FIRST COMMUNITY BANKSHARES INC /VA/ - Quarter Report: 2022 September (Form 10-Q)

fcbc20220930_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, 2022

☐ 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 October 28, 2022, there were 16,231,717 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, 2022 (Unaudited) and December 31, 2021	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	9
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49
Item 4.	Controls and Procedures		49

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		49
Item 1A.	Risk Factors		49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3.	Defaults Upon Senior Securities		50
Item 4.	Mine Safety Disclosures		50
Item 5.	Other Information		50
Item 6.	Exhibits		51

Signatures			53

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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:

●

inflation, interest rate, market and monetary fluctuations;

	●	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;

●

the effects of the COVID-19 pandemic, including 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;

●

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 sustainability of noninterest, or fee, income;

●

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. 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 Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	*September 30,*			*December 31,*
	*2022*			2021⁽¹⁾
(Amounts in thousands, except share and per share data)	(Unaudited)
Assets
Cash and due from banks	$	54,795		$	47,067
Federal funds sold		172,141			627,036
Interest-bearing deposits in banks		2,159			3,336
Total cash and cash equivalents		229,095			677,439
Debt securities available for sale		299,620			76,292
Loans held for investment, net of unearned income		2,362,733			2,165,569
Allowance for credit losses		(29,388	)		(27,858	)
Loans held for investment, net		2,333,345			2,137,711
Premises and equipment, net		47,891			52,284
Other real estate owned		559			1,015
Interest receivable		8,345			7,900
Goodwill		129,565			129,565
Other intangible assets		4,541			5,622
Other assets		107,838			106,691
Total assets	$	3,160,799		$	3,194,519

Liabilities
Deposits
Noninterest-bearing	$	878,423		$	842,783
Interest-bearing		1,831,798			1,886,608
Total deposits		2,710,221			2,729,391
Securities sold under agreements to repurchase		1,958			1,536
Interest, taxes, and other liabilities		36,362			35,817
Total liabilities		2,748,541			2,766,744

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; 23,412,168 shares issued and 16,273,177 outstanding at September 30, 2022; 23,971,347 shares issued and 16,878,220 outstanding at December 31, 2021		16,273			16,878
Additional paid-in capital		129,914			147,619
Retained earnings		285,096			264,824
Accumulated other comprehensive loss		(19,025	)		(1,546	)
Total stockholders' equity		412,258			427,775
Total liabilities and stockholders' equity	$	3,160,799		$	3,194,519

(1) Derived from audited financial statements
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)	*2022*		*2021*			*2022*		*2021*
Interest income
Interest and fees on loans	$	26,405	$	25,119		$	76,697	$	77,596
Interest on securities -- taxable		1,610		200			3,539		557
Interest on securities -- tax-exempt		175		245			547		818
Interest on deposits in banks		1,532		225			2,548		507
Total interest income		29,722		25,789			83,331		79,478
Interest expense
Interest on deposits		380		642			1,288		2,235
Interest on short-term borrowings		-		1			1		1
Total interest expense		380		643			1,289		2,236
Net interest income		29,342		25,146			82,042		77,242
Provision for (recovery of) credit losses		685		(1,394	)		3,156		(7,625	)
Net interest income after provision for loan losses		28,657		26,540			78,886		84,867
Noninterest income
Wealth management		932		974			2,897		2,913
Service charges on deposits		3,689		3,599			10,859		9,728
Other service charges and fees		2,988		3,143			9,302		9,331
Divestiture gain		1,658		-			1,658		-
Other operating income		683		1,004			3,282		3,114
Total noninterest income		9,950		8,720			27,998		25,086
Noninterest expense
Salaries and employee benefits		12,081		10,646			35,270		31,746
Occupancy expense		1,188		1,155			3,622		3,545
Furniture and equipment expense		1,478		1,385			4,588		4,209
Service fees		1,635		1,530			5,701		4,378
Advertising and public relations		718		536			1,835		1,487
Professional fees		208		313			1,205		1,069
Amortization of intangibles		365		365			1,082		1,082
FDIC premiums and assessments		321		216			796		619
Divestiture expenses		153		-			153		-
Other operating expense		2,998		2,690			8,134		8,882
Total noninterest expense		21,145		18,836			62,386		57,017
Income before income taxes		17,462		16,424			44,498		52,936
Income tax expense		4,111		3,816			10,419		12,323
Net income	$	13,351	$	12,608		$	34,079	$	40,613

Earnings per common share
Basic	$	0.82	$	0.73		$	2.05	$	2.32
Diluted		0.81		0.73			2.05		2.32
Weighted average shares outstanding
Basic		16,378,022		17,221,244			16,617,766		17,457,477
Diluted		16,413,202		17,279,576			16,654,697		17,511,900

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,*
	*2022*			*2021*			*2022*			*2021*
(Amounts in thousands)
Net income	$	13,351		$	12,608		$	34,079		$	40,613
Other comprehensive income, before tax
Available-for-sale debt securities:
Net unrealized losses on available-for-sale debt securities		(9,355	)		(207	)		(21,802	)		(1,007	)
Employee benefit plans:
Net actuarial loss		(1	)		-			(424	)		(206	)
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income		34			96			101			289
Net unrealized gains (losses) on employee benefit plans		33			96			(323	)		83
Other comprehensive loss, before tax		(9,322	)		(111	)		(22,125	)		(924	)
Income tax benefit		(1,957	)		(23	)		(4,646	)		(194	)
Other comprehensive loss, net of tax		(7,365	)		(88	)		(17,479	)		(730	)
Total comprehensive income	$	5,986		$	12,520		$	16,600		$	39,883

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, 2022 and 2021


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

Balance July, 1 2021		-	$	-		17,334,547		$	17,335		$	161,853		$	250,911		$	(2,565	)	$	427,534
Net income		-		-		-			-			-			12,608			-			12,608
Other comprehensive loss		-		-		-			-			-			-			(88	)		(88	)
Common dividends declared -- $0.27 per share		-		-		-			-			-			(4,659	)		-			(4,659	)
Equity-based compensation expense		-		-		553			-			37			-			-			37
Common stock options exercised		-		-		9,371			10			268			-			-			278
Issuance of common stock to 401(k) plan		-		-		3,967			4			116			-			-			120
Repurchase of common shares at $30.52 per share		-		-		(277,386	)		(278	)		(8,188	)		-			-			(8,466	)
Balance September 30, 2021		-	$	-		17,071,052		$	17,071		$	154,086		$	258,860		$	(2,653	)	$	427,364

Balance July, 1 2022		-	$	-		16,502,144		$	16,502		$	136,705		$	276,499		$	(11,660	)	$	418,046
Net income		-		-		-			-			-			13,351			-			13,351
Other comprehensive loss		-		-		-			-			-			-			(7,365	)		(7,365	)
Common dividends declared -- $0.29 per share		-		-		-			-			-			(4,754	)		-			(4,754	)
Equity-based compensation expense		-		-		-			-			52			-			-			52
Common stock options exercised -- shares		-		-		2,443			2			182			-			-			184
Issuance of common stock to 401(k) plan		-		-		3,990			4			123			-			-			127
Repurchase of common shares at $31.36 per share		-		-		(235,400	)		(235	)		(7,148	)		-			-			(7,383	)
Balance September 30, 2022		-	$	-		16,273,177		$	16,273		$	129,914		$	285,096		$	(19,025	)	$	412,258

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, 2022 and 2021


																	*Accumulated*
	*Preferred*				*Common*						*Additional*						*Other*
(Amounts in thousands, except share and per share data)		*Stock Outstanding*		*Preferred Stock*		*Stock Outstanding*			*Common Stock*			*Paid-in Capital*			*Retained Earnings*			*Comprehensive Loss*			*Total*
Balance January 1, 2021		-	$	-		17,722,507		$	17,723		$	173,345		$	237,585		$	(1,923	)	$	426,730
Cumulative effect of adoption of ASU 2016-13															(5,870	)					(5,870	)
Net income		-		-		-			-			-			40,613			-			40,613
Other comprehensive loss		-		-		-			-			-						(730	)		(730	)
Common dividends declared -- $0.77 per share		-		-		-			-			-			(13,468	)					(13,468	)
Equity-based compensation expense		-		-		42,340			42			816						-			858
Common stock options exercised		-		-		19,773			20			268						-			288
Issuance of common stock to 401(k) plan		-		-		13,118			13			360			-			-			373
Repurchase of common shares at $29.49 per share		-		-		(726,686	)		(727	)		(20,703	)		-			-			(21,430	)
Balance September 30, 2021		-	$	-		17,071,052		$	17,071		$	154,086		$	258,860		$	(2,653	)	$	427,364

Balance January 1, 2022		-	$	-		16,878,220		$	16,878		$	147,619		$	264,824		$	(1,546	)	$	427,775
Net income		-		-		-			-			-			34,079			-			34,079
Other comprehensive loss		-		-		-			-			-			-			(17,479	)		(17,479	)
Common dividends declared -- $0.83 per share		-		-		-			-			-			(13,807	)		-			(13,807	)
Equity-based compensation expense		-		-		25,137			25			511			-			-			536
Common stock options exercised		-		-		6,979			7			150			-			-			157
Issuance of common stock to 401(k) plan		-		-		13,748			14			401			-			-			415
Repurchase of common shares at $29.83 per share		-		-		(650,907	)		(651	)		(18,767	)		-			-			(19,418	)
Balance September 30, 2022		-	$	-		16,273,177		$	16,273		$	129,914		$	285,096		$	(19,025	)	$	412,258

