FIRST COMMUNITY BANKSHARES, INC.

20202023 FORM 10-K

INDEX

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Forward-looking statements in filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K 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 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 Annual Report on Form 10-K 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.  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 I, Item 1A of this report.

PART I

General

First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and reincorporated under the laws of the Commonwealth of Virginia 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 in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management. Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

We focus on building financial partnershipsoperate 53 branches across the states of Virginia, West Virginia, North Carolina, and creating enduring and mutually beneficial relationships with businesses and individuals through a personal and local approachTennessee.  We’re committed to the passionate pursuit of excellence in community banking and financial services. We strive to bewe’ve set our sights on being the bank of choice, employer of choice, and investment of choice in the marketscommunities in which we serve by offering impeccable service and a complete line of competitive products that include:operate.

Our  mission is to:

Our operations are guided by a strategic plan that focuses on organic growth supplemented by strategic acquisitions of complementary financial institutions. For a summary of our financial performance, see Item 6, “Selected Financial Data,” in Part II of this report.

Employees and Human Capital Resources

As of December 31, 2020,2023, we had 605616 full-time employees and 30 part-time29 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and customized corporate training engagements.

The safety, health and wellness of our employees is a top priority.  The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations.  Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences.COVID-19. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance and keeping increases in the employee portion of health care premiums as small as possible and sponsoring various wellness programs.

Employee retention helps us operate efficiently and achieve one of our business objectives, which is building financial partnerships. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our current 401(k) plan and a former employee stock ownership plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates.employees.  

Market Area

As of December 31, 2020,2023, we operated 5053 branch locations in Virginia, West Virginia, North Carolina, and Tennessee through our sole operating segment, Community Banking.  Economic indicators in our market areas show relatively stable employment and business conditions. We serve a diverse base of individuals and businesses across a variety of industries such as education; government and health services; retail trade; construction; manufacturing; tourism; coal mining and gas extraction; and transportation.

Competition

The financial services industry is highly competitive and constantly evolving. We encounter strong competition in attracting and retaining deposit, loan, and other financial relationships in our market areas. We compete with other commercial banks, thrifts, savings and loan associations, credit unions, consumer finance companies, mortgage banking firms, commercial finance and leasing companies, securities firms, brokerage firms, and insurance companies. We have positioned ourselves as a regional community bank that provides an alternative to larger banks, which often place less emphasis on personal relationships, and smaller community banks, which lack the capital and resources to efficiently serve customer needs. Factors that influence our ability to remain competitive include the ability to develop, maintain, and build long-term customer relationships; the quality, variety, and pricing of products and services; the convenience of banking locations and office hours; technological developments; and industry and general economic conditions. We seek to mitigate competitive pressures with our relationship style of banking, competitive pricing, and cost efficiencies, and disciplined approach to loan underwriting.efficiencies.

Supervision and Regulation

Overview

We are subject to extensive examination, supervision, and regulation under applicable federal and state laws andby various regulatory agencies. These regulations are intended to protect consumers, depositors, borrowers, deposit insurance funds, and the stability of the financial system and are not for the protection of stockholders or creditors.

Applicable laws and regulations restrict our permissible activities and investments and impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our banking subsidiary, and impose capital adequacy requirements on the Company and the Bank. The consequences of noncompliance with these laws and regulations can include substantial monetary and nonmonetary sanctions.

The following discussion summarizes significant laws and regulations applicable to the Company and the Bank. These summaries are not intended to be complete and are qualified in their entirety by reference to the applicable statute or regulation. Changes in laws and regulations may have a material effect on our business, financial condition, or results of operations.

First Community Bankshares, Inc.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (“BHC Act”) and a financial holding company under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”). The Company elected financial holding company status in December 2006. The Company and its subsidiaries are subject to supervision, regulation, and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The BHC Act generally provides for umbrella regulation of financial holding companies, such as the Company, by the Federal Reserve, as well as functional regulation of financial holding company subsidiaries by applicable regulatory agencies. The Federal Reserve is granted the authority, in certain circumstances, to require reports of, examine, and adopt rules applicable to any bank holding company subsidiary.

The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (“Exchange Act”), as administered by the Securities and Exchange Commission (“SEC”). The Company’s common stock is listed on the NASDAQ Global Select Market under the trading symbol FCBC and is subject to NASDAQ’s rules for listed companies.

First Community Bank

The Bank is a Virginia chartered bank and a member of the Federal Reserve subject to supervision, regulation, and examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank (“FRB”) of Richmond.Board. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”), and its deposits are insured by the FDIC to the extent provided by law. The regulations of these agencies govern most aspects of the Bank’s business, including requirements concerning the allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid on deposits, the payment of dividends, loans to affiliates, mergers and acquisitions, capital, and the establishment of branches. Various consumer and compliance laws and regulations also affect the Bank’s operations.

As a member bank, the Bank is required to hold stock in the FRBFederal Reserve Bank of Richmond ("FRB") in an amount equal to 6% of its capital stock and surplus (half paid to acquire the stock with the remainder held as a cash reserve). Member banks do not have any control over the Federal Reserve as a result of owning the stock and the stock cannot be sold or traded.

Permitted Activities under the BHC Act

The BHC Act limits the activities of bank holding companies, such as the Company, to the business of banking, managing or controlling banks and other activities the Federal Reserve determines to be closely related to banking. A bank holding company that elects treatment as a financial holding company under the GLB Act, such as the Company, may engage in a broader range of activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system. These activities include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve determines to be closely related to banking.

In order to maintain financial holding company status, the Company and the Bank must be well-capitalized and well-managed under applicable Federal Reserve regulations and have received at least a satisfactory rating under the Community Reinvestment Act (“CRA”). See “Prompt Corrective Action” and “Community Reinvestment Act” below. If we fail to meet these requirements, the Federal Reserve may impose corrective capital and managerial requirements and place limitations or conditions on our ability to conduct activities permissible for financial holding companies. If the deficiencies persist, the Federal Reserve may require the Company to divest the Bank or divest investments in companies engaged in activities permissible only for financial holding companies.

In July 2019, the federal bank regulators adopted final rules (the “Capital SimplificationsSimplification Rules”) that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. The Company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, subject to certain exemptions, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.

The Inflation Reduction Act of 2022 (the “IRA”) imposed a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022, by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

The BHC Act requires that bank holding companies obtain the Federal Reserve’s approval before acquiring direct or indirect ownership or control of more than 5% of the voting shares or all, or substantially all, of the assets of a bank. The regulatory authorities are required to consider the financial and managerial resources and future prospects of the bank holding company and the target bank, the convenience and needs of the communities to be served, and various competitive factors when approving acquisitions. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless the Federal Reserve determines it to be closely related to banking.

Capital Requirements

We are subject to various regulatory capital requirements administered by the Federal Reserve (the "Basel III Capital Rules").

Since fully phased in on January 1, 2019, Basel III Capital Rules require the Company and the Bank to maintain the following:

Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the Company and the Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.

Basel III Capital Rules prevent certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The rules do not require a phase-out of trust preferred securities issued before May 19, 2010, for holding companies of depository institutions with less than $15 billion in consolidated total assets, as of December 1, 2009.

In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected credit losses (“CECL”) on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). 

Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

In August 2018, the Federal Reserve issued an interim final rule, which expanded the applicability of the Small Bank Holding Company Policy Statement through an increase in the size limitation for qualifying bank holding companies from $1 billion to $3 billion in total consolidated assets. As a result, the Company qualifies under the Small Bank Holding Company Policy Statement for exemption from the Federal Reserve’s consolidated risk-based capital requirements at the holding company level. Management believes that the Company and the Bank wouldBank's current capital levels exceed the required capital amounts to the considered well-capitalized and also meet allthe fully phased-in minimum capital adequacy requirements, underincluding the related capital conservation buffers, as required by the Basel III Capital Rules on a fully phased-in basis, as of December 31, 2020.

Beginning2023. For additional information, see Note 20, "Regulatory Requirements and Restrictions," to the Consolidated Financial Statements in the first quarterPart II, Item 8 of 2020, a qualifying community banking organization may elect to use the community bank leverage ratio (“CBLR”) framework to eliminate the requirements for calculating and reporting risk-based capital ratios. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advance approaches banking organization. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% are considered to have satisfied the risk-based and leverage capital requirements and are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the FDICIA. Temporary relief was provided to community banks under the Coronavirus Aid, Relief and Economic Security Act to set the community bank ratio to 8.00% beginning in the second quarter of 2020 and for the remainder of 2020, and to 8.50% effective January 1, 2021, and 9.00% effective January 1, 2022.  A qualifying community banking organization may opt into and out of the CBLR framework by completing the associated reporting requirements on its callthis report.

Prompt Corrective Action

The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if the appropriate federal regulators determine that it is engaging in an unsafe or unsound practice or is in an unsafe or unsound condition. A bank’s capital category is determined solely for applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s financial condition or prospects for other purposes.

The Bank was classified as well-capitalized under prompt corrective action regulations as of December 31, 2020.2023. In order to be considered a well-capitalized institution under Basel III Capital Rules, an organization must not be subject to any written agreement, order, capital directive, or prompt corrective action directive and must maintain the following minimum capital ratios:

Undercapitalized institutions are required to submit a capital restoration plan to federal banking regulators. Under the Federal Deposit Insurance Act, as amended (“FDIA”), in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must provide appropriate assurances of performance and guarantee that its subsidiary bank will comply with its capital restoration plan, subject to certain limitations. Agency regulations contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, establishing branches, and engaging in new lines of business. With certain exceptions, a depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to its parent holding company if the institution would be undercapitalized after such distribution or payment.

A significantly undercapitalized institution is subject to various requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and ending deposits from correspondent banks. The FDIC has limited discretion in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator.

Safety and Soundness Standards

Guidelines adopted by federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation fees and benefits.compensation. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage risks and exposures. If an institution fails to meet safety and soundness standards, the regulatory agencies may require the institution to submit a written compliance plan describing the steps they would take to correct the situation and the time that such steps would be taken. If an institution fails to submit or implement an acceptable compliance plan, after being notified, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions, such as those applicable to undercapitalized institutions under the prompt corrective action provisions of the FDIA. An institution may be subject to judicial proceedings and civil money penalties if it fails to follow such an order.

Payment of Dividends

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company’s principal source of cash flow is derived from dividends paid by the Bank. There are various restrictions by regulatory agencies related to dividends paid by the Bank to the Company and dividends paid by the Company to its shareholders. The payment of dividends by the Company and the Bank may be limited by certain factors, such as requirements to maintain capital above regulatory guideline minimums.

Prior FRB approval is required for the Bank to declare or pay a dividend to the Company if the total of all dividends declared in any given year exceed the total of the Bank’s net profits for that year and its retained profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock. Dividends paid by the Company to shareholders are subject to oversight by the Federal Reserve. Federal Reserve policy states that bank holding companies generally should pay dividends on common stock only from income available over the past year if prospective earnings retention is consistent with the organization’s expected future needs, asset quality, and financial condition.

Regulatory agencies have the authority to limit or prohibit the Company and the Bank from paying dividends if the payments are deemed to constitute an unsafe or unsound practice. The appropriate regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only from current operating earnings. In addition, the Bank may not declare or pay a dividend if, after paying the dividend, the Bank would be classified as undercapitalized. In the current financial and economic environment, the FRBFederal Reserve has discouraged payout ratios that are at maximum allowable levels, unless both asset quality and capital are very strong, and has noted that bank holding companies should carefully review their dividend policy. Bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries.

Source of Strength

Federal Reserve policy and federal law requiresrequire the Company to act as a source of financial and managerial strength to the Bank. Under this requirement, the Company is expected to commit resources to support the Bank even when it may not be in a financial position to provide such resources. Because the Company is a legal entity separate and distinct from its subsidiaries, any capital loans it makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Transactions with Affiliates

The Federal Reserve Act (“FRA”) and Federal Reserve Regulation W place restrictions on “covered transactions” between the Bank and its affiliates, including the Company. The term “covered transactions” includes making loans, purchasing assets, issuing guarantees, and other similar transactions. The Dodd-Frank Act expanded the definition of “covered transactions” to include derivative activities, repurchase agreements, and securities lending or borrowing activities. These restrictions limit the amount of transactions with affiliates, require certain levels of collateral for loans to affiliates, and require that all transactions with affiliates be on terms that are consistent with safe and sound banking practices. In addition, these transactions must be on terms that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for similar transactions with non-affiliates.

The FRA and Federal Reserve Regulation O place restrictions on loans between the Company and the Bank and their directors, executive officers, principal shareholders, affiliates, and interests of those directors, executive officers, and principal shareholders. These restrictions limit the amount of loans to one borrower and require that loans are on terms that are substantially the same as, and follow underwriting procedures that are not less stringent than, those prevailing at the time for similar loans with non-insiders. In addition, the aggregate limit of loans to all insiders, as a group, cannot exceed the Bank’s total unimpaired capital and surplus.

Deposit Insurance and Assessments

Substantially all of the Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to quarterly deposit insurance assessments to maintain the DIF. Deposit insurance premiums are assessed using a risk-based system that places FDIC-insured institutions into one of four risk categories based on capital, supervisory ratings and other factors. The assessment rate determined by considering such information is then applied to the institution's average assets minus average tangible equity to determine the institution's insurance premium. The FDIC may change assessment rates or revise its risk-based assessment system if deemed necessary to maintain an adequate reserve ratio for the DIF. The Dodd-Frank Act required that the minimum reserve ratio for the DIF increase from 1.15% to 1.35% by September 30, 2020. Under the FDIA, the FDIC may terminate deposit insurance if it determines that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.  The Bank’sIn October 2022, the FDIC deposit insurance assessments were $426 thousand in 2020, $318 thousand in 2019, and $840 thousand in 2018. The decrease in FDIC assessments in 2019 and 2020 were primarilyadopted a final rule to increase the result of the receipt of Small Bank Assessment Credits from the FDIC.  On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent.  Because the reserve ratio exceeded 1.35 percent, twoinitial base deposit insurance assessment changes occurredrate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. The increased assessment is expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC regulations.  Surcharges on large banks, $10 billion or more in consolidated assets, ended; and small banks, less than $10 billion in consolidated assets, were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ration from 1.15 percent to 1.35 percent.  The credit was applied when the reserve ratio was at least 1.38 percent.  The Small Bank Credit was fully utilized by the second quarter of 2020.FDIC's amended restoration plan.

In addition, all FDIC-insured institutions were required to pay annual assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”) through March 29, 2019. The FICO is a mixed-ownership government corporation that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The Bank’s FICO assessments, which were set quarterly, were $6 thousand in 2019, and $66 thousand in 2018.

The Volcker Rule

TheA provision in the Dodd-Frank Act, known as the Volker Rule, amended the BHC Act to prohibit depository institutions and their affiliates from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with hedge funds or private equity funds, known as the Volcker Rule.funds. The Volcker Rule, which became effective in July 2015 and the implementing regulations of which were amended in 2019 and were subject to further amendment in 2020, does not significantly impact the operations of the Company and its subsidiaries, as we do not have any engagement in the businesses prohibited by the Volcker Rule.

Community Reinvestment Act

The CRA of 1977, as amended, requires depository institutions to help meet the credit needs of their market areas, including low- andlow-and moderate-income individuals and communities, consistent with safe and sound banking practices. Federal banking regulators periodically examine depository institutions and assign ratings based on CRA compliance. A rating of less than satisfactory may restrict certain operating activities, delay or deny certain transactions, or result in an institution losing its financial holding company status. The Bank received a rating of satisfactory in its most recent CRA examination.

In December 2019,On October 24, 2023, the FDIC, the Federal Deposit Insurance Corporation (“FDIC”)Reserve, and the Office of the Comptroller of the Currency (“OCC”("OCC") jointly proposed rules that would significantly change existingissued a final rule to strengthen and modernize the CRA regulations.  The proposed rules arefinal rule is intended, among other things, to increaseadapt to changes in the banking industry, including the expanded role of mobile and online banking, and to tailor performance standards to account for differences in bank activitysize and business models. The final rule introduces new tests under which the performance of banks with over $2 billion in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure.assets will be assessed. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-relatednew rule also includes data collection record keeping, and reporting. However,reporting requirements, some of which are applicable only to banks with over $10 billion in assets. The applicability date for the Federal Reserve Board did not joinmajority of the provisions in that proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA rule. In September 2020, the Federal Reserve Board issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invites public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying,regulations is January 1, 2026, and tailoring themadditional requirements will be applicable on January 1, 2027.  An institution’s failure to reflectcomply with the current banking landscape and better meet the core purposeprovisions of the CRA. The ANPR seeks feedbackCRA could, at a minimum, result in regulatory restrictions on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequitiesits activities. We received a “Satisfactory” CRA rating in credit access. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.most recently completed federal examination.

 Incentive Compensation

Federal regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance is based on the key principles that a banking organization’s incentive compensation arrangements should (1) provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Federal banking regulators periodically examine the incentive compensation arrangements of banking organizations and incorporate any deficiencies in the organization’s supervisory ratings, which can affect certain operating activities. The FRB may initiate enforcement actions if the organization’s incentive compensation arrangements or related risk management, control, or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop. It cannot be determined at this time if or when a final rule will be adopted or if compliance with such a final rule will adversely affect the ability of the Company and its subsidiaries to hire, retain and motivate their key employees.

In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including NASDAQ, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.  The NASDAQ's listing standards pursuant to the SEC's rule became effective on October 2, 2023. The Company adopted a compensation recovery policy pursuant to the NASDAQ listing standards on October 24, 2023. The policy is included as Exhibit 97.1 to this Form 10-K.

Anti-Tying Restrictions

The Bank and its affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company.

Consumer Protection and Privacy

We are subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include the Mortgage Reform and Anti-Predatory Lending Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collections Practices Act, the Right to Financial Privacy Act, the Fair Housing Act, and various state law counterparts. These laws and regulations contain extensive customer privacy protection provisions that limit the ability of financial institutions to disclose non-public information about consumers to non-affiliated third parties and require financial institutions to disclose certain policies to consumers.

The Consumer Financial Protection Bureau (“CFPB”) is a federal agency with broad authority to implement, examine, and enforce compliance with federal consumer protection laws that relate to credit card, deposit, mortgage, and other consumer financial products and services. The CFPB may enforce actions to prevent and remedy unfair, deceptive, or abusive acts and practices related to consumer financial products and services. The agency has authority to impose new disclosure requirements for any consumer financial product or service. The CFPB may impose a civil penalty or injunction against an entity in violation of federal consumer financial laws. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.   As a bank with less than $10 billion in assets, the Bank is subject to these federal consumer financial laws, but continues to be examined for compliance by the Federal Reserve, its primary federal banking regulator, not the CFPB.

Cybersecurity

In March 2015,Various federal regulators issued two related statements about cybersecurity. One statement indicates thatand state laws and regulations contain extensive data privacy and cybersecurity provisions, and the regulatory framework for data privacy and cybersecurity is rapidly evolving. The FRB, FDIC, and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institutions should design multiple layersinstitution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement, and maintain a comprehensive written information security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processesprogram designed to ensure the rapid recovery, resumption,security and maintenanceconfidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. In addition, various U.S. regulators, including the FRB and the SEC, have increased their focus on cyber security through guidance, examinations, and regulations.

At the federal level, the GLB Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such personal information except as provided in the financial institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of datapolicies and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack. If the Bank fails to observe the regulatory guidance, the Bank could be subject to various regulatory sanctions, including financial penalties.procedures.

In October 2016,addition, in November 2021, the federalFRB, OCC, and FDIC adopted a new regulation that, among other things, requires a banking regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and interconnected entities under their supervision. If established, the enhanced cyber risk management standards would be designed to help reduce the potential impact of a cyber-attack or other cyber-related failure on the financial system. The advance notice of proposed rulemaking addresses five categories of cyber standards: (i) cyber risk governance; (ii) cyber risk management; (iii) internal dependency management; (iv) external dependency management; and (v) incident response, cyber resilience, and situational awareness.  In May 2019, the Federal Reserve announced that it would revisit the Advance Notice of Proposed Rulemaking in the future.  In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require banking organizationsorganization to notify theirits primary regulatorfederal regulators within 36 hours of becoming aware ofafter identifying a “computer-security incident” that the banking organization believes in good faith could materially disrupt or degrade its business or operations in a “notification incident.” The Noticemanner that would, among other things, jeopardize the viability of Proposed Rulemaking also would require specificits operations, result in customers being unable to access their deposit and immediate notifications by bank service providersother accounts, result in a material loss of revenue, profit or franchise value, or pose a threat to the financial stability of the U.S.

In 2023, the SEC issued a final rule that become awarerequires disclosure of similar incidents.material cybersecurity incidents, as well as cybersecurity risk management, strategy and governance. Under this rule, banking organizations that are SEC registrants must generally disclose information about a material cybersecurity incident within four business days of determining it is material with periodic updates as to the status of the incident in subsequent filings as necessary.

See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity and Item 1C. Cybersecurity for a further discussion of risk management strategies and governance processes related to cybersecurity.

Bank Secrecy Act and Anti-Money Laundering

The Bank is subject to the requirements of the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA PATRIOT Act”) of 2001. The USA PATRIOT Act broadened existing anti-money laundering legislation by imposing new compliance and due diligence obligations focused on detecting and reporting money laundering transactions. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of our customers. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

Office of Foreign Assets Control Regulation

The U.S. Department of the Treasury’s (“Treasury”) Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals, and others. OFAC publishes lists of specially designated targets and countries. We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them, and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences, including causing applicable bank regulatory authorities to not approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act (“SOX Act”) of 2002 addresses a broad range of corporate governance, auditing and accounting, executive compensation, and disclosure requirements for public companies and their directors and officers. The SOX Act requires our Chief Executive Officer and Chief Financial Officer to certify the accuracy of certain information included in our quarterly and annual reports. The rules require these officers to certify that they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of our financial reporting and disclosure controls and procedures; that they have made certain disclosures to the auditors and to the Audit Committee of the Board of Directors about our controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Section 404 of the SOX Act requires management to undertake an assessment of the adequacy and effectiveness of our internal controls over financial reporting and requires our auditors to attest to and report on the effectiveness of these controls.

Climate-Related and Other ESG Developments

In recent years, federal, state and international lawmakers and regulators have increased their focus on financial institutions' and other companies' risk oversight, disclosures and practices in connection with climate change and other environmental, social and governance (“ESG”) matters. For example, in March 2022, the SEC issued a proposed rule on the enhancement and standardization of climate-related disclosures for investors. The proposed rule would require public issuers, including us, to significantly expand the scope of climate-related disclosures in their SEC filings. The SEC has also announced plans to propose rules to require enhanced disclosure regarding human capital management and board diversity for public issuers.

Available Information

We file annual, quarterly, and current reports; proxy statements; and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s website at www.sec.gov that contains reports, proxy and information statements, and other information that issuers file electronically with the SEC. We maintain a website at www.firstcommunitybank.com that makes available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information, including any amendments to those reports as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. You are encouraged to access these reports and other information about our business from the Investor Relations section of our website. The Investor Relations section contains information about our Board of Directors, executive officers, and corporate governance policies and principles, which include the charters of the standing committees of the Board of Directors, the Insider Trading Policy, and the Standards of Conduct governing our directors, officers, and employees. Information on our website is not incorporated by reference in this report.

The risk factors described below discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included, or incorporated by reference, in this report before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, the following risk factors are not intended to be an exhaustive list of all risks we face.

Risks Related to the Economic Environment

The 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.

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:

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 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.

The current economic environment poses significant challenges.

Our financial performance is generally highly dependent on the business environment in the markets in which we operate in and of the U.S. as a whole, which includes the ability of borrowers to pay interest, repay principal on outstanding loans, the value of collateral securing those loans, and demand for loans and other products and services we offer. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, and investor or business confidence; limitations on the availability, or increases, in the cost of credit and capital; increases in inflation, interest rates, or interest rates;employee costs; high unemployment; natural disasters; or a combination of these or other factors.

In recent years, economic growth and business activity across a wide range of industries has been slow and uneven. There are continuing concerns related to the level of U.S. government debt, fiscal actions that may be taken to address that debt, energy price volatility, global economic conditions, and significant uncertainty with respect to domestic and international fiscal and monetary policy. Economic and inflationary pressure on consumers and uncertainty about continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. There can be no assurance that these conditions will improve or that these conditions will not worsen. Such conditions could adversely affect the credit quality of the Bank’s loans and the Company’s business, financial condition, and results of operations.

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 part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.  Through December 31, 2020 $3.94 million, or 6.46%, of the Company’s Paycheck Protection Program loan balances had been forgiven by the SBA.

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.

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.

Regulatory Risks

We operate in a highly regulated industry subject to examination, supervision, enforcement, and other legal actions by various federal and state governmental authorities, laws, and judicial and administrative decisions.

Congress and federal regulatory agencies continually review banking laws, regulations, and policies. Changes to these statutes, regulations, and regulatory policies, including changes in the interpretation or implementation, may cause substantial and unpredictable effects, require additional costs, limit the types of financial services and products offered, or allow non-banks to offer competing financial services and products. Failure to follow laws, regulations, and policies may result in sanctions by regulatory agencies and civil money penalties, which could have material adverse effects on our reputation, business, financial condition, and results of operations. We have policies and procedures designed to prevent violations; however, there is no assurance that violations will not occur. Existing and future laws, regulations, and policies yet to be adopted may make compliance more difficult or expensive; restrict our ability to originate, broker, or sell loans; further limit or restrict commissions, interest, and other charges earned on loans we originate or sell; and adversely affect our business, financial condition, and results of operations.

The Bank’s ability to pay dividends is subject to regulatory limitations that may affect the Company’s ability to pay expenses and dividends to shareholders.

The Company is a legal entity that is separate and distinct from its subsidiaries. The Company depends on the Bank and its other subsidiaries for cash, liquidity, and the payment of dividends to the Company to pay operating expenses and dividends to stockholders. There is no assurance that the Bank will have the capacity to pay dividends to the Company in the future or that the Company will not require dividends from the Bank to satisfy obligations. The Bank’s dividend payment is governed by various statutes and regulations. For additional information, see “Payment of Dividends” in Item 1 of this report. The Company may not be able to service obligations as they become due if the Bank is unable to pay dividends sufficient to satisfy the Company’s obligations, including our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, cash flows, and prospects.

Interest rate risk results principally when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Federal Reserve. Changes in monetary policy and interest rates could influence the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings. Further, such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income and earnings could be adversely affected. Conversely, if interest rates received on loans and other investments fall more quickly than interest rates paid on deposits and other borrowings, our net interest income and earnings could also be adversely affected.

Uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR” the benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans), announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. Subsequently, the Federal Reserve Board announced final plans for the production of the Secured Overnight Financing Rate (SOFR), which resulted in the commencement of its published rates by the Federal Reserve Bank of New York on April 3, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.  It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.  At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally.  Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings.  If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results of operations.  On November 30, 2020, ICE Benchmark Administration Limited, the administrator of LIBOR, announced that it will consult on its intention to cease the publication of the one week and two month LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023. The outcome of such consultation and its impact on LIBOR could materially affect the economics as well as the timing of the transition away from LIBOR. 

Changes in the fair value of our investment securities may reduce stockholders’ equity and net income.

A decline in the estimated fair value of the Company's investment portfolio may result in a decline in stockholders’ equity, book value per common share, and tangible book value per common share. Unrealized losses are recorded even though the securities are not sold or held for sale. If a debt security is never sold and no credit impairment exists, the decrease is recovered at the security’s maturity. Equity securities have no stated maturity; therefore, declines in fair value may or may not be recovered over time. We conduct quarterly reviews of our securities portfolio to determine if unrealized losses are temporary or other than temporary. No assurance can be given that we will not need to recognize other-than-temporary impairment (“OTTI”) chargesa credit loss for the decline in fair value in the future. Additional OTTI chargescredit loss provision may materially affect our financial condition and earnings. For additional information, see Note 1, “Basis of Presentation and Significant Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

The repeal of the federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. We do not know what interest rates other institutions may offer as market interest rates begin to increase. Our interest expense will increase and net interest margin will decrease if we offer interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, and results of operations.

Credit Risk

Our accounting estimates and risk management processes rely on analytical and forecasting models.

The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset/liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models used for determining probable loan losses are inadequate, the allowance for loancredit losses may not be sufficient to cover actual loan losses and an increase in the loan loss provision could materially and adversely affect our operating results. Federal regulatory agencies regularly review our loans and allowance for loancredit losses as an integral part of the examination process. There is no assurance that we will not, or that regulators will not require us to, increase our allowance in future periods, which could materially and adversely affect our earnings and profitability. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon the sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition, and results of operations. For additional information, see "Fair Value Measurements" and "Allowance for LoanCredit Losses" in the "Critical Accounting Policies" section in Part II, Item 7 and Note 1, "Basis of Presentation and Significant Accounting Policies," to the Consolidated Financial Statements in Part II, Item 8 of this report.

We are subject to credit risk associated with the financial condition of other financial institutions

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Financial institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies, and other institutional clients. Our ability to engage in routine funding transactions could be adversely affected by the failure, actions, and commercial soundness of other financial institutions. These transactions may expose us to credit risk if our counterparty or client defaults on their contractual obligation. Our credit risk may increase if the collateral we hold cannot be realized or liquidated at prices sufficient to recover the full amount of the loan or derivative exposure due to us. In the event of default, we may be required to provide collateral to secure the obligation to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, we may experience delays in recovering the assets posted as collateral or may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty. Losses from routine funding transactions could have a material adverse effect on our financial condition and results of operations.

 Our commercial loan portfolio may expose us to increased credit risk.

Commercial business and real estate loans generally have a higher risk of loss because loan balances are typically larger than residential real estate and consumer loans and repayment is usually dependent on cash flows from the borrower’s business or the property securing the loan. Our commercial business loans are primarily made to small business and middle market customers. As of December 31, 2020,2023, commercial business and real estate loans totaled $1.11 billion, $1.66 billion, or 50.84%64.59%, of our total loan portfolio. As of the same date, our largest outstanding commercial business loan was $5.72 millionwas $15.74 million and largest outstanding commercial real estate loan was $9.73 million. $14.71 million. Commercial construction loans generally have a higher risk of loss due to the assumptions used to estimate the value of property at completion and the cost of the project, including interest. If the assumptions and estimates are inaccurate, the value of completed property may fall below the related loan amount. As of December 31, 2020,2023, commercial construction loans totaled $44.65  $105.95 million, or 2.04% of 4.12% our total loan portfolio. As of the same date, our largest outstanding commercial construction loan was $4.51 million. $20.59 million. Losses from our commercial loan portfolio could have a material adverse effect on our financial condition and results of operations.

Operational Risks

We face strong competition from other financial institutions, financial service companies, and organizations that offer services similar to our offerings.

Our larger competitors may have substantially greater resources and lending limits, name recognition, and market presence that allow them to offer products and services that we do not offer and to price loans and deposits more aggressively than we do. The expansion of non-bank competitors, which may have fewer regulatory constraints and lower cost structures, has intensified competitive pressures on core deposit generation and retention. For additional information, see "Competition" in Item 1 of this report. Our success depends, in part, on our ability to attract and retain customers by adapting our products and services to evolving customer needs and industry and economic conditions. Failure to perform in any of these areas could weaken our competitive position, reduce deposits and loan originations, and adversely affect our financial condition, results of operations, cash flows, and prospects.

Liquidity risk could impair our ability to fund operations.

Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity. Company specific factors such as a decline in our credit rating, an increase in the cost of capital from financial capital markets, a decrease in business activity due to adverse regulatory action or other company specific event, or a decrease in depositor or investor confidence may impair our access to funding with acceptable terms adequate to finance our activities. General factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a decrease in business activity due to political or environmental events may impair our access to liquidity.  Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as we and other regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely. As of December 31, 2023, approximately 18.37% of our deposits were uninsured and we rely on these deposits for liquidity. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations.

We may require additional capital in the future that may not be available when needed.

We may need to raise additional capital to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB’s Discount Window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital will be available, on acceptable terms or at all, in the future.

We test goodwill for impairment annually, or more frequently if events or circumstances indicate there may be impairment, using either a quantitative or qualitative assessment. If we determine that the carrying amount of a reporting unit is greater than its fair value, a goodwill impairment charge is recognized for the difference, but limited to the amount of goodwill allocated to that reporting unit. Unfavorable or uncertain economic and market conditions may trigger additional impairment charges that may cause an adverse effect on our earnings and financial position. For additional information, see “Goodwill and Other Intangible Assets”“Goodwill” in the “Critical Accounting Policies” section in Part II, Item 7 and Note 1, “Basis of Presentation and Significant Accounting Policies,” and Note 9,8, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

We are subject to certain obligations under FDIC loss share agreements that specify how to manage, service, report, and request reimbursement for losses incurred on covered assets.

Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain requirements, oversight and interpretation, and contractual term limitations. Our obligations under loss share agreements are extensive, and failure to follow any obligations could result in a specific asset, or group of assets, losing loss share coverage. Reimbursement requests are subject to FDIC review and may be delayed or disallowed if we do not comply with our obligations. Losses projected to occur during the loss share term may not be realized until after the expiration of the applicable agreement; consequently, those losses may have a material adverse impact on our results of operations. Our current loss estimates only include those projected to occur during the loss share period and for which we expect reimbursement from the FDIC at the applicable reimbursement rate. We are subject to FDIC audits to ensure compliance with the loss share agreements. The loss share agreements are subject to interpretation by the FDIC and us; therefore, disagreements about the coverage of losses, expenses, and contingencies may arise. The realization of benefits to be received from the FDIC ultimately depends on the performance of the underlying covered assets, the passage of time, claims paid by the FDIC, and interpretation; therefore, the amount received could differ materially from the carrying value of expected reimbursements and have a material effect on our financial condition and results of operations. For additional information, see Note 1, “Basis of Presentation and Accounting Policies,” and Note 7, “FDIC Indemnification Asset,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

We may be required to pay higher FDIC insurance premiums or special assessments.

