~~00008590702012-12-31~~0000859070fcbc:OREOMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsNonrecurringMember2020-12-31

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 ended ~~September 30, 2020~~March 31, 2021

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

Commission file number: 000-19297

FIRST COMMUNITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

55-0694814

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

P.O. Box 989

Bluefield, Virginia

24605-0989

(Address of principal executive offices)

(Zip Code)

(276) 326-9000

(Registrant’s telephone number, including area code)

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

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

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

☑ Yes ☐ No

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

☑ Yes ☐ No

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

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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

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

☐ Yes ☑ No

As of ~~October 27, 2020,~~May 04, 2021, there were ~~17,717,306~~17,538,048 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 ~~September 30, 2020~~March 31, 2021 (Unaudited) and December 31, ~~2019~~2020	4
		Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (Unaudited)	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (Unaudited)	98
		Notes to Condensed Consolidated Financial Statements (Unaudited)	109
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		4035
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		5748
Item 4.	Controls and Procedures		5748

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		5848
Item 1A.	Risk Factors		5848
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		6049
Item 3.	Defaults Upon Senior Securities		6049
Item 4.	Mine Safety Disclosures		6049
Item 5.	Other Information		6049
Item 6.	Exhibits		6049

Signatures			6251

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;~~insurance;

●

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

●

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;

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

●

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

●

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

●

unanticipated regulatory or judicial proceedings;

●

changes in consumer spending and saving habits; and

●

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

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	*September 30,*			*December 31,*			*March 31,*			*December 31,*
	*2020*			2019⁽¹⁾			*2021*			2020⁽¹⁾
(Amounts in thousands, except share and per share data)	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	49,895		$	66,818		$	54,863		$	58,404
Federal funds sold		323,355			148,000			570,486			395,756
Interest-bearing deposits in banks		2,414			2,191			3,396			2,401
Total cash and cash equivalents		375,664			217,009			628,745			456,561
Debt securities available for sale		90,972			169,574			87,643			83,358
Loans held for sale		0			263
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		(27,277	)		(18,425	)
Loans held for investment, net of unearned income (includes covered loans of $9,041 and $9,680, respectively)								2,146,640			2,186,632
Allowance for credit losses								(34,563	)		(26,182	)
Loans held for investment, net		2,167,718			2,096,035			2,112,077			2,160,450
FDIC indemnification asset		1,598			2,883			946			1,223
Premises and equipment, net		60,488			62,824			57,371			57,700
Other real estate owned		2,103			3,969			1,740			2,083
Interest receivable		9,151			6,677			8,724			9,052
Goodwill		129,565			129,565			129,565			129,565
Other intangible assets		7,433			8,519			6,712			7,069
Other assets		103,236			101,529			106,543			104,075
Total assets	$	2,947,928		$	2,798,847		$	3,140,066		$	3,011,136

Liabilities
Deposits						��
Noninterest-bearing	$	750,277		$	627,868		$	824,576		$	772,795
Interest-bearing		1,741,962			1,702,044			1,848,524			1,773,452
Total deposits		2,492,239			2,329,912			2,673,100			2,546,247
Securities sold under agreements to repurchase		956			1,601			1,519			964
Interest, taxes, and other liabilities		34,816			38,515			39,448			37,195
Total liabilities		2,528,011			2,370,028			2,714,067			2,584,406

Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding		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
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; 24,376,278 shares issued and 17,592,009 outstanding at March 31, 2021; 24,319,076 shares issued and 17,722,507 outstanding at December 31, 2020								17,592			17,723
Additional paid-in capital		172,980			192,413			169,173			173,345
Retained earnings		230,464			219,535			241,889			237,585
Accumulated other comprehensive loss		(1,244	)		(1,506	)		(2,655	)		(1,923	)
Total stockholders' equity		419,917			428,819			425,999			426,730
Total liabilities and stockholders' equity	$	2,947,928		$	2,798,847		$	3,140,066		$	3,011,136

(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*						*Nine Months Ended*						*Three Months Ended*
	*September 30,*						*September 30,*						*March 31,*
(Amounts in thousands, except share and per share data)	*2020*			*2019*			*2020*			*2019*			*2021*			*2020*
Interest income
Interest and fees on loans	$	27,297		$	22,068		$	82,346		$	66,968		$	26,540		$	28,058
Interest on securities -- taxable		190			261			808			916			198			380
Interest on securities -- tax-exempt		419			596			1,432			1,930			297			538
Interest on deposits in banks		89			680			704			1,784			116			533
Total interest income		27,995			23,605			85,290			71,598			27,151			29,509
Interest expense
Interest on deposits		1,161			1,383			4,431			4,080			869			1,825
Interest on short-term borrowings		0			1			4			122			0			2
Total interest expense		1,161			1,384			4,435			4,202			869			1,827
Net interest income		26,834			22,221			80,855			67,396			26,282			27,682
Provision for loan losses		4,703			675			12,034			3,480
(Recovery of) provision for credit losses														(4,001	)		3,500
Net interest income after provision for loan losses		22,131			21,546			68,821			63,916			30,283			24,182
Noninterest income
Wealth management		909			952			2,607			2,581			881			844
Service charges on deposits		3,250			3,785			9,541			10,892			3,031			3,731
Other service charges and fees		2,748			2,007			7,596			6,185			3,022			2,231
Net (loss) gain on sale of securities		0			0			385			(43	)
Net gain on sale of securities														0			385
Net FDIC indemnification asset amortization		(383	)		(719	)		(1,352	)		(1,787	)		(280	)		(486	)
Litigation settlements		0			900			0			4,600
Other operating income		1,114			709			3,323			1,935			915			844
Total noninterest income		7,638			7,634			22,100			24,363			7,569			7,549
Noninterest expense
Salaries and employee benefits		10,485			9,334			32,886			27,653			10,884			11,386
Occupancy expense		1,228			1,042			3,818			3,277			1,275			1,315
Furniture and equipment expense		1,412			1,183			4,112			3,278			1,367			1,384
Service fees		1,581			1,466			4,433			3,727			1,335			1,523
Advertising and public relations		430			795			1,417			1,832			335			512
Professional fees		408			548			948			1,290			466			233
Amortization of intangibles		365			251			1,086			746			357			361
FDIC premiums and assessments		191			0			224			318			199			0
Merger expenses		0			592			1,893			592			0			1,893
Other operating expense		3,071			2,233			8,931			8,167			2,602			3,057
Total noninterest expense		19,171			17,444			59,748			50,880			18,820			21,664
Income before income taxes		10,598			11,736			31,173			37,399			19,032			10,067
Income tax expense		2,332			2,580			6,797			8,161			4,430			2,195
Net income	$	8,266		$	9,156		$	24,376		$	29,238		$	14,602		$	7,872

Earnings per common share
Basic	$	0.47		$	0.59		$	1.37		$	1.86		$	0.83		$	0.44
Diluted		0.47			0.58			1.37			1.85			0.82			0.44
Weighted average shares outstanding
Basic		17,710,283			15,603,992			17,803,369			15,717,678			17,669,937			17,998,994
Diluted		17,732,428			15,664,587			17,836,963			15,785,484			17,729,185			18,050,071

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	*Three Months Ended*					*Nine Months Ended*						*Three Months Ended*
	*September 30,*					*September 30,*						*March 31,*
	*2020*			*2019*		*2020*			*2019*			*2021*			*2020*
(Amounts in thousands)
Net income	$	8,266		$	9,156	$	24,376		$	29,238		$	14,602		$	7,872
Other comprehensive income, before tax
Available-for-sale debt securities:
Change in net unrealized (losses) gains on debt securities without other-than-temporary impairment		(268	)		28		873			1,578			(817	)		1,199
Reclassification adjustment for net (gains) losses recognized in net income		0			0		(385	)		43
Reclassification adjustment for net (gains) recognized in net income													0			(385	)
Net unrealized (losses) gains on available-for-sale debt securities		(268	)		28		488			1,621			(817	)		814
Employee benefit plans:
Net actuarial (loss) gain		(1	)		1		(446	)		(405	)
Net actuarial (loss)													(206	)		(446	)
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income		97			67		290			207			97			97
Net unrealized gains (losses) on employee benefit plans		96			68		(156	)		(198	)
Net unrealized (losses) on employee benefit plans													(109	)		(349	)
Other comprehensive (loss) income, before tax		(172	)		96		332			1,423			(926	)		465
Income tax expense		(36	)		20		70			299
Income tax (benefit) expense													(194	)		98
Other comprehensive (loss) income, net of tax		(136	)		76		262			1,124			(732	)		367
Total comprehensive income	$	8,130		$	9,232	$	24,638		$	30,362		$	13,870		$	8,239

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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

THREE MONTHS ENDED

~~September 30,~~March 31, 2021 and 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 July 1, 2019	$	-	$	15,633		$	109,816		$	208,618		$	(381	)	$	333,686
Balance January 1, 2020																		$	0	$	18,377		$	192,413		$	219,535		$	(1,506	)	$	428,819
Net income		-		-			-			9,156			-			9,156			0		0			0			7,872			0			7,872
Other comprehensive income		-		-			-			-			76			76			0		0			0			0			367			367
Common dividends declared -- $0.25 per share		-		-			-			(3,908	)		-			(3,908	)
Common dividends declared -- $0.25 per share																			0		0			0			(4,593	)		0			(4,593	)
Equity-based compensation expense		-		0			216			-			-			216			0		51			788			0			0			839
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
Issuance of common stock to 401(k) plan -- 6,617 shares																			0		7			167			0			0			174
Repurchase of common shares -- 734,653 shares at $29.77 per share																			0		(735	)		(21,137	)		0			0			(21,872	)
Balance March 31, 2020																		$	0	$	17,700		$	172,231		$	222,814		$	(1,139	)	$	411,606

Balance July 1, 2020	$	-	$	17,710		$	172,601		$	226,627		$	(1,108	)	$	415,830
Balance January 1, 2021																		$	0	$	17,723		$	173,345		$	237,585		$	(1,923	)	$	426,730
Cumulative effect of adoption of ASU 2016-13																			0		0			0			(5,870	)		0			(5,870	)
Net income		-		-			-			8,266			-			8,266			0		0			0			14,602			0			14,602
Other comprehensive income		-		-			-			-			(136	)		(136	)		0		0			0			0			(732	)		(732	)
Common dividends declared -- $0.25 per share		-		-			-			(4,429	)		-			(4,429	)
Common dividends declared -- $0.25 per share																			0		0			0			(4,428	)		0			(4,428	)
Equity-based compensation expense		-		1			262			-			-			263			0		51			483			0			0			534
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
Issuance of common stock to 401(k) plan -- 5,652 shares																			0		6			142			0			0			148
Repurchase of common shares -- 187,700 shares at $26.56 per share																			0		(188	)		(4,797	)		0			0			(4,985	)
Balance March 31, 2021																		$	0	$	17,592		$	169,173		$	241,889		$	(2,655	)	$	425,999

See Notes to Condensed Consolidated Financial Statements.

~~Table of Contents~~

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

~~nine MONTHS ENDED~~

~~September 30, 2020 and 2019~~

Accumulated

Additional

Other

(Amounts in thousands,

Preferred

Common

Paid-in

Retained

Comprehensive

except share and per share data)

Stock

Stock

Capital

Earnings

Income (Loss)

Total

Balance January 1, 2019
$ 0 $ 16,007 $ 122,486 $ 195,793 $ (1,429 ) $ 332,857
Net income
- - - 29,238 - 29,238
Other comprehensive income
- - - - 1,124 1,124
Common dividends declared -- $0.71 per share
- - - (11,165 ) - (11,165 )
Equity-based compensation expense
- 42 1,180 - - 1,222
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
Net income
- - - 24,376 - 24,376
Other comprehensive income
- - - - 262 262
Common dividends declared -- $0.75 per share
- - - (13,447 ) - (13,447 )
Equity-based compensation expense
- 57 1,311 - - 1,368
Issuance of common stock to 401(k) plan -- 18,148 shares
- 18 393 - - 411
Repurchase of common shares -- 734,653 shares at $29.77 per share
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.~~

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	*Nine Months Ended*						*Three Months Ended*
	*September 30,*						*March 31,*
(Amounts in thousands)	*2020*			*2019*			*2021*			*2020*
Operating activities
Net income	$	24,376		$	29,238		$	14,602		$	7,872
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		12,034			3,480
(Recovery of) provision for credit losses								(4,001	)		3,500
Depreciation and amortization of premises and equipment		3,328			2,491			1,125			1,090
Amortization of premiums on investments, net		1,387			171			85			1,243
Amortization of FDIC indemnification asset, net		1,352			1,787			280			486
Amortization of intangible assets		1,086			746			357			361
Accretion on acquired loans		(5,221	)		(2,720	)		(1,187	)		(1,954	)
Equity-based compensation expense		1,368			1,222			402			839
Issuance of common stock to 401(k) plan		411			325			148			174
Loss (gain) on sale of premises and equipment, net		9			(104	)
Gain on sale of premises and equipment, net								(64	)		(1	)
Loss on sale of other real estate owned		299			791			316			300
(Gain) Loss on sale of securities		(385	)		43
(Increase) decrease in accrued interest receivable		(2,474	)		639
(Increase) decrease in other operating activities		(5,542	)		1,527
Gain on sale of securities								0			(385	)
Decrease in accrued interest receivable								328			560
Decrease/Increase in other operating activities								224			(2,712	)
Net cash provided by operating activities		32,028			39,636			12,615			11,373
Investing activities
Proceeds from sale of securities available for sale		51,027			13,897			0			51,027
Proceeds from maturities, prepayments, and calls of securities available for sale		29,614			29,555			6,489			10,751
Proceeds from maturities and calls of securities held to maturity		0			25,000
Payments to acquire securities available for sale		(2,553	)		(4,453	)		(11,675	)		0
(Originations of) proceeds from repayment of loans, net		(78,663	)		78,036
(Purchase of) proceeds from FHLB stock, net		(12	)		129
Proceeds from repayment of loans, net								45,985			19,052
Proceeds from (Purchase of) FHLB stock, net								1,012			(12	)
Payments to the FDIC		(67	)		(137	)		(3	)		(35	)
Proceeds from sale of premises and equipment		1,435			1,038			128			5
Payments to acquire premises and equipment		(2,474	)		(6,225	)		(922	)		(1,580	)
Proceeds from sale of other real estate owned		1,997			2,917			428			1,279
Net cash provided by investing activities		304			139,757			41,442			80,487
Financing activities
Increase in noninterest-bearing deposits, net		122,409			12,928
Increase (decrease) in noninterest-bearing deposits, net								51,781			(7,576	)
Increase (decrease) in interest-bearing deposits, net		39,918			(31,826	)		75,072			(33,922	)
Repayments of securities sold under agreements to repurchase, net		(645	)		(27,507	)
Proceeds from (repayments) of securities sold under agreements to repurchase, net								555			(253	)
Repayments of FHLB and other borrowings, net		(40	)		0			0			960
Proceeds from stock options exercised		0			124			132			0
Payments for repurchase of common stock		(21,872	)		(16,362	)		(4,985	)		(21,872	)
Payments of common dividends		(13,447	)		(11,165	)		(4,428	)		(4,593	)
Net cash provided by (used in) financing activities		126,323			(73,808	)		118,127			(67,256	)
Net increase in cash and cash equivalents		158,655			105,585			172,184			24,604
Cash and cash equivalents at beginning of period		217,009			76,873			456,561			217,009
Cash and cash equivalents at end of period	$	375,664		$	182,458		$	628,745		$	241,613

Supplemental disclosure -- cash flow information
Cash paid for interest	$	4,334		$	4,308		$	1,072		$	1,514
Cash paid for income taxes		5,607			7,083			4,744			1,454

Supplemental transactions -- noncash items
Transfer of loans to other real estate owned		695			2,883			460			377
Loans originated to finance other real estate owned		265			484			59			265
Decrease in accumulated other comprehensive loss		262			1,124
(Increase) decrease in accumulated other comprehensive loss								(732	)		367

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

General

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The reincorporation was completed on October 2, 2018. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. ~~The Bank 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~~2020 (the “~~2019~~2020 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on ~~March 13, 2020.~~April 2, 2021. The condensed consolidated balance sheet as of December 31, ~~2019~~2020, has been derived from the audited consolidated financial statements.

Reclassifications

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

Use of Estimates

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

Significant Accounting Policies

The Company’s significant accounting policies are included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s ~~2019~~2020 Form 10-K.

Allowance for Credit Losses (“ACL”)

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

ACL – Investment Securities

The Company uses a systematic methodology to determine its ACL for investment securities held-to-maturity. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held-to-maturity portfolio. The Company considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgement; therefore the the process for determining expected credit losses may result in a range of expected credit losses. The Company monitors the held-to-maturity portfolio to determine if a valuation account is necessary. The Company currently has no held-to-maturity investment securities.

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities. Nor does the Company record an allowance for credit losses on accrued interest receivable. As of March 31,2021, the accrued interest receivable for investment securities available for sale was $406 thousand.

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

The Company no longer evaluates securities for other-than-temporary impairment (“OTTI”), as ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.

ACL – Loans

The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption through retained earnings and subsequent adjustments will be made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.

A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgement and reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.

The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit (“HELOC”), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).

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

In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. Management reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology.

Management considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending polices and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company’s credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.

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When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $500,000 for individually-evaluated loans . Generally, individually-evaluated loans other than Troubled Debt Restructurings, otherwise referred to herein as “TDRs,” are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.

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

Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s acquired purchased credit impaired loans were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March 31,2021, the accrued interest receivable for loans was $8.31 million.

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of March 31,2021, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $465 thousand. The current adjustment to the ACL for unfunded commitments would be recognized through the provision for credit losses in the Statement of Income.

Risks and Uncertainties

Recent COVID-19 Virus Developments –

During the ~~first~~~~nine~~ ~~months~~year of 2020, and continuing into 2021, government reaction to the novel coronavirus (“COVID-19”) pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services.

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~~Company Response to COVID-~~19 –
As COVID-19 events unfolded during ~~the~~ ~~first~~~~nine~~ ~~months of~~ 2020, and 2021, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. ~~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:~~
o
~~Branch lobbies remain available, but on a limited appointment-only basis~~
o
~~Most transactions conducted via drive-throughs~~
o
~~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 for appropriate staff:~~
○ ~~Many of the Company's non-branch, operational essential employees remain working remotely~~
o
~~Geographically separated work locations of Bank and Company CEO’s and most other executive management team members~~
o
~~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-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~~
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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~~ ~~September 30, 2020~~~~, the Company has modified or deferred payments on a total of 3,362 loans totaling $426.45 million in principal.~~   As of ~~September~~March 31,2021, total COVID-19 loan deferrals stood at $17.48 million, down significantly from our peak of $436.11 million at June 30, ~~2020,~~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 and approximately $5.09 million in consumer mortgage and installment 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~~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”),~~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 ~~September 30, 2020~~March 31, 2021 the Company processed ~~803~~1,165 loans with original principal balances totaling ~~$62.74~~$85.21 million through both the first and second rounds of the PPP.
~~COVID-~~ As of 19March 31, 2021, $32.73 million or 39.21%, of the Company's Paycheck Protection Program loan balances have been forgiven by the SBA. As of March 31, 2021, 53.58% of the Company's first 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.~~
round Paycheck Protection Program loan balances had been forgiven.
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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.

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Recent Accounting Standards

Standards Adopted in ~~2020~~2021

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.~~
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 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~~assets held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses ~~on available-for-sale~~in investments in 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 ofadopted the new ~~standard.~~ standard as of January 1, 2021. The ~~Company has also subjected~~standard was applied using 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 recordingmodified retrospective method as 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,~~2021. Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326. Comparative prior period disclosures will be presented using the ~~opening balance of~~guidance for the allowance for ~~credit losses associated with~~loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required ~~gross-up~~standard. This standard did not have a material impact on our investment securities portfolio at implementation. Related to the implementation of ~~purchased credit deteriorated~~the standard, the Company recorded an additional ACL for loans ~~from~~of $13.11 million, deferred tax assets of $1.81 million, and additional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings of $5.87 million. See the ~~Highlands transaction.~~table below for the impact of ASU 2016-13 on the Company’s consolidated balance sheet.