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	*Nine Months Ended*
	*September 30,*
(Amounts in thousands)	*2022*			*2021*
Operating activities
Net income	$	34,079		$	40,613
Adjustments to reconcile net income to net cash provided by operating activities
Provision for (recovery of) credit losses		3,156			(7,625	)
Depreciation and amortization of premises and equipment		3,205			3,346
(Accretion) amortization of premiums on investments, net		(26	)		307
Amortization of FDIC indemnification asset, net		-			1,226
Amortization of intangible assets		1,082			1,082
Accretion on acquired loans		(2,224	)		(3,599	)
Gain on divestiture		(1,658	)		-
Equity-based compensation expense		536			858
Issuance of common stock to 401(k) plan		415			373
(Gain) loss on sale of premises and equipment, net		(772	)		518
Loss on sale of other real estate owned		423			135
(Increase) decrease in accrued interest receivable		(445	)		906
Decrease (increase) in other operating activities		3,757			(1,547	)
Net cash provided by operating activities		41,528			36,593
Investing activities
Proceeds from maturities, prepayments, and calls of securities available for sale		19,855			21,183
Payments to acquire securities available for sale		(264,960	)		(16,578	)
Net (increase) decrease in loans		(197,035	)		41,185
(Purchase of) proceeds from FHLB stock, net		(240	)		1,012
Proceeds from bank owned life insurance		1,046			-
Cash proceeds paid in divestiture		(59,039	)		-
Proceeds from sale of premises and equipment		1,542			2,578
Payments to acquire premises and equipment		(750	)		(2,454	)
Proceeds from sale of other real estate owned		471			1,796
Net cash (used) provided by investing activities		(499,110	)		48,722
Financing activities
Increase in noninterest-bearing deposits, net		54,024			47,352
(Decrease) increase in interest-bearing deposits, net		(12,140	)		80,247
Proceeds from securities sold under agreements to repurchase, net		422			142
Proceeds from stock options exercised		157			288
Payments for repurchase of common stock		(19,418	)		(21,430	)
Payments of common dividends		(13,807	)		(13,468	)
Net cash provided by financing activities		9,238			93,131
Net (decrease) increase in cash and cash equivalents		(448,344	)		178,446
Cash and cash equivalents at beginning of period		677,439			456,561
Cash and cash equivalents at end of period	$	229,095		$	635,007

Supplemental disclosure -- cash flow information
Cash paid for interest	$	1,728		$	2,508
Cash paid for income taxes		4,090			11,989

Supplemental transactions -- noncash items
Transfer of loans to other real estate owned		438			1,147
Loans originated to finance other real estate owned		-			59
Increase in accumulated other comprehensive loss, net of taxes		(17,479	)		(730	)

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”), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, 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, 2021 (the “2021 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2022. The condensed consolidated balance sheet as of December 31, 2021, 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 2021 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. 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 and does not record an allowance for credit losses on accrued interest receivable. As of September 30, 2022, the accrued interest receivable for investment securities available for sale was $1.06 million.

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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 of ASU 2016-13, through retained earnings and subsequent adjustments are 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 utilizes 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 reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered are 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 is evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporates 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. 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. 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, 2022, the accrued interest receivable for loans was $7.28 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, 2022, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $1.42 million.

Risks and Uncertainties

COVID-19 Virus Developments

During the last two-and-a-half years, 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, 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.

While direct impacts of COVID- 19 appear to be declining and conditions have improved as of September 30, 2022, if there is a resurgence in the virus, the Company could experience adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full 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'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.

Standards Not Yet Adopted

In March 2022, the Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provides accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023, with early adoption permitted. The amendments eliminate TDR accounting guidance for issuers that have adopted ASU 2016-13, create a single loan modification accounting model, and clarify disclosure requirements for loan modifications and write-offs. We are currently reviewing the impact of the updated guidance on our Consolidated Financial Statements, but do no anticipate a material impact. At this time, the Company has no plans to early adopt this guidance.

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Note 2. Divestitures

On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank (the "Emporia Branch Sale") . The sale included the branch real estate, certain personal property, and all deposits associated with the branch. There were no loans included in the transaction. Benchmark paid a deposit premium of two percent for certain deposits. In addition, Benchmark paid $1.50 million for branch real estate and certain personal property. Total deposits acquired by Benchmark totaled $61.05 million. The deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. The Company recognized a gain of $1.66 million from the Emporia Branch Sale.

Note 3. Debt Securities

There was no allowance for credit losses for debt securities as of September 30, 2022; 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, 2022*
	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Agency securities	$	1,500	$	-	$	(12	)	$	1,488
U.S. Treasury Notes		160,935		-		(4,475	)		156,460
Municipal securities		23,523		9		(471	)		23,061
Corporate notes		37,056		-		(2,537	)		34,519
Agency mortgage-backed securities		98,389		1		(14,298	)		84,092
Total	$	321,403	$	10	$	(21,793	)	$	299,620

	*December 31, 2021*
	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Agency securities	$	469	$	—	$	(3	)	$	466
Municipal securities		28,596		198		—			28,794
Corporate notes		9,935		—		(16	)		9,919
Agency mortgage-backed securities		37,273		513		(673	)		37,113
Total	$	76,273	$	711	$	(692	)	$	76,292

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, 2022*
	*Amortized*
(Amounts in thousands)	*Cost*		*Fair Value*
Available-for-sale debt securities
Due within one year	$	43,628	$	43,323
Due after one year but within five years		174,943		167,932
Due after five years but within ten years		4,443		4,273
		223,014		215,528
Agency mortgage-backed securities		98,389		84,092
Total debt securities available for sale	$	321,403	$	299,620

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, 2022*
	*Less than 12 Months*					*12 Months or Longer*					*Total*
	*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*
	*Value*		*Losses*			*Value*		*Losses*			*Value*		*Losses*
(Amounts in thousands)
U.S. Agency securities	$	1,488	$	(12	)	$	-	$	-		$	1,488	$	(12	)
U.S. Treasury Notes		156,460		(4,475	)		-		-			156,460		(4,475	)
Municipal securities		18,872		(471	)		-		-			18,872		(471	)
Corporate notes		34,519		(2,537	)		-		-			34,519		(2,537	)
Agency mortgage-backed securities		69,521		(10,452	)		14,515		(3,846	)		84,036		(14,298	)
Total	$	280,860	$	(17,947	)	$	14,515	$	(3,846	)	$	295,375	$	(21,793	)

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	*December 31, 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	$	—	$	—		$	459	$	(3	)	$	459	$	(3	)
Corporate notes		9,919		(16	)		—		—			9,919		(16	)
Agency mortgage-backed securities		14,092		(253	)		8,384		(420	)		22,476		(673	)
Total	$	24,011	$	(269	)	$	8,843	$	(423	)	$	32,854	$	(692	)

There were 136 individual debt securities in an unrealized loss position as of September 30, 2022, and the combined depreciation in value represented 7.27% of the debt securities portfolio. There were 23 individual debt securities in an unrealized loss position as of December 31, 2021, and their combined depreciation in value represented 0.91% of the debt securities portfolio. The decline in the market value of debt securities available for sale from December 31, 2021, is primarily attributable to the increasing rate environment throughout 2022.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of September 30, 2022, 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.

There were no gross realized gains and losses from the sale of available-for-sale debt securities for the three and nine months ended September 30, 2022 and 2021.

The carrying amount of securities pledged for various purposes totaled $27.82 million as of September 30, 2022, and $22.15 million as of December 31, 2021.

Note 4. 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 $1.29 million as of September 30, 2022, and $1.65 million as of December 31, 2021. Deferred loan fees, net of loan costs, totaled $4.11 million as of September 30, 2022, and $5.06 million as of December 31, 2021. For information about off-balance sheet financing, see Note 15, “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 to include net deferred loan fees of $4.11 million and $5.06 million and unamortized discount related to loans acquired of $4.11 million and $5.41 million million for September 30, 2022, and December 31, 2021, respectively. Accrued interest receivable (AIR) of $7.28 million as of September 30, 2022, and $7.54 million as of December 31, 2021, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

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	*September 30, 2022*					*December 31, 2021*
(Amounts in thousands)	*Amount*		*Percent*			*Amount*		*Percent*
Loans held for investment
Commercial loans
Construction, development, and other land	$	109,104		4.62	%	$	65,806		3.04	%
Commercial and industrial		148,024		6.26	%		133,630		6.17	%
Multi-family residential		135,489		5.73	%		100,402		4.64	%
Single family non-owner occupied		196,133		8.30	%		198,778		9.18	%
Non-farm, non-residential		777,350		32.90	%		707,506		32.67	%
Agricultural		10,537		0.45	%		9,341		0.43	%
Farmland		12,127		0.51	%		15,013		0.69	%
Total commercial loans		1,388,764		58.77	%		1,230,476		56.82	%
Consumer real estate loans
Home equity lines		77,424		3.28	%		79,857		3.69	%
Single family owner occupied		726,780		30.76	%		703,864		32.50	%
Owner occupied construction		14,602		0.62	%		16,910		0.78	%
Total consumer real estate loans		818,806		34.66	%		800,631		36.97	%
Consumer and other loans
Consumer loans		151,022		6.39	%		129,794		5.99	%
Other		4,141		0.18	%		4,668		0.22	%
Total consumer and other loans		155,163		6.57	%		134,462		6.21	%
Total loans held for investment, net of unearned income	$	2,362,733		100.00	%	$	2,165,569		100.00	%

The Company began participating as a Small Business Administration Paycheck Protection Program lender during the second quarter of 2020. At September 30, 2022, there was no remaining balance of PPP loans, compared to $20.64 million at December 31, 2021, which were included in commercial and industrial loan balances. There were no remaining net deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, at September 30, 2022. At December 31, 2021, the amount of net deferred loan origination fees related to PPP loans was $733 thousand. During the third quarter of 2022, the Company recorded amortization of net deferred loan origination fees of $80 thousand on PPP loans and recorded $734 thousand in amortization for the nine month period of 2022 . The Company recorded amortization of net deferred loan origination fees on PPP loans of $708 thousand and $2.24 million in amortization for the same periods, respectively, for 2021.

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Note 5. Credit Quality

The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:

●

Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.

●

Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.

●

Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.

●

Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

●

Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.

