~~0000859070us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember2019-06-30~~00008590702012-12-31

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 endedJune September 30,~~, 20~~20 2020

☐ 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)

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 ~~July 31,~~October 27, 2020, there were ~~17,710,285~~17,717,306 shares outstanding of the registrant’s Common Stock, $1.00 par value.

Table of Contents

FIRST COMMUNITY BANKSHARES, INC.
FORM 10-Q
INDEX

PART I.	FINANCIAL INFORMATION		Page

Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2020 (Unaudited) and December 31, 2019	4
		Condensed Consolidated Statements of Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2020 and 2019 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2020 and 2019 (Unaudited)	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2020 and 2019 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2020 and 2019 (Unaudited)	9
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		57
Item 4.	Controls and Procedures		57

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		58
Item 1A.	Risk Factors		58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		60
Item 3.	Defaults Upon Senior Securities		60
Item 4.	Mine Safety Disclosures		60
Item 5.	Other Information		60
Item 6.	Exhibits		60

Signatures			62

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

●

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

●

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

●

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

●

inflation, interest rate, market and monetary fluctuations;

●

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

●

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

●

the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

●

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

●

further, future, and proposed rules, including those that are part of the process outlined in the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” which require banking institutions to increase levels of capital;

●

technological changes;

●

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

●

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

●

unanticipated regulatory or judicial proceedings;

●

changes in consumer spending and saving habits; and

●

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

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,			*September 30,*			*December 31,*
	2020			2019⁽¹⁾			*2020*			2019⁽¹⁾
(Amounts in thousands, except share and per share data)	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	57,507		$	66,818		$	49,895		$	66,818
Federal funds sold		361,680			148,000			323,355			148,000
Interest-bearing deposits in banks		2,305			2,191			2,414			2,191
Total cash and cash equivalents		421,492			217,009			375,664			217,009
Debt securities available for sale		98,367			169,574			90,972			169,574
Loans held for sale		-			263			0			263
Loans held for investment, net of unearned income (includes covered loans of $11,257 and $12,861, respectively)		2,136,817			2,114,460
Loans held for investment, net of unearned income (includes covered loans of $10,744 and $12,861, respectively)								2,194,995			2,114,460
Allowance for loan losses		(23,758	)		(18,425	)		(27,277	)		(18,425	)
Loans held for investment, net		2,113,059			2,096,035			2,167,718			2,096,035
FDIC indemnification asset		1,943			2,883			1,598			2,883
Premises and equipment, net		62,658			62,824			60,488			62,824
Other real estate owned		2,181			3,969			2,103			3,969
Interest receivable		8,380			6,677			9,151			6,677
Goodwill		129,565			129,565			129,565			129,565
Other intangible assets		7,798			8,519			7,433			8,519
Other assets		103,623			101,529			103,236			101,529
Total assets	$	2,949,066		$	2,798,847		$	2,947,928		$	2,798,847

Liabilities
Deposits												��
Noninterest-bearing	$	752,899		$	627,868		$	750,277		$	627,868
Interest-bearing		1,744,947			1,702,044			1,741,962			1,702,044
Total deposits		2,497,846			2,329,912			2,492,239			2,329,912
Securities sold under agreements to repurchase		1,100			1,601			956			1,601
Interest, taxes, and other liabilities		34,290			38,515			34,816			38,515
Total liabilities		2,533,236			2,370,028			2,528,011			2,370,028

Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding		-			-
Common stock, $1 par value; 50,000,000 shares authorized; 24,306,138 shares issued and 17,709,569 outstanding at June 30, 2020; 24,238,907 shares issued and 18,376,991 outstanding at December 31, 2019		17,710			18,377
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								0			0
Common stock, $1 par value; 50,000,000 shares authorized; 24,313,091 shares issued and 17,716,522 outstanding at September 30, 2020; 24,238,907 shares issued and 18,376,991 outstanding at December 31, 2019								17,717			18,377
Additional paid-in capital		172,601			192,413			172,980			192,413
Retained earnings		226,627			219,535			230,464			219,535
Accumulated other comprehensive loss		(1,108	)		(1,506	)		(1,244	)		(1,506	)
Total stockholders' equity		415,830			428,819			419,917			428,819
Total liabilities and stockholders' equity	$	2,949,066		$	2,798,847		$	2,947,928		$	2,798,847

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended						Six Months Ended						*Three Months Ended*						*Nine Months Ended*
	June 30,						June 30,						*September 30,*						*September 30,*
(Amounts in thousands, except share and per share data)	2020			2019			2020			2019			*2020*			*2019*			*2020*			*2019*
Interest income
Interest and fees on loans	$	26,991		$	22,721		$	55,049		$	44,900		$	27,297		$	22,068		$	82,346		$	66,968
Interest on securities -- taxable		238			246			618			655			190			261			808			916
Interest on securities -- tax-exempt		475			649			1,013			1,334			419			596			1,432			1,930
Interest on deposits in banks		82			766			615			1,104			89			680			704			1,784
Total interest income		27,786			24,382			57,295			47,993			27,995			23,605			85,290			71,598
Interest expense
Interest on deposits		1,445			1,392			3,270			2,697			1,161			1,383			4,431			4,080
Interest on short-term borrowings		2			1			4			121			0			1			4			122
Total interest expense		1,447			1,393			3,274			2,818			1,161			1,384			4,435			4,202
Net interest income		26,339			22,989			54,021			45,175			26,834			22,221			80,855			67,396
Provision for credit losses		3,831			1,585			7,331			2,805
Provision for loan losses														4,703			675			12,034			3,480
Net interest income after provision for loan losses		22,508			21,404			46,690			42,370			22,131			21,546			68,821			63,916
Noninterest income
Wealth management		854			884			1,698			1,629			909			952			2,607			2,581
Service charges on deposits		2,560			3,699			6,291			7,107			3,250			3,785			9,541			10,892
Other service charges and fees		2,617			2,129			4,848			4,178			2,748			2,007			7,596			6,185
Net (loss) gain on sale of securities		-			(43	)		385			(43	)		0			0			385			(43	)
Net FDIC indemnification asset amortization		(483	)		(516	)		(969	)		(1,068	)		(383	)		(719	)		(1,352	)		(1,787	)
Litigation settlements		-			2,025			-			3,700			0			900			0			4,600
Other operating income		1,365			471			2,209			1,226			1,114			709			3,323			1,935
Total noninterest income		6,913			8,649			14,462			16,729			7,638			7,634			22,100			24,363
Noninterest expense
Salaries and employee benefits		11,015			9,153			22,401			18,319			10,485			9,334			32,886			27,653
Occupancy expense		1,275			1,082			2,590			2,235			1,228			1,042			3,818			3,277
Furniture and equipment expense		1,316			1,062			2,700			2,095			1,412			1,183			4,112			3,278
Service fees		1,329			1,231			2,852			2,261			1,581			1,466			4,433			3,727
Advertising and public relations		475			513			987			1,037			430			795			1,417			1,832
Professional fees		307			328			540			742			408			548			948			1,290
Amortization of intangibles		360			249			721			495			365			251			1,086			746
FDIC premiums and assessments		33			150			33			318			191			0			224			318
Merger expenses		-			-			1,893			-			0			592			1,893			592
Other operating expense		2,803			2,883			5,860			5,934			3,071			2,233			8,931			8,167
Total noninterest expense		18,913			16,651			40,577			33,436			19,171			17,444			59,748			50,880
Income before income taxes		10,508			13,402			20,575			25,663			10,598			11,736			31,173			37,399
Income tax expense		2,270			2,951			4,465			5,581			2,332			2,580			6,797			8,161
Net income	$	8,238		$	10,451		$	16,110		$	20,082		$	8,266		$	9,156		$	24,376		$	29,238

Earnings per common share
Basic	$	0.47		$	0.67		$	0.90		$	1.27		$	0.47		$	0.59		$	1.37		$	1.86
Diluted		0.46			0.66			0.90			1.27			0.47			0.58			1.37			1.85
Weighted average shares outstanding
Basic		17,701,853			15,712,204			17,850,423			15,775,462			17,710,283			15,603,992			17,803,369			15,717,678
Diluted		17,728,300			15,775,320			17,888,325			15,847,498			17,732,428			15,664,587			17,836,963			15,785,484

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended					Six Months Ended						*Three Months Ended*					*Nine Months Ended*
	June 30,					June 30,						*September 30,*					*September 30,*
	2020			2019		2020			2019			*2020*			*2019*		*2020*			*2019*
(Amounts in thousands)
Net income	$	8,238		$	10,451	$	16,110		$	20,082		$	8,266		$	9,156	$	24,376		$	29,238
Other comprehensive income, before tax
Available-for-sale debt securities:
Change in net unrealized (losses) gains on debt securities without other-than-temporary impairment		(58	)		332		1,141			1,550			(268	)		28		873			1,578
Reclassification adjustment for net (gains) losses recognized in net income		-			43		(385	)		43			0			0		(385	)		43
Net unrealized (losses) gains on available-for-sale debt securities		(58	)		375		756			1,593			(268	)		28		488			1,621
Employee benefit plans:
Net actuarial (loss) gain		-			1		(445	)		(406	)		(1	)		1		(446	)		(405	)
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income		97			70		193			139			97			67		290			207
Net unrealized gains (losses) on employee benefit plans		97			71		(252	)		(267	)		96			68		(156	)		(198	)
Other comprehensive income, before tax		39			446		504			1,326
Other comprehensive (loss) income, before tax													(172	)		96		332			1,423
Income tax expense		8			94		106			278			(36	)		20		70			299
Other comprehensive income, net of tax		31			352		398			1,048
Other comprehensive (loss) income, net of tax													(136	)		76		262			1,124
Total comprehensive income	$	8,269		$	10,803	$	16,508		$	21,130		$	8,130		$	9,232	$	24,638		$	30,362

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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

THREE MONTHS ENDED

~~June~~September 30, 2020 and 2019

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

Balance April 1, 2019	$	-	$	15,818		$	115,914		$	202,103		$	(733	)	$	333,102
Balance July 1, 2019																		$	-	$	15,633		$	109,816		$	208,618		$	(381	)	$	333,686
Net income		-		-			-			10,451			-			10,451			-		-			-			9,156			-			9,156
Other comprehensive income		-		-			-			-			352			352			-		-			-			-			76			76
Common dividends declared -- $0.25 per share		-		-			-			(3,936	)		-			(3,936	)
Common dividends declared -- $0.25 per share																			-		-			-			(3,908	)		-			(3,908	)
Equity-based compensation expense		-		4			145			-			-			149			-		0			216			-			-			216
Common stock options exercised -- 2,927 shares		-		2			56			-			-			58
Issuance of common stock to 401(k) plan -- 2,555 shares		-		3			84			-			-			87
Repurchase of common shares -- 194,000 shares at $33.90 per share		-		(194	)		(6,383	)		-			-			(6,577	)
Balance June 30, 2019	$	-	$	15,633		$	109,816		$	208,618		$	(381	)	$	333,686
Common stock options exercised -- 3,407 shares																			-		4			37			-			-			41
Issuance of common stock to 401(k) plan -- 3,010 shares																			-		4			95			-			-			99
Repurchase of common shares -- 60,500 shares at $33.11 per share																			-		(61	)		(1,942	)		-			-			(2,003	)
Balance September 30, 2019																		$	-	$	15,580		$	108,222		$	213,866		$	(305	)	$	337,363

Balance April 1, 2020	$	-	$	17,700		$	172,231		$	222,814		$	(1,139	)	$	411,606
Balance July 1, 2020																		$	-	$	17,710		$	172,601		$	226,627		$	(1,108	)	$	415,830
Net income		-		-			-			8,238			-			8,238			-		-			-			8,266			-			8,266
Other comprehensive income		-		-			-			-			31			31			-		-			-			-			(136	)		(136	)
Common dividends declared -- $0.25 per share		-		-			-			(4,425	)		-			(4,425	)
Common dividends declared -- $0.25 per share																			-		-			-			(4,429	)		-			(4,429	)
Equity-based compensation expense		-		5			261			-			-			266			-		1			262			-			-			263
Issuance of common stock to 401(k) plan -- 5,294 shares		-		5			109			-			-			114
Balance June 30, 2020	$	-	$	17,710		$	172,601		$	226,627		$	(1,108	)	$	415,830
Issuance of common stock to 401(k) plan -- 6,237 shares																			-		6			117			-			-			123
Balance September 30, 2020																		$	0	$	17,717		$	172,980		$	230,464		$	(1,244	)	$	419,917

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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

~~SIX~~nine MONTHS ENDED

~~June~~September 30, 2020 and 2019

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

Balance January 1, 2019	$	-	$	16,007		$	122,486		$	195,793		$	(1,429	)	$	332,857		$	0	$	16,007		$	122,486		$	195,793		$	(1,429	)	$	332,857
Net income		-		-			-			20,082			-			20,082			-		-			-			29,238			-			29,238
Other comprehensive income		-		-			-			-			1,048			1,048			-		-			-			-			1,124			1,124
Common dividends declared -- $0.46 per share		-		-			-			(7,257	)		-			(7,257	)
Common dividends declared -- $0.71 per share																			-		-			-			(11,165	)		-			(11,165	)
Equity-based compensation expense		-		42			964			-			-			1,006			-		42			1,180			-			-			1,222
Common stock options exercised -- 4,345 shares		-		4			78			-			-			82
Issuance of common stock to 401(k) plan -- 6,653 shares		-		7			220			-			-			227
Repurchase of common shares -- 426,900 shares at $33.63 per share		-		(427	)		(13,932	)		-			-			(14,359	)
Balance June 30, 2019	$	-	$	15,633		$	109,816		$	208,618		$	(381	)	$	333,686
Common stock options exercised -- 7,752 shares																			-		8			116			-			-			124
Issuance of common stock to 401(k) plan -- 9,663 shares																			-		10			315			-			-			325
Repurchase of common shares -- 487,400 shares at $33.57 per share																			-		(487	)		(15,875	)		-			-			(16,362	)
Balance September 30, 2019																		$	-	$	15,580		$	108,222		$	213,866		$	(305	)	$	337,363

Balance January 1, 2020	$	-	$	18,377		$	192,413		$	219,535		$	(1,506	)	$	428,819		$	-	$	18,377		$	192,413		$	219,535		$	(1,506	)	$	428,819
Net income		-		-			-			16,110			-			16,110			-		-			-			24,376			-			24,376
Other comprehensive income		-		-			-			-			398			398			-		-			-			-			262			262
Common dividends declared -- $0.50 per share		-		-			-			(9,018	)		-			(9,018	)
Common dividends declared -- $0.75 per share																			-		-			-			(13,447	)		-			(13,447	)
Equity-based compensation expense		-		56			1,049			-			-			1,105			-		57			1,311			-			-			1,368
Issuance of common stock to 401(k) plan -- 11,911 shares		-		12			276			-			-			288
Repurchase of common shares -- 734,653 shares at $29.77 per share		-		(735	)		(21,137	)		-			-			(21,872	)
Balance June 30, 2020	$	-	$	17,710		$	172,601		$	226,627		$	(1,108	)	$	415,830
Issuance of common stock to 401(k) plan -- 18,148 shares																			-		18			393			-			-			411
Repurchase of common shares -- 734,653 shares at $29.77 per share																			0		(735	)		(21,137	)		0			0			(21,872	)
Balance September 30, 2020																		$	0	$	17,717		$	172,980		$	230,464		$	(1,244	)	$	419,917

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended						*Nine Months Ended*
	June 30,						*September 30,*
(Amounts in thousands)	2020			2019			*2020*			*2019*
Operating activities
Net income	$	16,110		$	20,082		$	24,376		$	29,238
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		7,331			2,805			12,034			3,480
Depreciation and amortization of premises and equipment		2,209			1,565			3,328			2,491
Amortization of premiums on investments, net		1,304			116			1,387			171
Amortization of FDIC indemnification asset, net		969			1,068			1,352			1,787
Amortization of intangible assets		721			495			1,086			746
Accretion on acquired loans		(3,456	)		(2,154	)		(5,221	)		(2,720	)
Equity-based compensation expense		1,105			1,006			1,368			1,222
Issuance of common stock to 401(k) plan		288			227			411			325
Gain on sale of premises and equipment, net		(1	)		(183	)
Loss (gain) on sale of premises and equipment, net								9			(104	)
Loss on sale of other real estate owned		330			557			299			791
(Gain) Loss on sale of securities		(385	)		43			(385	)		43
(Increase) decrease in accrued interest receivable		(1,703	)		164			(2,474	)		639
Increase in other operating activities		(6,608	)		(342	)
(Increase) decrease in other operating activities								(5,542	)		1,527
Net cash provided by operating activities		18,214			25,449			32,028			39,636
Investing activities
Proceeds from sale of securities available for sale		51,027			13,897			51,027			13,897
Proceeds from maturities, prepayments, and calls of securities available for sale		20,018			23,824			29,614			29,555
Proceeds from maturities and calls of securities held to maturity		-			25,000			0			25,000
Payments to acquire securities available for sale		-			(2,234	)		(2,553	)		(4,453	)
(Originations of) proceeds from repayment of loans, net		(20,992	)		51,555			(78,663	)		78,036
(Purchase of) proceeds from FHLB stock, net		(12	)		129			(12	)		129
Payments to the FDIC		(29	)		(20	)		(67	)		(137	)
Proceeds from sale of premises and equipment		65			948			1,435			1,038
Payments to acquire premises and equipment		(2,125	)		(4,952	)		(2,474	)		(6,225	)
Proceeds from sale of other real estate owned		1,814			1,542			1,997			2,917
Net cash provided by investing activities		49,766			109,689			304			139,757
Financing activities
Increase in noninterest-bearing deposits, net		125,031			21,023			122,409			12,928
Increase (decrease) in interest-bearing deposits, net		42,903			(28,735	)		39,918			(31,826	)
Repayments of securities sold under agreements to repurchase, net		(501	)		(26,287	)		(645	)		(27,507	)
Repayments of FHLB and other borrowings, net		(40	)		-			(40	)		0
Proceeds from stock options exercised		-			82			0			124
Payments for repurchase of common stock		(21,872	)		(14,359	)		(21,872	)		(16,362	)
Payments of common dividends		(9,018	)		(7,257	)		(13,447	)		(11,165	)
Net cash provided by (used in) financing activities		136,503			(55,533	)		126,323			(73,808	)
Net increase in cash and cash equivalents		204,483			79,605			158,655			105,585
Cash and cash equivalents at beginning of period		217,009			76,873			217,009			76,873
Cash and cash equivalents at end of period	$	421,492		$	156,478		$	375,664		$	182,458

Supplemental disclosure -- cash flow information
Cash paid for interest	$	2,960		$	2,899		$	4,334		$	4,308
Cash paid for income taxes		4,547			5,337			5,607			7,083

Supplemental transactions -- noncash items
Transfer of loans to other real estate owned		621			2,694			695			2,883
Loans originated to finance other real estate owned		265			471			265			484
Decrease in accumulated other comprehensive loss		398			1,048			262			1,124

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

General

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, 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, 2019 (~~the~~ (the ““2019 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020. The condensed consolidated balance sheet as of December 31, 2019, 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 2019 Form 10-K.

Risks and Uncertainties

Recent COVID-19 Virus Developments –

During the first ~~half~~nine months of 2020, 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.