January 1, 2021

As Reported

Pre-

Impact of

Under

ASU 2016-13

ASU 2016-13

ASU 2016-13

Adoption

Adoption

Assets:

Non-covered loans held for investment

Allowance for credit losses on debt securities

Investment securities - available for sale
$ 83,358 $ 83,358 $ 0
A
Loans

Non-acquired loans and acquired performing loans
2,146,972 2,146,972 0
Acquired purchased deteriorated loans
45,535 39,660 5,875
B
Allowance for credit losses on loans
(39,289 ) (26,182 ) (13,107 )
C
Deferred tax asset
19,306 17,493 1,813
D
Accrued interest receivable - loans
9,109 9,052 57
B

Liabilities

Allowance for credit losses on off-balance sheet

credit exposures
575 66 509
E

Equity:

Retained earnings
231,714 237,585 (5,871 )
F

A. Per our analysis no ACL was necessary for investment securities available-for-sale.
B. Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.
C. Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Additional reserve related to purchased deteriorated loans of $5.88 million.
D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.
E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.
F. Net adjustment to retained earnings related to the adoption of ASU 2016-13.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ~~This update is effective for fiscal years,~~ The Company adopted this ASU as of January 1, 2021, 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~~it did not ~~yet been issued. The update is~~ ~~not~~ ~~expected to~~ have ~~any~~a material effect on the ~~Company’s~~Company's financial statements.
12

~~Table of Contents~~
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~~~~. 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

(Amounts in thousands)

Highlands

Adjustments

the Company

Assets

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

LIABILITIES

Deposits:

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

Consideration:

First Community Bankshares, Inc. common
2,792,729
Purchase price per share of the Company's common stock
$ 31.02
Fair value of Company common stock issued
86,631
Cash paid for fractional shares
16
Fair Value of total consideration transferred
$ 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~~ ~~September 30, 2019~~ ~~consolidated statement of income for the Company.~~
13
Table of Contents

~~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~~ ~~nine~~ ~~months ended~~ ~~September 30, 2020~~~~, have been excluded from the proforma information below. There were~~ no ~~residual merger expenses incurred for the~~ ~~third~~ ~~quarter of~~ ~~2020~~. No ~~adjustments have been made to the pro formas to eliminate the provision for loan losses for the quarter and year ended~~ ~~September 30, 2019~~ of Highlands in the amounts of $548 thousand and $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

Three months ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

2020

2019

Total revenues (net interest income plus noninterest income)
$ 34,472 $ 36,627 $ 102,955 $ 111,615
Net adjusted income available to the common shareholder
$ 8,266 $ 10,225 $ 25,864 $ 33,063

Note 32. Debt Securities

There was 0 allowance for credit losses for investments as of March 31, 2021; therefore, it is not presented in the table below. The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

September 30, 2020

March 31, 2021

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

(Amounts in thousands)

U.S. Agency securities
$ 576 $ 0 $ (4 ) $ 572 $ 534 $ 0 $ (4 ) $ 530
Municipal securities
55,036 631 0 55,667 40,125 370 0 40,495
Mortgage-backed Agency securities
33,776 999 (42 ) 34,733 46,402 957 (741 ) 46,618
Total
$ 89,388 $ 1,630 $ (46 ) $ 90,972 $ 87,061 $ 1,327 $ (745 ) $ 87,643

December 31, 2019

December 31, 2020

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

(Amounts in thousands)

U.S. Agency securities
$ 5,038 $ 0 $ (4 ) $ 5,034 $ 555 $ 0 $ (4 ) $ 551
Municipal securities
85,992 886 0 86,878 43,950 509 0 44,459
Mortgage-backed Agency securities
77,448 380 (166 ) 77,662 37,453 992 (97 ) 38,348
Total
$ 168,478 $ 1,266 $ (170 ) $ 169,574 $ 81,958 $ 1,501 $ (101 ) $ 83,358

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

September 30, 2020

March 31, 2021

Amortized

Amortized

(Amounts in thousands)

Cost

Fair Value

Cost

Fair Value

Available-for-sale debt securities

Due within one year
$ 0 $ 0 $ 980 $ 982
Due after one year but within five years
28,495 28,749 28,688 28,902
Due after five years but within ten years
27,117 27,490 10,991 11,141
Due after ten years
0 0
55,612 56,239 40,659 41,025
Mortgage-backed securities
33,776 34,733 46,402 46,618
Total debt securities available for sale
$ 89,388 $ 90,972 $ 87,061 $ 87,643

14

~~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:

September 30, 2020

March 31, 2021

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
$ 0 $ 0 $ 565 $ (4 ) $ 565 $ (4 ) $ 0 $ 0 $ 523 $ (4 ) $ 523 $ (4 )
Mortgage-backed Agency securities
3,405 (42 ) 0 0 3,405 (42 ) 21,453 (741 ) 0 0 21,453 (741 )
Total
$ 3,405 $ (42 ) $ 565 $ (4 ) $ 3,970 $ (46 ) $ 21,453 $ (741 ) $ 523 $ (4 ) $ 21,976 $ (745 )

December 31, 2019

December 31, 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
$ 975 $ (4 ) $ 0 $ 0 $ 975 $ (4 ) $ — $ — $ 544 $ (4) $ 544 $ (4)
Municipal securities — — — — — —
Mortgage-backed Agency securities
8,020 (48 ) 8,319 (118 ) 16,339 (166 ) 11,018 (97) 0 0 11,018 (97)
Total
$ 8,995 $ (52 ) $ 8,319 $ (118 ) $ 17,314 $ (170 ) $ 11,018 $ (97) $ 544 $ (4) $ 11,562 $ (101)

14
Table of Contents
There were 312 individual debt securities in an unrealized loss position as of ~~September 30, 2020~~March 31, 2021, and the combined depreciation in value represented ~~0.05%~~0.85% of the debt securities portfolio. There were 176 individual debt securities in an unrealized loss position as of December 31, ~~2019~~2020, and their combined depreciation in value represented ~~0.10%~~0.12% of the debt securities portfolio.

~~The Company reviews its investment portfolio quarterly~~Management evaluates securities for ~~indications of other-than-temporary~~ impairment ~~(“OTTI”). The initial indicator of OTTI for debt securities is~~where there has been a decline in fair value below ~~book~~the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the ~~severity~~creation of an allowance for credit losses. Consideration is given to (1) the financial condition and ~~duration~~near-term prospects of the ~~decline. The credit-related OTTI~~issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is ~~recognized~~more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of March 31, 2021 continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.
Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to ~~noninterest income and the noncredit-related OTTI is recognized~~earnings as a provision for credit losses in ~~other comprehensive income (“OCI”). During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2020~~ ~~and~~ ~~2019~~, the Company incurred 0 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.such periods.

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

Three Months Ended

Nine Months Ended

Three Months Ended

September 30,

September 30,

March 31,

2020

2019

2020

2019

2021

2020

(Amounts in thousands)

Gross realized gains
$ 0 0 $ 419 $ 67 $ 0 $ 419
Gross realized losses
0 0 (34 ) (110 ) 0 (34 )
Net Gain (Loss) on sale of securities
$ 0 $ 0 $ 385 $ (43 ) $ 0 $ 385

The carrying amount of securities pledged for various purposes totaled ~~$36.17~~$37.13 million as of ~~September 30, 2020~~March 31, 2021, and ~~$27.87~~$36.56 million as of December 31, ~~2019~~2020.

Note 43. 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 ~~$1.67~~$1.18 million as of ~~September 30, 2020~~March 31, 2021, and ~~$2.20~~$1.13 million as of December 31, ~~2019~~2020. Deferred loan fees, net of loan costs, totaled ~~$7.47~~$6.52 million as of ~~September 30, 2020~~March 31, 2021, and ~~$4.60~~$5.58 million as of December 31, ~~2019~~2020. For information about off-balance sheet financing, see Note ~~15,~~14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis for the current period March 31, 2021, to include net deferred loan fees of $6.52 million and unamortized discount total related to loans acquired of $7.78 million. Accrued interest receivable (AIR) of $8.31 million is accounted for separately and reported in Interest Receivable on the Statement of Condition.
The comparative periods in the table below reflect the loan portfolio prior to the adoption of ASU 2016-13. Prior periods were reported as shown in the below tables, with the acquired loans being net of earned income and of related discounts, which includes the credit discount on the acquired credit impaired loans.
15
Table of Contents

Included in total loans are covered loans that are generally reimbursable by the FDIC at the applicable loss share percentage of 80%. As of March 31, 2021, covered loan balances totaled $9.04 million; covered loan balances were $9.68 million year-end 2020.The following table presents loans, net of unearned income, within the ~~non-covered~~ portfolio by loan class, as of the dates indicated:

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

(Amounts in thousands)

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Non-covered loans held for investment

Loans held for investment

Commercial loans

Construction, development, and other land
$ 46,785 2.13 % $ 48,659 2.30 % $ 45,328 2.11 % $ 44,674 2.04 %
Commercial and industrial
179,714 8.19 % 142,962 6.76 % 162,227 7.56 % 173,024 7.91 %
Multi-family residential
105,647 4.81 % 121,840 5.76 % 105,592 4.92 % 115,161 5.27 %
Single family non-owner occupied
189,265 8.62 % 163,181 7.72 % 187,896 8.75 % 187,783 8.59 %
Non-farm, non-residential
748,815 34.11 % 727,261 34.39 % 718,830 33.49 % 734,793 33.60 %
Agricultural
10,362 0.47 % 11,756 0.56 % 9,723 0.45 % 9,749 0.45 %
Farmland
22,973 1.05 % 23,155 1.10 % 19,014 0.89 % 19,761 0.90 %
Total commercial loans
1,303,561 59.38 % 1,238,814 58.59 % 1,248,610 58.17 % 1,284,945 58.76 %
Consumer real estate loans

Home equity lines
94,056 4.29 % 110,078 5.21 % 92,095 4.29 % 96,526 4.41 %
Single family owner occupied
644,598 29.37 % 620,697 29.35 % 665,128 30.98 % 661,054 30.24 %
Owner occupied construction
17,460 0.79 % 17,241 0.82 % 18,376 0.86 % 17,720 0.81 %
Total consumer real estate loans
756,114 34.45 % 748,016 35.38 % 775,599 36.13 % 775,300 35.46 %
Consumer and other loans

Consumer loans
118,738 5.41 % 110,027 5.20 % 117,904 5.49 % 120,373 5.50 %
Other
5,838 0.27 % 4,742 0.22 % 4,527 0.21 % 6,014 0.28 %
Total consumer and other loans
124,576 5.68 % 114,769 5.42 % 122,431 5.70 % 126,387 5.78 %
Total non-covered loans
2,184,251 99.51 % 2,101,599 99.39 %
Total covered loans
10,744 0.49 % 12,861 0.61 %
Total loans held for investment, net of unearned income
$ 2,194,995 100.00 % $ 2,114,460 100.00 % $ 2,146,640 100.00 % $ 2,186,632 100.00 %

Loans held for sale
$ 0 $ 263

~~Commercial and industrial loan balances grew significantly compared to~~ ~~December 31, 2019~~. The Company began participating as a Small Business Administration ~~(“SBA”)~~ Paycheck Protection Program ~~(“PPP”)~~ lender during the second quarter of ~~2020~~2020.. At ~~September 30, 2020~~March 31, 2021, the PPP loans had a current balance of ~~$61.00~~$50.75 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 ~~$2.30~~$3.27 million at ~~September 30, 2020~~March 31, 2021, were also recorded. During the ~~third~~first quarter of ~~2020~~2021, the Company recorded amortization of net deferred loan origination fees of ~~$287~~$922 thousand on PPP ~~loans and $479 thousand in amortization for the~~ ~~nine~~ ~~month period.~~loans. 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~~Prior to the ~~covered loan portfolio, by loan class, as~~adoption of ASU 2016-13,the ~~dates indicated:~~

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
16

~~Table of Contents~~
~~The~~ Company ~~identifies~~identified certain purchased loans as impaired when fair values ~~are~~were established at acquisition and ~~groups~~grouped those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company ~~estimates~~estimated cash flows to be collected on PCI loans and ~~discounts~~discounted those cash flows at a market rate of interest. Effective January 1, 2020, ~~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~~were 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

December 31, 2020

Unpaid Principal

Unpaid Principal

Recorded

Unpaid Principal

(Amounts in thousands)

Recorded Investment

Balance

Recorded Investment

Balance

Investment

Balance

PCI Loans, by acquisition

Peoples
$ 0 $ 0 $ 5,071 $ 6,431 $ 0 $ 0
Waccamaw
0 0 2,708 14,277 0 0
Highlands
43,527 53,295 53,116 64,096 39,662 47,514
Other acquired
0 0 352 378 0 0
Total PCI Loans
$ 43,527 $ 53,295 $ 61,247 $ 85,182 $ 39,662 $ 47,514

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

Peoples

Waccamaw

Highlands

Total

(Amounts in thousands)

Balance January 1, 2019
$ 2,590 $ 14,639 $ 0 $ 17,229
Accretion
(734 ) (2,761 ) 0 (3,495 )
Reclassifications (to) from nonaccretable difference⁽¹⁾
14 1,200 0 1,214
Other changes, net
167 141 0 308
Balance September 30, 2019
$ 2,037 $ 13,219 $ 0 $ 15,256

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

Peoples

Waccamaw

Highlands

Total

(Amounts in thousands)

Balance January 1, 2020
$ 1,890 $ 12,574 $ 8,152 $ 22,616
Accretion
0 0 (686 ) (686 )
Reclassifications (to) from nonaccretable difference⁽¹⁾
0 0 0 0
Other changes, net
(1,890 ) (12,574 ) 0 (14,464 )
Balance March 31, 2020
$ 0 $ 0 $ 7,466 $ 7,466

(1) Represents changes attributable to expected loss assumptions

16
Table of Contents

Note 54. 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.

17

~~Table of Contents~~
The following ~~tables present~~table presents 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.~~Covered loan balances totaled $9.04 million and $9.68 million for March 31, 2021 and December 31, 2020, respectively.

September 30, 2020

March 31, 2021

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
$ 35,889 $ 8,419 $ 2,477 $ 0 $ 0 $ 46,785 $ 40,347 $ 2,440 $ 2,541 $ 0 $ 0 $ 45,328
Commercial and industrial
153,153 19,369 7,192 0 0 179,714 153,725 3,556 4,946 0 0 162,227
Multi-family residential
81,528 20,937 3,182 0 0 105,647 96,018 6,215 3,359 0 0 105,592
Single family non-owner occupied
143,235 32,649 13,368 13 0 189,265 166,474 8,802 12,608 12 0 187,896
Non-farm, non-residential
507,094 201,975 39,746 0 0 748,815 577,928 106,228 34,674 0 0 718,830
Agricultural
6,804 3,216 342 0 0 10,362 7,430 1,611 682 0 0 9,723
Farmland
13,281 5,139 4,553 0 0 22,973 13,893 1,333 3,788 0 0 19,014
Consumer real estate loans -
Home equity lines
89,729 1,317 3,010 0 0 94,056 87,260 1,294 3,541 0 0 92,095
Single family owner occupied
607,616 3,815 33,167 0 0 644,598 629,303 3,488 32,336 0 0 665,127
Owner occupied construction
16,684 202 574 0 0 17,460 18,090 0 286 0 0 18,376
Consumer and other loans -
Consumer loans
116,786 197 1,755 0 0 118,738 115,895 23 1,987 0 0 117,905
Other
5,838 0 0 0 0 5,838 4,527 0 0 0 0 4,527
Total non-covered loans
1,777,637 297,235 109,366 13 0 2,184,251
Covered loans

Commercial loans

Construction, development, and other land
0 27 0 0 0 27
Single family non-owner occupied
155 33 0 0 0 188
Consumer real estate loans -
Home equity lines
7,365 386 328 0 0 8,079
Single family owner occupied
1,832 269 349 0 0 2,450
Total covered loans
9,352 715 677 0 0 10,744
Total loans
$ 1,786,989 $ 297,950 $ 110,043 $ 13 $ 0 $ 2,194,995 $ 1,910,890 $ 134,990 $ 100,748 $ 12 $ 0 $ 2,146,640

December 31, 2020

Special

(Amounts in thousands)

Pass

Mention

Substandard

Doubtful

Loss

Total

Commercial loans

Construction, development, and other land
$ 36,934 $ 4,975 $ 2,765 $ 0 $ 0 $ 44,674
Commercial and industrial
160,625 7,065 5,519 0 0 173,209
Multi-family residential
103,291 8,586 3,284 0 0 115,161
Single family non-owner occupied
165,146 9,602 12,838 12 0 187,598
Non-farm, non-residential
568,438 125,907 40,448 0 0 734,793
Agricultural
7,724 1,686 339 0 0 9,749
Farmland
13,527 2,597 3,637 0 0 19,761
Consumer real estate loans
-
Home equity lines
91,712 1,488 3,326 0 0 96,526
Single family owner occupied
623,860 3,859 33,335 0 0 661,054
Owner occupied construction
17,232 201 287 0 0 17,720
Consumer and other loans
-
Consumer loans
118,134 28 2,211 0 0 120,373
Other
6,014 0 0 0 0 6,014
Total loans
$ 1,912,637 $ 165,994 $ 107,989 $ 12 $ 0 $ 2,186,632
17
Table of Contents
The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated.
(Amounts in thousands)

Term Loans Amortized Cost Basis by Origination Year

Balance at March 31, 2021

2021

2020

2019

2018

2017

Prior

Revolving

Total

Construction, development

and other land

Pass
$ 3,119 $ 13,696 $ 6,642 $ 5,879 $ 2,205 $ 8,364 $ 442 $ 40,347
Special Mention
0 282 0 1,179 682 251 46 2,440
Substandard
0 0 84 13 282 2,162 0 2,541
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total construction, development, and other land
$ 3,119 $ 13,978 $ 6,726 $ 7,071 $ 3,169 $ 10,777 $ 488 $ 45,328
Commercial and industrial

Pass
$ 6,729 $ 28,778 $ 21,645 $ 17,695 $ 6,271 $ 7,165 $ 14,694 $ 102,977
Special Mention
0 392 1,246 1,306 297 59 256 3,556
Substandard
0 422 1,081 343 1,728 1,343 29 4,946
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total commercial and industrial
$ 6,729 $ 29,592 $ 23,972 $ 19,344 $ 8,296 $ 8,567 $ 14,979 $ 111,479
Paycheck Protection Loans

Pass
$ 22,436 $ 28,312 $ 0 $ 0 $ 0 $ 0 $ 0 $ 50,748
Special Mention
0 0 0 0 0 0 0 0
Substandard
0 0 0 0 0 0 0 0
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total Paycheck Protection Loans
$ 22,436 $ 28,312 $ 0 $ 0 $ 0 $ 0 $ 0 $ 50,748
Multi-family residential

Pass
$ 3,110 $ 28,363 $ 6,296 $ 2,147 $ 5,557 $ 49,593 $ 952 $ 96,018
Special Mention
0 0 0 0 2,573 3,642 0 6,215
Substandard
0 0 0 434 673 2,252 0 3,359
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total multi-family residential
$ 3,110 $ 28,363 $ 6,296 $ 2,581 $ 8,803 $ 55,487 $ 952 $ 105,592
Non-farm, non-residential

Pass
$ 27,998 $ 145,910 $ 57,936 $ 67,978 $ 51,626 $ 214,496 $ 11,984 $ 577,928
Special Mention
0 16,810 10,453 3,338 26,743 48,797 87 106,228
Substandard
1,340 741 5,738 9,583 9,951 7,186 135 34,674
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total non-farm, non-residential
$ 29,338 $ 163,461 $ 74,127 $ 80,899 $ 88,320 $ 270,479 $ 12,206 $ 718,830
Agricultural

Pass
$ 1,041 $ 2,506 $ 1,426 $ 590 $ 936 $ 430 $ 501 $ 7,430
Special Mention
49 128 366 650 328 30 60 1,611
Substandard
0 15 214 208 33 212 0 682
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total agricultural
$ 1,090 $ 2,649 $ 2,006 $ 1,448 $ 1,297 $ 672 $ 561 $ 9,723
Farmland

Pass
$ 649 $ 1,237 $ 216 $ 1,132 $ 472 $ 8,756 $ 1,431 $ 13,893
Special Mention
0 0 0 372 662 299 0 1,333
Substandard
0 15 943 252 255 2,323 0 3,788
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total farmland
$ 649 $ 1,252 $ 1,159 $ 1,756 $ 1,389 $ 11,378 $ 1,431 $ 19,014

18
Table of Contents

December 31, 2019

Special

(Amounts in thousands)

Pass

Mention

Substandard

Doubtful

Loss

Total

Non-covered loans

Commercial loans

Construction, development, and other land
$ 45,781 $ 2,079 $ 799 $ 0 $ 0 $ 48,659
Commercial and industrial
135,651 4,327 2,984 0 0 142,962
Multi-family residential
118,045 2,468 1,327 0 0 121,840
Single family non-owner occupied
149,916 7,489 5,776 0 0 163,181
Non-farm, non-residential
683,481 27,160 16,620 0 0 727,261
Agricultural
11,299 122 335 0 0 11,756
Farmland
17,609 4,107 1,439 0 0 23,155
Consumer real estate loans

Home equity lines
106,246 2,014 1,818 0 0 110,078
Single family owner occupied
580,580 17,001 23,116 0 0 620,697
Owner occupied construction
16,341 179 721 0 0 17,241
Consumer and other loans

Consumer loans
108,065 1,341 621 0 0 110,027
Other
4,742 0 0 0 0 4,742
Total non-covered loans
1,977,756 68,287 55,556 0 0 2,101,599
Covered loans

Commercial loans

Construction, development, and other land
0 28 0 0 0 28
Single family non-owner occupied
199 0 0 0 0 199
Non-farm, non-residential
0 0 3 0 0 3
Consumer real estate loans

Home equity lines
7,177 2,327 349 0 0 9,853
Single family owner occupied
2,111 275 392 0 0 2,778
Total covered loans
9,487 2,630 744 0 0 12,861
Total loans
$ 1,987,243 $ 70,917 $ 56,300 $ 0 $ 0 $ 2,114,460
(Amounts in thousands)

Term Loans Amortized Cost Basis by Origination Year

Balance at March 31, 2021

2021

2020

2019

2018

2017

Prior

Revolving

Total

Home equity lines

Pass
$ 162 $ 683 $ 696 $ 303 $ 110 $ 10,643 $ 74,663 $ 87,260
Special Mention
0 0 0 122 0 519 653 1,294
Substandard
0 0 23 125 188 1,808 1,397 3,541
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total home equity lines
$ 162 $ 683 $ 719 $ 550 $ 298 $ 12,970 $ 76,713 $ 92,095
Single family Mortgage

Pass
$ 55,294 $ 241,770 $ 76,583 $ 61,791 $ 55,113 $ 304,325 $ 901 $ 795,777
Special Mention
0 916 1,133 275 2,655 7,311 0 12,290
Substandard
754 748 1,935 3,634 2,548 35,325 0 44,944
Doubtful
0 0 0 0 0 12 0 12
Loss
0 0 0 0 0 0 0 0
Total single family owner occupied
$ 56,048 $ 243,434 $ 79,651 $ 65,700 $ 60,316 $ 346,973 $ 901 $ 853,023
Owner occupied construction

Pass
$ 900 $ 9,816 $ 2,747 $ 1,932 $ 456 $ 2,239 $ 0 $ 18,090
Special Mention
0 0 0 0 0 0 0 0
Substandard
0 0 0 0 0 286 0 286
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total owner occupied construction
$ 900 $ 9,816 $ 2,747 $ 1,932 $ 456 $ 2,525 $ 0 $ 18,376
Consumer loans

Pass
$ 15,522 $ 50,551 $ 28,501 $ 8,754 $ 3,742 $ 10,841 $ 2,511 $ 120,422
Special Mention
0 0 10 12 0 0 1 23
Substandard
0 378 978 215 162 175 79 1,987
Doubtful
0 0 0 0 0 0 0 0
Loss
0 0 0 0 0 0 0 0
Total consumer loans
$ 15,522 $ 50,929 $ 29,489 $ 8,981 $ 3,904 $ 11,016 $ 2,591 $ 122,432

Amounts in thousands)

Term Loans Amortized Cost Basis by Origination Year

Balance at March 31, 2021

2021

2020

2019

2018

2017

Prior

Revolving

Total

Total Loans

Pass
$ 136,960 $ 551,622 $ 202,688 $ 168,201 $ 126,488 $ 616,852 $ 108,079 $ 1,910,890
Special Mention
49 18,528 13,208 7,254 33,940 60,908 1,103 134,990
Substandard
2,094 2,319 10,996 14,807 15,820 53,072 1,640 100,748
Doubtful
0 0 0 0 0 12 0 12
Loss
0 0 0 0 0 0 0 0
Total loans
$ 139,103 $ 572,469 $ 226,892 $ 190,262 $ 176,248 $ 730,844 $ 110,822 $ 2,146,640
~~The~~
19
Table of Contents
Prior to the adoption of ASU 2016-13, the Company ~~identifies~~identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. IfWhen the Company ~~determines~~determined that it iswas probable all principal and interest amounts ~~contractually~~ due ~~will~~would not be collected in accordance with the contractual terms of the loan isagreement, the loan was generally deemed impaired.