The following table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated:

	*September 30, 2022*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Commercial loans
Construction, development, and other land	$	107,937	$	757	$	410	$	-	$	-	$	109,104
Commercial and industrial		145,064		1,084		1,876		-		-		148,024
Multi-family residential		130,970		4,081		438		-		-		135,489
Single family non-owner occupied		185,415		2,358		8,360		-		-		196,133
Non-farm, non-residential		749,705		16,206		11,439		-		-		777,350
Agricultural		10,324		51		162		-		-		10,537
Farmland		9,909		589		1,629		-		-		12,127
Consumer real estate loans
Home equity lines		74,067		430		2,927		-		-		77,424
Single family owner occupied		697,976		2,022		26,782		-		-		726,780
Owner occupied construction		14,438		-		164		-		-		14,602
Consumer and other loans
Consumer loans		148,436		10		2,576		-		-		151,022
Other		4,141		-		-		-		-		4,141
Total loans	$	2,278,382	$	27,588	$	56,763	$	-	$	-	$	2,362,733

	*December 31, 2021*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*

Commercial loans
Construction, development, and other land	$	64,498	$	451	$	857	$	-	$	-	$	65,806
Commercial and industrial		128,770		1,005		3,855		-		-		133,630
Multi-family residential		98,457		1,090		855		-		-		100,402
Single family non-owner occupied		186,184		3,607		8,977		10		-		198,778
Non-farm, non-residential		665,559		25,624		16,323		-		-		707,506
Agricultural		8,758		70		513		-		-		9,341
Farmland		11,939		633		2,441		-		-		15,013
Consumer real estate loans
Home equity lines		76,259		426		3,172		-		-		79,857
Single family owner occupied		671,459		2,420		29,985		-		-		703,864
Owner occupied construction		16,629		-		281		-		-		16,910
Consumer and other loans
Consumer loans		127,514		16		2,264		-		-		129,794
Other		4,668		-		-		-		-		4,668
Total loans	$	2,060,694	$	35,342	$	69,523	$	10	$	-	$	2,165,569

Table of Contents

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, 2022	2022		2021		2020		2019		2018		Prior		Revolving		Total
Construction, development and other land
Pass	$	39,902	$	45,588	$	8,631	$	3,144	$	2,724	$	7,594	$	354	$	107,937
Special Mention		-		156		-		-		102		463		36		757
Substandard		-		-		362		36		12		-		-		410
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total construction, development, and other land	$	39,902	$	45,744	$	8,993	$	3,180	$	2,838	$	8,057	$	390	$	109,104
Commercial and industrial
Pass	$	60,771	$	26,011	$	13,335	$	8,824	$	9,815	$	9,764	$	16,544	$	145,064
Special Mention		234		22		28		524		179		-		97		1,084
Substandard		147		122		122		425		212		330		518		1,876
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total commercial and industrial	$	61,152	$	26,155	$	13,485	$	9,773	$	10,206	$	10,094	$	17,159	$	148,024
Multi-family residential
Pass	$	40,595	$	15,211	$	26,878	$	3,757	$	1,788	$	41,807	$	934	$	130,970
Special Mention		-		-		-		-		-		4,081		-		4,081
Substandard		-		-		-		-		-		438		-		438
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total multi-family residential	$	40,595	$	15,211	$	26,878	$	3,757	$	1,788	$	46,326	$	934	$	135,489
Non-farm, non-residential
Pass	$	183,767	$	145,439	$	122,934	$	53,060	$	37,644	$	192,843	$	14,018	$	749,705
Special Mention		-		1,946		860		1,205		2,756		9,289		150		16,206
Substandard		-		1,130		682		2,762		714		5,924		227		11,439
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total non-farm, non-residential	$	183,767	$	148,515	$	124,476	$	57,027	$	41,114	$	208,056	$	14,395	$	777,350
Agricultural
Pass	$	4,071	$	3,447	$	1,158	$	469	$	364	$	382	$	433	$	10,324
Special Mention		-		35		16		-		-		-		-		51
Substandard		-		38		3		75		30		16		-		162
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total agricultural	$	4,071	$	3,520	$	1,177	$	544	$	394	$	398	$	433	$	10,537
Farmland
Pass	$	217	$	720	$	814	$	77	$	885	$	5,662	$	1,534	$	9,909
Special Mention		-		110		-		-		227		252		-		589
Substandard		-		-		13		-		256		1,360		-		1,629
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total farmland	$	217	$	830	$	827	$	77	$	1,368	$	7,274	$	1,534	$	12,127

Table of Contents

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at September 30, 2022	2022		2021		2020		2019		2018		Prior		Revolving		Total
Home equity lines
Pass	$	967	$	100	$	76	$	-	$	77	$	-	$	72,847	$	74,067
Special Mention		-		-		-		-		-		-		430		430
Substandard		-		-		28		36		205		1,207		1,451		2,927
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total home equity lines	$	967	$	100	$	104	$	36	$	282	$	1,207	$	74,728	$	77,424
Single family Mortgage
Pass	$	124,170	$	233,991	$	208,988	$	51,754	$	38,014	$	225,285	$	1,189	$	883,391
Special Mention		-		380		91		367		264		3,278		-		4,380
Substandard		378		1,090		708		1,164		2,143		29,659		-		35,142
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total single family owner and non-owner occupied	$	124,548	$	235,461	$	209,787	$	53,285	$	40,421	$	258,222	$	1,189	$	922,913
Owner occupied construction
Pass	$	5,224	$	8,686	$	-	$	23	$	13	$	492	$	-	$	14,438
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		162		-		2		-		164
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total owner occupied construction	$	5,224	$	8,686	$	-	$	185	$	13	$	494	$	-	$	14,602
Consumer loans
Pass	$	67,539	$	43,169	$	18,776	$	9,514	$	3,176	$	8,178	$	2,225	$	152,577
Special Mention		-		3		-		6		-		-		1		10
Substandard		423		892		556		443		46		137		79		2,576
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total consumer loans	$	67,962	$	44,064	$	19,332	$	9,963	$	3,222	$	8,315	$	2,305	$	155,163

(Amounts in thousands)	*Term Loans Amortized Cost Basis by Origination Year*
Balance at September 30, 2022	*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Revolving*		*Total*
Total Loans
Pass	$	527,223	$	522,362	$	401,590	$	130,622	$	94,500	$	492,007	$	110,078	$	2,278,382
Special Mention		234		2,652		995		2,102		3,528		17,363		714		27,588
Substandard		948		3,272		2,474		5,103		3,618		39,073		2,275		56,763
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total loans	$	528,405	$	528,286	$	405,059	$	137,827	$	101,646	$	548,443	$	113,067	$	2,362,733

Table of Contents

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Construction, development
and other land
Pass	$	40,207	$	10,127	$	3,081	$	3,704	$	1,308	$	5,717	$	354	$	64,498
Special Mention		-		266		-		128		-		21		36		451
Substandard		-		-		128		11		291		427		-		857
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total construction, development, and other land	$	40,207	$	10,393	$	3,209	$	3,843	$	1,599	$	6,165	$	390	$	65,806
Commercial and industrial
Pass	$	34,539	$	18,887	$	13,679	$	13,772	$	4,817	$	5,890	$	16,544	$	108,128
Special Mention		32		60		597		192		28		-		96		1,005
Substandard		184		355		706		384		842		866		518		3,855
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total commercial and industrial	$	34,755	$	19,302	$	14,982	$	14,348	$	5,687	$	6,756	$	17,158	$	112,988
Paycheck Protection Loans
Pass	$	16,482	$	4,160	$	-	$	-	$	-	$	-	$	-	$	20,642
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total Paycheck Protection Loans	$	16,482	$	4,160	$	-	$	-	$	-	$	-	$	-	$	20,642
Multi-family residential
Pass	$	11,307	$	24,299	$	4,644	$	1,897	$	8,413	$	46,962	$	935	$	98,457
Special Mention		-		-		-		-		-		1,090		-		1,090
Substandard		-		-		-		-		-		855		-		855
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total multi-family residential	$	11,307	$	24,299	$	4,644	$	1,897	$	8,413	$	48,907	$	935	$	100,402
Non-farm, non-residential
Pass	$	147,978	$	146,381	$	62,651	$	50,943	$	43,776	$	199,812	$	14,018	$	665,559
Special Mention		397		3,334		823		2,595		9,190		9,135		150		25,624
Substandard		1,161		711		2,508		2,531		3,232		5,953		227		16,323
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total non-farm, non-residential	$	149,536	$	150,426	$	65,982	$	56,069	$	56,198	$	214,900	$	14,395	$	707,506
Agricultural
Pass	$	4,564	$	1,548	$	998	$	534	$	346	$	335	$	433	$	8,758
Special Mention		43		27		-		-		-		-		-		70
Substandard		44		11		282		39		17		120		-		513
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total agricultural	$	4,651	$	1,586	$	1,280	$	573	$	363	$	455	$	433	$	9,341
Farmland
Pass	$	428	$	1,047	$	82	$	1,125	$	887	$	6,835	$	1,535	$	11,939
Special Mention		189		-		-		240		5		199		-		633
Substandard		-		14		519		249		264		1,395		-		2,441
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total farmland	$	617	$	1,061	$	601	$	1,614	$	1,156	$	8,429	$	1,535	$	15,013

Table of Contents

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Home equity lines
Pass	$	115	$	59	$	-	$	25	$	2	$	2,168	$	73,890	$	76,259
Special Mention		-		-		-		-		-		-		426		426
Substandard		-		-		28		249		128		1,316		1,451		3,172
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total home equity lines	$	115	$	59	$	28	$	274	$	130	$	3,484	$	75,767	$	79,857
Single family Mortgage
Pass	$	239,917	$	225,294	$	61,925	$	46,716	$	41,757	$	240,845	$	1,189	$	857,643
Special Mention		399		510		937		269		137		3,775		-		6,027
Substandard		1,213		799		1,475		1,668		1,878		31,929		-		38,962
Doubtful		-		-		-		-		-		10		-		10
Loss		-		-		-		-		-		-		-		-
Total single family owner and non-owner occupied	$	241,529	$	226,603	$	64,337	$	48,653	$	43,772	$	276,559	$	1,189	$	902,642
Owner occupied construction
Pass	$	9,689	$	4,729	$	178	$	22	$	428	$	1,583	$	-	$	16,629
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		281		-		281
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total owner occupied construction	$	9,689	$	4,729	$	178	$	22	$	428	$	1,864	$	-	$	16,910
Consumer loans
Pass	$	65,018	$	31,065	$	16,548	$	4,980	$	2,306	$	10,040	$	2,225	$	132,182
Special Mention		-		-		16		-		-		-		-		16
Substandard		328		663		824		107		78		186		78		2,264
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total consumer loans	$	65,346	$	31,728	$	17,388	$	5,087	$	2,384	$	10,226	$	2,303	$	134,462