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Company Response to COVID-19 –

As COVID-19 events unfolded during the first ~~half~~nine months of 2020, 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. In particular, the Company took the following actions, among others:

•

Implemented its board-approved pandemic business continuity plan

•

Appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-19

•

Modified branch operations:

Branch lobbies remain available, but on a limited appointment-only basis

Most transactions conducted via drive-throughs

Increased emphasis on digital banking platforms

•

Implemented physical separation of critical operational workforce for Bank and non-Bank financial services subsidiaries

•

Expanded paid time off and health benefits for employees

•

Implemented work from home ~~strategy:~~strategy for appropriate staff:

○

~~The majority~~Many of the ~~Company’s~~Company's non-branch, operational essential employees ~~(approximately~~ ~~60%~~ ~~of the Company’s back office workforce) are~~remain working remotely

Geographically separated work locations of Bank and Company CEO’s and most other executive management team members

Suspended non-essential work-related travel

•

Implemented a pay differential for employees continuing to work at branch or back office locations which ended May 31, 2020

•

Adopted ~~self-quarantine~~self-monitoring and quarantining procedures

•

Implemented enhanced facility cleaning protocols

•

Redeployed staff to critical customer service operations to expedite loan payment deferral requests, Paycheck Protection Program lending efforts, and other operations

Potential Effects of COVID-19 –

The adverse impact of COVID-19 to the economy has impaired some of the Company’s customers’ ability to fulfill their financial obligations to the Company, reducing interest income on loans or increasing loan losses. In keeping with Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the Company continues to work with COVID-19 affected borrowers to defer loan payments, interest, and fees. Through ~~June~~September 30, 2020, the Company has modified or deferred payments on a total of ~~3,097~~3,362 loans totaling ~~$436.11~~$426.45 million in ~~principal; 1,277~~principal. As of September 30, 2020, commercial and consumer loans currently in deferral decreased to $102.54 million and $13.09 million, respectively. Included in the September 30, 2020 deferral amounts are re-deferrals for approximately $69.32 million commercial loans ~~totaling $340.00~~and approximately $5.09 million in ~~principal, 972~~ consumer mortgage and installment ~~loans totaling $12.92 million in principal, 706 consumer mortgages totaling $76.01 million in principal, and 142 home equity loans totaling $7.18 million in principal.~~loans. Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.

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

In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other legislative and regulatory actions may materially impact the Company. The Company is participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through ~~June~~September 30, 2020the Company processed ~~758~~803 loans with original principal balances totaling ~~$60.23~~$62.74 million through the PPP.

COVID-19 could cause a sustained decline in the Company’s stock price or the occurrence of an event that could, under certain circumstances, create the impairment of goodwill. In the event the Company deems all or a portion of its goodwill to be impaired, the Company could record a non-cash charge to earnings for the amount of such impairment. Such a charge would have no impact on tangible or regulatory capital.

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

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

Recent Accounting Standards

Standards Adopted in 20202020

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.~~Early adoption is permitted, including adoption in any interim period for which financial statements have~~ ~~not~~ ~~yet been issued. The update did~~ ~~not~~ ~~have a material effect on the Company’s financial statements.~~

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary”. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR (London Inter-bank Offered Rate) and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. With global capital markets expected to move away from LIBOR and other inter-bank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective March 12, 2020 through December 31, 2022. The Company adopted this ASU on March 12, 2020. The update is not expected to have any material effect on the Company’s financial ~~statements.~~statements when and as changes are made to various assets and liabilities for reference rates.

Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU purportedly requires earlier recording of credit losses on loans and other financial instruments 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 on available-for-sale debt securities and purchased financial assets with credit deterioration. The CARES Act was passed by the United States Congress and signed into law by the President of the United States at the end of March 2020. The CARES Act states that “Notwithstanding any other provision of law, no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016-13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses, during the period beginning on March 27, 2020 and ending on the earlier of: (1) the date on which the national emergency concerning the novel coronavirus disease (COVID-19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or (2) December 31, 2020. The Company has elected to “not comply with” ASU 2016-13 for the period specified in the CARES Act and any subsequent controlling legislation or regulation. In preparation for expiration of the period specified in the CARES Act, the Company has selected loss estimation methodologies for its allowance for credit losses, performed testing on the chosen methodologies, and determined a qualitative adjustment methodology that aligns with the requirements of the new standard. The Company has also subjected the model to third party validation. Based upon the aforesaid preparatory measures, upon expiration of the period specified in the CARES Act and any subsequent controlling legislation or regulation, the Company anticipates recording a cumulative-effect adjustment to retained earnings of approximately $5.61 million in connection with adoption of the new standard, consisting of tax-effected increases in the allowance for credit losses associated with the Company’s legacy loan portfolio prior to the addition of Highlands Bankshares, Inc. and the portfolio of purchased performing loans associated with Highlands of approximately $2.89 million and $4.44 million, respectively. The Company also anticipates making an approximate $7.04 million adjustment as of January 1, 2020, to the opening balance of the allowance for credit losses associated with the required gross-up of purchased credit deteriorated loans from the Highlands transaction.

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. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The update is not expected to have any material effect on the Company’s financial statements.

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

Note 2. Acquisitions

Highlands Bankshares, Inc.

On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands”) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock. The transaction was consummated the close of business December 31, ~~2019.~~ 2019. The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.

The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.

	As recorded by		Fair Value				As recorded by		As recorded by		Fair Value				As recorded by
(Amounts in thousands)	Highlands		Adjustments				the Company		Highlands		Adjustments				the Company
Assets
Cash and cash equivalents	$	25,879	$	-			$	25,879	$	25,879	$	0			$	25,879
Securities available for sale		53,732		-				53,732		53,732		0				53,732
Loans held for sale		263		-				263		263		0				263
Loans held for investment, net of allowance and mark		438,896		(11,429	)	( a )		427,467		438,896		(11,429	)	( a )		427,467
Premises and equipment		16,722		(2,317	)	( b )		14,405		16,722		(2,317	)	( b )		14,405
Other real estate		1,963		-				1,963		1,963		0				1,963
Other assets		25,556		2,250		( c )		27,806		25,556		2,250		( c )		27,806
Intangible assets		-		4,490		( d )		4,490		0		4,490		( d )		4,490
Total assets	$	563,011	$	(7,006	)		$	556,005	$	563,011	$	(7,006	)		$	556,005

LIABILITIES
Deposits:
Noninterest-bearing	$	155,714	$	-			$	155,714	$	155,714	$	0			$	155,714
Interest-bearing		346,028		1,261		( e )		347,289		346,028		1,261		( e )		347,289
Total deposits		501,742		1,261				503,003		501,742		1,261				503,003
Long term debt		40		-				40		40		0				40
Other liabilities		2,938		198		( f )		3,136		2,938		198		( f )		3,136
Total liabilities		504,720		1,459				506,179		504,720		1,459				506,179
Net identifiable assets acquired over (under) liabilities assumed		58,291		(8,465	)			49,826		58,291		(8,465	)			49,826
Goodwill		-		36,821				36,821		0		36,821				36,821
Net assets acquired over liabilities assumed	$	58,291	$	28,356			$	86,647	$	58,291	$	28,356			$	86,647

Consideration:
First Community Bankshares, Inc. common								2,792,729								2,792,729
Purchase price per share of the Company's common stock							$	31.02							$	31.02
Fair value of Company common stock issued								86,631								86,631
Cash paid for fractional shares								16								16
Fair Value of total consideration transferred							$	86,647							$	86,647

Explanation of fair value adjustments:

( a ) - Adjustment reflects the fair value adjustments of $(14.70) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses ("ALLL") and deferred loan fees of $3.27 million recorded by Highlands.

( b ) - Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.

( c ) - Adjustment to record the deferred tax asset related to the fair value adjustments.

( d ) - Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

( e ) - Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.

( f ) - Adjustment reflects the fair value adjustment for death benefits payable of $320 thousand, the fair value adjustment for lease liability of $(37) thousand and the fair value adjustment to the reserve for unfunded commitments of $(85) thousand.

Comparative and Pro Forma Financial Information for Acquisitions

As the merger date was the close of business, December 31, 2019, Highlands had no earnings contribution to the ~~June~~September 30, 2019consolidated statement of income for the Company.

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The following table discloses the impact of the merger. The table also presents certain pro forma information as if Highlands had been acquired on January 1, 2019. These results combine the historical results of Highlands in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2019.

Residual merger-related costs of $1.89 million incurred by the Company during the ~~six~~nine months ended ~~June~~September 30, 2020, have been excluded from the proforma information below. There were no residual merger expenses incurred for the ~~second~~third quarter of ~~2020.~~2020. No adjustments have been made to the pro formas to eliminate the provision for loan losses for the quarter and year ended ~~June~~September 30, 2019of Highlands in the amounts of ~~$836,000~~$548 thousand and ~~$939,000,~~$1.49 million, respectively. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisitions which are not reflected in the pro forma amounts below:

	ProForma								*ProForma*
	Three months ended June 30,				Six months ended June 30,				*Three months ended September 30,*				*Nine Months Ended September 30,*
(Dollars in thousands)	2020		2019		2020		2019		*2020*		*2019*		*2020*		*2019*
Total revenues (net interest income plus noninterest income)	$	33,252	$	37,753	$	68,483	$	74,987	$	34,472	$	36,627	$	102,955	$	111,615
Net adjusted income available to the common shareholder	$	8,240	$	10,943	$	17,600	$	22,299	$	8,266	$	10,225	$	25,864	$	33,063

Note 3. Debt Securities

The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

		June 30, 2020									*September 30, 2020*
		Amortized		Unrealized		Unrealized			Fair		*Amortized*		*Unrealized*		*Unrealized*			*Fair*
		Cost		Gains		Losses			Value		*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)	(Amounts in thousands)
U.S. Agency securities	U.S. Agency securities	$	597	$	-	$	(4	)	$	593	$	576	$	0	$	(4	)	$	572
Municipal securities	Municipal securities		61,722		769		-			62,491		55,036		631		0			55,667
Mortgage-backed Agency securities	Mortgage-backed Agency securities		34,195		1,088		-			35,283		33,776		999		(42	)		34,733
Total	Total	$	96,514	$	1,857	$	(4	)	$	98,367	$	89,388	$	1,630	$	(46	)	$	90,972

		December 31, 2019									December 31, 2019
		Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
(Amounts in thousands)	(Amounts in thousands)
U.S. Agency securities	U.S. Agency securities	$	5,038	$	-	$	(4	)	$	5,034	$	5,038	$	0	$	(4	)	$	5,034
Municipal securities	Municipal securities		85,992		886		-			86,878		85,992		886		0			86,878
Mortgage-backed Agency securities	Mortgage-backed Agency securities		77,448		380		(166	)		77,662		77,448		380		(166	)		77,662
Total	Total	$	168,478	$	1,266	$	(170	)	$	169,574	$	168,478	$	1,266	$	(170	)	$	169,574

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.

	June 30, 2020				*September 30, 2020*
	Amortized				*Amortized*
(Amounts in thousands)	Cost		Fair Value		*Cost*		*Fair Value*
Available-for-sale debt securities
Due within one year	$	-	$	-	$	0	$	0
Due after one year but within five years		31,290		31,609		28,495		28,749
Due after five years but within ten years		31,029		31,475		27,117		27,490
Due after ten years		-		-		0		0
		62,319		63,084		55,612		56,239
Mortgage-backed securities		34,195		35,283		33,776		34,733
Total debt securities available for sale	$	96,514	$	98,367	$	89,388	$	90,972

Table of Contents

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:

	June 30, 2020														*September 30, 2020*
	Less than 12 Months				12 Months or Longer					Total					*Less than 12 Months*					*12 Months or Longer*					*Total*
	Fair		Unrealized		Fair		Unrealized			Fair		Unrealized			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*
	Value		Losses		Value		Losses			Value		Losses			*Value*		*Losses*			*Value*		*Losses*			*Value*		*Losses*
(Amounts in thousands)
U.S. Agency securities	$	-	$	-	$	586	$	(4	)	$	586	$	(4	)	$	0	$	0		$	565	$	(4	)	$	565	$	(4	)
Mortgage-backed Agency securities		-		-		-		-			-		-			3,405		(42	)		0		0			3,405		(42	)
Total	$	-	$	-	$	586	$	(4	)	$	586	$	(4	)	$	3,405	$	(42	)	$	565	$	(4	)	$	3,970	$	(46	)

	December 31, 2019															December 31, 2019
	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
(Amounts in thousands)
U.S. Agency securities	$	975	$	(4	)	$	-	$	-		$	975	$	(4	)	$	975	$	(4	)	$	0	$	0		$	975	$	(4	)
Mortgage-backed Agency securities		8,020		(48	)		8,319		(118	)		16,339		(166	)		8,020		(48	)		8,319		(118	)		16,339		(166	)
Total	$	8,995	$	(52	)	$	8,319	$	(118	)	$	17,314	$	(170	)	$	8,995	$	(52	)	$	8,319	$	(118	)	$	17,314	$	(170	)

There ~~was 1~~were 3 individual debt ~~security~~securities in an unrealized loss position as of ~~June~~September 30, 2020, and the combined depreciation in value ~~was insignificant in relation to value~~represented 0.05% of the debt securities portfolio. There were 17 individual debt securities in an unrealized loss position as of December 31, 2019, and their combined depreciation in value represented 0.10% of the debt securities portfolio.

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for debt securities is a decline in fair value below book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company incurred no0 OTTI charges on debt securities. Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current economic factors.

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

	Three Months Ended					Six Months Ended						*Three Months Ended*				*Nine Months Ended*
	June 30,					June 30,						*September 30,*				*September 30,*
	2020		2019			2020			2019			*2020*		*2019*		*2020*			*2019*
(Amounts in thousands)
Gross realized gains	$	-	$	67		$	419		$	67		$	0		0	$	419		$	67
Gross realized losses		-		(110	)		(34	)		(110	)		0		0		(34	)		(110	)
Net loss on sale of securities	$	-	$	(43	)	$	385		$	(43	)
Net Gain (Loss) on sale of securities												$	0	$	0	$	385		$	(43	)

The carrying amount of securities pledged for various purposes totaled ~~$33.04~~$36.17 million as of ~~June~~September 30, 2020, and $27.87 million as of December 31, ~~2019.~~2019.

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. Covered loans are those loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled ~~$1.41~~$1.67 million as of ~~June~~September 30, 2020, and $2.20 million as of December 31, ~~2019.~~ 2019. Deferred loan fees, net of loan costs, totaled ~~$6.04~~$7.47 million as of ~~June~~September 30, 2020, and $4.60 million as of December 31, ~~2019.~~ 2019. For information about off-balance sheet financing, see Note 15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

Table of Contents

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

	June 30, 2020					December 31, 2019					*September 30, 2020*					*December 31, 2019*
(Amounts in thousands)	Amount		Percent			Amount		Percent			*Amount*		*Percent*			*Amount*		*Percent*
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	52,585		2.46	%	$	48,659		2.30	%	$	46,785		2.13	%	$	48,659		2.30	%
Commercial and industrial		184,298		8.62	%		142,962		6.76	%		179,714		8.19	%		142,962		6.76	%
Multi-family residential		105,768		4.95	%		121,840		5.76	%		105,647		4.81	%		121,840		5.76	%
Single family non-owner occupied		188,389		8.82	%		163,181		7.72	%		189,265		8.62	%		163,181		7.72	%
Non-farm, non-residential		723,100		33.84	%		727,261		34.39	%		748,815		34.11	%		727,261		34.39	%
Agricultural		10,407		0.49	%		11,756		0.56	%		10,362		0.47	%		11,756		0.56	%
Farmland		23,662		1.11	%		23,155		1.10	%		22,973		1.05	%		23,155		1.10	%
Total commercial loans		1,288,209		60.29	%		1,238,814		58.59	%		1,303,561		59.38	%		1,238,814		58.59	%
Consumer real estate loans
Home equity lines		99,566		4.66	%		110,078		5.21	%		94,056		4.29	%		110,078		5.21	%
Single family owner occupied		603,446		28.24	%		620,697		29.35	%		644,598		29.37	%		620,697		29.35	%
Owner occupied construction		15,311		0.72	%		17,241		0.82	%		17,460		0.79	%		17,241		0.82	%
Total consumer real estate loans		718,323		33.62	%		748,016		35.38	%		756,114		34.45	%		748,016		35.38	%
Consumer and other loans
Consumer loans		114,551		5.36	%		110,027		5.20	%		118,738		5.41	%		110,027		5.20	%
Other		4,477		0.21	%		4,742		0.22	%		5,838		0.27	%		4,742		0.22	%
Total consumer and other loans		119,028		5.57	%		114,769		5.42	%		124,576		5.68	%		114,769		5.42	%
Total non-covered loans		2,125,560		99.48	%		2,101,599		99.39	%		2,184,251		99.51	%		2,101,599		99.39	%
Total covered loans		11,257		0.52	%		12,861		0.61	%		10,744		0.49	%		12,861		0.61	%
Total loans held for investment, net of unearned income	$	2,136,817		100.00	%	$	2,114,460		100.00	%	$	2,194,995		100.00	%	$	2,114,460		100.00	%

Loans held for sale	$	-				$	263				$	0				$	263

Commercial and industrial loan balances grew significantly compared to December 31, ~~2019.~~ 2019. The Company began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender during the second quarter of ~~2020.~~2020. At ~~June~~September 30, 2020, the PPP loans had a current balance of ~~$60.23~~$61.00 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled ~~$2.26~~$2.30 million at ~~June~~September 30, 2020, were also recorded. During the ~~second~~third quarter of 2020, the Company recorded amortization of net deferred loan origination fees of ~~$192~~$287 thousand on PPP ~~loans.~~loans and $479 thousand in amortization for the nine month period. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.

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

June 30, 2020

December 31, 2019

(Amounts in thousands)

Covered loans

Commercial loans

Construction, development, and other land
$ 27 $ 28
Single family non-owner occupied
191 199
Non-farm, non-residential
1 3
Total commercial loans
219 230
Consumer real estate loans

Home equity lines
8,512 9,853
Single family owner occupied
2,526 2,778
Total consumer real estate loans
11,038 12,631
Total covered loans
$ 11,257 $ 12,861

	*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)
Covered loans
Commercial loans
Construction, development, and other land	$	27	$	28
Single family non-owner occupied		188		199
Non-farm, non-residential		0		3
Total commercial loans		215		230
Consumer real estate loans
Home equity lines		8,079		9,853
Single family owner occupied		2,450		2,778
Total consumer real estate loans		10,529		12,631
Total covered loans	$	10,744	$	12,861

Table of Contents

The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. Effective January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio. The only remaining PCI pools are those loans acquired in the Highlands acquisition on December 31, ~~2019.~~2019.

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

									*September 30, 2020*				*December 31, 2019*
	June 30, 2020				December 31, 2019						*Unpaid Principal*				*Unpaid Principal*
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		*Recorded Investment*		*Balance*		*Recorded Investment*		*Balance*
PCI Loans, by acquisition
Peoples	$	-	$	-	$	5,071	$	6,431	$	0	$	0	$	5,071	$	6,431
Waccamaw		-		-		2,708		14,277		0		0		2,708		14,277
Highlands		48,193		58,181		53,116		64,096		43,527		53,295		53,116		64,096
Other acquired		-		-		352		378		0		0		352		378
Total PCI Loans	$	48,193	$	58,181	$	61,247	$	85,182	$	43,527	$	53,295	$	61,247	$	85,182

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

	Peoples			Waccamaw			Highlands			Total			*Peoples*			*Waccamaw*			*Highlands*			*Total*
(Amounts in thousands)
Balance January 1, 2019	$	2,590		$	14,639		$	-		$	17,229		$	2,590		$	14,639		$	0		$	17,229
Accretion		(503	)		(2,151	)		-			(2,654	)		(734	)		(2,761	)		0			(3,495	)
Reclassifications (to) from nonaccretable difference⁽¹⁾		11			851			-			862			14			1,200			0			1,214
Other changes, net		111			341			-			452			167			141			0			308
Balance June 30, 2019	$	2,209		$	13,680		$	-		$	15,889
Balance September 30, 2019													$	2,037		$	13,219		$	0		$	15,256

Balance January 1, 2020	$	1,890		$	12,574		$	8,152		$	22,616		$	1,890		$	12,574		$	8,152		$	22,616
Accretion		-			-			(1,334	)		(1,334	)		0			0			(1,952	)		(1,952	)
Reclassifications from nonaccretable difference⁽¹⁾		-			-			-			-			0			0			0			0
Other changes, net		(1,890	)		(12,574	)		-			(14,464	)		(1,890	)		(12,574	)		0			(14,464	)
Balance June 30, 2020	$	-		$	-		$	6,818		$	6,818
Balance September 30, 2020													$	0		$	0		$	6,200		$	6,200

(1) Represents changes attributable to expected loss assumptions

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.