19

~~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:~~date indicated prior to the adoption of ASU 2016-13:

September 30, 2020

December 31, 2019

December 31, 2020

Unpaid

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Recorded

Principal

Related

(Amounts in thousands)

Investment

Balance

Allowance

Investment

Balance

Allowance

Investment

Balance

Allowance

Impaired loans with no related allowance

Commercial loans

Construction, development, and other land
$ 869 $ 1,097 $ - $ 552 $ 768 $ - $ 616 $ 891 $ -
Commercial and industrial
3,242 3,302 - 576 599 - 2,341 2,392 -
Multi-family residential
923 1,009 - 1,254 1,661 - 946 1,593 -
Single family non-owner occupied
5,011 5,663 - 2,652 3,176 - 4,816 5,785 -
Non-farm, non-residential
7,712 8,362 - 4,158 4,762 - 8,238 9,467 -
Agricultural
267 275 - 158 164 - 218 226 -
Farmland
1,517 1,591 - 1,437 1,500 - 1,228 1,311 -
Consumer real estate loans

Home equity lines
1,540 1,697 - 1,372 1,477 - 1,604 1,772 -
Single family owner occupied
16,100 18,467 - 15,588 17,835 - 16,778 19,361 -
Owner occupied construction
503 511 - 648 648 - 216 216 -
Consumer and other loans

Consumer loans
413 424 - 290 294 - 818 833 -
Total impaired loans with no allowance
38,097 42,398 - 28,685 32,884 - 37,819 43,847 -

Impaired loans with a related allowance

Commercial loans

Commercial and industrial
0 0 0 0 0 0 0 0 0
Multi-family residential
944 1,278 222 0 0 0 0 0 0
Single family non-owner occupied
0 0 0 0 0 0 0 0 0
Non-farm, non-residential
1,779 1,970 565 1,241 1,227 292 1,068 1,121 319
Farmland
0 0 0 0 0 0 0 0 0
Consumer real estate loans

Home equity lines
0 0 0 0 0 0 0 0 0
Single family owner occupied
1,418 1,522 239 1,246 1,246 353 338 338 108
Consumer and other loans

Consumer loans
0 0 0 0 0 0 0 0 0
Total impaired loans with an allowance
4,141 4,770 1,026 2,487 2,473 645 1,406 1,459 427
Total impaired loans⁽¹⁾
$ 42,238 $ 47,168 $ 1,026 $ 31,172 $ 35,357 $ 645
Total impaired loans(1)
$ 39,225 $ 45,306 $ 427

(1)
Total recorded investment of impaired loans include loans totaling ~~$33.48 million as of~~ ~~September 30, 2020~~~~, and $24.64~~$31.18 million as of December 31, ~~2019~~2020, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment.

20
Table of Contents

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

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Average

Average

Average

Average

Interest Income

Recorded

Interest Income

Recorded

Interest Income

Recorded

Interest Income

Recorded

(Amounts in thousands)

Recognized

Investment

Recognized

Investment

Recognized

Investment

Recognized

Investment

Impaired loans with no related allowance:

Commercial loans

Construction, development, and other land
$ 6 $ 882 $ 5 $ 570 $ 21 $ 1,021 $ 17 $ 720
Commercial and industrial
46 3,315 2 66 135 2,845 7 277
Multi-family residential
9 967 5 1,269 38 685 21 1,385
Single family non-owner occupied
54 5,090 41 2,958 126 4,798 97 3,063
Non-farm, non-residential
79 7,786 20 4,590 206 7,115 84 4,832
Agricultural
4 272 9 223 7 247 11 108
Farmland
12 1,526 19 1,536 48 1,640 45 1,474
Consumer real estate loans

Home equity lines
13 1,588 17 1,463 29 1,569 31 1,452
Single family owner occupied
120 16,328 176 16,593 410 17,044 454 16,123
Owner occupied construction
2 542 3 224 12 470 7 223
Consumer and other loans

Consumer loans
8 420 6 319 19 445 10 187
Total impaired loans with no related allowance
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
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
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
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
11 4,156 (10 ) 2,507 49 4,093 63 2,779
Total impaired loans
$ 364 $ 42,872 $ 293 $ 32,318 $ 1,100 $ 41,972 $ 847 $ 32,623
21

~~Table of Contents~~

Three Months Ended March 31,

2020

Average

Interest Income

Recorded

(Amounts in thousands)

Recognized

Investment

Impaired loans with no related allowance:

Commercial loans

Construction, development, and other land
$ 8 $ 1,299
Commercial and industrial
29 2,029
Multi-family residential
11 670
Single family non-owner occupied
35 4,101
Non-farm, non-residential
43 4,674
Agricultural
1 206
Farmland
21 1,560
Consumer real estate loans

Home equity lines
9 1,467
Single family owner occupied
168 17,550
Owner occupied construction
6 334
Consumer and other loans

Consumer loans
4 407
Total impaired loans with no related allowance
335 34,297

Impaired loans with a related allowance:

Commercial loans

Construction, development, and other land
0 0
Commercial and industrial
0 0
Multi-family residential
0 941
Single family non-owner occupied
0 0
Non-farm, non-residential
0 1,338
Farmland
0 0
Consumer real estate loans

Home equity lines
0 0
Single family owner occupied
13 1,240
Owner occupied construction
0 0
Total impaired loans with a related allowance
13 3,519
Total impaired loans
$ 348 $ 37,816

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. Covered nonaccrual loans totaled $359 thousand at March 31, 2021; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

March 31, 2021

(Amounts in thousands)

No Allowance

With an Allowance

Total

Commercial loans

Construction, development, and other land
$ 391 $ 0 $ 391
Commercial and industrial
1,781 0 1,781
Multi-family residential
854 0 854
Single family non-owner occupied
3,631 0 3,631
Non-farm, non-residential
7,295 0 7,295
Agricultural
267 0 267
Farmland
485 0 485
Consumer real estate loans
-
Home equity lines
1,035 0 1,035
Single family owner occupied
9,333 187 9,520
Owner occupied construction
0 0 0
Consumer and other loans
-
Consumer loans
847 0 847
Total nonaccrual loans
$ 25,919 $ 187 $ 26,106
During the three month period, $9 thousand in nonaccrual loan interest was recognized.
21
Table of Contents
The following table presents nonaccrual loans prior to the adoption of ASU 2016-13.PCI loans ~~are~~were generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. Covered nonaccrual loans totaled $297 thousand at December 31, 2020; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the ~~dates~~date indicated:

September 30, 2020

December 31, 2019

(Amounts in thousands)

Non-covered

Covered

Total

Non-covered

Covered

Total

December 31, 2020

Commercial loans

Construction, development, and other land
$ 285 $ 0 $ 285 $ 211 $ 0 $ 211 $ 244
Commercial and industrial
1,765 0 1,765 530 0 530 895
Multi-family residential
1,536 0 1,536 1,144 0 1,144 946
Single family non-owner occupied
3,289 0 3,289 1,286 0 1,286 2,990
Non-farm, non-residential
6,612 0 6,612 3,400 0 3,400 6,343
Agricultural
267 0 267 158 0 158 217
Farmland
814 0 814 713 0 713 489
Consumer real estate loans
Home equity lines
951 313 1,264 753 220 973 1,122
Single family owner occupied
8,012 20 8,032 7,259 24 7,283 7,976
Owner occupied construction
536 0 536 428 0 428 0
Consumer and other loans

Consumer loans
357 0 357 231 0 231 781
Total nonaccrual loans
$ 24,424 $ 333 $ 24,757 $ 16,113 $ 244 $ 16,357 $ 22,003
The following table presents the aging of past due loans, by loan class, as of the date indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Non-covered accruing loans contractually past due 90 days or more totaled $171 thousand as of March 31, 2021.

March 31, 2021

Amortized Cost of

30 - 59 Days

60 - 89 Days

90+ Days

Total

Current

Total
> 90 Days Accruing
(Amounts in thousands)

Past Due

Past Due

Past Due

Past Due

Loans

Loans

No Allowance

Commercial loans

Construction, development, and other land
$ 40 $ 0 $ 384 $ 424 $ 44,904 $ 45,328 $ 0
Commercial and industrial
1,116 746 550 2,412 159,815 162,227 0
Multi-family residential
156 0 854 1,010 104,582 105,592 0
Single family non-owner occupied
778 655 2,042 3,475 184,421 187,896 163
Non-farm, non-residential
76 283 3,916 4,275 714,555 718,830 0
Agricultural
221 93 46 360 9,363 9,723 0
Farmland
9 0 485 494 18,520 19,014 0
Consumer real estate loans

Home equity lines
493 181 557 1,231 90,864 92,095 0
Single family owner occupied
4,455 1,291 4,477 10,223 654,905 665,128 0
Owner occupied construction
0 0 0 0 18,376 18,376 0
Consumer and other loans

Consumer loans
1,394 280 417 2,091 115,813 117,904 8
Other
0 0 0 0 4,527 4,527 0
Total loans
$ 8,738 $ 3,529 $ 13,728 $ 25,995 $ 2,120,645 $ 2,146,640 $ 171

22
Table of Contents

The following ~~tables present~~table presents the aging of past due loans, by loan class, as of the ~~dates indicated.~~date indicated prior to the adoption of ASU 2016-13. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, ~~continue~~continued to accrue interest based on expected cash flows; therefore, PCI loans ~~are~~were not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled ~~$43 thousand as of~~ ~~September 30, 2020~~~~, compared to $144~~$295 thousand as of December 31, ~~2019~~2020.

September 30, 2020

December 31, 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
$ - $ - $ 285 $ 285 $ 46,500 $ 46,785 $ 1,039 $ 0 $ 235 $ 1,274 $ 43,400 $ 44,674
Commercial and industrial
1,280 163 1,061 2,504 177,210 179,714 669 230 700 1,599 171,425 173,024
Multi-family residential
810 334 1,202 2,346 103,301 105,647 103 0 946 1,049 114,112 115,161
Single family non-owner occupied
842 636 2,255 3,733 185,532 189,265 925 488 2,144 3,557 184,226 187,783
Non-farm, non-residential
608 1,856 3,619 6,083 742,732 748,815 601 296 3,368 4,265 730,528 734,793
Agricultural
1 16 84 101 10,261 10,362 70 189 88 347 9,402 9,749
Farmland
125 0 737 862 22,111 22,973 43 0 457 500 19,261 19,761
Consumer real estate loans
Home equity lines
509 248 443 1,200 92,856 94,056 649 380 425 1,454 95,072 96,526
Single family owner occupied
2,894 1,286 3,533 7,713 636,885 644,598 5,317 2,265 3,891 11,473 649,581 661,054
Owner occupied construction
71 91 394 556 16,904 17,460 82 0 0 82 17,638 17,720
Consumer and other loans

Consumer loans
1,679 436 187 2,302 116,436 118,738 2,637 746 651 4,034 116,339 120,373
Other
- - - - 5,838 5,838 0 0 0 0 6,014 6,014
Total non-covered loans
8,819 5,066 13,800 27,685 2,156,566 2,184,251
Covered loans

Commercial loans

Construction, development, and other land
0 0 0 0 27 27
Single family non-owner occupied
0 0 0 0 188 188
Non-farm, non-residential
0 0 0 0 0 0
Consumer real estate loans
Home equity lines
123 0 263 386 7,693 8,079
Single family owner occupied
20 0 0 20 2,430 2,450
Total covered loans
143 0 263 406 10,338 10,744
Total loans
$ 8,962 $ 5,066 $ 14,063 $ 28,091 $ 2,166,904 $ 2,194,995 $ 12,135 $ 4,594 $ 12,905 $ 29,634 $ 2,156,998 $ 2,186,632

In estimating estimated credit losses, ASC 23326

~~Table~~ prescribes that if foreclosure is probable, a collateral dependent asset (“CDA”) is required to be measured at the fair value of ~~Contents~~

December 31, 2019

30 - 59 Days

60 - 89 Days

90+ Days

Total

Current

Total

(Amounts in thousands)

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
Commercial and industrial
1,913 238 507 2,658 140,304 142,962
Multi-family residential
375 0 1,144 1,519 120,321 121,840
Single family non-owner occupied
754 267 661 1,682 161,499 163,181
Non-farm, non-residential
917 1,949 3,027 5,893 721,368 727,261
Agricultural
86 164 0 250 11,506 11,756
Farmland
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
Single family owner occupied
7,728 2,390 3,766 13,884 606,813 620,697
Owner occupied construction
207 0 428 635 16,606 17,241
Consumer and other loans

Consumer loans
1,735 439 202 2,376 107,651 110,027
Other
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
Covered loans

Commercial loans

Construction, development, and other land
0 0 0 0 28 28
Single family non-owner occupied
0 0 0 0 199 199
Non-farm, non-residential
0 0 0 0 3 3
Consumer real estate loans

Home equity lines
144 28 0 172 9,681 9,853
Single family owner occupied
0 50 0 50 2,728 2,778
Total covered loans
144 78 0 222 12,639 12,861
Total loans
$ 16,236 $ 6,104 $ 11,113 $ 33,453 $ 2,081,007 $ 2,114,460
the collateral, but as a practical expedient, if foreclosure is not probable, fair value measurement is optional. For those CDA loans measured at the fair value of collateral, a credit loss expense is recorded for loan amounts in excess of fair value. The table below summarizes collateral dependent loans, by type of collateral, and the extent to which they are collateralized during the period.
(Amounts in thousands)

March 31, 2021

Collateral Coverage

%

Commercial Real Estate

Hotel
$ 0 $ 0 -
Office
0 0 0
Other
2,480 3,126 126.05 %
Retail
0 0 0
Multi-Family

Industrial
0 0 0
Office
0 0 0
Other
686 723 105 %
Commercial and industrial

Industrial
0 0 0
Other
0 0 0
Home equity loans
42 0 0.00 %
Consumer owner occupied
189 0 0.00 %
Consumer
- - -
Total collateral dependent loans
$ 3,397 $ 3,849 113.31 %

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 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 ~~trouble debt restructurings ("TDRs")~~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.~~ No ~~covered loans were recorded as TDRs as of~~ ~~September 30, 2020~~~~, or~~ ~~December 31, 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~~2021 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, ~~2019~~2019. . The Company elected to adopt this provision of the CARES Act.

~~Through~~From ~~September 30,~~March, 2020,through March 31, 2021, the Company had modified a total of ~~3,362~~3,812 loans with principal balances totaling ~~$426.45~~$466.59 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,~~March 31, 2021, ~~current commercial and consumer~~total COVID-19 loan deferrals ~~were $102.54 million and $13.09 million, respectively.~~stood at $17.48 million.

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Table of Contents

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

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

(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 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Commercial and industrial
0 1,342 1,342 0 0 0 353 709 1,062 0 1,326 1,326
Single family non-owner occupied
538 1,274 1,812 552 595 1,147 1,523 1,045 2,568 1,585 1,265 2,850
Non-farm, non-residential
0 2,419 2,419 0 307 307 1,388 2,393 3,781 0 2,407 2,407
Consumer real estate loans

Home equity lines
0 81 81 0 115 115 0 75 75 0 77 77
Single family owner occupied
1,535 5,573 7,108 1,790 5,305 7,095 216 4,560 4,776 229 4,927 5,156
Owner occupied construction
0 217 217 0 221 221 0 216 216 0 216 216
Consumer and other loans

Consumer loans
0 30 30 0 32 32 0 29 29 0 30 30
Total TDRs
$ 2,073 $ 10,936 $ 13,009 $ 2,342 $ 6,575 $ 8,917 $ 3,480 $ 9,027 $ 12,507 $ 1,814 $ 10,248 $ 12,062

Allowance for loan losses related to TDRs
$ 347 $ 353
Allowance for credit losses related to TDRs
$ 0 $ 0

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2020

2019

2021

2020

(Amounts in thousands)

Interest income recognized
$ 122 $ 56 $ 372 $ 203 $ 104 $ 98

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,

Three Months Ended March 31,

2020

2019

2021

2020

Post-modification

Post-modification

Post-modification

Post-modification

Total

Pre-modification

Recorded

Total

Pre-modification

Recorded

Total

Pre-modification

Recorded

Total

Pre-modification

Recorded

(Amounts in thousands)

Contracts

Recorded Investment

Investment(1)

Contracts

Recorded Investment

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
- - - 0 0 0 0 0 0 1 50 50
Single family owner occupied
0 0 0 0 0 0 0 0 0
Total below market interest rate and extended payment term
- - - 0 0 0 0 0 0 1 50 50
Payment deferral

Construction, development, and other land 0 0 0 1 63 63
Commercial and industrial
0 0 0 - - - 0 0 0 1 602 602
Single family non-owner occupied 0 0 0 1 529 529
Non-farm, non-residential
0 0 0 - - - 1 1,390 1,390 1 577 577
Single family owner occupied
0 0 0 1 33 29 0 0 0 2 672 672
Total principal deferral
0 0 0 1 33 29 1 1,390 1,390 6 2,443 2,443
Total
0 $ 0 $ 0 1 $ 33 $ 29 1 $ 1,390 $ 1,390 7 $ 2,493 $ 2,493

(1)
Represents the loan balance immediately following modification

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Table of Contents

Nine Months Ended September 30,

2020

2019

Post-modification

Post-modification

Total

Pre-modification

Recorded

Total

Pre-modification

Recorded

(Amounts in thousands)

Contracts

Recorded Investment

Investment(1)

Contracts

Recorded Investment

Investment(1)

Below market interest rate Single family non-owner occupied
1 50 50 - $ - $ -
Total below market interest rate
1 50 50 - - -
Below market interest rate and extended payment term

Single family non-owner occupied
- - - 2 221 218
Single family owner occupied - - - 2 488 480
Total below market interest rate and extended payment term
- - - 4 709 698
Payment deferral

Construction, development, and other land
1 63 63 - - -
Commercial and industrial
3 1,708 1,708 - - -
Single family non-owner occupied
1 529 529 - - -
Non-farm, non-residential
3 2,115 2,115 - - -
Single family owner occupied
3 742 726 1 33 29
Home equity lines
- - - 0 0 0
Total principal deferral
11 5,157 5,141 1 33 29
Total
12 $ 5,207 $ 5,191 5 $ 742 $ 727

(1)
~~Represents the loan balance immediately following modification~~
~~Payment~~There were 0 payment defaults on loans modified as TDRs restructured within the previous 12 months as of ~~September 30, 2020~~March 31, 2021, ~~were~~and one loan for ~~one~~ ~~loan in the amount~~$209 thousand as of ~~$100 thousand; there were~~ ~~none~~ in ~~2019~~March 31, 2020..