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Total Loans
Pass	$	570,244	$	467,596	$	163,786	$	123,718	$	104,040	$	520,187	$	111,123	$	2,060,694
Special Mention		1,060		4,197		2,373		3,424		9,360		14,220		708		35,342
Substandard		2,930		2,553		6,470		5,238		6,730		43,328		2,274		69,523
Doubtful		-		-		-		-		-		10		-		10
Loss		-		-		-		-		-		-		-		-
Total loans	$	574,234	$	474,346	$	172,629	$	132,380	$	120,130	$	577,745	$	114,105	$	2,165,569

Table of Contents

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, 2022*						*December 31, 2021*
(Amounts in thousands)	*No Allowance*		*With an Allowance*		*Total*		*No Allowance*		*With an Allowance*		*Total*
Commercial loans
Construction, development, and other land	$	33	$	-	$	33	$	409	$	-	$	409
Commercial and industrial		265		-		265		1,734		-		1,734
Multi-family residential		396		-		396		208		-		208
Single family non-owner occupied		1,320		-		1,320		2,304		-		2,304
Non-farm, non-residential		2,273		-		2,273		3,439		1,100		4,539
Agricultural		18		-		18		136		-		136
Farmland		133		-		133		222		-		222
Consumer real estate loans
Home equity lines		503		-		503		767		-		767
Single family owner occupied		8,416		-		8,416		8,957		-		8,957
Owner occupied construction		-		-		-		-		-		-
Consumer and other loans
Consumer loans		1,946		-		1,946		1,492		-		1,492
Total nonaccrual loans	$	15,303	$	-	$	15,303	$	19,668	$	1,100	$	20,768

During the third quarter of 2022, $1 thousand in nonaccrual loan interest was recognized compared to $14 thousand for the same period of 2021. During the first nine months of 2022 $4 thousand in nonaccrual loan interest was recognized compared to $38 thousand for the same period of 2021 .

The following tables presents the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category:

	*September 30, 2022*
													*Amortized Cost of*
	*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*		*> 90 Days Accruing*
(Amounts in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*		*No Allowance*

Commercial loans
Construction, development, and other land	$	40	$	8	$	25	$	73	$	109,031	$	109,104	$	-
Commercial and industrial		319		186		45		550		147,474		148,024		-
Multi-family residential		-		-		-		-		135,489		135,489		-
Single family non-owner occupied		398		239		335		972		195,161		196,133		-
Non-farm, non-residential		780		-		1,377		2,157		775,193		777,350		-
Agricultural		30		18		11		59		10,478		10,537		-
Farmland		-		-		133		133		11,994		12,127		-
Consumer real estate loans
Home equity lines		425		183		309		917		76,507		77,424		-
Single family owner occupied		4,686		2,057		3,454		10,197		716,583		726,780		-
Owner occupied construction		-		-		-		-		14,602		14,602		-
Consumer and other loans
Consumer loans		3,767		1,616		944		6,327		144,695		151,022		-
Other		-		-		-		-		4,141		4,141		-
Total loans	$	10,445	$	4,307	$	6,633	$	21,385	$	2,341,348	$	2,362,733	$	-

	December 31, 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	$	52	$	-	$	120	$	172	$	65,634	$	65,806	$	-
Commercial and industrial		325		35		1,394		1,754		131,876		133,630		-
Multi-family residential		97		-		-		97		100,305		100,402		-
Single family non-owner occupied		1,210		583		795		2,588		196,190		198,778		-
Non-farm, non-residential		1,002		441		2,333		3,776		703,730		707,506		-
Agricultural		73		7		101		181		9,160		9,341		-
Farmland		52		-		222		274		14,739		15,013		-
Consumer real estate loans
Home equity lines		275		388		333		996		78,861		79,857		-
Single family owner occupied		4,740		2,584		3,880		11,204		692,660		703,864		-
Owner occupied construction		139		-		-		139		16,771		16,910		-
Consumer and other loans
Consumer loans		3,469		1,182		1,049		5,700		124,094		129,794		-
Other		-		-		-		-		4,668		4,668		-
Total loans	$	11,434	$	5,220	$	10,227	$	26,881	$	2,138,688	$	2,165,569	$	-

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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. As of September 30, 2022, there were no collateral dependent loans.

	*September 30, 2022*						*December 31, 2021*
(Amounts in thousands)	*Balance*		*Collateral Coverage*		%		*Balance*		*Collateral Coverage*		%
Commercial Real Estate
Hotel	$	-	$	-		-	$	-	$	-		-
Office		-		-		-		-		-		-
Other		-		-		-		2,216		2,312		104.33	%
Retail		-		-		-		-		-		-
Multi-Family
Industrial		-		-		-		-		-		-
Office		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial and industrial
Industrial		-		-		-		-		-		-
Other		-		-		-		-		-		-
Home equity loans		-		-		-		-		-		-
Consumer owner occupied		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total collateral dependent loans	$	-	$	-		-	$	2,216	$	2,312		104.33	%

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.

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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, 2022*						*December 31, 2021*
(Amounts in thousands)	*Nonaccrual(1)*		*Accruing*		*Total*		*Nonaccrual(1)*		*Accruing*		*Total*
Commercial loans
Commercial and industrial	$	-	$	409	$	409	$	396	$	470	$	866
Single family non-owner occupied		147		844		991		857		1,100		1,957
Non-farm, non-residential		-		766		766		-		2,021		2,021
Consumer real estate loans
Home equity lines		-		59		59		-		67		67
Single family owner occupied		1,328		4,925		6,253		1,266		4,755		6,021
Owner occupied construction		-		-		-		-		212		212
Consumer and other loans
Consumer loans		-		25		25		-		27		27
Total TDRs	$	1,475	$	7,028	$	8,503	$	2,519	$	8,652	$	11,171

Allowance for credit losses related to TDRs					$	-					$	-

(1)	Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

The following table presents interest income recognized on TDRs for the periods indicated:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2022*		*2021*		*2022*		*2021*
(Amounts in thousands)
Interest income recognized	$	97	$	92	$	299	$	290

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,*
	*2022*						*2021*
(Amounts in thousands)	*Total Contracts*		*Pre-modification Recorded Investment*		*Post-modification Recorded Investment(1)*		*Total Contracts*		*Pre-modification Recorded Investment*		*Post-modification Recorded Investment(1)*
Payment deferral
Single family owner occupied		1	$	94	$	72		-		-		-
Total payment deferral		1	$	94	$	72		-	$	-	$	-
Below market interest rate and extended payment term
Single family owner occupied		-	$	-	$	-		2	$	302	$	283
Total below market interest rate and extended term		-	$	-	$	-		2	$	302	$	283
Total		1	$	94	$	72		2	$	302	$	283

(1)	Represents the loan balance immediately following modification

	*Nine Months Ended September 30,*
	*2022*						*2021*
(Amounts in thousands)	*Total Contracts*		*Pre-modification Recorded Investment*		*Post-modification Recorded Investment(1)*		*Total Contracts*		*Pre-modification Recorded Investment*		*Post-modification Recorded Investment(1)*
Below market interest rate
Single family owner occupied		1	$	31	$	32		-	$	-	$	-
Total below market interest rate		1	$	31	$	32		-		-		-
Below market interest rate and extended payment term
Single family owner occupied		-	$	-	$	-		2	$	302	$	283
Total below market interest rate and extended payment term		-	$	-	$	-		2	$	302	$	283
Payment deferral
Single family owner occupied		3	$	331	$	317		-		-		-
Non-farm, non-residential		-		-		-		1		1,390		1,368
Total payment deferral		3	$	331	$	317		1	$	1,390	$	1,368
Total		4	$	362	$	349		3	$	1,692	$	1,651

(1)	Represents the loan balance immediately following modification

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There were no payment defaults for loans modified as TDRs restructured within the previous 12 months as of September 30, 2022, and there was one payment default in the amount of $ 1.37 million as of September 30, 2021 .

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, 2022*		*December 31, 2021*
(Amounts in thousands)
OREO	$	559	$	1,015

OREO secured by residential real estate	$	231	$	337
Residential real estate loans in the foreclosure process⁽¹⁾	$	2,678	$	2,210

(1)	The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction

Note 6. Allowance for Credit Losses

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

	*Three Months Ended September 30, 2022*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	16,119		$	10,049		$	3,581		$	29,749
(Recovery of) provision for credit losses charged to operations		(444	)		(1,391	)		2,520			685
Charge-offs		(89	)		(182	)		(1,887	)		(2,158	)
Recoveries		872			77			163			1,112
Net recoveries (charge-offs)		783			(105	)		(1,724	)		(1,046	)
Ending balance	$	16,458		$	8,553		$	4,377		$	29,388

	*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
(Recovery of) provision for credit 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) recoveries		(122	)		(16	)		(448	)		(586	)
Ending balance	$	16,078		$	10,722		$	3,077		$	29,877

	*Nine Months Ended September 30, 2022*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	14,775		$	9,972		$	3,111		$	27,858
(Recovery of) provision for credit losses charged to operations		(144	)		(1,584	)		4,884			3,156
Charge-offs		(497	)		(276	)		(4,156	)		(4,929	)
Recoveries		2,324			441			538			3,303
Net recoveries (charge-offs)		1,827			165			(3,618	)		(1,626	)
Ending balance	$	16,458		$	8,553		$	4,377		$	29,388

	*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
(Recovery of) provision for credit 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) recoveries		(657	)		471			(1,601	)		(1,787	)
Ending balance	$	16,078		$	10,722		$	3,077		$	29,877

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Note 7. Deposits

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

	*September 30, 2022*		*December 31, 2021*
(Amounts in thousands)
Noninterest-bearing demand deposits	$	878,423	$	842,783
Interest-bearing deposits:
Interest-bearing demand deposits		658,211		676,254
Money market accounts		281,435		293,915
Savings deposits		587,413		561,576
Certificates of deposit		196,365		237,919
Individual retirement accounts		108,374		116,944
Total interest-bearing deposits		1,831,798		1,886,608
Total deposits	$	2,710,221	$	2,729,391

Note 8. Leases

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

The Company’s current operating leases relate to one existing bank branch and one operating lease acquired in a prior bank acquisition. The acquired operating lease was for vacant land and will terminate in July of 2029. The Company’s ROU asset was $672 thousand as of September 30, 2022 compared to $741 thousand as of December 31, 2021. The operating lease liability as of September 30, 2022, was $692 thousand compared to $770 thousand as of December 31, 2021. The Company’s total operating leases have remaining terms of 2 - 7 years; compared with 4 months to 7.5 years as of December 31, 2021. The September 30, 2022 weighted average discount rate of 3.22% did not change from December 31, 2021.