Our deposits are insured up to applicable limits by the DIF of the FDIC and we are subject to deposit insurance assessments to maintain the DIF. For additional information, see “Deposit Insurance and Assessments” in Item 1 of this report. We are unable to predict future insurance assessment rates; however, deterioration in our risk-based capital ratios or adjustments to base assessment rates may result in higher insurance premiums or special assessments. The deterioration of banking and economic conditions and financial institution failures deplete the FDIC’s DIF and reduce the ratio of reserves to insured deposits. If the DIF is unable to meet funding requirements, increases in deposit insurance premium rates or special assessments may be required. Future assessments, increases, or required prepayments related to FDIC insurance premiums may negatively affect our financial condition and results of operations.

Our operational capabilities depend on internal and third-party systems which could fail, be breached or otherwise be compromised.

We rely on electronic communications and information systems, including those provided by third-party service providers, to conduct our business operations. Risks associated with our reliance on internal and third-party technology include cybersecurity incidents, operational failures and service interruptions, misconduct by our employees or those of third parties, and reputational damages. First Community Bank cannot be certain that we will receive timely notification from our third parties of cyberattacks or other cybersecurity breaches affecting their systems. Like other financial institutions, First Community Bank experiences malicious cyber activity directed at our vendors and other service providers. There is no guarantee that the measures the Company takes will provide absolute security or recoverability given that the techniques used in cyberattacks are complex and frequently change and are difficult to anticipate. Our employees and third parties may expose the Company to risk as a result of human error, misconduct, malfeasance, or a failure or breach of systems and infrastructure. For example, the Company’s ability to conduct business may be adversely affected by any significant disruptions, including to third parties service providers. Our third-party service providers include large entities with significant market presence in their respective fields; therefore, their services could be difficult to replace quickly if there are operational failures or service interruptions.

We face cybersecurity risks which could result in the disclosure of confidential information, adversely affect the Company’s operations, cause reputational damage, and create significant legal and financial exposure.

First Community Bank and its customers, regulators, and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to and are likely to continue to be the target of cyberattacks, such as denial of service attacks, hacking, malware or ransomware intrusion, data corruption attempts, terrorist activities, or identity theft. Cyberattacks may expose security vulnerabilities in the Company’s systems or the systems of third parties or other security measures that could result in the unauthorized gathering, monitoring, misuse, release, loss, or destruction of confidential, proprietary, or sensitive information. A cyberattack could also damage the Company’s systems by introducing material disruptions to the Company’s or the Company’s customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance the Company’s protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Company’s systems and implement controls, processes, policies and other protective measures, the Company may not be able to anticipate all security breaches, nor may the Company be able to implement sufficient preventive measures against such security breaches, which may result in material losses or other adverse consequences.

Even the most advanced internal control environment may be vulnerable to compromise. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently and may not be recognized until launched or well after a breach has occurred. In addition, the existence of cyberattacks or security breaches at third-party vendors with access to the Company’s data may not be disclosed to the Company in a timely manner.

A successful penetration or circumvention of system security could cause serious negative consequences, including loss of customers and business opportunities; costs associated with maintaining business relationships after an attack or breach; significant disruption to the Company’s operations and business; misappropriation, exposure or destruction of the Company’s confidential information, intellectual property, funds and those of the Company’s customers; damage to the Company’s or the Company’s customers’ or third parties’ computers or systems; or a violation of applicable privacy laws and other laws. This could result in litigation exposure, regulatory fines, penalties, loss of confidence in the Company’s security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, which could adversely impact the Company’s results of operations, liquidity, and financial condition. In addition, the Company may not have adequate insurance coverage to compensate for losses from a cybersecurity event.

We continue to encounter technological changeand must effectively anticipate and implement new technology.are subject to information security risks associated with technology.

The financial services industry continues to experience rapid technological change with the introduction of new, and increasingly complex, technology-driven products and services. The effective use of technology increases operational efficiency that enables financial service institutions to reduce costs.meet rapidly evolving customer demands. Our future success depends, in large part, on our ability to provide products and services that satisfactorily meet the financial needs of our customers, as well as to realize additional efficiencies in our operations. We may fail to use technology-driven products and services effectively to better serve our customers and increase operational efficiency or sufficiently invest in technology solutions and upgrades to ensure systems are operating properly. Further, many of our competitors have substantially greater resources to invest in technology, which may adversely affect our ability to compete.

We rely on electronic communications and information systems, including those provided by third-party vendors, to conduct our business operations. Our security risks increase as our reliance on technology increases; consequently, the expectation to safeguard information by monitoring systems for potential failures, disruptions, and breakdowns has also increased. Risks associated with technology include security breaches, operational failures and service interruptions, and reputational damages. These risks also apply to our third-party service providers. Our third-party vendors include large entities with significant market presence in their respective fields; therefore, their services could be difficult to replace quickly if there are operational failures or service interruptions.

We rely on our technology-driven systems to conduct daily business and accounting operations that include the collection, processing, and retention of confidential financial and client information. We may be vulnerable to security breaches, such as employee error, cyberattacks, and viruses, beyond our control. In addition to security breaches, programming errors, vandalism, natural disasters, terrorist attacks, and third-party vendor disruptions may cause operational failures and service interruptions to our communication and information systems. Further, our systems may be temporarily disrupted during implementation or upgrade. Security breaches and service interruptions related to our information systems could damage our reputation, which may cause us to lose customers, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.

Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information, or to introduce viruses or other malware through "Trojan horse" programs to our information systems and/or our customers' computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology, and customer and employee education, such cyberattacks against us or our third-party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cybercrime are complex and continue to evolve. More generally, publicized information about security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.

While we have not experienced a significant compromise, significant data loss, or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyberattacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third-party vendors, including as a result of cyberattacks, could (1) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of our customers; (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (3) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose us to civil litigation, governmental fines and possible financial liability; (4) require significant management attention and resources to remedy the damages that result; or (5) harm our reputation or cause a decrease in the number of customers who choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to claims and litigation pertaining to intellectual property.

Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support the Company’s day-to-day operations. Technology companies often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions often seek injunctions and substantial damages.

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time consuming, disruptive to the Company’s operations, and distracting to management. If the Company is found to have infringed on one or more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third party. In certain cases, the Company may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial condition, and results of operations.

Risks Related to Our Common Stock

The market price of our common stock may be volatile.

Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired. Our common stock price may fluctuate significantly due to a variety of factors that include the following:

General market fluctuations; industry factors; political conditions; and general economic conditions and events, such as economic slowdowns, recessions, interest rate changes, or credit loss trends, could also cause our common stock price to decrease regardless of operating results.

The trading volume in our common stock is less than that of other larger financial services companies.

Although our common stock is listed for trading on the NASDAQ, the trading volume in our common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock or the expectation of these sales could cause our stock price to fall.

We may not continue to pay dividends on our common stock in the future.

Our common stockholders are only entitled to receive dividends when declared by our Board of Directors from funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so, and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. As a financial holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve about capital adequacy and dividends. For additional information, see “Payment of Dividends” in Item 1 of this report.

General Risks

We may require additional capital in the future that may not be available when needed.

We may need to raise additional capital to strengthen our capital position, increase our liquidity, satisfy obligations, or pursue growth objectives. Our ability to raise additional capital depends on current conditions in capital markets, which are outside our control, and our financial performance. Certain economic conditions and declining market confidence may increase our cost of funds and limit our access to customary sources of capital, such as borrowings with other financial institutions, repurchase agreements, and availability under the FRB's Discount Window. Events that limit access to capital markets and the inability to obtain capital may have a materially adverse effect on our business, financial condition, results of operations, and market value of common stock. We cannot provide any assurance that additional capital will be available, on acceptable terms or at all, in the future.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. In the ordinary course of business, we foreclose on and take title to properties that secure certain loans. Hazardous or toxic substances could be found on properties we own. If substances are present, we may be liable for remediation costs, personal injury claims, and property damage and our ability to use or sell the property would be limited. We have policies and procedures in place that require environmental reviews before initiating foreclosure actions on real property; however, these reviews may not detect all potential environmental hazards. Environmental laws that require us to incur substantial remediation costs, which could materially reduce the affected property’s value, and other liabilities associated with environmental hazards could have a material adverse effect on our financial condition and results of operations.

Potential acquisitions may disrupt our business and dilute stockholder value.

We may seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or the potential for improved profitability through financial management, economies of scale, or expanded services. Risks inherent in acquiring other banks, businesses, and banking branches may include the following:

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of debt or equity securities may occur at any time. Acquisitions typically involve goodwill, a purchase premium over the acquired company’s book and market values; therefore, dilution of our tangible book value and net income per common share may occur. If we are unable to realize revenue increases, cost savings, geographic or product presence growth, or other projected benefits from acquisitions, our financial condition and results of operations may be adversely affected.

Attractive acquisition opportunities may not be available in the future.

We expect banking and financial companies, which may have significantly greater resources, to compete for the acquisition of financial service businesses. This competition could increase the price of potential acquisitions that we believe are attractive. If we fail to receive proper regulatory approval, we will not be able to consummate an acquisition. Our regulators consider our capital, liquidity, profitability, regulatory compliance, level of goodwill and intangible assets, and other factors when considering acquisition and expansion proposals. Future acquisitions may be dilutive to our earnings and equity per share of our common stock.

We may lose members of our management team and have difficulty attracting skilled personnel.

Our success depends, in large part, on our ability to attract and retain key employees. Competition for the best people can be intense. The unexpected loss of key personnel could have a material adverse impact on our business due to the loss of certain skills, market knowledge, and industry experience and the difficulty of promptly finding qualified replacement personnel. Certain existing and proposed regulatory guidance on compensation may also negatively affect our ability to retain and attract skilled personnel.

Our internal controls and procedures may fail or be circumvented.

We review our internal controls over financial reporting quarterly and enhance controls in response to these assessments, internal and external audit, and regulatory recommendations. A control system, no matter how well conceived and operated, includes certain assumptions and can only provide reasonable assurance that the objectives of the control system are met. These controls may be circumvented by individual acts, collusion, or management override. Any failure or circumvention related to our controls and procedures or failure to follow regulations related to controls and procedures could have a material adverse effect on our business, reputation, results of operations, and financial condition.

We are subject to environmental, social and governance ("ESG") risks that could adversely affect the Company's results of operations, reputation, and the market price of its securities.

Certain investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations with respect to ESG matters when making investment decisions. Certain investors are beginning to incorporate the business risks of ESG regulation and activism and the adequacy of companies’ responses to these into their investment decisions. These shifts in investing priorities may result in adverse effects on the market price of the Company’s securities.

The U.S. Congress, state legislatures and federal and state regulatory agencies, as well as certain stock exchanges, continue to propose numerous initiatives related to ESG matters. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting practices, and credit portfolio concentrations management practices. The lack of empirical data surrounding the credit and other financial risks posed by ESG regulation and activism render it impossible to predict how specifically ESG matters may impact the Company’s financial condition and results of operations.

Specifically, environmental activism may adversely impact the economic viability of many of the Company’s deposit and loan customers in our West Virginia and southwestern Virginia markets. We have customers who operate in carbon-intensive industries like coal, oil and gas that are exposed to climate activism risks and those risks created by a transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies. Further, the effects of climate change activism may negatively impact regional and local economic activity, which could impact the economies of the communities the Company serves and in which we operate. The Company’s business, reputation and ability to attract and retain employees and customers may also be harmed if our response to ESG activism is perceived to be excessive or insufficient.

Federal and state banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as a tool to effect ESG activism, both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of ESG matters. Given that ESG matters could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from activism, the Company faces increasing focus on our resilience to ESG risks. Ongoing legislative or regulatory uncertainties and changes regarding ESG risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

None.

Cybersecurity Risk Management and Strategy

Cybersecurity risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies to facilitate and conduct financial transactions. The Company maintains a comprehensive risk-based cybersecurity program to identify, measure, manage, and disclose material cybersecurity risks. The Company utilizes the Federal Financial Institution Examination Council’s ("FFIEC") Cybersecurity Assessment Tool ("CAT") as a diagnostic test to help identify the Company’s cyber risk level and determine the maturity of our cybersecurity program. The CAT is supplemented by an annual self-assessment and external audits and reviews, the results of which drive the development and implementation of the Company’s cybersecurity strategy to ensure that cyber risk management practices are aligned with the risk profile of the Company. 

The Company uses the Center for Internet Security ("CIS") Critical Security Controls framework to balance cybersecurity risk exposure with investment in mitigation strategies. This framework provides a prescriptive, prioritized set of cybersecurity safeguards that fully align with those of the National Institute of Standards and Technology, the International Standards Organization 27000 series, and the requirements and guidance from applicable regulatory authorities, including the Federal Financial Institutions Examination Council.

The Company’s cybersecurity strategy is enabled by people, processes, and technology that provide multilayered defenses including advanced capabilities for early and rapid cyber threat identification, detection, protection, response, and recovery. The Company employs a team of dedicated, skilled talent to operationalize the cybersecurity strategy. The internal team is supported by arrangements with a third party to provide continuous endpoint monitoring and incident response. 

The Company’s entire workforce receives mandatory cybersecurity training that includes quarterly social engineering exercises and informative online courses assigned based on assessed skill gaps. The Company also provides cyber risk awareness guidance to customers and promotes customer cyber hygiene through periodic communications. The Company conducts scenario-driven test exercises simulating impacts and consequences developed through analysis of real-world cybersecurity incidents as well as known and anticipated cyber threats. These exercises are designed to assess the viability of the Company’s incident response and management programs and provide the basis for continuous improvement.

The Company actively monitors and evaluates threats, events, and the performance of its business operations and continually adapts its risk mitigation activities accordingly. To that end, the Company maintains a comprehensive vulnerability management program that includes regular internal scans of the entire network to identify and measure the severity of security vulnerabilities, a team of dedicated network engineers who are responsible for fixing identified vulnerabilities within pre-defined timeframes based on severity, and at least annual independent network penetration testing by a qualified third party.  

Cyber risk monitoring also includes the Company’s arrangements with and exposure to third party service providers. We identify the criticality of our third-party service providers, in part, by determining their use of and access to confidential customer information. We conduct comprehensive cybersecurity reviews on all third parties that have access to confidential information. Our third-party reviews make use of technology that provides significant visibility into third party organizations, in real time, to assess third party compliance with a host of globally recognized IT security standards and frameworks and the likelihood of a cyberattack on a third party.

The Company also maintains a robust firewall system and firewall management program to restrict inbound and outbound network traffic. A dedicated team of network engineers manages firewall rulesets and monitors firewall health and alerting.

The risks from cybersecurity threats have not materially affected the Company’s business strategy, results of operations, or financial condition. Although the Company has invested substantial resources to manage and reduce cybersecurity risk, it is not possible to eliminate this risk. The Company obtains insurance that protects against certain losses, expenses, and damages associated with cybersecurity risk. See Item 1A, “Risk Factors,” for additional information regarding cybersecurity risk.
 
Cybersecurity Governance

The Company’s Board of Directors devotes significant time and attention to its oversight of cybersecurity risk. Select members of the Board serve on the Information Systems Steering Committee ("ISSC"), which is responsible for approving IT strategic plans and all IT-related policies and for oversight of the information security program, among other matters. To fulfill its responsibilities, the ISSC receives periodic reports on the cybersecurity risk management program, including information security risks and incidents, emerging threats, and both internal and independent audit reports on the effectiveness of the control environment. 

Executive leadership is responsible for management of the cybersecurity program. The IT Security Director supervises daily operations of the cybersecurity program and reports directly to the Chief Risk Officer ("CRO"). The CRO chairs the Information Security Sub-Committee ("Sub-Committee"), a management committee that meets at least monthly to receive regular updates on the status of the cybersecurity risk management program and strategic cyber initiatives. The Sub-Committee’s actions and activities are reviewed by the ISSC at least quarterly. The Company has a management level Change Control Board ("CCB") which is responsible for reviewing and approving actions of the vulnerability management team, changes to hardware/software including the introduction of new hardware/software, and changes to firewall rulesets. The IT Security Director serves as a voting member of the CCB. Additionally, the Company has a Cyber Incident Response Team ("CIRT") which includes key members of management including the CRO and IT Security Director. The CIRT manages significant cyber-specific events with escalation up to executive leadership and the Board. 

We own our corporate headquarters located at One Community Place, Bluefield, Virginia. As of December 31, 2020,2023, the Bank provided financial services through a network of  50 branch locations in West Virginia (18(17 branches), Virginia (23 branches), North Carolina (7(11 branches), and Tennessee (2 branches). We own 49all of those branchesthe branch locations with the exception of two branch locations which are leased; one location in West Virginia and lease the remaining branch.other in North Carolina.  As of December 31, 2020,2023, there were no mortgages or liens against any properties. We believe that our properties are suitable and adequate to serve as financial services facilities. A list of all branch and ATM locations is available on our website at www.firstcommunitybank.com. Information contained on our website is not part of this report. For additional information, see Note 8,7, “Premises, Equipment, and Leases,” to the Consolidated Financial Statements in Part II, Item 8 of this report.

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

None.

PART II

Market Information and Holders

Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC. As of March 02, 2021,1, 2024, there were 2,900 3,619 record holders and 17,641,124 outstanding18,470,596 outstanding shares of our common stock.

Purchases of Equity Securities

We repurchased 734,653768,079 shares of our common stock in 2020, 487,4002023, 706,117 shares of our common stock in 2019,2022, and 1,060,312949,386 shares in 2018.2021.  

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

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of a Publicly Announced Plan				Maximum Number of Shares that May Yet be Purchased Under the Plan(1)
October 1-31, 2023			138,100			$	30.65				138,100				2,553,900
November 1-30, 2023			42,900				33.96				42,900				2,511,000
December 1-31, 2023			8,500				34.12				8,500				2,502,500
Total			189,500			$	31.55				189,500

 

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(1)

In the first quarter of 2020, the Company exhausted its 6,600,000 shares repurchase authorization.  As a result of the uncertainty associated with the COVID-19 pandemic; the Company elected not to repurchase shares during the remainder of 2020.  In February 2021,September 2023, the Board of Directors approved a new 2,400,000repurchase plan to repurchase 2,700,000 shares and terminated the share repurchase authorization.                                                                                                                                                                                  plan adopted in January, 2021.  The 2021 plan would have expired December 2023.  The timing, price, and quantity of purchases under the repurchase plan are at the discretion of management and the repurchase plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances.

 

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Stock Performance Graph

 

The following graph, compiled by S&P Global Market Intelligence (“S&P Global”), compares the cumulative total shareholder return on our common stock for the five years ended December 31, 2020,2023, with the cumulative total return of the S&P 500 Index, the NASDAQ Composite Index, and S&P Global’s Asset Size & Regional Peer Group. The Asset Size & Regional Peer Group consists of 4247 bank holding companies with total assets between $1 billion and $5 billion that are located in the Southeast Region of the United States and traded on NASDAQ, the OTC Bulletin Board, and pink sheets. The cumulative returns assume that $100 was originally invested on December 31, 2014,2018, and that all dividends are reinvested.

 

 

		Year Ended December 31,																								Year Ended December 31,
		2015				2016				2017				2018				2019				2020				2018				2019				2020				2021				2022				2023
First Community Bankshares, Inc.			100.00				166.50				162.63				185.68				188.32				137.10				100.00				101.42				73.86				118.56				124.63				141.73
S&P 500 Index			100.00				111.96				136.40				130.42				171.49				203.04				100.00				131.49				155.68				200.37				164.08				207.21
NASDAQ Composite Index			100.00				108.87				141.13				137.12				187.44				271.64				100.00				136.69				198.10				242.03				163.28				236.17
S&P Global Asset & Regional Peer Group(1)			100.00				134.61				152.15				142.04				167.21				132.04				100.00				120.00				96.19				137.45				130.50				128.73

 

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(1) Includes the following institutions: American National Bankshares Inc.; Atlantic Capital Bancshares,Auburn National Bancorporation, Inc.; BankFirst Capital Corporation; BayFirst Financial Corp.; Burke & Herbert Financial Services Corp.; C&F Financial Corporation; Capital City Bank Group, Inc.; CapStar Financial Holdings, Inc.; Carter Bankshares, Inc.; Chesapeake Financial Shares, Inc.; Citizens Bancorp Investment, Inc.; Citizens Holding Company; CoastalSouth Bancshares, Inc.; Colony Bankcorp, Inc.; Community Bankers Trust Corporation;Dogwood State Bank; Eagle Financial Services, Inc.; F&M Bank Corp.; FineMark Holdings, Inc.; First Community Bankshares, Inc.; First Community Corporation;  First Home Bancorp,National Corporation; First US Bancshares, Inc.; Freedom Financial Holdings, Inc.; FVCBankcorp, Inc.; GrandSouth Bancorporation; Heritage Southeast Bancorporation,HomeTrust Bancshares, Inc.; HomeTrust Bancshares,John Marshall Bancorp, Inc.; MainStreet Bancshares, Inc.; MetroCity Bankshares, Inc.; Morris State Bancshares, Inc.; Mountain Commerce Bankcorp,Bancorp, Inc.; MVB Financial Corp.; National Bankshares, Inc.; NewtekOne, Inc.; Oakworth Capital, Inc.; Old Point Financial Corporation; Peoples Bancorp of North Carolina, Inc.; PremierPrimis Financial Bancorp,Corp.; Skyline Bankshares, Inc.; Professional Holding Corp.; Reliant Bancorp, Inc.; Select Bancorp, Inc.; SmartFinancial,South Atlantic Bancshares, Inc.; Southern First Bancshares, Inc.;  Southern National Bancorp of Virginia,States Bancshares, Inc.; Summit Financial Group, Inc.; TGRUnited Bancorporation of Alabama, Inc.; USCB Financial Holdings, Inc.; Uwharrie Capital Corp.; Virginia National Bankshares Corporation; White River Bancshares, Co.

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Item 6.

Selected Financial Data.Reserved

 

The following table presents selected consolidated financial data, derived from the audited financial statements, as of and for the five years ended December 31, 2020. This information should be read in conjunction with Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.

		Year Ended December 31,
(Amounts in thousands, except share and per share data)		2020				2019				2018				2017				2016
Selected Balance Sheet Data
Investment debt securities		$	83,358			$	169,574			$	178,129			$	190,674			$	212,639
Loans			2,186,632				2,114,460				1,775,084				1,817,184				1,852,948
Allowance for loan losses			26,182				18,425				18,267				19,276				17,948
Total assets			3,011,136				2,798,847				2,244,374				2,388,460				2,386,398
Average assets			2,892,287				2,217,241				2,330,611				2,370,321				2,455,458
Deposits			2,546,247				2,329,912				1,855,750				1,929,891				1,841,338
Borrowings			964				1,641				29,370				80,086				178,713
Total liabilities			2,584,406				2,370,028				1,911,517				2,037,746				2,047,341
Total stockholders' equity			426,730				428,819				332,857				350,714				339,057
Average stockholders' equity			420,792				336,138				341,519				349,701				338,475
Summary of Operations
Interest income		$	114,036			$	94,968			$	98,294			$	95,308			$	94,724
Interest expense			5,464				5,515				7,449				8,090				9,844
Net interest income			108,572				89,453				90,845				87,218				84,880
Provision for loan losses			12,668				3,571				2,393				2,771				1,255
Noninterest income			29,833				33,677				26,443				24,568				25,534
Noninterest expense			79,625				69,763				69,773				66,902				71,214
Income tax expense			10,186				10,994				8,782				20,628				12,819
Net income			35,926				38,802				36,340				21,485				25,126
Net income available to common shareholders			35,926				38,802				36,340				21,485				25,126
Selected Share and Per Share Data
Basic earnings per common share		$	2.02			$	2.47			$	2.19			$	1.26			$	1.45
Diluted earnings per common share			2.02				2.46				2.18				1.26				1.45
Cash dividends per common share			1.00				0.96				0.78				0.68				0.60
Special cash dividend per common share			—				—				0.48				—				—
Book value per common share at year-end			24.08				23.33				20.79				20.63				19.95
Weighted average basic shares outstanding			17,781,748				15,690,812				16,587,504				17,002,116				17,319,689
Weighted average diluted shares outstanding			17,815,380				15,756,093				16,666,385				17,077,842				17,365,524
Selected Ratios
Return on average assets			1.24	%			1.75	%			1.56	%			0.91	%			1.02	%
Return on average common equity			8.54	%			11.54	%			10.64	%			6.14	%			7.42	%
Average equity to average assets			14.55	%			15.16	%			14.65	%			14.75	%			13.78	%
Dividend payout			49.50	%			38.82	%			57.51	%			53.81	%			41.36	%
Common equity Tier 1 ratio			14.28	%			14.31	%			13.72	%			13.98	%			13.88	%
Tier 1 risk-based capital ratio			14.28	%			14.31	%			13.72	%			13.98	%			14.74	%
Total risk-based capital ratio			15.53	%			15.21	%			14.79	%			15.06	%			15.79	%
Tier 1 leverage ratio			10.24	%			14.02	%			10.95	%			11.06	%			11.07	%

2019

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report. 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 bank150 year-old Virginia-chartered banking institution. Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.  As of December 31, 2020,2023, the Bank operated 5053 branches in Virginia, West Virginia, North Carolina and Tennessee. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent,supplemented by retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities.

 

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of commissions on assets under management and investment advisory fees. As of December 31, 2020,2023, the Trust Division and FCWM managed and administered $1.18$1.49 billion in combined assets under various fee-based arrangements as fiduciary or agent.

 

OurOn April 21, 2023, the Company completed the acquisition of Surrey Bancorp.  Total assets of $466.25 million were acquired in the transaction.  In addition the Company issued 2.99 million common shares in the transaction.  The purchase transaction created $14.38 million in goodwill and $12.7 million in other intangible assets. The Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank on September 16, 2022, which resulted in a gain of $1.66 million. The Company had no acquisition and divestiture activity during the last three years includes the December 31, 2019, acquisition of Highlands Bankshares, Inc. (“Highlands”), headquartered in Abingdon, Virginia with total assets of $563 million. The completion of the transaction resulted in total consolidated assets increasing to $2.80 billion immediately after the transaction. Activity in prior years include the completion of our Agreement and Plan of Reincorporation and Merger changing our corporate domicile from Nevada to Virginia on October 2, 2018, as well as the sale of our remaining insurance agency assets to Bankers Insurance, LLC on October 1, 2018.2021.    For additional information, see Note 2, “Acquisitions and Divestitures,” to the Consolidated Financial Statements in Item 8 of this report.

 

Recent Developments: COVID-19 and the CARES Act

The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic and almost all public commerce and related business activities have been curtailed, to varying degrees, with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 has the potential to create widespread business continuity issues for the Company.

Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (“PPP”). The package also included extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s operations and could continue to impact operations going forward.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While progress has been made on the vaccine front, if the global response to contain COVID-19 is prolonged or is unsuccessful, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

Pertaining to our December 31, 2020, financial condition and results of operations, COVID-19 had a material impact on our allowance for loan losses (“ALL”). While we have not yet experienced any significant charge-offs related to COVID-19, our ALL calculation and resulting provision for loan losses were significantly impacted by expectations for future losses due to governmental reactions to the pandemic. Refer to our discussion of the ALL in Note 6 of our financial statements as well as additional discussion in MD&A. Should economic conditions worsen, we could experience further increases in our required ALL and record additional loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

The Company’s fee income has been reduced due to COVID-19.  Consumer spending behavior has proven to be very conservative during the pandemic resulting in a decrease in overdraft behavior that generates NSF and other fee income.  Should the pandemic and the global response escalate further, it is possible that the Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.

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The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted. As of December 31, 2020, the Company carried $3.47 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 recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

As of December 31, 2020, the Company continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2020.  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 2020.  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 judgments 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.

As of December 31, 2020, our goodwill was not impaired. Management performed a quantitative goodwill impairment test as of October 1, 2020. The goodwill impairment test did not identify any goodwill impairment for our one reporting unit, nor was it at risk of failing the quantitative test. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020, we had goodwill of $129.57 million, representing approximately 30.36% of equity.

As of December 31, 2020, we did not have any impairment with respect to our intangible assets or other long-lived assets. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2020 we had intangible assets of $7.07 million, representing approximately 1.66% of equity.

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 WHO’s pandemic declaration, the Company’s Enterprise Risk Management team implemented its Board approved Business Continuity Plan.  The Company appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID-19.   Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company’s preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19. At December 31, 2020, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations. We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.

As of December 31, 2020, we don’t anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020, and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.  Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company 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 December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.  It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021 ("CAA") signed into law on December 27, 2000, that extended the ability to provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.

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With the passage of the PPP, administered by the Small Business Administration (“SBA”) 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 part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") enacted on December 27, 2020, in January, 2021, the SBA released applications for the second round of PPP loans for second draw loans for borrowers who received funding in the first round and first draw loans to first time borrowers.  As of December 31, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.  Through December 31, 2020, $3.94 million, or 6.46%, of the Company’s PPP loan balances had been forgiven by the SBA. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish an allowance for credit loss through additional credit loss expense charged to earnings.

The Company is committed to assisting our customers in this time of need. Branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members with lobbies available on a limited appointment-only basis.  In addition, we have increased our emphasis on digital banking platforms.

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Within a short period of time, through teamwork and the adaptability of our management and staff, we were able to transition and provide remote access to non-customer facing employees to effectively work from remote locations and were able to ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible communicable illness, including COVID-19, and have been provided additional paid time off to cover compensation during such absences.

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.

Critical Accounting Policies

 

Our consolidated financial statements are prepared in conformity with generally accepted accounting principles (“GAAP”) in the U.S. and prevailing practices in the banking industry. Our accounting policies, as presented in Note 1, “Basis of Presentation and Significant Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report are fundamental in understanding MD&A and the disclosures presented in Item 8, “Financial Statements and Supplementary Data,” of this report. Management may be required to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates used, we have identified the allowance for loan losses and goodwill as the accounting areas that require the most subjective or complex judgments or are the most susceptible to change.

 

Allowance for LoanCredit Losses or "ACL"

 

We reviewThe ACL reflects management’s estimate of losses that will result from the inability of our allowance forborrowers to make required loan losses quarterlypayments. Management uses a systematic methodology to determine if it is sufficient to absorb probable loan losses inits ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the portfolio. This determination requires management to make significant estimateseffects of past events, current conditions, and assumptions. While management uses its best judgmentreasonable and available information,supportable forecasts on the ultimate adequacycollectability of the allowance is dependent uponloan portfolio. The Company’s estimate of its ACL involves a varietyhigh degree of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertaintiesjudgment; therefore, management’s process for determining expected credit losses may result in material changesa range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 – "Basis of Presentation - Significant Accounting Policies" in this Annual Report on Form 10-K for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 — "Allowance for Credit Losses" in this Annual Report on Form 10-K, “Allowance for Credit Losses” in this MD&A. 

The Company uses a number of economic variables to estimate the allowance for loancredit losses, with the most significant driver being a forecast of the national unemployment rate. In the December 31, 2023, estimate, the Company assumed an unemployment forecast range of  4.0% to 4.3%, compared to the range of 3.9% to 4.8% utilized in the near term; however, the amount of the change cannot reasonably be estimated.

Our allowance for loan losses consists of specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans that have been segmented into loan classes with similar risk characteristics such as the type of loan and collateral. General reserve allocations are basedDecember 31, 2022, estimate.  Based on management’s judgments of qualitative and quantitative factors that include, but are not limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for loans classified as special mention and substandard within each loan class in the commercial loan segment are adjusted by an additional qualitative factor.  Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfoliosensitivity analysis as of December 31, 2020. For2023, an increase of 1% in the unemployment forecast would result in an increase in the allowance for credit losses of approximately 9.00%. 

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information see Note 6, “Allowance for Loan Losses,” toabout the Consolidated Financial Statementsclosing date fair values becomes available. Acquisition and divestiture activities are included in Item 8the Company’s consolidated results of this report.operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred.

 

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Goodwill 

 

Goodwill is tested for impairment annually, on October 31^st, or more frequently if events or circumstances indicate there may be impairment.  We have one reporting unit, Community Banking.  If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2020,2023, which resulted in no goodwill impairment.

Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value.  The process to determine fair value of our reporting unit utilizes widely accepted valuation techniques, such as the market approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method).  The Company engaged an independent valuation specialist to assist with goodwill impairment testing utilizing both the market and  DCF methods.  The resulting fair values from the aforementioned methods were appropriately weighted to determine the final fair value of our reporting unit.

Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples.  The selection of the multiples considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline companies.  Among other factors considered, are the level and expected growth in return on tangible equity relative to the guideline companies selected, implied control premiums, recent transaction prices, as well as data in comparable macroeconomic environments. 

Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate.  The cash flows for the forecasted period are estimated based on management’s most recent projections available as of the testing date, given consideration to minimum equity capital requirements.  The projections include macroeconomic variables developed at the same time.  The terminal growth rate is selected based on management’s long-term expectation for the reporting unit.  The discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.

At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment of goodwill.  While the inherent risk related to uncertainty is embedded in the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and uncertainties related to the pandemic.  Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the valuation.  If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment charges in the future. For additional information, see Note 9, “Goodwill 8, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in Item 8 of this report.