Table of Contents

The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately.

	June 30, 2020												*September 30, 2020*
			Special												*Special*
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total		*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Non-covered loans
Commercial loans
Construction, development, and other land	$	35,181	$	14,669	$	2,735	$	-	$	-	$	52,585	$	35,889	$	8,419	$	2,477	$	0	$	0	$	46,785
Commercial and industrial		153,507		22,852		7,939		-		-		184,298		153,153		19,369		7,192		0		0		179,714
Multi-family residential		80,539		21,771		3,458		-		-		105,768		81,528		20,937		3,182		0		0		105,647
Single family non-owner occupied		138,578		35,590		14,207		14		-		188,389		143,235		32,649		13,368		13		0		189,265
Non-farm, non-residential		474,297		207,483		41,320		-		-		723,100		507,094		201,975		39,746		0		0		748,815
Agricultural		6,650		3,443		314		-		-		10,407		6,804		3,216		342		0		0		10,362
Farmland		12,933		5,452		5,277		-		-		23,662		13,281		5,139		4,553		0		0		22,973
Consumer real estate loans																								-
Home equity lines		94,694		1,397		3,475		-		-		99,566		89,729		1,317		3,010		0		0		94,056
Single family owner occupied		565,016		3,245		35,185		-		-		603,446		607,616		3,815		33,167		0		0		644,598
Owner occupied construction		14,498		202		611		-		-		15,311		16,684		202		574		0		0		17,460
Consumer and other loans																								-
Consumer loans		112,537		109		1,905		-		-		114,551		116,786		197		1,755		0		0		118,738
Other		4,477		-		-		-		-		4,477		5,838		0		0		0		0		5,838
Total non-covered loans		1,692,907		316,213		116,426		14		-		2,125,560		1,777,637		297,235		109,366		13		0		2,184,251
Covered loans
Commercial loans
Construction, development, and other land		-		27		-		-		-		27		0		27		0		0		0		27
Single family non-owner occupied		191		-		-		-		-		191		155		33		0		0		0		188
Non-farm, non-residential		-		-		1		-		-		1
Consumer real estate loans																								-
Home equity lines		7,803		379		330		-		-		8,512		7,365		386		328		0		0		8,079
Single family owner occupied		1,890		272		364		-		-		2,526		1,832		269		349		0		0		2,450
Total covered loans		9,884		678		695		-		-		11,257		9,352		715		677		0		0		10,744
Total loans	$	1,702,791	$	316,891	$	117,121	$	14	$	-	$	2,136,817	$	1,786,989	$	297,950	$	110,043	$	13	$	0	$	2,194,995

Table of Contents

	December 31, 2019												December 31, 2019
			Special												Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total		*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Non-covered loans
Commercial loans
Construction, development, and other land	$	45,781	$	2,079	$	799	$	-	$	-	$	48,659	$	45,781	$	2,079	$	799	$	0	$	0	$	48,659
Commercial and industrial		135,651		4,327		2,984		-		-		142,962		135,651		4,327		2,984		0		0		142,962
Multi-family residential		118,045		2,468		1,327		-		-		121,840		118,045		2,468		1,327		0		0		121,840
Single family non-owner occupied		149,916		7,489		5,776		-		-		163,181		149,916		7,489		5,776		0		0		163,181
Non-farm, non-residential		683,481		27,160		16,620		-		-		727,261		683,481		27,160		16,620		0		0		727,261
Agricultural		11,299		122		335		-		-		11,756		11,299		122		335		0		0		11,756
Farmland		17,609		4,107		1,439		-		-		23,155		17,609		4,107		1,439		0		0		23,155
Consumer real estate loans
Home equity lines		106,246		2,014		1,818		-		-		110,078		106,246		2,014		1,818		0		0		110,078
Single family owner occupied		580,580		17,001		23,116		-		-		620,697		580,580		17,001		23,116		0		0		620,697
Owner occupied construction		16,341		179		721		-		-		17,241		16,341		179		721		0		0		17,241
Consumer and other loans
Consumer loans		108,065		1,341		621		-		-		110,027		108,065		1,341		621		0		0		110,027
Other		4,742		-		-		-		-		4,742		4,742		0		0		0		0		4,742
Total non-covered loans		1,977,756		68,287		55,556		-		-		2,101,599		1,977,756		68,287		55,556		0		0		2,101,599
Covered loans
Commercial loans
Construction, development, and other land		-		28		-		-		-		28		0		28		0		0		0		28
Single family non-owner occupied		199		-		-		-		-		199		199		0		0		0		0		199
Non-farm, non-residential		-		-		3		-		-		3		0		0		3		0		0		3
Consumer real estate loans
Home equity lines		7,177		2,327		349		-		-		9,853		7,177		2,327		349		0		0		9,853
Single family owner occupied		2,111		275		392		-		-		2,778		2,111		275		392		0		0		2,778
Total covered loans		9,487		2,630		744		-		-		12,861		9,487		2,630		744		0		0		12,861
Total loans	$	1,987,243	$	70,917	$	56,300	$	-	$	-	$	2,114,460	$	1,987,243	$	70,917	$	56,300	$	0	$	0	$	2,114,460

The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed impaired.

Table of Contents

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the dates indicated:

	June 30, 2020						December 31, 2019						*September 30, 2020*						*December 31, 2019*
			Unpaid						Unpaid						*Unpaid*						*Unpaid*
	*Recorded*		*Principal*		*Related*		*Recorded*		*Principal*		*Related*		*Recorded*		*Principal*		*Related*		*Recorded*		*Principal*		*Related*
(Amounts in thousands)	*Investment*		*Balance*		*Allowance*		*Investment*		*Balance*		*Allowance*		*Investment*		*Balance*		*Allowance*		*Investment*		*Balance*		*Allowance*
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land	$	877	$	1,101	$	-	$	552	$	768	$	-	$	869	$	1,097	$	-	$	552	$	768	$	-
Commercial and industrial		2,890		3,458		-		576		599		-		3,242		3,302		-		576		599		-
Multi-family residential		341		772		-		1,254		1,661		-		923		1,009		-		1,254		1,661		-
Single family non-owner occupied		5,027		5,760		-		2,652		3,176		-		5,011		5,663		-		2,652		3,176		-
Non-farm, non-residential		7,659		9,433		-		4,158		4,762		-		7,712		8,362		-		4,158		4,762		-
Agricultural		261		265		-		158		164		-		267		275		-		158		164		-
Farmland		1,815		1,907		-		1,437		1,500		-		1,517		1,591		-		1,437		1,500		-
Consumer real estate loans
Home equity lines		1,604		1,756		-		1,372		1,477		-		1,540		1,697		-		1,372		1,477		-
Single family owner occupied		16,717		19,858		-		15,588		17,835		-		16,100		18,467		-		15,588		17,835		-
Owner occupied construction		540		548		-		648		648		-		503		511		-		648		648		-
Consumer and other loans
Consumer loans		500		507		-		290		294		-		413		424		-		290		294		-
Total impaired loans with no allowance		38,231		45,365		-		28,685		32,884		-		38,097		42,398		-		28,685		32,884		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		-		-		-		-		-		-		0		0		0		0		0		0
Multi-family residential		944		1,277		279		-		-		-		944		1,278		222		0		0		0
Single family non-owner occupied		-		-		-		-		-		-		0		0		0		0		0		0
Non-farm, non-residential		1,798		1,982		684		1,241		1,227		292		1,779		1,970		565		1,241		1,227		292
Farmland		-		-		-		-		-		-		0		0		0		0		0		0
Consumer real estate loans
Home equity lines		-		-		-		-		-		-		0		0		0		0		0		0
Single family owner occupied		1,769		1,869		370		1,246		1,246		353		1,418		1,522		239		1,246		1,246		353
Consumer and other loans
Consumer loans		-		-		-		-		-		-		0		0		0		0		0		0
Total impaired loans with an allowance		4,511		5,128		1,333		2,487		2,473		645		4,141		4,770		1,026		2,487		2,473		645
Total impaired loans⁽¹⁾	$	42,742	$	50,493	$	1,333	$	31,172	$	35,357	$	645	$	42,238	$	47,168	$	1,026	$	31,172	$	35,357	$	645

(1)

Total recorded investment of impaired loans include loans totaling ~~$33.59~~$33.48 million as of ~~June~~September 30, 2020, and $24.64 million as of December 31, 2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment.

Table of Contents

The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:

																	*Three Months Ended September 30,*									*Nine Months Ended September 30,*
																	*2020*				*2019*					*2020*				*2019*
	Three Months Ended June 30,								Six Months Ended June 30,										*Average*					*Average*				*Average*				*Average*
	2020				2019				2020				2019				*Interest Income*		*Recorded*		*Interest Income*			*Recorded*		*Interest Income*		*Recorded*		*Interest Income*		*Recorded*
(Amounts in thousands)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		*Recognized*		*Investment*		*Recognized*			*Investment*		*Recognized*		*Investment*		*Recognized*		*Investment*
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	7	$	882	$	5	$	790	$	15	$	1,091	$	12	$	795	$	6	$	882	$	5		$	570	$	21	$	1,021	$	17	$	720
Commercial and industrial		60		3,191		2		149		89		2,610		5		383		46		3,315		2			66		135		2,845		7		277
Multi-family residential		18		417		7		1,269		29		544		16		1,444		9		967		5			1,269		38		685		21		1,385
Single family non-owner occupied		37		5,203		28		3,237		72		4,652		56		3,116		54		5,090		41			2,958		126		4,798		97		3,063
Non-farm, non-residential		84		8,886		47		5,230		127		6,780		64		4,953		79		7,786		20			4,590		206		7,115		84		4,832
Agricultural		2		264		-		48		3		235		2		51		4		272		9			223		7		247		11		108
Farmland		15		1,835		10		1,438		36		1,698		26		1,444		12		1,526		19			1,536		48		1,640		45		1,474
Consumer real estate loans
Home equity lines		7		1,652		7		1,484		16		1,560		14		1,446		13		1,588		17			1,463		29		1,569		31		1,452
Single family owner occupied		122		17,251		154		15,838		290		17,401		278		15,889		120		16,328		176			16,593		410		17,044		454		16,123
Owner occupied construction		4		534		2		223		10		434		4		222		2		542		3			224		12		470		7		223
Consumer and other loans
Consumer loans		7		507		3		137		11		455		4		121		8		420		6			319		19		445		10		187
Total impaired loans with no related allowance		363		40,622		265		29,843		698		37,460		481		29,864		353		38,716		303			29,811		1,051		37,879		784		29,844

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-		-		-		-		-		-		-		0		0		0			0		0		0		0		0
Commercial and industrial		-		-		-		-		-		-		-		-		0		0		0			0		0		0		0		0
Multi-family residential		-		944		-		-		-		943		-		-		0		944		0			0		0		943		0		0
Single family non-owner occupied		-		-		-		-		-		-		-		-		0		0		0			0		0		0		0		0
Non-farm, non-residential		14		1,884		8		553		14		1,611		8		277		8		1,789		20			1,254		22		1,670		28		602
Farmland		-		-		-		-		-		-		-		-		0		0		0			0		0		0		0		0
Consumer real estate loans
Home equity lines		-		-		-		-		-		-		-		-		0		0		0			0		0		0		0		0
Single family owner occupied		11		1,777		36		2,987		24		1,508		65		2,639		3		1,423		(30	)		1,253		27		1,480		35		2,177
Owner occupied construction		-		-		-		-		-		-		-		-		0		0		0			0		0		0		0		0
Total impaired loans with a related allowance		25		4,605		44		3,540		38		4,062		73		2,916		11		4,156		(10	)		2,507		49		4,093		63		2,779
Total impaired loans	$	388	$	45,227	$	309	$	33,383	$	736	$	41,522	$	554	$	32,780	$	364	$	42,872	$	293		$	32,318	$	1,100	$	41,972	$	847	$	32,623

Table of Contents

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. PCI loans are generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

	June 30, 2020						December 31, 2019						*September 30, 2020*						*December 31, 2019*
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total		*Non-covered*		*Covered*		*Total*		*Non-covered*		*Covered*		*Total*
Commercial loans
Construction, development, and other land	$	540	$	-	$	540	$	211	$	-	$	211	$	285	$	0	$	285	$	211	$	0	$	211
Commercial and industrial		1,379		-		1,379		530		-		530		1,765		0		1,765		530		0		530
Multi-family residential		1,205		-		1,205		1,144		-		1,144		1,536		0		1,536		1,144		0		1,144
Single family non-owner occupied		3,071		-		3,071		1,286		-		1,286		3,289		0		3,289		1,286		0		1,286
Non-farm, non-residential		6,556		-		6,556		3,400		-		3,400		6,612		0		6,612		3,400		0		3,400
Agricultural		262		-		262		158		-		158		267		0		267		158		0		158
Farmland		1,106		-		1,106		713		-		713		814		0		814		713		0		713
Consumer real estate loans
Home equity lines		1,069		278		1,347		753		220		973		951		313		1,264		753		220		973
Single family owner occupied		8,521		21		8,542		7,259		24		7,283		8,012		20		8,032		7,259		24		7,283
Owner occupied construction		321		-		321		428		-		428		536		0		536		428		0		428
Consumer and other loans
Consumer loans		441		-		441		231		-		231		357		0		357		231		0		231
Total nonaccrual loans	$	24,471	$	299	$	24,770	$	16,113	$	244	$	16,357	$	24,424	$	333	$	24,757	$	16,113	$	244	$	16,357

Table of Contents

The following tables present 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. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled ~~$284~~$43 thousand as of ~~June~~September 30, 2020, compared to $144 thousand as of December 31, ~~2019.~~2019.

	June 30, 2020												*September 30, 2020*
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total		*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans		*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*
Non-covered loans
Commercial loans
Construction, development, and other land	$	-	$	82	$	438	$	520	$	52,065	$	52,585		$ -		$ -		$ 285		$ 285		$ 46,500		$ 46,785
Commercial and industrial		411		1,525		387		2,323		181,975		184,298		1,280		163		1,061		2,504		177,210		179,714
Multi-family residential		961		595		944		2,500		103,268		105,768		810		334		1,202		2,346		103,301		105,647
Single family non-owner occupied		976		1,114		2,315		4,405		183,984		188,389		842		636		2,255		3,733		185,532		189,265
Non-farm, non-residential		1,853		902		4,918		7,673		715,427		723,100		608		1,856		3,619		6,083		742,732		748,815
Agricultural		222		13		45		280		10,127		10,407		1		16		84		101		10,261		10,362
Farmland		14		99		1,025		1,138		22,524		23,662		125		0		737		862		22,111		22,973
Consumer real estate loans
Home equity lines		294		143		597		1,034		98,532		99,566		509		248		443		1,200		92,856		94,056
Single family owner occupied		3,181		982		3,613		7,776		595,670		603,446		2,894		1,286		3,533		7,713		636,885		644,598
Owner occupied construction		-		-		-		-		15,311		15,311		71		91		394		556		16,904		17,460
Consumer and other loans
Consumer loans		848		105		240		1,193		113,358		114,551		1,679		436		187		2,302		116,436		118,738
Other		-		-		-		-		4,477		4,477		-		-		-		-		5,838		5,838
Total non-covered loans		8,760		5,560		14,522		28,842		2,096,718		2,125,560		8,819		5,066		13,800		27,685		2,156,566		2,184,251
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		27		27		0		0		0		0		27		27
Single family non-owner occupied		-		-		-		-		191		191		0		0		0		0		188		188
Non-farm, non-residential		-		-		-		-		1		1		0		0		0		0		0		0
Consumer real estate loans
Home equity lines		62		113		114		289		8,223		8,512		123		0		263		386		7,693		8,079
Single family owner occupied		21		-		-		21		2,505		2,526		20		0		0		20		2,430		2,450
Total covered loans		83		113		114		310		10,947		11,257		143		0		263		406		10,338		10,744
Total loans	$	8,843	$	5,673	$	14,636	$	29,152	$	2,107,665	$	2,136,817		$ 8,962		$ 5,066		$ 14,063		$ 28,091		$ 2,166,904		$ 2,194,995

Table of Contents

	December 31, 2019												December 31, 2019
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total		30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans		*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*
Non-covered loans
Commercial loans
Construction, development, and other land	$	63	$	65	$	211	$	339	$	48,320	$	48,659	$	63	$	65	$	211	$	339	$	48,320	$	48,659
Commercial and industrial		1,913		238		507		2,658		140,304		142,962		1,913		238		507		2,658		140,304		142,962
Multi-family residential		375		-		1,144		1,519		120,321		121,840		375		0		1,144		1,519		120,321		121,840
Single family non-owner occupied		754		267		661		1,682		161,499		163,181		754		267		661		1,682		161,499		163,181
Non-farm, non-residential		917		1,949		3,027		5,893		721,368		727,261		917		1,949		3,027		5,893		721,368		727,261
Agricultural		86		164		-		250		11,506		11,756		86		164		0		250		11,506		11,756
Farmland		856		349		664		1,869		21,286		23,155		856		349		664		1,869		21,286		23,155
Consumer real estate loans
Home equity lines		1,436		165		503		2,104		107,974		110,078		1,436		165		503		2,104		107,974		110,078
Single family owner occupied		7,728		2,390		3,766		13,884		606,813		620,697		7,728		2,390		3,766		13,884		606,813		620,697
Owner occupied construction		207		-		428		635		16,606		17,241		207		0		428		635		16,606		17,241
Consumer and other loans
Consumer loans		1,735		439		202		2,376		107,651		110,027		1,735		439		202		2,376		107,651		110,027
Other		22		-		-		22		4,720		4,742		22		0		0		22		4,720		4,742
Total non-covered loans		16,092		6,026		11,113		33,231		2,068,368		2,101,599		16,092		6,026		11,113		33,231		2,068,368		2,101,599
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		28		28		0		0		0		0		28		28
Single family non-owner occupied		-		-		-		-		199		199		0		0		0		0		199		199
Non-farm, non-residential		-		-		-		-		3		3		0		0		0		0		3		3
Consumer real estate loans
Home equity lines		144		28		-		172		9,681		9,853		144		28		0		172		9,681		9,853
Single family owner occupied		-		50		-		50		2,728		2,778		0		50		0		50		2,728		2,778
Total covered loans		144		78		-		222		12,639		12,861		144		78		0		222		12,639		12,861
Total loans	$	16,236	$	6,104	$	11,113	$	33,453	$	2,081,007	$	2,114,460	$	16,236	$	6,104	$	11,113	$	33,453	$	2,081,007	$	2,114,460

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of $500 thousand are evaluated for a specific reserve based on either the collateral or ~~net present value~~cash flow method, whichever is most applicable. Restructured loans under $500 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain ~~TDRs~~trouble debt restructurings ("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. PCI loans are generally not considered TDRs as long as the loans remain in the assigned loan pool. ~~NaN~~No covered loans were recorded as TDRs as of ~~June~~September 30, 2020, or December 31, ~~2019.~~2019.