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

Year	*September 30, 2022*
(Amounts in thousands)
2023	$	119
2024		119
2025		104
2026		101
2027 and thereafter		285
Total lease payments		728
Less: Interest		(36	)
Present value of lease liabilities	$	692

Year	*December 31, 2021*
(Amounts in thousands)
2022	$	131
2023		119
2024		117
2025		101
2026 and thereafter		362
Total lease payments		830
Less: Interest		(60	)
Present value of lease liabilities	$	770

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Note 9. Borrowings

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

	*September 30, 2022*					*December 31, 2021*
			*Weighted*					*Weighted*
(Amounts in thousands)	*Balance*		*Average Rate*			*Balance*		*Average Rate*
Retail repurchase agreements	$	1,958		0.07	%	$	1,536		0.07	%

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

As of September 30, 2022, the Company had no long-term borrowings.

Unused borrowing capacity with the FHLB totaled $422.61 million, net of FHLB letters of credit of $126.54 million, as of September 30, 2022. As of September 30, 2022, the Company pledged $736.92 million in qualifying loans to secure the FHLB borrowing capacity.

Note 10. 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, 2022.

Through July 2022, the Company had certain interest rate swaps that did not qualify as fair value hedges and the fair value changes in the derivative were recognized in earnings each period. On July 26, 2022, these swaps were terminated at a cost of $72 thousand.

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

	*September 30, 2022*						*December 31, 2021*
	*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	$	4,161	$	211	$	-	$	4,388	$	-	$	229
Derivatives not designated as hedges
Interest rate swaps	$	-	$	-	$	-	$	7,890	$	-	$	608
Total derivatives	$	4,161	$	211	$	-	$	12,278	$	-	$	837

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)	*2022*		*2021*		*2022*		*2021*		*Income Statement Location*
Derivatives designated as hedges
Interest rate swaps	$	3	$	27	$	47	$	83	Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps	$	6	$	45	$	90	$	163	Interest and fees on loans
Total derivative expense	$	9	$	72	$	137	$	246

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Note 11. 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 ("SERP") and the Directors’ Supplemental Retirement Plan ("Director Plan"). The SERP was frozen near the end of 2021; the Director Plan was fundamentally frozen at that time as well. 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,*
	*2022*		*2021*		*2022*		*2021*		*Income Statement Location*
(Amounts in thousands)
Service cost	$	-	$	88	$	-	$	264	Salaries and employee benefits
Interest cost		83		78		249		236	Other expense
Amortization of prior service cost		-		31		-		92	Other expense
Amortization of losses		34		65		101		197	Other expense
Net periodic cost	$	117	$	262	$	350	$	789

Note 12. 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,*
	*2022*		*2021*		*2022*		*2021*
(Amounts in thousands, except share and per share data)
Net income	$	13,351	$	12,608	$	34,079	$	40,613

Weighted average common shares outstanding, basic		16,378,022		17,221,244		16,617,766		17,457,477
Dilutive effect of potential common shares
Stock options		18,975		33,370		16,615		31,094
Unvested stock awards		10,570		24,962		14,681		23,329
Performance restricted stock units		5,635		-		5,635		-
Total dilutive effect of potential common shares		35,180		58,332		36,931		54,423
Weighted average common shares outstanding, diluted		16,413,202		17,279,576		16,654,697		17,511,900

Basic earnings per common share	$	0.82	$	0.73	$	2.05	$	2.32
Diluted earnings per common share		0.81		0.73		2.05		2.32

Antidilutive potential common shares
Stock options		131,198		-		131,198		13,990
Unvested stock awards		-		-		-		214
Total potential antidilutive shares		131,198		-		131,198		14,204

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Note 13. 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, 2022*
	*Unrealized Gains*
	*(Losses) on Available-*
	*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	(9,817	)	$	(1,843	)	$	(11,660	)
Other comprehensive loss before reclassifications		(7,392	)		-			(7,392	)
Reclassified from AOCI		-			27			27
Other comprehensive loss, net		(7,392	)		27			(7,365	)
Ending balance	$	(17,209	)	$	(1,816	)	$	(19,025	)

	*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, net		(164	)		76			(88	)
Ending balance	$	310		$	(2,963	)	$	(2,653	)

	*Nine Months Ended September 30, 2022*
	*Unrealized Gains*
	*(Losses) on Available-*
	*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	15		$	(1,561	)	$	(1,546	)
Other comprehensive loss before reclassifications		(17,224	)		(335	)		(17,559	)
Reclassified from AOCI		-			80			80
Other comprehensive loss, net		(17,224	)		(255	)		(17,479	)
Ending balance	$	(17,209	)	$	(1,816	)	$	(19,025	)

	*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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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)	*2022*		*2021*		*2022*		*2021*		*Line Item Affected*
Available-for-sale securities
Gain recognized	$	-	$	-	$	-	$	-	Net loss on sale of securities
Reclassified out of AOCI, before tax		-		-		-		-	Income before income taxes
Income tax expense		-		-		-		-	Income tax expense
Reclassified out of AOCI, net of tax		-		-		-		-	Net income
Employee benefit plans
Amortization of prior service cost	$	-	$	31	$	-	$	92	Salaries and employee benefits
Amortization of net actuarial benefit cost		34		65		101		197	Salaries and employee benefits
Reclassified out of AOCI, before tax		34		96		101		289	Income before income taxes
Income tax expense		7		20		21		61	Income tax expense
Reclassified out of AOCI, net of tax		27		76		80		228	Net income
Total reclassified out of AOCI, net of tax	$	27	$	76	$	80	$	228	Net income

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

Note 14. 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, 2022*
	*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale debt securities
U.S. Agency securities	$	1,488	$	-	$	1,488	$	-
U.S. Treasury Notes		156,460		-		156,460		-
Municipal securities		23,061		-		23,061		-
Corporate Notes		34,519				34,519
Agency mortgage-backed securities		84,092		-		84,092		-
Total available-for-sale debt securities		299,620		-		299,620		-
Equity securities		55		-		55		-
Fair value loans		3,950		-		-		3,950
Deferred compensation assets		4,822		4,822		-		-
Deferred compensation liabilities		4,822		4,822		-		-

	*December 31, 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	$	466	$	-	$	466	$	-
Municipal securities		28,794		-		28,794		-
Corporate notes		9,919		-		9,919		-
Agency mortgage-backed securities		37,113		-		37,113		-
Total available-for-sale debt securities		76,292		-		76,292		-
Equity securities		55		-		55		-
Fair value loans		13,106		-		-		13,106
Deferred compensation assets		5,245		5,245		-		-
Deferred compensation liabilities		5,245		5,245		-		-
Derivative liabilities		837		-		837		-

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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, 2022*
	*Total*		*Fair Value Measurements Using*
	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Collateral dependent assets with specific reserves	$	-	$	-	$	-	$	-
OREO	$	559	$	-	$	-	$	559

	*December 31, 2021*
	*Total*		*Fair Value Measurements Using*
	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Collateral dependent assets with specific reserves	$	2,312	$	-	$	-	$	2,312
OREO		1,015		-		-		1,015

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, 2022*

Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		0% to 0% (0%)
OREO	Discounted appraisals(1)	Appraisal adjustments(2)		10% to 95% (73%)

(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, 2021*

Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		0% to 11% (6%)
OREO	Discounted appraisals(1)	Appraisal adjustments(2)		0% to 87% (32%)

(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, 2022*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	229,095	$	229,095	$	229,095	$	-	$	-
Debt securities available for sale		299,620		299,620		-		299,620		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,333,345		2,198,020		-		-		2,198,020
Derivative financial assets		211		211		-		211		-
Interest receivable		8,345		8,345		-		8,345		-
Deferred compensation assets		4,822		4,822		4,822		-		-

Liabilities
Time deposits		304,739		304,232		-		304,232		-
Securities sold under agreements to repurchase		1,958		1,958		-		1,958		-
Interest payable		180		180		-		180		-
Deferred compensation liabilities		4,822		4,822		4,822		-		-

	*December 31, 2021*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	677,439	$	677,439	$	677,439	$	-	$	-
Debt securities available for sale		76,292		76,292		-		76,292		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,137,711		2,108,513		-		-		2,108,513
Interest receivable		7,900		7,900		-		7,900		-
Deferred compensation assets		5,245		5,245		5,245		-		-

Liabilities
Time deposits		354,863		352,000		-		352,000		-
Securities sold under agreements to repurchase		1,536		1,536		-		1,536		-
Interest payable		314		314		-		314		-
Deferred compensation liabilities		5,245		5,245		5,245		-		-
Derivative liabilities		837		837		-		837		-

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Note 15. 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, 2022*		*December 31, 2021*
(Amounts in thousands)
Commitments to extend credit	$	302,765	$	272,447
Standby letters of credit and financial guarantees⁽¹⁾		129,527		153,717
Total off-balance sheet risk	$	432,292	$	426,164

Allowance for unfunded commitments ⁽²⁾	$	1,416	$	678

(1)	Includes FHLB letters of credit
(2)	Included in Interest, taxes, and other liabilities on the Condensed Consolidated Balance Sheet

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, 2021 (the “2021 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, 2022, the Bank operated 48 branches in Virginia, West Virginia, North Carolina and Tennessee. As of September 30, 2022, full-time equivalent employees, calculated using the number of hours worked, totaled 613. 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, 2022, the Trust Division and FCWM managed and administered $1.19 billion in combined assets under various fee-based arrangements as fiduciary or agent. The Bank also offers a full range of commercial and personal insurance products through its strategic partnership with Bankers Insurance, LLC.

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 Quarterly Report on Form 10-Q. 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, 2022, 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 2021 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2021 Form 10-K.