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

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

(Amounts in thousands)

OREO
$ 2,103 $ 3,969 $ 1,740 $ 2,083

OREO secured by residential real estate
$ 767 $ 2,232 $ 645 $ 769
Residential real estate loans in the foreclosure process⁽¹⁾
2,938 1,539 2,900 4,141

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

Note 65. Allowance for ~~Loan~~Credit Losses

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

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Consumer Real

Consumer and

Total

Consumer Real

Consumer and

Total

(Amounts in thousands)

Commercial

Estate

Other

Allowance

Commercial

Estate

Other

Allowance

Total allowance

Beginning balance
$ 13,909 $ 7,294 $ 2,555 $ 23,758 $ 14,661 $ 8,951 $ 2,570 $ 26,182
Cumulative effect of adoption of ASU 2016-13 8,360 4,145 602 13,107
Provision for (recovery of) loan losses charged to operations
1,972 1,975 756 4,703 (3,070 ) (1,542 ) 611 (4,001 )
Charge-offs
(501 ) (188 ) (874 ) (1,563 ) (757 ) (10 ) (963 ) (1,730 )
Recoveries
169 38 172 379 392 343 270 1,005
Net charge-offs
(332 ) (150 ) (702 ) (1,184 ) (365 ) 333 (693 ) (725 )
Ending balance
$ 15,549 $ 9,119 $ 2,609 $ 27,277 $ 19,586 $ 11,887 $ 3,090 $ 34,563

Three Months Ended March 31, 2020

Consumer Real

Consumer and

Total

(Amounts in thousands)

Commercial

Estate

Other

Allowance

Total allowance

Beginning balance
$ 10,235 $ 6,325 $ 1,865 $ 18,425
Provision for loan losses charged to operations
1,987 1,145 368 3,500
Charge-offs
(268 ) (63 ) (863 ) (1,194 )
Recoveries
121 112 173 406
Net charge-offs
(147 ) 49 (690 ) (788 )
Ending balance
$ 12,075 $ 7,519 $ 1,543 $ 21,137

26

~~Table of Contents~~

Three Months Ended September 30, 2019

Consumer Real

Consumer and

Total

(Amounts in thousands)

Commercial

Estate

Other

Allowance

Total allowance

Beginning balance
$ 10,215 $ 6,881 $ 1,444 $ 18,540
Provision for (Recovery of) loan losses charged to operations
203 (338 ) 810 675
Charge-offs
(159 ) (253 ) (552 ) (964 )
Recoveries
40 96 106 242
Net (charge-offs) recoveries
(119 ) (157 ) (446 ) (722 )
Ending balance
$ 10,299 $ 6,386 $ 1,808 $ 18,493

Nine Months Ended September 30, 2020

Consumer Real

Consumer and

Total

(Amounts in thousands)

Commercial

Estate

Other

Allowance

Total allowance

Beginning balance
$ 10,235 $ 6,325 $ 1,865 $ 18,425
Provision for loan losses charged to operations
6,577 2,899 2,558 12,034
Charge-offs
(1,647 ) (430 ) (2,352 ) (4,429 )
Recoveries
384 325 538 1,247
Net (charge-offs) recoveries
(1,263 ) (105 ) (1,814 ) (3,182 )
Ending balance
$ 15,549 $ 9,119 $ 2,609 $ 27,277

Nine Months Ended September 30, 2019

Consumer Real

Consumer and

Total

(Amounts in thousands)

Commercial

Estate

Other

Allowance

Total allowance

Beginning balance
$ 10,499 $ 6,732 $ 1,036 $ 18,267
Provision for loan losses charged to operations
1,359 411 1,710 3,480
Charge-offs
(2,165 ) (1,203 ) (1,332 ) (4,700 )
Recoveries
606 446 394 1,446
Net (charge-offs) recoveries
(1,559 ) (757 ) (938 ) (3,254 )
Ending balance
$ 10,299 $ 6,386 $ 1,808 $ 18,493
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The following ~~tables present~~table presents the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the ~~dates indicated:~~date indicated prior to the adoption of ASU 2016-13:

September 30, 2020

December 31, 2020

Loans Individually

Allowance for Loans

Loans Collectively

Allowance for Loans

Loans Individually

Allowance for Loans

Loans Collectively

Allowance for Loans

Evaluated for

Individually

Evaluated for

Collectively

Evaluated for

Individually

Evaluated for

Collectively

(Amounts in thousands)

Impairment

Evaluated

Impairment

Evaluated

Impairment

Evaluated

Impairment

Evaluated

Commercial loans

Construction, development, and other land
$ 0 $ 0 $ 45,517 $ 630 $ 0 $ 0 $ 43,716 $ 528
Commercial and industrial
767 0 177,396 1,102 724 0 171,486 1,024
Multi-family residential
944 222 103,087 1,299 695 0 112,852 1,417
Single family non-owner occupied
1,054 0 183,088 1,974 1,041 0 183,283 1,861
Non-farm, non-residential
3,774 565 726,741 9,360 3,916 319 714,160 9,097
Agricultural
0 0 10,341 174 0 0 9,728 218
Farmland
0 0 19,940 225 0 0 17,540 196
Total commercial loans
6,539 787 1,266,110 14,764 6,376 319 1,252,765 14,341
Consumer real estate loans

Home equity lines
0 0 101,276 871 0 0 95,765 799
Single family owner occupied
2,259 239 634,021 7,815 1,673 108 647,040 7,849
Owner occupied construction
0 0 17,460 194 0 0 17,567 195
Total consumer real estate loans
2,259 239 752,757 8,880 1,673 108 760,372 8,843
Consumer and other loans

Consumer loans
0 0 117,965 2,607 0 0 119,770 2,570
Other
0 0 5,838 0 0 0 6,014 0
Total consumer and other loans
0 0 123,803 2,607 0 0 125,784 2,570
Total loans, excluding PCI loans
$ 8,798 $ 1,026 $ 2,142,670 $ 26,251 $ 8,049 $ 427 $ 2,138,921 $ 25,754

December 31, 2019

Loans Individually

Allowance for Loans

Loans Collectively

Allowance for Loans

Evaluated for

Individually

Evaluated for

Collectively

(Amounts in thousands)

Impairment

Evaluated

Impairment

Evaluated

Commercial loans

Construction, development, and other land
$ 0 $ 0 $ 30,334 $ 245
Commercial and industrial
0 0 95,659 699
Multi-family residential
944 0 98,201 969
Single family non-owner occupied
0 0 128,520 1,323
Non-farm, non-residential
2,575 292 591,520 6,361
Agricultural
0 0 9,458 145
Farmland
0 0 16,146 201
Total commercial loans
3,519 292 969,838 9,943
Consumer real estate loans

Home equity lines
0 0 91,999 673
Single family owner occupied
3,016 353 490,712 5,175
Owner occupied construction
0 0 16,144 124
Total consumer real estate loans
3,016 353 598,855 5,972
Consumer and other loans

Consumer loans
0 0 99,199 1,865
Other
0 0 4,742 0
Total consumer and other loans
0 0 103,941 1,865
Total loans, excluding PCI loans
$ 6,535 $ 645 $ 1,672,634 $ 17,780
28

~~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:~~date indicated prior to the adoption of ASU 2016-13:

September 30, 2020

December 31, 2019

December 31, 2020

Allowance for Loan

Allowance for Loan

Allowance for Loan

Recorded

Pools With

Recorded

Pools With

Recorded

Pools With

(Amounts in thousands)

Investment

Impairment

Investment

Impairment

Investment

Impairment

Commercial loans

Waccamaw commercial
$ 0 $ 0 $ 0 $ 0
Peoples commercial
0 0 4,371 0
Highlands:

1-4 family, senior-commercial
5,311 0 4,564 0
Construction & land development
1,295 0 1,956 0 $ 958 $ 0
Farmland and other agricultural
3,054 0 3,722 0 2,242 0
Multifamily
1,616 0 1,663 0 1,614 0
Commercial real estate
18,300 0 21,710 0 20,176 0
Commercial and industrial
1,551 0 2,829 0 814 0
Other
0 0 352 0
Total commercial loans
31,127 0 41,167 0 25,804 0
Consumer real estate loans

Waccamaw serviced home equity lines
0 0 2,121 0
Waccamaw residential
0 0 587 0
Highlands:
- - - -
1-4 family, junior and HELOCS
859 0 2,157 0 761 0
1-4 family, senior-consumer
10,768 0 13,174 0 12,494 0
Consumer
773 0 1,341 0 603 0
Peoples residential
0 0 700 0
Total consumer real estate loans
12,400 0 20,080 0 13,858 0
Total PCI loans
$ 43,527 $ 0 $ 61,247 $ 0 $ 39,662 $ 0

~~Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of~~ ~~September 30, 2020~~.
~~Note~~ 7~~. FDIC~~ ~~Indemnification Asset~~
~~In connection with the FDIC-assisted acquisition of Waccamaw Bank 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 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 September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

(Amounts in thousands)

Beginning balance
$ 1,943 $ 4,020 $ 2,883 $ 5,108
Reimbursable expenses to the FDIC
0 0 0 0
Net amortization
(383 ) (719 ) (1,352 ) (1,787 )
Payments to the FDIC
38 157 67 137
Ending balance
$ 1,598 $ 3,458 $ 1,598 $ 3,458

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Note 86. Deposits

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

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

(Amounts in thousands)

Noninterest-bearing demand deposits
$ 750,277 $ 627,868 $ 824,576 $ 772,795
Interest-bearing deposits:

Interest-bearing demand deposits
576,731 497,470 634,947 598,148
Money market accounts
241,843 235,712 285,157 258,864
Savings deposits
486,506 453,240 524,021 495,821
Certificates of deposit
307,267 372,821 279,832 293,848
Individual retirement accounts
129,615 142,801 124,567 126,771
Total interest-bearing deposits
1,741,962 1,702,044 1,848,524 1,773,452
Total deposits
$ 2,492,239 $ 2,329,912 $ 2,673,100 $ 2,546,247

Note 97. Leases

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

The Company’s current operating leases relate primarily to bank branches. The Company’s ROU asset was ~~$852~~$808 thousand as of ~~September 30, 2020~~March 31, 2021 compared to ~~$917~~$830 thousand as of December 31, ~~2019~~2020. The operating lease liability as of ~~September 30, 2020~~March 31, 2021 was ~~$920~~$861 compared to ~~$1.01 million~~$891 thousand as of December 31, ~~2019~~2020. The Company’s total operating leases have remaining terms of ~~2-9~~1-8 years; compared with ~~2-10~~1-9 years as of December 31, ~~2019~~2020. The ~~September 30, 2020~~March 31, 2021 weighted average discount rate of 3.22% did not change from December 31, ~~2019~~2020.

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

Year

September 30, 2020

March 31, 2021

(Amounts in thousands)

2021
$ 154
2022
140 $ 154
2023
119 122
2024
119 119
2025 and thereafter
490
2025
113
2026 and thereafter
437
Total lease payments
1,022 945
Less: Interest
(102 ) (84 )
Present value of lease liabilities
$ 920 $ 861

Year

December 31, 2019

December 31, 2020

(Amounts in thousands)

2020
$ 154
2021
154 $ 154
2022
131 131
2023
119 119
2024 and thereafter
580
2024
117
2025 and thereafter
463
Total lease payments
1,138 984
Less: Interest
(129 ) (93 )
Present value of lease liabilities
$ 1,009 $ 891

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Table of Contents

Note 108. Borrowings

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

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Weighted

Weighted

Weighted

Weighted

(Amounts in thousands)

Balance

Average Rate

Balance

Average Rate

Balance

Average Rate

Balance

Average Rate

Retail repurchase agreements
$ 956 0.14 % $ 1,601 0.14 % $ 1,519 0.07 % $ 964 0.32 %

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

As of ~~September 30, 2020~~March 31, 2021, the Company had no0 long-term borrowings.

Unused borrowing capacity with the FHLB totaled ~~$322.82~~$267.02 million, net of FHLB letters of credit of ~~$169.64~~$179.17 million, as of ~~September 30, 2020~~March 31, 2021. As of ~~September 30, 2020~~March 31, 2021, the Company pledged ~~$891.45~~$784.76 million in qualifying loans to secure the FHLB borrowing capacity.

The Company ~~maintains~~maintained 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~~matured in April 2021. There was 0 outstanding balance on the line as of ~~September 30, 2020~~March 31, 2021, or December 31, ~~2019~~2020.

Note 119. 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~~Certain of 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 ~~September 30, 2020~~March 31, 2021. . The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.
The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Notional or

Fair Value

Notional or

Fair Value

Notional or

Fair Value

Notional or

Fair Value

Contractual

Derivative

Derivative

Contractual

Derivative

Derivativ

Contractual

Derivative

Derivative

Contractual

Derivative

Derivative

(Amounts in thousands)

Amount

Assets

Liabilities

Amount

Assets

Liabilities

Amount

Assets

Liabilities

Amount

Assets

Liabilities

Derivatives designated as hedges

Interest rate swaps
$ 16,889 $ 0 $ 1,261 $ 17,432 $ 0 $ 510 $ 5,045 $ 0 $ 310 $ 4,772 $ 0 $ 465
Derivatives not designated as hedges
Interest rate swaps $ 8,310 0 $ 725 $ 11,928 0 $ 666
Total derivatives
$ 16,889 $ 0 $ 1,261 $ 17,432 $ 0 $ 510 $ 13,355 $ 0 $ 1,035 $ 16,700 $ 0 $ 1,131

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Amounts in thousands)

2020

2019

2020

2019

Income Statement Location

2021

2020

Income Statement Location
Derivatives designated as hedges

Interest rate swaps
$ 80 $ 1 $ 172 $ 1
Interest and fees on loans
$ 28 $ 12
Interest and fees on loans
Derivatives not designated as hedges

Interest rate swaps
68 0
Interest and fees on loans
Total derivative expense
$ 80 $ 1 $ 172 $ 1 $ 96 $ 12

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Table of Contents

Note 1210. Employee Benefit Plans

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2020

2019

Income Statement Location

2021

2020

Income Statement Location
(Amounts in thousands)

Service cost
$ 77 $ 80 $ 232 $ 240
Salaries and employee benefits
$ 88 $ 77
Salaries and employee benefits
Interest cost
88 101 266 303
Other expense
79 89
Other expense
Amortization of prior service cost
51 65 151 193
Other expense
31 50
Other expense
Amortization of losses
46 5 139 16
Other expense
66 46
Other expense
Net periodic cost
$ 262 $ 251 $ 788 $ 752 $ 264 $ 262

Note 1311. Earnings per Share

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

Three Months Ended

Nine Months Ended

Three Months Ended

September 30,

September 30,

March 31,

2020

2019

2020

2019

2021

2020

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

Net income
$ 8,266 $ 9,156 $ 24,376 $ 29,238 $ 14,602 $ 7,872

Weighted average common shares outstanding, basic
17,710,283 15,603,992 17,803,369 15,717,678 17,669,937 17,998,994
Dilutive effect of potential common shares

Stock options
16,163 52,360 23,711 55,898 24,956 36,199
Restricted stock
5,982 8,235 9,883 11,908 34,292 14,878
Total dilutive effect of potential common shares
22,145 60,595 33,594 67,806 59,248 51,077
Weighted average common shares outstanding, diluted
17,732,428 15,664,587 17,836,963 15,785,484 17,729,185 18,050,071

Basic earnings per common share
$ 0.47 $ 0.59 $ 1.37 $ 1.86 $ 0.83 $ 0.44
Diluted earnings per common share
0.47 0.58 1.37 1.85 0.82 0.44

Antidilutive potential common shares

Stock options
78,016 0 61,241 0 13,990 0
Restricted stock
26,012 0 27,874 0 7,809 32,137
Total potential antidilutive shares
104,028 0 89,115 0 21,799 32,137

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Note 1412. 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

Three Months Ended March 31, 2021

Unrealized Gains

Unrealized Gains

(Losses) on Available-

(Losses) on Available-

for-Sale Securities

Employee Benefit Plans

Total

for-Sale Securities

Employee Benefit Plans

Total

(Amounts in thousands)

Beginning balance
$ 1,464 $ (2,572 ) $ (1,108 ) $ 1,106 $ (3,029 ) $ (1,923 )
Other comprehensive income (loss) before reclassifications
(213 ) 1 (212 )
Other comprehensive loss before reclassifications
(646 ) (163 ) (809 )
Reclassified from AOCI
0 76 76 0 77 77
Other comprehensive (loss) income, net
(213 ) 77 (136 )
Other comprehensive loss income, net
(646 ) (86 ) (732 )
Ending balance
$ 1,251 $ (2,495 ) $ (1,244 ) $ 460 $ (3,115 ) $ (2,655 )

Three Months Ended September 30, 2019

Three Months Ended March 31, 2020

Unrealized Gains

Unrealized Gains

(Losses) on Available-

(Losses) on Available-

for-Sale Securities

Employee Benefit Plans

Total

for-Sale Securities

Employee Benefit Plans

Total

(Amounts in thousands)

Beginning balance
$ 973 $ (1,354 ) $ (381 ) $ 866 $ (2,372 ) $ (1,506 )
Other comprehensive income (loss) before reclassifications
23 (2 ) 21 947 (352 ) 595
Reclassified from AOCI
0 55 55 (304 ) 76 (228 )
Other comprehensive income, net
23 53 76 643 (276 ) 367
Ending balance
$ 996 $ (1,301 ) $ (305 ) $ 1,509 $ (2,648 ) $ (1,139 )

Nine Months Ended September 30, 2020

Unrealized Gains

(Losses) on Available-

for-Sale Securities

Employee Benefit Plans

Total

(Amounts in thousands)

Beginning balance
$ 866 $ (2,372 ) $ (1,506 )
Other comprehensive income (loss) before reclassifications
689 (352 ) 337
Reclassified from AOCI
(304 ) 229 (75 )
Other comprehensive income (loss), net
385 (123 ) 262
Ending balance
$ 1,251 $ (2,495 ) $ (1,244 )

Nine Months Ended September 30, 2019

Unrealized Gains

(Losses) on Available-

for-Sale Securities

Employee Benefit Plans

Total

(Amounts in thousands)

Beginning balance
$ (285 ) $ (1,144 ) $ (1,429 )
Other comprehensive income (loss)

before reclassifications
1,247 (322 ) 925
Reclassified from AOCI
34 165 199
Other comprehensive income (loss), net
1,281 (157 ) 1,124
Ending balance
$ 996 $ (1,301 ) $ (305 )
33

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

Three Months Ended

Nine Months Ended

Three Months Ended

September 30,

September 30,

Income Statement

March 31,

Income Statement

(Amounts in thousands)

2020

2019

2020

2019

Line Item Affected

2021

2020

Line Item Affected

Available-for-sale securities

Gain recognized
$ 0 $ 0 $ (385 ) $ 43
Net loss on sale of securities
$ 0 $ (385 )
Net loss on sale of securities

Reclassified out of AOCI, before tax
0 0 (385 ) 43
Income before income taxes
0 (385 )
Income before income taxes

Income tax expense
0 0 (81 ) 9
Income tax expense
0 (81 )
Income tax expense

Reclassified out of AOCI, net of tax
0 0 (304 ) 34
Net income
0 (304 )
Net income

Employee benefit plans

Amortization of prior service cost
$ 51 $ 65 $ 150 $ 193
(1)
$ 31 $ 50
Amortization of net actuarial benefit cost
46 5 140 16
(1)
66 46
Reclassified out of AOCI, before tax
97 70 290 209
Income before income taxes
97 96
Income before income taxes

Income tax expense
21 15 61 44
Income tax expense
20 20
Income tax expense

Reclassified out of AOCI, net of tax
76 55 229 165
Net income
77 76
Net income

Total reclassified out of AOCI, net of tax
$ 76 $ 55 $ (75 ) $ 199
Net income
$ 77 $ (228 )
Net income

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

Note 1513. Fair Value

Financial Instruments Measured at Fair Value

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

●
Level 1 – Observable, unadjusted quoted prices in active markets

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

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

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

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

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

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

September 30, 2020

March 31, 2021

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
$ 572 $ 0 $ 572 $ 0 $ 530 $ 0 $ 530 $ 0
Municipal securities
55,667 0 55,667 0 40,495 0 40,495 0
Mortgage-backed Agency securities
34,733 0 34,733 0 46,618 0 46,618 0
Total available-for-sale debt securities
90,972 0 90,972 0 87,643 0 87,643 0
Equity securities
55 55 0 0 55 0 55 0
Fair value loans
15,628 0 0 15,628 14,265 0 0 14,265
Deferred compensation assets
3,752 3,752 0 0 4,634 4,634 0 0
Deferred compensation liabilities
3,752 3,752 0 0 4,634 4,634 0 0
Derivative liabilities
1,261 0 1,261 0 1,035 0 1,035 0

December 31, 2019

December 31, 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
$ 5,034 $ 0 $ 5,034 $ 0 $ 551 $ 0 $ 551 $ 0
Municipal securities
86,878 0 86,878 0 44,459 0 44,459 0
Mortgage-backed Agency securities
77,662 0 77,662 0 38,348 0 38,348 0
Total available-for-sale debt securities
169,574 0 169,574 0 83,358 0 83,358 0
Equity securities
55 55 0 0 55 0 55 0
Fair value loans
16,922 0 0 16,922 17,831 0 0 17,831
Deferred compensation assets
3,990 3,990 0 0 4,181 4,181 0 0
Deferred compensation liabilities
3,990 3,990 0 0 4,181 4,181 0 0
Derivative liabilities
510 510 1,131 0 1,131 0

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Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. ~~Impaired~~Prior to the adoption of ASU 2016-13, impaired loans ~~are~~were recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third-party valuation within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

~~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:

September 30, 2020

March 31, 2021

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
$ 3,114 $ 0 $ 0 $ 3,114
Collateral dependent assets with specific reserves $ 3,296 $ 0 $ 0 $ 3,296
OREO
2,103 0 0 2,103 $ 1,740 $ 0 $ 0 $ 1,740

December 31, 2019

December 31, 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
$ 1,828 $ 0 $ 0 $ 1,828
Impaired loans, Pre-ASU 2016-13
$ 979 $ 0 $ 0 $ 979
OREO
3,969 0 0 3,969 2,083 0 0 2,083

36

~~Table of Contents~~
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~~(Weighted Average)

Technique

Input

~~September 30, 2020~~
~~December~~March 31, ~~2019~~2021

~~Impaired loans, non-covered~~Collateral dependent assets with specific reserves
Discounted appraisals(1)

Appraisal adjustments(2)
3%0% to ~~42% (25%)~~ ~~22% to 36% (26%~~53%(3%)
OREO
Discounted appraisals(1)

Appraisal adjustments(2)
0% to 77% ~~(24%)~~ ~~15% to 100% (8%~~(29%)

(1)
Fair value is generally based on appraisals of the underlying collateral.
(2)
Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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Table of Contents
Fair Value of Financial Instruments

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

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

FDIC Indemnification Asset. The FDIC indemnification asset 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 estimated at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.