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, 2020 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.~~ 2019. The Company elected to adopt this provision of the CARES Act.

Through ~~June~~September 30, 2020, the Company had modified ~~3,097~~a total of 3,362 loans with principal balances totaling ~~$436.11~~$426.45 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of September, 30, 2020, current commercial and consumer loan deferrals were $102.54 million and $13.09 million, respectively.

Table of Contents

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

	June 30, 2020						December 31, 2019						*September 30, 2020*						*December 31, 2019*
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total		*Nonaccrual(1)*		*Accruing*		*Total*		*Nonaccrual(1)*		*Accruing*		*Total*
Commercial loans
Construction, development, and other land	$	-	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0	$	0
Commercial and industrial		-		1,498		1,498		-		-		-		0		1,342		1,342		0		0		0
Single family non-owner occupied		543		1,279		1,822		552		595		1,147		538		1,274		1,812		552		595		1,147
Non-farm, non-residential		-		2,425		2,425		-		307		307		0		2,419		2,419		0		307		307
Consumer real estate loans
Home equity lines		-		83		83		-		115		115		0		81		81		0		115		115
Single family owner occupied		1,748		5,886		7,634		1,790		5,305		7,095		1,535		5,573		7,108		1,790		5,305		7,095
Owner occupied construction		-		218		218		-		221		221		0		217		217		0		221		221
Consumer and other loans
Consumer loans		-		31		31		-		32		32		0		30		30		0		32		32
Total TDRs	$	2,291	$	11,420	$	13,711	$	2,342	$	6,575	$	8,917	$	2,073	$	10,936	$	13,009	$	2,342	$	6,575	$	8,917

Allowance for loan losses related to TDRs					$	470					$	353					$	347					$	353

(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 June 30,				Six Months Ended June 30,				*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	2020		2019		2020		2019		*2020*		*2019*		*2020*		*2019*
(Amounts in thousands)
Interest income recognized	$	152	$	84	$	250	$	147	$	122	$	56	$	372	$	203

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,*
													*2020*						*2019*
	Three Months Ended June 30,																*Post-modification*						*Post-modification*
	2020						2019						*Total*		*Pre-modification*		*Recorded*		*Total*		*Pre-modification*		*Recorded*
(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⁾		*Contracts*		*Recorded Investment*		*Investment(1)*		*Contracts*		*Recorded Investment*		*Investment(1)*
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		1		80		81		-		-		-		0		0		0
Single family owner occupied								1		185		184								0		0		0
Total below market interest rate and extended payment term		-		-		-		2		265		265		-		-		-		0		0		0
Payment deferral
Commercial and industrial		1		1,106		1,106		-		-		-		0		0		0		-		-		-
Non-farm, non-residential		2		1,538		1,538		-		-		-		0		0		0		-		-		-
Single family owner occupied		1		70		54		-		-		-		0		0		0		1		33		29
Total principal deferral		4		2,714		2,698		-		-		-		0		0		0		1		33		29
Total		4	$	2,714	$	2,698		2	$	265	$	265		0	$	0	$	0		1	$	33	$	29

(1)	Represents the loan balance immediately following modification

Table of Contents

													*Nine Months Ended September 30,*
													*2020*						*2019*
	Six Months Ended June 30,																*Post-modification*						*Post-modification*
	2020						2019						*Total*		*Pre-modification*		*Recorded*		*Total*		*Pre-modification*		*Recorded*
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modificatio Recorded Investment⁽¹⁾		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment⁽¹⁾		*Contracts*		*Recorded Investment*		*Investment(1)*		*Contracts*		*Recorded Investment*		*Investment(1)*
Below market interest rate Single family non-owner occupied		1		50		50		-	$	-	$	-		1		50		50		-	$	-	$	-
Total below market interest rate		1		50		50		-		-		-		1		50		50		-		-		-
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		3		454		432		-		-		-		2		221		218
Single family owner occupied								2		489		484		-		-		-		2		488		480
Total below market interest rate and extended payment term		-		-		-		5		943		916		-		-		-		4		709		698
Payment deferral
Construction, development, and other land		1		63		63		-		-		-		1		63		63		-		-		-
Commercial and industrial		2		1,708		1,708		-		-		-		3		1,708		1,708		-		-		-
Single family non-owner occupied		1		529		529		-		-		-		1		529		529		-		-		-
Non-farm, non-residential		3		2,115		2,115		-		-		-		3		2,115		2,115		-		-		-
Single family owner occupied		3		742		726		1		66		45		3		742		726		1		33		29
Home equity lines		-		-		-		1		4		3		-		-		-		0		0		0
Total principal deferral		10		5,157		5,141		2		70		48		11		5,157		5,141		1		33		29
Total		11	$	5,207	$	5,191		7	$	1,013	$	964		12	$	5,207	$	5,191		5	$	742	$	727

(1)	Represents the loan balance immediately following modification

Payment defaults on loans modified as TDRs restructured within the previous 12 months as of ~~June~~September 30, 2020, were for one loan in the amount of ~~$124~~$100 thousand; there were none in ~~2019.~~2019.

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

	June 30, 2020		December 31, 2019		*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)
OREO	$	2,181	$	3,969	$	2,103	$	3,969
Total OREO	$	2,181	$	3,969

OREO secured by residential real estate	$	949	$	2,232	$	767	$	2,232
Residential real estate loans in the foreclosure process⁽¹⁾		2,621		1,539		2,938		1,539

(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 Loan Losses

The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI loans as of ~~June~~September 30, ~~2020.~~2020.

													*Three Months Ended September 30, 2020*
	Three Months Ended June 30, 2020															*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total Allowance			*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	12,075		$	7,519		$	1,543		$	21,137		$	13,909		$	7,294		$	2,555		$	23,758
Provision for (recovery of) loan losses charged to operations		2,618			(221	)		1,434			3,831			1,972			1,975			756			4,703
Charge-offs		(878	)		(179	)		(615	)		(1,672	)		(501	)		(188	)		(874	)		(1,563	)
Recoveries		94			175			193			462			169			38			172			379
Net charge-offs		(784	)		(4	)		(422	)		(1,210	)		(332	)		(150	)		(702	)		(1,184	)
Ending balance	$	13,909		$	7,294		$	2,555		$	23,758		$	15,549		$	9,119		$	2,609		$	27,277

Table of Contents

													*Three Months Ended September 30, 2019*
	Three Months Ended June 30, 2019															*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total Allowance			*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,065		$	6,856		$	1,322		$	18,243		$	10,215		$	6,881		$	1,444		$	18,540
Provision for (Recovery of) loan losses charged to operations		1,263			(68	)		390			1,585			203			(338	)		810			675
Charge-offs		(1,514	)		(191	)		(409	)		(2,114	)		(159	)		(253	)		(552	)		(964	)
Recoveries		402			284			140			826			40			96			106			242
Net (charge-offs) recoveries		(1,112	)		93			(269	)		(1,288	)		(119	)		(157	)		(446	)		(722	)
Ending balance	$	10,216		$	6,881		$	1,443		$	18,540		$	10,299		$	6,386		$	1,808		$	18,493

													*Nine Months Ended September 30, 2020*
	Six Months Ended June 30, 2020															*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total Allowance			*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,235		$	6,325		$	1,865		$	18,425		$	10,235		$	6,325		$	1,865		$	18,425
Provision for loan losses charged to operations		4,605			924			1,802			7,331			6,577			2,899			2,558			12,034
Charge-offs		(1,146	)		(242	)		(1,478	)		(2,866	)		(1,647	)		(430	)		(2,352	)		(4,429	)
Recoveries		215			287			366			868			384			325			538			1,247
Net (charge-offs) recoveries		(931	)		45			(1,112	)		(1,998	)		(1,263	)		(105	)		(1,814	)		(3,182	)
Ending balance	$	13,909		$	7,294		$	2,555		$	23,758		$	15,549		$	9,119		$	2,609		$	27,277

													*Nine Months Ended September 30, 2019*
	Six Months Ended June 30, 2019															*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total Allowance			*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,499		$	6,732		$	1,036		$	18,267		$	10,499		$	6,732		$	1,036		$	18,267
Provision for loan losses charged to operations		1,157			749			899			2,805			1,359			411			1,710			3,480
Charge-offs		(2,006	)		(950	)		(780	)		(3,736	)		(2,165	)		(1,203	)		(1,332	)		(4,700	)
Recoveries		566			350			288			1,204			606			446			394			1,446
Net (charge-offs) recoveries		(1,440	)		(600	)		(492	)		(2,532	)		(1,559	)		(757	)		(938	)		(3,254	)
Ending balance	$	10,216		$	6,881		$	1,443		$	18,540		$	10,299		$	6,386		$	1,808		$	18,493

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The following tables present the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the dates indicated:

									*September 30, 2020*
									*Loans Individually*		*Allowance for Loans*		*Loans Collectively*		*Allowance for Loans*
	June 30, 2020								*Evaluated for*		*Individually*		*Evaluated for*		*Collectively*
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		*Impairment*		*Evaluated*		*Impairment*		*Evaluated*
Commercial loans
Construction, development, and other land	$	-	$	-	$	50,846	$	695	$	0	$	0	$	45,517	$	630
Commercial and industrial		896		-		180,981		934		767		0		177,396		1,102
Multi-family residential		944		279		103,189		1,162		944		222		103,087		1,299
Single family non-owner occupied		530		-		181,314		1,706		1,054		0		183,088		1,974
Non-farm, non-residential		3,803		684		700,242		8,020		3,774		565		726,741		9,360
Agricultural		-		-		10,380		206		0		0		10,341		174
Farmland		-		-		20,303		225		0		0		19,940		225
Total commercial loans		6,173		963		1,247,255		12,948		6,539		787		1,266,110		14,764
Consumer real estate loans
Home equity lines		-		-		106,825		752		0		0		101,276		871
Single family owner occupied		2,981		370		591,999		6,033		2,259		239		634,021		7,815
Owner occupied construction		-		-		15,311		139		0		0		17,460		194
Total consumer real estate loans		2,981		370		714,135		6,924		2,259		239		752,757		8,880
Consumer and other loans
Consumer loans		-		-		113,603		2,553		0		0		117,965		2,607
Other		-		-		4,477		-		0		0		5,838		0
Total consumer and other loans		-		-		118,080		2,553		0		0		123,803		2,607
Total loans, excluding PCI loans	$	9,154	$	1,333	$	2,079,470	$	22,425	$	8,798	$	1,026	$	2,142,670	$	26,251

									December 31, 2019
									Loans Individually		Allowance for Loans		Loans Collectively		Allowance for Loans
	December 31, 2019								Evaluated for		Individually		Evaluated for		Collectively
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		*Impairment*		*Evaluated*		*Impairment*		*Evaluated*
Commercial loans
Construction, development, and other land	$	-	$	-	$	30,334	$	245	$	0	$	0	$	30,334	$	245
Commercial and industrial		-		-		95,659		699		0		0		95,659		699
Multi-family residential		944		-		98,201		969		944		0		98,201		969
Single family non-owner occupied		-		-		128,520		1,323		0		0		128,520		1,323
Non-farm, non-residential		2,575		292		591,520		6,361		2,575		292		591,520		6,361
Agricultural		-		-		9,458		145		0		0		9,458		145
Farmland		-		-		16,146		201		0		0		16,146		201
Total commercial loans		3,519		292		969,838		9,943		3,519		292		969,838		9,943
Consumer real estate loans
Home equity lines		-		-		91,999		673		0		0		91,999		673
Single family owner occupied		3,016		353		490,712		5,175		3,016		353		490,712		5,175
Owner occupied construction		-		-		16,144		124		0		0		16,144		124
Total consumer real estate loans		3,016		353		598,855		5,972		3,016		353		598,855		5,972
Consumer and other loans
Consumer loans		-		-		99,199		1,865		0		0		99,199		1,865
Other		-		-		4,742		-		0		0		4,742		0
Total consumer and other loans		-		-		103,941		1,865		0		0		103,941		1,865
Total loans, excluding PCI loans	$	6,535	$	645	$	1,672,634	$	17,780	$	6,535	$	645	$	1,672,634	$	17,780

Table of Contents

The following table presents the recorded investment in PCI loans and the allowance for loan losses on PCI loans, by loan pool, as of the dates indicated:

									*September 30, 2020*				*December 31, 2019*
											*Allowance for Loan*				*Allowance for Loan*
	June 30, 2020				December 31, 2019				*Recorded*		*Pools With*		*Recorded*		*Pools With*
(Amounts in thousands)	Recorded Investment		Allowance for Loan Pools With Impairment		Recorded Investment		Allowance for Loan Pools With Impairment		*Investment*		*Impairment*		*Investment*		*Impairment*
Commercial loans
Waccamaw commercial	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0
Peoples commercial		-		-		4,371		-		0		0		4,371		0
Highlands:
1-4 family, senior-commercial		6,736		-		4,564		-		5,311		0		4,564		0
Construction & land development		1,766		-		1,956		-		1,295		0		1,956		0
Farmland and other agricultural		3,386		-		3,722		-		3,054		0		3,722		0
Multifamily		1,635		-		1,663		-		1,616		0		1,663		0
Commercial real estate		19,056		-		21,710		-		18,300		0		21,710		0
Commercial and industrial		2,421		-		2,829		-		1,551		0		2,829		0
Other		-		-		352		-		0		0		352		0
Total commercial loans		35,000		-		41,167		-		31,127		0		41,167		0
Consumer real estate loans
Waccamaw serviced home equity lines		-		-		2,121		-		0		0		2,121		0
Waccamaw residential		-		-		587		-		0		0		587		0
Highlands:		-		-		-		-		-		-		-		-
1-4 family, junior and HELOCS		1,253		-		2,157		-		859		0		2,157		0
1-4 family, senior-consumer		10,992		-		13,174		-		10,768		0		13,174		0
Consumer		948		-		1,341		-		773		0		1,341		0
Peoples residential		-		-		700		-		0		0		700		0
Total consumer real estate loans		13,193		-		20,080		-		12,400		0		20,080		0
Total PCI loans	$	48,193	$	-	$	61,247	$	-	$	43,527	$	0	$	61,247	$	0

Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of ~~June~~September 30, ~~2020.~~2020.

Note 7. FDIC Indemnification Asset

In connection with the FDIC-assisted acquisition of Waccamaw Bank ~~(“Waccamaw”)~~ in 2012, the Company entered into loss share agreements with the FDIC in which the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to those covered assets. Loss share coverage for commercial loans expired June 30, 2017, with recoveries ending June 30, 2020. Loss share coverage on single family loans will expire June 30, 2022. The Company’s ~~consolidated~~condensed statements of income include the expense on covered assets net of estimated reimbursements. The following table presents the changes in the FDIC indemnification asset and total covered loans and OREO for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,						*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	2020			2019			2020			2019			*2020*			*2019*			*2020*			*2019*
(Amounts in thousands)
Beginning balance	$	2,433		$	4,578		$	2,883		$	5,108		$	1,943		$	4,020		$	2,883		$	5,108
Reimbursable expenses to the FDIC		-			-			-			-			0			0			0			0
Net amortization		(483	)		(516	)		(969	)		(1,068	)		(383	)		(719	)		(1,352	)		(1,787	)
(Receipts from) payments to the FDIC		(7	)		(42	)		29			(20	)
Payments to the FDIC														38			157			67			137
Ending balance	$	1,943		$	4,020		$	1,943		$	4,020		$	1,598		$	3,458		$	1,598		$	3,458

Table of Contents

Note 8. Deposits

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

	June 30, 2020		December 31, 2019		*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)
Noninterest-bearing demand deposits	$	752,899	$	627,868	$	750,277	$	627,868
Interest-bearing deposits:
Interest-bearing demand deposits		564,417		497,470		576,731		497,470
Money market accounts		238,957		235,712		241,843		235,712
Savings deposits		482,532		453,240		486,506		453,240
Certificates of deposit		326,558		372,821		307,267		372,821
Individual retirement accounts		132,483		142,801		129,615		142,801
Total interest-bearing deposits		1,744,947		1,702,044		1,741,962		1,702,044
Total deposits	$	2,497,846	$	2,329,912	$	2,492,239	$	2,329,912

Note 9. 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 ~~consolidated~~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 ~~consolidated~~condensed statements of income.

The Company’s current operating leases relate primarily to bank branches. The Company’s ROU asset was ~~$874~~$852 thousand as of ~~June~~September 30, 2020compared to $917 thousand as of December 31, ~~2019.~~ 2019. The operating lease liability as of ~~June~~September 30, 2020was ~~$950~~$920 compared to $1.01 million as of December 31, ~~2019.~~ 2019. The Company’s total operating leases have remaining terms of ~~2 – 9~~2-9 years; compared with 2-10 years as of December 31, ~~2019.~~ 2019. The ~~June~~September 30, 2020weighted average discount rate of 3.22% did not change from December 31, ~~2019.~~2019.

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

Year	June 30, 2020			*September 30, 2020*
(Amounts in thousands)
2021	$	154		$	154
2022		148			140
2023		119			119
2024		119			119
2025 and thereafter		520			490
Total lease payments		1,060			1,022
Less: Interest		(110	)		(102	)
Present value of lease liabilities	$	950		$	920

Year	December 31, 2019
(Amounts in thousands)
2020	$	154
2021		154
2022		131
2023		119
2024 and thereafter		580
Total lease payments		1,138
Less: Interest		(129	)
Present value of lease liabilities	$	1,009

Table of Contents

Note 10. Borrowings

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

											*September 30, 2020*					*December 31, 2019*
	June 30, 2020					December 31, 2019							*Weighted*					*Weighted*
(Amounts in thousands)	Balance		Weighted Average Rate			Balance		Weighted Average Rate			*Balance*		*Average Rate*			*Balance*		*Average Rate*
Short-term borrowings
Retail repurchase agreements		1,100		0.39	%	$	1,601		0.14	%	$	956		0.14	%	$	1,601		0.14	%
Total borrowings	$	1,100				$	1,601

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

As of ~~June~~September 30, 2020, the Company had no long-term borrowings.

Unused borrowing capacity with the FHLB totaled ~~$365.67~~$322.82 million, net of FHLB letters of credit of ~~$169.04~~$169.64 million, as of ~~June~~September 30, ~~2020.~~ 2020. As of ~~June~~September 30, 2020, the Company pledged ~~$939.81~~$891.45 million in qualifying loans to secure the FHLB borrowing capacity.

The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of one-month LIBOR plus 2.00% that matures in April 2021. There was 0 outstanding balance on the line as of ~~June~~September 30, 2020or December 31, ~~2019.~~2019.