 

Non-GAAP Financial Measures

 

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent (“FTE”) basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

 

We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21% for periods after January 1, 2018.. The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:

 

		Year Ended December 31,												Year Ended December 31,
		2020				2019				2018				2023				2022				2021
(Amounts in thousands)
Net interest income, GAAP		$	108,572			$	89,453			$	90,845			$	127,684			$	112,663			$	102,474
FTE adjustment(1)			647				848				899				454				451				439
Net interest income, FTE		$	109,219			$	90,301			$	91,744			$	128,138			$	113,114			$	102,913
Net interest margin, GAAP			4.27	%			4.54	%			4.37	%			4.43	%			3.90	%			3.65	%
FTE adjustment(1)			0.02	%			0.05	%			0.04	%			0.02	%			0.02	%			0.02	%
Net interest margin, FTE			4.29	%			4.59	%			4.41	%			4.44	%			3.92	%			3.67	%

 

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(1)	FTE basis of 21%.

 

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Performance Overview

 

Highlights of our results of operations in 2020,2023, and financial condition as of December 31, 2020,2023, include the following:

 

●

For the full year, the Company earned $35.93Annual net income for 2023 of $48.02 million, or $2.02$2.72 per diluted common share, a decrease of $2.88 million, or 7.41% over 2019.

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Return on average assets remained strong at 1.24% for the twelve-month period.

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Net interest margin decreased 30 basis points to 4.29% for the full year 2020 compared to 2019.  The decrease is reflective of the current historic low interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired loans.

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The Company booked loan loss provision of $12.67 million;was an increase of $9.10$1.36 million, or 2.91%, compared to the year 2019.  The increase was primarily related to the economic uncertainty caused by the coronavirus pandemic.

●

The Company booked $239.60 million of new residential mortgage loans during the year.2022.

	●	The Company processed 803 loans with original balances totaling $62.74Net interest income increased $15.02 million through the SBA's Paycheck Protection Programcompared to assist small businesses during the COVID-19 pandemic.  As of December 31, 2020, $3.94 million, or 6.46%, of these loan balances had been forgiven by the SBA. 2022, as increases in benchmark interest rates have improved net interest margin.
	●	Interest-freeInterest and fees on loans increased $22.16 million from the same period of 2022 and is attributable to both an increase in yield and an increase in average balance compared to the yield and average balance of the prior year. The Company acquired Surrey Bancorp on April 21, 2023, adding approximately $239.08 million in loans.  Interest income on deposits grew $144.93in banks decreased $1.28 million during 2020,to $2.48 million, primarily due to a significant decrease in the average balance compared to 2022.
	●	Net interest margin of 4.44% is an increase of 52 basis points over the same period of 2022.  The yield on earning assets increased 79 basis points primarily driven by increased earnings on loans.
	●	Provision for credit losses increased $1.41 million and total deposits grew $216.34is primarily attributable to $1.61 million in day two provision for the Surrey portfolio.
	●	Net income was negatively impacted by a $3.00 million accrual for estimated litigation expenses. In addition, $2.39 million in merger related expenses were recognized in 2023 in relation to the Surrey acquisition.

	●	Annualized return on average assets ("ROA") was 1.48% for the twelve months of 2023 compared to 1.45% for the same period of 2022. Annualized return on average common equity ("ROE") was 10.02% for the twelve months of 2023 compared to 11.04%, for the same period of 2022.
	●	The Company completed the strategic acquisition of Surrey Bancorp, on April 21, 2023.  Total assets of $466.25 million were acquired in the transaction increasing the Company's consolidated assets to $3.39 billion.   In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in capital of $71.35 million.  The purchase transaction created $14.38 million in goodwill and $12.70 million in other intangible assets.  Other major balance sheet components increased in the transaction with $239.08 million acquired in loans and $403.64 million in deposits.
	●	The Company’s loan portfolio increased by $172.10 million, or 9.29% 7.17%, from December 31, 2022.  Excluding the Surrey transaction, the loan portfolio decreased approximately $66.98 million, or 2.79%.
	●	Deposits increased $43.51 million, or 1.62%, from year-end 2022.  Excluding the Surrey transaction, deposits decreased approximately $360.13 million, or 13.44%, from December 31, 2022.

	●	Non-performing loans to total loans increased to 0.76% of total loans when compared to year-end 2022.  Net charge-offs for the year ended December 31, 2023, were $4.81 million, or 0.19% of annualized average loans, compared to net charge-offs of $3.87 million, or 0.17% of annualized average loans, for the same period in 2022.
	●	The allowance for credit losses to total loans was 1.41% at December 31, 2023, compared to 1.27% for the same period of 2022.
	●	The accumulated other comprehensive loss of $10.95 million at December 31, 2023, decreased $4.77 million compared to the accumulated other comprehensive loss of $15.71 million at December 31, 2022.
	●	The Company repurchased 768,079 common shares during 2020. 2023 for a total cost of $23.04 million. The Company recently announced a new 2.7 million share repurchase program that replaced the remainder of the prior program.
	●	Book value per common share increased $0.75 to $24.08 compared toat December 31, 2019.

●

The Company completed its stock repurchase authorization in the first quarter2023, was $27.20, an increase of 2020 with the repurchase of 734,653 shares for approximately $21.87 million.  As of December 31, 2020, the Company continues to significantly exceed regulatory "well capitalized" targets, as well as all capital targets of its capital management plan.$1.19 from year-end 2022.

 

Results of Operations

Net Income

 

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

 

														2020 Compared to 2019								2019 Compared to 2018																				2023 Compared to 2022								2022 Compared to 2021
		Year Ended December 31,												Increase				%				Increase				%				Year Ended December 31,												Increase				%				Increase				%
(Amounts in thousands, except per share data)		2020				2019				2018				(Decrease)				Change				(Decrease)				Change				2023				2022				2021				(Decrease)				Change				(Decrease)				Change
Net income		$	35,926			$	38,802			$	36,340			$	(2,876	)			(7.41	)%		$	2,462				6.77	%		$	48,020			$	46,662			$	51,168			$	1,358				2.91	%		$	(4,506	)			(8.81	)%
Basic earnings per common share			2.02				2.47				2.19				(0.45	)			(18.22	)%			0.28				12.79	%			2.67				2.82				2.95				(0.15	)			(5.32	)%			(0.13	)			(4.41	)%
Diluted earnings per common share			2.02				2.46				2.18				(0.44	)			(17.88	)%			0.28				12.84	%			2.72				2.82				2.94				(0.10	)			(3.55	)%			(0.12	)			(4.08	)%
Return on average assets			1.24	%			1.75	%			1.56	%			(0.51	)%			(29.14	)%			0.19	%			12.18	%			1.48	%			1.45	%			1.63	%			0.03	%			2.07	%			(0.18	)%			(11.04	)%
Return on average common equity			8.54	%			11.54	%			10.64	%			(3.00	)%			(26.00	)%			0.90	%			8.46	%			10.02	%			11.04	%			11.96	%			(1.02	)%			(9.24	)%			(0.92	)%			(7.69	)%

 

20202023 Compared to 20192022.  Pre-tax income decreased $3.68increased $1.82 million or 7.40%, duecompared to 2022.  The increase was primarily attributable to an increase in net interest income of $15.02 million.  Net interest income totaled $127.68 million compared to $112.66 million in 2022.  The increase in net interest income was offset by an increase in the provision for credit losses of $1.41 million and an increase in noninterest expense of $9.86$12.06 million.  The increase in provision for credit losses was primarily due to $1.61 million recorded for the day two provision for the acquisition of the Surrey loan portfolio.  The increase in noninterest expense included a $3.00 million accrual for estimated litigation expenses, an increase in salaries and benefits costs of $2.70 million, and an increase of $1.80 million in merger expenses.  Both the merger expense and the increase in salaries and benefits were primarily due to the acquisition of Surrey Bancorp. 

2022 Compared to 2021.   Pre-tax income decreased $6.37 million, or 9.58%, primarily due  to an increase of $15.04 million in provision for loancredit losses of $9.10 million, and a decrease in noninterest income of $3.84 million.  The decreases to income were offset by aan increase in net interest income of $19.12$10.19 million.  Income tax expense decreased $808 thousand primarily as a result of the decrease in pre-tax income.

2019 Compared to 2018. Pre-tax income increased $4.67 million, or 10.36%, due to anThe increase in noninterest incomeprovision for credit losses of $7.23$15.04 million partially offset bywas attributable to a decreasereturn to normalized provisions that include forecasts for higher unemployment rates and weaker macroeconomic trends as compared with prior year recoveries of pandemic-related provisioning.  The increase in net interest income of $1.39$10.19 million was primarily due to increases in both interest on securities and an increaseinterest and fees on loans.  The increases were primarily driven by significant growth in both portfolios.  Interest on deposits in banks increased as well and was primarily driven by rate increases in the provision for loan losses of $1.18 million. Income tax expense increased $2.21 million due to an increase in the effectiveFOMC's target federal funds rate from 19.46% in 2019 to 22.08% in 2020. throughout 2022.

 

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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” above. The following table presents the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

 

		Year Ended December 31,																																				Year Ended December 31,
		2020												2019												2018												2023												2022												2021
(Amounts in thousands)		Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)				Average Balance				Interest(1)				Average Yield/ Rate(1)
Assets
Earning assets
Loans(2)(3)		$	2,142,637			$	110,619				5.16	%		$	1,722,419			$	88,990				5.17	%		$	1,795,391			$	91,819				5.11	%		$	2,538,361			$	127,019				5.00	%		$	2,298,503			$	104,830				4.56	%		$	2,153,099			$	102,996				4.78	%
Securities available for sale			105,005				3,259				3.10	%			126,732				4,334				3.42	%			176,766				5,419				3.07	%			298,389				8,115				2.72	%			256,221				6,172				2.41	%			81,049				2,008				2.48	%
Securities held to maturity			—				—				—				3,045				45				1.48	%			25,081				418				1.67	%
Interest-bearing deposits			296,495				805				0.27	%			116,119				2,447				2.10	%			81,520				1,537				1.89	%			46,601				2,485				5.33	%			330,785				3,767				1.14	%			570,040				745				0.13	%
Total earning assets			2,544,137			$	114,683				4.51	%			1,968,315			$	95,816				4.87	%			2,078,758			$	99,193				4.77	%			2,883,351			$	137,619				4.77	%			2,885,509			$	114,769				3.98	%			2,804,188			$	105,749				3.77	%
Other assets			348,150												248,926												251,853												369,700												328,635												330,640
Total assets		$	2,892,287											$	2,217,241											$	2,330,611											$	3,253,051											$	3,214,144											$	3,134,828
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits		$	556,279			$	311				0.06	%		$	453,824			$	281				0.06	%		$	466,403			$	246				0.05	%		$	686,534			$	405				0.06	%		$	683,502			$	112				0.02	%		$	646,999			$	127				0.02	%
Savings deposits			711,831				902				0.13	%			504,081				823				0.16	%			508,353				382				0.08	%			847,397				6,781				0.80	%			880,171				306				0.03	%			816,845				281				0.03	%
Time deposits			456,755				4,247				0.93	%			418,450				4,288				1.02	%			471,335				4,516				0.96	%			267,957				2,155				0.80	%			322,158				1,235				0.38	%			387,249				2,427				0.63	%
Total interest-bearing deposits			1,724,865				5,460				0.32	%			1,376,355				5,392				0.39	%			1,446,091				5,144				0.36	%			1,801,888				9,341				0.52	%			1,885,831				1,653				0.09	%			1,851,093				2,835				0.15	%
Borrowings
Federal funds purchased																																							2,715				139				5.12	%			—				—				—				—				—				—
Retail repurchase agreements			1,145				3				0.28	%			2,471				4				0.14	%			4,010				5				0.12	%			1,528				1				0.06	%			2,239				2				0.07	%			1,194				1				0.07	%
Wholesale repurchase agreements			—				—				—				3,767				119				3.17	%			25,000				806				3.22	%
FHLB advances and other borrowings			36				1				2.23	%			—				—				—				36,849				1,494				4.05	%
Total borrowings			1,181				4				0.34	%			6,238				123				1.96	%			65,859				2,305				3.50	%			4,243				140				3.30	%			2,239				2				0.07	%			1,194				1				0.07	%
Total interest-bearing liabilities			1,726,046				5,464				0.32	%			1,382,593				5,515				0.40	%			1,511,950				7,449				0.49	%			1,806,131				9,481				0.52	%			1,888,070				1,655				0.09	%			1,852,287				2,836				0.15	%
Noninterest-bearing demand deposits			707,623												468,774												448,903												926,378												864,224												816,638
Other liabilities			37,826												29,736												28,239												41,477												39,363												38,151
Total liabilities			2,471,495												1,881,103												1,989,092												2,773,986												2,791,657												2,707,076
Stockholders' equity			420,792												336,138												341,519												479,065												422,487												427,752
Total liabilities and equity		$	2,892,287											$	2,217,241											$	2,330,611											$	3,253,051											$	3,214,144											$	3,134,828
Net interest income, FTE(1)						$	109,219											$	90,301											$	91,744											$	128,138											$	113,114											$	102,913
Net interest rate spread, FTE(1)											4.19	%											4.47	%											4.28	%											4.25	%											3.89	%											3.62	%
Net interest margin, FTE(1)											4.29	%											4.59	%											4.41	%											4.44	%											3.92	%											3.67	%

 

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(1)	FTE basis based on the federal statutory rate of 21%.
(2)	Nonaccrual loans are included in average balances; however, no related interest income is recognized during the period of nonaccrual.
(3)	Interest on loans include non-cash purchase accounting accretion of $7.99$2.74 million in 2020, $3.232023, $2.62 million in 2019,2022, and $6.39$4.66 million in 2018.2021.

 

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

 

		Year Ended																Year Ended																Year Ended																Year Ended
		December 31, 2020 Compared to 2019																December 31, 2019 Compared to 2018																December 31, 2023 Compared to 2022																December 31, 2022 Compared to 2021
		Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to
										Rate/																Rate/																Rate/																Rate/
(Amounts in thousands)		Volume				Rate				Volume				Total				Volume				Rate				Volume				Total				Volume				Rate				Volume				Total				Volume				Rate				Volume				Total
Interest earned on(1):
Loans		$	21,736			$	(42	)		$	(65	)		$	21,629			$	(3,729	)		$	1,077			$	(177	)		$	(2,829	)		$	10,939			$	10,187			$	1,063			$	22,189			$	6,956			$	(4,798	)		$	(324	)		$	1,834
Securities available for sale			(743	)			(101	)			(231	)			(1,075	)			(1,536	)			619				(168	)			(1,085	)			1,016				796				131				1,943				4,340				(56	)			(120	)			4,164
Securities held to maturity			(45	)			—				—				(45	)			(368	)			(48	)			43				(373	)
Interest-bearing deposits with other banks			3,791				(534	)			(4,899	)			(1,642	)			654				171				85				910				(3,236	)			13,872				(11,918	)			(1,282	)			(313	)			5,747				(2,412	)			3,022
Total interest-earning assets			24,739				(677	)			(5,195	)			18,867				(4,979	)			1,819				(217	)			(3,377	)			8,719				24,855				(10,724	)			22,850				10,983				893				(2,856	)			9,020
Interest paid on(1):
Demand deposits			63				(7	)			(26	)			30				(6	)			47				(6	)			35				—				291				2				293				7				(21	)			(1	)			(15	)
Savings deposits			338				(46	)			(213	)			79				(3	)			407				37				441				(11	)			6,737				(251	)			6,475				22				3				—				25
Time deposits			391				(97	)			(335	)			(41	)			(508	)			283				(3	)			(228	)			(208	)			1,356				(228	)			920				(408	)			(942	)			158				(1,192	)
Federal funds purchased																																			—				—				139				139				—				—				—				—
Retail repurchase agreements			(2	)			1				—				(1	)			(2	)			1				—				(1	)			—				(1	)			—				(1	)			—				—				1				1
Wholesale repurchase agreements			(119	)			—				—				(119	)			(684	)			(12	)			9				(687	)
FHLB advances and other borrowings			—				—				1				1				(1,492	)			(1,492	)			1,490				(1,494	)
Total interest-bearing liabilities			671				(149	)			(573	)			(51	)			(2,695	)			(766	)			1,527				(1,934	)			(219	)			8,383				(338	)			7,826				(379	)			(960	)			158				(1,181	)
Change in net interest income(1)		$	24,068			$	(528	)		$	(4,622	)		$	18,918			$	(2,284	)		$	2,585			$	(1,744	)		$	(1,443	)		$	8,938			$	16,472			$	(10,386	)		$	15,024			$	11,362			$	1,853			$	(3,014	)		$	10,201

 

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

 

20202023 Compared to 20192022. Net interest income comprised 78.45%77.32% of total net interest and noninterest income in 20202023 compared to 72.65%75.19% in 2019.2022.  Net interest income increased $19.12$15.02 million, or 21.37%13.33%, compared to a increase of $18.92and increased $15.02 million, or 20.95%13.28%, on a FTE basis. The FTE net interest margin decreased 30increased 52 basis points and the FTE net interest spread decreased 28increased36 basis points.points.  The decreaseincrease was primarily driven by increases in both average balances and rates for loans and securities available for sale.  The average balance for loans increased $239.86 million, while the netyield increased 44 basis points resulting in a tax effected increase in interest marginon loans of $22.19 million compared to 2022.  The average balance for securities available for sale increased $42.17 million and the netyield increased 31 basis points resulting in a tax effected increase to interest spread are primarily attributableon securities available for sale of $1.94 million compared to the current historically low interest rate environment partially offset by purchase accounting accretion from the Highlands portfolio as well as accelerated paydowns of acquired loans.2022.

 

Average earning assets increased $575.82decreased $2.16 million, or 29.25%0.07%, primarily due to a decrease in interest-bearing deposits with banks of $284.18 million, or 85.91%.  This decrease was offset by an increase in average loans and average interest-bearing deposits offset by a decrease in average debt securities.securities available for sale as noted above.  The yield on earning assets decreased 36increased 79 basis points, as the yields on interest-bearing deposits and debt securities decreasedor 19.85%, primarily due to significant increase in benchmark rates as compared to the historically low rate environment. Average loans increased $420.22 million, or 24.40%, and thesame period of 2022.  The average loan to deposit ratio decreasedincreased to 88.08%93.04% from 93.35%. The increase83.58% in average loans was primarily due to the addition of Highlands.2022.  Non-cash accretion income relatedincreased  $125 thousand, or 4.77% to PCI loans increased $4.76 million, or 147.37%, to $7.99 million due the addition of Highlands and the fourth quarter payoff of a large acquired loan relationship.$2.74 million.  The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 319 basis points for both 2023 and 2022.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $81.94 million, or 4.34%, primarily due to a decrease in deposits.  Time deposits decreased $54.20 million, or 16.82%, and savings deposits decreased $32.77 million, or 3.72%. Interest-bearing demand deposits increased $3.03 million or 0.44%.  The yield on interest-bearings liabilities increased 43 basis points and is primarily due to increases in benchmark rates throughout 2022 and 2023.

2022 Compared to 2021. Net interest income comprised 75.19% of total net interest and noninterest income in 2022 compared to 74.92% in 2021.  Net interest income increased $10.19 million, or 9.94%, and increased $10.20 million, or 9.91%, on a FTE basis. The FTE net interest margin increased 25 basis points and the FTE net interest spread increased 27 basis points.  The increase in net interest margin was primarily driven by an increase in yield on earning assets of 21 basis points, specifically, interest on deposits in banks. The increased yield on interest on deposits in banks was primarily driven by rate increases in the FOMC's target federal funds rate throughout 2022.

Average earning assets increased $81.32 million, or 2.90%, primarily due to an increase in average securities available for sale of $175.17 million, or 216.13%, and average loans of $145.40 million, or 6.75%.  The increases were offset by a decrease in average interest-bearing deposits in banks of $239.26 million, or 41.97%. The yield on earning assets increased 21 basis points primarily due to an increase in yield on interest on deposits in banks of 101 basis points to 1.14% compared to 0.13% in 2021.   The increase in yield was primarily driven by rate increases in the FOMC's target federal funds rate throughout 2022.  The average loan to deposit ratio increased to 83.58% from 80.71% in 2022.  Non-cash accretion income related to PCD loans decreased $2.04 million, or 43.77%, to $2.62 million due to reduced balances in the PCD portfolios. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 9 basis points compared to 17 basis points in the prior year.2021.

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $343.45$35.78 million, or 24.84%1.93%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 86 basis points.  Average interest-bearing deposits increased $348.51$34.74 million, or 25.32%1.88%, which was driven by the December 31, 2019, Highlands acquisition with increases of $207.75$63.33 million, or 41.21%7.75%, in average savings deposits, $102.46$36.50 million, or 22.58%5.64%, in average interest-bearing demand deposits, and $38.31offset by a decrease of $65.09 million, or 9.15%16.81%, in average time deposits.

 

2019 Compared to 2018. Net interest income comprised 72.65% of total net interest and noninterest income in 2019 compared to 77.45% in 2018. Net interest income decreased $1.39 million, or 1.53%, compared to a  decrease of $1.44 million, or 1.57%, on a FTE basis. The FTE net interest margin increased 18 basis points and the FTE net interest spread increased 19 basis points.

Average earning assets decreased $110.44 million, or 5.31%, primarily due to a decrease in average loans and debt securities offset by an increase in interest-bearing deposits. The yield on earning assets increased 10 basis points as the yields on debt securities, and interest-bearing deposits increased. Average loans decreased $72.97 million, or 4.06%, and the average loan to deposit ratio decreased to 93.35% from 94.74%. Non-cash accretion income related to PCI loans decreased $3.16 million, or 49.46%, to $3.23 million due to continued acquired portfolio attrition. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 17 basis points compared to 30 basis points in the prior year.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $129.36 million, or 8.56%, primarily due to a decline in average interest-bearing deposits and average borrowings. The yield on interest-bearing liabilities decreased 9 basis points. Average borrowings decreased $59.62 million, or 90.53%, largely due to a $22.77 million, or 78.50%, decrease in average retail and wholesale repurchase agreements and a $36.85 million, or 100.00%, decrease in average FHLB advances. Average interest-bearing deposits decreased $69.74 million, or 4.82%, which was driven by a $52.89 million, or 11.22%, decrease in average time deposits, and a $12.58 million, or 2.70%, decrease in average interest-bearing demand deposits.

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Provision for LoanCredit Losses

 

20202023 Compared to 20192022.  The provision charged to operations increased $9.10$1.41 million or 254.75%.compared to the prior year.  The provision expense of $7.99 million was comprised of $8.44 million related to provision expense for loans and a recovery of provision of $450 thousand for unfunded loan commitments.  Provision for credit losses for loans of $8.44 million was recorded compared to the provision of $6.57 million recorded in 2022.  The increase in provision is commensurate with changes in economic forecasts and growth in the loan portfolio associated with the acquisition of Surrey Bancorp on April 21, 2023.  $1.61 million of the provision is attributable to day two provision for the Surrey portfolio.  As noted above a recovery of provision for loan commitments was primarily related to the economic uncertainty caused by the coronavirus pandemic.recorded in 2023 of $450 thousand and was recorded in provision for credit losses.   A provision expense of $518 thousand was recorded for unfunded loan commitments in 2022 and was recorded in other operating expense.

20192022 Compared to 20182021.  The provision charged to operations increased $1.18$15.04 million, or 49.23%,177.58%.  The increase was attributable to $3.57 million, as we effectively covered net charge-offs forgrowth of the year.loan portfolio throughout 2022 and an economic forecast that projects higher unemployment rates and weaker macroeconomic trends.  The prior year included recoveries of pandemic-related provisioning.

 

Noninterest Income

 

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

 

														2020 Compared to 2019								2019 Compared to 2018																				2023 Compared to 2022								2022 Compared to 2021
		Year Ended December 31,												Increase						%		Increase						%		Year Ended December 31,												Increase				%				Increase				%
		2020				2019				2018				(Decrease)				Change				(Decrease)				Change				2023				2022				2021				(Decrease)				Change				(Decrease)				Change
(Amounts in thousands)
Wealth management		$	3,417			$	3,423			$	3,262			$	(6	)			-0.18	%		$	161				4.94	%		$	4,179			$	3,855			$	3,853			$	324				8.40	%		$	2				0.05	%
Service charges on deposits			13,019				14,594				14,733				(1,575	)			-10.79	%			(139	)			-0.94	%			13,996				14,213				13,446				(217	)			-1.53	%			767				5.70	%
Other service charges and fees			10,333				8,281				7,733				2,052				24.78	%			548				7.09	%			13,647				12,308				12,422				1,339				10.88	%			(114	)			-0.92	%
Insurance commissions			—				—				966				—				—				(966	)			-100.00	%
Net (loss) gain on sale of securities			385				(43	)			(618	)			428				-995.35	%			575				-93.04	%
Net gain on sale of securities																															(21	)			-				-				(21	)			—				—				-
Net FDIC indemnification asset amortization			(1,690	)			(2,377	)			(2,181	)			687				-28.90	%			(196	)			8.99	%			-				-				(1,226	)			—				—				1,226				-100.00	%
Litigation income			—				6,995				—				(6,995	)			-100.00	%			6,995				—
Gain on divestiture																															-				1,658				-				(1,658	)			-100.00	%			1,658				—
Other operating income			4,369				2,804				2,548				1,565				55.81	%			256				10.05	%			5,651				5,148				5,806				503				9.77	%			(658	)			-11.33	%
Total noninterest income		$	29,833			$	33,677			$	26,443			$	(3,844	)			-11.41	%		$	7,234				27.36	%		$	37,452			$	37,182			$	34,301			$	270				0.73	%		$	2,881				8.40	%

20202023 Compared to 20192022. Noninterest income comprised 21.55%22.68% of total net interest and noninterest income in 20202023 compared to 27.35%24.81% in 2019.2022.  Noninterest income decreased $3.84 million,increased $270 thousand, or 11.41%, primarily due to $7.00 million received in litigation settlements in 2019. Service charges on deposits decreased $1.58 million, or 10.79%; the decrease0.73%.  The increase was primarily attributable to pandemic shutdowns throughout 2020.  Otherthe result of an increase in other service charges and fees increased $2.05of $1.34 million, or 24.78%, primarily from an10.88%.  The increase in net interchange income for the addition of Highlands accounts.  Other operating income increased $1.57 million, or 55.81%, andother services charges was primarily driven by third party incentives associated with debit cards.an increase in interchange income. Wealth management income increased $324 thousand, or 8.40%.  These increases to noninterest income were offset by the 2022 gain recorded for the divestiture of the Emporia, Virginia branch of $1.66 million.

 

20192022 Compared to 20182021. Noninterest income comprised 27.35%24.81% of total net interest and noninterest income in 20202022 compared to 22.55%25.08% in 2019.2021. Noninterest income increased $7.23$2.88 million, or 27.36%8.40%, primarily due to the receipt$1.66 million gain recognized from the sale of $7.00the Company's Emporia, Virginia, branch to Benchmark Community Bank in the third quarter of 2022.   Also contributing to the increase was $1.23 million received in litigation settlements. Other servicenet FDIC indemnification asset amortization recognized in 2021, as the asset became fully amortized in 2021.  Service charges and feeson deposits increased $548$767 thousand, or 7.09%5.70%, primarily from an increase in net interchange income. Net securities losses decreased $575 thousand, or 93.04%.and is attributable to increased customer activity compared to the activity levels experienced during the pandemic lock-downs.  Other operating income increases were offset by a $966decreased $658 thousand, decrease in insurance commissions dueor 11.33%, and is primarily attributable to the divestiture2021 recovered amount of the Company’s remaining insurance agency assets in 2019.$1.00 million of an acquired loan from a failed bank acquisition that had been written down prior to acquisition.

 

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Noninterest Expense

 

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

 

														2020 Compared to 2019								2019 Compared to 2018																				2023 Compared to 2022								2022 Compared to 2021
		Year Ended December 31,												Increase						%		Increase						%		Year Ended December 31,												Increase				%				Increase				%
		2020				2019				2018				(Decrease)				Change				(Decrease)				Change				2023				2022				2021				(Decrease)				Change				(Decrease)				Change
(Amounts in thousands)
Salaries and employee benefits		$	44,005			$	37,148			$	36,690			$	6,857				18.46	%		$	458				1.25	%		$	49,887			$	47,183				44,239			$	2,704				5.73	%		$	2,944				6.65	%
Occupancy expense			5,043				4,334				4,542				709				16.36	%			(208	)			-4.58	%			4,967				4,818				4,913				149				3.09	%			(95	)			-1.93	%
Furniture and equipment expense			5,558				4,457				3,980				1,101				24.70	%			477				11.98	%			5,878				6,001				5,627				(123	)			-2.05	%			374				6.65	%
Service fees			5,665				4,448				3,860				1,217				27.36	%			588				15.23	%			8,908				7,606				6,324				1,302				17.12	%			1,282				20.27	%
Advertising and public relations			1,951				2,310				2,011				(359	)			-15.54	%			299				14.87	%			3,300				2,409				2,076				891				36.99	%			333				16.04	%
Professional fees			1,224				1,698				1,430				(474	)			-27.92	%			268				18.74	%			1,567				1,303				1,524				264				20.26	%			(221	)			-14.50	%
Amortization of intangibles			1,450				997				1,039				453				45.44	%			(42	)			-4.04	%			1,731				1,446				1,446				285				19.71	%			—				0.00	%
FDIC premiums and assessments			426				318				906				108				33.96	%			(588	)			-64.90	%			1,511				1,126				832				385				34.19	%			294				35.34	%
Loss on extinguishment of debt			—				—				1,096				—				—				(1,096	)			—
Merger, acquisition, and divestiture expense			1,893				2,124				—				(231	)			-10.88	%			2,124				—
Goodwill impairment			—				—				1,492				—				—				(1,492	)			—
Merger expense																															2,393				596				-				1,797				301.51	%			596				—
Divestiture expense																															—				153				—				(153	)			-100.00	%			153				—
Litigation expense																															3,000				—				—				3,000				—				—				—
Other operating expense			12,410				11,929				12,727				481				4.03	%			(798	)			-6.27	%			12,035				10,475				11,737				1,560				14.89	%			(1,262	)			-10.75	%
Total noninterest expense		$	79,625			$	69,763			$	69,773			$	9,862				14.14	%		$	(10	)			-0.01	%		$	95,177			$	83,116			$	78,718			$	12,061				14.51	%		$	4,398				5.59	%

 

20202023 Compared to 20192022.  Non interest expense increased $12.06 million, or 14.51%, compared to 2022.  The Company recorded $3.00 million in estimated litigation expenses in the fourth quarter of 2023.  Other increases occurred in salaries and employee benefits of $2.70 million, or 5.73%, other operating expense of $1.56 million, or 14.89%, service fees of $1.30 million or 17.12%, and advertising and public relations of  $891 thousand, or 36.99%.  In addition, the Company recorded merger expenses of $2.39 million in 2023 related to the Surrey Bancorp acquisition.  The related cost for the addition of Surrey branches and staff was a primary driver in the increase to noninterest expense.

2022 Compared to 2021. Noninterest expense increased $9.86,$4.40 million, or 14.14%5.59%.  The increase was primarily due to an increase in salaries and employee benefits of $6.86$2.94 million, or 18.46%6.65%, which was largelyand service fees of $1.28 million, or 20.27%.  The increase in salaries and benefits is due to wage increases implemented in the additionfirst quarter of Highlands employees.2022 as part of the Company's strategic initiative to enhance Human Capital Management, which included an increased minimum wage.  Service fees increased due to an increase in core processing expense.  In addition, occupancythe Company recorded merger and furniture and equipment expense increase a combined total of $1.81 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.

2019 Compared to 2018. Noninterest expense decreased $10 thousand, or 0.01%, which was largely due to one-time charges recognized in 2019 for goodwill impairmentdivestiture expenses related to the announced Surrey Bancorp acquisition and the divestiture of the Company’s remaining insurance agency assetsCompany's Emporia Virginia branch of $1.49 million$596 thousand and the loss on extinguishment of the Company’s remaining FHLB debt of $1.10 million. In addition,$153 thousand, respectively.  These increases to expense were offset primarily by a decrease in other operating expense decreased $798 thousand due to property write-downs that occurred in 2019 and FDIC premiums decreased $588 thousand due to small bank assessment credits received from the FDIC. These decreases were offset by an increase in merger expenses of $2.12$1.26 million, relatedor 10.75%.  The decrease is primarily attributable to the Highlands acquisition as well as increases in service fees, furniture and equipment expense, and an increase in salaries and employee benefits totaling $1.52 million.2021 write-down of bank property of $781 thousand.

 

Income Tax Expense

 

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies. The Tax Reform Act enacted on December 22, 2017, reduced our federal statutory income tax rate from 35% to 21% beginning January 1, 2018.

 

20202023 Compared to 20192022. Income tax expense increased $459 thousand, or 3.40% and was primarily due to the increase in pre-tax income.  The effective tax rate increased slightly to 22.51% in 2023 compared to 22.43% in 2022. 

2022 Compared to 2021. Income tax expense decreased $808 thousand,$1.87 million or 7.35%12.14%, and is primarily attributable to the decrease in pre-tax net income.  The effective tax rate increaseddecreased to 22.09%22.43% in 20202022 compared to 22.08%23.09% in 2019. 

2019 Compared to 2018. Income tax expense increased $2.21 million, or 25.19%, and the effective tax rate increased to 22.08% in 2019 compared to 19.46% in 2018. The lower effective rate in 2019 was primarily due to the enactment of the Tax Reform Act and the completion of the deferred tax asset revaluation, which resulted in a $1.67 million reduction in tax expense.2021.