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Performance Overview

Highlights of our results of operations for the three and nine months ended September 30, 2022, and financial condition as of September 30, 2022, include the following:

●

Net income of $13.35 million for the quarter was an increase of $743 thousand compared to $12.61 million recorded in the same quarter of 2021. The increase is primarily attributable to an increase in net interest income of $4.2 million and the branch sale gains of $1.66 million offset by an increase in the provision for credit losses of $2.08 million and an increase in salaries and employee benefits of $1.44 million compared to 2021.

	●	On September 16, 2022, the Company completed the sale of First Community Bank’s Emporia, Virginia branch to Benchmark Community Bank. A gain of $1.66 million was realized from the sale.
	●	Net interest margin for the third quarter was 4.01%, which was a 45 basis point increase from 3.56% reported for third quarter of 2021. The yield on earning assets increased 42 basis points, primarily driven by increased earnings on securities and overnight funds.
	●	The cost of interest-bearing deposits declined 6 basis points to 0.08%, primarily driven by a decrease in the cost of time deposits and focus on non-maturing deposits. Additionally, non-maturing deposit balances remained strong even after the Emporia Branch Sale.

	●	Net interest income increased $4.2 million compared to the same quarter of 2021. Interest income from securities of $1.79 million was an increase of $1.34 million over the third quarter of 2021. Interest on fed funds also increased $1.31 million to $1.53 million for the third quarter as a result of the Federal Open Market Committee’s incremental 300 basis point rate increase in overnight rates throughout 2022 as compared to the overnight rates of 2021. Interest and fees on loans increased $1.29 million from the same quarter of 2021 and is primarily attributable to loan demand and originations.
	●	The provision for credit losses of $685 thousand for the quarter was an increase of $2.08 million compared to the same quarter of 2021. The increase was attributable to a return to normalized provisions as compared with prior year recoveries of pandemic-related provisioning.

	●	Despite the significant increase in credit loss provision over 2021, annualized return on average assets was 1.63% for the third quarter and 1.41% for the first nine months of 2022. Annualized return on average common equity was 12.60% for the third quarter and 10.73% for the first nine months of 2022.
	●	Salaries and employee benefits for the third quarter increased $1.44 million, or 13.48%, over the same quarter in 2021. Salaries and employee benefits for the first nine months increased $3.52 million, or 11.10%, over the first nine months of 2021. During the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.5 million as part of its ongoing strategic initiative to enhance Human Capital Management, which included an increased minimum wage.
	●	The Company’s loan portfolio increased by $197.16 million, an annualized growth rate of 12.17%, during the first nine months of 2022. Loan demand and originations were strong in all categories, including construction, commercial real estate, residential mortgage, and consumer loans.
	●	Total deposits sold to Benchmark as part of the Emporia Branch Sale totaled $61.05 million.
	●	During the third quarter, the Company repurchased 235,400 of its common shares for $7.38 million. The Company repurchased 650,907 common shares for $19.42 million during the first nine months of 2022.
	●	The allowance for credit losses to total loans decreased slightly to 1.24% of total loans.
	●	Book value per share at September 30, 2022, was $25.33, a slight decrease of $0.01 from year-end 2021.

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)	2022			2021			(Decrease)			% Change			2022			2021			(Decrease)			% Change

Net income	$	13,351		$	12,608		$	743			5.89	%	$	34,079		$	40,613		$	(6,534	)		-16.09	%

Basic earnings per common share		0.82			0.73			0.09			12.33	%		2.05			2.32			(0.27	)		-11.64	%
Diluted earnings per common share		0.81			0.73			0.08			10.96	%		2.05			2.32			(0.27	)		-11.64	%

Return on average assets		1.63	%		1.59	%		0.04	%		2.52	%		1.41	%		1.74	%		-0.33	%		-18.97	%
Return on average common equity		12.60	%		11.65	%		0.95	%		8.15	%		10.73	%		12.70	%		-1.97	%		-15.51	%

Three-Month Comparison.

Net income increased $743 thousand in the third quarter of 2022 largely due to a $4.2 million increase in net interest income and the branch sale gains totaling $1.66 million. The increases were offset by an increase in the provision for credit losses of $2.08 million to $685 thousand for the third quarter of 2022 compared to a recovery of provision of $1.39 million in the third quarter of 2021. The current year provision is largely due to the loan growth, in particular commercial loan demand. The recovery of provision in the third quarter of 2021 was due to the recovery of pandemic-related provisioning. In addition, salaries and employee benefits increased $1.44 million when compared to the same period of 2021.

Nine-Month Comparison. Net income decreased $6.53 million in the first nine months of 2022 largely due to a $10.78 million increase in the provision for credit losses. Provision for credit losses totaled $3.16 million for the first nine months of 2022 compared to a recovery of provision of $7.63 million in the same period of 2021. As noted for the quarter, the current year provision is largely due to loan growth in the first nine months, in particular commercial loan demand. The recovery of provision in 2021 was driven by the recovery of pandemic-related provisioning. In addition, salaries and employee benefits increased $3.52 million for the first nine months when compared to the same period of 2021. These decreases were offset by an increase in net interest income of $4.8 million, as well as the Emporia Branch Sale gains totaling $1.66 million for first nine months of 2022 when compared to the same period 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,
	2022							2021
	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⁾	$	2,334,596	$	26,474		4.50	%	$	2,149,647	$	25,161		4.64	%
Securities available for sale		301,360		1,833		2.41	%		79,995		509		2.52	%
Interest-bearing deposits		275,290		1,531		2.21	%		586,787		225		0.15	%
Total earning assets		2,911,246		29,838		4.07	%		2,816,429		25,895		3.65	%
Other assets		328,534							330,679
Total assets	$	3,239,780						$	3,147,108

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	689,376	$	28		0.02	%	$	651,237	$	27		0.02	%
Savings deposits		887,454		67		0.03	%		826,144		63		0.03	%
Time deposits		317,294		285		0.36	%		378,895		552		0.58	%
Total interest-bearing deposits		1,894,124		380		0.08	%		1,856,276		642		0.13	%
Borrowings
Retail repurchase agreements		2,378		-		N/M			1,040		1		0.07	%
Total borrowings		2,378		-		N/M			1,040		1		0.07	%
Total interest-bearing liabilities		1,896,502		380		0.08	%		1,857,316		643		0.14	%
Noninterest-bearing demand deposits		881,429							824,112
Other liabilities		41,373							36,419
Total liabilities		2,819,304							2,717,847
Stockholders' equity		420,476							429,261
Total liabilities and stockholders' equity	$	3,239,780						$	3,147,108
Net interest income, FTE⁽¹⁾			$	29,458						$	25,252
Net interest rate spread						3.99	%						3.51	%
Net interest margin, FTE⁽¹⁾						4.01	%						3.56	%

(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 $487 thousand and $1.01 million for the three months ended September 30, 2022 and 2021, respectively.

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AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Nine Months Ended September 30,
	2022							2021
	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⁾	$	2,269,974	$	76,886		4.53	%	$	2,149,556	$	77,722		4.83	%
Securities available for sale		241,640		4,230		2.34	%		82,563		1,590		2.57	%
Interest-bearing deposits		398,326		2,549		0.86	%		555,435		509		0.12	%
Total earning assets		2,909,940		83,665		3.84	%		2,787,554		79,821		3.83	%
Other assets		329,508							331,239
Total assets	$	3,239,448						$	3,118,793

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	689,226	$	85		0.02	%	$	639,809	$	99		0.02	%
Savings deposits		888,062		200		0.03	%		807,863		217		0.04	%
Time deposits		331,808		1,003		0.40	%		395,465		1,919		0.65	%
Total interest-bearing deposits		1,909,096		1,288		0.09	%		1,843,137		2,235		0.15	%
Borrowings
Retail repurchase agreements		2,161		1		0.07	%		1,179		1		0.07	%
Total borrowings		2,161		1		0.07	%		1,179		1		0.07	%
Total interest-bearing liabilities		1,911,257		1,289		0.09	%		1,844,316		2,236		0.16	%
Noninterest-bearing demand deposits		864,119							809,128
Other liabilities		39,487							37,871
Total liabilities		2,814,863							2,691,315
Stockholders' equity		424,585							427,478
Total liabilities and stockholders' equity	$	3,239,448						$	3,118,793
Net interest income, FTE⁽¹⁾			$	82,376						$	77,585
Net interest rate spread						3.75	%						3.67	%
Net interest margin, FTE⁽¹⁾						3.78	%						3.72	%

(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 $2.22 million and $3.45 million for the nine months ended September 30, 2022 and 2021, respectively.

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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, 2022 Compared to 2021												September 30, 2022 Compared to 2021
	Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to
							Rate/												Rate/
(Amounts in thousands)	Volume			Rate			Volume			Total			Volume			Rate			Volume			Total
Interest earned on(1)
Loans	$	6,424		$	(2,327	)	$	(2,784	)	$	1,313		$	4,354		$	(4,915	)	$	(275	)	$	(836	)
Securities available-for-sale		4,180			(67	)		(2,789	)		1,324			3,064			(145	)		(279	)		2,640
Interest-bearing deposits with other banks		(353	)		9,018			(7,359	)		1,306			(144	)		3,046			(862	)		2,040
Total interest earning assets		10,251			6,624			(12,932	)		3,943			7,274			(2,014	)		(1,416	)		3,844

Interest paid on
Demand deposits		5			(2	)		(2	)		1			8			(20	)		(2	)		(14	)
Savings deposits		14			(2	)		(8	)		4			22			(35	)		(4	)		(17	)
Time deposits		(267	)		(625	)		625			(267	)		(309	)		(723	)		116			(916	)
Retail repurchase agreements		(1	)		-			-			(1	)		-			-			-			-
FHLB advances and other borrowings		-			-			-			-			-			-			-			-
Total interest-bearing liabilities		(249	)		(629	)		615			(263	)		(279	)		(778	)		110			(947	)

Change in net interest income(1)	$	10,500		$	7,253		$	(13,547	)	$	4,206		$	7,553		$	(1,236	)	$	(1,526	)	$	4,791

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

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Three-Month Comparison. Net interest income comprised 74.68% of total net interest and noninterest income in the third quarter of 2022 compared to 74.25% in the same quarter of 2021. Net interest income on a GAAP basis increased $4.2 million, or 16.69%, compared to an increase of $4.21 million, or 16.66%, on a FTE basis. The net interest margin on a FTE basis increased 45 basis points and the net interest spread on a FTE basis increased 48 basis points. The increase was primarily driven by increased earnings on securities and overnight funds and a decrease in the cost of time deposits.