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

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

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 16, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

37

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

September 30, 2020

March 31, 2021

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
$ 375,664 $ 375,664 $ 375,664 $ 0 $ 0 $ 628,745 $ 628,745 $ 628,745 $ 0 $ 0
Debt securities available for sale
90,972 90,972 0 90,972 0 87,643 87,643 0 87,643 0
Equity securities
55 55 55 0 0 55 55 0 55 0
Loans held for investment, net of allowance
2,167,718 2,123,823 0 0 2,123,823 2,146,640 2,095,680 0 0 2,095,680
FDIC indemnification asset
1,598 666 0 0 666 946 394 0 0 394
Interest receivable
9,151 9,151 0 9,151 0 8,724 8,724 0 8,724 0
Deferred compensation assets
3,752 3,752 3,752 0 0 4,634 4,634 4,634 0 0

Liabilities

Time deposits
436,882 440,283 0 440,283 0 404,399 404,939 0 404,939 0
Securities sold under agreements to repurchase
956 956 0 956 0 1,519 1,519 0 1,519 0
Interest payable
719 719 0 719 0 414 414 0 414 0
Derivative financial liabilities
1,261 1,261 0 1,261 0 1,035 1,035 0 1,035 0
Deferred compensation liabilities
3,752 3,752 3,752 0 0 4,634 4,634 4,634 0 0

December 31, 2019

December 31, 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
$ 217,009 $ 217,009 $ 217,009 $ 0 $ 0 $ 456,561 $ 456,561 $ 456,561 $ 0 $ 0
Debt securities available for sale
169,574 169,574 0 169,574 0 83,358 83,358 0 83,358 0
Equity securities
55 55 55 0 0 55 55 0 55 0
Loans held for sale
263 263 0 0 263 0 0 0 0 0
Loans held for investment, net of allowance
2,096,035 2,068,257 0 0 2,068,257 2,160,450 2,126,221 0 0 2,126,221
FDIC indemnification asset
2,883 1,201 0 0 1,201 1,223 509 0 0 509
Interest receivable
6,677 6,677 0 6,677 0 9,052 9,052 0 9,052 0
Deferred compensation assets
3,990 3,990 3,990 0 0 4,181 4,181 4,181 0 0

Liabilities

Time deposits
515,622 512,134 0 512,134 0 420,619 423,120 0 423,120 0
Securities sold under agreements to repurchase
1,601 1,601 0 1,601 0 964 964 0 964 0
Interest payable
472 472 0 472 0 582 582 0 582 0
Derivative liabilities
510 510 0 510 0 4,181 4,181 4,181 0 0
Deferred compensation liabilities
3,990 3,990 3,990 0 0 1,131 1,131 0 1,131 0

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Table of Contents

Note 1614. 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.

38

~~Table of Contents~~
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.

Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.

The following table presents the off-balance sheet financial instruments as of the dates indicated:

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

(Amounts in thousands)

Commitments to extend credit
$ 219,297 $ 228,716 $ 234,828 $ 229,408
Standby letters of credit and financial guarantees⁽¹⁾
173,925 167,612 182,259 179,022
Total off-balance sheet risk
$ 393,222 $ 396,328 $ 417,087 $ 408,430

Reserve for unfunded commitments
$ 66 $ 66 $ 465 $ 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~~2020 (the ~~“2019~~“2020 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

Executive Overview

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of ~~September 30, 2020,~~March 31, 2021, the Bank operated 5250 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 ~~September 30, 2020,~~March 31, 2021, full-time equivalent employees, calculated using the number of hours worked, totaled ~~630.~~621. 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.~~network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of ~~September 30, 2020,~~March 31, 2021, the Trust Division and FCWM managed and administered ~~$1.13~~$1.23 billion in combined assets under various fee-based arrangements as fiduciary or agent.

Recent ~~Events~~Events: COVID-19

~~In December 2019,~~The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a ~~novel strain~~broad range of ~~coronavirus (“COVID-19”) surfaced~~industries in ~~China,~~which the Company's customers operate and ~~quickly~~could impair their ability to fulfill their financial obligations to the Company. The spread ~~across most~~ of the ~~earth, including~~outbreak has caused significant disruptions in the ~~United States. In March 2020, President Trump declared a National Public Health Emergency. Government responses to the COVID-19 pandemic severely restricted the level of economic~~U.S. economy and has disrupted banking and other financial activity in the ~~Company’s 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~~areas in which the Company ~~operates, many~~operates.
Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. The goal of these actions has been to curb the ~~Company’s customers are non-essential businesses, or are employed by non-essential businesses,~~economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (PPP). In addition to the general impact of COVID-19, certain provisions of legislative and regulatory relief efforts have ~~been adversely affected by government shutdowns.~~had a material impact on the Company's operations and could continue to impact operations going forward.

The ~~Company’s business, financial condition,~~PPP loan program was extended and amended through additional legislation during 2020. The Consolidated Appropriations Act of 2021 was adopted in December, 2020, to provide additional COVID-19 relief and among other measures, extended weekly unemployment benefits, provided another round of economic stimulus payments to individuals and families, lengthened temporary suspensions and modifications of several bank-related provisions and provided more aid to small businesses. The 2021 Consolidated Appropriations Act reauthorized and appropriated up to $284.5 billion for the PPP for both first-time and second-time borrowers to receive loan disbursements for a period ending March 31, 2021, expanded the list of eligible PPP expenses and created a simplified loan forgiveness application for loans under $150 thousand.
During the first quarter of 2021, President Biden signed a number of executive orders relating to stimulus and relief measures. These orders include, among other things, (i) an extension, through March 31, 2021, of the moratorium on evictions and foreclosures on federally-backed mortgages, (ii) an extension, through September 30, 2021, of the deferral of federal student loan payments and interest and (iii) an extension, through June 30, 2021, of certain mortgage forbearance programs and guidelines.
On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals. Among other things, the ARP Act provides (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the Small Business Administration (“SBA”) to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and makes $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026, non-taxable income, and (vii) funding to support state and local governments; K-12 schools and higher education; the Centers for Disease Control; public transit; rental assistance; child care; and airline industry workers.
On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was enacted, extending the bankruptcy relief provisions enacted in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act of 2020 bill until March 27, 2022. These provisions provide financially distressed small businesses and individuals greater access to bankruptcy relief.
On March 30, 2021, the PPP Extension Act of 2021 was enacted, extending the Paycheck Protection Program from its previous expiration date of March 31, 2021 to June 30, 2021. Beginning June 1, 2021, the SBA may only process applications submitted prior to that date, and it may not accept any new loan applications. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.
Financial position 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, 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~~2020, COVID-19 had a material impact on our allowance for credit losses. While we did not experience any significant charge-offs related to ~~implement~~COVID-19, our allowance calculation and ~~exercise social distancing, on March 20, 2020,~~resulting provision for credit losses were significantly impacted by governmental reactions and forced shutdowns. On January 1, 2021, we adopted ASU 2016-13, ("CECL"), which had the ~~Company began limiting access to branch lobbies~~effect of increasing our allowance for credit losses by $13.11 million. In the first quarter of 2021, the economic forecasts improved significantly, resulting in a reversal of provision for credit losses of $4.00 million. However, should economic conditions or forecasts worsen, we could experience further increase in our required allowance for credit losses and ~~conducting most business through drive-through tellers and through electronic and online means. To support~~record additional credit loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the ~~health and well-being~~effects of employees, a significant amount of the Company's non-customer facing, operational workforce is currently working remotely, and the Company temporarily implemented pay differential for employees not working 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.
COVID-19 are prolonged.

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~~In order~~
The Company's fee income has been reduced due to ~~help our customers~~COVID-19. Consumer spending behavior has proven to be very conservative during the pandemic resulting in ~~these unprecedented times,~~a decrease in overdraft behavior that generates NSF and other fee income. Should the pandemic and the global response escalate further, it is possible that the Company ~~modified or deferred~~could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.
The Company's interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, on a total of 3,362 loans totaling $426.45 million in principal through September 30, 2020.  At September 30, 2020, loans currently in deferral amounted to $115.63 million. Included in the September 30, 2020, amounts are re-deferrals for approximately $69.32 million commercial loansinterest, and ~~approximately $5.09 million in consumer mortgage and installment loans. Deferred~~fees. While interest and fees ~~for these loans will~~ continue to ~~accrue. However,~~accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments ~~occur, accrued~~emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be ~~reversed, which would negatively impact~~reversed. In such a scenario, interest income in future ~~periods. The~~periods could be negatively impacted. As of March 31, 2021, the Company carried $3.40 million of accrued ~~interest~~income and fees on outstanding deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognized the breadth of the economic impact may affect its borrowers' ability to repay in future periods.
Capital and liquidity
As of March 31, 2021, the Company and Bank continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for ~~these loans total $1.10 million~~prompt corrective action. Management believes there have been no conditions or events that would change the Bank's classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of ~~September 30, 2020. To date,~~March 31, 2021. While we believe that we have sufficient capital, our reported and regulatory capital ratios could be adversely impacted by loan losses and other negative trends initiated by the pandemic. We rely on cash on hand as well as dividends from the Bank to pay dividends to our shareholders. If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay dividends to our shareholders.
We maintain access to multiple sources of liquidity. Wholesale funding markets remain open to us, however, short-term funding rates have been volatile throughout the pandemic. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. In addition, if an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Asset Valuation
Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgements will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
Our processes, controls and business continuity plan
The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics. Upon the pandemic declaration, the Company's Enterprise Risk Management team implemented its Board approved Business Continuity Plan. The Company appointed an internal pandemic preparedness task force comprised of the Company's management to address both operational and financial risks posed by COVID-19. Shortly after invoking the Plan, the Company ~~has~~deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company's preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations. At March 31, 2021, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations. We have not ~~experienced an increase~~incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in ~~borrowers drawing on lines~~future periods.
As of ~~credit. Management currently believes~~March 31, 2021, we do not anticipate significant challenges to our ability to maintain our systems and controls in light of the ~~hotel/motel and retail loan portfolios~~measures we have taken to ~~be at~~prevent the ~~greatest risk.~~
spread of COVID-19. 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 September 30, 2020, the Company processed 803 loans with original principal balances totaling $62.74 milliondoes not currently face any material resource constraint through the ~~SBA’s PPP.~~
~~Management~~implementation of our business continuity plans.
Lending operations and accommodations to borrowers
The CARES Act as amended included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the ~~Board~~earlier of ~~Directors are closely monitoring~~(i) December 31, 2021, or (ii) 60 days after the ~~impact~~end of the COVID-19 ~~pandemic on results~~national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of operations and financial condition. The Company recorded a provision for loan losses of $12.03 million for the first nine months of 2020 which is significantly higher than in the recent previous periods. Management expects the provisions for loan losses for periods ending after 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~~Company elected to adopt this provision of the ~~Highlands region in Virginia, North Carolina,~~CARES Act. Through March 31, 2021, we have modified a total of 3,812 commercial and ~~Tennessee. The total purchase price for the transaction was $86.65~~consumer loans totaling $466.59 million.
~~The Highlands transaction was accounted for using the acquisition method of accounting~~ Those modifications were generally short-term payment deferrals and ~~accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value~~are not considered TDRs based on the ~~acquisition date. Fair values are preliminary~~CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period has ended and ~~subject~~timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to ~~refinement up~~additional modifications, payment performance and current underwriting. As of March 31, 2021, current COVID-19 loan deferrals stood at $17.48 million. It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, that extended the ability to ~~a year after~~provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the ~~closing date~~volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the ~~acquisition.~~
amount of any future charge-offs on deferred loans is unknown.
Critical Accounting Estimates

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

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Table of Contents
Allowance for Credit Losses or "ACL"

The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 – Basis of Presentation - Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5 — Allowance for Credit Losses in this Quarterly Report on Form 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A. Periods prior to the January 1, 2021, adoption of ASU 2-16-13 follow prior accounting guidance for estimated loan losses and may not be comparable.
Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended ~~September 30, 2020,~~March 31, 2021, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our ~~2019~~2020 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our ~~2019~~2020 Form 10-K.

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~~Table of Contents~~
Performance Overview

Highlights of our results of operations for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, and financial condition as of ~~September 30, 2020,~~March 31, 2021, include the following:

●
~~Diluted earnings per share was $0.47~~Net income for the ~~third~~ quarter ~~and $1.37~~increased $6.73 million to $14.60 million compared to the same quarter of 2020. The large increase is primarily attributable to the reversal of $4.00 million in allowance for ~~the first nine months .~~credit losses due to improved economic forecasts from those seen at year-end 2020.

●
~~Current quarter earnings include~~On January 26, 2021, the Board of Directors approved a ~~loan loss provision of $4.70~~new plan to repurchase, on the open market at prevailing prices, up to 2.4 million an increase of $4.03 million over third quarter of 2019. The year to date loan loss provision was $12.03 million, an increase of $8.55 million from the prior year. The increase further recognizes the economic uncertaintyshares of the ~~COVID-19 pandemic.~~Company's common stock through January 26, 2024. During the quarter, the Company repurchased 187,700 common shares for $4.99 million.

●
~~Despite~~Diluted earnings per share increased $0.38 to $0.82 compared to the ~~significant increase in loan loss provision, return on average assets remained strong at 1.11% for the third~~same quarter ~~and 1.14% for the nine month period.~~of 2020.

●
Net interest margin decreased 46 basis points to 4.10% compared to the same quarter of 2019. Net interest margin decreased 30 basis points to 4.33% for the first nine months compared to the same period of 2019. Both decreases are reflective of the current historically low interest rate environment.

● ~~Service charges~~Return on ~~deposit accounts have~~average assets increased ~~since~~to 1.94% compared to 1.16% from the ~~second~~same quarter of 2020; return on average equity increased to 13.94% compared to 7.49% from the same quarter of 2020 as ~~pandemic shutdowns and stay-at-home orders were relaxed during the summer.~~well.
●
~~Total deposits have grown $162.33 million, or 6.97%, during 2020 with $122.41 million~~Net charge-offs for the first quarter of 2021 were $725 thousand and the ~~increase occurring in interest free categories.~~
● ~~Book value per common share~~allowance for credit losses remains very strong at ~~September 30, 2020, was $23.70, an increase~~1.61% of ~~$0.37 during the year.~~total loans.

●
AsBook value per common share at March 31, 2021, was $24.22, an increase of 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 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.$0.14 from year-end.

Results of Operations

Net Income

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

Three Months Ended

Nine Months Ended

Three Months Ended

(Amounts in thousands, except per

September 30,

Increase

September 30,

Increase

March 31,

Increase

share data)

2020

2019

(Decrease)

% Change

2020

2019

(Decrease)

% Change

2021

2020

(Decrease)

% Change

Net income
$ 8,266 $ 9,156 $ (890 ) -9.72 % $ 24,376 $ 29,238 $ (4,862 ) -16.63 % $ 14,602 $ 7,872 $ 6,730 85.49 %

Basic earnings per common share
0.47 0.59 (0.12 ) -20.34 % 1.37 1.86 (0.49 ) -26.34 % 0.83 0.44 0.39 88.64 %
Diluted earnings per common share
0.47 0.58 (0.11 ) -18.97 % 1.37 1.85 (0.48 ) -25.95 % 0.82 0.44 0.38 86.36 %

Return on average assets
1.11 % 1.65 % -0.54 % -32.73 % 1.14 % 1.76 % -0.62 % -35.23 % 1.94 % 1.16 % 0.78 % 67.24 %
Return on average common equity
7.83 % 10.80 % -2.97 % -27.50 % 7.76 % 11.70 % -3.94 % -33.68 % 13.94 % 7.49 % 6.45 % 86.11 %

Three-Month Comparison. Net income ~~decreased $890 thousand~~increased $6.73 million in the ~~third~~first quarter of ~~2020~~2021 largely due to a ~~$4.03~~$7.50 million ~~increase~~decrease in the provision for ~~loan~~credit losses as a result of ~~increasing the reserve~~recovering $4.00 million of credit loss provision to recognize the impact of ~~the coronavirus slowdown.~~significantly improving economic forecasts. Additional ~~decreases~~increases resulted from ~~increases in salaries and employee benefits of $1.15~~$1.89 million in ~~2020 reflective of the addition of Highlands and a one-time litigation settlement of $900 thousand included~~residual merger expenses that were recognized in the ~~third~~first quarter ~~results from 2019.~~of 2020. These ~~decreases~~increases were offset by ~~an increase~~a decreases of ~~$4.61~~$1.40 million in net interest income, ~~that is~~ reflective of the ~~addition of Highlands in 2020~~current historic low rate environment; and ~~$592~~$700 thousand in ~~merger expenses recognized in the third quarter of 2019 .~~
~~Nine-Month Comparison.~~ Net income decreased $4.86 million in the first nine months of 2020 due to a $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 $5.23 million which wasservice charges on deposits reflective of conservative spending behavior of customers during the addition of Highlands as well as expenses arising from the implementation of a pay differential related to COVID-19 which ended May 31, 2020. Also contributing to the decrease, were litigation settlements received of $4.60 million received in 2019. These decreases were offset by an increase of $13.46 million in net interest income that is reflective of the of Highlands acquisition.pandemic.

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Net Interest Income

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

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

Three Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

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⁾
$ 2,171,023 $ 27,331 5.01 % $ 1,706,936 $ 22,106 5.14 % $ 2,165,054 $ 26,582 4.98 % $ 2,081,132 $ 28,105 5.43 %
Securities available for sale
93,263 720 3.07 % 118,450 1,015 3.40 % 83,634 573 2.78 % 136,109 1,060 3.13 %
Interest-bearing deposits
352,144 90 0.10 % 122,891 680 2.20 % 468,067 118 0.10 % 163,483 535 1.31 %
Total earning assets
2,616,430 28,141 4.28 % 1,948,277 23,801 4.85 % 2,716,755 27,273 4.07 % 2,380,724 29,700 5.02 %
Other assets
344,285 250,142 331,483 353,647
Total assets
$ 2,960,715 $ 2,198,419 $ 3,048,238 $ 2,734,371

Liabilities and stockholders' equity

Interest-bearing deposits

Demand deposits
$ 580,165 $ 73 0.05 % $ 450,650 $ 78 0.07 % $ 613,003 $ 39 0.03 % $ 502,603 $ 90 0.07 %
Savings deposits
720,657 136 0.08 % 500,600 222 0.18 % 778,430 91 0.05 % 679,656 414 0.24 %
Time deposits
448,275 951 0.84 % 413,012 1,083 1.04 % 412,986 739 0.73 % 485,085 1,322 1.10 %
Total interest-bearing deposits
1,749,097 1,160 0.26 % 1,364,262 1,383 0.40 % 1,804,419 869 0.19 % 1,667,344 1,826 0.44 %
Borrowings

Retail repurchase agreements
969 1 0.14 % 2,107 1 0.17 % 1,234 - N/M 1,459 2 0.59 %
FHLB advances and other borrowings - - 134 1 N/M
Total borrowings
969 1 0.14 % 2,107 1 0.17 % 1,234 - N/M 1,593 3 1.70 %
Total interest-bearing liabilities
1,750,066 1,161 0.26 % 1,366,369 1,384 0.40 % 1,805,653 869 0.19 % 1,668,937 1,829 0.44 %
Noninterest-bearing demand deposits
754,147 466,253 777,876 600,636
Other liabilities
36,379 29,449 39,926 42,174
Total liabilities
2,540,592 1,862,071 2,623,455 2,311,747
Stockholders' equity
420,123 336,348 424,783 422,624
Total liabilities and stockholders' equity
$ 2,960,715 $ 2,198,419 $ 3,048,238 $ 2,734,371
Net interest income, FTE⁽¹⁾
$ 26,980 $ 22,417 $ 26,404 $ 27,871
Net interest rate spread
4.02 % 4.44 % 3.88 % 4.58 %
Net interest margin, FTE⁽¹⁾
4.10 % 4.56 % 3.94 % 4.71 %

(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 ~~$1.77~~$1.19 million and ~~$566 thousand~~$1.95 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

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~~Table of Contents~~
~~AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)~~

Nine Months Ended September 30,

2020

2019

Average

Average Yield/

Average

Average Yield/

(Amounts in thousands)

Balance

Interest⁽¹⁾

Rate⁽¹⁾

Balance

Interest⁽¹⁾

Rate⁽¹⁾

Assets

Earning assets

Loans⁽²⁾⁽³⁾
$ 2,127,383 $ 82,476 5.18 % $ 1,730,940 $ 67,114 5.18 %
Securities available for sale
110,852 2,619 3.16 % 130,029 3,314 3.41 %
Securities held to maturity
- - - 4,071 45 1.48 %
Interest-bearing deposits
270,106 706 0.34 % 101,364 1,784 2.34 %
Total earning assets
2,508,341 85,801 4.57 % 1,966,404 72,257 4.91 %
Other assets
351,589 248,801
Total assets
$ 2,859,930 $ 2,215,205

Liabilities and stockholders' equity

Interest-bearing deposits

Demand deposits
$ 543,539 $ 261 0.06 % $ 450,653 $ 192 0.06 %
Savings deposits
702,604 790 0.15 % 502,241 589 0.16 %
Time deposits
466,126 3,380 0.97 % 426,885 3,299 1.03 %
Total interest-bearing deposits
1,712,269 4,431 0.35 % 1,379,779 4,080 0.40 %
Borrowings

Retail repurchase agreements
1,218 3 0.32 % 2,792 3 0.13 %
Wholesale repurchase agreements
- - - 5,037 119 3.17 %
FHLB advances and other borrowings
48 1 2.23 % - - -
Total borrowings
1,266 4 0.42 % 7,829 122 2.08 %
Total interest-bearing liabilities
1,713,535 4,435 0.35 % 1,387,608 4,202 0.40 %
Noninterest-bearing demand deposits
688,891 464,958
Other liabilities
38,001 28,651
Total liabilities
2,440,427 1,881,217
Stockholders' equity
419,503 333,988
Total liabilities and stockholders' equity
$ 2,859,930 $ 2,215,205
Net interest income, FTE⁽¹⁾
$ 81,366 $ 68,055
Net interest rate spread
4.22 % 4.51 %
Net interest margin, FTE⁽¹⁾
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 $5.22 million and $2.72 million for the nine months ended September 30, 2020 and 2019, respectively.~~
44

Table of Contents

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

Three Months Ended

Nine Months Ended

Three Months Ended

September 30, 2020 Compared to 2019

September 30, 2020 Compared to 2019

March 31, 2021 Compared to 2020

Dollar Increase (Decrease) due to

Dollar Increase (Decrease) due to

Dollar Increase (Decrease) due to

Rate/

Rate/

Rate/

(Amounts in thousands)