 

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Financial Condition

 

Total assets as of December 31, 2020,2023, increased $212.29$132.97 million, or 7.58%4.24%, to $3.01$3.27 billion from $2.80$3.14 billion as of December 31, 2019. The increase is primarily attributable to the increase in overnight funds of $247.762022. Total liabilities increased $51.66 million, or 167.40%. Total liabilities as of December 31, 2020,1.90%, and stockholders' equity increased $214.38$81.31 million, or 9.05%, to $2.58 billion from $2.37 billion as19.27%.  The primary driver for the change in the balance sheet components was the acquisition of December 31, 2019. The increase is primarilySurrey Bancorp on April 21, 2023.  Total assets of $466.25 million were acquired in the result oftransaction.  In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in total depositscapital of $216.34$71.35 million.  The purchase transaction created $14.38 million or 9.29%.  The increase in deposits is primarily attributable to the significant increasegoodwill and $12.7 million in demand deposits due to the unprecedented level of stimulus payments from the Federal Government in response to the pandemic. other intangible assets.

Investment Securities

 

Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as collateral where required, and to make selective investments for Community Reinvestment Act purposes. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Available-for-sale debt securities as of December 31, 2020,2023, decreased $86.22$19.39 million, or 50.84%6.46%, compared to December 31, 2019.2022. The decrease was  attributable to sales of $51.03 million primarily due to the liquidation of the Highlands portfolio, as well as$83.59 million in maturities, prepayments, and calls, as well as sales of $44.68$38.98 million in securities available for sale.  Included in the sale of securities was the entire portfolio of Surrey with an acquired fair value of $20.93 million comprised primarily of U.S. Treasury securities.  A loss of $28 thousand was recognized in the sale of the portfolio.  The decreases were offset by purchases of $10.27 million.$74.10 million and $20.93 million in investments acquired in the Surrey acquisition.  The market value of debt securities available for sale as a percentage of amortized cost was 101.71%95.23% as of December 31, 20202023, compared to 100.65%93.82% as of December 31, 2019.2022. There were no held-to-maturity debt securities as of December 31, 20202023, or December 31, 2019.  The remaining debt securities in the held-to-maturity category in 2018 matured during the first quarter of 2019. The funds were used to repay the Company’s remaining wholesale repurchase agreement of $25 million. The following table presents the amortized cost and fair value of debt securities as of the dates indicated:2022. 

		December 31,
		2020								2019								2018
		Amortized				Fair				Amortized				Fair				Amortized				Fair
(Amounts in thousands)		Cost				Value				Cost				Value				Cost				Value
Available for Sale
U.S. Agency securities		$	555			$	551			$	5,038			$	5,034			$	1,108			$	1,113
U.S. Treasury securities			—				—				—				—				19,970				19,960
Municipal securities			43,950				44,459				85,992				86,878				96,886				97,289
Single issue trust preferred securites			—				—				—				—				—				—
Mortgage-backed Agency securities			37,453				38,348				77,448				77,662				35,513				34,754
Total securities available for sale		$	81,958			$	83,358			$	168,478			$	169,574			$	153,477			$	153,116
Fair value to amortized cost							101.71	%							100.65	%							99.76	%
Held to Maturity
U.S. Agency securities		$	—			$	—			$	—			$	—			$	17,887			$	17,867
Corporate securities			—				—				—				—				7,126				7,123
Total securities held to maturity		$	—			$	—			$	—			$	—			$	25,013			$	24,990
Fair value to amortized cost																							99.91	%

 

The following table provides information about our investment portfolio as of the dates indicated:

 

		December 31,
		2020												2019												December 31,
		Available for Sale				Held to Maturity				Total				Available for Sale				Held to Maturity				Total				2023				2022
(Amounts in years)
Average life			5.02				N/A				5.02				6.41				N/A				6.41				4.33				4.61
Average duration			1.84				N/A				1.84				5.30				N/A				5.30				2.36				2.84

 

There were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity as of December 31, 20202023 or 2019.2022.

 

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The following table presentsManagement 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 weighted-average yieldmore 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 available-for-saleexpected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. Based on the application of the new standard, and that all debt securities by contractual maturity,available for sale in an unrealized loss position as of December 31, 2020. Actual maturities could differ from contractual maturities because issuers may have the right2023, continue to call or prepay obligations with or without penalties.

		Available-for-Sale Securities
(Amounts in thousands)		U.S. Agency Securities				U.S. Treasury Securities				Municipal Securities				Total				Tax Equivalent Purchase Yield(1)
Amortized cost maturity:
One year or less		$	—			$	—			$	—			$	—				—
After one year through five years			—				—				24,485				24,485				3.78	%
After five years through ten years			555				—				19,465				20,020				3.24	%
After ten years			—				—				—				—				—
Amortized cost		$	555			$	—			$	43,950				44,505
Mortgage-backed securities															37,453				2.13	%
Total amortized cost														$	81,958
Tax equivalent purchase yield(1)			2.09	%			—				3.56	%			3.54	%
Average contractual maturity (in years)			6.05				—				4.75				4.77
Fair value maturity:
One year or less		$	—			$	—			$	—			$	—
After one year through five years			—				—				24,703				24,703
After five years through ten years			551				—				19,756				20,307
After ten years			—				—				—				—
Fair value		$	551			$	—			$	44,459				45,010
Mortgage-backed securities															38,348
Total fair value														$	83,358

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(1)

FTE basis of 21%

Investment securities are reviewed quarterlyperform as scheduled, we do not believe that a provision for indications of other-than-temporary impairment (“OTTI”) charges.credit losses is necessary in 2023. We recognized no OTTIimpairment charges in earnings associated with debt securities in 2020 or 2019.2022. For additional information, see Note 1, “Basis of Presentation and Significant Accounting Policies,” and Note 3, “Debt Securities,” to the Consolidated Financial Statements in Item 8, of this report.

 

Loans Held for Investment

 

Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). The general characteristics of each loan segment are as follows:

 

●

Commercial loans – This segment consists of loans to small and mid-size industrial, commercial, and service companies that include, but are not limited to, natural gas producers, retail merchants, and wholesale merchants.companies. Commercial real estate projects represent a variety of sectors of the commercial real estate market, including single family and apartment lessors, commercial real estate lessors, and hotel/motel operators. Commercial loan underwriting guidelines require that comprehensive reviews and independent evaluations be performed on credits exceeding predefined size limits. Updates to these loan reviews are done periodically or annually depending on the size of the loan relationship.

●

Consumer real estate loans – This segment consists of largely of loans to individuals within our market footprint for home equity loans and lines of credit and for the purchase or constructionpurpose of owner occupied homes.financing residential properties. Residential real estate loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

●

Consumer and other loans – This segment consists of loans to individuals within our market footprint that include, but are not limited to, automobile, credit cards, personal lines of credit, credit cards, and the purchase of automobiles, boats, mobile homes, and other consumer goods. Consumer loan underwriting guidelines require that borrowers meet certain credit, income, and collateral standards at origination.

 

Total loans held for investment, net of unearned income, as of December 31, 2020,2023, increased $72.17$172.10 million, or 3.41%7.17%, compared to December 31, 2019. Covered2022. primarily due to the Surrey acquisition with loans decreased $3.18acquired totaling $239.08 million.  The largest components of Surrey's portfolio included approximately $98.89 million or 24.73%, as the Waccamaw Bank (“Waccamaw”) covered loan portfolio continues to pay down.in non-farm, non-residential loans, $61.47 million commercial and industrial loans, and $23.03 million in non-owner occupied single family loans.  We had no foreign loans or loan concentrations to any single borrower or industry, which are not otherwise disclosed as a category of loans that represented 10% or more of outstanding loans, as of December 31, 20202023 or 2019.2022. For additional information, see Note 4, “Loans,” to the Consolidated Financial Statements in Item 8 of this report.

 

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The following table presents loans, net of unearned income and by loan class, as of the dates indicated:

		December 31,
(Amounts in thousands)		2020				2019				2018				2017				2016
Non-covered loans held for investment
Commercial loans
Construction, development, and other land		$	44,649			$	48,659			$	63,508			$	60,017			$	56,948
Commercial and industrial			173,024				142,962				104,863				92,188				92,204
Multi-family residential			115,161				121,840				107,012				125,202				134,228
Single family non-owner occupied			187,598				163,181				140,097				141,670				142,965
Non-farm, non-residential			734,793				727,261				613,877				616,633				598,674
Agricultural			9,749				11,756				8,545				7,035				6,003
Farmland			19,761				23,155				18,905				25,649				31,729
Total commercial loans			1,284,735				1,238,814				1,056,807				1,068,394				1,062,751
Consumer real estate loans
Home equity lines			89,432				110,078				93,466				103,205				106,361
Single family owner occupied			658,678				620,697				510,963				502,686				500,891
Owner occupied construction			17,720				17,241				18,171				39,178				44,535
Total consumer real estate loans			765,830				748,016				622,600				645,069				651,787
Consumer and other loans
Consumer loans			120,373				110,027				71,552				70,772				77,445
Other			6,014				4,742				5,310				5,001				3,971
Total consumer and other loans			126,387				114,769				76,862				75,773				81,416
Total non-covered loans			2,176,952				2,101,599				1,756,269				1,789,236				1,795,954
Total covered loans			9,680				12,861				18,815				27,948				56,994
Total loans held for investment, net of unearned income			2,186,632				2,114,460				1,775,084				1,817,184				1,852,948
Less: allowance for loan losses			26,182				18,425				18,267				19,276				17,948
Total loans held for investment, net of unearned income and allowance		$	2,160,450			$	2,096,035			$	1,756,817			$	1,797,908			$	1,835,000
Loans held for sale		$	—			$	263			$	—			$	—			$	—

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

		December 31,
(Amounts in thousands)		2020				2019				2018				2017				2016
Commercial loans
Construction, development, and other land		$	25			$	28			$	35			$	39			$	4,570
Commercial and industrial			—				—				—				—				895
Multi-family residential			—				—				—				—				8
Single family non-owner occupied			185				199				238				284				962
Non-farm, non-residential			—				3				6				9				7,512
Agricultural			—				—				—				—				25
Farmland			—				—				—				—				397
Total commercial loans			210				230				279				332				14,369
Consumer real estate loans
Home equity lines			7,094				9,853				15,284				23,720				35,817
Single family owner occupied			2,376				2,778				3,252				3,896				6,729
Owner occupied construction			—				—				—				—				—
Total consumer real estate loans			9,470				12,631				18,536				27,616				42,546
Consumer and other loans
Consumer loans			—				—				—				—				79
Total covered loans		$	9,680			$	12,861			$	18,815			$	27,948			$	56,994

The following table presents the percentage of loans to total loans in the non-covered portfolio, by loan class, as of the dates indicated:

		December 31,
		2020				2019				2018				2017				2016
Commercial loans
Construction, development, and other land			2.04	%			2.31	%			3.61	%			3.36	%			3.17	%
Commercial and industrial			7.95	%			6.80	%			5.97	%			5.15	%			5.13	%
Multi-family residential			5.29	%			5.80	%			6.09	%			7.00	%			7.47	%
Single family non-owner occupied			8.62	%			7.76	%			7.98	%			7.92	%			7.96	%
Non-farm, non-residential			33.75	%			34.62	%			34.95	%			34.46	%			33.34	%
Agricultural			0.45	%			0.56	%			0.49	%			0.39	%			0.34	%
Farmland			0.91	%			1.10	%			1.08	%			1.43	%			1.77	%
Total commercial loans			59.01	%			58.95	%			60.17	%			59.71	%			59.18	%
Consumer real estate loans
Home equity lines			4.11	%			5.24	%			5.32	%			5.77	%			5.92	%
Single family owner occupied			30.26	%			29.52	%			29.09	%			28.09	%			27.89	%
Owner occupied construction			0.81	%			0.83	%			1.04	%			2.19	%			2.48	%
Total consumer real estate loans			35.18	%			35.59	%			35.45	%			36.05	%			36.29	%
Consumer and other loans
Consumer loans			5.54	%			5.25	%			4.08	%			3.96	%			4.31	%
Other			0.27	%			0.21	%			0.30	%			0.28	%			0.22	%
Total consumer and other loans			5.81	%			5.46	%			4.38	%			4.24	%			4.53	%
Total non-covered loans			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%

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The following table presents the percentage of loans to total loans in the covered portfolio, by loan class, as of the dates indicated:

		December 31,
		2020				2019				2018				2017				2016
Commercial loans
Construction, development, and other land			0.26	%			0.22	%			0.19	%			0.14	%			8.02	%
Commercial and industrial			0.00	%			0.00	%			0.00	%			0.00	%			1.57	%
Multi-family residential			0.00	%			0.00	%			0.00	%			0.00	%			0.01	%
Single family non-owner occupied			1.91	%			1.55	%			1.26	%			1.02	%			1.69	%
Non-farm, non-residential			0.00	%			0.02	%			0.03	%			0.03	%			13.18	%
Agricultural			0.00	%			0.00	%			0.00	%			0.00	%			0.04	%
Farmland			0.00	%			0.00	%			0.00	%			0.00	%			0.70	%
Total commercial loans			2.17	%			1.79	%			1.48	%			1.19	%			25.21	%
Consumer real estate loans
Home equity lines			73.28	%			76.61	%			81.23	%			84.87	%			62.84	%
Single family owner occupied			24.55	%			21.60	%			17.29	%			13.94	%			11.81	%
Owner occupied construction			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%
Total consumer real estate loans			97.83	%			98.21	%			98.52	%			98.81	%			74.65	%
Consumer and other loans
Consumer loans			0.00	%			0.00	%			0.00	%			0.00	%			0.14	%
Total covered loans			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%

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The following table presents the maturities and rate sensitivities of the non-covered loan portfolio as of December 31, 2020:2023:

 

(Amounts in thousands)		Due in One Year or Less				Due After One Year Through Five Years				Due After Five Years				Total				Due in One Year or Less				Due After One Year Through Five Years				Due After Five Through Fifteen Years				Due After Fifteen Years				Total
Commercial loans
Construction, development, and other land(1)		$	8,954			$	8,533			$	27,162			$	44,649			$	13,206			$	10,955			$	56,076			$	25,708			$	105,945
Commercial and industrial			18,539				117,394				37,091				173,024				34,664				94,828				61,173				21,185				211,850
Multi-family residential			3,197				19,411				92,553				115,161				4,496				37,060				97,772				49,054				188,382
Single family non-owner occupied			8,900				21,630				157,068				187,598				4,556				13,712				79,076				127,551				224,895
Non-farm, non-residential			54,172				169,001				511,620				734,793				22,487				128,724				379,376				363,963				894,550
Agricultural			1,615				7,174				960				9,749				1,126				9,878				9,675				990				21,669
Farmland			2,329				6,414				11,018				19,761				1,258				1,811				8,850				2,283				14,202
Total commercial loans			97,706				349,557				837,472				1,284,735				81,793				296,968				691,998				590,734				1,661,493
Consumer real estate loans
Home equity lines			5,263				11,912				72,257				89,432				4,097				12,437				64,023				7,069				87,626
Single family owner occupied			2,734				21,836				634,108				658,678				964				17,367				163,912				513,897				696,140
Owner occupied construction			270				764				16,686				17,720				278				44				1,093				7,030				8,445
Total consumer real estate loans			8,267				34,512				723,051				765,830				5,339				29,848				229,028				527,996				792,211
Consumer and other loans
Consumer loans			9,770				87,023				23,580				120,373				4,299				91,825				19,145				1,822				117,091
Other			6,014				—				—				6,014				1,503				—				—				—				1,503
Total consumer and other loans			15,784				87,023				23,580				126,387				5,802				91,825				19,145				1,822				118,594
Total non-covered loans		$	121,757			$	471,092			$	1,584,103			$	2,176,952
Total loans																		$	92,934			$	418,641			$	940,171			$	1,120,552			$	2,572,298
Rate sensitivities
Predetermined interest rate		$	77,371			$	434,895			$	862,277			$	1,374,543			$	46,214			$	359,624			$	577,336			$	657,642			$	1,640,816
Floating or adjustable interest rate			44,385				36,197				721,827				802,409				46,720				59,017				362,835				462,910				931,482
Total non-covered loans		$	121,756			$	471,092			$	1,584,104			$	2,176,952
Total loans																		$	92,934			$	418,641			$	940,171			$	1,120,552			$	2,572,298

 

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(1)		Construction loans with maturities due after five years include construction to permanent loans that have not yet converted to principal and interest payments.

 

The following table presents the maturities and rate sensitivities of the covered loan portfolio as of December 31, 2020:

(Amounts in thousands)		Due in One Year or Less				Due After One Year Through Five Years				Due After Five Years				Total
Commercial loans
Construction, development, and other land		$	—			$	25			$	—			$	25
Single family non-owner occupied			168				17				—				185
Non-farm, non-residential			—				—				—				—
Total commercial loans			168				42				—				210
Consumer real estate loans
Home equity lines			792				4,553				1,749				7,094
Single family owner occupied			8				202				2,166				2,376
Total consumer real estate loans			800				4,755				3,915				9,470
Total covered loans		$	968			$	4,797			$	3,915			$	9,680
Rate sensitivities
Predetermined interest rate		$	222			$	703			$	2,192			$	3,117
Floating or adjustable interest rate			746				4,094				1,723				6,563
Total covered loans		$	968			$	4,797			$	3,915			$	9,680

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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’sCompany has a loan review function generally analyzes all commercialindependent of credit administration that performs a risk-based review of a sample of loans and loan relationships greater than $4.00 million annuallyin the Company's commercial portfolio, and at various times duringconducts analytical review of credit quality on the year. Smaller commercial and retail loans are sampled for review during the year.Company's non-commercial portfolios.

 

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, modified loans past due 90 days or more, and other real estate owned ("OREO"). Prior to the adoption of ASU 2022-02, unseasoned troubled debt restructurings (“TDRs”("TDRs"), and OREO. were included in nonperforming assets.  Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts.  Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5, “Credit Quality,” to the Consolidated Financial Statements in Item 8 of this report.

 

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

 

		December 31,
(Amounts in thousands)		2020				2019				2018				2017				2016
Non-covered nonperforming
Nonaccrual loans		$	21,706			$	16,113			$	19,583			$	18,997			$	15,854
Accruing loans past due 90 days or more			295				144				58				1				—
TDRs(1)			187				720				161				120				114
Total non-covered nonperforming loans			22,188				16,977				19,802				19,118				15,968
Non-covered OREO			2,083				3,969				3,806				2,409				5,109
Total non-covered nonperforming assets		$	24,271			$	20,946			$	23,608			$	21,527			$	21,077
Covered nonperforming
Nonaccrual loans		$	297			$	244			$	322			$	342			$	608
Total covered nonperforming loans			297				244				322				342				608
Covered OREO			—				—				32				105				276
Total covered nonperforming assets		$	297			$	244			$	354			$	447			$	884
Total nonperforming
Nonaccrual loans		$	22,003			$	16,357			$	19,905			$	19,339			$	16,462
Accruing loans past due 90 days or more			295				144				58				1				—
TDRs(1)			187				720				161				120				114
Total nonperforming loans			22,485				17,221				20,124				19,460				16,576
OREO			2,083				3,969				3,838				2,514				5,385
Total nonperforming assets		$	24,568			$	21,190			$	23,962			$	21,974			$	21,961
Additional Information
Performing TDRs(2)		$	10,061			$	5,855			$	6,266			$	7,614			$	12,838
Total TDRs(3)			10,248				6,575				6,427				7,734				12,952
Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans			—				1,068				1,175				1,217				1,414
Actual interest income recorded on restructured and nonperforming loans			473				277				264				222				424
Non-covered ratios
Nonperforming loans to total loans			1.02	%			0.81	%			1.13	%			1.07	%			0.89	%
Nonperforming assets to total assets			0.81	%			0.75	%			1.06	%			0.91	%			0.90	%
Non-PCI allowance to nonperforming loans			118.00	%			108.53	%			92.25	%			100.83	%			112.32	%
Non-PCI allowance to total loans			1.20	%			0.88	%			1.04	%			1.08	%			1.00	%
Total ratios
Nonperforming loans to total loans			1.03	%			0.81	%			1.13	%			1.07	%			0.89	%
Nonperforming assets to total assets			0.82	%			0.76	%			1.07	%			0.92	%			0.92	%
Allowance for loan losses to nonperforming loans			116.44	%			106.99	%			90.77	%			99.05	%			108.28	%
Allowance for loan losses to total loans			1.20	%			0.87	%			1.03	%			1.06	%			0.97	%

		December 31,
(Amounts in thousands)		2023				2022				2021				2020				2019
Nonperforming
Nonaccrual loans		$	19,356			$	15,208			$	20,768			$	22,003			$	16,357
Accruing loans past due 90 days or more			104				142				87				295				144
Modified loans past due 90 days or more (1)			—				—				—				—				—
TDRs'(2)(3)			—				1,346				1,367				187				720
Total non-covered nonperforming loans			19,460				16,696				22,222				22,485				17,221
OREO			192				703				1,015				2,083				3,969
Total nonperforming assets		$	19,652			$	17,399			$	23,237			$	24,568			$	21,190
Additional Information
Total modified loans (1)		$	2,046			$	—			$	—			$	—			$	—
Total Accruing TDRs (3)			—				7,112				8,652				10,248				6,575
Gross interest income that would have been recorded under the original terms of restructured and nonperforming loans			969				883				1,129				1,586				1,068
Actual interest income recorded on restructured and nonperforming loans			6				388				422				473				277
Total ratios
Nonperforming loans to total loans			0.76	%			0.70	%			1.03	%			1.03	%			0.81	%
Nonperforming assets to total assets			0.60	%			0.55	%			0.73	%			0.82	%			0.76	%
Allowance for credit losses to nonperforming loans			185.97	%			183.01	%			125.36	%			116.44	%			106.99	%
Allowance for credit losses to total loans			1.41	%			1.27	%			1.29	%			1.20	%			0.87	%

 

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(1)		ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.  ASU adopted effective January 1, 2023.
(1)(2)		TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.22 million, $1.80 million, $1.18 million,, and $95 thousand, $898 thousand, $169 thousand, and $224 thousand for the fivefour years ended December 31, 20202022.  They arewere included in nonaccrual loans.
(2)		TDRs with six months or moreloans as reported prior to the adoption of satisfactory payment performance exclude nonaccrual TDRs of $637 thousand, $2.25 million, $1.68 million, $1.76 million, and $1.06 million for the five years ended December 31, 2020.  They are included in nonaccrual loans.ASU 2022-02.
(3)		Total accruing TDRs exclude nonaccrual TDRs of  $1.81$1.32 million, $2.34$2.52 million, $2.58 million, $1.93$1.81 million, and $1.28$2.34 million for the fivefour years ended December 31, 2020.2022.  They arewere included in nonaccrual loans.loans as reported prior to the adoption of ASU 2022-02.

 

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Non-covered nonperformingNonperforming assets as of December 31, 2020,2023, increased $3.33$2.25 million, or 15.87%12.95%, from December 31, 2019, primarily2022, with the largest increase due to an increase of  $5.59 million, or 34.71%,due to an increase in non-covered nonaccrual loans of $4.15 million.  The increase was offset by a $1.89decrease of $1.35 million or 47.52% decrease in non-coverednonaccrual TDRs that was reported in December 31, 2022.  The adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, on January 1, 2023, eliminated the accounting guidance for troubled debt restructurings by creditors as provided in ASC 310-40, Receivables - Troubled Debt Restructuring by Creditors.  Therefore, the guidance applied prior to January 1, 2023, is no longer applicable.  OREO and a $533decreased $511 thousand, or 74.03%, decrease in non-covered, non-performing troubled debt restructurings.  Non-covered OREO, which is carried at the lesser of estimated net realizable value72.69% and accruing loans past due 90 days or cost, consisted of 22 properties with an average holding period of 16 months as of December 31, 2020. The net loss on the sale of OREO was $316more decreased $38 thousand in 2020, $1.25 million in 2019, and $1.33 million in 2018. The following table presents the changes in OREO during the periods indicated:

		Year Ended December 31,
		2020												2019
		Non-covered				Covered				Total				Non-covered				Covered				Total
(Amounts in thousands)
Beginning balance		$	3,969			$	—			$	3,969			$	3,806			$	32			$	3,838
Acquired			—				—				—				1,962				—				1,962
Additions			695				—				695				3,030				131				3,161
Disposals			(2,139	)			—				(2,139	)			(3,837	)			(152	)			(3,989	)
Valuation adjustments			(442	)			—				(442	)			(992	)			(11	)			(1,003	)
Ending balance		$	2,083			$	—			$	2,083			$	3,969			$	—			$	3,969

from 2022.  As of December 31, 2020, non-covered2023, nonaccrual loans were largely attributed to single family owner occupied (36.67%(48.38%) and, non-farm, non-residential (29.22%real estate (12.63%) loans. As of December 31, 2020, approximately $6.09 million, or 28.06%, of non-covered nonaccrualand consumer loans were attributed to performing loans acquired in business combinations.(9.85%).  Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loancredit losses based on management’smanagement's estimate of loss at ultimate resolution.

 

Certain TDRs are classified as nonperforming when modifiedDelinquent loans, comprised of loans 30 days or more past due and are returned to performing status after six months of satisfactory payment performance; however, thesenonaccrual loans, remain identified as impaired until full payment or other satisfaction of the obligation occurs. Total TDRstotaled $33.93 million as of December 31, 2020, increased $3.152023, a increase of $4.25 million, or 35.27%14.32%, compared to $12.06$29.68 million from December 31, 2019. Nonperforming accruing TDRs as of December 31, 2020, decreased $533 thousand, or 74.03%, to $187 thousand from December 31, 2019. Nonperforming accruing TDRs2022. Delinquent loans as a percent of total accruing TDRsloans totaled 1.82%1.32% as of December 31, 2020,2023, which includes past due loans 0.57% and nonaccrual loans 0.75%, compared to 13.69%1.24%  as of December 31, 2019. Specific reserves on TDRs totaled $233 thousand as of December 31, 2020, compared to $353 thousand as of December 31, 2019. 2022.

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms.

The Coronavirus Aid, Relief  As noted above, ASU 2022-02, eliminated and Economic Security ("CARES") Act included a provision allowing banks to not applyreplaced the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency.  The relief can only be applied to modificationsguidance for borrowers that were not more than 30 days past dueexperiencing financial difficulties previously applied under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors.  ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, discloses loans for borrowers experiencing financial difficulty as modified loans.  Total loans modified as of December 31, 2019.  The Company elected to adopt this provision of the CARES Act.2023, were $2.05 million.  

 

Through December 31, 2020, we have modified 3,625 commercial and consumer loans totaling $458.17 million.  Those modifications were generally short-term payment deferrals and are not considered TDR's based onOREO, which is carried at 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 upgradelesser of estimated net realizable value or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modificationcost, consisted of 6 properties with an average holding 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 December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively.

Commercial Loans Modified Under CARES Act 

The following table details the balance of commercial loans modified for short-term payment deferral under provision of the CARES Act as of the dates indicated.

		December 31, 2020							September 30, 2020							June 30, 2020
						Percent							Percent							Percent
(unaudited, in thousands)		Balance				Modified			Balance				Modified			Balance				Modified
Construction, development, and other land		$	1,409			3.15	%		$	3,753			8.88	%		$	14,377			27.33	%
Commercial and industrial			1,363			0.79	%			6,700			3.61	%			25,584			13.88	%
Multi-family residential			351			0.30	%			5,919			5.61	%			22,021			20.82	%
Single family non-owner occupied			1,683			0.90	%			7,049			3.65	%			39,135			20.75	%
Commercial Real Estate - Hotel/Motel			17,465			17.42	%			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			3,968			0.69	%			22,912			3.92	%			116,871			20.58	%
Agricultural			33			0.34	%			1,322			12.93	%			3,464			33.29	%
Farmland			266			1.35	%			2,223			9.56	%			5,865			24.79	%
Total commercial modifications		$	26,538			2.07	%		$	102,535			7.78	%		$	339,997			26.39	%

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $35.72 million10 months as of December 31, 2020, an increase2023. The net loss on the sale of $97OREO was  $84 thousand or 0.27%, comparedin 2023, $453 thousand in 2022, and $231 thousand in 2021. The following table presents the changes in OREO during the periods indicated:

		Year Ended December 31,
		2023				2022
(Amounts in thousands)
Beginning balance		$	703			$	1,015
Additions			391				705
Disposals			(798	)			(533	)
Valuation adjustments			(104	)			(484	)
Ending balance		$	192			$	703

Allowance for CreditLosses (ACL)

The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to $35.62 millionmake required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s measurement of credit losses policy adheres to GAAP as well as interagency guidance. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

For collectively evaluated loans, the Company in general uses two modeling approaches to estimate expected credit losses. The Company projects the contractual run-off of December 31, 2019. Non-covered delinquent loansits portfolio at the segment level and incorporates a prepayment assumption in order to estimate exposure at default. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as a percent of total non-covered loans totaled 1.64% as of December 31, 2020, which includes past due loans (0.64%)their credit profile improves and nonaccrual loans (1.00%), comparedthat the repayment terms were not considered to 1.69% as of December 31, 2019.be unique to the asset.

 

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AllowanceIn addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure historical credit loss experience with similar risk characteristics within the segments. For the majority of segment models for Loan Lossescollectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology or simple loss rate modeling methodology.

 

TheIncluded in its systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e. formulaic model results). Each period, the Company considers qualitative factors that are relevant within the qualitative framework.  For further discussion of our Allowance for Credit Losses - See Note 1 - "Basis of Presentation - Significant Accounting Policies".

With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loan losses is maintained atfrom an incurred loss method to a level management deems sufficient to absorb probablelife of loan losses inherent in the loan portfolio. The allowance is increased by the provisionmethod. See Note 1 – "Basis of Presentation and Significant Accounting Policies" for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates.further details. As of December 31, 2020, our qualitative risk factors reflect2023,  the balance of the ACL for loans was $36.19 million, or 1.41% of total loans. The ACL at December 31, 2023, increased $5.63 million from the balance of $30.56 million recorded December 31, 2022. This increase included a increased riskprovision of possible loan losses due$7.99 million and net charge-offs for the twelve months of $4.81 million. The increase in provision for the twelve months ended December 31, 2023, included a day two provision of $1.61 million for Surrey loans.  In addition, $2.01 million was added to the effects ofreserve for Surrey's purchased credit deteriorated loans.

At December 31, 2023, the COVID-19 pandemic. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase theCompany also had an allowance for loanunfunded commitments of $746 thousand which was recorded in Other Liabilities on the Balance Sheet.  During 2023, there was a recovery of provision for credit losses on unfunded commitments of $450 thousand which was recorded in future periods. provision expense on the Statement of Income. During 2022, the provision for credit losses on unfunded commitments was $518 thousand and was recorded in other expense on the Statement of Income.  

Management considered the allowance adequate as of December 31, 2020;2023; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see “Allowance for Loan Losses”Credit Losses or ("ACL")” in the “Critical Accounting Policies” section above and Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

 

The allowance for loan losses as of December 31, 2020, increased $7.76, or 42.10%, from December 31, 2019, primarily due the increased potential for loan defaults and losses related to the COVID-19 pandemic.  The non-PCI allowance as a percent of non-covered loans totaled 1.20% as of December 31, 2020, compared to 0.88% as of December 31, 2019. PCI loans were aggregated into fifteen loan pools as of December 31, 2020 and five loan pools in 2019. The Highlands transaction added ten additional pools to the five existing pools from 2019. Effective January 1, 2020, the Company collapsed the PCI loans and discounts for Peoples and Waccamaw acquired loans into the non-PCI 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 $1.50 million, or 43.89% in 2020 compared to 2019.