Average earning assets increased $94.82 million, or 3.37%, primarily due to an increase in both the securities available for sale and loan portfolios. Securities available for sale increased $221.37 million, or 276.72%, due to recent purchases of $264.96 million in the first nine months of 2022. In addition, average loans increased $184.95 million, or 8.60%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits decreased $311.50 million, or 53.09%. The yield on earning assets increased 42 basis points, or 11.51%, primarily due to the increase in yield on overnight funds due to the Federal Open Market Committee's incremental increase in the fed funds rate of 300 basis points throughout 2022. The average loan to deposit ratio increased to 84.11% from 80.20% in the same quarter of 2021. Non-cash accretion income decreased $522 thousand, or 51.73%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $39.19 million, or 2.11%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 6 basis points. Average interest-bearing deposits increased $37.85 million, or 2.04%. Savings deposits increased $61.31 million, or 7.42%, and interest-bearing demand deposits increased $38.14 million, or 5.86%. These increases were offset by a decrease in time deposits of $61.60 million, or 16.26%.

Nine-Month Comparison. Net interest income comprised 74.56% of total net interest and noninterest income in the nine months ended September 30, 2022 compared to 75.48% in the same period of 2021. Net interest income on a GAAP basis increased $4.80 million, or 6.21%, compared to an increase of $4.79 million, or 6.18%, on a FTE basis. The net interest margin on a FTE basis increased 6 basis points and the net interest spread on a FTE basis increased 8 basis points. As noted for the quarter increase, the nine-month period increase was primarily driven by increased earnings on securities and overnight funds and a decrease in the cost of time deposits.

Average earning assets increased $122.39 million, or 4.39%, primarily due to an increase in both the securities available for sale and loan portfolios. Securities available for sale increased $159.08 million, or 192.67%, due to recent purchases of $264.96 million in the first nine months of 2022. In addition, average loans increased $120.42 million, or 5.60%, primarily due to strong levels of loan demand in all categories. Average interest-bearing deposits decreased $157.11 million, or 28.29%. The yield on earning assets increased 1 basis point for the nine month period as compared to 2021. The average loan to deposit ratio increased to 81.85% from 81.05% in the same period of 2021. Non-cash accretion income decreased $1.23 million, or 35.57%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $66.94 million, or 3.63%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 7 basis points. Average interest-bearing deposits increased $65.96 million, or 3.58%. Savings deposits increased $80.2 million, or 9.93%, and interest-bearing demand deposits increased $49.42 million, or 7.72%. These increases were offset by a decrease in time deposits of $63.66 million, or 16.10%.

Provision for Credit Losses

Three-Month Comparison. The provision charged to operations increased $2.08 million, in the third quarter of 2022 compared to the same quarter of 2021. Provision for credit losses of $685 thousand was recorded in the third quarter of 2022 and was primarily attributable to loan growth. A recovery of provision of $1.39 million was recorded in the third quarter of 2021 and was due to significantly improved economic forecasts from pandemic provisioning.

Nine-Month Comparison. The provision charged to operations increased $10.78 million, for the nine months ended September 30, 2022 compared to the same period of 2021. Provision for credit losses of $3.16 million was recorded for the first nine months of 2022 and was primarily attributable to loan growth. A recovery of provision of $7.63 million was recorded in the same period of 2021 and was due to significantly improved economic forecasts from pandemic provisioning.

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			%
	2022		2021		(Decrease)			Change			2022		2021		(Decrease)			Change
(Amounts in thousands)
Wealth management	$	932	$	974	$	(42	)		-4.31	%	$	2,897	$	2,913	$	(16	)		-0.55	%
Service charges on deposits		3,689		3,599		90			2.50	%		10,859		9,728		1,131			11.63	%
Other service charges and fees		2,988		3,143		(155	)		-4.93	%		9,302		9,331		(29	)		-0.31	%
Divestiture Gain		1,658		-		1,658			-			1,658		-		1,658			-
Other operating income		683		1,004		(321	)		-31.97	%		3,282		3,114		168			5.39	%
Total noninterest income	$	9,950	$	8,720	$	1,230			14.11	%	$	27,998	$	25,086	$	2,912			11.61	%

Three-Month Comparison. Noninterest income comprised 25.32% of total net interest and noninterest income in the third quarter of 2022 compared to 25.75% in the same quarter of 2021. Noninterest income increased $1.23 million or 14.11%. The increase is primarily driven by the $1.66 million gain realized during the quarter for the Emporia Branch Sale.

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Nine-Month Comparison. Noninterest income comprised 25.44% of total net interest and noninterest income for the first nine months of 2022 compared to 24.52% in the same period of 2021. Noninterest income increased $2.91 million or 11.61%. A gain $1.66 million was realized during the quarter for the sale of the Emporia, Virginia branch. Service charges on deposits increased $1.13 million, or 11.63%, compared with the same period of 2021. The increases are primarily attributable to increased customer activity compared to the activity levels experienced during 2021.

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			%
	2022		2021		(Decrease)			Change			2022		2021		(Decrease)			Change
(Amounts in thousands)
Salaries and employee benefits	$	12,081	$	10,646	$	1,435			13.48	%	$	35,270	$	31,746	$	3,524			11.10	%
Occupancy expense		1,188		1,155		33			2.86	%		3,622		3,545		77			2.17	%
Furniture and equipment expense		1,478		1,385		93			6.71	%		4,588		4,209		379			9.00	%
Service fees		1,635		1,530		105			6.86	%		5,701		4,378		1,323			30.22	%
Advertising and public relations		718		536		182			33.96	%		1,835		1,487		348			23.40	%
Professional fees		208		313		(105	)		-33.55	%		1,205		1,069		136			12.72	%
Amortization of intangibles		365		365		-			0.00	%		1,082		1,082		-			0.00	%
FDIC premiums and assessments		321		216		105			48.61	%		796		619		177			28.59	%
Divestiture expense		153		-		153			-			153		-		153			-
Other operating expense		2,998		2,690		308			11.45	%		8,134		8,882		(748	)		-8.42	%
Total noninterest expense	$	21,145	$	18,836	$	2,309			12.26	%	$	62,386	$	57,017	$	5,369			9.42	%

Three-Month Comparison. Noninterest expense increased $2.31 million, or 12.26%, in the third quarter of 2022 compared to the same quarter of 2021. The increase was largely attributable to an increase in salaries and employee benefits of $1.44 million or 13.48%. Early in the first quarter of 2022, the Company implemented annualized wage increases of approximately $2.5 million as part of its strategic initiative to enhance Human Capital Management, which included an increased minimum wage. Other operating expense increased $308 thousand, or 11.45%. The increase is primarily attributable to a $310 thousand increase in the provision for off-balance sheet credit losses. Other increases occurred in advertising and public relations of $182 thousand and divestiture expense of $153 thousand.

Nine-Month Comparison. Noninterest expense increased $5.37 million, or 9.42%, in the first nine months of 2022 compared to the same period of 2021. As in the quarter, the increase was largely attributable to an increase in salaries and employee benefits of $3.52 million or 11.10%. The increase is due to wage increases implemented in the first quarter as part of the Company's strategic initiative to enhance Human Capital Management, which included an increased minimum wage. In addition, service fees increased $1.32 million, or 30.22% primarily due to an increase in core processing expense. These increases were offset by a decrease in other operating expense of $748 thousand, or 8.42%. The decrease is primarily attributable to the 2021 write-down of bank property of $781 thousand.

Income Tax Expense

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies.

Three-Month Comparison. Income tax expense increased $295 thousand, or 7.73% and was primarily due to the decrease in pre-tax income. The effective tax rate increased to 23.54% in the third quarter of 2022 from 23.23% in the same quarter of 2021.

Nine-Month Comparison. Income tax expense decreased $1.90 million, or 15.45% and was primarily due to the decrease in pre-tax income. The effective tax rate increased 13 basis points to 23.41% for the first nine months of 2022 compared to 23.28% in the same period of 2021.

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,
	2022			2021			2022			2021
(Amounts in thousands)
Net interest income, GAAP	$	29,342		$	25,146		$	82,042		$	77,242
FTE adjustment(1)		116			106			334			343
Net interest income, FTE		29,458			25,252			82,376			77,585

Net interest margin, GAAP		3.99	%		3.54	%		3.77	%		3.70	%
FTE adjustment(1)		0.02	%		0.02	%		0.01	%		0.02	%
Net interest margin, FTE		4.01	%		3.56	%		3.78	%		3.72	%

(1) FTE basis of 21%.

Financial Condition

Total assets as of September 30, 2022, decreased $33.72 million, or 1.06%, from December 31, 2021. The decrease in assets was primarily driven by a decrease in overnight funds of $454.9 million, or 72.55%. The decrease in overnight funds was offset by an increase in available-for-sale debt securities of $223.33 million, or 292.73%, and an increase in loans of $197.16 million, or 9.10%. Total liabilities decreased $18.20 million, or 0.66%, as of September 30, 2022, from December 31, 2021. The decrease in liabilities was primarily driven by a decrease in total deposits of $19.17 million, or 0.70%. The decrease in deposits was primarily due to the $61.05 million divestiture of deposits in the Emporia branch sale offset by an increase in deposits of $41.88 million excluding the effect of the Emporia Branch Sale.

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, 2022, increased $223.33 million, or 292.73%, compared to December 31, 2021. The increase is due to the purchase of $264.96 million in securities comprised of U. S. Treasury Notes, mortgage-backed securities, and corporate notes. The purchases were offset by $19.86 million in maturities, prepayments, and calls. The market value of debt securities available for sale as a percentage of amortized cost was 93.22% as of September 30, 2022, compared to 100.02% as of December 31, 2021. The decrease in the market value of debt securities available for sale as a percentage of amortized cost is primarily attributable to the increasing rate environment since year-end 2021.

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, 2022 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.