Volume

Rate

Volume

Total

Volume

Rate

Volume

Total

Volume

Rate

Volume

Total

Interest earned on⁽¹⁾

Loans
$ 5,994 $ (557 ) $ (212 ) $ 5,225 $ 15,371 $ (23 ) $ 14 $ 15,362 $ 1,124 $ (2,321 ) $ (326 ) $ (1,523 )
Securities available-for-sale
(215 ) (98 ) 18 (295 ) (489 ) (82 ) (124 ) (695 ) (405 ) (119 ) 37 (487 )
Securities held-to-maturity
- - - - (45 ) - - (45 )
Interest-bearing deposits with other banks
1,265 (647 ) (1,208 ) (590 ) 2,957 (511 ) (3,524 ) (1,078 ) 989 (489 ) (917 ) (417 )
Total interest earning assets
7,044 (1,302 ) (1,402 ) 4,340 17,794 (616 ) (3,634 ) 13,544 1,708 (2,929 ) (1,206 ) (2,427 )

Interest paid on

Demand deposits
22 (21 ) (6 ) (5 ) 40 8 21 69 20 (57 ) (14 ) (51 )
Savings deposits
97 (127 ) (56 ) (86 ) 235 (8 ) (26 ) 201 60 (331 ) (52 ) (323 )
Time deposits
92 (204 ) (20 ) (132 ) 303 (69 ) (153 ) 81 (195 ) (443 ) 55 (583 )
Retail repurchase agreements
- - - - (2 ) 1 1 - - (2 ) - (2 )
Wholesale repurchase agreements - - - - (119 ) - - (119 )
FHLB advances and other borrowings
- - - - - - 1 1 - - (1 ) (1 )
Total interest-bearing liabilities
211 (352 ) (82 ) (223 ) 457 (68 ) (156 ) 233 (115 ) (833 ) (12 ) (960 )

Change in net interest income⁽¹⁾
$ 6,833 $ (950 ) $ (1,320 ) $ 4,563 $ 17,337 $ (548 ) $ (3,478 ) $ 13,311 $ 1,823 $ (2,096 ) $ (1,194 ) $ (1,467 )

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

Three-Month Comparison. Net interest income comprised ~~77.84%~~77.64% of total net interest and noninterest income in the ~~third~~first quarter of ~~2020~~2021 compared to ~~74.43%~~78.57% in the same quarter of ~~2019.~~2020. Net interest income on a GAAP basis ~~increased $4.61~~decreased $1.40 million, or ~~20.76%~~5.06%, compared to ~~an increase~~a decrease of ~~$4.56~~$1.47 million, or ~~20.36%~~5.26%, on a FTE basis. The net interest margin on a FTE basis decreased 4677 basis points and the net interest spread on a FTE basis decreased 4270 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 ~~$668.15~~$336.03 million, or ~~34.29%~~14.11%, primarily due to an increase in ~~average loans as well as~~interest-bearing deposits and an increase in average loans. Average interest-bearing ~~deposits.~~deposits increased $304.58 million or $186.31%. This increase is primarily due to unprecedented levels of federal government stimulus during the pandemic. Average loans increased ~~$464.09~~$83.92 million, ~~which~~or 4.03%. These increases were offset by a decrease in securities available-for-sale of $52.48 million, or 38.55%. The decrease was primarily ~~due~~attributable to the ~~addition~~sale of ~~Highlands.~~the Highlands portfolio in the first quarter of 2020. The yield on earning assets decreased 5795 basis points or ~~11.75%~~18.92%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to ~~86.73%~~83.84% from ~~93.25%~~91.76% in the same quarter of ~~2019.~~2020. Non-cash accretion income ~~increased $1.20 million,~~decreased $767 thousand, or ~~211.84%, due to the addition of loans from the Highlands acquisition.~~39.25%.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased ~~$383.70~~$136.72 million, or ~~28.08%~~8.19%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 1425 basis points. Average interest-bearing deposits increased ~~$384.84~~$137.08 million, or ~~28.21%~~8.22%, which was driven by unprecedented levels of federal government stimulus during the ~~December 31, 2019 Highlands acquisition with increases in average~~pandemic. Interest-bearing demand deposits increased $110.40 million, or 21.97%, and savings deposits ~~of $220.06~~increased $98.77 million, or ~~43.96%, interest-bearing demand of $129.52 million, or 28.74%, and~~14.53%. These increases were offset by a decrease in time deposits of ~~$35.26~~$72.10 million, or ~~8.54%~~
~~Nine-Month Comparison~~14.86%. Net interest income comprised 78.53% of total net interest and noninterest income for the first nine months of 2020 compared to 73.45% in the same period of 2019. Net interest income on a GAAP basis increased $13.46 million, or 19.97%, compared to an increase of $13.31 million, or 19.56%, on a FTE basis. The net interest margin on a FTE basis decreased 30 basis points and the net interest spread on a FTE basis decreased 29 basis 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 nine months.
Average earning assets increased $541.94 million, or 27.56%, primarily due to an increase in loans and overnight funds sold. The yield on earning assets decreased 34 basis points as the yields in interest-bearing deposits and the available-for-sale investment portfolio decreased. Average loans increased $396.44 million, 22.90%, and the average loan to deposit ratio decreased to 88.60% from 93.83% in the same period of 2019. Non-cash accretion income increased $2.50 million, or 91.98%, due to the addition of loans from the Highlands acquisition.
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~~Table of Contents~~
Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $325.93 million, or 23.49%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 5 basis points or 12.50%. Average borrowings decreased $6.56 million, or 83.83%, largely due to a decrease in average wholesale repurchase agreements of $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 $332.49 million, or 24.10%, which was driven by the December 2019 acquisition of Highlands, resulting in increases of $200.36 million in savings, $92.89 million in interest-bearing demand, and $39.24 million in time deposits.

Provision for ~~Loan~~Credit Losses

Three-Month Comparison. The provision charged to operations ~~increased $4.03~~decreased $7.50 million, or ~~596.74%~~214.31%, ~~to $4.70 million~~ in the ~~third~~first quarter of ~~2020~~2021 compared to the same quarter of ~~2019.~~2020. The ~~increase~~decrease in the provision was primarily due to ~~the impact of the coronavirus slowdown.~~significantly improved economic forecasts. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.

~~Nine-Month Comparison~~. The provision charged to operations increased $8.55 million, or 245.80%, to $12.03 million for the first 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 $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

Nine Months Ended

Three Months Ended

September 30,

Increase
%
September 30,

Increase
%
March 31,

Increase

%

2020

2019

(Decrease)

Change

2020

2019

(Decrease)

Change

2021

2020

(Decrease)

Change

(Amounts in thousands)

Wealth management
$ 909 $ 952 $ (43 ) -4.52 % $ 2,607 $ 2,581 $ 26 1.01 % $ 881 $ 844 $ 37 4.38 %
Service charges on deposits
3,250 3,785 (535 ) -14.13 % 9,541 10,892 (1,351 ) -12.40 % 3,031 3,731 (700 ) -18.76 %
Other service charges and fees
2,748 2,007 741 36.92 % 7,596 6,185 1,411 22.81 % 3,022 2,231 791 35.45 %
Net gain on sale of securities
- - - - 385 (43 ) 428 -995.35 % - 385 (385 ) -100.00 %
Net FDIC indemnification asset amortization
(383 ) (719 ) 336 -46.73 % (1,352 ) (1,787 ) 435 -24.34 % (280 ) (486 ) 206 -42.39 %
Other income/litigation settlements
- 900 (900 ) -100.00 % - 4,600 (4,600 ) -100.00 %
Other operating income
1,114 709 405 57.12 % 3,323 1,935 1,388 71.73 % 915 844 71 8.41 %
Total noninterest income
$ 7,638 $ 7,634 $ 4 0.05 % $ 22,100 $ 24,363 $ (2,263 ) -9.29 % $ 7,569 $ 7,549 $ 20 0.26 %

Three-Month Comparison. Noninterest income comprised ~~22.16%~~22.36% of total net interest and noninterest income in the ~~third~~first quarter of ~~2020~~2021 compared to ~~25.57%~~21.43% in the same quarter of ~~2019.~~2020. Noninterest income increased $4$20 thousand, or ~~0.05%~~0.26%. The increase was primarily due to ~~increases~~an increase in ~~both~~ net interchange income of $822 thousand included in other service charges and ~~other operating income for~~fees and a ~~combined total of $1.15 million. A decrease~~reduction in ~~the amortization of the~~net FDIC indemnification asset amortization of ~~$336 thousand contributed to the increase in noninterest income as well.~~$206 thousand. These increases were offset by ~~litigation settlements received in the third quarter of 2019 of $900 thousand as well as~~ a decrease in service charges on deposits of ~~$535~~$700 thousand ~~as a result of~~resulting from pandemic ~~shutdowns.~~
~~Nine-Month Comparison~~~~. Noninterest income comprised 21.47% of total net interest~~shutdowns throughout 2020 and ~~noninterest income for~~ the first ~~nine months~~quarter of ~~2020 compared to 26.55%~~2021 and a gain on the sale of securities of $385 thousand in the ~~same period~~first quarter of 2019. Noninterest income decreased $2.26 million, or 9.29%, primarily due to $4.60 million received from litigation settlements in 2019. In addition, service charges on deposits decreased $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 service charges and fees and other operating income. Other service charges and fees increased $1.41 million, or 22.81%, primarily due to an increase in net interchange income. Other Operating income increased $1.39 million or 71.73% and was primarily driven by third party incentives associated with debit cards and demand deposit accounts. 2020.

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Noninterest Expense

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

Three Months Ended

Nine Months Ended

September 30,

Increase
%
September 30,

Increase
%

2020

2019

(Decrease)

Change

2020

2019

(Decrease)

Change

(Amounts in thousands)

Salaries and employee benefits
$ 10,485 $ 9,334 $ 1,151 12.33 % $ 32,886 $ 27,653 $ 5,233 18.92 %
Occupancy expense
1,228 1,042 186 17.85 % 3,818 3,277 541 16.51 %
Furniture and equipment expense
1,412 1,183 229 19.36 % 4,112 3,278 834 25.44 %
Service fees
1,581 1,466 115 7.84 % 4,433 3,727 706 18.94 %
Advertising and public relations
430 795 (365 ) -45.91 % 1,417 1,832 (415 ) -22.65 %
Professional fees
408 548 (140 ) -25.55 % 948 1,290 (342 ) -26.51 %
Amortization of intangibles
365 251 114 45.42 % 1,086 746 340 45.58 %
FDIC premiums and assessments
191 - 191 - 224 318 (94 ) -29.56 %
Merger expense
- 592 (592 ) -100.00 % 1,893 592 1,301 219.76 %
Other operating expense
3,071 2,233 838 37.53 % 8,931 8,167 764 9.35 %
Total noninterest expense
$ 19,171 $ 17,444 $ 1,727 9.90 % $ 59,748 $ 50,880 $ 8,868 17.43 %

Three Months Ended

March 31,

Increase

%

2021

2020

(Decrease)

Change

(Amounts in thousands)

Salaries and employee benefits
$ 10,884 $ 11,386 $ (502 ) -4.41 %
Occupancy expense
1,275 1,315 (40 ) -3.04 %
Furniture and equipment expense
1,367 1,384 (17 ) -1.23 %
Service fees
1,335 1,523 (188 ) -12.34 %
Advertising and public relations
335 512 (177 ) -34.57 %
Professional fees
466 233 233 100.00 %
Amortization of intangibles
357 361 (4 ) -1.11 %
FDIC premiums and assessments
199 - 199 N/M
Merger expense
- 1,893 (1,893 ) -100.00 %
Other operating expense
2,602 3,057 (455 ) -14.88 %
Total noninterest expense
$ 18,820 $ 21,664 $ (2,844 ) -13.13 %

Three-Month Comparison. Noninterest expense ~~increased $1.73~~decreased $2.84 million, or ~~9.90%~~13.13%, in the ~~third~~first quarter of ~~2020~~2021 compared to the same quarter of ~~2019.~~2020. The ~~increase~~decrease was largely due to an increase in salaries and benefits of $1.15 million primarily attributable to the addition of Highlands 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 the addition of branch locations acquired in the Highlands transaction. Increases in the third quarter of 2020 were offset primarily by merger expenses of $592 thousand that were incurred in the third quarter of 2019.
~~Nine-Month Comparison~~. Noninterest expense increased $8.87 million, or 17.43%, in the first nine months of 2020 compared to the same period of 2019. The increase was primarily due to an increase in salaries and benefits of $5.23 million, or 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~~recognized in the first quarter of ~~2020 related~~2020. In addition, salaries and benefits decreased $502 thousand, or 4.41%, primarily due to ~~the Highlands acquisition. Occupancy and furniture and equipment~~branch closures. Other operating expense ~~increased a combined total of $1.38 million~~decreased $455 thousand, or 14.88% and was primarily driven by ~~the addition of branch locations acquired~~decreases in ~~the Highlands transaction.~~expenses related to credit impaired loans.

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 $248 thousand,~~increased $2.24 million, or ~~9.61%~~101.82%, primarily due to the ~~decrease~~increase in pre-tax earnings. The effective tax rate increased to ~~22.00%~~23.28% in the ~~third~~first quarter of ~~2020~~2021 from ~~21.98%~~21.80% in the same quarter of ~~2019.~~
~~Nine-Month Comparison~~~~. Income tax expense decreased $1.36 million, or 16.71%, and the effective tax rate decreased to 21.80% in the third quarter of 2020 from 21.82% in the same quarter of 2019.~~2020.

Non-GAAP Financial Measures

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2020

2019

2021

2020

(Amounts in thousands)

Net interest income, GAAP
$ 26,834 $ 22,221 $ 80,855 $ 67,396 $ 26,282 $ 27,682
FTE adjustment(1)
146 196 511 659
FTE adjustment⁽¹⁾
122 189
Net interest income, FTE
26,980 22,417 81,366 68,055 26,404 27,871

Net interest margin, GAAP
4.08 % 4.53 % 4.30 % 4.58 % 3.92 % 4.68 %
FTE adjustment(1)
0.02 % 0.03 % 0.03 % 0.05 %
FTE adjustment⁽¹⁾
0.02 % 0.03 %
Net interest margin, FTE
4.10 % 4.56 % 4.33 % 4.63 % 3.94 % 4.71 %
(1) FTE basis of 21%.

Financial Condition

Total assets as of ~~September 30, 2020,~~March 31, 2021, increased ~~$149.08~~$128.93 million, or ~~5.33%~~4.28% from December 31, ~~2019.~~2020. The increase in assets was primarily driven by a increase in overnight funds of ~~$175.36~~$174.73 million, or ~~118.48%~~44.15%. In addition, total liabilities as of ~~September 30, 2020,~~March 31, 2021, increased ~~$157.98~~$129.66 million, or ~~6.67%~~5.02% from December 31, ~~2019.~~2020. The increase in liabilities was primarily the result of an increase in total deposits of ~~$162.33~~$126.85 million, or ~~6.97%~~4.98%.

Investment Securities

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

Available-for-sale debt securities as of ~~September 30, 2020,~~March 31, 2021, decreased ~~$78.60~~$4.29 million, or ~~46.35%~~5.14%, compared to December 31, ~~2019. The decrease was primarily due to the sale of $51.03 million in securities in the first quarter.~~2020. The market value of debt securities available for sale as a percentage of amortized cost was ~~101.77.~~100.67.% as of ~~September 30, 2020,~~March 31, 2021, compared to ~~100.65%~~101.71% as of December 31, ~~2019.~~2020.

~~Investment~~Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are ~~reviewed~~issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly ~~for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings~~to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for ~~the three~~sale in an unrealized loss position as of March 31, 2021 continue to perform as scheduled and ~~nine months ended 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.~~we do not believe that a provision for credit losses is necessary.
Loans Held for Investment

Loans held for investment, ~~our~~which generates the largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. 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 ~~September 30, 2020, increased $80.54~~March 31, 2021, decreased $39.99 million, or ~~3.81%~~1.83%, compared to December 31, ~~2019.~~2020. Covered loans decreased ~~$2.12 million,~~$639 thousand, or ~~16.46%~~6.60%, as the covered Waccamaw portfolio continues to pay down. Covered loans were $9.04 million, $9.68 million, and $12.12 million at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. For additional information, see Note 4,3, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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

September 30, 2020

December 31, 2019

September 30, 2019

March 31, 2021

December 31, 2020

March 31, 2020

(Amounts in thousands)

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Non-covered loans held for investment

Loans held for investment

Commercial loans

Construction, development, and other land
$ 46,785 2.13 % $ 48,659 2.30 % $ 61,350 3.62 % $ 45,328 9.00 % $ 44,674 2.04 % $ 53,348 2.54 %
Commercial and industrial
179,714 8.19 % 142,962 6.76 % 93,627 5.53 % 162,227 7.56 % 173,024 7.91 % 129,728 6.19 %
Multi-family residential
105,647 4.81 % 121,840 5.76 % 96,274 5.68 % 105,592 4.92 % 115,161 5.27 % 110,202 5.26 %
Single family non-owner occupied
189,265 8.62 % 163,181 7.72 % 135,298 7.99 % 187,896 8.75 % 187,783 8.59 % 187,965 8.96 %
Non-farm, non-residential
748,815 34.11 % 727,261 34.39 % 584,897 34.52 % 718,830 33.49 % 734,793 33.60 % 726,666 34.66 %
Agricultural
10,362 0.47 % 11,756 0.56 % 9,429 0.56 % 9,723 0.45 % 9,749 0.45 % 11,303 0.54 %
Farmland
22,973 1.05 % 23,155 1.10 % 16,728 0.99 % 19,014 0.89 % 19,761 0.90 % 26,045 1.24 %
Total commercial loans
1,303,561 59.38 % 1,238,814 58.59 % 997,603 58.89 % 1,248,610 58.17 % 1,284,945 58.76 % 1,245,257 59.40 %
Consumer real estate loans

Home equity lines
94,056 4.29 % 110,078 5.21 % 86,349 5.10 % 92,095 4.29 % 96,526 4.41 % 114,690 5.46 %
Single family owner occupied
644,598 29.37 % 620,697 29.35 % 484,567 28.60 % 665,128 30.98 % 661,054 30.24 % 606,132 28.90 %
Owner occupied construction
17,460 0.79 % 17,241 0.82 % 14,872 0.87 % 18,376 0.86 % 17,720 0.81 % 13,946 0.65 %
Total consumer real estate loans
756,114 34.45 % 748,016 35.38 % 585,788 34.57 % 775,599 36.13 % 775,300 35.46 % 734,768 35.02 %
Consumer and other loans

Consumer loans
118,738 5.41 % 110,027 5.20 % 92,027 5.43 % 117,904 5.49 % 120,373 5.50 % 112,127 5.35 %
Other
5,838 0.27 % 4,742 0.22 % 4,540 0.27 % 4,527 0.21 % 6,014 0.28 % 4,573 0.22 %
Total consumer and other loans
124,576 5.68 % 114,769 5.42 % 96,567 5.70 % 122,431 5.70 % 126,387 5.78 % 116,700 5.57 %
Total non-covered loans
2,184,251 99.51 % 2,101,599 99.39 % 1,679,958 99.15 %
Total covered loans
10,744 0.49 % 12,861 0.61 % 14,158 0.84 %
Total loans held for investment, net of unearned income
2,194,995 100.00 % 2,114,460 100.00 % 1,694,116 99.99 % 2,146,640 100.00 % 2,186,632 100.00 % 2,096,725 100.00 %
Less: allowance for loan losses
27,277 18,425 18,493
Less: allowance for credit losses
34,563 26,182 21,137
Total loans held for investment, net of unearned income and allowance
$ 2,167,718 $ 2,096,035 $ 1,675,623 $ 2,112,077 $ 2,160,450 $ 2,075,588

Loans held for sale
$ - $ 263 $ -

~~Commercial and industrial loan balances grew significantly~~Total loans decreased $39.99 million compared to December 31, ~~2019.~~2020. The decrease was primarily attributable to a decrease in the total commercial loan category of $36.33 million; comprised of decreases of $15.96 in commercial real estate, $10.80 in commercial and industrial, and $9.57 million in the multi-family. During the second quarter of 2020, we began participating as a Small Business Administration ~~(“SBA”)~~ Paycheck Protection Program ~~(“PPP”)~~ lender. The decrease in commercial loans from December 2020 to March 2021 is primarily attributable to $28.79 million received from the SBA for debt forgiveness. At ~~September 30, 2020,~~March 31, 2021, the PPP loans had a current balance of ~~$61.00~~$50.75 million, and were included in commercial and industrial loan balances. ~~Deferred~~Remaining deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, ~~which~~ totaled ~~$2.30~~$3.27 million at ~~September 30, 2020,~~March 31, 2021, were also recorded. During the ~~third~~first quarter of ~~2020,~~2021, we recorded amortization of net deferred loan origination fees of ~~$286~~$922 thousand on PPP ~~loans, while year to date we recorded amortization of $479 thousand.~~loans. 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.