Note 11. Derivative Instruments and Hedging Activities

Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

The Company 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. The Company’s interest rate swaps qualify and are designated 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 ~~June~~September 30, ~~2020.~~ 2020. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

													*September 30, 2020*						*December 31, 2019*
	June 30, 2020						December 31, 2019						*Notional or*		*Fair Value*				*Notional or*		*Fair Value*
	Notional or		Fair Value				Notional or		Fair Value				*Contractual*		*Derivative*		*Derivative*		*Contractual*		*Derivative*		*Derivativ*
(Amounts in thousands)	Contractual Amount		Derivative Assets		Derivative Liabilities		Contractual Amount		Derivative Assets		Derivativ Liabilities		*Amount*		*Assets*		*Liabilities*		*Amount*		*Assets*		*Liabilities*
Derivatives designated as hedges
Interest rate swaps	$	17,052	$	-	$	1,322	$	17,432	$	-	$	510	$	16,889	$	0	$	1,261	$	17,432	$	0	$	510
Total derivatives	$	17,052	$	-	$	1,322	$	17,432	$	-	$	510	$	16,889	$	0	$	1,261	$	17,432	$	0	$	510

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 June 30,				Six Months Ended June 30,					*Three Months Ended September 30,*				*Nine Months Ended September 30,*
(Amounts in thousands)	2020		2019		2020		2019		Income Statement Location	*2020*		*2019*		*2020*		*2019*		*Income Statement Location*
Derivatives designated as hedges
Interest rate swaps	$	80	$	-	$	92	$	-	Interest and fees on loans	$	80	$	1	$	172	$	1	Interest and fees on loans
Total derivative expense	$	80	$	-	$	92	$	-		$	80	$	1	$	172	$	1

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Note 12. Employee Benefit Plans

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

	Three Months Ended June 30,				Six Months Ended June 30,					*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	2020		2019		2020		2019		Income Statement Location	*2020*		*2019*		*2020*		*2019*		*Income Statement Location*
(Amounts in thousands)
Service cost	$	78	$	80	$	155	$	160	Salaries and employee benefits	$	77	$	80	$	232	$	240	Salaries and employee benefits
Interest cost		89		101		178		202	Other expense		88		101		266		303	Other expense
Amortization of prior service cost		50		64		100		128	Other expense		51		65		151		193	Other expense
Amortization of losses		47		6		93		11	Other expense		46		5		139		16	Other expense
Net periodic cost	$	264	$	251	$	526	$	501		$	262	$	251	$	788	$	752

Note 13. Earnings per Share

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

	Three Months Ended				Six Months Ended				*Three Months Ended*				*Nine Months Ended*
	June 30,				June 30,				*September 30,*				*September 30,*
	2020		2019		2020		2019		*2020*		*2019*		*2020*		*2019*
(Amounts in thousands, except share and per share data)
Net income	$	8,238	$	10,451	$	16,110	$	20,082	$	8,266	$	9,156	$	24,376	$	29,238

Weighted average common shares outstanding, basic		17,701,853		15,712,204		17,850,423		15,775,462		17,710,283		15,603,992		17,803,369		15,717,678
Dilutive effect of potential common shares
Stock options		20,661		56,818		27,017		57,795		16,163		52,360		23,711		55,898
Restricted stock		5,786		6,298		10,885		14,241		5,982		8,235		9,883		11,908
Total dilutive effect of potential common shares		26,447		63,116		37,902		72,036		22,145		60,595		33,594		67,806
Weighted average common shares outstanding, diluted		17,728,300		15,775,320		17,888,325		15,847,498		17,732,428		15,664,587		17,836,963		15,785,484

Basic earnings per common share	$	0.47	$	0.67	$	0.90	$	1.27	$	0.47	$	0.59	$	1.37	$	1.86
Diluted earnings per common share		0.46		0.66		0.90		1.27		0.47		0.58		1.37		1.85

Antidilutive potential common shares
Stock options		60,375		-		66,808		-		78,016		0		61,241		0
Restricted stock		34,661		-		32,159		-		26,012		0		27,874		0
Total potential antidilutive shares		95,036		-		98,967		-		104,028		0		89,115		0

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Note 14. 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, 2020*
										*Unrealized Gains*
	Three Months Ended June 30, 2020									*(Losses) on Available-*
	Unrealized Gains (Losses) on Available- for-Sale Securities			Employee Benefit Plans			Total			*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	1,509		$	(2,648	)	$	(1,139	)	$	1,464		$	(2,572	)	$	(1,108	)
Other comprehensive income (loss) before reclassifications		(45	)		-			(45	)		(213	)		1			(212	)
Reclassified from AOCI		-			76			76			0			76			76
Other comprehensive income, net		(45	)		76			31
Other comprehensive (loss) income, net											(213	)		77			(136	)
Ending balance	$	1,464		$	(2,572	)	$	(1,108	)	$	1,251		$	(2,495	)	$	(1,244	)

									*Three Months Ended September 30, 2019*
									*Unrealized Gains*
	Three Months Ended June 30, 2019								*(Losses) on Available-*
	Unrealized Gains (Losses) on Available- for-Sale Securities		Employee Benefit Plans			Total			*for-Sale Securities*		*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	677	$	(1,410	)	$	(733	)	$	973	$	(1,354	)	$	(381	)
Other comprehensive income (loss) before reclassifications		262		-			262			23		(2	)		21
Reclassified from AOCI		34		56			90			0		55			55
Other comprehensive (loss) income, net		296		56			352
Other comprehensive income, net										23		53			76
Ending balance	$	973	$	(1,354	)	$	(381	)	$	996	$	(1,301	)	$	(305	)

										*Nine Months Ended September 30, 2020*
										*Unrealized Gains*
	Six Months Ended June 30, 2020									*(Losses) on Available-*
	Unrealized Gains (Losses) on Available- for-Sale Securities			Employee Benefit Plans			Total			*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	866		$	(2,372	)	$	(1,506	)	$	866		$	(2,372	)	$	(1,506	)
Other comprehensive income (loss) before reclassifications		902			(353	)		549			689			(352	)		337
Reclassified from AOCI		(304	)		153			(151	)		(304	)		229			(75	)
Other comprehensive income, net		598			(200	)		398
Other comprehensive income (loss), net											385			(123	)		262
Ending balance	$	1,464		$	(2,572	)	$	(1,108	)	$	1,251		$	(2,495	)	$	(1,244	)

										*Nine Months Ended September 30, 2019*
										*Unrealized Gains*
	Six Months Ended June 30, 2019									*(Losses) on Available-*
	Unrealized Gains (Losses) on Available- for-Sale Securities			Employee Benefit Plans			Total			*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	(285	)	$	(1,144	)	$	(1,429	)	$	(285	)	$	(1,144	)	$	(1,429	)
Other comprehensive income (loss)
before reclassifications		1,224			(320	)		904			1,247			(322	)		925
Reclassified from AOCI		34			110			144			34			165			199
Other comprehensive (loss) income, net		1,258			(210	)		1,048
Other comprehensive income (loss), net											1,281			(157	)		1,124
Ending balance	$	973		$	(1,354	)	$	(381	)	$	996		$	(1,301	)	$	(305	)

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

	Three Months Ended				Six Months Ended						*Three Months Ended*				*Nine Months Ended*
	June 30,				June 30,					Income Statement	*September 30,*				*September 30,*					*Income Statement*
(Amounts in thousands)	2020		2019		2020			2019		Line Item Affected	*2020*		*2019*		*2020*			*2019*		*Line Item Affected*
Available-for-sale securities
Gain recognized	$	-	$	43	$	(385	)	$	43	Net loss on sale of securities	$	0	$	0	$	(385	)	$	43	Net loss on sale of securities
Reclassified out of AOCI, before tax		-		43		(385	)		43	Income before income taxes		0		0		(385	)		43	Income before income taxes
Income tax expense		-		9		(81	)		9	Income tax expense		0		0		(81	)		9	Income tax expense
Reclassified out of AOCI, net of tax		-		34		(304	)		34	Net income		0		0		(304	)		34	Net income
Employee benefit plans
Amortization of prior service cost	$	50	$	64	$	100		$	128	(1)	$	51	$	65	$	150		$	193	(1)
Amortization of net actuarial benefit cost		47		6		93			11	(1)		46		5		140			16	(1)
Reclassified out of AOCI, before tax		97		70		193			139	Income before income taxes		97		70		290			209	Income before income taxes
Income tax expense		21		15		41			29	Income tax expense		21		15		61			44	Income tax expense
Reclassified out of AOCI, net of tax		76		55		152			110	Net income		76		55		229			165	Net income
Total reclassified out of AOCI, net of tax	$	76	$	89	$	(152	)	$	144	Net income	$	76	$	55	$	(75	)	$	199	Net income

(1)	Amortization is included in net periodic pension cost. See Note 11, "Employee Benefit Plans."

Note 15. 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.

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.

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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 ~~using the exit price notion, which is~~ derived from third-party models. Loans ~~related to~~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:

	June 30, 2020								*September 30, 2020*
	Total		Fair Value Measurements Using						*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale debt securities
U.S. Agency securities	$	593	$	-	$	593	$	-	$	572	$	0	$	572	$	0
Municipal securities		62,491		-		62,491		-		55,667		0		55,667		0
Mortgage-backed Agency securities		35,283		-		35,283		-		34,733		0		34,733		0
Total available-for-sale debt securities		98,367		-		98,367		-		90,972		0		90,972		0
Equity securities		55		55		-		-		55		55		0		0
Fair value loans		12,128		-		-		12,128		15,628		0		0		15,628
Deferred compensation assets		3,790		3,790		-		-		3,752		3,752		0		0
Deferred compensation liabilities		3,790		3,790		-		-		3,752		3,752		0		0
Derivative liabilities		1,322		-		1,322		-		1,261		0		1,261		0

	December 31, 2019								*December 31, 2019*
	Total		Fair Value Measurements Using						*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale debt securities
U.S. Agency securities	$	5,034	$	-	$	5,034	$	-	$	5,034	$	0	$	5,034	$	0
Municipal securities		86,878		-		86,878		-		86,878		0		86,878		0
Mortgage-backed Agency securities		77,662		-		77,662		-		77,662		0		77,662		0
Total available-for-sale debt securities		169,574		-		169,574		-		169,574		0		169,574		0
Equity securities		55		55		-		-		55		55		0		0
Fair value loans		10,358		-		-		10,358		16,922		0		0		16,922
Deferred compensation assets		3,990		3,990		-		-		3,990		3,990		0		0
Deferred compensation liabilities		3,990		3,990		-		-		3,990		3,990		0		0
Derivative liabilities		510				510				510				510

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Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Impaired loans are 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.

Specific reserves are generally recorded for impaired loans while third-party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the third-party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution, except in cases involving bankruptcy and various state judicial processes that may extend the time for ultimate resolution.

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:

	June 30, 2020								*September 30, 2020*
	Total		Fair Value Measurements Using						*Total*		*Fair Value Measurements Using*
	Fair Value		Level 1		Level 2		Level 3		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Impaired loans, non-covered	$	3,178	$	-	$	-	$	3,178	$	3,114	$	0	$	0	$	3,114
OREO		2,181		-		-		2,181		2,103		0		0		2,103

	December 31, 2019								December 31, 2019
	Total		Fair Value Measurements Using						Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans, non-covered	$	1,828	$	-	$	-	$	1,828	$	1,828	$	0	$	0	$	1,828
OREO		3,969		-		-		3,969		3,969		0		0		3,969

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Quantitative Information about Level 3 Fair Value Measurements

The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:

Valuation

Unobservable

Discount Range (Weighted Average)

Technique

Input

June 30, 2020

December 31, 2019

Impaired loans, non-covered
Discounted appraisals⁽¹⁾

Appraisal adjustments⁽²⁾
5% to 65% (30%) 22% to 36% (26%)
OREO
Discounted appraisals⁽¹⁾

Appraisal adjustments⁽²⁾
0% to 77% (25%) 15% to 100% (8%)

Valuation

Unobservable

Discount Range (Weighted Average)

Technique

Input

September 30, 2020

December 31, 2019

Impaired loans, non-covered

Discounted appraisals(1)

Appraisal adjustments(2)

3% to 42% (25%)

22% to 36% (26%)

OREO

Discounted appraisals(1)

Appraisal adjustments(2)

0% to 77% (24%)

15% to 100% (8%)

(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.

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 ~~are reported~~fair value is estimated at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

FDIC Indemnification Asset. The FDIC indemnification asset ~~is reported at~~ fair value is estimated using discounted future cash flows that apply current discount rates.

Accrued Interest Receivable/Payable. Accrued interest receivable/payable fair value is ~~reported~~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 ~~reported~~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 ~~reported~~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 16, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

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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:

	June 30, 2020										*September 30, 2020*
	Carrying				Fair Value Measurements Using						*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3		*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	421,492	$	421,492	$	421,492	$	-	$	-	$	375,664	$	375,664	$	375,664	$	0	$	0
Debt securities available for sale		98,367		98,367		-		98,367		-		90,972		90,972		0		90,972		0
Equity securities		55		55		55		-		-		55		55		55		0		0
Loans held for investment, net of allowance		2,136,817		2,041,821		-		-		2,041,821		2,167,718		2,123,823		0		0		2,123,823
FDIC indemnification asset		1,943		810		-		-		810		1,598		666		0		0		666
Interest receivable		8,380		8,380		-		8,380		-		9,151		9,151		0		9,151		0
Deferred compensation assets		3,790		3,790		3,790		-		-		3,752		3,752		3,752		0		0

Liabilities
Time deposits		459,041		462,940		-		462,940		-		436,882		440,283		0		440,283		0
Securities sold under agreements to repurchase		1,100		1,100		-		1,100		-		956		956		0		956		0
Interest payable		808		808		-		808		-		719		719		0		719		0
Derivative financial liabilities		1,322		1,322		-		1,322		-		1,261		1,261		0		1,261		0
Deferred compensation liabilities		3,790		3,790		3,790		-		-		3,752		3,752		3,752		0		0

	December 31, 2019										December 31, 2019
	Carrying				Fair Value Measurements Using						Carrying				Fair Value Measurements Using
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3		*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	217,009	$	217,009	$	217,009	$	-	$	-	$	217,009	$	217,009	$	217,009	$	0	$	0
Debt securities available for sale		169,574		169,574		-		169,574		-		169,574		169,574		0		169,574		0
Equity securities		55		55		55		-		-		55		55		55		0		0
Loans held for sale		263		263		-		-		263		263		263		0		0		263
Loans held for investment, net of allowance		2,096,035		2,068,257		-		-		2,068,257		2,096,035		2,068,257		0		0		2,068,257
FDIC indemnification asset		2,883		1,201		-		-		1,201		2,883		1,201		0		0		1,201
Interest receivable		6,677		6,677		-		6,677		-		6,677		6,677		0		6,677		0
Deferred compensation assets		3,990		3,990		3,990		-		-		3,990		3,990		3,990		0		0

Liabilities
Time deposits		515,622		512,134		-		512,134		-		515,622		512,134		0		512,134		0
Securities sold under agreements to repurchase		1,601		1,601		-		1,601		-		1,601		1,601		0		1,601		0
Interest payable		472		472		-		472		-		472		472		0		472		0
Derivative liabilities		510		510		-		510		-		510		510		0		510		0
Deferred compensation liabilities		3,990		3,990		3,990		-		-		3,990		3,990		3,990		0		0

Note 16. 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.

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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:

	June 30, 2020		December 31, 2019		*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)
Commitments to extend credit	$	218,577	$	228,716	$	219,297	$	228,716
Standby letters of credit and financial guarantees⁽¹⁾		174,545		167,612		173,925		167,612
Total off-balance sheet risk		393,122		396,328	$	393,222	$	396,328

Reserve for unfunded commitments	$	66	$	66	$	66	$	66

(1)	Includes FHLB letters of credit

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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, 2019 (the “2019 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 ~~June~~September 30, 2020, the Bank operated 5852 branches as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, as People’s Community Bank, a Division of First Community Bank, in Tennessee. As of ~~June~~September 30, 2020, full-time equivalent employees, calculated using the number of hours worked, totaled ~~640.~~630. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

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 ~~June~~September 30, 2020, the Trust Division and FCWM managed and administered ~~$1.10~~$1.13 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Recent Events

In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China, and quickly spread across most of the earth, including the United States. In March 2020, President Trump declared a National Public Health Emergency. Government responses to the COVID-19 pandemic ~~have~~ severely restricted the level of economic activity in the Company’s ~~markets.~~markets during the Spring and early Summer of 2020. While the financial services industry has been designated an essential business in each of the states in which the Company operates, many of the Company’s customers are non-essential businesses, or are employed by non-essential businesses, and have been adversely affected by government shutdowns.

The Company’s business, financial condition, and results of operations generally rely upon the ability of borrowers to repay their loans, the value of collateral underlying secured loans, and demand for loans and other financial products and services. Each of these conditions depends highly on the business environment in the primary markets where the Company operates and in the United States as a whole. The COVID-19 pandemic has, and will continue to have, a significant impact on the Company’s business and operations.

To date, the COVID-19 pandemic has impacted trade, travel, employee productivity, unemployment, consumer spending, and other economic activities which has resulted in less economic activity, lower equity market valuations, significant volatility and disruption in financial markets, ~~and has~~which have all adversely affected the Company’s business volume, financial condition and results of operations. However, the impact of the COVID-19 pandemic is fluid and continues to evolve. The ultimate extent to which the COVID-19 pandemic will impact the Company’s business, financial condition, and results of operations is currently uncertain and will depend on various developments, including the duration and scope of the pandemic, governmental, regulatory and private sector responses to the pandemic, the pandemic’s depth of impact on national and local economies, financial market reactions, responses of the Company’s customers, employees and vendors, and other factors.

In order to implement and exercise social distancing, on March 20, 2020, the Company began limiting access to branch lobbies and conducting most business through drive-through tellers and through electronic and online means. To support the health and well-being of employees, a ~~majority~~significant amount of the ~~Company’s back office~~Company's non-customer facing, operational workforce is currently working remotely, and the Company temporarily implemented pay differential for employees not working ~~remotely;~~remotely, which ended when states and localities began their phased re-opening plans. To support and assist loan customers and/or comply with guidance from regulatory authorities, the Company has deferred loan payments for many consumer and commercial customers, suspended residential property foreclosures, evictions, and involuntary automobile repossessions, and is offering fee waivers, payment deferrals, and other extraordinary assistance for automobile, mortgage, small business and personal lending customers. Future regulatory or governmental actions may require these and other types of customer-assistance measures.

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~~Through June 30, 2020,~~In order to help our customers in these unprecedented times, the Company ~~has~~ modified or deferred payments on a total of ~~3,097~~3,362 loans totaling ~~$436.11 million in principal; 1,277 commercial loans totaling $340.00~~$426.45 million in principal ~~972 consumer installment~~through September 30, 2020. At September 30, 2020, loans ~~totaling $12.92~~currently in deferral amounted to $115.63 million. Included in the September 30, 2020, amounts are re-deferrals for approximately $69.32 million commercial loans and approximately $5.09 million in ~~principal, 706~~ consumer ~~mortgages totaling $76.01 million in principal,~~mortgage and ~~142 home equity loans totaling $7.18 million in principal.~~installment loans. Deferred interest and fees for these loans will continue to accrue. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. The accrued interest for these loans ~~totaled $702 thousand~~total $1.10 million as of ~~June~~September 30, 2020. ~~At this time, the Company is unable to project the materiality of any such impact. The Company proactively reached out to customers to provide guidance and assistance on loan deferrals.~~ To date, the Company has not experienced an increase in borrowers drawing on lines of credit. Management currently believes the hotel/motel and retail loan portfolios to be at the greatest risk.

The Company is also participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist both existing customers and non-customers. Through ~~June~~September 30, 2020, the Company processed ~~758~~803 loans with original principal balances totaling ~~$60.23~~$62.74 million through the SBA’s PPP.

Management and the Board of Directors are closely monitoring the impact of the COVID-19 pandemic on results of operations and financial condition. The Company recorded a provision for loan losses of ~~$3.83~~$12.03 million ~~in the second quarter of 2020 and $3.50 million in~~for the first ~~quarter~~nine months of 2020 which ~~was~~is significantly higher than in the recent previous ~~quarters.~~periods. Management expects the provisions for loan losses for periods ending after ~~June~~September 30, 2020, to be materially impacted by the COVID-19 pandemic.