The following table presents the changes in the allowance for loan losses,net charge-offs, by loan class, and the ratio to average loans during the periods indicated:

 

		December 31,																				December 31,
		2020				2019				2018				2017				2016				2023												2022												2021
(Amounts in thousands)																						Net (charge-offs) recoveries				Average Loans				Ratio of Net (charge-offs) recoveries to average loans				Net (charge-offs) recoveries				Average Loans				Ratio of Net (charge-offs) recoveries to average loans				Net (charge-offs) recoveries				Average Loans				Ratio of Net (charge-offs) recoveries to average loans
Beginning balance		$	18,425			$	18,267			$	19,276			$	17,948			$	20,233
Provision for loan losses charged to operations, non-PCI loans			12,668				3,571				2,393				2,783				1,296
(Recovery of) provision for loan losses charged to operations, PCI loans			—				—				—				(12	)			(41	)
Recovery of loan losses recorded through the FDIC indemnification asset			—				—				—				—				(1	)
Charge-offs
Commercial loans
Construction, development, and other land			349				353				100				427				254			$	511			$	108,437				0.47	%		$	56			$	88,204				0.06	%		$	(108	)		$	47,285				-0.23	%
Commercial and industrial			856				549				566				224				144				(8	)			216,618				0.00	%			844				169,101				0.50	%			(639	)			173,206				-0.37	%
Multi-family residential			295				310				16				9				64				9				163,797				0.01	%			105				124,229				0.08	%			302				102,175				0.30	%
Single family non-owner occupied			442				64				88				52				237				13				220,316				0.01	%			186				193,455				0.10	%			58				185,752				0.03	%
Non-farm, non-residential			650				1,015				119				142				1,684				443				863,078				0.05	%			848				754,518				0.11	%			(696	)			724,444				-0.10	%
Agricultural			160				52				68				—				—				(30	)			18,982				-0.16	%			(70	)			10,407				-0.67	%			(157	)			9,441				-1.66	%
Farmland			17				205				279				68				9				30				13,856				0.21	%			38				12,290				0.31	%			(56	)			16,799				-0.33	%
Total commercial loans																							968				1,605,084				0.06	%			2,007				1,352,204				0.15	%			(1,296	)			1,259,102				-0.10	%
Consumer real estate loans
Home equity lines			145				474				285				13				1,073				123				77,348				0.16	%			67				72,511				0.09	%			397				82,861				0.48	%
Single family owner occupied			413				1,316				1,720				675				508				(15	)			704,217				0.00	%			13				702,384				0.00	%			132				657,741				0.02	%
Owner occupied construction			—				—				—				11				31				—				16,778				0.00	%			—				23,898				0.00	%			—				27,529				0.00	%
Total consumer real estate loans																							108				798,343				0.01	%			80				798,793				0.01	%			529				768,131				0.07	%
Consumer and other loans
Consumer loans			3,296				1,923				1,666				1,322				1,172				(5,889	)			134,934				-4.36	%			(5,960	)			147,506				-4.04	%			(2,193	)			125,866				-1.74	%
Total charge-offs			6,623				6,261				4,907				2,943				5,176
Recoveries
Commercial loans
Construction, development, and other land			266				146				210				306				282
Commercial and industrial			177				99				200				160				484
Multi-family residential			39				3				17				9				15
Single family non-owner occupied			37				12				98				180				79
Non-farm, non-residential			95				546				191				146				59
Agricultural			11				1				7				—				—
Farmland			5				66				—				—				—
Consumer real estate loans
Home equity lines			262				401				216				201				137
Single family owner occupied			142				1,045				238				108				182
Owner occupied construction			—				42				—				105				39
Consumer and other
Consumer loans			678				487				328				285				360
Total recoveries			1,712				2,848				1,505				1,500				1,637
Net charge-offs			4,911				3,413				3,402				1,443				3,539
Ending balance		$	26,182			$	18,425			$	18,267			$	19,276			$	17,948
Net charge-offs to average non-covered loans			0.23	%			0.20	%			0.19	%			0.08	%			0.21	%
Net charge-offs to average total loans			0.23	%			0.20	%			0.19	%			0.08	%			0.20	%
Total																						$	(4,813	)		$	2,538,361				-0.19	%		$	(3,873	)		$	2,298,503				-0.17	%		$	(2,960	)		$	2,153,099				0.14	%

 

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The following table presents the allowance for loan losses, excluding PCI loans, by loan class, as of the dates indicated:

 

		December 31,
(Amounts in thousands)		2020				2019				2018				2017				2016
Commercial loans										��
Construction, development, and other land		$	528			$	245			$	417			$	830			$	889
Commercial and industrial			1,024				699				663				762				495
Multi-family residential			1,417				969				1,192				1,094				1,157
Single family non-owner occupied			1,861				1,323				1,442				1,976				2,752
Non-farm, non-residential			9,417				6,653				6,530				6,597				6,185
Agricultural			218				145				85				51				43
Farmland			196				201				170				362				169
Consumer real estate loans
Home equity lines			799				673				748				803				895
Single family owner occupied			7,957				5,528				5,853				5,710				4,364
Owner occupied construction			195				124				131				297				228
Consumer and other loans
Consumer loans			2,570				1,865				1,036				794				759
Total allowance, excluding PCI loans		$	26,182			$	18,425			$	18,267			$	19,276			$	17,936

There was no allowance related to PCI loans as of December 31, 2020, nor for December 31, 2019, 2018, or 2017.  As of December 31, 2016 there was an allowance of $12 thousand related to PCI loans.

		December 31,
		2023								2022
(Amounts in thousands)		Balance				Percentage of Total Allowance				Balance				Percentage of Total Allowance
Commercial loans
Construction, development, and other land		$	3,549				4.12	%		$	3,197				4.88	%
Commercial and industrial			3,997				8.24	%			2,561				6.27	%
Multi-family residential			1,191				7.32	%			853				6.17	%
Single family non-owner occupied			2,581				8.74	%			2,169				8.59	%
Non-farm, non-residential			9,837				34.78	%			8,117				32.82	%
Agricultural			570				0.84	%			198				0.50	%
Farmland			125				0.55	%			118				0.49	%
Consumer real estate loans
Home equity lines			1,588				3.41	%			1,053				3.15	%
Single family owner occupied			7,989				27.06	%			7,744				30.61	%
Owner occupied construction			116				0.33	%			134				0.43	%
Consumer and other loans
Consumer loans			4,646				4.61	%			4,412				6.09	%
Total allowance		$	36,189				100.00	%		$	30,556				100.00	%

Deposits

 

Total deposits as of December 31, 2020,2023, increased $216.34$43.51 million, or 9.29%1.62%, compared to December 31, 2019. Time2022.  The increase was primarily attributable to the acquisition of Surrey Bancorp.  The Company acquired $403.64 million in deposits which consist of certificates of deposit and individual retirementin the transaction: acquiring $158.39 million in demand accounts, decreased $95.00 million; savings deposits, which consist of money market accounts and savings accounts, increased $65.73 million;$99.32 million in interest-bearing demand, $102.70 million in savings, and $43.23 million in time deposit accounts.  Excluding the Surrey acquisition, deposits increased $100.68decreased $360.13 million while noninterest-bearingwith decreases occurring in savings of $103.35 million, demand deposits increased $144.93of $98.64 million, asinterest-bearing demand of December 31, 2020, compared$84.95 million, and time deposits of $73,18 million.  Deposit attrition related to December 31, 2019.  We attribute the significant increaseSurrey post-merger totaled $70.77 million, with attrition of $36.97 million in interest-bearing demand, $13.65 million in time deposits, $13.18 million in demand, deposits to the unprecedented level of stimulus payments from the Federal Governmentand $6.96 million in response to the pandemic.savings. We had no material deposit concentrations to any single customer or industry that represented 10% or more of outstanding deposits as of December 31, 20202023 or 2019.2022.

 

The following schedule presents the contractual maturities of time deposits of $100$250 thousand or more as of December 31, 2020:2023:

 

(Amounts in thousands)
Three months or less		$	22,487			$	4,069
Over three through six months			24,516				874
Over six through twelve months			32,584				2,643
Over twelve months			74,197				11,006
		$	153,784			$	18,592

 

Borrowings

 

Total borrowings as of December 31, 2020,2023, decreased $637$755 thousand, or 39.79%40.29%, compared to December 31, 2019.2022. Total borrowings for 20202023 were comprised entirely of short-term borrowings, which consist of retail repurchase agreements.  The weighted average rate increased 18 basis points to 0.32%of 0.06% as of December 31, 2020, compared to 2023, decreased one basis point from the weighted average rate of 0.07% as of  December 31, 2019.2022.

 

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The following table presents the balances and weighted average rates paid on short-term borrowings for the periods indicated:

		Year Ended December 31,
		2020								2019								2018
		Amount				Rate				Amount				Rate				Amount				Rate
(Amounts in thousands)
Year-end balance		$	964				0.23	%		$	1,601				0.16	%		$	4,370				0.13	%
Average annual balance(1)			1,181				0.32	%			2,471				0.14	%			4,010				0.12	%
Maximum month-end balance(1)			2,348								28,508								29,305

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Long-term borrowings consisted of a $40 thousand amortizing advance with the FHLB of Atlanta that was assumed in the Highlands transaction. That small borrowing was repaid early in 2020. In the first quarter of 2019, the Company’s remaining wholesale repurchase agreement of $25.00 million with a weighted average rate of 3.18% matured. During 2018, the prepayment of the FHLB advance resulted in a prepayment penalty of $1.10 million. The prepayment was funded with cash and equivalents on hand, as well as proceeds from the sale of single issue trust preferred investment securities, and resulted in annualized net pre-tax savings of approximately $800 thousand. 

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity is a measure of our ability to convert assets tomeet current and future cash or raise cashflow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial obligations. We believe that liquidity management should encompass an overallinstitution to meet its current financial obligations is a function of its balance sheet approachstructure that draws together all sources and uses of liquidity. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

Poor or inadequate liquidity risk management may result in a funding deficit that could have a material impact on our operations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) to detect potential liquidity issues and protect our depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee (“ALCO”) of the Board of Directors. ALCO reviews liquidity risk exposure and policies related to liquidity management; ensures that systems and internal controls are consistent with liquidity policies; and provides accurate reports about liquidity needs, sources, and compliance. The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows during a funding crisis. The liquidity model incorporates various funding crisis scenarios and a specific action plan is formulated, and activated, when a financial shock that affects our normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will be met through liquidation of balance sheet assets, including unpledged securities. As of December 31, 2023, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Company.

In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to the Consolidated Financial Statements in Item 8 of this report for the expected timing of such payments as of December 31, 2023. These include payments related to (i) operating leases (Note - 7 Premises, Equipment, and Leases ), (ii) time deposits with stated maturity dates (Note 9 - Deposits), and (iii) commitments to extend credit and standby letters of credit (Note - 19 Litigation, Commitments, and Contingencies).

 

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of December 31, 2020,2023, the Company’s cash reserves and short-term investment securities totaled $10.09 $14.68 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. There was no outstanding balance on the line of credit as of December 31, 2020.$22.47 million, respectively.  The Company’s cash reserves and investments provide adequate working capital to meet obligations and projected dividends to shareholders and anticipated debt repayments 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”)FRB Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of December 31, 2020,2023, our unencumbered cash totaled $456.56$116.42 million, unused borrowing capacity from the FHLB totaled $292.92$342.81 million, available credit from the FRB Discount Window totaled $6.08$123.81 million, available lines from correspondent banks totaled $85.00$100.00 million, and unpledged available-for-sale securities totaled $46.79$135.88 million.

 

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Cash Flows

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

		Year Ended December 31,
		2020				2019				2018
(Amounts in thousands)
Net cash provided by operating activities		$	45,844			$	56,655			$	49,499
Net cash provided by investing activities			17,798				171,377				49,398
Net cash used in financing activities			175,910				(87,896	)			(179,975	)
Net increase (decrease) in cash and cash equivalents			239,552				140,136				(81,078	)
Cash and cash equivalents, beginning balance			217,009				76,873				157,951
Cash and cash equivalents, ending balance		$	456,561			$	217,009			$	76,873

2020 Compared to 2019. Cash and cash equivalents increased $239.55 million compared to a increase of $140.14 million in the prior year. The increase was primarily due to an increase in both interest-bearing and noninterest-bearing deposits for a total of $216.34 million.  The increase in deposits was largely due to the significant inflow of unprecedented government stimulus in response to the COVID-19 pandemic and changes in consumer spending.

2019 Compared to 2018. Cash and cash equivalents increased $140.14 million compared to a decrease of $81.08 million in the prior year. The increase was primarily due to a $121.98 million increase in net cash used in investing activities due to a net decrease in funds used to purchase investment securities and an increase in loan proceeds received. Net cash provided by financing activities increased $92.08 million largely due to a reduction in the net decrease in deposits year over year, and a net decrease in the repayment of borrowings. Net cash provided by operating activities increased $7.16 million primarily due to an increase in net income and a decrease in accretion income on acquired loans.

Capital Resources

 

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of December 31, 2020, decreased $2.092023, increased $81.31 million, or 0.49%19.27%, to $426.73$503.29 million from $428.82$421.99 million as of December 31, 2019.2022.  The change in stockholders' equity was largely due to the acquisition of Surrey Bancorp.  The Company issued 2.99 million shares of common stock in the transaction resulting in an increase to capital of $71.35 million.  In addition, the Company earned $35.93$48.02 million, which was offset by repurchasing 734,653768,079 shares of our common stock totaling $21.87$23.04 million and declaring dividends on our common stock of $17.88$21.09 million. Our book value per common share increased $0.75$1.19 to $24.08$27.20 as of December 31, 2020,2023, from $23.33$26.01 as of December 31, 2019.2022.

Capital Adequacy Requirements

 

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III.  Our current minimum required capital ratios are as follows:

 

●

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

●

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

●

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

●

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

 

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

 

		December 31,												December 31,
		2020				2019				2018				2023				2022				2021
The Company
Common equity Tier 1 ratio			14.28	%			14.31	%			13.72	%			14.69	%			13.37	%			14.39	%
Tier 1 risk-based capital ratio			14.28	%			14.31	%			13.72	%			14.69	%			13.37	%			14.39	%
Total risk-based capital ratio			15.53	%			15.21	%			14.79	%			15.94	%			14.62	%			15.65	%
Tier 1 leverage ratio			10.24	%			14.01	%			10.95	%			11.52	%			10.17	%			9.65	%
The Bank
Common equity Tier 1 ratio			13.57	%			12.87	%			12.55	%			12.97	%			11.69	%			13.37	%
Tier 1 risk-based capital ratio			13.57	%			12.87	%			12.55	%			12.97	%			11.69	%			13.37	%
Total risk-based capital ratio			14.82	%			13.78	%			13.62	%			14.22	%			12.94	%			14.62	%
Tier 1 leverage ratio			9.73	%			12.61	%			9.98	%			10.07	%			8.79	%			8.94	%

 

As of December 31, 2020,2023, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of December 31, 2020.2023. For additional information, see “Capital Requirements” in Part I, Item 1 and Note 21,20, “Regulatory Requirements and Restrictions,” to the Consolidated Financial Statements in Item 8 of this report.

Commitments, Contingencies, and Off-Balance Sheet Arrangements

Contractual Obligations

We enter into certain contractual obligations in the normal course of business that require future cash payments. Management believes we have adequate resources to fund our outstanding commitments and the ability to adjust rates on certificates of deposit, in a changing interest rate environment; attract new deposits; and replace deposits with FHLB advances or other fund providers, if cost effective. The following table presents our contractual cash obligations, by payment date, as of December 31, 2020:

		Less Than				One to				Three to				More than
		One Year				Three Years				Five Years				Five Years				Total
(Amounts in thousands)
Deposits without a stated maturity(1)		$	2,125,628			$	—			$	—			$	—			$	2,125,628
Certificates of deposit(2)(3)			228,133				134,403				55,765				7,898				426,199
Securities sold under agreements to repurchase			964				—				—				—				964
Operating leases			154				250				218				362				984
Total contractual cash obligations		$	2,354,879			$	134,653			$	55,983			$	8,260			$	2,553,775

---

(1)	Excludes interest
(2)	Includes interest on fixed and variable rate obligations (changes in market interest rates may materially affect the variable rate obligation to be paid, which is reflected using the rates in effect as of December 31, 2020)
(3)	Excludes unamortized premiums and discounts

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.

 

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The following table presents our off-balance sheet arrangements, by commitment expiration, as of December 31, 2020:

		Less than				One to				Three to				More than
		One Year(1)				Three Years				Five Years				Five Years				Total
(Amounts in thousands)
Commitments to extend credit		$	101,309			$	53,429			$	7,511			$	67,159			$	229,408
Financial letters of credit			80				160				50				—				290
Performance letters of credit(2)			2,288				176,239				205				—				178,732
Total off-balance sheet risk		$	103,677			$	229,828			$	7,766			$	67,159			$	408,430

---

(1)	Lines of credit with no stated maturity date are included in the less than one year expiration category.
(2)	Includes FHLB letters of credit

The reserve for the risk inherent in unfunded lending commitments totaled $66 thousand as of December 31, 2020 and 2019. For additional information, see Note 20, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements in Item 8 of this report.

 

Market Risk and Interest Rate Sensitivity

 

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

 

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

 

During 2020,At December 31, 2023, the Federal Open Market Committee decreasedset the benchmark federal funds rate 150 basis points toat a range of 0 to 255.25% - 5.50% basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.  Due toIn the current target Fed Fundsdownward rate asshock presented, benchmark interest rates were assumed at levels with floors near 0%.  The following table presents the sensitivity of December 31, 2020, we do not reflectnet interest income from immediate and sustained rate shocks in various interest rate scenarios over a decrease of more than 100 basis points from current rates in our analysis.twelve-month period for the periods indicated.

 

		Year Ended December 31,
		2020								2019
Increase (Decrease) in Basis Points		Change in Net Interest Income				Percent Change				Change in Net Interest Income				Percent Change
(Dollars in thousands)
300		$	8,429				8.5	%		$	171				0.2	%
200			5,912				6.0	%			428				0.4	%
100			3,130				3.2	%			426				0.4	%
(100)			(4,749	)			-4.8	%			(4,631	)			-4.3	%
(200)			N/A				N/A				(8,571	)			-8.0	%

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		December 31,
		2023								2022
Increase (Decrease) in Basis Points		Change in Net Interest Income				Percent Change				Change in Net Interest Income				Percent Change
(Dollars in thousands)
400		$	3,285				2.6	%			1,043				0.8	%
300			2,446				1.9	%			631				0.5	%
200			1,606				1.3	%			214				0.2	%
100			757				0.6	%			79				0.6	%
(100)			(3,858	)			-3.0	%			(5,644	)			-4.5	%
(200)			(9,527	)			-7.5	%			(12,849	)			-10.4	%

 

We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As of December 31, 2020,2023, we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.

The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of December 31, 2020, we maintained interest rate swap agreements with notional amounts totaling $16.70 million to modify our exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. The total of the fair value of the swap agreements on the balance sheet, which are accounted for as fair value hedges, was recorded as a derivative liability totaling $1.13 million as of December 31, 2020, and a derivative liability totaling $510 thousand as of December 31, 2019. For additional information, see Note 12, “Derivative Instruments and Hedging Activities,” to the Consolidated Financial Statements in Item 8 of this report.

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.

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

 

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 7 of this report.

 

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Item 8.

Financial Statements and Supplementary Data.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

 

	Page
Consolidated Balance Sheets as of December 31, 20202023 and 20120229	4739
Consolidated Statements of Income for the years ended December 31, 2020, 2019,2023, 2022, and 20120218	4840
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019,2023, 2022, and 20120218	4941
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019,2023, 2022, and 20120218	5042
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019,2023, 2022, and 20120218	5143
Notes to Consolidated Financial Statements	5244
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and on Management’s Assessment of Internal Control on Financial Reporting	10288
Management’s Assessment of Internal Control Over Financial Reporting	104
Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control Over Financial Reporting	10593

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

 

		December 31,								December 31,
(Amounts in thousands, except share and per share data)		2020				2019				2023				2022
Assets
Cash and due from banks		$	58,404			$	66,818			$	77,563			$	63,044
Federal funds sold			395,756				148,000				37,312				105,636
Interest-bearing deposits in banks			2,401				2,191				1,545				2,166
Total cash and cash equivalents			456,561				217,009				116,420				170,846
Debt securities available for sale			83,358				169,574
Loans held for sale			0				263
Loans held for investment, net of unearned income (includes covered loans of $9,680 and $12,861, respectively)			2,186,632				2,114,460
Allowance for loan losses			(26,182	)			(18,425	)
Debt securities available for sale, at fair value											280,961				300,349
Loans held for investment, net of unearned income											2,572,298				2,400,197
Allowance for credit losses											(36,189	)			(30,556	)
Loans held for investment, net			2,160,450				2,096,035				2,536,109				2,369,641
FDIC indemnification asset			1,223				2,883
Premises and equipment, net			57,700				62,824				50,680				47,340
Other real estate owned			2,083				3,969				192				703
Interest receivable			9,052				6,677				10,881				9,279
Goodwill			129,565				129,565				143,946				129,565
Other intangible assets			7,069				8,519				15,145				4,176
Other assets			104,075				101,529				114,211				103,673
Total assets		$	3,011,136			$	2,798,847			$	3,268,545			$	3,135,572
Liabilities
Noninterest-bearing deposits		$	772,795			$	627,868			$	931,920			$	872,168
Interest-bearing deposits			1,773,452				1,702,044				1,790,405				1,806,647
Total deposits			2,546,247				2,329,912				2,722,325				2,678,815
Securities sold under agreements to repurchase			964				1,601				1,119				1,874
Interest, taxes, and other liabilities			37,195				38,515				41,807				32,898
Total liabilities			2,584,406				2,370,028				2,765,251				2,713,587
Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding			0				0				—				—
Common stock, $1 par value; 50,000,000 shares authorized; 24,319,076 issued and 17,722,507 outstanding at December 31, 2020; 24,238,907 shares issued and 18,376,991 shares outstanding at December 31, 2019.			17,723				18,377
Common stock, $1 par value; 50,000,000 shares authorized; 27,522,547 issued and 18,502,396 outstanding at December 31, 2023; 24,477,471 shares issued and 16,225,399 shares outstanding at December 31, 2022											18,502				16,225
Additional paid-in capital			173,345				192,413				175,841				128,508
Retained earnings			237,585				219,535				319,902				292,971
Accumulated other comprehensive loss			(1,923	)			(1,506	)			(10,951	)			(15,719	)
Total stockholders' equity			426,730				428,819				503,294				421,985
Total liabilities and stockholders' equity		$	3,011,136			$	2,798,847			$	3,268,545			$	3,135,572

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands, except share and per share data)		2020				2019				2018				2023				2022				2021
Interest income
Interest and fees on loans		$	110,447			$	88,805			$	91,671			$	126,727			$	104,570			$	102,832
Interest on securities -- taxable			1,004				1,219				2,258				7,345				5,271				700
Interest on securities -- tax-exempt			1,785				2,497				2,828				611				715				1,037
Interest on deposits in banks			800				2,447				1,537				2,482				3,763				741
Total interest income			114,036				94,968				98,294				137,165				114,319				105,310
Interest expense
Interest on deposits			5,460				5,392				5,144				9,341				1,654				2,835
Interest on short-term borrowings			4				123				811				140				2				1
Interest on long-term debt			0				0				1,494
Total interest expense			5,464				5,515				7,449				9,481				1,656				2,836
Net interest income			108,572				89,453				90,845				127,684				112,663				102,474
Provision for loan losses			12,668				3,571				2,393
Provision for (recovery of) credit losses															7,985				6,572				(8,471	)
Net interest income after provision for loan losses			95,904				85,882				88,452				119,699				106,091				110,945
Noninterest income
Wealth management			3,417				3,423				3,262				4,179				3,855				3,853
Service charges on deposits			13,019				14,594				14,733				13,996				14,213				13,446
Other service charges and fees			10,333				8,281				7,733				13,647				12,308				12,422
Insurance commissions			0				0				966
Net gain (loss) on sale of securities			385				(43	)			(618	)
Net loss on sale of securities															(21	)			—				—
Net FDIC indemnification asset amortization			(1,690	)			(2,377	)			(2,181	)			—				—				(1,226	)
Litigation settlements			0				6,995				0
Gain on divestitures															—				1,658				—
Other operating income			4,369				2,804				2,548				5,651				5,148				5,806
Total noninterest income			29,833				33,677				26,443				37,452				37,182				34,301
Noninterest expense
Salaries and employee benefits			44,005				37,148				36,690				49,887				47,183				44,239
Occupancy expense			5,043				4,334				4,542				4,967				4,818				4,913
Furniture and equipment expense			5,558				4,457				3,980				5,878				6,001				5,627
Service fees			5,665				4,448				3,860				8,908				7,606				6,324
Advertising and public relations			1,951				2,310				2,011				3,300				2,409				2,076
Professional fees			1,224				1,698				1,430				1,567				1,303				1,524
Amortization of intangibles			1,450				997				1,039				1,731				1,446				1,446
FDIC premiums and assessments			426				318				906				1,511				1,126				832
Loss on extinguishment of debt			0				0				1,096
Goodwill impairment			0				0				1,492
Merger expense			1,893				2,124				0				2,393				596				—
Divestiture expense															—				153				—
Litigation expense															3,000				—				—
Other operating expense			12,410				11,929				12,727				12,035				10,475				11,737
Total noninterest expense			79,625				69,763				69,773				95,177				83,116				78,718
Income before income taxes			46,112				49,796				45,122				61,974				60,157				66,528
Income tax expense			10,186				10,994				8,782				13,954				13,495				15,360
Net income		$	35,926			$	38,802			$	36,340			$	48,020			$	46,662			$	51,168
Earnings per common share
Basic		$	2.02			$	2.47			$	2.19			$	2.67			$	2.82			$	2.95
Diluted			2.02				2.46				2.18				2.72				2.82				2.94
Cash dividends per common share			1.00				0.96				0.78				1.16				1.12				1.04
Special cash divided per common share			0				0				0.48
Weighted average shares outstanding
Basic			17,781,748				15,690,812				16,587,504				17,996,373				16,519,848				17,335,615
Diluted			17,815,380				15,756,093				16,666,385				18,027,151				16,562,257				17,402,936

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Year Ended December 31,
		2020				2019				2018
(Amounts in thousands)
Net income		$	35,926			$	38,802			$	36,340
Other comprehensive income, before tax
Available-for-sale debt securities:
Change in net unrealized gains (losses) on securities without other-than-temporary impairment			689				1,414				(2,213	)
Reclassification adjustment for net (gain) loss recognized in net income			(385	)			43				618
Net unrealized gains (losses) on available-for-sale debt securities			304				1,457				(1,595	)
Employee benefit plans:
Net actuarial (loss) gain			(1,217	)			(1,570	)			565
Plan change			0				(262	)			0
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income			386				278				285
Net unrealized (losses) gains on employee benefit plans			(831	)			(1,554	)			850
Other comprehensive (loss) income, before tax			(527	)			(97	)			(745	)
Income tax expense			110				20				156
Other comprehensive (loss) income, net of tax			(417	)			(77	)			(589	)
Total comprehensive income		$	35,509			$	38,725			$	35,751

		Year Ended December 31,
		2023				2022				2021
(Amounts in thousands)
Net income		$	48,020			$	46,662			$	51,168
Other comprehensive income, before tax
Available-for-sale debt securities:
Net unrealized gains (losses) on securities			5,669				(19,793	)			(1,381	)
Reclassification adjustment for net loss recognized in net income			21				—				—
Net unrealized gains on available-for-sale debt securities			5,690				(19,793	)			(1,381	)
Employee benefit plans:
Net actuarial gain			306				1,718				1,472
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income			38				135				386
Net unrealized gains on employee benefit plans			344				1,853				1,858
Other comprehensive income (loss), before tax			6,034				(17,940	)			477
Income tax (expense) benefit			(1,266	)			3,767				(100	)
Other comprehensive income (loss), net of tax			4,768				(14,173	)			377
Total comprehensive income		$	52,788			$	32,489			$	51,545

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

																						Accumulated
										Additional												Other
		Preferred				Common				Paid-in				Retained				Treasury				Comprehensive
(Amounts in thousands, except share and per share data)		Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Total
Balance January 1, 2018		$	0			$	21,382			$	228,750			$	180,543			$	(79,121	)		$	(840	)		$	350,714
Net income			0				0				—				36,340				0				0				36,340
Other comprehensive income			0				0				—				0				0				(589	)			(589	)
Common dividends declared -- $0.78 per share			0				0				—				(12,966	)			0				0				(12,966	)
Special common dividend declared -- $0.48 per share			0				0				—				(8,124	)			0				0				(8,124	)
Equity-based compensation expense			0				0				535				0				623				0				1,158
Common stock options exercised -- 24,186 shares			0				0				(84	)			0				468				0				384
Issuance of treasury stock to 401(k) plan -- 11,331 shares			0				0				138				0				214				0				352
Purchase of treasury shares -- 1,060,312 shares at $32.45 per share			0				0				—				0				(34,412	)			0				(34,412	)
Reclassification of treasury stock			0				(5,375	)			(106,853	)			0				112,228				0				0
Balance December 31, 2018		$	0			$	16,007			$	122,486			$	195,793			$	0			$	(1,429	)		$	332,857
Balance January 1, 2019		$	0			$	16,007			$	122,486			$	195,793			$	0			$	(1,429	)		$	332,857
Net income			0				0				—				38,802				0				0				38,802
Other comprehensive loss			0				0				—				0				0				(77	)			(77	)
Common dividends declared -- $0.96 per share			0				0				—				(15,060	)			0				0				(15,060	)
Equity-based compensation expense			0				44				1,437				0				0				0				1,481
Common stock options exercised -- 8,459 shares			0				8				128				0				0				0				136
Issuance of stock to 401(k) plan -- 12,407 shares			0				12				399				0				0				0				411
Repurchase of common shares -- 487,400 shares at $33.57 per share			0				(487	)			(15,875	)			0				0				0				(16,362	)
Highlands Bankshares, Inc. acquisition			0				2,793				83,838				0				0				0				86,631
Balance December 31, 2019		$	0			$	18,377			$	192,413			$	219,535			$	0			$	(1,506	)		$	428,819
Balance January 1, 2020		$	0			$	18,377			$	192,413			$	219,535			$	0			$	(1,506	)		$	428,819
Net income			0				0				—				35,926				0				0				35,926
Other comprehensive loss			0				0				—				0				0				(417	)			(417	)
Common dividends declared -- $1.00 per share			0				0				—				(17,876	)			0				0				(17,876	)
Equity-based compensation expense			0				58				1,585				0				0				0				1,643
Issuance of stock to 401(k) plan -- 22,693 shares			0				23				484				0				0				0				507
Repurchase of common shares -- 734,653 shares at $29.77 per share			0				(735	)			(21,137	)			0				0				0				(21,872	)
Balance December 31, 2020		$	0			$	17,723			$	173,345			$	237,585			$	0			$	(1,923	)		$	426,730

																										Accumulated
		Preferred								Common								Additional								Other
		Stock				Preferred				Stock				Common				Paid-in				Retained				Comprehensive
(Amounts in thousands, except share and per share data)		Outstanding				Stock				Outstanding				Stock				Capital				Earnings				Income (Loss)				Total
Balance January 1, 2021			—			$	—				17,722,507			$	17,723			$	173,345			$	237,585			$	(1,923	)		$	426,730
Cumulative effect of adoption of ASU 2016-13			—				—				-				—				—				(5,870	)			—				(5,870	)
Net income			—				—				-				—				—				51,168				—				51,168
Other comprehensive income			—				—				-				—				—				—				377				377
Common dividends declared -- $1.04 per share			—				—				-				—				—				(18,059	)			—				(18,059	)
Equity-based compensation expense			—				—				48,388				48				1,233				—				—				1,281
Common stock options exercised			—				—				39,995				40				498				—				—				538
Issuance of stock to 401(k) plan			—				—				16,716				16				476				—				—				492
Repurchase of common shares -- at $30.42 per share			—				—				(949,386	)			(949	)			(27,933	)			—				—				(28,882	)
Balance December 31, 2021			—			$	—				16,878,220			$	16,878			$	147,619			$	264,824			$	(1,546	)		$	427,775
Balance January 1, 2022			—			$	—				16,878,220			$	16,878			$	147,619			$	264,824			$	(1,546	)		$	427,775
Net income			—				—				-				—				—				46,662				—				46,662
Other comprehensive loss			—				—				-				—				—				—				(14,173	)			(14,173	)
Common dividends declared -- $1.12 per share			—				—				-				—				—				(18,515	)			—				(18,515	)
Equity-based compensation expense			—				—				25,137				25				693				—				—				718
Common stock options exercised			—				—				7,575				8				164				—				—				172
Issuance of stock to 401(k) plan			—				—				20,584				20				637				—				—				657
Repurchase of common shares -- at $30.18 per share			—				—				(706,117	)			(706	)			(20,605	)			—				—				(21,311	)
Balance December 31, 2022			—			$	—				16,225,399			$	16,225			$	128,508			$	292,971			$	(15,719	)		$	421,985
Balance January 1, 2023			—			$	—				16,225,399			$	16,225			$	128,508			$	292,971			$	(15,719	)		$	421,985
Issuance of common stock pursuant to acquisition			—				—				2,996,786				2,997				68,357			$	—			$	—				71,354
Net income			—				—				-				—				—				48,020				—				48,020
Other comprehensive income			—				—				-				—				—				—				4,768				4,768
Common dividends declared -- $1.16 per share			—				—				-				—				—				(21,089	)			—				(21,089	)
Equity-based compensation expense			—				—				24,312				25				572				—				—				597
Common stock options exercised			—				—				4,288				4				87				—				—				91
Issuance of stock to 401(k) plan			—				—				19,690				20				586				—				—				606
Repurchase of common shares -- at $29.99 per share			—				—				(768,079	)			(769	)			(22,269	)			—				—				(23,038	)
Balance December 31, 2023			—			$	—				18,502,396			$	18,502			$	175,841			$	319,902			$	(10,951	)		$	503,294

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows

 

		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands)		2020				2019				2018				2023				2022				2021
Operating activities
Net income		$	35,926			$	38,802			$	36,340			$	48,020			$	46,662			$	51,168
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			12,668				3,571				2,393
Provision for (recovery of) credit losses															7,985				6,572				(8,471	)
Depreciation and amortization of premises and equipment			4,458				3,448				2,912				3,954				4,154				4,471
Amortization of premiums on investments, net			1,468				195				40
Amortization of FDIC indemnification asset, net			1,690				2,377				2,181
(Accretion)/amortization of discounts/premiums on investments, net															(2,471	)			(261	)			454
Amortization of intangible assets			1,450				997				1,039				1,731				1,446				1,446
Goodwill impairment			0				0				1,492
Accretion on acquired loans			(7,991	)			(3,231	)			(6,391	)			(2,743	)			(2,618	)			(4,656	)
Gain on divestiture															—				(1,658	)			—
Equity-based compensation expense			1,643				1,481				1,158				597				718				1,281
Issuance of common stock to 401(k) plan			507				411				352				606				657				492
Gain on sale of premises and equipment, net			(59	)			(75	)			(25	)
(Gain) loss on sale of premises and equipment, net															(189	)			(772	)			499
Provision expense and loss on sale of other real estate owned			319				1,253				1,313				84				453				231
(Gain) loss on sale of securities			(385	)			43				618
Writedowns of property, plant & equipment			812				380				1,007
Loss on extinguishment of debt			0				0				1,096
(Increase) decrease in other operating activities			(6,662	)			7,003				3,974
Loss on sale of securities															21				—				—
Decrease in other operating activities															4,233				3,671				1,300
Net cash provided by operating activities			45,844				56,655				49,499				61,828				59,024				48,215
Investing activities
Proceeds from sale of securities available for sale			51,027				13,898				8,937
Proceeds from sale of available for sale securities															38,979				—				370
Proceeds from maturities, prepayments, and calls of securities available for sale			44,676				32,863				68,765				83,586				25,748				27,256
Proceeds from maturities and calls of securities held to maturity			0				25,000				0
Payments to acquire securities available for sale			(10,267	)			(8,255	)			(67,355	)			(74,103	)			(269,337	)			(22,394	)
(Originations of) proceeds from repayments loans, net			(69,259	)			85,233				39,512
Proceeds from repayments (originations of) loans, net															64,538				(236,620	)			27,467
Proceeds from bank owned life insurance			0				0				458				—				1,763				—
(Redemption of) payments for FHLB stock, net			(12	)			129				(2,122	)
Cash proceeds from mergers, acquisitions, and divestitures, net			0				25,863				10
Payments to the FDIC			(30	)			(152	)			(151	)
(Payments for) redemption of FHLB stock, net															(877	)			(240	)			1,012
Net cash provided by (used in) acquisitions and divestitures															176,684				(59,039	)			—
Proceeds from sale of premises and equipment			2,861				1,955				955				1,827				1,542				2,616
Payments to acquire premises and equipment			(3,195	)			(8,411	)			(2,551	)			(2,770	)			(1,160	)			(3,038	)
Proceeds from sale of other real estate owned			1,997				3,254				2,940				798				564				2,061
Net cash provided by investing activities			17,798				171,377				49,398
Net cash provided by (used in) investing activities															288,662				(536,779	)			35,350
Financing activities
Increase in noninterest-bearing deposits, net			144,927				12,604				5,407
Increase (decrease) in interest-bearing deposits, net			71,408				(41,445	)			(79,548	)
Repayments of securities sold under agreements to repurchase, net			(637	)			(27,769	)			(716	)
(Decrease) increase in noninterest-bearing deposits, net															(98,637	)			47,769				69,988
(Decrease) increase in interest-bearing deposits, net															(261,488	)			(37,291	)			113,156
(Payments for) proceeds from in securities sold under agreements to repurchase, net															(755	)			—				572
Repayments of FHLB and other borrowings, net			(40	)			0				(50,000	)			—				338				—
Proceeds from stock options exercised			0				136				384				91				172				538
Payments for repurchase of common stock			(21,872	)			(16,362	)			(34,412	)			(23,038	)			(21,311	)			(28,882	)
Payments of common stock dividends			(17,876	)			(15,060	)			(21,090	)			(21,089	)			(18,515	)			(18,059	)
Net cash provided by (used in) financing activities			175,910				(87,896	)			(179,975	)
Net increase (decrease) in cash and cash equivalents			239,552				140,136				(81,078	)
Net cash (used in) provided by financing activities															(404,916	)			(28,838	)			137,313
Net (decrease) increase in cash and cash equivalents															(54,426	)			(506,593	)			220,878
Cash and cash equivalents at beginning of period			217,009				76,873				157,951				170,846				677,439				456,561
Cash and cash equivalents at end of period		$	456,561			$	217,009			$	76,873			$	116,420			$	170,846			$	677,439
Supplemental disclosure -- cash flow information
Cash paid for interest		$	5,500			$	5,661			$	7,935			$	9,084			$	2,114			$	3,141
Cash paid for income taxes			9,074				8,057				7,610				11,783				7,590				14,399
Supplemental transactions -- non-cash items
Transfer of loans to other real estate			695				3,160				5,686				391				705				1,283
Loans originated to finance other real estate			266				484				164				20				—				59
Increase in accumulated other comprehensive loss			417				77				589
Non-cash sales price related to divestitures			0				0				1,603
Change in accumulated other comprehensive income/(loss)															4,768				(14,173	)			377
Acquisitions:
Fair value of assets acquired			0				556,005				0				466,247				—				—
Fair value of liabilities assumed			0				506,179				0				409,258				—				—
Net assets acquired			0				49,826				0				71,370				—				—
Common stock issued in acquisition			0				86,631				0				71,354				—				—

 

See Notes to Consolidated Financial Statements.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

First Community Bankshares, Inc. (the “Company”), is a financial holding company was founded in 1989 and reincorporatedincorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

 

Principles of Consolidation

 

The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management.