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

September 30, 2020

December 31, 2019

September 30, 2019

(Amounts in thousands)

Amount

Percent

Amount

Percent

Amount

Percent

Commercial loans

Construction, development, and other land
$ 27 0.25 % $ 28 0.22 % $ 30 0.21 %
Single family non-owner occupied
188 1.75 % 199 1.55 % 216 1.53 %
Non-farm, non-residential
- 0.00 % 3 0.02 % 4 0.03 %
Total commercial loans
215 2.00 % 230 1.79 % 250 1.77 %
Consumer real estate loans

Home equity lines
8,079 75.20 % 9,853 76.61 % 11,031 77.91 %
Single family owner occupied
2,450 22.80 % 2,778 21.60 % 2,877 20.32 %
Total consumer real estate loans
10,529 98.00 % 12,631 98.21 % 13,908 98.23 %
Total covered loans
$ 10,744 100.00 % $ 12,861 100.00 % $ 14,158 100.00 %
Commercial Loans Modified Under CARES Act

As of March 31, 2021, total COVID-19 loan deferrals stood at $17.48 million; down significantly from our peak of $436.11 million at June 30, 2020. The ~~following table details the balance~~March 31, 2021, total included $14.55 million in commercial loan deferrals. Commercial loan COVID-19 deferrals continue to decrease from our peak of ~~commercial loans modified for short-term payment deferral under provisions~~$340.00 million at June 30, 2020 and year-end 2020 of ~~the CARES Act as of the dates indicated.~~$26.54 million.
September 30, 2020 June 30, 2020

Percent

Percent

(unaudited, in thousands)

Balance

Modified

Balance

Modified

Construction, development, and other land
$ 3,753 8.88 % $ 14,377 27.33 %
Commercial and industrial
6,700 3.61 % 25,584 13.88 %
Multi-family residential
5,919 5.61 % 22,021 20.82 %
Single family non-owner occupied
7,049 3.65 % 39,135 20.75 %
Commercial Real Estate - Hotel/Motel
48,225 46.69 % 92,940 89.75 %
Commercial Real Estate - Retail Strip Centers
4,432 6.45 % 19,740 38.17 %
Commercial Real Estate - Other
22,912 3.92 % 116,871 20.58 %
Agricultural
1,322 12.93 % 3,464 33.29 %
Farmland
2,223 9.56 % 5,865 24.79 %
Total commercial modifications
$ 102,535 7.78 % $ 339,997 26.39 %
50

~~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~~Prior to the adoption of ASU 2016-13 ("CECL"), loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5,4, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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

September 30, 2020

December 31, 2019

September 30, 2019

March 31, 2021

December 31, 2020

March 31, 2020

(Amounts in thousands)

Non-covered nonperforming

Nonaccrual loans
$ 24,423 $ 16,113 $ 16,701
Accruing loans past due 90 days or more
43 144 107
TDRs(1)
456 720 668
Total nonperforming loans
24,922 16,977 17,476
Non-covered OREO
2,103 3,969 2,528
Total non-covered nonperforming assets
$ 27,025 $ 20,946 $ 20,004

Covered nonperforming

Nonaccrual loans
$ 333 $ 244 $ 243
Total nonperforming loans
333 244 243
Covered OREO
- - -
Total covered nonperforming assets
$ 333 $ 244 $ 243

Total nonperforming

Nonperforming

Nonaccrual loans
$ 24,756 $ 16,357 $ 16,944 $ 26,106 $ 22,003 $ 20,408
Accruing loans past due 90 days or more
43 144 107 171 295 329
TDRs(1)
456 720 668 308 187 623
Total nonperforming loans
25,255 17,221 17,719 26,585 22,485 21,360
OREO
2,103 3,969 2,528 1,740 2,083 2,502
Total nonperforming assets
$ 27,358 $ 21,190 $ 20,247 $ 28,325 $ 24,568 $ 23,862

Additional Information

Performing TDRs(2)
$ 10,480 $ 5,855 $ 5,635
Total Accruing TDRs(3)
10,936 6,575 6,303
Total Accruing TDRs(2)
9,027 10,248 9,052

Non-covered ratios

Nonperforming loans to total loans
1.14 % 0.81 % 1.04 %
Nonperforming assets to total assets
0.92 % 0.75 % 0.91 %
Non-PCI allowance to nonperforming loans
109.45 % 108.53 % 105.82 %
Non-PCI allowance to total loans
1.25 % 0.88 % 1.10 %

Total ratios

Asset Quality Ratios:

Nonperforming loans to total loans
1.15 % 0.81 % 1.05 % 1.24 % 1.03 % 1.02 %
Nonperforming assets to total assets
0.93 % 0.76 % 0.92 % 0.90 % 0.82 % 0.87 %
Allowance for loan losses to nonperforming loans
108.01 % 106.99 % 104.37 % 130.01 % 116.44 % 98.96 %
Allowance for loan losses to total loans
1.24 % 0.87 % 1.09 % 1.61 % 1.20 % 1.01 %

(1)
TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of ~~$1.57~~$2.09 million, ~~$95 thousand, and $329 thousand for the periods ended September 30, 2020, December 31, 2019, and September 30, 2019, respectively.~~
~~(2)~~
~~TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $474 thousand, $2.25~~$1.18 million, and ~~$2.19~~$2.31 million for the periods ended ~~September 30, 2020,~~March 31, 2021, December 31, ~~2019,~~2020, and ~~September 30, 2019,~~March 31, 2020, respectively. They are included in nonaccrual loans.
~~(3)~~(2)
Total accruing TDRs exclude nonaccrual TDRs of ~~$2.04~~$3.48 million, ~~$2.34~~$1.81 million, and ~~$2.52~~$2.62 million for the periods ended ~~September 30, 2020,~~March 31, 2021, December 31, ~~2019,~~2020, and ~~September 30, 2019,~~March 31, 2020, respectively. They are included in nonaccrual loans.

~~Non-covered nonperforming~~Nonperforming assets as of ~~September 30, 2020,~~March 31, 2021, increased ~~$6.08~~$3.70 million, or ~~29.02%~~15.22%, from December 31, ~~2019,~~2020, primarily due to an increase in ~~non-covered~~ nonaccrual loans ~~acquired from Highlands Union Bank~~of $4.04 million, or 18.62%, offset by a decrease in OREO of ~~$1.87 million. Non-covered nonaccrual loans as of September 30, 2020, increased $8.31 million, or 51.57%, from December 31, 2019.~~$343 thousand. As of ~~September 30, 2020, non-covered~~March 31, 2021, nonaccrual loans were largely attributed to single family owner occupied ~~(32.80%~~(36.92%), non-farm, non-residential ~~(27.07%~~(28.33%), and single family non-owner occupied loans ~~(13.47%~~(14.10%). ~~As of September 30, 2020, approximately $6.86 million or 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~~Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled ~~$33.90~~$33.05 million as of ~~September 30, 2020,~~March 31, 2021, a decrease of ~~$1.72~~$2.71 million, or ~~4.84%~~7.62%, compared to $35.62 million as of December 31, ~~2019. Non-covered delinquent~~2020. Delinquent loans as a percent of total non-covered loans totaled ~~1.55%~~1.54% as of ~~September 30, 2020,~~March 31, 2021, which includes past due loans ~~(0.43%~~(0.34%) and nonaccrual loans ~~(1.12%~~(1.20%).

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When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of ~~September 30, 2020, increased $4.36~~March 31, 2021, decreased $1.22 million, or ~~66.33%~~11.91%, to ~~$10.94~~$9.03 million from December 31, ~~2019.~~2020. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of ~~September 30, 2020,~~March 31, 2021, increased ~~$1.87 million to $2.77 million~~$121 thousand compared to December 31, ~~2019.~~2020. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled ~~25.29%~~3.41% as of ~~September 30, 2020,~~March 31, 2021, compared to ~~13.69%~~1.82% as of December 31, ~~2019. Specific~~2020. There were no specific reserves onrelated to TDRs ~~totaled $347 thousand~~ as of ~~September 30, 2020,~~March 31, 2021, compared to $353 thousand as of December 31, ~~2019.~~2020.

The ~~Coronavirus Aid, Relief and Economic Security (“CARES”)~~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~~2021 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through ~~September 30, 2020,~~March 31, 2021, we had modified ~~3,362~~a total of 3,812 loans for ~~$426.45~~$466.59 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered ~~TDR’s~~TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of March 31, 2021, current COVID-19 loan deferrals stood at $17.48 million, down significantly from our peak of $436.11 at June 30, 2020.

The balance of non-accrual loans was higher at ~~September 30, 2020,~~March 31, 2021, due mainly to the conversion of $5.70 million in loans from purchased credit impaired to purchased credit deteriorated status as a result of the Company's adoption of CECL coupled with the migration of ~~three~~a $972 thousand commercial ~~real estate loans with a total balance of $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~~industrial loan relationship during the quarter. Additionally, 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 September 30, 2020.

~~Non-covered~~ OREO, which is carried at the lesser of estimated net realizable value or cost, decreased ~~$1.87 million,~~$343 thousand, or ~~47.01%~~16.47%, as of ~~September 30, 2020,~~March 31, 2021, compared to December 31, ~~2019,~~2020, and consisted of 2220 properties with an average holding period of approximately 1318 months. The ~~net gain on the sale of OREO totaled $32 thousand for the three months ended September 30, 2020, compared to a net loss of $234 thousand for the same period of the prior year; the~~ net loss on the sale of OREO totaled $316 thousand for the ~~nine~~three months ended ~~September 30, 2020 totaled $296 thousand~~March 31, 2021, compared to ~~$790~~a net loss of $300 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

Non-covered

Covered

Total

Non-covered

Covered

Total

2021

2020

(Amounts in thousands)

Beginning balance
$ 3,969 $ - $ 3,969 $ 3,806 $ 32 $ 3,838 $ 2,083 $ 3,969
Additions
695 - 695 2,752 131 2,883 460 377
Disposals
(2,139 ) - (2,139 ) (3,388 ) (152 ) (3,540 ) (593 ) (1,453 )
Valuation adjustments
(422 ) - (422 ) (642 ) (11 ) (653 ) (210 ) (391 )
Ending balance
$ 2,103 $ - $ 2,103 $ 2,528 $ - $ 2,528 $ 1,740 $ 2,502

Allowance for ~~Loan~~Credit Losses

The ~~allowance~~ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan ~~losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in~~portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The ~~allowance is increased by the provision~~Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for ~~loan~~determining expected credit 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 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 a range of expected credit losses. It is possible that others, given the ~~need~~same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to ~~increase~~adjust the ~~allowance~~ACL for ~~loan~~management’s current estimate of expected credit losses. The Company’s measurement of credit losses policy adheres to GAAP as well as interagency guidance. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.
For collectively evaluated loans, the Company in ~~future periods. Management considered~~general uses two modeling approaches to estimate expected credit losses. The Company projects the ~~allowance adequate as~~contractual run-off of ~~September 30, 2020; however, no assurance~~its portfolio at the segment level and incorporates a prepayment assumption in order to estimate exposure at default. Financial assets that have been individually evaluated can be ~~made~~returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that ~~additions~~the repayment terms were not considered to be unique 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.~~asset.

In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The ~~allowance~~Company utilized call report data to measure historical credit loss experience with similar risk characteristics within the segments. For the majority of segment models for loan losses as of September 30, 2020, increased $8.85 million, or 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-coveredcollectively evaluated loans, ~~totaled 1.25% as of 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 increased $462 thousand for the three months ended September 30, 2020, compared to the same period of the prior year. For the nine months ended September 30, 2020, net charge-offs decreased $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.incorporated at least one macroeconomic driver either using a statistical regression modeling methodology or simple loss rate modeling methodology.

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Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e. formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework. For further discussion of our Allowance for Credit Losses - See Note 1 - Summary of Significant Accounting Policies.
With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method. See Note 1 – Basis of Presentation - Significant Accounting Policies for further details. As of March 31, 2021, the balance of the ACL was $34.56 million, or 1.61% of total loans. The ACL at March 31, 2021, increased $8.38 million from the balance of $26.18 million recorded before the adoption of the new standard on January 1, 2021. This increase included a $13.11 million cumulative adjustment for the adoption of ASU 2016-13 offset by a reversal of provision of $4.00 million and net charge-offs for the quarter of $725 thousand. The reversal in provision was due to significantly improved economic forecasts for unemployment, GDP growth, and home prices from those used at year-end 2020.
At March 31, 2021, the Company also had an allowance for unfunded commitments of $465 thousand which was recorded in Other Liabilities on the Balance Sheet. With the adoption of ASU 2016-13 effective January 1, 2021, the Company increased its allowance for credit losses on unfunded commitments by $509 thousand. During 2020, the provision for credit losses on unfunded commitments was $66 thousand which was recorded in the provision for credit losses on the Statement of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during 2021.

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

Three Months Ended September 30,

2020

2019

Non-PCI

Non-PCI

Portfolio

PCI Portfolio

Total

Portfolio

PCI Portfolio

Total

(Amounts in thousands)

Beginning balance
$ 23,758 $ - $ 23,758 $ 18,540 $ - $ 18,540
Provision for (recovery of) loan losses charged to operations
4,703 - 4,703 675 - 675
Charge-offs
(1,563 ) - (1,563 ) (964 ) - (964 )
Recoveries
379 - 379 242 - 242
Net charge-offs
(1,184 ) - (1,184 ) (722 ) - (722 )
Ending balance
$ 27,277 $ - $ 27,277 $ 18,493 $ - $ 18,493

Nine Months Ended September 30,

2020

2019

Three Months Ended March 31,

Non-PCI

Non-PCI

2021

2020

Portfolio

PCI Portfolio

Total

Portfolio

PCI Portfolio

Total

(Amounts in thousands)

Beginning balance
$ 18,425 $ - $ 18,425 $ 18,267 $ - $ 18,267 $ 26,182 $ 18,425
Provision for loan losses

charged to operations
12,034 - 12,034 3,480 - 3,480
Cumulative effect of adoption of ASU 2016-13
13,107 -
Provision for (recovery of) loan losses charged to operations
-
Charge-offs
(4,429 ) - (4,429 ) (4,700 ) - (4,700 ) (4,001 ) 3,500
Recoveries
1,247 - 1,247 1,446 - 1,446 (1,730 ) (1,194 )
Net charge-offs
(3,182 ) - (3,182 ) (3,254 ) - (3,254 ) 1,005 406
Ending balance
$ 27,277 $ - $ 27,277 $ 18,493 $ - $ 18,493 (725 ) (788 )
$ 34,563 $ 21,137

Deposits

Total deposits as of ~~September 30, 2020,~~March 31, 2021, increased ~~$162.33~~$126.85 million, or ~~6.97%~~4.98%, compared to December 31, ~~2019.~~2020. The increase was largely attributable to savings and noninterest-bearing demand deposits which increased ~~$122.41~~$54.49 million, or ~~19.50%.~~7.22% and $51.78 million, or 6.70%, respectively. Interest-bearing demand ~~and savings~~ deposits also reflected growth with ~~increases~~an increase of ~~$79.26~~$36.80 million, or ~~15.93% and $39.40 million, or 5.72%, respectively.~~6.15%. These increases were offset by a decrease in time deposits of ~~$78.74~~$16.22 million, or ~~15.27%~~3.86%. We attribute a significant amount of the increase in deposits to the unprecedented level of federal government stimulus during the ~~second~~first quarter of ~~2020.~~2021.

Borrowings

Total borrowings as of ~~September 30, 2020, decreased $645~~March 31, 2021, increased $555 thousand, compared to December 31, ~~2019.~~2020.

Liquidity and Capital Resources

Liquidity

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

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As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of ~~September 30, 2020,~~March 31, 2021, the Company’s cash reserves totaled ~~$9.46 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00~~$12.29 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of ~~September 30, 2020,~~March 31, 2021, our unencumbered cash totaled ~~$375.66~~$628.75 million, unused borrowing capacity from the FHLB totaled ~~$322.82~~$267.02 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 ~~$54.80~~$50.51 million.

Cash Flows

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

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

(Amounts in thousands)

Net cash provided by operating activities
$ 32,028 $ 39,636 $ 12,615 $ 11,373
Net cash provided by investing activities
304 139,757 41,442 80,487
Net cash provided by (used in) financing activities
126,323 (73,808 ) 118,127 (67,256 )
Net increase in cash and cash equivalents
158,655 105,585 172,184 24,604
Cash and cash equivalents, beginning balance
217,009 76,873 456,561 217,009
Cash and cash equivalents, ending balance
$ 375,664 $ 182,458 $ 628,745 $ 241,613

Cash and cash equivalents increased ~~$158.66~~$172.18 million for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, compared to an increase of ~~$105.59~~$24.60 million for the same period of the prior year. The increase in cash and cash equivalents during ~~2020~~the quarter was due largely to the significant inflow of non-maturity deposits from 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 ~~September 30, 2020,~~March 31, 2021, decreased ~~$8.90 million,~~$731 thousand, or ~~2.08%~~0.17%, to ~~$419.92~~$426.00 million from ~~$428.82~~$426.73 million as of December 31, ~~2019.~~2020. The change in stockholders’ equity was largely due to ~~net income~~the cumulative effect adjustment resulting from the adoption of ~~$24.38~~ASU 2016-13, "Financial Instruments--Credit Losses (Topic 326) of $5.87 million, ~~offset by~~ the repurchase of ~~734,653~~187,700 shares of our common stock totaling ~~$21.87~~$4.99 million and dividends declared on our common stock of ~~$13.45~~$4.43 million offset by net income of $14.60 million. ~~Accumulated other comprehensive loss decreased $262 thousand to $1.24 million as of 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 ~~$0.37~~$0.14 or ~~1.57%~~0.58% to ~~$23.70~~$24.22 as of ~~September 30, 2020,~~March 31, 2021, from ~~$23.33~~$24.08 as of December 31, ~~2019.~~2020.
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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~~2020 Form 10-K. Our current required capital ratios are as follows:

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

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

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

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

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

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Company

Bank

Company

Bank

Company

Bank

Company

Bank

Common equity Tier 1 ratio
13.89% 13.21% 14.31% 12.87% 14.53% 13.69% 14.28% 13.57%
Tier 1 risk-based capital ratio
13.89% 13.21% 14.31% 12.87% 14.53% 13.69% 14.28% 13.57%
Total risk-based capital ratio
15.14% 14.46% 15.21% 13.78% 15.79% 14.95% 15.53% 14.82%
Tier 1 leverage ratio
10.06% 9.57% 14.01% 12.61% 10.04% 9.46% 10.24% 9.73%

Our risk-based capital ratios as of ~~September 30, 2020, decreased~~March 31, 2021, increased from December 31, ~~2019,~~2020, due to a decrease in ~~total capital.~~our risk-weighted assets. The decrease in ~~total capital~~risk-weighted assets was primarily ~~attributable~~due 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 $24.38 million.~~decrease in total loans from year-end 2020. . As of ~~September 30, 2020,~~March 31, 2021, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of ~~September 30, 2020.~~March 31, 2021.

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Off-Balance Sheet Arrangements

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

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

(Amounts in thousands)

Commitments to extend credit
$ 219,297 $ 228,716 $ 234,828 $ 229,408
Standby letters of credit and financial guarantees (1)
173,925 167,612 182,259 179,022
Total off-balance sheet risk
$ 393,222 $ 396,328 $ 417,087 $ 408,430

Reserve for unfunded commitments
$ 66 $ 66 $ 465 $ 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 ~~September 30, 2020,~~March 31, 2021, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 0 to 25 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

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
$ 7,633 6.97 % $ 171 0.20 % $ 12,551 12.33 % $ 8,429 8.50 %
200
5,354 4.89 % 428 0.40 % 8,628 8.48 % 5,912 6.00 %
100
2,846 2.60 % 426 0.40 % 4,489 4.41 % 3,130 3.20 %
(100)
N/A - (4,631 ) -4.30 % N/A N/A (4,749 ) -4.80 %
47
Table of Contents

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~~developed a LIBOR transition ~~efforts into two phases. The first phase is adding additional language to new loans that allows~~plan. In 2018, the Company ~~to replace~~discontinued the use of LIBOR ~~with an equivalent~~as a reference 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,~~new loan originations. Additionally, the Company ~~will be transitioning from~~has the ~~LIBOR swap curve~~ability to substitute an alternative ~~reference rates when repricing certain loans. The second phase is transitioning current variable~~referenced rate for most adjustable rate loans ~~tied~~originated prior to ~~LIBOR or on a LIBOR swap curve. The Company is currently quantifying the dollar amount and number of loans that extend beyond 2021.~~2018.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of ~~September 30, 2020,~~March 31, 2021, our disclosure controls and procedures were effective.
57

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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 ~~September 30, 2020,~~March 31, 2021, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.
OTHER INFORMATION

ITEM 1.
Legal Proceedings

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

ITEM 1A.
Risk Factors

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, ~~2019~~2020 discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included in our annual report on Form 10-K for the year ended December 31, ~~2019~~2020 before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, ~~2019.~~2020.

~~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 September 30, 2020, we have funded approximately 803 loans with original principal balances totaling $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.
59

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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 no187,700 shares of our common stock during the ~~third~~first quarter of ~~2020~~2021 compared to ~~194,000~~734,651 shares during the same quarter of ~~2019. We do not currently have a publicly announced plan to repurchase shares.~~2020.
The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of a Publicly Announced Plan

Maximum Number of Shares that May Yet be Purchased Under the Plan

January 1-31, 2021
7,700 $ 21.66 167,037.64 2,392,300
February 1-28, 2021
76,500 24.03 1,837,926.90 2,315,800
March 1-31, 2021
103,500 28.79 2,979,537.30 2,212,300
Total
187,700 $ 26.56 4,984,501.84

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
10.15**
Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.16**
Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101***
Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of ~~September 30, 2020,~~March 31, 2021, (Unaudited) and December 31, ~~2019;~~2020; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).
104* The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020,~~March 31, 2021, formatted in Inline XBRL (included within the Exhibit 101 attachments).

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the ~~9th~~7th day of ~~November, 2020.~~May, 2021.

First Community Bankshares, Inc.
(Registrant)

/s/ William P. Stafford, II

William P. Stafford, II

Chief Executive Officer

(Principal Executive Officer)

/s/ David D. Brown

David D. Brown

Chief Financial Officer

(Principal Accounting Officer)

6251

	○	~~Many of the Company's non-branch, operational essential employees remain working remotely~~
	o	~~Geographically separated work locations of Bank and Company CEO’s and most other executive management team members~~


	January 1, 2021
	As Reported			Pre-			Impact of
	Under			ASU 2016-13			ASU 2016-13
	ASU 2016-13			Adoption			Adoption


Assets:
Non-covered loans held for investment
Allowance for credit losses on debt securities
Investment securities - available for sale	$	83,358		$	83,358		$	0		A
Loans
Non-acquired loans and acquired performing loans		2,146,972			2,146,972			0
Acquired purchased deteriorated loans		45,535			39,660			5,875		B
Allowance for credit losses on loans		(39,289	)		(26,182	)		(13,107	)	C
Deferred tax asset		19,306			17,493			1,813		D
Accrued interest receivable - loans		9,109			9,052			57		B

Liabilities
Allowance for credit losses on off-balance sheet
credit exposures		575			66			509		E

Equity:
Retained earnings		231,714			237,585			(5,871	)	F

A.	Per our analysis no ACL was necessary for investment securities available-for-sale.
B.	Accrued interest receivable from acquired credit impaired loans of $57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $57 thousand that was moved to the ACL for the purchased credit deteriorated loans.
C.	Calculated adjustment to the ACL related to the adoption of ASU 2016-13. Additional reserve related to purchased deteriorated loans of $5.88 million.
D.	Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016-13 using a 23.37% tax rate.
E.	Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016-13.
F.	Net adjustment to retained earnings related to the adoption of ASU 2016-13.