Acquisitions and Divestitures

On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands” ) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock. The transaction was consummated at the close of business December 31, 2019. The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.

The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement up to a year after the closing date of the acquisition.

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.

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended ~~June~~September 30, 2020, 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 2019 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2019 Form 10-K.

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Performance Overview

Highlights of our results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and financial condition as of ~~June~~September 30, 2020, include the following:

●

Diluted earnings per share was ~~$0.46~~$0.47 for the third quarter and ~~$0.90~~$1.37 for the ~~six~~first nine months .

●

Current quarter earnings include a loan loss provision of ~~$3.83~~$4.70 million, an increase of ~~$2.25~~$4.03 million over ~~second~~third quarter of 2019. ~~Coupled with~~The year to date loan loss provision was $12.03 million, an increase of $8.55 million from the ~~provision~~prior year. The increase further recognizes the economic uncertainty of the ~~first quarter of 2020, the provision had the cumulative effect of increasing loan loss reserves $5.33 million for the six month period to recognize the impact of the coronavirus slowdown.~~COVID-19 pandemic.

●

Despite the significant increase in loan loss provision, return on average assets remained strong at ~~1.15%~~1.11% for ~~both~~ the ~~second~~third quarter and 1.14% for the ~~six~~nine month period. ~~The significant increase in loan loss provision over previous quarterly provisions reduced return on average assets for the quarter by 0.24%.~~

●

Net interest margin decreased 5046 basis points to ~~4.22%~~4.10% compared to the same quarter of 2019. Net interest margin decreased 2030 basis points to ~~4.46%~~4.33% for the ~~six~~first nine months compared to the same period of 2019. Both decreases are reflective of the current historically low interest rate environment.

	●	Service charges on deposit accounts have increased since the second quarter of 2020 as pandemic shutdowns and stay-at-home orders were relaxed during the summer.
	●	Total deposits have grown $162.33 million, or 6.97%, during 2020 with $122.41 million of the increase occurring in interest free categories.
	●	Book value per common share at September 30, 2020, was $23.70, an increase of $0.37 during the year.
	●	As of ~~June~~September 30, 2020, the Company continues to significantly exceed regulatory “well capitalized” targets, as well as all capital targets of its capital management plan. The Company completed its previous share repurchase authorization in the first quarter of 2020, prior to the onset of the current ~~coronavirus~~COVID-19 pandemic, which completed a strategic objective of acquiring 6.6 million shares, returning over $149 million in surplus capital to shareholders. In light of the uncertain economic forecast, the Company has temporarily delayed consideration of a new share repurchase authorization to preserve and further accumulate surplus capital.

●

~~Total deposits have grown $167.93 million, or 7.21%, during 2020 with $125.03 million of the increase coming in interest free categories.~~

Results of Operations

Net Income

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

	Three Months Ended						Three Months Ended						Six Months Ended						Six Months Ended						Three Months Ended												Nine Months Ended
(Amounts in thousands, except per	June 30,						Increase						June 30,						Increase						September 30,						Increase						September 30,						Increase
share data)	2020			2019			(Decrease)			% Change			2020			2019			(Decrease)			% Change			2020			2019			(Decrease)			% Change			2020			2019			(Decrease)			% Change

Net income	$	8,238		$	10,451		$	(2,213	)		-21.18	%	$	16,110		$	20,082		$	(3,972	)		-19.78	%	$	8,266		$	9,156		$	(890	)		-9.72	%	$	24,376		$	29,238		$	(4,862	)		-16.63	%

Basic earnings per common share		0.47			0.67			(0.20	)		-29.85	%		0.90			1.27			(0.37	)		-29.13	%		0.47			0.59			(0.12	)		-20.34	%		1.37			1.86			(0.49	)		-26.34	%
Diluted earnings per common share		0.46			0.66			(0.20	)		-30.30	%		0.90			1.27			(0.37	)		-29.13	%		0.47			0.58			(0.11	)		-18.97	%		1.37			1.85			(0.48	)		-25.95	%

Return on average assets		1.15	%		1.89	%		-0.74	%		-39.15	%		1.15	%		1.82	%		-0.67	%		-36.81	%		1.11	%		1.65	%		-0.54	%		-32.73	%		1.14	%		1.76	%		-0.62	%		-35.23	%
Return on average common equity		7.97	%		12.57	%		-4.60	%		-36.60	%		7.73	%		12.17	%		-4.44	%		-36.48	%		7.83	%		10.80	%		-2.97	%		-27.50	%		7.76	%		11.70	%		-3.94	%		-33.68	%

Three-Month Comparison. Net income decreased ~~$2.21 million~~$890 thousand in the ~~second~~third quarter of 2020 largely due to a ~~$2.25~~$4.03 million increase in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown. Additional decreases resulted from increases in salaries and employee benefits of ~~$1.86~~$1.15 million in 2020 reflective of the addition of Highlands ~~as well as expenses arising from the implementation of~~and a pay differential related to COVID-19 which ended May 31, 2020. Pandemic shutdowns and stay-at-home orders had a significant negative impact on deposit service charges resulting in a decrease of $1.14 million in income. Results for second quarter 2019 included one-time litigation ~~settlements~~settlement of ~~$2.03 million.~~$900 thousand included in the third quarter results from 2019. These decreases were offset by an increase of ~~$3.35~~$4.61 million in net interest income that is reflective of the addition of ~~Highlands; as well as an increase~~Highlands in 2020 and $592 thousand in merger expenses recognized in the third quarter of ~~$1.43 million in various other noninterest income categories.~~2019 .

~~Six-Month~~Nine-Month Comparison. Net income decreased ~~$3.97~~$4.86 million in the first ~~six~~nine months of 2020 due to a ~~$4.53~~$8.55 million increase in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown as noted above. Additional decreases resulted from an increase in salaries and employee benefits of ~~$4.08~~$5.23 million which was reflective of the addition of Highlands as well as expenses arising from the implementation of ~~the~~a pay differential related to COVID-19 which ended May 31, 2020. ~~2019 included~~Also contributing to the decrease, were litigation settlements received of ~~$3.70 million.~~$4.60 million received in 2019. These decreases were offset by an increase of ~~$8.85~~$13.46 million in net interest income that is reflective of the of Highlands acquisition.

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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 June 30,														Three Months Ended September 30,
	2020							2019							2020							2019
	Average				Average Yield/			Average				Average Yield/			Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾⁽³⁾	$	2,129,513	$	27,040		5.11	%	$	1,721,392	$	22,772		5.31	%	$	2,171,023	$	27,331		5.01	%	$	1,706,936	$	22,106		5.14	%
Securities available for sale		103,378		839		3.26	%		126,153		1,068		3.40	%		93,263		720		3.07	%		118,450		1,015		3.40	%
Interest-bearing deposits		293,791		81		0.11	%		125,759		766		2.44	%		352,144		90		0.10	%		122,891		680		2.20	%
Total earning assets		2,526,682		27,960		4.45	%		1,973,304		24,606		5.00	%		2,616,430		28,141		4.28	%		1,948,277		23,801		4.85	%
Other assets		356,913							248,270							344,285							250,142
Total assets	$	2,883,595						$	2,221,574						$	2,960,715						$	2,198,419

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	547,445	$	98		0.07	%	$	454,246	$	77		0.07	%	$	580,165	$	73		0.05	%	$	450,650	$	78		0.07	%
Savings deposits		707,298		240		0.14	%		504,854		192		0.15	%		720,657		136		0.08	%		500,600		222		0.18	%
Time deposits		465,212		1,107		0.96	%		429,469		1,123		1.05	%		448,275		951		0.84	%		413,012		1,083		1.04	%
Total interest-bearing deposits		1,719,955		1,445		0.34	%		1,388,569		1,392		0.40	%		1,749,097		1,160		0.26	%		1,364,262		1,383		0.40	%
Borrowings
Retail repurchase agreements		1,244		1		0.14	%		3,024		1		0.13	%		969		1		0.14	%		2,107		1		0.17	%
Total borrowings		1,244		1		0.14	%		3,024		1		0.13	%		969		1		0.14	%		2,107		1		0.17	%
Total interest-bearing liabilities		1,721,199		1,446		0.34	%		1,391,593		1,393		0.40	%		1,750,066		1,161		0.26	%		1,366,369		1,384		0.40	%
Noninterest-bearing demand deposits		711,174							468,782							754,147							466,253
Other liabilities		35,467							27,604							36,379							29,449
Total liabilities		2,467,840							1,887,979							2,540,592							1,862,071
Stockholders' equity		415,755							333,595							420,123							336,348
Total liabilities and stockholders' equity	$	2,883,595						$	2,221,574						$	2,960,715						$	2,198,419
Net interest income, FTE⁽¹⁾			$	26,514						$	23,213						$	26,980						$	22,417
Net interest rate spread						4.11	%						4.60	%						4.02	%						4.44	%
Net interest margin, FTE⁽¹⁾						4.22	%						4.72	%						4.10	%						4.56	%

(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 ~~$1.50~~$1.77 million and ~~$1.39 million~~$566 thousand for the three months ended ~~June~~September 30, 2020 and 2019, respectively.

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AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Six Months Ended June 30,														Nine Months Ended September 30,
	2020							2019							2020							2019
	Average				Average Yield/			Average				Average Yield/			Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾⁽³⁾	$	2,105,323	$	55,145		5.27	%	$	1,743,141	$	45,008		5.21	%	$	2,127,383	$	82,476		5.18	%	$	1,730,940	$	67,114		5.18	%
Securities available for sale		119,744		1,899		3.19	%		135,914		2,299		3.42	%		110,852		2,619		3.16	%		130,029		3,314		3.41	%
Securities held to maturity		-		-		-			6,140		45		1.48	%		-		-		-			4,071		45		1.48	%
Interest-bearing deposits		228,636		616		0.53	%		90,423		1,104		2.45	%		270,106		706		0.34	%		101,364		1,784		2.34	%
Total earning assets		2,453,703		57,660		4.73	%		1,975,618		48,456		4.95	%		2,508,341		85,801		4.57	%		1,966,404		72,257		4.91	%
Other assets		355,280							248,118							351,589							248,801
Total assets	$	2,808,983						$	2,223,736						$	2,859,930						$	2,215,205

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	525,024	$	188		0.07	%	$	450,655	$	114		0.05	%	$	543,539	$	261		0.06	%	$	450,653	$	192		0.06	%
Savings deposits		693,477		654		0.19	%		503,075		367		0.15	%		702,604		790		0.15	%		502,241		589		0.16	%
Time deposits		475,149		2,429		1.03	%		433,936		2,216		1.03	%		466,126		3,380		0.97	%		426,885		3,299		1.03	%
Total interest-bearing deposits		1,693,650		3,271		0.39	%		1,387,666		2,697		0.39	%		1,712,269		4,431		0.35	%		1,379,779		4,080		0.40	%
Borrowings
Retail repurchase agreements		1,346		3		0.39	%		3,141		2		0.14	%		1,218		3		0.32	%		2,792		3		0.13	%
Wholesale repurchase agreements		-		-		-			7,597		119		3.17	%		-		-		-			5,037		119		3.17	%
FHLB advances and other borrowings		72		1		2.23	%		-		-		-			48		1		2.23	%		-		-		-
Total borrowings		1,418		4		0.57	%		10,738		121		2.27	%		1,266		4		0.42	%		7,829		122		2.08	%
Total interest-bearing liabilities		1,695,068		3,275		0.39	%		1,398,404		2,818		0.41	%		1,713,535		4,435		0.35	%		1,387,608		4,202		0.40	%
Noninterest-bearing demand deposits		655,906							464,299							688,891							464,958
Other liabilities		38,820							28,245							38,001							28,651
Total liabilities		2,389,794							1,890,948							2,440,427							1,881,217
Stockholders' equity		419,189							332,788							419,503							333,988
Total liabilities and stockholders' equity	$	2,808,983						$	2,223,736						$	2,859,930						$	2,215,205
Net interest income, FTE⁽¹⁾			$	54,385						$	45,638						$	81,366						$	68,055
Net interest rate spread						4.34	%						4.54	%						4.22	%						4.51	%
Net interest margin, FTE⁽¹⁾						4.46	%						4.66	%						4.33	%						4.63	%

(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 purchase accounting accretion of ~~$3.46~~$5.22 million and ~~$2.15~~$2.72 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

Table of Contents

The following table presents the impact to net interest income on a FTE basis due to changes in volume ~~(average~~(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												Six Months Ended												Three Months Ended												Nine Months Ended
	June 30, 2020 Compared to 2019												June 30, 2020 Compared to 2019												September 30, 2020 Compared to 2019												September 30, 2020 Compared to 2019
	Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to
							Rate/												Rate/												Rate/												Rate/
(Amounts in thousands)	Volume			Rate			Volume			Total			Volume			Rate			Volume			Total			Volume			Rate			Volume			Total			Volume			Rate			Volume			Total
Interest earned on⁽¹⁾
Loans	$	10,798		$	(1,828	)	$	(4,702	)	$	4,268		$	9,352		$	565		$	220		$	10,137		$	5,994		$	(557	)	$	(212	)	$	5,225		$	15,371		$	(23	)	$	14		$	15,362
Securities available-for-sale		(386	)		(88	)		245			(229	)		(274	)		(157	)		31			(400	)		(215	)		(98	)		18			(295	)		(489	)		(82	)		(124	)		(695	)
Securities held-to-maturity		-			-			-			-			(45	)		(45	)		45			(45	)		-			-			-			-			(45	)		-			-			(45	)
Interest-bearing deposits with other banks		2,047			(1,463	)		(1,269	)		(685	)		1,681			(863	)		(1,306	)		(488	)		1,265			(647	)		(1,208	)		(590	)		2,957			(511	)		(3,524	)		(1,078	)
Total interest earning assets		12,459			(3,379	)		(5,726	)		3,354			10,714			(500	)		(1,010	)		9,204			7,044			(1,302	)		(1,402	)		4,340			17,794			(616	)		(3,634	)		13,544

Interest paid on⁽¹⁾
Demand deposits		32			9			(20	)		21			19			48			7			74			22			(21	)		(6	)		(5	)		40			8			21			69
Savings deposits		154			(41	)		(65	)		48			139			108			40			287			97			(127	)		(56	)		(86	)		235			(8	)		(26	)		201
Time deposits		187			(202	)		(1	)		(16	)		210			2			1			213			92			(204	)		(20	)		(132	)		303			(69	)		(153	)		81
Retail repurchase agreements		(1	)		-			1			-			(1	)		4			(2	)		1			-			-			-			-			(2	)		1			1			-
Wholesale repurchase agreements		-			-			-			-			(119	)		(120	)		120			(119	)		-			-			-			-			(119	)		-			-			(119	)
FHLB advances and other borrowings		-			-			1			1			-			-			1			1			-			-			-			-			-			-			1			1
Total interest-bearing liabilities		372			(234	)		(84	)		54			248			42			167			457			211			(352	)		(82	)		(223	)		457			(68	)		(156	)		233

Change in net interest income⁽¹⁾	$	12,087		$	(3,145	)	$	(5,642	)	$	3,300		$	10,466		$	(542	)	$	(1,177	)	$	8,747		$	6,833		$	(950	)	$	(1,320	)	$	4,563		$	17,337		$	(548	)	$	(3,478	)	$	13,311

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

Three-Month Comparison. Net interest income comprised ~~79.21%~~77.84% of total net interest and noninterest income in the ~~second~~third quarter of 2020 compared to ~~72.66%~~74.43% in the same quarter of 2019. Net interest income on a GAAP basis increased ~~$3.35~~$4.61 million, or ~~14.57%~~20.76%, compared to an increase of ~~$3.30~~$4.56 million, or ~~14.22%~~20.36%, on a FTE basis. The net interest margin on a FTE basis decreased 5046 basis points and the net interest spread on a FTE basis decreased 4942 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment.

Average earning assets increased ~~$553.38~~$668.15 million, or ~~28.04%~~34.29%, primarily due to an increase in average loans as well as an increase in interest-bearing deposits. Average loans increased ~~$408.12~~$464.09 million which was primarily due to the addition of Highlands. The yield on earning assets decreased 5557 basis points or ~~11.00%~~11.75%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to ~~87.59%~~86.73% from ~~92.68%~~93.25% in the same quarter of 2019. Non-cash accretion income increased ~~$112 thousand,~~$1.20 million, or ~~8.06%~~211.84%, due to the addition of loans from the Highlands acquisition.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased ~~$329.61~~$383.70 million, or ~~23.69%~~28.08%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 614 basis points. Average interest-bearing deposits increased ~~$331.39~~$384.84 million, or ~~23.87%~~28.21%, which was driven by the December 31, 2019 Highlands acquisition with increases in average savings deposits of ~~$202.44~~$220.06 million, or ~~40.10%~~43.96%, interest-bearing demand of ~~$93.20~~$129.52 million, or ~~20.52%~~28.74%, and time deposits of ~~$35.74~~$35.26 million, or ~~8.32%~~8.54%

~~Six-Month~~Nine-Month Comparison. Net interest income comprised ~~78.88%~~78.53% of total net interest and noninterest income for the first ~~six~~nine months of 2020 compared to ~~72.98%~~73.45% in the same period of 2019. Net interest income on a GAAP basis increased ~~$8.85~~$13.46 million, or ~~19.58%~~19.97%, compared to an increase of ~~$8.75~~$13.31 million, or ~~19.17%~~19.56%, on a FTE basis. The net interest margin on a FTE basis decreased 2030 basis points and the net interest spread on a FTE basis decreased 2029 basis ~~points as well.~~points. The decrease in the net interest margin and the net interest spread are primarily attributable to the historically low rate environment experienced over the past ~~quarter.~~nine months.

Average earning assets increased ~~$478.09~~$541.94 million, or ~~24.20%~~27.56%, primarily due to an increase in loans and overnight funds sold. The yield on earning assets decreased 2234 basis points as the yields in interest-bearing deposits and the available-for-sale investment portfolio decreased. Average loans increased ~~$362.18~~$396.44 million, ~~or 20.78%~~22.90%, and the average loan to deposit ratio decreased to ~~89.61%~~88.60% from ~~94.12%~~93.83% in the same period of 2019. Non-cash accretion income increased ~~$1.30~~$2.50 million, or ~~60.40%~~91.98%, due to the addition of loans from the Highlands acquisition.

Table of Contents

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased ~~$296.66~~$325.93 million, or ~~21.21%~~23.49%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 25 basis points or ~~4.88%~~12.50%. Average borrowings decreased ~~$9.32~~$6.56 million, or ~~86.79%~~83.83%, largely due to a decrease in average wholesale repurchase agreements of ~~$7.60~~$5.04 million. The decrease resulted from the payoff of a $25 million wholesale repurchase agreement in the first quarter of 2019. Average interest-bearing deposits increased ~~$305.98~~$332.49 million, or ~~22.05%~~24.10%, which was driven by the December 2019 acquisition of Highlands, resulting in increases of ~~$190.40~~$200.36 million in savings, ~~$74.37~~$92.89 million in interest-bearing demand, and ~~$41.21~~$39.24 million in time deposits.

Provision for Loan Losses

Three-Month Comparison. The provision charged to operations increased ~~$2.25~~$4.03 million, or ~~141.70%~~596.74%, to ~~$3.83~~$4.70 million in the ~~second~~third quarter of 2020 compared to the same quarter of 2019. The increase in the provision was primarily due to the impact of the ~~the~~ coronavirus slowdown. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.