 

The Company maintains investments in variable interest entities (“VIEs”). VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is required if a reporting entity is the primary beneficiary of the VIE. The Company periodically reviews its VIEs and has determined that it is not the primary beneficiary of any VIE; therefore, the assets and liabilities of these entities are not consolidated into the financial statements.

 

Reclassification

 

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

Use of Estimates

 

Preparation of the consolidatedTo prepare financial statements in conformity with GAAP requiresaccounting principles generally accepted in the United States of America management to makemakes estimates and assumptions thatbased on available information. These estimates and assumptions affect the amounts reported amounts of assetsin the financial statements and liabilities as of the date of the balance sheetdisclosures provided, and reported amounts of revenues and expenses during the reporting period. Actualactual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, the allowance for loan losses and goodwill and other intangible asset. For additional information, see “Critical Accounting Policies” in Part II, Item 7 of this report.differ.

Summary of Significant Accounting Policies

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value hierarchy ranks the inputs used in measuring fair value as follows:

 

●

Level 1 – Observable, unadjusted quoted prices in active markets

●

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

●

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

 

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

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing balances on deposit with the Federal Home Loan Bank (“FHLB”("FHLB"), the Federal Reserve Bank (“FRB”of Richmond ("FRB"), and correspondent banks that are available for immediate withdrawal.

Investment Securities

 

Management classifies debt securities as held-to-maturity or available-for-sale based on the intent and ability to hold the securities to maturity. Debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. Debt securities not classified as held to maturity are classified as available-for-sale securities and carried at estimated fair value. Available-for-sale securities consist of securities the Company intends to hold for indefinite periods of time including securities to be used as part of the Company’s asset/liability management strategy and securities that may be sold in response to changes in interest rates, prepayment risk, or other similar factors.for a variety of reasons. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income (“AOCI”), net of income taxes, in stockholders’ equity. Gains or losses on calls, maturities, or sales of investment securities are recorded based on the specific identification method and included in noninterest income. Premiums are amortized to first call date and discounts are amortized or accreted over the life of a security into interest income.

 

The Company reviews its investment portfolio quarterlyManagement evaluates securities for indications of other-than-temporary impairment (“OTTI”) using inputs from independent third parties to determine thewhere there has been a decline in fair value below the amortized cost basis of investment securities, which are reviewed and corroborated by management. Unrealized losses are evaluateda security to determine whether there is a credit loss associated with the impairment is temporarydecline in fair value on at least a quarterly basis, and more frequently when economic or other-than-temporary in nature. For debt securities, management considers its intent to sell the securities, the evidence available to determine if it is more likely than not that the securities will have to be sold before recovery of amortized cost, and the probable credit losses. Probable creditmarket concerns warrant such evaluation. Credit losses are evaluatedcalculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected future cash flows;flows with the severity and durationamortized cost basis of the impairment;security.  The credit loss component would be recognized through the issuer’sprovision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects to service the debt; the cause of the decline, such as adverse conditions relatedissuer 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 industry, or economic environment;debt security prior to recovering its fair value, (5) the payment structureanticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. The Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value.  The nature of the debt;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 issuer’s failure to make scheduled interest or principal payments;security’s fair value and any change in the issuer’s credit rating by rating agencies. Ifhistorical 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 future cash flows discounted atwith the security's effective yield is less thanamortized cost basis of the net book value, the difference is recognized as a credit-related OTTI in noninterest income. If management does not intend to sell and if we are not likely to be required to sell the security, the OTTI is separated into an amount representing thesecurity.  The credit loss which iscomponent would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities.  Nor does the Company record an allowance for credit losses on accrued interest receivable.  As of   December 31, 2023, the accrued interest receivable for investment securities available for sale was $ 1.25  million compared to $1.34 million as a charge to noninterest income, and the amount representing all other factors, which is recognized in other comprehensive income (“OCI”)of  December 31, 2022.

 

Other Investments

As a condition of membership in the FHLB and the FRB,Federal Reserve, the Company is required to hold a minimum level of stock in the FHLB of Atlanta and the FRB of Richmond. These securities are carried at cost and periodically reviewed for impairment. The total investment in FHLB and FRB stock, which is included in other assets, was $10.80 $13.04 million as of December 31, 2023, and $10.02 million as of December 31, 2020, and $8.90 million as of December 31, 20192022.

 

The Company owns certain long-term equity investments without readily determinable fair values, including certain tax credit limited partnerships and various limited liability companies that manage real estate investments, facilitate tax credits, and provide title insurance and other related financial services. These investments are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The total carrying value in these investments, which is included other assets, totaled $3.93$3.70 million as of December 31, 20202023, and $3.68$3.78 million as of December 31, 20192022.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Business Combinations

 

The Company accounts for business combinations using the acquisition method of accounting as outlined in using Topic 805 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. In instances where the price of the acquired business is less than the net assets acquired, a gain on the purchase is recorded. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisals by qualified independent parties for relevant asset and liability categories. Certain financial assets and liabilities are valued using discount models that apply current discount rates to streams of cash flow. Valuation methods require assumptions, which can result in alternate valuations, varying levels of goodwill or bargain purchase gains, or amortization expense or accretion income. Management must make estimates for the useful or economic lives of certain acquired assets and liabilities that are used to establish the amortization or accretion of some intangible assets and liabilities, such as core deposits. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information about the closing date fair values becomes available. Acquisition and divestiture activities are included in the Company’s consolidated results of operations from the closing date of the transaction. Acquisition and divestiture related costs are recognized in noninterest expense as incurred. For additional information, see “Purchased Credit ImpairedDeteriorated Loans” and “Intangible Assets” below.

 

Loans Held for Investment

 

Loans classified as held for investment are originated with the intent to hold indefinitely, until maturity, or until pay-off. Loans held for investment are carried at the principal amount outstanding, net of unearned income and any necessary write-downs to reduce individual loans to net realizable value. Interest income on performing loans is recognized as interest income at the contractual rate of interest. Loan origination fees, including loan commitment and underwriting fees, are reduced by direct costs associated with loan processing, including salaries, legal review, and appraisal fees. Net deferred loan fees are deferred and amortized over the life of the related loan or commitment period.

 

Purchased Performing Loans. Purchased loans that are deemed to be performing at the acquisition date are accounted for using the contractual cash flow method of accounting, which results in the loans being recorded at fair value with a credit discount. The fair value discount or premium is accreted or amortized, as the case may be, as an adjustment to yield over the estimated contractual lives of the loans.No allowance for loan losses is recorded at acquisition for purchased loans because the fair values of the acquired loans incorporate credit risk assumptions.

 

Purchased Credit ImpairedDeteriorated (“PCI”PCD”) Loans. When purchasedPurchased 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 exhibit evidenceby 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 deterioration afterlosses 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 it is probable at acquisition the Company will not collect all contractually required principal and interest payments, the loans are referred toamortized cost basis as PCI loans. PCI loans are accounted for using Topic 310-30 of the FASB ASC. PCIacquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Per the guidance, the Company groups PCI loans that have common risk characteristics into loan pools. Evidence of credit quality deterioration at acquisition may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans identified as credit impaired. If contractually required payments at acquisition exceed cash flows expected to be collected, the excess is the non-accretable difference, which is available to absorb credit losses on those loans or pools of loans. If the cash flows expected at acquisition exceed the estimated fair values, the excess is the accretable yield, which is recognized inthrough the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining liveslife of thosethe PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s acquired purchased credit impaired loans or pools of loans when there is a reasonable expectation about the amount and timing of such cash flows.were treated as PCD loans.

 

ImpairedIndividually Evaluated Loans and Nonperforming Assets.  The Company maintains an active and robust problem credit identification system through its ongoing credit review function.  When a credit is identified as exhibiting characteristics of weakening, the Company assesses the credit for potential impairment. Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual terms of the loan agreements are uncertain. The Company conducts quarterly reviews of loans with balances of $500 thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are notno limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped bylonger shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $500,000 for individually-evaluated loans. Generally, individually-evaluated loans are reviewed quarterly by management. Impairmenton nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is measuredprobable. The expected credit losses on individually-evaluated loans will be estimated based uponon discounted cash flow analysis unless the presentloan meets the criteria for use of the fair value of collateral, either by virtue of an expected future cash flows discounted atforeclosure or through meeting the loan's effectivedefinition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.  The Company follows its nonaccrual policy by reversing contractual interest rate orincome in the net realizable value ofincome statement when the collateral ifCompany places a loan on nonaccrual status. Therefore, Management excludes the loan is collateral dependent. Interest income realizedaccrued interest receivable balance from the amortized cost basis in measuring expected credit losses on impaired loans in nonaccrual status, if any, is recognized upon receipt.the portfolio and does not record an allowance for credit losses on accrued interest receivable.  The accrual of interest, which is based on the daily amount of principal outstanding, on impairedindividually evaluated loans is generally continued unless the loan becomes delinquent 90 days or more.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Loans are considered past due when either principal or interest payments become contractually delinquent by 30 days or more. The Company’s policy is to discontinue the accrual of interest, if warranted, on loans based on the payment status, evaluation of the related collateral, and the financial strength of the borrower. Loans that are 90 days or more past due are placed on nonaccrual status. Management may elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, interest accrued and not collected in the current year is reversed from income, and interest accrued and not collected from prior years is charged to the allowance for loancredit losses. Nonaccrual loans may be returned to accrual status when all principal and interest amounts contractually due, including past due payments, are brought current; the ability of the borrower to repay the obligation is reasonably assured; and there is generally a period of at least six months of repayment performance by the borrower in accordance with the contractual terms.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Seriously delinquent loans are evaluated for loss mitigation options. Closed-end retail loans are generally charged off against the allowance for loancredit losses when the loans become 120 days past due. Open-end retail loans and residential real estate secured loans are generally charged off when the loans become 180 days past due. Unsecured loans are generally charged off when the loans become 90 days past due. All other loans are charged off against the allowance for loancredit losses after collection attempts have been exhausted, which generally is within 120 days. Recoveries of loans previously charged off are credited to the allowance for loancredit losses in the period received.

 

Loans are considered troubled debt restructurings (“TDRs”) when Effective January 1, 2023, the Company grants concessions,adopted Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.  The allowance for legal or economic reasons,credit losses incorporates an estimate of lifetime credit losses and is recorded on each asset upon origination.  The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.  The Company uses a probability of default/loss given default model to determine the allowance for credit losses.  An assessment of whether a borrower is experiencing financial difficulty is made at the the time of the modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty that wouldis already included in the allowance for credit losses, a change to the allowance for credit losses is generally not otherwiserecorded upon modification.  Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be considered. Theuncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.  Additionally, the Company generally makes concessions inmay allow a loan to go interest rates, loan terms, and/or amortization terms. All TDRs $500 thousand or greater are evaluatedonly for a specific reserve based on either the collateral or net present value method, whichever is most applicable. TDRs under $500 thousand are subject to the reserve calculation for classified loans based primarily on the historical loss rate. At the datespecified period of modification, nonaccrual loans are classified as nonaccrual TDRs. TDRs classified as nonperforming at the date of modification 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.time.

 

Other real estate owned (“OREO”) acquired through foreclosure, or other settlement, is carried at the lower of cost or fair value less estimated selling costs. The fair value is generally based on current third-party appraisals. When a property is transferred into OREO, any excess of the loan balance over the net realizable fair value is charged against the allowance for loancredit losses. Operating expenses, gains, and losses on the sale of OREO are included in other noninterest expense in the Company’s consolidated statements of income after any fair value write-downs are recorded as valuation adjustments.

Allowance for LoanCredit Losses (ACL)

 

We reviewThe Company reviews our allowance for loancredit losses quarterly to determine if it is sufficient to absorb probable loanexpected credit losses in the portfolio. This determination requires management to make significant estimates and assumptions. While managementthe Company uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for loancredit losses in the near term; however, the amount of the change cannot reasonably be estimated.

 

Our allowanceThe 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 losses consistsportfolio.  The Company considers the effects of specific reserves assignedpast 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 impaired loansadjust the ACL for management’s current estimate of expected credit losses.  The Company’s ACL is calculated using collectively evaluated and credit relationships and general reserves assigned to unimpairedindividually evaluated loans.

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

Risk characteristics of residential real estate loans which include loans secured by Single family properties, HELOC, and Owner occupied construction loans are dependent upon individual borrowers who are affected by changes in general economic conditions, real estate valuations, and the demand for housing.  Commercial and Industrial, Multi-family residential, Non-farm/non-residential, Agricultural, and Loans secured by Farmland are similar in that they are generally dependent upon the borrower's internal cash flow from operations to service the debt and changes in general economic conditions.  Commercial construction, Development, and other land loans, Consumer, and Other consumer loans (open pool) are similar in that they are dependent on changes in general economic conditions.

For collectively evaluated loans, the Company uses a combination of discounted cash flow and open pool to estimate expected credit losses.  During 2022, the Company changed third party model providers which necessitated a change from remaining life to open pool for the portfolios noted above.  The change in method was not quantitatively significant.  In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL.  The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics such aswithin the type of loansegments over an economic cycle.  The Company reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics.  Also considered were further adjustments to historical loss information for current conditions and collateral. General reserve allocations are based on management’s judgments of qualitativereasonable and quantitative factorssupportable forecasts that include, but are not limited to, probable lossesdiffer from loan and other credit arrangements, general economicthe conditions changes in credit concentrations or pledged collateral,that existed for the period over which historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for loans classified as special mention and substandard within each loan class ininformation was evaluated.  For the commercial loan segment are adjusted by an additional qualitative factor.  Loans are considered impaired when, in the opinion of management and based on current information and events, the collection of principal and interest payments due under the contractual termsmajority of the loan agreements are uncertain. Thesegments of collectively evaluated loans, the Company conducts quarterly reviews of loans with balances ofincorporated at least $500one thousand or greater that are deemed to be impaired. Factors considered in determining impairment include, but are not limited to, the borrower’s cash flow and capacity for debt repayment, the valuation of collateral, historical loss percentages, and economic conditions. Impairment allowances allocated to individual loans, including individual credit relationships and loan pools grouped by similar risk characteristics, are reviewed quarterly by management, Impairment is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. No allowance for loan losses is carried over or established at acquisition for purchased loans acquired in business combinations. A provision for loan losses is recorded for any credit deterioration in purchased performing loans after the acquisition date. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted atmacroeconomic driver using a market rate of interest. Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020. For additional information, see Note 6, “Allowance for Loan Losses,” to the Consolidated Financial Statements in Item 8 of this report.

FDIC Indemnification Assetstatistical regression modeling methodology.

 

The FDIC indemnification asset representsCompany 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 carrying amounteconomic 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 right to receive payments fromreasonable and supportable forecast for the FDIC for losses incurred on certain loans and OREO purchased fromcurrent period along with the FDIC that are covered by loss share agreements. The FDIC indemnification asset is measured separately from related covered assets because it is not contractually embeddedinputs used in the assets or transferable shouldestimation of expected credit losses.  For the assets be disposed. Undercontractual term that extends beyond the acquisition method of accounting,reasonable and supportable forecast period, the FDIC indemnification asset is recorded at fair valueCompany reverts to historical loss information over eight quarters using projected cash flows based on expected reimbursements and applicable loss share percentages as outlined in the loss share agreements. The expected reimbursements doa straight-line approach.  Management notmay include reimbursable amounts related to future covered expenditures. The cash flows are discounted to reflect the timing and receipt of reimbursements from the FDIC. The discount is accreted through noninterest income over future periods. Post-acquisition adjustments to the indemnification asset are measuredapply different reversion techniques depending on the same basiseconomic environment for the financial asset portfolio and as the underlying covered assets. Increases in the cash flows of covered loans reduce the FDIC indemnification asset balance, which is recognized as amortization through noninterest income over the shorter of the remaining life of the FDIC indemnification asset or the underlying loans. Decreases in the cash flows of covered loans increase the FDIC indemnification asset balance, which is recognized as accretion through noninterest income. Certain expenses related to covered assets are reimbursable from the FDIC through monthly and quarterly claims. Estimated reimbursements from the FDIC are netted against covered expenses in the consolidated statements of income.

current period has utilized a linear reversion technique. 

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

When loans are acquired they are identified as either purchased credit deteriorated ("PCD") or non-PCD.  PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date.  The ACL for PCD assets is recognized within the business combination accounting  with no initial impact to net income.  Changes is estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.

Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default.  The actual cash flows on these loans could differ materially from the fair value estimates.  The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the "discount" on the acquired loans.  Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.  The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination.  Estimated credit losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans.

As previously noted, effective January 1, 2023, the Company adopted Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.  The allowance for credit losses incorporates an estimate of lifetime credit losses and is recorded on each asset upon origination.  The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.  The Company uses a probability of default/loss given default model to determine the allowance for credit losses.  An assessment of whether a borrower is experiencing financial difficulty is made at the the time of the modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification.  Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.  Additionally, the Company may allow a loan to go interest only for a specified period of time.

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. The Company has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of  December 31, 2023, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $746 thousand compared to $1.20 million as of December 31, 2022.  The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans. The current adjustment to the ACL for unfunded commitments is recognized through provision for credit losses in the Statement of Income. Prior to 2023, the current adjustment to the ACL for unfunded commitments was recognized through other operating expense in the Statement of Income.  For additional information, see Note 6, “Allowance for Credit Losses,” to the Consolidated Financial Statements in Item 8 of this report.  

Premises and Equipment

 

Premises, equipment, and capital leases are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 5 to 10 years for furniture, fixtures, and equipment; 3 to 5 years for computer software, hardware, and data handling equipment; and 7 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 20 years and leasehold improvements are amortized over the lesser of the term of the respective leases plus the first optional renewal period, when renewal is reasonably assured, or the estimated useful lives of the improvements. The Company leases various properties within its branch network. Leases generally have initial terms of up to 10 years and most contain options to renew with increases in rent. All leases are accounted for as operating leases. Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the underlying asset are capitalized. Disposition gains and losses are reflected in current operations.

 

Intangible Assets

 

Intangible assets consist of goodwill, core deposit intangible assets, and other identifiable intangible assets that result from business combinations. Goodwill represents the excess of the purchase price over the fair value of net assets acquired that is allocated to the appropriate reporting unit when acquired. Core deposit intangible assets represent the future earnings potential of acquired deposit relationships that are amortized over their estimated remaining useful lives. Other identifiable intangible assets primarily represent the rights arising from contractual arrangements that are amortized using the straight-line method.

 

An interim analysis of Goodwill is performed quarterly, and goodwill is tested for impairment annually, on October 31^st,31st, or more frequently if events or circumstances indicate there may be impairment. We have one reporting unit, Community Banking.  If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test on October 31, 2020, which resulted in

Management has concluded that there was no goodwill impairment.impairment for 2023 and  2022. 

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Quantitative goodwill impairment testing involves significant management judgement, requiring an assessment of whether

Bank Owned Life Insurance

The Company has purchased life insurance policies on certain key executives and personnel.  The value recorded on the carryingbalance sheet is the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or amounts due that are probable at settlement.

Other Comprehensive Income

Other comprehensive income includes unrealized gains and losses on securities available-for-sale and changes in the funded status of the reporting unitnonqualified domestic, noncontributory defined benefit plans which are recognized as separate components of equity.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be supported by its fair value.  The processreasonable estimated.  For additional information, see Note 19, “Litigation, Commitments, and Contingencies,” to determine fair valuethe Consolidated Financial Statements in Item 8 of our reporting unit utilizes widely accepted valuation techniques, such as the market approach (earnings multiples and transaction multiples) and the income approach (discounted cash flow (“DCF”) method).  The Company engaged an independent valuation specialist to assist with goodwill impairment testing utilizing both the market and  DCF methods.  The resulting fair values from the aforementioned methods were appropriately weighted to determine the final fair value of our reporting unit.this report.  

 

Under the market approach, the key assumptions are selected price to earnings ratios and price to tangible book value multiples.  The selection of the multiples considers the operating performance and financial condition of our reporting unit as compared with those of a group of selected publicly traded guideline companies.  Among other factors considered, are the level and expected growth in return on tangible equity relative to the guideline companies selected, implied control premiums, recent transaction prices, as well as data in comparable macroeconomic environments. 

Under the DCF approach, the key assumptions used are the cash flows for the forecasted period, the terminal growth rate, and the discount rate.  The cash flows for the forecasted period are estimated based on management’s most recent projections available as of the testing date, given consideration to minimum equity capital requirements.  The projections include macroeconomic variables developed at the same time.  The terminal growth rate is selected based on management’s long-term expectation for the reporting unit.  The discount rate is based on the reporting unit’s estimated cost of equity capital, computed under the capital asset pricing model and reflects the risk and uncertainty in the financial markets in the internally generated cash flow projections.

At October 31, 2020, the fair value of the Company’s reporting unit compared to the carrying value resulted in no impairment of goodwill.  While the inherent risk related to uncertainty is embedded in the key assumptions used in the valuations, the current environment continues to evolve due to the challenge and uncertainties related to the pandemic.  Further deterioration in macroeconomic and market conditions, potential adverse effects to economic forecasts due to the severity and duration of the pandemic, as well as the responses of governments, customers, and clients, could negatively impact the assumptions used in the valuation.  If the future should differ from management’s best estimate of key assumptions, the Company could potentially experience goodwill impairment charges in the future. 

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and recognized as short-term borrowings in the Company’s consolidated balance sheets. Securities, generally U.S. government and federal agency securities, pledged as collateral under these arrangements can be sold or repledged only if replaced by the secured party. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided as appropriate.

Derivative Instruments

 

The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract such as interest rates, equity security prices, currencies, commodity prices, or credit spreads. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount, such as interest rate swaps or currency forwards, or to purchase or sell other financial instruments at specified terms on a specified date, such as options to buy or sell securities or currencies. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

If certain conditions are met, a derivative may be designated as a hedge related to fair value, cash flow, or foreign exposure risk. The recognition of changes in the fair value of a derivative instrument varies depending on the intended use of the derivative and the resulting designation. The Company accounts for hedges of customer loans as fair value hedges. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Changes in the fair value of derivatives not designated as hedging instruments are recognized as a gain or loss in earnings. The Company formally documents any relationships between hedging instruments and hedged items and the risk management objective and strategy for undertaking each hedged transaction. All derivative instruments are reported at fair value in the consolidated balance sheets.

Equity-Based Compensation

 

The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. The Black-Scholes-Merton valuation model is used to estimate the fair value of stock options at the grant date while the fair value of restricted stock awards is based on the market price of the Company’s common stock on the grant date. The Black-Scholes-Merton model incorporates the following assumptions: the expected volatility is based on the weekly historical volatility of the Company’s common stock price over the expected term of the option; the expected term is generally calculated using the shortcut method; the risk-free interest rate is based on the U.S. Department of the Treasury’s (“Treasury”) yield curve on the grant date with a term comparable to the grant; and the dividend yield is based on the Company’s dividend yield using the most recent dividend rate paid per share and trading price of the Company’s common stock. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Revenue Recognition

 

Wealth management. Wealth management income represents monthly fees due from wealth management customers in consideration for managing and administrating the customers' assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when the performance obligation is completed each month, which is generally the time that payment is received. Income also includes fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that are referred to the third party. These fees are paid to the Company by the third party on a quarterly basis and recognized ratably throughout the quarter as the performance obligation is satisfied.

 

Service charges on deposits and other service charges and fees.

Service charges on deposits and other service charges and fees represent general service fees for account maintenance and activity and transaction-based fees that consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. Other service charges and fees include interchange income from debit and credit card transaction fees.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Advertising Expenses

 

Advertising costs are generally expensed as incurred. The Company may establish accruals for expectedincurred advertising expenses in the course of a fiscal year.

Income Taxes

 

Income tax expense is comprised of the current and deferred tax consequences of events and transactions already recognized. The Company includes interest and penalties related to income tax liabilities in income tax expense. The effective tax rate, income tax expense as a percent of pre-tax income, may vary significantly from statutory rates due to tax credits and permanent differences. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are adjusted through the provision for income taxes as changes in tax laws or rates are enacted.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Per Share Results

 

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. Under the treasury stock method of accounting, potential common stock may be issued for stock options, non-vested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.

Risks and Uncertainties

Recent COVID-19 Virus Developments –

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

Company Response to COVID-19 –

As COVID-19 events unfolded during 2020, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In particular, the Company took the following actions, among others:

•

Implemented its board-approved pandemic business continuity plan

•

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

•

Modified branch operations:

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

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 December 31,2020, the Company has modified or deferred payments on a total of 3,625 loans totaling $458.17 million in principal.  As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.  Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.

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

 

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In addition to the general impact of COVID-19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other legislative and regulatory actions may materially impact the Company. The Company is participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a two-year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through December 31,2020 the Company processed 803 loans with original principal balances totaling $62.74 million through the PPP.  As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA.

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

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

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

Recent Accounting Standards

 

Standards to be Adopted in 2021

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires earlier recording of credit losses on loans and other financial assets held by financial institutions and other organizations. This ASU also requires an entityorganization to utilize a new impairment model knownmeasure 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 current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss”quality and recordunderwriting standards of an allowanceorganization’s portfolio. In addition, the ASU amends the accounting for credit losses (“ACL”) that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses for loans, investmentinvestments in debt securities portfolio, and purchased financial assets with credit deterioration.  We doThe Company adopted the new standard as of January 1, 2021.  The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021.  This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard.  This standard did not expect this standard to have a material impact on our investment securities portfolio at implementation.  This ASU also will require enhanced disclosures.  The new guidance was effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The CARES Act, as amended, allowed certain relief onRelated to the implementation of the ASU, andstandard, the Company adopted the new standard asrecorded an additional ACL for loans of January 1, 2021, $13.11 million, deferred tax assets of $1.81 million, and applied the standard’s provisions as a cumulative-effectadditional reserve for unfunded commitments of $509 thousand and an adjustment to retained earnings, as of the beginning of the first reporting period in which the guidance is adopted. The Company currently estimates that our ACL under CECL will total approximately $39.29 million and the allowance for unfunded commitments will approximate $576 thousand.  The estimated decline in stockholders' equity, net of tax, approximatedof $5.87 million. 

This estimate is influenced bySee the composition, characteristics and quality of our loan portfolio, as well astable below for the economic conditions and forecasts as of each reporting period.  These economic conditions and forecasts could be significantly different in future periods.  The impact of the change in the allowance on our results of operations in a provision for credit losses will depend on the current period net charge-offs, level of loan originations, and change in mix of the loan portfolio.

Standards Adopted in 2020

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)".  This ASU provides for the simplification of the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  After adoption, an entity should measure impairment of goodwill in a reporting unit when the carrying amount exceeds its fair value by the difference in these amounts.  This ASU was effective for fiscal years beginning after December 15, 2019.  The Company adopted this ASU effective January 1, 2020.  The ASU did not have any material effect on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 20182016-13 "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.Company’s consolidated balance sheet.

 

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 updates 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.

		January 1, 2021
		As Reported				Pre-				Impact of
		Under				ASU 2016-13				ASU 2016-13
		ASU 2016-13				Adoption				Adoption
Assets:
Non-covered loans held for investment
Allowance for credit losses on debt securities
Investment securities - available for sale		$	83,358			$	83,358			$	-		A
Loans
Non-acquired loans and acquired performing loans			2,146,972				2,146,972				-
Acquired purchased deteriorated loans			45,535				39,660				5,875		B
Allowance for credit losses on loans			(39,289	)			(26,182	)			(13,107	)	C
Deferred tax asset			19,306				17,493				1,813		D
Accrued interest receivable - loans			9,109				9,052				57		B
Liabilities
Allowance for credit losses on off-balance sheet
credit exposures			575				66				509		E
Equity:
Retained earnings			231,714				237,585				(5,870	)	F

 

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

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Standards Not Yet Adopted

In December 2019,March 2022, the FASBFinancial Accounting Standards Board issued ASU 20192022-12,02, “Income TaxesFinancial Instruments-Credit Losses (Topic 740326), Simplifying the Accounting.  Troubled Debt Restructurings and Vintage Disclosures.  This new accounting topic provided accounting guidance for Income Taxes”. Thistroubled debt restructuring (TDR) and write-offs, effective January 1, 2023.  The amendments eliminated TDR accounting guidance for issuers that adopted ASU simplifies the2016-13, created a single loan modification accounting model, and clarified disclosure requirements for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim periodloan modifications and the recognition for deferred tax liabilities for outside basis differences. This update iswrite-offs.  We adopted this standard, effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.January 1, 2023.  Early adoption is permitted, including adoption in any interim period for which financial statements haveThe updated guidance had notno yet been issued. The update is not expected to have any material effectimpact on the Company’s financial statements.our Consolidated Financial Statements.

 

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

 

Note 2. Acquisitions and Divestitures

 

On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch (the "Emporia Branch Sale") to Benchmark Community Bank ("Benchmark"). The following are business combinationssale included the branch real estate, certain personal property, and divestitures which have occurred overall deposits associated with the pastbranch. There were threeno years:

Highlands Bankshares, Inc.loans included in the transaction. Benchmark paid a deposit premium of two percent for certain deposits. In addition, Benchmark paid $1.50 million for branch real estate and certain personal property. Total deposits acquired by Benchmark totaled $61.05 million. The deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. The Company recognized a gain of $1.66 million from the Emporia Branch Sale.