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

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

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

	*ProForma*
	*Three months ended September 30,*				*Nine Months Ended September 30,*
(Dollars in thousands)	*2020*		*2019*		*2020*		*2019*
Total revenues (net interest income plus noninterest income)	$	34,472	$	36,627	$	102,955	$	111,615
Net adjusted income available to the common shareholder	$	8,266	$	10,225	$	25,864	$	33,063

	*September 30, 2020*									*March 31, 2021*
	*Amortized*		*Unrealized*		*Unrealized*			*Fair*		*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	*Cost*		*Gains*		*Losses*			*Value*		*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Agency securities	$	576	$	0	$	(4	)	$	572	$	534	$	0	$	(4	)	$	530
Municipal securities		55,036		631		0			55,667		40,125		370		0			40,495
Mortgage-backed Agency securities		33,776		999		(42	)		34,733		46,402		957		(741	)		46,618
Total	$	89,388	$	1,630	$	(46	)	$	90,972	$	87,061	$	1,327	$	(745	)	$	87,643

	December 31, 2019									*December 31, 2020*
	Amortized		Unrealized		Unrealized			Fair		*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	Cost		Gains		Losses			Value		*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Agency securities	$	5,038	$	0	$	(4	)	$	5,034	$	555	$	0	$	(4	)	$	551
Municipal securities		85,992		886		0			86,878		43,950		509		0			44,459
Mortgage-backed Agency securities		77,448		380		(166	)		77,662		37,453		992		(97	)		38,348
Total	$	168,478	$	1,266	$	(170	)	$	169,574	$	81,958	$	1,501	$	(101	)	$	83,358

	*September 30, 2020*															*March 31, 2021*
	*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	$	0	$	0		$	565	$	(4	)	$	565	$	(4	)	$	0	$	0		$	523	$	(4	)	$	523	$	(4	)
Mortgage-backed Agency securities		3,405		(42	)		0		0			3,405		(42	)		21,453		(741	)		0		0			21,453		(741	)
Total	$	3,405	$	(42	)	$	565	$	(4	)	$	3,970	$	(46	)	$	21,453	$	(741	)	$	523	$	(4	)	$	21,976	$	(745	)

	December 31, 2019															*December 31, 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	$	975	$	(4	)	$	0	$	0		$	975	$	(4	)		$ —		$ —		$ 544		$ (4)		$ 544		$ (4)
Municipal securities																	—		—		—		—		—		—
Mortgage-backed Agency securities		8,020		(48	)		8,319		(118	)		16,339		(166	)		11,018		(97)		0		0		11,018		(97)
Total	$	8,995	$	(52	)	$	8,319	$	(118	)	$	17,314	$	(170	)		$ 11,018		$ (97)		$ 544		$ (4)		$ 11,562		$ (101)

	*September 30, 2020*					*December 31, 2019*					*March 31, 2021*					*December 31, 2020*
(Amounts in thousands)	*Amount*		*Percent*			*Amount*		*Percent*			*Amount*		*Percent*			*Amount*		*Percent*
Non-covered loans held for investment
Loans held for investment
Commercial loans
Construction, development, and other land	$	46,785		2.13	%	$	48,659		2.30	%	$	45,328		2.11	%	$	44,674		2.04	%
Commercial and industrial		179,714		8.19	%		142,962		6.76	%		162,227		7.56	%		173,024		7.91	%
Multi-family residential		105,647		4.81	%		121,840		5.76	%		105,592		4.92	%		115,161		5.27	%
Single family non-owner occupied		189,265		8.62	%		163,181		7.72	%		187,896		8.75	%		187,783		8.59	%
Non-farm, non-residential		748,815		34.11	%		727,261		34.39	%		718,830		33.49	%		734,793		33.60	%
Agricultural		10,362		0.47	%		11,756		0.56	%		9,723		0.45	%		9,749		0.45	%
Farmland		22,973		1.05	%		23,155		1.10	%		19,014		0.89	%		19,761		0.90	%
Total commercial loans		1,303,561		59.38	%		1,238,814		58.59	%		1,248,610		58.17	%		1,284,945		58.76	%
Consumer real estate loans
Home equity lines		94,056		4.29	%		110,078		5.21	%		92,095		4.29	%		96,526		4.41	%
Single family owner occupied		644,598		29.37	%		620,697		29.35	%		665,128		30.98	%		661,054		30.24	%
Owner occupied construction		17,460		0.79	%		17,241		0.82	%		18,376		0.86	%		17,720		0.81	%
Total consumer real estate loans		756,114		34.45	%		748,016		35.38	%		775,599		36.13	%		775,300		35.46	%
Consumer and other loans
Consumer loans		118,738		5.41	%		110,027		5.20	%		117,904		5.49	%		120,373		5.50	%
Other		5,838		0.27	%		4,742		0.22	%		4,527		0.21	%		6,014		0.28	%
Total consumer and other loans		124,576		5.68	%		114,769		5.42	%		122,431		5.70	%		126,387		5.78	%
Total non-covered loans		2,184,251		99.51	%		2,101,599		99.39	%
Total covered loans		10,744		0.49	%		12,861		0.61	%
Total loans held for investment, net of unearned income	$	2,194,995		100.00	%	$	2,114,460		100.00	%	$	2,146,640		100.00	%	$	2,186,632		100.00	%

Loans held for sale	$	0				$	263

	*September 30, 2020*				*December 31, 2019*				December 31, 2020
			*Unpaid Principal*				*Unpaid Principal*		Recorded		Unpaid Principal
(Amounts in thousands)	*Recorded Investment*		*Balance*		*Recorded Investment*		*Balance*		Investment		Balance
PCI Loans, by acquisition
Peoples	$	0	$	0	$	5,071	$	6,431	$	0	$	0
Waccamaw		0		0		2,708		14,277		0		0
Highlands		43,527		53,295		53,116		64,096		39,662		47,514
Other acquired		0		0		352		378		0		0
Total PCI Loans	$	43,527	$	53,295	$	61,247	$	85,182	$	39,662	$	47,514

	*Peoples*			*Waccamaw*			*Highlands*			*Total*
(Amounts in thousands)
Balance January 1, 2019	$	2,590		$	14,639		$	0		$	17,229
Accretion		(734	)		(2,761	)		0			(3,495	)
Reclassifications (to) from nonaccretable difference⁽¹⁾		14			1,200			0			1,214
Other changes, net		167			141			0			308
Balance September 30, 2019	$	2,037		$	13,219		$	0		$	15,256

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

	*September 30, 2020*												*March 31, 2021*
			*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	$	35,889	$	8,419	$	2,477	$	0	$	0	$	46,785	$	40,347	$	2,440	$	2,541	$	0	$	0	$	45,328
Commercial and industrial		153,153		19,369		7,192		0		0		179,714		153,725		3,556		4,946		0		0		162,227
Multi-family residential		81,528		20,937		3,182		0		0		105,647		96,018		6,215		3,359		0		0		105,592
Single family non-owner occupied		143,235		32,649		13,368		13		0		189,265		166,474		8,802		12,608		12		0		187,896
Non-farm, non-residential		507,094		201,975		39,746		0		0		748,815		577,928		106,228		34,674		0		0		718,830
Agricultural		6,804		3,216		342		0		0		10,362		7,430		1,611		682		0		0		9,723
Farmland		13,281		5,139		4,553		0		0		22,973		13,893		1,333		3,788		0		0		19,014
Consumer real estate loans												-
Home equity lines		89,729		1,317		3,010		0		0		94,056		87,260		1,294		3,541		0		0		92,095
Single family owner occupied		607,616		3,815		33,167		0		0		644,598		629,303		3,488		32,336		0		0		665,127
Owner occupied construction		16,684		202		574		0		0		17,460		18,090		0		286		0		0		18,376
Consumer and other loans												-
Consumer loans		116,786		197		1,755		0		0		118,738		115,895		23		1,987		0		0		117,905
Other		5,838		0		0		0		0		5,838		4,527		0		0		0		0		4,527
Total non-covered loans		1,777,637		297,235		109,366		13		0		2,184,251
Covered loans
Commercial loans
Construction, development, and other land		0		27		0		0		0		27
Single family non-owner occupied		155		33		0		0		0		188
Consumer real estate loans												-
Home equity lines		7,365		386		328		0		0		8,079
Single family owner occupied		1,832		269		349		0		0		2,450
Total covered loans		9,352		715		677		0		0		10,744
Total loans	$	1,786,989	$	297,950	$	110,043	$	13	$	0	$	2,194,995	$	1,910,890	$	134,990	$	100,748	$	12	$	0	$	2,146,640

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

Commercial loans
Construction, development, and other land	$	36,934	$	4,975	$	2,765	$	0	$	0	$	44,674
Commercial and industrial		160,625		7,065		5,519		0		0		173,209
Multi-family residential		103,291		8,586		3,284		0		0		115,161
Single family non-owner occupied		165,146		9,602		12,838		12		0		187,598
Non-farm, non-residential		568,438		125,907		40,448		0		0		734,793
Agricultural		7,724		1,686		339		0		0		9,749
Farmland		13,527		2,597		3,637		0		0		19,761
Consumer real estate loans												-
Home equity lines		91,712		1,488		3,326		0		0		96,526
Single family owner occupied		623,860		3,859		33,335		0		0		661,054
Owner occupied construction		17,232		201		287		0		0		17,720
Consumer and other loans												-
Consumer loans		118,134		28		2,211		0		0		120,373
Other		6,014		0		0		0		0		6,014
Total loans	$	1,912,637	$	165,994	$	107,989	$	12	$	0	$	2,186,632

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at March 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Construction, development
and other land
Pass	$	3,119	$	13,696	$	6,642	$	5,879	$	2,205	$	8,364	$	442	$	40,347
Special Mention		0		282		0		1,179		682		251		46		2,440
Substandard		0		0		84		13		282		2,162		0		2,541
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total construction, development, and other land	$	3,119	$	13,978	$	6,726	$	7,071	$	3,169	$	10,777	$	488	$	45,328
Commercial and industrial
Pass	$	6,729	$	28,778	$	21,645	$	17,695	$	6,271	$	7,165	$	14,694	$	102,977
Special Mention		0		392		1,246		1,306		297		59		256		3,556
Substandard		0		422		1,081		343		1,728		1,343		29		4,946
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total commercial and industrial	$	6,729	$	29,592	$	23,972	$	19,344	$	8,296	$	8,567	$	14,979	$	111,479
Paycheck Protection Loans
Pass	$	22,436	$	28,312	$	0	$	0	$	0	$	0	$	0	$	50,748
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total Paycheck Protection Loans	$	22,436	$	28,312	$	0	$	0	$	0	$	0	$	0	$	50,748
Multi-family residential
Pass	$	3,110	$	28,363	$	6,296	$	2,147	$	5,557	$	49,593	$	952	$	96,018
Special Mention		0		0		0		0		2,573		3,642		0		6,215
Substandard		0		0		0		434		673		2,252		0		3,359
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total multi-family residential	$	3,110	$	28,363	$	6,296	$	2,581	$	8,803	$	55,487	$	952	$	105,592
Non-farm, non-residential
Pass	$	27,998	$	145,910	$	57,936	$	67,978	$	51,626	$	214,496	$	11,984	$	577,928
Special Mention		0		16,810		10,453		3,338		26,743		48,797		87		106,228
Substandard		1,340		741		5,738		9,583		9,951		7,186		135		34,674
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total non-farm, non-residential	$	29,338	$	163,461	$	74,127	$	80,899	$	88,320	$	270,479	$	12,206	$	718,830
Agricultural
Pass	$	1,041	$	2,506	$	1,426	$	590	$	936	$	430	$	501	$	7,430
Special Mention		49		128		366		650		328		30		60		1,611
Substandard		0		15		214		208		33		212		0		682
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total agricultural	$	1,090	$	2,649	$	2,006	$	1,448	$	1,297	$	672	$	561	$	9,723
Farmland
Pass	$	649	$	1,237	$	216	$	1,132	$	472	$	8,756	$	1,431	$	13,893
Special Mention		0		0		0		372		662		299		0		1,333
Substandard		0		15		943		252		255		2,323		0		3,788
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
Total farmland	$	649	$	1,252	$	1,159	$	1,756	$	1,389	$	11,378	$	1,431	$	19,014

Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at March 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Total Loans
Pass	$	136,960	$	551,622	$	202,688	$	168,201	$	126,488	$	616,852	$	108,079	$	1,910,890
Special Mention		49		18,528		13,208		7,254		33,940		60,908		1,103		134,990
Substandard		2,094		2,319		10,996		14,807		15,820		53,072		1,640		100,748
Doubtful		0		0		0		0		0		12		0		12
Loss		0		0		0		0		0		0		0		0
Total loans	$	139,103	$	572,469	$	226,892	$	190,262	$	176,248	$	730,844	$	110,822	$	2,146,640

	Three Months Ended March 31,
	2020
			Average
	*Interest Income*		*Recorded*
(Amounts in thousands)	*Recognized*		*Investment*
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	8	$	1,299
Commercial and industrial		29		2,029
Multi-family residential		11		670
Single family non-owner occupied		35		4,101
Non-farm, non-residential		43		4,674
Agricultural		1		206
Farmland		21		1,560
Consumer real estate loans
Home equity lines		9		1,467
Single family owner occupied		168		17,550
Owner occupied construction		6		334
Consumer and other loans
Consumer loans		4		407
Total impaired loans with no related allowance		335		34,297

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		0		0
Commercial and industrial		0		0
Multi-family residential		0		941
Single family non-owner occupied		0		0
Non-farm, non-residential		0		1,338
Farmland		0		0
Consumer real estate loans
Home equity lines		0		0
Single family owner occupied		13		1,240
Owner occupied construction		0		0
Total impaired loans with a related allowance		13		3,519
Total impaired loans	$	348	$	37,816

	March 31, 2021
(Amounts in thousands)	No Allowance		With an Allowance		Total
Commercial loans
Construction, development, and other land	$	391	$	0	$	391
Commercial and industrial		1,781		0		1,781
Multi-family residential		854		0		854
Single family non-owner occupied		3,631		0		3,631
Non-farm, non-residential		7,295		0		7,295
Agricultural		267		0		267
Farmland		485		0		485
Consumer real estate loans						-
Home equity lines		1,035		0		1,035
Single family owner occupied		9,333		187		9,520
Owner occupied construction		0		0		0
Consumer and other loans						-
Consumer loans		847		0		847
Total nonaccrual loans	$	25,919	$	187	$	26,106

	*March 31, 2021*
													*Amortized Cost of*
	*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*		*> 90 Days Accruing*
(Amounts in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*		*No Allowance*

Commercial loans
Construction, development, and other land	$	40	$	0	$	384	$	424	$	44,904	$	45,328	$	0
Commercial and industrial		1,116		746		550		2,412		159,815		162,227		0
Multi-family residential		156		0		854		1,010		104,582		105,592		0
Single family non-owner occupied		778		655		2,042		3,475		184,421		187,896		163
Non-farm, non-residential		76		283		3,916		4,275		714,555		718,830		0
Agricultural		221		93		46		360		9,363		9,723		0
Farmland		9		0		485		494		18,520		19,014		0
Consumer real estate loans
Home equity lines		493		181		557		1,231		90,864		92,095		0
Single family owner occupied		4,455		1,291		4,477		10,223		654,905		665,128		0
Owner occupied construction		0		0		0		0		18,376		18,376		0
Consumer and other loans
Consumer loans		1,394		280		417		2,091		115,813		117,904		8
Other		0		0		0		0		4,527		4,527		0
Total loans	$	8,738	$	3,529	$	13,728	$	25,995	$	2,120,645	$	2,146,640	$	171

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

(Amounts in thousands)	March 31, 2021		Collateral Coverage		%
Commercial Real Estate
Hotel	$	0	$	0		-
Office		0		0		0
Other		2,480		3,126		126.05	%
Retail		0		0		0
Multi-Family
Industrial		0		0		0
Office		0		0		0
Other		686		723		105	%
Commercial and industrial
Industrial		0		0		0
Other		0		0		0
Home equity loans		42		0		0.00	%
Consumer owner occupied		189		0		0.00	%
Consumer		-		-		-
Total collateral dependent loans	$	3,397	$	3,849		113.31	%

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*				*Three Months Ended March 31,*
	*2020*		*2019*		*2020*		*2019*		*2021*		*2020*
(Amounts in thousands)
Interest income recognized	$	122	$	56	$	372	$	203	$	104	$	98

	*Three Months Ended September 30, 2020*												*Three Months Ended March 31, 2021*
				*Consumer Real*			*Consumer and*			*Total*						*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*			*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	13,909		$	7,294		$	2,555		$	23,758		$	14,661		$	8,951		$	2,570		$	26,182
Cumulative effect of adoption of ASU 2016-13														8,360			4,145			602			13,107
Provision for (recovery of) loan losses charged to operations		1,972			1,975			756			4,703			(3,070	)		(1,542	)		611			(4,001	)
Charge-offs		(501	)		(188	)		(874	)		(1,563	)		(757	)		(10	)		(963	)		(1,730	)
Recoveries		169			38			172			379			392			343			270			1,005
Net charge-offs		(332	)		(150	)		(702	)		(1,184	)		(365	)		333			(693	)		(725	)
Ending balance	$	15,549		$	9,119		$	2,609		$	27,277		$	19,586		$	11,887		$	3,090		$	34,563

	*Three Months Ended March 31, 2020*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,235		$	6,325		$	1,865		$	18,425
Provision for loan losses charged to operations		1,987			1,145			368			3,500
Charge-offs		(268	)		(63	)		(863	)		(1,194	)
Recoveries		121			112			173			406
Net charge-offs		(147	)		49			(690	)		(788	)
Ending balance	$	12,075		$	7,519		$	1,543		$	21,137

	*Three Months Ended September 30, 2019*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,215		$	6,881		$	1,444		$	18,540
Provision for (Recovery of) loan losses charged to operations		203			(338	)		810			675
Charge-offs		(159	)		(253	)		(552	)		(964	)
Recoveries		40			96			106			242
Net (charge-offs) recoveries		(119	)		(157	)		(446	)		(722	)
Ending balance	$	10,299		$	6,386		$	1,808		$	18,493

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

	*Nine Months Ended September 30, 2019*
				*Consumer Real*			*Consumer and*			*Total*
(Amounts in thousands)	*Commercial*			*Estate*			*Other*			*Allowance*
Total allowance
Beginning balance	$	10,499		$	6,732		$	1,036		$	18,267
Provision for loan losses charged to operations		1,359			411			1,710			3,480
Charge-offs		(2,165	)		(1,203	)		(1,332	)		(4,700	)
Recoveries		606			446			394			1,446
Net (charge-offs) recoveries		(1,559	)		(757	)		(938	)		(3,254	)
Ending balance	$	10,299		$	6,386		$	1,808		$	18,493

	*September 30, 2020*								*December 31, 2020*
	*Loans Individually*		*Allowance for Loans*		*Loans Collectively*		*Allowance for Loans*		*Loans Individually*		*Allowance for Loans*		*Loans Collectively*		*Allowance for Loans*
	*Evaluated for*		*Individually*		*Evaluated for*		*Collectively*		*Evaluated for*		*Individually*		*Evaluated for*		*Collectively*
(Amounts in thousands)	*Impairment*		*Evaluated*		*Impairment*		*Evaluated*		*Impairment*		*Evaluated*		*Impairment*		*Evaluated*
Commercial loans
Construction, development, and other land	$	0	$	0	$	45,517	$	630	$	0	$	0	$	43,716	$	528
Commercial and industrial		767		0		177,396		1,102		724		0		171,486		1,024
Multi-family residential		944		222		103,087		1,299		695		0		112,852		1,417
Single family non-owner occupied		1,054		0		183,088		1,974		1,041		0		183,283		1,861
Non-farm, non-residential		3,774		565		726,741		9,360		3,916		319		714,160		9,097
Agricultural		0		0		10,341		174		0		0		9,728		218
Farmland		0		0		19,940		225		0		0		17,540		196
Total commercial loans		6,539		787		1,266,110		14,764		6,376		319		1,252,765		14,341
Consumer real estate loans
Home equity lines		0		0		101,276		871		0		0		95,765		799
Single family owner occupied		2,259		239		634,021		7,815		1,673		108		647,040		7,849
Owner occupied construction		0		0		17,460		194		0		0		17,567		195
Total consumer real estate loans		2,259		239		752,757		8,880		1,673		108		760,372		8,843
Consumer and other loans
Consumer loans		0		0		117,965		2,607		0		0		119,770		2,570
Other		0		0		5,838		0		0		0		6,014		0
Total consumer and other loans		0		0		123,803		2,607		0		0		125,784		2,570
Total loans, excluding PCI loans	$	8,798	$	1,026	$	2,142,670	$	26,251	$	8,049	$	427	$	2,138,921	$	25,754

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

Year	*September 30, 2020*			*March 31, 2021*
(Amounts in thousands)
2021	$	154
2022		140		$	154
2023		119			122
2024		119			119
2025 and thereafter		490
2025					113
2026 and thereafter					437
Total lease payments		1,022			945
Less: Interest		(102	)		(84	)
Present value of lease liabilities	$	920		$	861