~~Six-Month~~Nine-Month Comparison. The provision charged to operations increased ~~$4.53~~$8.55 million, or ~~161.35%~~245.80%, to ~~$7.33~~$12.03 million for the first ~~six~~nine months of 2020 compared to the same period of 2019. The provision net of year to date net charge-offs of $3.18 million had the effect of increasing loan loss reserves ~~$5.33 million to recognize the impact of the coronavirus slowdown.~~$8.85 million. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.

Noninterest Income

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

	Three Months Ended												Six Months Ended												Three Months Ended												Nine Months Ended
	June 30,						Increase			%			June 30,						Increase			%			September 30,						Increase					%	September 30,						Increase					%
	2020			2019			(Decrease)			Change			2020			2019			(Decrease)			Change			2020			2019			(Decrease)			Change			2020			2019			(Decrease)			Change
(Amounts in thousands)
Wealth management	$	854		$	884		$	(30	)		-3.39	%	$	1,698		$	1,629		$	69			4.24	%	$	909		$	952		$	(43	)		-4.52	%	$	2,607		$	2,581		$	26			1.01	%
Service charges on deposits		2,560			3,699			(1,139	)		-30.79	%		6,291			7,107			(816	)		-11.48	%		3,250			3,785			(535	)		-14.13	%		9,541			10,892			(1,351	)		-12.40	%
Other service charges and fees		2,617			2,129			488			22.92	%		4,848			4,178			670			16.04	%		2,748			2,007			741			36.92	%		7,596			6,185			1,411			22.81	%
Net gain on sale of securities		-			(43	)		43			-			385			(43	)		428			-			-			-			-			-			385			(43	)		428			-995.35	%
Net FDIC indemnification asset amortization		(483	)		(516	)		33			-6.40	%		(969	)		(1,068	)		99			-9.27	%		(383	)		(719	)		336			-46.73	%		(1,352	)		(1,787	)		435			-24.34	%
Other income/litigation settlements		-			2,025			(2,025	)		-			-			3,700			(3,700	)		-			-			900			(900	)		-100.00	%		-			4,600			(4,600	)		-100.00	%
Other operating income		1,365			471			894			189.81	%		2,209			1,226			983			80.18	%		1,114			709			405			57.12	%		3,323			1,935			1,388			71.73	%
Total noninterest income	$	6,913		$	8,649		$	(1,736	)		-20.07	%	$	14,462		$	16,729		$	(2,267	)		-13.55	%	$	7,638		$	7,634		$	4			0.05	%	$	22,100		$	24,363		$	(2,263	)		-9.29	%

Three-Month Comparison. Noninterest income comprised ~~20.79%~~22.16% of total net interest and noninterest income in the ~~second~~third quarter of 2020 compared to ~~27.34%~~25.57% in the same quarter of 2019. Noninterest income ~~decreased $1.74 million,~~increased $4 thousand, or ~~20.07%~~0.05%. The ~~decrease~~increase was primarily due to ~~$2.03 million received from~~increases in both net interchange income and other operating income for a combined total of $1.15 million. A decrease in the amortization of the FDIC indemnification asset of $336 thousand contributed to the increase in noninterest income as well. These increases were offset by litigation settlements received in the ~~second~~third quarter of ~~2019. In addition,~~2019 of $900 thousand as well as a decrease in service charges on deposits ~~decreased $1.14 million due to the impact~~of $535 thousand as a result of pandemic shutdowns and stay-at-home orders. These amounts were offset by increases in other service charges and fees and other operating income of $1.38 million. The increases were primarily driven by an increase in net interchange income.shutdowns.

~~Six-Month~~Nine-Month Comparison. Noninterest income comprised ~~21.12%~~21.47% of total net interest and noninterest income for the first ~~six~~nine months of 2020 compared to ~~27.02%~~26.55% in the same period of 2019. Noninterest income decreased ~~$2.27~~$2.26 million, or ~~13.55%~~9.29%, primarily due to ~~$3.70~~$4.60 million received from litigation settlements in 2019. In addition, service charges on deposits decreased ~~$816 thousand~~$1.35 million primarily as a result of the second and third quarter effects of the pandemic shutdowns. These decreases were primarily offset by increases in ~~other operating income,~~ other service charges and fees and ~~the~~other operating income. Other service charges and fees increased $1.41 million, or 22.81%, primarily due to an increase in net ~~gain on sale of securities.~~interchange income. Other Operating income increased ~~$983 thousand~~$1.39 million or ~~80.18%~~71.73% and was primarily driven by third party incentives associated with debit cards and demand deposit accounts. Other service charges and fees increased $670 thousand, or 16.04%, primarily due to an increase of $734 thousand in net interchange income. Excluding the impact from litigation settlements, noninterest income increased $1.43 million, or 11.00%, for the first six months of 2020.

Table of Contents

Noninterest Expense

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

	Three Months Ended										Six Months Ended										Three Months Ended										Nine Months Ended
	June 30,				Increase			%			June 30,				Increase			%			September 30,				Increase					%	September 30,				Increase					%
	2020		2019		(Decrease)			Change			2020		2019		(Decrease)			Change			2020		2019		(Decrease)			Change			2020		2019		(Decrease)			Change
(Amounts in thousands)
Salaries and employee benefits	$	11,015	$	9,153	$	1,862			20.34	%	$	22,401	$	18,319	$	4,082			22.28	%	$	10,485	$	9,334	$	1,151			12.33	%	$	32,886	$	27,653	$	5,233			18.92	%
Occupancy expense		1,275		1,082		193			17.84	%		2,590		2,235		355			15.88	%		1,228		1,042		186			17.85	%		3,818		3,277		541			16.51	%
Furniture and equipment expense		1,316		1,062		254			23.92	%		2,700		2,095		605			28.88	%		1,412		1,183		229			19.36	%		4,112		3,278		834			25.44	%
Service fees		1,329		1,231		98			7.96	%		2,852		2,261		591			26.14	%		1,581		1,466		115			7.84	%		4,433		3,727		706			18.94	%
Advertising and public relations		475		513		(38	)		-7.41	%		987		1,037		(50	)		-4.82	%		430		795		(365	)		-45.91	%		1,417		1,832		(415	)		-22.65	%
Professional fees		307		328		(21	)		-6.40	%		540		742		(202	)		-27.22	%		408		548		(140	)		-25.55	%		948		1,290		(342	)		-26.51	%
Amortization of intangibles		360		249		111			44.58	%		721		495		226			45.66	%		365		251		114			45.42	%		1,086		746		340			45.58	%
FDIC premiums and assessments		33		150		(117	)		-78.00	%		33		318		(285	)		-89.62	%		191		-		191			-			224		318		(94	)		-29.56	%
Merger expense		-		-		-			-			1,893		-		1,893			-			-		592		(592	)		-100.00	%		1,893		592		1,301			219.76	%
Other operating expense		2,803		2,883		(80	)		-2.77	%		5,860		5,934		(74	)		-1.25	%		3,071		2,233		838			37.53	%		8,931		8,167		764			9.35	%
Total noninterest expense	$	18,913	$	16,651	$	2,262			13.58	%	$	40,577	$	33,436	$	7,141			21.36	%	$	19,171	$	17,444	$	1,727			9.90	%	$	59,748	$	50,880	$	8,868			17.43	%

Three-Month Comparison. Noninterest expense increased ~~$2.26~~$1.73 million, or ~~13.58%~~9.90%, in the ~~second~~third quarter of 2020 compared to the same quarter of 2019. The increase was largely due to an increase in salaries and benefits of ~~$1.86~~$1.15 million primarily attributable to the addition of Highlands ~~employees as well as an increase~~employees. Other increases also occurred in occupancy and furniture and equipment expense, and other operating expense for a combined total of $1.25 million. The increases in these categories were primarily due to ~~temporary COVID-19 related~~the addition of branch locations acquired in the Highlands transaction. Increases in the third quarter of 2020 were offset primarily by merger expenses ~~for pay differential made to employees continuing to work at branch and back-office locations.~~of $592 thousand that were incurred in the third quarter of 2019.

~~Six~~~~-Month~~Nine-Month Comparison. Noninterest expense increased ~~$7.14~~$8.87 million, or ~~21.36%~~17.43%, in the first ~~six~~nine months of 2020 compared to the same period of 2019. The increase was primarily due to an increase in salaries and benefits of ~~$4.08~~$5.23 million, or ~~22.28%~~18.92% which was largely due to the addition of Highlands employees. In addition, the Company incurred $1.89 million in residual merger expenses during the first quarter of 2020 related to the Highlands acquisition. Occupancy and furniture and equipment expense increased a combined total of ~~$960 thousand~~$1.38 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.

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 decreased ~~$681~~$248 thousand, or ~~23.08%~~9.61%, primarily due to the decrease in pre-tax earnings. The effective tax rate ~~decreased~~increased to ~~21.60%~~22.00% in the ~~second~~third quarter of 2020 from ~~22.02%~~21.98% in the same quarter of 2019.

~~Six-Month~~Nine-Month Comparison. Income tax expense decreased ~~$1.12~~$1.36 million, or ~~20.00%~~16.71%, and the effective tax rate decreased to ~~21.70%~~21.80% in the ~~second~~third quarter of ~~2019~~2020 from ~~21.75%~~21.82% in the same quarter of 2019.

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.

Table of Contents

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 June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019			2020			2019			2020			2019
(Amounts in thousands)
Net interest income, GAAP	$	26,339		$	22,989		$	54,021		$	45,175		$	26,834		$	22,221		$	80,855		$	67,396
FTE adjustment⁽¹⁾		174			224			364			463
FTE adjustment(1)														146			196			511			659
Net interest income, FTE		26,513			23,213			54,385			45,638			26,980			22,417			81,366			68,055

Net interest margin, GAAP		4.19	%		4.67	%		4.43	%		4.61	%		4.08	%		4.53	%		4.30	%		4.58	%
FTE adjustment⁽¹⁾		0.03	%		0.04	%		0.03	%		0.05	%
FTE adjustment(1)														0.02	%		0.03	%		0.03	%		0.05	%
Net interest margin, FTE		4.22	%		4.72	%		4.46	%		4.66	%		4.10	%		4.56	%		4.33	%		4.63	%

(1) FTE basis of 21%.

Financial Condition

Total assets as of ~~June~~September 30, 2020, increased ~~$150.22~~$149.08 million, or ~~5.37%~~5.33% from December 31, 2019. The increase in assets was primarily driven by a increase in overnight funds of ~~$213.68~~$175.36 million, or ~~144.38%~~118.48%. In addition, total liabilities as of ~~June~~September 30, 2020, increased ~~$163.21~~$157.98 million, or ~~6.89%~~6.67% from December 31, 2019. The increase in liabilities was primarily the result of an increase in total deposits of ~~$167.93~~$162.33 million, or ~~7.21%~~6.97%.

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 ~~June~~September 30, 2020, decreased ~~$71.21~~$78.60 million, or ~~41.99%~~46.35%, compared to December 31, 2019. The decrease was primarily due to the sale of $51.03 million in securities in the first quarter. The market value of debt securities available for sale as a percentage of amortized cost was ~~101.92.~~101.77.% as of ~~June~~September 30, 2020, compared to 100.65% as of December 31, 2019.

Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities for the three and ~~six~~nine months ended ~~June~~September 30, 2020 or 2019. For additional information, see Note 2, “Debt Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Loans Held for Investment

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of ~~June~~September 30, 2020, increased ~~$22.36~~$80.54 million, or ~~1.06%~~3.81%, compared to December 31, 2019. Covered loans decreased ~~$1.60~~$2.12 million, or ~~12.47%~~16.46%, as the covered Waccamaw portfolio continues to pay down. For additional information, see Note 4, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Table of Contents

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

	June 30, 2020					December 31, 2019					June 30, 2019					September 30, 2020					December 31, 2019					September 30, 2019
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	52,585		2.46	%	$	48,659		2.30	%	$	62,155		3.61	%	$	46,785		2.13	%	$	48,659		2.30	%	$	61,350		3.62	%
Commercial and industrial		184,298		8.62	%		142,962		6.76	%		92,304		5.36	%		179,714		8.19	%		142,962		6.76	%		93,627		5.53	%
Multi-family residential		105,768		4.95	%		121,840		5.76	%		100,569		5.84	%		105,647		4.81	%		121,840		5.76	%		96,274		5.68	%
Single family non-owner occupied		188,389		8.82	%		163,181		7.72	%		139,180		8.11	%		189,265		8.62	%		163,181		7.72	%		135,298		7.99	%
Non-farm, non-residential		723,100		33.84	%		727,261		34.39	%		596,163		34.64	%		748,815		34.11	%		727,261		34.39	%		584,897		34.52	%
Agricultural		10,407		0.49	%		11,756		0.56	%		9,462		0.55	%		10,362		0.47	%		11,756		0.56	%		9,429		0.56	%
Farmland		23,662		1.11	%		23,155		1.10	%		17,322		1.01	%		22,973		1.05	%		23,155		1.10	%		16,728		0.99	%
Total commercial loans		1,288,209		60.29	%		1,238,814		58.59	%		1,017,155		59.12	%		1,303,561		59.38	%		1,238,814		58.59	%		997,603		58.89	%
Consumer real estate loans
Home equity lines		99,566		4.66	%		110,078		5.21	%		88,094		5.12	%		94,056		4.29	%		110,078		5.21	%		86,349		5.10	%
Single family owner occupied		603,446		28.24	%		620,697		29.35	%		493,555		28.67	%		644,598		29.37	%		620,697		29.35	%		484,567		28.60	%
Owner occupied construction		15,311		0.72	%		17,241		0.82	%		13,755		0.80	%		17,460		0.79	%		17,241		0.82	%		14,872		0.87	%
Total consumer real estate loans		718,323		33.62	%		748,016		35.38	%		595,404		34.59	%		756,114		34.45	%		748,016		35.38	%		585,788		34.57	%
Consumer and other loans
Consumer loans		114,551		5.36	%		110,027		5.20	%		88,352		5.13	%		118,738		5.41	%		110,027		5.20	%		92,027		5.43	%
Other		4,477		0.21	%		4,742		0.22	%		4,497		0.26	%		5,838		0.27	%		4,742		0.22	%		4,540		0.27	%
Total consumer and other loans		119,028		5.57	%		114,769		5.42	%		92,849		5.39	%		124,576		5.68	%		114,769		5.42	%		96,567		5.70	%
Total non-covered loans		2,125,560		99.48	%		2,101,599		99.39	%		1,705,408		99.10	%		2,184,251		99.51	%		2,101,599		99.39	%		1,679,958		99.15	%
Total covered loans		11,257		0.52	%		12,861		0.61	%		15,520		0.90	%		10,744		0.49	%		12,861		0.61	%		14,158		0.84	%
Total loans held for investment, net of unearned income		2,136,817		100.00	%		2,114,460		100.00	%		1,720,928		100.00	%		2,194,995		100.00	%		2,114,460		100.00	%		1,694,116		99.99	%
Less: allowance for loan losses		23,758					18,425					18,540					27,277					18,425					18,493
Total loans held for investment, net of unearned income and allowance	$	2,113,059				$	2,096,035				$	1,702,388				$	2,167,718				$	2,096,035				$	1,675,623

Loans held for sale	$	-				$	263				$	-				$	-				$	263				$	-

Commercial and industrial loan balances grew significantly compared to December 31, 2019. During the second quarter, we began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender. At ~~June~~September 30, 2020, the PPP loans had a current balance of ~~$60.23~~$61.00 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled ~~$2.26~~$2.30 million at ~~June~~September 30, 2020, were also recorded. During the ~~second~~third quarter of 2020, we recorded amortization of net deferred loan origination fees of ~~$192~~$286 thousand on PPP ~~loans.~~loans, while year to date we recorded amortization of $479 thousand. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.

Table of Contents

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

	June 30, 2020					December 31, 2019					June 30, 2019					September 30, 2020					December 31, 2019					September 30, 2019
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial loans
Construction, development, and other land	$	27		0.24	%	$	28		0.22	%	$	31		0.20	%	$	27		0.25	%	$	28		0.22	%	$	30		0.21	%
Single family non-owner occupied		191		1.70	%		199		1.55	%		224		1.44	%		188		1.75	%		199		1.55	%		216		1.53	%
Non-farm, non-residential		1		0.01	%		3		0.02	%		5		0.03	%		-		0.00	%		3		0.02	%		4		0.03	%
Total commercial loans		219		1.95	%		230		1.79	%		260		1.67	%		215		2.00	%		230		1.79	%		250		1.77	%
Consumer real estate loans
Home equity lines		8,512		75.61	%		9,853		76.61	%		12,254		78.96	%		8,079		75.20	%		9,853		76.61	%		11,031		77.91	%
Single family owner occupied		2,526		22.44	%		2,778		21.60	%		3,006		19.37	%		2,450		22.80	%		2,778		21.60	%		2,877		20.32	%
Total consumer real estate loans		11,038		98.05	%		12,631		98.21	%		15,260		98.33	%		10,529		98.00	%		12,631		98.21	%		13,908		98.23	%
Total covered loans	$	11,257		100.00	%	$	12,861		100.00	%	$	15,520		100.00	%	$	10,744		100.00	%	$	12,861		100.00	%	$	14,158		100.00	%

Commercial Loans Modified Under CARES Act

The following table details the balance of commercial loans modified for short-term payment deferral under provisions of the CARES Act as of ~~June 30, 2020.~~the dates indicated.