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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, 2022					December 31, 2021					September 30, 2021
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Loans held for investment
Commercial loans
Construction, development, and other land	$	109,104		4.62	%	$	65,806		3.04	%	$	56,466		2.62	%
Commercial and industrial		148,024		6.26	%		133,630		6.17	%		133,923		6.22	%
Multi-family residential		135,489		5.73	%		100,402		4.64	%		100,444		4.67	%
Single family non-owner occupied		196,133		8.30	%		198,778		9.18	%		196,946		9.15	%
Non-farm, non-residential		777,350		32.90	%		707,506		32.67	%		711,861		33.08	%
Agricultural		10,537		0.45	%		9,341		0.43	%		9,784		0.45	%
Farmland		12,127		0.51	%		15,013		0.69	%		17,614		0.82	%
Total commercial loans		1,388,764		58.77	%		1,230,476		56.82	%		1,227,038		57.01	%
Consumer real estate loans
Home equity lines		77,424		3.28	%		79,857		3.69	%		83,079		3.86	%
Single family owner occupied		726,780		30.76	%		703,864		32.50	%		684,930		31.83	%
Owner occupied construction		14,602		0.62	%		16,910		0.78	%		25,551		1.19	%
Total consumer real estate loans		818,806		34.66	%		800,631		36.97	%		793,560		36.88	%
Consumer and other loans
Consumer loans		151,022		6.39	%		129,794		5.99	%		126,578		5.88	%
Other		4,141		0.18	%		4,668		0.22	%		4,927		0.23	%
Total consumer and other loans		155,163		6.57	%		134,462		6.21	%		131,505		6.11	%
Total loans held for investment, net of unearned income		2,362,733		100.00	%		2,165,569		100.00	%		2,152,103		100.00	%
Less: allowance for credit losses		29,388					27,858					29,877
Total loans held for investment, net of unearned income and allowance	$	2,333,345				$	2,137,711				$	2,122,226

Total loans as of September 30, 2022, increased $197.16 million, or 9.10%, compared to December 31, 2021, with increases in all three loan segments. The largest increase, $158.29 million, occurred in the commercial loan segment. The increase was comprised of increases of $69.84 million in non-farm, non-residential real estate, $43.30 million in construction, development, and other land, and $35.09 million in multi-family categories. Consumer and other loans increased $20.70 million and consumer real estate loans increased $18.18 million with the increase concentrated in the single family owner occupied category.

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 performs an independent credit analysis on a risk-based sample of commercial loan relationships annually, and performs a qualitative review of a sample of smaller commercial and retail loans.

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.

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

	September 30, 2022			December 31, 2021			September 30, 2021
(Amounts in thousands)
Nonperforming
Nonaccrual loans	$	15,303		$	20,768		$	22,067
Accruing loans past due 90 days or more		131			87			5
TDRs(1)		1,331			1,367			584
Total nonperforming loans		16,765			22,222			22,656
OREO		559			1,015			1,240
Total nonperforming assets	$	17,324		$	23,237		$	23,896


Additional Information
Total Accruing TDRs(2)	$	7,028		$	8,652		$	8,185


Asset Quality Ratios:
Nonperforming loans to total loans		0.71	%		1.03	%		1.05	%
Nonperforming assets to total assets		0.55	%		0.73	%		0.76	%
Allowance for credit losses to nonperforming loans		175.29	%		125.36	%		131.87	%
Allowance for credit losses to total loans		1.24	%		1.29	%		1.39	%

(1)	TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $2.09 million, $1.80 million, and $3.03 million for the periods ended September 30, 2022, December 31, 2021, and September 30, 2021, respectively. They are included in nonaccrual loans.
(2)	Total accruing TDRs exclude nonaccrual TDRs of $1.48 million, $2.52 million, and $3.60 million for the periods ended September 30, 2022, December 31, 2021, and September 30, 2021, respectively. They are included in nonaccrual loans.

Nonperforming assets as of September 30, 2022, decreased $5.91 million, or 25.45%, from December 31, 2021, with the largest decrease occurring on nonaccrual loans. Nonaccrual loans decreased $5.47 million, or 26.31%, non-performing TDR's decreased $36 thousand, or 2.63%, and OREO decreased $456 thousand, or 44.93%. As of September 30, 2022, nonaccrual loans were largely attributed to single family owner occupied (55%), non-farm, non-residential (14.85%), and consumer loans (12.72%). 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 $27.41 million as of September 30, 2022, a decrease of $5.70 million, or 17.21%, compared to $33.10 million as of December 31, 2021. Delinquent loans as a percent of total loans totaled 1.16% as of September 30, 2022, which includes past due loans (0.51%) and nonaccrual loans (0.65%).

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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, 2022, decreased $1.62 million, or 18.77%, to $7.03 million from December 31, 2021. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of September 30, 2022, decreased $36 thousand compared to December 31, 2021. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 18.94% as of September 30, 2022, compared to 15.81% as of December 31, 2021. There were no specific reserves related to TDRs as of September 30, 2022, or December 31, 2021.

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.

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $456 thousand, or 44.93%, as of September 30, 2022, compared to December 31, 2021, and consisted of 10 properties with an average holding period of approximately 12 months. The net loss on the sale of OREO totaled $422 thousand for the nine months ended September 30, 2022, compared to $135 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,
	2022			2021
(Amounts in thousands)
Beginning balance	$	1,015		$	2,083
Additions		438			1,147
Disposals		(442	)		(1,738	)
Valuation adjustments		(452	)		(252	)
Ending balance	$	559		$	1,240

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, 2022, the balance of the ACL for loans was $29.39 million, or 1.24% of total loans. The ACL at September 30, 2022, increased $1.53 million from the balance of $27.86 million recorded at December 31, 2021. This increase included a $3.16 million provision offset by net charge-offs for the nine months of $1.63 million. The provision was primarily driven by loan growth in the first nine months of 2022.

At September 30, 2022, the Company also had an allowance for unfunded commitments of $1.42 million which was recorded in Other Liabilities on the Balance Sheet. During the first nine months of 2022, the provision for credit losses on unfunded commitments was $737 thousand compared to a provision of $102 thousand recorded in the same period of 2021.

Deposits

Total deposits as of September 30, 2022, decreased $19.17 million, or 0.70%, compared to December 31, 2021. Total deposits divested in the Emporia Branch Sale to Benchmark totaled $61.05 million. The divested deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. Excluding the effect of the branch sale, deposits increased $41.88 million. The increase was largely attributable to an increase in non-interest bearing demand of $54.02 million, or 6.41%, and an increase in savings of $24.87 million, or 2.91%. Interest-bearing demand deposits also reflected growth with an increase of $10.42 million, or 1.54%. These increases were offset by a decrease in time deposits of $47.43 million, or 13.37%.

Borrowings

Total borrowings in the form of retail repurchase agreements as of September 30, 2022, increased $422 thousand, or 27.47%, compared to December 31, 2021.

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, 2022, the Company’s cash reserves and short-term investment securities totaled $10.54 million and $43.32 million, respectively. 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, 2022, our unencumbered cash totaled $229.10 million, unused borrowing capacity from the FHLB totaled $422.61 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 $271.80 million.

Capital Resources

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of September 30, 2022, decreased $15.52 million, or 3.63%, to $412.26 million from $427.78 million as of December 31, 2021. The change in stockholders’ equity was largely due to net income of $34.08 million offset by other comprehensive loss of $17.48 million, the repurchase of 650,907 shares of our common stock totaling $19.42 million, and dividends declared on our common stock of $13.81 million. 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 decreased $0.01, or 0.04%, to $25.33 as of September 30, 2022, from $25.34 as of December 31, 2021.

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 2021 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, 2022		December 31, 2021
	Company	Bank	Company	Bank

Common equity Tier 1 ratio	13.09%	11.70%	14.39%	13.37%
Tier 1 risk-based capital ratio	13.09%	11.70%	14.39%	13.37%
Total risk-based capital ratio	14.34%	12.95%	15.65%	14.62%
Tier 1 leverage ratio	9.53%	8.53%	9.65%	8.94%

Our risk-based capital ratios as of September 30, 2022, decreased from December 31, 2021, due to an increase in our risk-weighted assets. The increase in risk-weighted assets was primarily due to the increase in total loans as well as an increase in available for sale debt securities from year-end 2021. As of September 30, 2022, 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, 2022.

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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, 2022		December 31, 2021
(Amounts in thousands)
Commitments to extend credit	$	302,765	$	272,447
Standby letters of credit and financial guarantees (1)		129,527		153,717
Total off-balance sheet risk	$	432,292	$	426,164

Allowance for unfunded commitments	$	1,416	$	678

(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, 2022, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 300 to 325 basis points. The level of benchmark interest rates at year-end 2021, rendered a complete downward shock of 100 and 200 basis points meaningless; accordingly, a downward rate scenario is only presented for the current period. In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

	September 30, 2022						December 31, 2021
Increase (Decrease) in Basis Points	Change in Net Interest Income			Percent Change			Change in Net Interest Income		Percent Change
(Dollars in thousands)
300	$	2,858			2.44	%	$	14,960		14.90	%
200		1,859			1.59	%		10,303		10.30	%
100		1,062			0.91	%		5,502		5.50	%
(100)		(6,709	)		-5.72	%		N/A		N/A
(200)		(14,486	)		-12.36	%		N/A		N/A

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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.

Astronomic federal government spending, growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, have contributed to rising inflation. In response, the Federal Reserve Bank has begun raising interest rates and signaled that it will continue to raise rates, taper its purchase of mortgage and other bonds and reduce the size of the balance sheet over time. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) in 2023, 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 Quarterly Report on Form 10-Q.

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, 2022, 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, 2022, 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, 2021, 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, 2021 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, 2021.

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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 235,400 shares of our common stock during the third quarter of 2022 compared to 277,386 shares purchased during the same quarter of 2021.

The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan		Maximum Number of Shares that May Yet be Purchased Under the Plan

July 1-31, 2022		89,700	$	29.85		89,700		945,407
August 1-31, 2022		76,400		32.46		76,400		869,007
September 1-30, 2022		69,300		32.12		69,300		799,707
Total		235,400	$	31.36		235,400

ITEM 3.

Defaults Upon Senior Securities

None.

ITEM 4.

Mine Safety Disclosures

None.

ITEM 5.

Other Information

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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

10.6**	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
10.9.6*	Amendment #5 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan.
10.9.7*	Amendment #6 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan.
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, 2022, (Unaudited) and December 31, 2021; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2022 and 2021; 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, 2022, 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 8th day of November, 2022.

		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)