1-31, 2021		50,800	$	29.28		1,487,211.06		1,950,700
August 1-31, 2021		108,700		31.21		3,392,651.12		1,842,000
September 1-30, 2021		117,886		30.41		3,584,804.76		1,724,114
Total		277,386	$	30.52		8,464,666.94

ITEM 3.

Defaults Upon Senior Securities

None.

ITEM 4.

Mine Safety Disclosures

None.

ITEM 5.

Other Information

On November 3, 2021, the Compensation and Retirement Committee (the “CRC”) of the Board of Directors of First Community Bankshares, Inc. (the “Company”) approved the exchange of certain unvested restricted stock awards granted under Restricted Stock Grant Agreements dated as of March 19, 2021 (the “Restricted Stock Grant Agreements”) between the Company and certain officers and directors, including each of William P. Stafford, II, Gary R. Mills, David D. Brown, Jason R. Belcher, and Sarah W. Harmon (the “Named Executive Officers”), for unvested stock options of equivalent value. As proposed, each of the unvested restricted share awards will be exchanged for 4.1931 unvested stock options, each with an exercise price equal to the greater of $33.00 or the closing price of a share of the Company's stock on the trading day before the date of grant. These stock options will vest over a period of three years.

The directors and all members of management, including the Named Executive Officers, will remain subject to any sale restrictions in respect of prior stock grant agreements, as well as the Company’s Stock Ownership Policy. Under this policy, Messrs. Stafford and Mills must each own stock with a market value of at least 3.5 times his base compensation. Messrs. Brown and Belcher, and Ms. Harmon must each own shares with a market value of 2.5 times his or her base compensation. The proposed exchange of restricted shares awards for stock options is subject to the consent of the individuals who received the restricted share awards.

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The CRC elected to approve the aforesaid exchange of the unvested restricted stock awards for unvested stock options after the Company initiated a review of its restricted stock awards under the 2012 Omnibus Equity Compensation Plan (the “2012 Plan”) in response to a shareholder demand letter received in June, 2021. The shareholder demand letter alleges that, although the Company complied with the overall share issuance limit in the 2012 Plan, grants of restricted stock and performance awards prior to 2021 allegedly exceeded a sub-limit in the 2012 Plan that limited the award of certain forms of restricted stock, restricted stock units, or performance awards to 300,000 shares. The Company disagrees with that assertion. Nevertheless, the CRC took the above-described actions prior to vesting of the restricted share awards in order to ensure that the Company remained in compliance with the referenced sublimit during 2021.

The following table sets forth the number of restricted stock awards and performance awards granted by the Company prior to 2021 and granted by the Company in 2021 following the exchange, and the aggregate number of awards granted under the 2012 Plan.

	Restricted				Performance			Unrestricted
	Stock Awards				Awards			Stock Awards
Summary of awards at the end of 2020

Awards granted under the 2012 Plan prior to December 31, 2020		241,424				80,872			36,420	⁽¹⁾
Forfeited awards		(7,040	)			(6,730	)		-
Cancelled awards		-				(9,848	)		-
Net awards under the 2012 Plan prior to December 31, 2020		234,384				64,294			36,420

Summary of 2021 awards

Awards granted in 2021		3,941		⁽²⁾		-			10,816
Forfeited awards		(2,650	)			-			-
Net awards granted in 2021 under the 2012 Plan		1,291				-			10,816

Total awards under the 2012 Plan		235,675				64,294			47,236

(1) These shares were referred to inadvertently as restricted shares in certain prior disclosures, including the Company’s Form 10-K for the year ended December 31, 2020.

(2) Excludes the above-described 31,291 shares of unvested restricted stock awards which were exchanged for stock options and 7,254 shares of unvested restricted stock awards originally awarded to non-executive employees. On November 3, 2021 the CRC approved the amendment of each Restricted Stock Grant Agreement entered into in 2021 between the Company and these non-executive employees to fully vest the awards under those Restricted Stock Agreements totaling 7,254 shares and to eliminate a provision requiring that those shares be held, unencumbered, for five years after vesting. These proposed changes to the Restricted Stock Grant Agreements are subject to the consent of each non-executive employee who received the awards.

During 2021, the CRC retained a compensation consultant. This engagement includes a review of the 2012 Plan and assistance in developing a new Omnibus Equity Compensation Plan to replace the 2012 Plan, which expires in 2022. As part of that review, the compensation consultant is reviewing the Company’s compensation practices and policies. Any changes to the Company’s compensation practices or policies will be discussed in the Compensation Discussion and Analysis section of the Company’s 2022 Annual Meeting Proxy Statement. At the 2022 Annual Meeting, the Company intends to request approval of a new Omnibus Equity Compensation Plan to replace the expiring 2012 Plan.

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ITEM 6.

Exhibits

2.1	Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
2.2	Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019
3.1	Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
3.2	Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018
4.1	Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018
4.2	Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018
10.1.1**	First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.1.2**	Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004
10.2**	First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002
10.3**	First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002
10.4**	First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan, incorporated by reference to Annex B of the Definitive Proxy Statement on Form DEF 14A dated April 27, 2004, filed on March 15, 2004

10.5**	First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004
10.6**	First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012
10.7**	First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013
10.8**	First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.9.1**	First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009;
10.9.2**	Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010
10.9.3**	Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013

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10.9.4**	Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.9.5**	Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.10**	Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19,2019
10.11.1**	First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.11.2**	Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.12.1**	First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.12.2**	Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.13**	Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.15**	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
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101***

Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2021, (Unaudited) and December 31, 2020; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2021 and 2020; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2021 and 2020; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2021 and 2020; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2021 and 2020; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

104*

The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (included within the Exhibit 101 attachments).

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 9th day of November, 2021.

		First Community Bankshares, Inc. (Registrant)




		/s/ William P. Stafford, II
		William P. Stafford, II
		Chief Executive Officer
		(Principal Executive Officer)




		/s/ David D. Brown
		David D. Brown
		Chief Financial Officer
		(Principal Accounting Officer)