				September 30, 2020				June 30, 2020
	Total		Percent			Percent				Percent
(unaudited, in thousands)	Balance		Modified	Balance		Modified		Balance		Modified

Construction, development, and other land	$	14,377	27.33%	$	3,753	8.88	%	$	14,377	27.33	%
Commercial and industrial		25,584	13.88%		6,700	3.61	%		25,584	13.88	%
Multi-family residential		22,021	20.82%		5,919	5.61	%		22,021	20.82	%
Single family non-owner occupied		39,135	20.75%		7,049	3.65	%		39,135	20.75	%
Commercial Real Estate - Hotel/Motel		92,940	89.75%		48,225	46.69	%		92,940	89.75	%
Commercial Real Estate - Retail Strip Centers		19,740	38.17%		4,432	6.45	%		19,740	38.17	%
Commercial Real Estate - Other		116,871	20.58%		22,912	3.92	%		116,871	20.58	%
Agricultural		3,464	33.29%		1,322	12.93	%		3,464	33.29	%
Farmland		5,865	24.79%		2,223	9.56	%		5,865	24.79	%
Total commercial modifications	$	339,997	26.39%	$	102,535	7.78	%	$	339,997	26.39	%

Table of Contents

Risk Elements

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

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

Table of Contents

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

	June 30, 2020			December 31, 2019			June 30, 2019			September 30, 2020			December 31, 2019			September 30, 2019
(Amounts in thousands)
Non-covered nonperforming
Nonaccrual loans	$	24,471		$	16,113		$	16,368		$	24,423		$	16,113		$	16,701
Accruing loans past due 90 days or more		284			144			37			43			144			107
TDRs⁽¹⁾		598			720			821
TDRs(1)											456			720			668
Total nonperforming loans		25,353			16,977			17,226			24,922			16,977			17,476
Non-covered OREO		2,181			3,969			3,810			2,103			3,969			2,528
Total non-covered nonperforming assets	$	27,534		$	20,946		$	21,036		$	27,025		$	20,946		$	20,004

Covered nonperforming
Nonaccrual loans	$	299		$	244		$	203		$	333		$	244		$	243
Total nonperforming loans		299			244			203			333			244			243
Covered OREO		-			-			152			-			-			-
Total covered nonperforming assets	$	299		$	244		$	355		$	333		$	244		$	243

Total nonperforming
Nonaccrual loans	$	24,770		$	16,357		$	16,571		$	24,756		$	16,357		$	16,944
Accruing loans past due 90 days or more		284			144			37			43			144			107
TDRs⁽¹⁾		598			720			821
TDRs(1)											456			720			668
Total nonperforming loans		25,652			17,221			17,429			25,255			17,221			17,719
OREO		2,181			3,969			3,962			2,103			3,969			2,528
Total nonperforming assets	$	27,833		$	21,190		$	21,391		$	27,358		$	21,190		$	20,247

Additional Information
Performing TDRs⁽²⁾	$	10,822		$	5,855		$	5,676
Total Accruing TDRs⁽³⁾		11,420			6,575			6,497
Performing TDRs(2)										$	10,480		$	5,855		$	5,635
Total Accruing TDRs(3)											10,936			6,575			6,303

Non-covered ratios
Nonperforming loans to total loans		1.19	%		0.81	%		1.02	%		1.14	%		0.81	%		1.04	%
Nonperforming assets to total assets		0.94	%		0.75	%		0.96	%		0.92	%		0.75	%		0.91	%
Non-PCI allowance to nonperforming loans		93.71	%		108.53	%		107.63	%		109.45	%		108.53	%		105.82	%
Non-PCI allowance to total loans		1.12	%		0.88	%		1.10	%		1.25	%		0.88	%		1.10	%

Total ratios
Nonperforming loans to total loans		1.20	%		0.81	%		1.02	%		1.15	%		0.81	%		1.05	%
Nonperforming assets to total assets		0.94	%		0.76	%		0.97	%		0.93	%		0.76	%		0.92	%
Allowance for loan losses to nonperforming loans		92.62	%		106.99	%		106.37	%		108.01	%		106.99	%		104.37	%
Allowance for loan losses to total loans		1.11	%		0.87	%		1.09	%		1.24	%		0.87	%		1.09	%

(1)	TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of ~~$1.88~~$1.57 million, $95 thousand, and ~~$666~~$329 thousand for the periods ended ~~June~~September 30, 2020, December 31, 2019, and ~~June~~September 30, 2019, respectively.
(2)	TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of ~~$413~~$474 thousand, $2.25 million, and ~~$2.02~~$2.19 million for the periods ended ~~June~~September 30, 2020, December 31, 2019, and ~~June~~September 30, 2019, respectively.
(3)	Total accruing TDRs exclude nonaccrual TDRs of ~~$2.29~~$2.04 million, $2.34 million, and ~~$2.73~~$2.52 million for the periods ended ~~June~~September 30, 2020, December 31, 2019, and ~~June~~September 30, 2019, respectively.

Non-covered nonperforming assets as of ~~June~~September 30, 2020, increased ~~$6.59~~$6.08 million, or ~~31.45%~~29.02%, from December 31, 2019, primarily due to an increase in non-covered nonaccrual loans acquired from Highlands Union Bank offset by a decrease in OREO of ~~$1.79~~$1.87 million. Non-covered nonaccrual loans as of ~~June~~September 30, 2020, increased ~~$8.36~~$8.31 million, or ~~51.87%~~51.57%, from December 31, 2019. As of ~~June~~September 30, 2020, non-covered nonaccrual loans were largely attributed to single family owner occupied ~~(34.82%~~(32.80%), non-farm, non-residential ~~(26.79%~~(27.07%), and single family non-owner occupied loans ~~(12.55%~~(13.47%). As of ~~June~~September 30, 2020, approximately ~~$7.18~~$6.86 million or ~~29.33%~~28.09%, of non-covered nonaccrual loans were attributed to performing loans acquired through the Highlands acquisition. 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.

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled ~~$35.86~~$33.90 million as of ~~June~~September 30, 2020, a ~~slight increase~~decrease of ~~$237 thousand,~~$1.72 million, or ~~0.67%~~4.84%, compared to $35.62 million as of December 31, 2019. Non-covered delinquent loans as a percent of total non-covered loans totaled ~~1.69%~~1.55% as of ~~June~~September 30, 2020, which includes past due loans ~~(0.54%~~(0.43%) and nonaccrual loans ~~(1.15%~~(1.12%).

Table of Contents

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 ~~June~~September 30, 2020, increased ~~$4.85~~$4.36 million, or ~~73.69%~~66.33%, to ~~$11.42~~$10.94 million from December 31, 2019. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of ~~June~~September 30, 2020, increased ~~$4.21~~$1.87 million to ~~$5.11~~$2.77 million compared to December 31, 2019. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled ~~44.75%~~25.29% as of ~~June~~September 30, 2020, compared to 13.69% as of December 31, 2019. Specific reserves on TDRs totaled ~~$470~~$347 thousand as of ~~June~~September 30, 2020, compared to $353 thousand as of December 31, 2019.

The Coronavirus Aid, Relief and Economic Security (“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, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through ~~June~~September 30, 2020, we had modified ~~3,097~~3,362 loans for ~~$436.11~~$426.45 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDR’s based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company ~~will consider~~is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.

The balance of non-accrual loans was higher at ~~June~~September 30, 2020, due mainly to the migration of three commercial real estate loans ~~during the quarter~~ with a total balance of ~~$2.63 million.~~$2.58 million coupled with approximately $6.00 million in HUB loans since year-end. The loans were past due prior to the COVID-19 emergency declaration and payments continued to slow during the quarter. Additionally, ~~FCB~~the Bank suspended foreclosure and repossession activity at the end of March due to the COVID-19 pandemic and loans that would have normally been resolved through these processes remain in the portfolio at ~~June~~September 30, 2020.

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased ~~$1.79~~$1.87 million, or ~~45.05%~~47.01%, as of ~~June~~September 30, 2020, compared to December 31, 2019, and consisted of 1922 properties with an average holding period of 12approximately 13 months. The net ~~loss~~gain on the sale of OREO totaled ~~$28~~$32 thousand for the three months ended ~~June~~September 30, 2020, compared to ~~$192~~a net loss of $234 thousand for the same period of the prior year; the net loss on the sale of OREO for the ~~six~~nine months ended ~~June~~September 30, 2020 totaled ~~$328~~$296 thousand compared to ~~$556~~$790 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

	Six Months Ended June 30,																	Nine Months Ended September 30,
	2020								2019									2020								2019
	Non-covered			Covered		Total			Non-covered			Covered			Total			Non-covered			Covered		Total			Non-covered			Covered			Total
(Amounts in thousands)
Beginning balance	$	3,969		$	-	$	3,969		$	3,806		$	32		$	3,838		$	3,969		$	-	$	3,969		$	3,806		$	32		$	3,838
Additions		621			-		621			2,564			130			2,694			695			-		695			2,752			131			2,883
Disposals		(2,005	)		-		(2,005	)		(2,129	)		-			(2,129	)		(2,139	)		-		(2,139	)		(3,388	)		(152	)		(3,540	)
Valuation adjustments		(404	)		-		(404	)		(431	)		(10	)		(441	)		(422	)		-		(422	)		(642	)		(11	)		(653	)
Ending balance	$	2,181		$	-	$	2,181		$	3,810		$	152		$	3,962		$	2,103		$	-	$	2,103		$	2,528		$	-		$	2,528

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates. As of ~~June~~September 30, 2020, our allowance reflects a higher risk of loan losses due to uncertainty around the impact that the COVID-19 pandemic will have on business and economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of ~~June~~September 30, 2020; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see Note 6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The allowance for loan losses as of ~~June~~September 30, 2020, increased ~~$5.33~~$8.85 million, or ~~28.94%~~48.04%, from December 31, 2019 due primarily to the increased potential for loan defaults and losses related to the COVID-19 pandemic. The non-PCI allowance as a percent of non-covered loans totaled ~~1.12%~~1.25% as of ~~June~~September 30, 2020, compared to 0.88% as of December 31, 2019. Effective January 1, 2020, the Company collapsed the PCI loans and discounts for Peoples and Waccamaw acquired loans into the core loan portfolio. The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and Home Equity Lines, Commercial Land and Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner Occupied, Commercial and Industrial, and Consumer. Net charge-offs ~~decreased $78~~increased $462 thousand for the three months ended ~~June~~September 30, 2020, compared to the same period of the prior year. For the ~~six~~nine months ended ~~June~~September 30, 2020, net charge-offs decreased ~~$534~~$72 thousand, compared with the same period of the prior year. The decrease in net charge-offs was driven by reduced losses in the single-family owner occupied loan pool.

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

																	Three Months Ended September 30,
	Three Months Ended June 30,																2020								2019
	2020								2019								Non-PCI								Non-PCI
	Non-PCI Portfolio			PCI Portfolio		Total			Non-PCI Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total
(Amounts in thousands)
Beginning balance	$	21,137		$	-	$	21,137		$	18,243		$	-	$	18,243		$	23,758		$	-	$	23,758		$	18,540		$	-	$	18,540
Provision for (recovery of) loan losses charged to operations		3,831			-		3,831			1,585			-		1,585			4,703			-		4,703			675			-		675
Charge-offs		(1,672	)		-		(1,672	)		(2,114	)		-		(2,114	)		(1,563	)		-		(1,563	)		(964	)		-		(964	)
Recoveries		462			-		462			826			-		826			379			-		379			242			-		242
Net charge-offs		(1,210	)		-		(1,210	)		(1,288	)		-		(1,288	)		(1,184	)		-		(1,184	)		(722	)		-		(722	)
Ending balance	$	23,758		$	-	$	23,758		$	18,540		$	-	$	18,540		$	27,277		$	-	$	27,277		$	18,493		$	-	$	18,493

																	Nine Months Ended September 30,
	Six Months Ended June 30,																2020								2019
	2020								2019								Non-PCI								Non-PCI
	Non-PCI Portfolio			PCI Portfolio		Total			Non-PCI Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total
(Amounts in thousands)
Beginning balance	$	18,425		$	-	$	18,425		$	18,267		$	-	$	18,267		$	18,425		$	-	$	18,425		$	18,267		$	-	$	18,267
Provision for loan losses
charged to operations		7,331			-		7,331			2,805			-		2,805			12,034			-		12,034			3,480			-		3,480
Charge-offs		(2,866	)		-		(2,866	)		(3,736	)		-		(3,736	)		(4,429	)		-		(4,429	)		(4,700	)		-		(4,700	)
Recoveries		868			-		868			1,204			-		1,204			1,247			-		1,247			1,446			-		1,446
Net charge-offs		(1,998	)		-		(1,998	)		(2,532	)		-		(2,532	)		(3,182	)		-		(3,182	)		(3,254	)		-		(3,254	)
Ending balance	$	23,758		$	-	$	23,758		$	18,540		$	-	$	18,540		$	27,277		$	-	$	27,277		$	18,493		$	-	$	18,493

Deposits

Total deposits as of ~~June~~September 30, 2020, increased ~~$167.93~~$162.33 million, or ~~7.21%~~6.97%, compared to December 31, 2019. The increase was largely attributable to noninterest-bearing demand deposits which increased ~~$125.03~~$122.41 million, or ~~19.91%~~19.50%. Interest-bearing demand and savings deposits also reflected growth with increases of ~~$66.95~~$79.26 million, or ~~13.46%~~15.93% and ~~$32.54~~$39.40 million, or ~~4.72%~~5.72%, respectively. These increases were offset by a decrease in time deposits of ~~$56.58~~$78.74 million, or ~~10.97%~~15.27%. We attribute a significant amount of the increase in deposits to the unprecedented level of federal government stimulus during the second quarter of 2020.

Borrowings

Total borrowings as of ~~June~~September 30, 2020, decreased ~~$500~~$645 thousand, compared to December 31, 2019.

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 ~~June~~September 30, 2020, the Company’s cash reserves totaled ~~$8.87~~$9.46 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of ~~June~~September 30, 2020, our unencumbered cash totaled ~~$421.49~~$375.66 million, unused borrowing capacity from the FHLB totaled ~~$365.67~~$322.82 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $85.00 million, and unpledged available-for-sale securities totaled ~~$65.33~~$54.80 million.

Cash Flows

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

	Six Months Ended June 30,					Nine Months Ended September 30,
	2020		2019			2020		2019
(Amounts in thousands)
Net cash provided by operating activities	$	18,214	$	25,449		$	32,028	$	39,636
Net cash provided by investing activities		49,766		109,689			304		139,757
Net cash provided by (used in) financing activities		136,503		(55,533	)		126,323		(73,808	)
Net increase in cash and cash equivalents		204,483		79,605			158,655		105,585
Cash and cash equivalents, beginning balance		217,009		76,873			217,009		76,873
Cash and cash equivalents, ending balance	$	421,492	$	156,478		$	375,664	$	182,458

Cash and cash equivalents increased ~~$204.48~~$158.66 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to an increase of ~~$79.61~~$105.59 million for the same period of the prior year. The increase in cash and cash equivalents during 2020 was ~~driven by an increase in net cash provided in financing activities~~due largely to the significant inflow of ~~$192.04 million. The increase in net cash used in financing activities was driven by an increase in~~non-maturity deposits ~~of $175.65 million; offset by the 2019 repayment of the wholesale repurchase agreement of $25.00 million. Net cash provided by investing activities decreased $59.92 million~~ from ~~the same period of the prior year. The decrease was primarily driven by a $72.55 million net increase in loans.~~unprecedented government stimulus.

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 ~~June~~September 30, 2020, decreased ~~$12.99~~$8.90 million, or ~~3.03%~~2.08%, to ~~$415.83~~$419.92 million from $428.82 million as of December 31, 2019. The change in stockholders’ equity was largely due to net income of ~~$16.11~~$24.38 million offset by the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared on our common stock of ~~$9.02~~$13.45 million. Accumulated other comprehensive loss decreased ~~$398~~$262 thousand to ~~$1.11~~$1.24 million as of ~~June~~September 30, 2020, compared to December 31, 2019, primarily due to net unrealized gains on securities. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders’ equity in the calculation of our capital ratios. Our book value per common share increased ~~$0.15~~$0.37 or ~~0.63%~~1.57% to ~~$23.48~~$23.70 as of ~~June~~September 30, 2020, from $23.33 as of December 31, 2019.

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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 2019 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:

	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
	Company	Bank	Company	Bank	Company	Bank	Company	Bank

Common equity Tier 1 ratio	13.89%	13.23%	14.31%	12.87%	13.89%	13.21%	14.31%	12.87%
Tier 1 risk-based capital ratio	13.89%	13.23%	14.31%	12.87%	13.89%	13.21%	14.31%	12.87%
Total risk-based capital ratio	15.07%	14.41%	15.21%	13.78%	15.14%	14.46%	15.21%	13.78%
Tier 1 leverage ratio	10.18%	9.70%	14.01%	12.61%	10.06%	9.57%	14.01%	12.61%

Our risk-based capital ratios as of ~~June~~September 30, 2020, decreased from December 31, 2019, due to a decrease in total capital. The decrease in total capital was primarily attributable to the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared of $13.45 million, offset by net income of ~~$16.11~~$24.38 million. As of ~~June~~September 30, 2020, 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 ~~June~~September 30, 2020.

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:

	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
(Amounts in thousands)
Commitments to extend credit	$	218,577	$	228,716	$	219,297	$	228,716
Standby letters of credit and financial guarantees ⁽¹⁾		174,545		167,612		173,925		167,612
Total off-balance sheet risk	$	393,122	$	396,328	$	393,222	$	396,328

Reserve for unfunded commitments	$	66	$	66	$	66	$	66

(1)	Includes FHLB letters of credit

Market Risk and Interest Rate Sensitivity

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

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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 ~~June~~September 30, 2020, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 0 to 25 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

	June 30, 2020					December 31, 2019						September 30, 2020					December 31, 2019
	Change in		Percent			Change in			Percent			Change in		Percent			Change in			Percent
Increase (Decrease) in Basis Points	Net Interest Income		Change			Net Interest Income			Change			Net Interest Income		Change			Net Interest Income			Change
(Dollars in thousands)
300	$	8,529		8.3	%	$	171			0.2	%	$	7,633		6.97	%	$	171			0.20	%
200		6,072		5.9	%		428			0.4	%		5,354		4.89	%		428			0.40	%
100		3,192		3.1	%		426			0.4	%		2,846		2.60	%		426			0.40	%
(100)		N/A		-			(4,631	)		-4.3	%		N/A		-			(4,631	)		-4.30	%

Inflation and Changing Prices

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

In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) at the end of 2021, the Company has broken the transition efforts into two phases. The first phase is adding additional language to new loans that allows the Company to replace LIBOR with an equivalent rate index and adjust the margin to ensure the resulting interest rate is the same as it previously was using LIBOR. Also included in the first phase, the Company will be transitioning from the LIBOR swap curve to ~~treasury~~alternative reference rates when repricing certain loans. The second phase is transitioning current variable loans tied to LIBOR or on a LIBOR swap curve. The Company is currently quantifying the dollar amount and number of loans that extend beyond 2021.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 2 of this report.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of ~~June~~September 30, 2020, our disclosure controls and procedures were effective.

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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 ~~June~~September 30, 2020, 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, 2019 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, 2019 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, 2019.

The Company is providing these additional risk factors to supplement the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.

The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have branches and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.

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The ultimate effects of the COVID-19 pandemic on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. This may include, or exacerbate, among other consequences, the following:

●

employees contracting COVID-19;

●

reductions in our operating effectiveness as our employees work from home;

●

increased cybersecurity risk due to the continuation of the work-from-home measures;

●

a work stoppage, forced quarantine, or other interruption of our business;

●

unavailability of key personnel necessary to conduct our business activities;

●

effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;

●

sustained closures of our branch lobbies or the offices of our customers;

●

declines in demand for loans and other banking services and products;

●

reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic;

●

unprecedented volatility in United States financial markets;

●

volatile performance of our investment securities portfolio;

●

decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for loan losses;

●

declines in value of collateral for loans, including real estate collateral;

●

declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and

●

declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets.

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.

The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and

could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020 and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As of ~~June~~September 30, 2020, we have funded approximately ~~758~~803 loans with original principal balances totaling ~~$60.23~~$62.74 million through the PPP program.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both customers and non-customers who approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

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The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, the Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that the Bank would have otherwise extended credit. Rules providing for forgiveness have been constantly evolving, including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.

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 no shares of our common stock during the ~~second~~third quarter of 2020 compared to 194,000 shares during the same quarter of 2019. We do not currently have a publicly announced plan to repurchase shares.

ITEM 3.

Defaults Upon Senior Securities

None.

ITEM 4.

Mine Safety Disclosures

None.

ITEM 5.

Other Information

None.

ITEM 6.

Exhibits

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

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10.5**	First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004
10.6**	First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012
10.7**	First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013
10.8**	First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.9.1**	First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009;
10.9.2**	Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010
10.9.3**	Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013
10.9.4**	Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.9.5**	Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.10**	Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19,2019
10.11.1**	First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.11.2**	Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.12.1**	First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.12.2**	Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.13**	Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.14**	~~Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly, incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K dated and filed on April 16, 2015~~
10.15**	Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.16**	Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.17**	~~Employment Agreement between First Community Bank and Mark R. Evans, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009~~
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 ~~June~~September 30, 2020, (Unaudited) and December 31, 2019; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019; 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 ~~June~~September 30, 2020, 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 the10^th 9th day of ~~August,~~November, 2020.

		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)

	Valuation	Unobservable	Discount Range (Weighted Average)
	Technique	Input	June 30, 2020				December 31, 2019

Impaired loans, non-covered	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾	5%	to	65%	(30%)	22%	to	36%	(26%)
OREO	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾	0%	to	77%	(25%)	15%	to	100%	(8%)