 

On DecemberNovember 18, 2022, 31,2019,the Company acquired Highlands Bankshares, Inc. (���Highlands”and NC-based Surrey Bancorp ("Surrey"), parent company of Abingdon, Virginia.Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. Under the terms of the acquisition,agreement and plan of merger, each share of Highlands’Surrey common and preferred stock outstanding immediately converted into the right to receive 0.27030.7159 shares of the Company’sCompany's common stock. The transaction combinedwas consummated on twoApril 21, 2023. 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$71.37 million.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The HighlandsSurrey transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition. The Company incurred a total of $2.99 million in merger expenses related to the Surrey transaction, $596 thousand was recorded in the last quarter of 2022 and $2.39 million in the firstnine months of 2023. These costs were primarily related to data conversion, investment banking fees, and legal fees.

 

		As recorded by				Fair Value					As recorded by
(Amounts in thousands, except share data)		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

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the fair value of the liabilities assumed. The Surrey acquisition resulted in the Company recognizing $14.38 million in goodwill. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. Core deposit intangibles for the Surrey transaction totaled $12.70 million.

When loans are acquired they are identified as either purchased credit deteriorated PCD or non-PCD. PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date. The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise. Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances. The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated credit losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans. The fair value of purchased loans with credit deterioration was $101.42 million on the date of acquisition with the gross contractual amount totaling $111.22 million. The Company estimates that $2.01 million of contractual cash flows specific to the purchased loans with credit deterioration will not be collected. Non purchased credit deteriorated loans acquired had a fair value of $137.55 million with a gross contractual value of $143.55 million.

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		As recorded by				Fair Value					As recorded by
(Amounts in thousands, except share data)		Surrey				Adjustments					the Company
Assets
Cash and cash equivalents		$	176,700			$	—				$	176,700
Securities available for sale			22,027				(1,093	)	( a )			20,934
Loans held for investment, net of allowance and mark			251,944				(12,864	)	( b )			239,080
Premises and equipment			5,501				774		( c )			6,275
Other assets			10,787				(229	)	( d ), ( e )			10,558
Intangible assets			—				12,700		( f )			12,700
Total assets		$	466,959			$	(712	)			$	466,247
LIABILITIES
Deposits:
Noninterest-bearing		$	158,389			$	—				$	158,389
Interest-bearing			246,460				(1,214	)	( g )			245,246
Total deposits			404,849				(1,214	)				403,635
Long term debt			—				—					—
Other liabilities			6,004				(381	)	( h )			5,623
Total liabilities			410,853				(1,595	)				409,258
Net identifiable assets acquired over (under) liabilities assumed			56,106				883					56,989
Goodwill			—				14,381					14,381
Net assets acquired over liabilities assumed		$	56,106			$	15,264				$	71,370
Consideration:
First Community Bankshares, Inc. common												2,996,786
Purchase price per share of the Company's common stock											$	23.81
Fair Value of Company common stock issued												71,354
Cash paid for fractional shares												16
Fair Value of total consideration transferred											$	71,370

Explanation of fair value adjustments;

 

Explanation of(a)

Adjustment reflects the fair value adjustments: adjustment based on the Company's evaluation of the acquired investment portfolio.

( a ) - (b)

Adjustment reflects the fair value adjustments of $(14.70)$(15.80) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loancredit losses and deferred loan fees of $3.27$2.94 million as recorded  by Highlands. Surrey.

( b ) - (c)

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

( c ) - (d)

Adjustment reflects the fair value adjustment based on the Company's evaluation of stocks with other banks of $47 thousand.

(e)	Adjustment to record the deferred tax asset related to the fair value adjustments. adjustments $(177) thousand.

( d ) - (f)

Adjustment reflects the recording ofto record the core deposit intangible on the acquired deposit accounts.

( e ) - (g)

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

( f ) - (h)

Adjustment reflects the fair value adjustment for death benefitsto reclass deferred tax asset $(99) thousand, goodwill $(282) thousand, federal income tax payable of $320 thousand, the fair value adjustment for lease liability of $(37)$(389) thousand, and the fair value adjustment to the reserve for unfunded commitments of $(85)state income tax payable $8 thousand.

 

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The following table presents the carrying amount of acquired loans at December 31, 2019, which consist of loans with no credit deterioration, or performing loans, and loans with credit deterioration, or impaired loans.

		December 31, 2019
		Purchased				Purchased
(Amounts in thousands)		Performing				Impaired				Total
Commercial loans
Construction, development, and other land		$	15,763			$	1,956			$	17,719
Commercial and industrial			44,474				2,829				47,303
Multi-family residential			21,032				1,663				22,695
Single family non-owner occupied			29,357				4,564				33,921
Non-farm, non-residential			107,489				21,710				129,199
Agricultural			2,298				0				2,298
Farmland			3,287				3,722				7,009
Total commercial loans			223,700				36,444				260,144
Consumer real estate loans
Home equity lines			23,654				2,157				25,811
Single family owner occupied			116,413				13,174				129,587
Owner occupied construction			1,097				0				1,097
Total consumer real estate loans			141,164				15,331				156,495
Consumer and other loans
Consumer loans			9,487				1,341				10,828
Loans acquired at fair value		$	374,351			$	53,116			$	427,467

Comparative and Pro Forma Financial Information for Acquisitions in 2020

As the merger date was the close of business, December 31, 2019, Highlands had no earnings contribution to the 2019 consolidated statement of income for the Company.  Merger-related expenses of $2.12 million were recorded in the consolidated statement of income and include incremental costs related to the closing of the acquisition, including legal, investment banker costs, and other costs.

 

The following table discloses the impact of the merger.  The table also presents certainsupplemental pro forma information as if Highlandsthe acquisition had beenoccurred at the beginning of 2022. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising form the transaction, depreciation and expense on January 1, 2018.  These results combineproperty acquired, interest expense on deposits acquired, and the historicalrelated income tax effects. The pro forma financial information is not necessarily indicative of the 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 whatoperations that would have occurred had the acquisition taken placetransactions been effected on January 1, 2018.the assumed dates. 

 

Merger-related costs of $1.89 million incurred by the Company for the year ended December 31, 2020, and merger-related costs incurred by both the Company and Highlands of $7.16 million for the year ended 2019 have been excluded from the proforma information below. No adjustments have been made to the pro formas to eliminate the recovery of provision for loancredit losses by Surrey for the yearsperiod ended December 31, 20192022 and 2018 of Highlands in the amount of $738,000 and $1.84 million, respectively.$1.27 million.  The Company expectsexpects 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: acquisition.

 

		ProForma				ProForma				ProForma				ProForma
		Year Ended				Year Ended				Year Ended				Year Ended
(Dollars in thousands)		December 31, 2019				December 31, 2018				December 31, 2023				December 31, 2022
Total revenues (net interest income plus noninterest income)		$	150,618			$	145,656			$	165,136			$	170,206
Net adjusted income available to the common shareholder		$	43,463			$	42,470			$	50,282			$	55,415

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bankers Insurance, LLC

On October 1, 2018, the Company completed the sale of its remaining insurance agency assets to Bankers Insurance, LLC (“BI”) of Glen Allen, Virginia, in exchange for an equity interest in BI. The sale strategically allows the Company to continue offering insurance products to its customers through a larger, more diversified insurance agency. In connection with the divestiture, the Company recognized a one-time goodwill impairment charge of $1.49 million during the third quarter of 2018. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment.

		Year Ended December 31,
(Amounts in thousands)		2020				2019				2018
Divestitures
Book value of assets sold			0				0				(1,685	)
Book value of liabilities sold			0				0				37
Sales price in excess of net liabilities assumed			0				0				0
Total sales price			0				0				(1,648	)
Cash sold			0				0				35
Non-cash sales price			0				0				1,603
Amount due remaining on books			0				0				0
Net cash received in divestitures			0				0				(10	)
Net cash received in acquisitions and divestitures		$	—			$	—			$	—

Note 3. Debt Securities

 

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

 

		December 31, 2020																December 31, 2023
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	555			$	0			$	(4	)		$	551			$	5,750			$	—			$	(1	)		$	5,749
U.S. Treasury securities																			146,653				16				(843	)			145,826
Municipal securities			43,950				509				0				44,459				19,528				11				(162	)			19,377
Corporate Notes																			28,566				—				(1,485	)			27,081
Mortgage-backed Agency securities			37,453				992				(97	)			38,348				94,548				2				(11,622	)			82,928
Total		$	81,958			$	1,501			$	(101	)		$	83,358			$	295,045			$	29			$	(14,113	)		$	280,961

 

		December 31, 2019																December 31, 2022
		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			$	1,500			$	—			$	(15	)		$	1,485
U.S. Treasury securities																			161,617				—				(4,353	)			157,264
Municipal securities			85,992				886				0				86,878				23,480				21				(192	)			23,309
Mortgage-backed Agency securities			77,448				380				(166	)			77,662				37,046				—				(2,189	)			34,857
Total		$	168,478			$	1,266			$	(170	)		$	169,574				96,480				3				(13,049	)			83,434
																		$	320,123			$	24			$	(19,798	)		$	300,349

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the amortized cost and fair value of available-for-sale debt securities, by contractual maturity, as of December 31, 20202023. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

(Amounts in thousands)		U.S. Agency Securities				Municipal Securities				Total
Amortized cost maturity:
One year or less		$	0			$	0			$	0
After one year through five years			0				24,485				24,485
After five years through ten years			555				19,465				20,020
After ten years			0				0				0
Amortized cost		$	555			$	43,950				44,505
Mortgage-backed securities											37,453
Total amortized cost										$	81,958
Fair value maturity:
One year or less		$	0			$	0			$	0
After one year through five years			0				24,703				24,703
After five years through ten years			551				19,756				20,307
After ten years			0				0				0
Fair value		$	551			$	44,459				45,010
Mortgage-backed securities											38,348
Total fair value										$	83,358

(Amounts in thousands)		U.S. Agency Securities				U.S. Treasury Securities				Municipal Securities				Corporate Notes				Total
Amortized cost maturity:
One year or less		$	5,750			$	146,653			$	5,118			$	—			$	157,521
After one year through five years			—				—				14,410				28,566				42,976
After five years through ten years			—				—				—				—				—
After ten years			—				—				—				—				—
Amortized cost		$	5,750			$	146,653			$	19,528			$	28,566				200,497
Mortgage-backed securities																			94,548
Total amortized cost																		$	295,045
Fair value maturity:
One year or less		$	5,749			$	145,826			$	5,116			$	—			$	156,691
After one year through five years			—				—				14,261				27,081				41,342
After five years through ten years			—				—				—				—				—
After ten years			—				—				—				—				—
Fair value		$	5,749			$	145,826			$	19,377			$	27,081				198,033
Mortgage-backed securities																			82,928
Total fair value																		$	280,961

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		December 31, 2020																								December 31, 2023
		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			$	544			$	(4	)		$	544			$	(4	)		$	5,749			$	(1	)		$	—			$	—			$	5,749			$	(1	)
U.S. Treasury securities																											11,417				(14	)			129,108				(829	)			140,525				(843	)
Municipal securities			0				0				0				0				0				0				4,742				(20	)			5,484				(142	)			10,226				(162	)
Corporate Notes																											—				—				27,081				(1,485	)			27,081				(1,485	)
Mortgage-backed Agency securities			11,018				(97	)			0				0				11,018				(97	)			3,421				(10	)			78,319				(11,612	)			81,740				(11,622	)
Total		$	11,018			$	(97	)		$	544			$	(4	)		$	11,562			$	(101	)		$	25,329			$	(45	)		$	239,992			$	(14,068	)		$	265,321			$	(14,113	)

 

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

		December 31, 2022
		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
(Amounts in thousands)
U.S. Agency securities		$	1,485			$	(15	)		$	—			$	—			$	1,485			$	(15	)
U.S. Treasury securities			157,264				(4,353	)			—				—				157,264				(4,353	)
Municipal securities			12,347				(192	)			—				—				12,347				(192	)
Corporate Notes			32,368				(2,172	)			2,489				(17	)			34,857				(2,189	)
Mortgage-backed Agency securities			64,993				(8,824	)			18,305				(4,225	)			83,298				(13,049	)
Total		$	268,457			$	(15,556	)		$	20,794			$	(4,242	)		$	289,251			$	(19,798	)

 

There were 6112 individual debt securities in an unrealized loss position as of December 31, 20202023, and their combined depreciation in value represented 0.12%5.02% of the debt securities portfolio. These securities included 1 security in a continuous unrealized loss position for 12 months or longer that the Company does not intend to sell, and that it has determined is not more likely than not going to be required to sell, prior to maturity or recovery. There were 17113 individual debt securities in an unrealized loss position as of December 31, 20192022, and their combined depreciation in value represented  0.10%6.59 % of the debt securities portfolio.

Approximately $38.98 million in securities available for sale have been sold in 652023

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Table.  Gross gains and gross losses were $30 thousand and $51 thousand, respectively for December 31, 2023.  There were no sales of Contents

FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company reviews its investment portfolio quarterlyavailable for indications of OTTI. The initial indicator of OTTI forsale debt securities is a decline in fair value below book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in OCI. Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current economic factors.

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

		Year Ended December 31,
		2020				2019				2018
(Amounts in thousands)
Gross realized gains		$	419			$	67			$	0
Gross realized losses			(34	)			(110	)			(618	)
Net gain (loss) on sale of securities		$	385			$	(43	)		$	(618	)

2022.The carrying amount of securities pledged for various purposes totaled $36.56$145.09 million as of December 31, 20202023, and $27.87$22.43 million as of December 31, 20192022.

In determining whether or not a security is impaired, we consider the severity of the loss as well as our intent to hold the securities to maturity or the recovery of the cost basis.  Unrealized losses have not been recognized into income as the decline in fair value is largely due to changes in interest rates and other market conditions.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  

U. S. Agency securities

The Company has one U.S. Agency security as of  December 31, 2023, with an amortized cost of $5.75 million.  The security is issued by the Federal Home Loan Bank.  The security is guaranteed of full and timely payments by the issuing agency.  Based on management's analysis and judgement, there was no credit loss attributable to the U.S. Agency security at December 31, 2023.

U.S. Treasury securities

U.S. Treasury securities are backed by the full faith and credit of the United States government.  At December 31, 2023, the total amortized cost of available for sale U. S. Treasury securities was $146.65 million.  Based on management's analysis and judgement, there were no credit losses attributable to U.S. Treasury securities at December 31, 2023.

Municipal securities

Municipal securities are securities issued by various municipalities in the United States.  At December 31, 2023, the total amortized cost of available for sale Municipal securities was $19.53 million.  The majority of the portfolio was rated AA or higher, with no securities rated below investment grade at year-end.  Based on management's analysis and judgement, there were no credit losses attributable to Municipal securities at December 31, 2023.

Corporate Notes

Corporate notes are debt obligations issued by public or private corporations.  As of  December 31, 2023, the total amortized cost of available for sale Corporate notes was $28.57 million.  The majority of the portfolio was rated AA or higher, with no securities rated below investment grade at year-end.  Based on management's analysis and judgement, there were no credit losses attributable to Corporate note securities at December 31, 2023.

Mortgage-backed Agency securities

Mortgage-backed Agency securities within the Company's portfolio are issued by Ginnie Mae, Fannie Mae, and Freddie Mac.  As of  December 31, 2023, the total amortized cost of available for sale mortgage-backed Agency securities was $94.55 million.  Each agency provides a guarantee of full and timely payments of principal and interest by the issuing agency.  Based on management's analysis and judgement, there were no credit losses attributable to mortgage-backed Agency securities at December 31, 2023.

  

55

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Loans

 

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes.  Covered loans are those loans acquired in FDIC assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled $1.13$1.50 million as of December 31, 20202023, and $2.20$1.80 million as of December 31, 20192022. Deferred loan fees were $5.58$7.71 million as of December 31, 20202023, and $4.60$8.81 million as of December 31, 20192022. For information about off-balance sheet financing, see Note 20,19, “Litigation, Commitments, and Contingencies,” to the Consolidated Financial Statements of this report.

 

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis for the periods indicated, to include net deferred loan fees of $7.71 million as of December 31, 2023, and $8.81 million as of December 31, 2022.  Additionally, included is, the unamortized discount total related to loans acquired of $15.29 million as of December 31, 2023, and $3.80 million as of December 31, 2022.  Accrued interest receivable (AIR) of $9.64 million as of December 31, 2023, and $7.94 million as of December 31, 2022 , is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

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

 

		December 31,																December 31,
		2020								2019								2023								2022
(Amounts in thousands)		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land		$	44,649				2.04	%		$	48,659				2.30	%		$	105,945				4.12	%		$	117,174				4.88	%
Commercial and industrial			173,024				7.91	%			142,962				6.76	%			211,850				8.24	%			150,428				6.27	%
Multi-family residential			115,161				5.27	%			121,840				5.76	%			188,382				7.32	%			148,026				6.17	%
Single family non-owner occupied			187,598				8.58	%			163,181				7.72	%			224,895				8.74	%			206,121				8.59	%
Non-farm, non-residential			734,793				33.60	%			727,261				34.39	%			894,550				34.78	%			787,703				32.82	%
Agricultural			9,749				0.45	%			11,756				0.56	%			21,669				0.84	%			12,032				0.50	%
Farmland			19,761				0.90	%			23,155				1.10	%			14,202				0.55	%			11,779				0.49	%
Total commercial loans			1,284,735				58.75	%			1,238,814				58.59	%			1,661,493				64.59	%			1,433,263				59.72	%
Consumer real estate loans
Home equity lines			89,432				4.09	%			110,078				5.21	%			87,626				3.41	%			75,642				3.15	%
Single family owner occupied			658,678				30.12	%			620,697				29.35	%			696,140				27.06	%			734,540				30.61	%
Owner occupied construction			17,720				0.81	%			17,241				0.82	%			8,445				0.33	%			10,366				0.43	%
Total consumer real estate loans			765,830				35.02	%			748,016				35.38	%			792,211				30.80	%			820,548				34.19	%
Consumer and other loans
Consumer loans			120,373				5.50	%			110,027				5.20	%			117,091				4.55	%			144,582				6.02	%
Other			6,014				0.28	%			4,742				0.22	%			1,503				0.06	%			1,804				0.07	%
Total consumer and other loans			126,387				5.78	%			114,769				5.42	%			118,594				4.61	%			146,386				6.09	%
Total non-covered loans			2,176,952				99.56	%			2,101,599				99.39	%
Total covered loans			9,680				0.44	%			12,861				0.61	%
Total loans held for investment, net of unearned income		$	2,186,632				100.00	%		$	2,114,460				100.00	%		$	2,572,298				100.00	%		$	2,400,197				100.00	%
Loans held for Sale		$	0			$	—			$	263			$	—

 

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

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. At December 31,2020, the PPP loans had a current balance of $57.06 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 million at December 31,2020, were also recorded. During 2020, the Company recorded amortization of net deferred loan origination fees of $868 thousand on PPP 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. As of December 31, 2020, $3.94 million, or 6.46%, of the Company's Paycheck Protection Program loan balances had been forgiven by the SBA. 

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

		December 31,
(Amounts in thousands)		2020				2019
Covered loans
Commercial loans
Construction, development, and other land		$	25			$	28
Single family non-owner occupied			185				199
Non-farm, non-residential			0				3
Total commercial loans			210				230
Consumer real estate loans
Home equity lines			7,094				9,853
Single family owner occupied			2,376				2,778
Total consumer real estate loans			9,470				12,631
Total covered loans		$	9,680			$	12,861

The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those PCI loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest.   Effective January 1, 2020, the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio.  The only remaining PCI pools are those loans acquired in the Highlands acquisition on December 31, 2019.  The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Highlands acquisition added $8.15 million in accretable yield. The total fair value of the Highlands PCI loans was $53.12 million at the time of the acquisition. The gross contractual cash flows for the Highlands PCI loans was $76.45 million. 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, 2018		$	3,388			$	19,465			$	0			$	22,853
Accretion			(1,263	)			(6,269	)			0				(7,532	)
Reclassifications from nonaccretable difference(1)			8				1,770				0				1,778
Other changes, net			457				(327	)			0				130
Balance December 31, 2018		$	2,590			$	14,639			$	0			$	17,229
Balance January 1, 2019		$	2,590			$	14,639			$	0			$	17,229
Accretion			(950	)			(3,317	)			0				(4,267	)
Reclassifications from nonaccretable difference(1)			17				1,440				0				1,457
Other changes, net			233				(188	)			0				45
Balance December 31, 2019		$	1,890			$	12,574			$	0			$	14,464
Balance January 1, 2020		$	1,890			$	12,574			$	0			$	14,464
Additions			0				0				8,152				8,152
Accretion			0				0				(2,497	)			(2,497	)
Other changes, net			(1,890	)			(12,574	)			0				(14,464	)
Balance Balance at December 31, 2020		$	0			$	0			$	5,655			$	5,655

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(1)	Represents changes attributable to expected loss assumptions

 

 

Note 5. Credit Quality

 

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

 

●

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

●

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

●

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

●

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

●

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

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		December 31, 2020																								December 31, 2023
						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		$	36,934			$	4,950			$	2,765			$	0			$	0			$	44,649			$	103,573			$	1,955			$	417			$	—			$	—			$	105,945
Commercial and industrial			160,474				7,031				5,519				0				0				173,024				207,034				2,097				2,719				—				—				211,850
Multi-family residential			103,291				8,586				3,284				0				0				115,161				184,565				3,522				295				—				—				188,382
Single family non-owner occupied			165,146				9,602				12,838				12				0				187,598				215,375				2,016				7,504				—				—				224,895
Non-farm, non-residential			568,438				125,907				40,448				0				0				734,793				866,711				15,240				12,599				—				—				894,550
Agricultural			7,724				1,686				339				0				0				9,749				15,944				3,878				1,847				—				—				21,669
Farmland			13,527				2,597				3,637				0				0				19,761				12,480				484				1,238				—				—				14,202
Consumer real estate loans																							—
Home equity lines			85,316				1,112				3,004				0				0				89,432				83,769				546				3,311				—				—				87,626
Single family owner occupied			622,082				3,594				33,002				0				0				658,678				669,878				2,360				23,902				—				—				696,140
Owner occupied construction			17,232				201				287				0				0				17,720				8,445				—				—				—				—				8,445
Consumer and other loans																							—
Consumer loans			118,134				28				2,211				0				0				120,373				114,725				4				2,362				—				—				117,091
Other			6,014				0				0				0				0				6,014				1,503				—				—				—				—				1,503
Total non-covered loans			1,904,312				165,294				107,334				12				0				2,176,952
Covered loans
Commercial loans
Construction, development, and other land			0				25				0				0				0				25
Single family non-owner occupied			151				34				0				0				0				185
Consumer real estate loans
Home equity lines			6,396				376				322				0				0				7,094
Single family owner occupied			1,778				265				333				0				0				2,376
Total covered loans			8,325				700				655				0				0				9,680
Total loans		$	1,912,637			$	165,994			$	107,989			$	12			$	0			$	2,186,632			$	2,484,002			$	32,102			$	56,194			$	—			$	—			$	2,572,298

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2022
						Special
(Amounts in thousands)		Pass				Mention				Substandard				Doubtful				Loss				Total
Commercial loans
Construction, development, and other land		$	115,972			$	853			$	349			$	—			$	—			$	117,174
Commercial and industrial			147,543				920				1,965				—				—				150,428
Multi-family residential			143,859				3,946				221				—				—				148,026
Single family non-owner occupied			195,775				2,303				8,043				—				—				206,121
Non-farm, non-residential			761,154				14,903				11,646				—				—				787,703
Agricultural			11,722				47				263				—				—				12,032
Farmland			9,868				573				1,338				—				—				11,779
Consumer real estate loans
Home equity lines			72,927				288				2,427				—				—				75,642
Single family owner occupied			706,952				1,958				25,630				—				—				734,540
Owner occupied construction			10,204				—				162				—				—				10,366
Consumer and other loans
Consumer loans			141,551				11				3,020				—				—				144,582
Other			1,804				—				—				—				—				1,804
Total loans		$	2,319,331			$	25,802			$	55,064			$	-			$	-			$	2,400,197

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2023		2023				2022				2021				2020				2019				Prior				Revolving				Total
Construction, development
and other land
Pass		$	12,379			$	54,752			$	23,328			$	4,121			$	2,700			$	3,874			$	2,419			$	103,573
Special Mention			1,737				-				-				139				-				79				-				1,955
Substandard			-				-				-				-				175				242				-				417
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total construction, development, and other land		$	14,116			$	54,752			$	23,328			$	4,260			$	2,875			$	4,195			$	2,419			$	105,945
Current period gross write-offs		$	-			$	-			$	-			$	-			$	13			$	-			$	-			$	13
Commercial and industrial
Pass		$	53,619			$	64,380			$	19,477			$	11,538			$	5,717			$	11,775			$	40,528			$	207,034
Special Mention			-				229				11				-				349				1,408				100				2,097
Substandard			51				744				276				86				926				636				-				2,719
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total commercial and industrial		$	53,670			$	65,353			$	19,764			$	11,624			$	6,992			$	13,819			$	40,628			$	211,850
Current period gross write-offs		$	66			$	168			$	201			$	51			$	32			$	66			$	-			$	584
Multi-family residential
Pass		$	6,753			$	67,484			$	36,621			$	30,021			$	3,280			$	36,982			$	3,424			$	184,565
Special Mention			-				-				-				-				-				3,522				-				3,522
Substandard			-				-				-				-				-				295				-				295
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total multi-family residential		$	6,753			$	67,484			$	36,621			$	30,021			$	3,280			$	40,799			$	3,424			$	188,382
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Non-farm, non-residential
Pass		$	83,420			$	234,607			$	151,433			$	114,974			$	53,466			$	217,034			$	11,777			$	866,711
Special Mention			65				583				2,590				819				-				11,132				51				15,240
Substandard			1,175				238				1,968				690				3,175				5,143				210				12,599
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total non-farm, non-residential		$	84,660			$	235,428			$	155,991			$	116,483			$	56,641			$	233,309			$	12,038			$	894,550
Current period gross write-offs		$	-			$	8			$	-			$	-			$	-			$	2			$	-			$	10
Agricultural
Pass		$	5,004			$	4,215			$	2,352			$	625			$	674			$	2,094			$	980			$	15,944
Special Mention			28				276				184				8				90				3,292				-				3,878
Substandard			157				166				50				28				1,188				258				-				1,847
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total agricultural		$	5,189			$	4,657			$	2,586			$	661			$	1,952			$	5,644			$	980			$	21,669
Current period gross write-offs		$	-			$	59			$	-			$	9			$	14			$	8			$	-			$	90
Farmland
Pass		$	1,380			$	1,237			$	1,557			$	912			$	745			$	5,766			$	883			$	12,480
Special Mention			-				-				103				-				-				381				-				484
Substandard			-				-				-				-				-				1,238				-				1,238
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total farmland		$	1,380			$	1,237			$	1,660			$	912			$	745			$	7,385			$	883			$	14,202
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-

59

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2023		2023				2022				2021				2020				2019				Prior				Revolving				Total
Home equity lines
Pass		$	9			$	962			$	86			$	73			$	68			$	3,800			$	78,771			$	83,769
Special Mention			-				-				-				-				-				45				501				546
Substandard			-				12				-				27				102				1,853				1,317				3,311
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total home equity lines		$	9			$	974			$	86			$	100			$	170			$	5,698			$	80,589			$	87,626
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	227			$	227
Single family Mortgage
Pass		$	50,826			$	164,974			$	221,352			$	191,156			$	44,974			$	211,540			$	431			$	885,253
Special Mention			-				-				465				98				108				3,705				-				4,376
Substandard			236				555				1,464				1,381				1,515				26,255				-				31,406
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total single family owner and non-owner occupied		$	51,062			$	165,529			$	223,281			$	192,635			$	46,597			$	241,500			$	431			$	921,035
Current period gross write-offs		$	-			$	-			$	47			$	-			$	-			$	194			$	-			$	241
Owner occupied construction
Pass		$	3,620			$	4,232			$	240			$	-			$	21			$	332			$	-			$	8,445
Special Mention			-				-				-				-				-				-				-				-
Substandard			-				-				-				-				-				-				-				-
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total owner occupied construction		$	3,620			$	4,232			$	240			$	-			$	21			$	332			$	-			$	8,445
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Consumer loans
Pass		$	31,243			$	43,675			$	20,672			$	7,710			$	3,214			$	1,026			$	8,688			$	116,228
Special Mention			-				-				3				-				-				-				1				4
Substandard			338				820				590				198				157				212				47				2,362
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total consumer loans		$	31,581			$	44,495			$	21,265			$	7,908			$	3,371			$	1,238			$	8,736			$	118,594
Current period gross write-offs		$	1,238			$	3,594			$	1,852			$	518			$	196			$	77			$	185			$	7,660

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2023		2023				2022				2021				2020				2019				Prior				Revolving				Total
Total Loans
Pass		$	248,253			$	640,518			$	477,118			$	361,130			$	114,859			$	494,223			$	147,901			$	2,484,002
Special Mention			1,830				1,088				3,356				1,064				547				23,564				653				32,102
Substandard			1,957				2,535				4,348				2,410				7,238				36,132				1,574				56,194
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total loans		$	252,040			$	644,141			$	484,822			$	364,604			$	122,644			$	553,919			$	150,128			$	2,572,298
Current period gross write-offs		$	1,304			$	3,829			$	2,100			$	578			$	255			$	347			$	412			$	8,825

60

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		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 December 31, 2022		2022				2021				2020				2019				2018				Prior				Revolving				Total
Construction, development
and other land
Pass		$	58,770			$	39,995			$	4,602			$	3,050			$	2,485			$	5,608			$	1,462			$	115,972
Special Mention			-				225				-				-				94				534				-				853
Substandard			-				-				267				71				11				-				-				349
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total construction, development, and other land		$	58,770			$	40,220			$	4,869			$	3,121			$	2,590			$	6,142			$	1,462			$	117,174
Commercial and industrial
Pass		$	69,678			$	23,746			$	12,047			$	7,729			$	9,121			$	8,890			$	16,332			$	147,543
Special Mention			227				20				21				367				185				1				99				920
Substandard			130				112				114				620				192				797				-				1,965
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total commercial and industrial		$	70,035			$	23,878			$	12,182			$	8,716			$	9,498			$	9,688			$	16,431			$	150,428
Multi-family residential
Pass		$	45,261			$	20,881			$	31,087			$	3,733			$	1,328			$	41,063			$	506			$	143,859
Special Mention			-				-				-				-				-				3,946				-				3,946
Substandard			-				-				-				-				-				221				-				221
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total multi-family residential		$	45,261			$	20,881			$	31,087			$	3,733			$	1,328			$	45,230			$	506			$	148,026
Non-farm, non-residential
Pass		$	218,595			$	145,675			$	114,840			$	52,575			$	35,564			$	185,448			$	8,457			$	761,154
Special Mention			-				1,927				852				1,193				2,708				8,076				147				14,903
Substandard			-				1,267				675				2,509				1,531				5,664				-				11,646
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total non-farm, non-residential		$	218,595			$	148,869			$	116,367			$	56,277			$	39,803			$	199,188			$	8,604			$	787,703
Agricultural
Pass		$	6,244			$	3,225			$	1,003			$	376			$	154			$	214			$	506			$	11,722
Special Mention			-				33				14				-				-				-				-				47
Substandard			124				37				1				66				24				11				-				263
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total agricultural		$	6,368			$	3,295			$	1,018			$	442			$	178			$	225			$	506			$	12,032
Farmland
Pass		$	646			$	713			$	796			$	77			$	869			$	6,150			$	617			$	9,868
Special Mention			-				109				-				-				222				242				-				573
Substandard			-				-				12				-				253				1,073				-				1,338
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total farmland		$	646			$	822			$	808			$	77			$	1,344			$	7,465			$	617			$	11,779

 

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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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:

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2022		2022				2021				2020				2019				2018				Prior				Revolving				Total
Home equity lines
Pass		$	1,960			$	198			$	241			$	-			$	24			$	7,429			$	63,075			$	72,927
Special Mention			-				-				-				-				-				117				171				288
Substandard			-				-				27				35				114				1,253				998				2,427
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total home equity lines		$	1,960			$	198			$	268			$	35			$	138			$	8,799			$	64,244			$	75,642
Single family Mortgage
Pass		$	157,890			$	237,363			$	207,480			$	48,795			$	36,678			$	214,148			$	373			$	902,727
Special Mention			-				376				90				363				262				3,170				-				4,261
Substandard			461				1,196				740				1,217				1,991				28,068				-				33,673
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total single family owner and non-owner occupied		$	158,351			$	238,935			$	208,310			$	50,375			$	38,931			$	245,386			$	373			$	940,661
Owner occupied construction
Pass		$	6,357			$	3,344			$	-			$	23			$	11			$	469			$	-			$	10,204
Special Mention			-				-				-				-				-				-				-				-
Substandard			-				-				162				-				-				-				-				162
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total owner occupied construction		$	6,357			$	3,344			$	162			$	23			$	11			$	469			$	-			$	10,366
Consumer loans
Pass		$	69,579			$	37,603			$	16,033			$	7,640			$	2,528			$	2,040			$	7,932			$	143,355
Special Mention			-				5				-				6				-				-				-				11
Substandard			881				1,002				466				416				36				159				60				3,020
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total consumer loans		$	70,460			$	38,610			$	16,499			$	8,062			$	2,564			$	2,199			$	7,992			$	146,386

 

		December 31, 2020												December 31, 2019
						Unpaid												Unpaid
		Recorded				Principal				Related				Recorded				Principal				Related
(Amounts in thousands)		Investment				Balance				Allowance				Investment				Balance				Allowance
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land		$	616			$	891			$	—			$	552			$	768			$	—
Commercial and industrial			2,341				2,392				—				576				599				—
Multi-family residential			946				1,593				—				1,254				1,661				—
Single family non-owner occupied			4,816				5,785				—				2,652				3,176				—
Non-farm, non-residential			8,238				9,467				—				4,158				4,762				—
Agricultural			218				226				—				158				164				—
Farmland			1,228				1,311				—				1,437				1,500				—
Consumer real estate loans
Home equity lines			1,604				1,772				—				1,372				1,477				—
Single family owner occupied			16,778				19,361				—				15,588				17,835				—
Owner occupied construction			216				216				—				648				648				—
Consumer and other loans
Consumer loans			818				833				—				290				294				—
Total impaired loans with no allowance			37,819				43,847				—				28,685				32,884				—
Impaired loans with a related allowance
Commercial loans
Non-farm, non-residential			1,068				1,121				319				1,241				1,227				292
Consumer real estate loans
Single family owner occupied			338				338				108				1,246				1,246				353
Total impaired loans with an allowance			1,406				1,459				427				2,487				2,473				645
Total impaired loans(1)		$	39,225			$	45,306			$	427			$	31,172			$	35,357			$	645

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at December 31, 2022		2022				2021				2020				2019				2018				Prior				Revolving				Total
Total Loans
Pass		$	634,980			$	512,743			$	388,129			$	123,998			$	88,762			$	471,459			$	99,260			$	2,319,331
Special Mention			227				2,695				977				1,929				3,471				16,086				417				25,802
Substandard			1,596				3,614				2,464				4,934				4,152				37,246				1,058				55,064
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total loans		$	636,803			$	519,052			$	391,570			$	130,861			$	96,385			$	524,791			$	100,735			$	2,400,197

 

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(1)

Total impaired loans include loans totaling $31.18 million as of December 31, 2020, and $24.64 million as of December 31, 2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment. During the first quarter of 2018, the Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from $250 thousand to $500 thousand or greater.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

		Year Ended December 31,
		2020								2019								2018
(Amounts in thousands)		Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land		$	25			$	935			$	22			$	704			$	26			$	921
Commercial and industrial			155				2,749				34				363				19				383
Multi-family residential			19				808				24				1,356				47				910
Single family non-owner occupied			189				4,890				123				2,979				123				2,652
Non-farm, non-residential			295				7,450				123				4,683				133				4,828
Agricultural			9				241				9				121				0				164
Farmland			63				1,569				55				1,469				64				1,172
Consumer real estate loans
Home equity lines			51				1,594				46				1,439				44				1,637
Single family owner occupied			578				17,044				599				16,058				503				15,423
Owner occupied construction			10				407				29				308				8				244
Consumer and other loans
Consumer loans			42				543				13				213				9				161
Total impaired loans with no related allowance			1,436				38,230				1,077				29,693				976				28,495
Impaired loans with a related allowance:
Commercial loans
Multi-family residential			0				707				0				0				2				270
Single family non-owner occupied			0				0				0				0				7				110
Non-farm, non-residential			17				1,524				48				766				2				809
Farmland			0				0				0				0				0				307
Consumer real estate loans
Home equity lines			0				0				0				0				3				68
Single family owner occupied			29				1,196				46				1,947				158				5,296
Total impaired loans with a related allowance			46				3,427				94				2,713				172				6,860
Total impaired loans		$	1,482			$	41,657			$	1,171			$	32,406			$	1,148			$	35,355

There were 0 PCI loan pools that became impaired subsequent to the acquisition of the loans as of December 31, 2020 or 2019. 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		December 31, 2020												December 31, 2019												December 31, 2023												December 31, 2022
(Amounts in thousands)		Non-covered				Covered				Total				Non-covered				Covered				Total				No Allowance				With an Allowance				Total				No Allowance				With an Allowance				Total
Commercial loans
Construction, development, and other land		$	244			$	0			$	244			$	211			$	0			$	211			$	172			$	—			$	172			$	31			$	—			$	31
Commercial and industrial			895				0				895				530				0				530				1,438				—				1,438				438				—				438
Multi-family residential			946				0				946				1,144				0				1,144				183				—				183				220				—				220
Single family non-owner occupied			2,990				0				2,990				1,286				0				1,286				832				—				832				984				—				984
Non-farm, non-residential			6,343				0				6,343				3,400				0				3,400				1,271				1,173				2,444				1,771				—				1,771
Agricultural			217				0				217				158				0				158				1,558				—				1,558				9				—				9
Farmland			489				0				489				713				0				713				123				—				123				133				—				133
Consumer real estate loans
Home equity lines			841				281				1,122				753				220				973				1,335				—				1,335				400				—				400
Single family owner occupied			7,960				16				7,976				7,259				24				7,283				9,365				—				9,365				8,228				589				8,817
Owner occupied construction			0				0				0				428				0				428				—				—				—				—				—				—
Consumer and other loans
Consumer loans			781				0				781				231				0				231				1,906				—				1,906				2,405				—				2,405
Total nonaccrual loans		$	21,706			$	297			$	22,003			$	16,113			$	244			$	16,357			$	18,183			$	1,173			$	19,356			$	14,619			$	589			$	15,208

 

In both  2023 and 2022 nonaccrual loan interest was recognized was immaterial.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables presentpresents the aging of past due loans, by loan class, as of the datesdate indicated.  Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $295 thousand as of December 31, 2020, and $144 thousand as of December 31, 2019.

 

																										December 31, 2023
		December 31, 2020																																																Amortized Cost of
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total				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				Past Due				Past Due				Past Due				Past Due				Loans				Loans				No Allowance
Non-covered loans
Commercial loans
Construction, development, and other land		$	1,039			$	—			$	235			$	1,274			$	43,375			$	44,649			$	38			$	6			$	23			$	67			$	105,878			$	105,945			$	—
Commercial and industrial			669				230				700				1,599				171,425				173,024				1,232				766				390				2,388				209,462				211,850				—
Multi-family residential			103				0				946				1,049				114,112				115,161				115				68				—				183				188,199				188,382				—
Single family non-owner occupied			925				488				2,144				3,557				184,041				187,598				777				455				232				1,464				223,431				224,895				—
Non-farm, non-residential			601				296				3,368				4,265				730,528				734,793				617				229				382				1,228				893,322				894,550				—
Agricultural			70				189				88				347				9,402				9,749				22				56				217				295				21,374				21,669				—
Farmland			43				0				457				500				19,261				19,761				15				—				—				15				14,187				14,202				—
Consumer real estate loans
Home equity lines			574				380				171				1,125				88,307				89,432				639				343				534				1,516				86,110				87,626				—
Single family owner occupied			5,283				2,265				3,891				11,439				647,239				658,678				6,108				2,831				3,519				12,458				683,682				696,140				—
Owner occupied construction			82				0				0				82				17,638				17,720				—				—				—				—				8,445				8,445				—
Consumer and other loans
Consumer loans			2,637				746				651				4,034				116,339				120,373				4,390				1,440				1,087				6,917				110,174				117,091				—
Other			—				—				—				—				6,014				6,014				—				—				—				—				1,503				1,503				—
Total non-covered loans			12,026				4,594				12,651				29,271				2,147,681				2,176,952
Covered loans
Commercial loans
Construction, development, and other land			0				0				0				0				25				25
Single family non-owner occupied			0				0				0				0				185				185
Consumer real estate loans
Home equity lines			75				0				254				329				6,765				7,094
Single family owner occupied			34				0				0				34				2,342				2,376
Total covered loans			109				0				254				363				9,317				9,680
Total loans		$	12,135			$	4,594			$	12,905			$	29,634			$	2,156,998			$	2,186,632			$	13,953			$	6,194			$	6,384			$	26,531			$	2,545,767			$	2,572,298			$	—

		December 31, 2022
																										Amortized Cost of
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total				>90 Days Accruing
(Amounts in thousands)		Past Due				Past Due				Past Due				Past Due				Loans				Loans				No Allowance
Commercial loans
Construction, development, and other land		$	393			$	8			$	23			$	424			$	116,750			$	117,174			$	—
Commercial and industrial			756				129				217				1,102				149,326				150,428				—
Multi-family residential			—				—				83				83				147,943				148,026				—
Single family non-owner occupied			990				122				299				1,411				204,710				206,121				—
Non-farm, non-residential			646				52				548				1,246				786,457				787,703				—
Agricultural			36				135				9				180				11,852				12,032				—
Farmland			—				—				133				133				11,646				11,779				—
Consumer real estate loans
Home equity lines			519				115				262				896				74,746				75,642				—
Single family owner occupied			5,951				2,322				3,166				11,439				723,101				734,540				—
Owner occupied construction			—				—				—				—				10,366				10,366				—
Consumer and other loans
Consumer loans			4,282				1,960				1,459				7,701				136,881				144,582				—
Other			—				—				—				—				1,804				1,804				—
Total loans		$	13,573			$	4,843			$	6,199			$	24,615			$	2,375,582			$	2,400,197			$	—

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASC 326 prescribes that when an entity determines foreclosure is probable, the expected credit loss is required to be measured based on the fair value of the collateral.  As a practical expedient, an entity may use the fair value as of the reporting date when recording the net carrying amount of the asset.  For the collateral dependent asset ("CDA") a credit loss expense is recorded for loan amounts in excess of fair value of the collateral.  The table below summarizes collateral dependent loans, where foreclosure is possible, by type of collateral, and the extent to which they are collateralized during the periods.   

 

		December 31, 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

		December 31, 2023												December 31, 2022
(Amounts in thousands)		Balance				Collateral Coverage				Coverage Ratio				Balance				Collateral Coverage				Coverage Ratio
Commercial Real Estate
Other		$	1,173			$	825				70.33	%		$	-			$	-				-
Consumer owner occupied			-				-								589				574				97.45	%
Total collateral dependent loans		$	1,173			$	825				70.33	%		$	589			$	574				97.45	%

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excessEffective, January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.  The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2015-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs.  Presented below are the amortized cost basis and percentage of $500 thousand are evaluatedloan class for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $500 thousand are subjectloan modifications made to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classifiedborrowers experiencing financial difficulty by loan class, concession type, and financial effect 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 December 31, 2020 or 2019.date indicated.

 

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

		Payment Delays
		Amortized Cost Basis				% of Total Class of
		December 31, 2023				Financing Receivable				Financial Effect
(Amounts in thousands)
Non farm, non residential property		$	662				0.07	%		Deferred six months of interest to loan maturity.
Single family owner occupied			548				0.08	%		Deferred $66 thousand in principal to loan maturity
Single family non owner occupied			89				0.04	%		Deferred 6 months of interest to Loan Maturity.
Commercial & industrial			171				0.08	%		Deferred $8 thousand in Principal to Loan Maturity.
Total		$	1,470
		Term Extensions
		Amortized Cost Basis				% of Total Class of
		December 31, 2023				Financing Receivable				Financial Effect
(Amounts in thousands)
Consumer		$	6				0.01	%		Extended term from 60 to 84 months
Total		$	6
		Principal Forgiveness
		Amortized Cost Basis				% of Total Class of
		December 31, 2023				Financing Receivable				Financial Effect
(Amounts in thousands)
Single family owner occupied		$	5				0.00	%		Reduced amortized cost basis by $13 thousand
Total		$	5
		Term Extension and Rate Reduction
		Amortized Cost Basis				% of Total Class of
		December 31, 2023				Financing Receivable				Financial Effect
(Amounts in thousands)
Single family owner occupied		$	565				0.08	%		Reduced interest income and extended time to recover principal.
Total		$	565

 

Through December 31,2020, the Company had modified a total of 3,625 loans with principal balances totaling $458.17 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 December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.  As of  December 31, 2023, there were no modified loans (or portions of a loan) deemed uncollectible.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.  The following table presentsdepicts the performance of loans that have been modified in the last twelve months:

		December 31, 2023
		Payment Status (Amortized Cost Basis)
		Current				30-89 Days Past Due				90+ Days Past Due
(Amounts in thousands)
Non farm, non residential property		$	662			$	-			$	-
Single family owner occupied			864				254				-
Single family non owner occupied			89
Commercial & industrial			171
Consumer			6				-				-
Total		$	1,792			$	254			$	-

The Company did not retroactively adopt ASU 2022-02January 1, 2023, as such the periods are not comparable.  Prior to the adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures below is the presentation of loans modified as TDRs by loan class and accrual status, as of the dates indicated:

 

		December 31,																								December 31,
		2020												2019												2022
(Amounts in thousands)		Nonaccrual(1)				Accruing				Total				Nonaccrual(1)				Accruing				Total				Nonaccrual(1)				Accruing				Total
Commercial loans
Commercial and industrial		$	0			$	1,326			$	1,326			$	0			$	0			$	0			$	—			$	374			$	374
Single family non-owner occupied			1,585				1,265				2,850				552				595				1,147				142				838				980
Non-farm, non-residential			0				2,407				2,407				0				307				307				—				747				747
Consumer real estate loans
Home equity lines			0				77				77				0				115				115				—				55				55
Single family owner occupied			229				4,927				5,156				1,790				5,305				7,095				1,182				5,073				6,255
Owner occupied construction			0				216				216				0				221				221				—				—				—
Consumer and other loans
Consumer loans			0				30				30				0				32				32				—				25				25
Total TDRs		$	1,814			$	10,248			$	12,062			$	2,342			$	6,575			$	8,917			$	1,324			$	7,112			$	8,436
Allowance for loan losses related to TDRs										$	0											$	353
Allowance for credit losses related to TDRs																																		$	—

 

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

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2020				2019				2018				2022				2021
(Amounts in thousands)
Interest income recognized		$	473			$	277			$	264			$	383			$	422

 

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

 

		Year Ended December 31,																								Year Ended December 31,
		2020												2019												2022
(Amounts in thousands)		Total Contracts				Pre-modification Recorded Investment				Post modification Recorded Investment(1)				Total Contracts				Pre-modification Recorded Investment				Post modification Recorded Investment(1)				Total Contracts				Pre-modification Recorded Investment				Post modification Recorded Investment(1)
Below market interest rate
Single family owner occupied			1			$	50			$	50				0			$	0			$	0				1			$	31			$	32
Below market interest rate and extended payment term
Single family non-owner occupied																											—				—				—
Single family owner occupied			—				—				—				6				887				871				—				—				—
Total below market interest rate and extended payment term																											—				—				—
Principal deferral
Construction, development, and other land development			3				1,708				1,708				0				0				0
Non-farm, non-residential			3				2,115				2,115				—				—				—
Home equity			0				0				0				1				5				2
Single family non-owner occupied																											—				—				—
Single family owner occupied			5				1,085				1,054				3				331				279				5				494				481
Total principal deferral			11				4,908				4,877				4				336				281				5				494				481
Total			12			$	4,958			$	4,927				10			$	1,223			$	1,152				6			$	525			$	513

(1)	Represents the loan balance immediately following modification

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presentsThere were no payment defaults for loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a payment default during the periods indicatedDecember 31, 2022.

		Year Ended December 31,
		2020								2019
		Total				Recorded				Total				Recorded
		Contracts				Investment				Contracts				Investment
(Amounts in thousands)
Single family owner occupied			1			$	53				0			$	0
Total			1			$	53				0			$	0

 

The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

 

		December 31, 2020				December 31, 2019				December 31, 2023				December 31, 2022
(Amounts in thousands)
Non-covered OREO		$	2,083			$	3,969
Total OREO		$	2,083			$	3,969			$	192			$	703
Non-covered OREO secured by residential real estate		$	769			$	2,232
OREO secured by residential real estate										$	192			$	407
Residential real estate loans in the foreclosure process(1)			4,141				1,539			$	1,895			$	1,474

 

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

 

 

Note 6. Allowance for LoanCredit Losses

 

The following tables present the changes in the allowance for loancredit losses, by loan segment, during the periods indicated. There was no allowance related to PCI loans as of December 31, 2020 or 2019.

 

		Year Ended December 31, 2020																Year Ended December 31, 2023
(Amounts in thousands)		Commercial				Consumer Real Estate				Consumer and Other				Total Allowance				Commercial				Consumer Real Estate				Consumer and Other				Total Allowance
Beginning balance		$	10,235			$	6,325			$	1,865			$	18,425
Provision for loan losses charged to operations			6,583				2,760				3,325				12,668
Total allowance
Balance at beginning of year:
Allowance for credit losses - loans																		$	17,213			$	8,931			$	4,412			$	30,556
Allowance for credit losses - loan commitments																			1,018				156				22				1,196
Total allowance for credit losses beginning of year																			18,231				9,087				4,434				31,752
Purchased credit deteriorated -Surrey acquisition																			1,452				529				30				2,011
Provision for credit losses:
Provision for (recovery of) credit losses - loans																			2,217				125				6,093				8,435
Provision for (recovery of) credit losses - loan commitments																			(421	)			(35	)			6				(450	)
Total provision for credit losses - loans and loan commitments																			1,796				90				6,099				7,985
Charge-offs			(2,769	)			(558	)			(3,296	)			(6,623	)			(753	)			(412	)			(7,660	)			(8,825	)
Recoveries			612				424				676				1,712				1,721				520				1,771				4,012
Net charge-offs			(2,157	)			(134	)			(2,620	)			(4,911	)
Net (charge-offs) recoveries																			968				108				(5,889	)			(4,813	)
Allowance for credit losses - loans																			21,850				9,693				4,646				36,189
Allowance for credit losses - loan commitments																			597				121				28				746
Ending balance		$	14,661			$	8,951			$	2,570			$	26,182			$	22,447			$	9,814			$	4,674			$	36,935

 

		Year Ended December 31, 2019
(Amounts in thousands)		Commercial				Consumer Real Estate				Consumer and Other				Total Allowance
Beginning balance		$	10,499			$	6,732			$	1,036			$	18,267
Provision for (recovery of) loan losses charged to operations			1,411				(105	)			2,265				3,571
Charge-offs			(2,548	)			(1,790	)			(1,923	)			(6,261	)
Recoveries			873				1,488				487				2,848
Net charge-offs			(1,675	)			(302	)			(1,436	)			(3,413	)
Ending balance		$	10,235			$	6,325			$	1,865			$	18,425

		Year Ended December 31, 2022
(Amounts in thousands)		Commercial				Consumer Real Estate				Consumer and Other				Total Allowance
Total allowance
Balance at beginning of year:
Allowance for credit losses - loans		$	14,775			$	9,972			$	3,111			$	27,858
Allowance for credit losses - loan commitments			576				88				14				678
Total allowance for credit losses beginning of year			15,351				10,060				3,125				28,536
Provision for credit losses:
Provision for (recovery of) credit losses - loans			431				(1,121	)			7,262				6,572
Provision for (recovery of) credit losses - loan commitments			442				68				8				518
Total provision for credit losses - loans and loan commitments			873				(1,053	)			7,270				7,090
Charge-offs			(633	)			(427	)			(6,743	)			(7,803	)
Recoveries			2,640				507				782				3,929
Net (charge-offs) recoveries			2,007				80				(5,961	)			(3,874	)
Allowance for credit losses - loans			17,213				8,931				4,412				30,556
Allowance for credit losses - loan commitments			1,018				156				22				1,196
Ending balance		$	18,231			$	9,087			$	4,434			$	31,752

 

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

		December 31, 2020
(Amounts in thousands)		Loans Individually Evaluated for Impairment				Allowance for Loans Individually Evaluated				Loans Collectively Evaluated for Impairment				Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land		$	0			$	0			$	43,716			$	528
Commercial and industrial			724				0				171,486				1,024
Multi-family residential			695				0				112,852				1,417
Single family non-owner occupied			1,041				0				183,283				1,861
Non-farm, non-residential			3,916				319				714,160				9,097
Agricultural			0				0				9,728				218
Farmland			0				0				17,540				196
Total commercial loans			6,376				319				1,252,765				14,341
Consumer real estate loans
Home equity lines			0				0				95,765				799
Single family owner occupied			1,673				108				647,040				7,849
Owner occupied construction			0				0				17,567				195
Total consumer real estate loans			1,673				108				760,372				8,843
Consumer and other loans
Consumer loans			0				0				119,770				2,570
Other			0				0				6,014				0
Total consumer and other loans			0				0				125,784				2,570
Total loans, excluding PCI loans		$	8,049			$	427			$	2,138,921			$	25,754

		December 31, 2019
(Amounts in thousands)		Loans Individually Evaluated for Impairment				Allowance for Loans Individually Evaluated				Loans Collectively Evaluated for Impairment				Allowance for Loans Collectively 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

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

		December 31, 2020								December 31, 2019
(Amounts in thousands)		Recorded Investment				Allowance for Loan Pools With Impairment				Recorded Investment				Allowance for Loan Pools With Impairment
Commercial loans
Waccamaw commercial		$	0			$	0			$	0			$	0
Peoples commercial			0				0				4,371				0
Highlands:
1-4 family, senior-commercial			0				0				4,564				0
Construction & land development			958				0				1,956				0
Farmland and other agricultural			2,242				0				3,722				0
Multifamily			1,614				0				1,663				0
Commercial real estate-owner occupied			16,717				0				13,024				0
Commercial real estate- non-owner occupied			3,459				0				8,686				0
Commercial and industrial			814				0				2,829				0
Other			0				0				352				0
Total commercial loans			25,804				0				41,167				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			761				0				2,157				0
1-4 family, senior-consumer			12,494				0				13,174				0
Consumer			603				0				1,341				0
Peoples residential			0				0				700				0
Total consumer real estate loans			13,858				0				20,080				0
Total PCI loans		$	39,662			$	0			$	61,247			$	0

Management believes the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 on commercial loans expired June 30, 2017, with recoveries continuing until June 30, 2020. Loss share coverage on single family loans will expire June 30, 2022. The Company’s consolidated 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 for the periods indicated:

		Year Ended December 31,
		2020				2019
(Amounts in thousands)
Beginning balance		$	2,883			$	5,108
Net amortization			(1,690	)			(2,377	)
Payments to the FDIC			30				152
Ending balance		$	1,223			$	2,883
Covered loans		$	9,680			$	12,861

Note 8. Premises, Equipment, and Leases

 

Premises and Equipment

 

The following table presents the components of premises and equipment as of the dates indicated:

 

		December 31,								December 31,
		2020				2019				2023				2022
(Amounts in thousands)
Land		$	21,693			$	22,899			$	19,497			$	19,460
Buildings and leasehold improvements			50,639				52,351				51,557				47,009
Equipment			40,072				38,173				42,810				40,552
Total premises and equipment			112,404				113,423				113,864				107,021
Accumulated depreciation and amortization			(54,704	)			(50,599	)			(63,184	)			(59,681	)
Total premises and equipment, net		$	57,700			$	62,824			$	50,680			$	47,340

 

ImpairmentThere were no impairment charges related to certain long-term investments in land and buildings totaled $812in 2023 or in 2022. Impairment charges of $781 thousand was recognized in 2020, $380 thousand in 2019, and $1.01 million in 20182021. Depreciation and amortization expense for premises and equipment was $4.46$3.95 million in 20202023, $3.45$4.15 million in 20192022, and $2.91$4.47 million in 20182021.

 

Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”; the standard was adopted prospectively. The Company currently has two operatingOperating leases that are recorded as a right of use (“ROU”) asset and operating lease liability. The right of useROU asset is recorded in other assets, on the consolidated balance sheet, while the lease liability is recorded in other liabilities.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 current ROU asset and lease liability werehave been recognized at the adoption date of January 1, 2019, based on the present value of the remaining lease payments using a discount rate that represented our incremental borrowing rate at the timelease commencement date or the date of adoption.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 consolidatedcondensed statements of income.

 

The Company’s current operating leases relate primarily to two existing bank branches. Twobranches and one operating leases werelease acquired in the Highlands transaction; neither of which werea prior bank acquisition. The acquired operating lease was for bank branches. One of the leases was terminated in the first quarter of 2020; while the other remaining Highlands’ leasevacant land and will terminate in early 2022.July of 2029.   No ROU was recorded in the transaction due to theThe Company's ROU asset related to the lease that terminates in 2022 being impairedwas $594 thousand as of  the acquisition date; aDecember 31, 2023, compared to $648 thousand as of December 31, 2022.  The operating lease liability as of  December 31, 2023, was recorded for $82 thousand.$620 thousand compared to $670 thousand as of December 31, 2022.  The Company’s total operating leases have remaining terms of 1 – 9 years. Asyears to 5.5 years compared with 2 years to 6.5 years as of December 31, 20202022. The December 31, 2023, the Company’s ROU asset and lease liability were $830 thousand and $891 thousand, respectively. The weighted average discount rate was 3.22%3.24%, compared to 3.28% from December 31, 2022.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Year		Amount				Amount
(Amounts in thousands)
2021		$	154
2022			131
2023			119
2024			117			$	151
2025 and thereafter			463
2025							109
2026							101
2027							101
2028 and thereafter							160
Total lease payments			984				622
Less: Interest			(93	)			(2	)
Present value of lease liabilities		$	891			$	620

 

Lease expense which is included in occupancy expense on the Consolidated Statement of Income was $180 thousand in 2020, $203$171 thousand in 20192023, $175 thousand in 2022, and $318$182 thousand in 20182021. The Company maintained no subleases as of December 31, 20202023.

  

 

Note 98. Goodwill and Other Intangible Assets

 

Goodwill

 

The Company has one reporting unit for goodwill impairment testing purposes, Community Banking. In October 2018, the Company sold its remaining insurance agency assets to BI in exchange for an equity interest in BI. In connection with the divestiture, the Company recognized a one-time goodwill impairment charge of $1.49 million. The Company used the fair value of the equity interest in BI as the basis for determining the goodwill impairment. The Company performed its annual assessment of goodwill during the fourth quarteras of 2020October 31, 2023, and concluded that the carrying value of goodwill was not impaired. No events have occurred after the analysis to indicate potential impairment.

 

As of December 31, 2023, the Company's goodwill totaled $143.95 million.  The following table presentsSurrey acquisition resulted in the changesCompany recognizing $14.38 million in goodwill by reporting unit, duringin the periods indicated:transaction.  The balance was $129.57 million for both 2022 and 2021.

 

(Amounts in thousands)
Balance January 1, 2018		$	95,779
Dispositions			(1,543	)
Impairment Charges			(1,492	)
Balance December 31, 2018		$	92,744
Balance January 1, 2019		$	92,744
Acquisitions			36,821
Balance December 31, 2019		$	129,565
Balance January 1, 2020		$	129,565
Acquisitions and dispositions, net			0
Balance December 31, 2020		$	129,565

(Amounts in thousands)
Balance January 1, 2021		$	129,565
Acquisitions			—
Balance December 31, 2021		$	129,565
Balance January 1, 2022		$	129,565
Acquisitions			—
Balance December 31, 2022		$	129,565
Balance January 1, 2023		$	129,565
Acquisitions			14,381
Balance December 31, 2023		$	143,946

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Intangible Assets

 

As of December 31, 20202023, the remaining lives of core deposit intangibles ranged from 41.50 years to 109 years with a weighted average remaining life of 78.42 years.  Other identifiable intangibles currently consist primarily ofThe Surrey acquisition resulted in the value assigned to contractual rights arising from FCWM.Company recognizing $12.70 million in core deposit intangibles. The following table presents the components of other intangible assets as of the dates indicated:

 

		December 31,												December 31,
		2020				2019				2018				2023				2022				2021
(Amounts in thousands)
Core deposit intangibles		$	8,519			$	8,184			$	8,184			$	12,674			$	12,674			$	12,674
Acquisitions			0				4,490				0				12,700				—				—
Accumulated amortization			(1,450	)			(4,155	)			(3,158	)			(10,229	)			(8,498	)			(7,052	)
Core deposit intangibles, net			7,069				8,519				5,026
Other identifiable intangibles			0				0				535
Accumulated amortization			0				0				(535	)
Other identifiable intangibles, net			0				0				0
Total other intangible assets, net		$	7,069			$	8,519			$	5,026			$	15,145			$	4,176			$	5,622

 

Amortization expense for other intangible assets was $1.73 million in 2023, and $1.45 million in both 2020, $997 thousand in 20192022, and $1.04 million in 20182021.

 

The following schedule presents the estimated amortization expense for intangible assets, by year, as of December 31, 20202023:

 

(Amounts in thousands)
2021		$	1,446
2022			1,446
2023			878
2024			856
2025			648
2026 and thereafter			1,795
Total estimated amortization expense		$	7,069

(Amounts in thousands)
2024		$	2,126
2025			1,917
2026			1,719
2027			1,719
2028			1,719
2029 and thereafter			5,945
Total estimated amortization expense		$	15,145

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.Deposits

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

		December 31,
		2023				2022
(Amounts in thousands)
Noninterest-bearing demand deposits		$	931,920			$	872,168
Interest-bearing deposits
Interest-bearing demand deposits			693,979				679,609
Money market accounts			307,487				264,734
Savings deposits			535,566				578,974
Certificates of deposit			166,417				180,008
Individual retirement accounts			86,956				103,322
Total interest-bearing deposits			1,790,405				1,806,647
Total deposits		$	2,722,325			$	2,678,815

The following schedule presents the contractual maturities of time deposits, defined as certificates of deposits and individual retirement accounts, by year, as of December 31, 2023:

(Amounts in thousands)
2024		$	130,213
2025			65,618
2026			21,231
2027			15,617
2028			16,983
2029 and thereafter			3,711
Total contractual maturities		$	253,373

Time deposits of $250 thousand or more totaled $18.59 million as of December 31, 2023, and $15.21 million as of December 31, 2022. The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2023:

(Amounts in thousands)
Three months or less		$	4,069
Over three through six months			874
Over six through twelve months			2,643
Over twelve months			11,006
Total contractual maturities		$	18,592

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 10. Deposits

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

		December 31,
		2020				2019
(Amounts in thousands)
Noninterest-bearing demand deposits		$	772,795			$	627,868
Interest-bearing deposits
Interest-bearing demand deposits			598,148				497,470
Money market accounts			258,864				235,712
Savings deposits			495,821				453,240
Certificates of deposit			293,848				372,821
Individual retirement accounts			126,771				142,801
Total interest-bearing deposits			1,773,452				1,702,044
Total deposits		$	2,546,247			$	2,329,912

The following schedule presents the contractual maturities of time deposits, by year, as of December 31, 2020:

(Amounts in thousands)
2021		$	225,521
2022			86,293
2023			45,797
2024			24,440
2025			30,820
2026 and thereafter			7,748
Total contractual maturities		$	420,619

Time deposits of $250 thousand or more totaled $35.93 million as of December 31, 2020, and $53.49 million as of December 31, 2019. The following schedule presents the contractual maturities of time deposits of $250 thousand or more as of December 31, 2020:

(Amounts in thousands)
Three months or less		$	3,372
Over three through six months			6,605
Over six through twelve months			9,841
Over twelve months			16,112
Total contractual maturities		$	35,930

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11.Borrowings

 

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

 

		December 31,
		2020								2019
(Amounts in thousands)		Balance				Weighted Average Rate				Balance				Weighted Average Rate
Short-term borrowings
Retail repurchase agreements		$	964				0.32	%		$	1,601				0.14	%
Long-term borrowings
Wholesale repurchase agreements			0				0				0				0
Total borrowings		$	964							$	1,601

		December 31,
		2023								2022
(Amounts in thousands)		Balance				Weighted Average Rate				Balance				Weighted Average Rate
Retail repurchase agreements		$	1,119				0.06	%		$	1,874				0.07	%

 

Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements. The counterparties may redeem callable repurchase agreements, which could substantially shorten the borrowings’ lives. The prepayment or early termination of a repurchase agreement may result in substantial penalties based on market conditions. The following schedule presents the contractual maturities of repurchase agreements, by type of collateral pledged, as of December 31, 20202023:

 

		Overnight and Continuous				Up to 30 Days				30 - 90 Days				Greater than 90 Days				Total
(Amounts in thousands)
U.S. Agency securities		$	0			$	0			$	0			$	0			$	0
Municipal securities			542				0				0				0				542
Mortgage-backed Agency securities			422				0				0				0				422
Total		$	964			$	0			$	0			$	0			$	964

The Company’s remaining wholesale repurchase agreement of $25 million matured during the first quarter of 2019. The Company repaid the borrowing with then current liquidity.

		Overnight and Continuous				Up to 30 Days				30 - 90 Days				Greater than 90 Days				Total
(Amounts in thousands)
Municipal securities		$	63			$	-			$	-			$	-			$	63
Mortgage-backed Agency securities			1,056				—				—				—				1,056
Total		$	1,119			$	—			$	—			$	—			$	1,119

 

As of December 31, 20202023, unused borrowing capacity with the FHLB totaled $292.92$342.81 million, net of FHLB letters of credit of $175.83$126.37 million. The Company pledged $840.63$469.18 million in qualifying loans to secure the FHLB letters of credit, which provide an attractive alternative to pledging securities for public unit deposits.

 

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

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1112. 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.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company useshas used interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curvebenchmark interest rates in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rateSecured Overnight Financing Rate ("SOFR") plus a spread falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBORthe floating rate and the stated fixed rate. If LIBORSOFR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBORthe floating rate and the stated fixed rate.

Certain of the Company’sCompany's interest rate swaps qualify as fair value hedging instruments; therefore,instruments. Therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of December 31, 20202023. The remaining

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

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

 

		December 31,																								December 31,
		2020												2019												2023												2022
(Amounts in thousands)		Notional or Contractual Amount				Derivative Assets				Derivative Liabilities				Notional or Contractual Amount				Derivative Assets				Derivative Liabilities				Notional or Contractual Amount				Derivative Assets				Derivative Liabilities				Notional or Contractual Amount				Derivative Assets				Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps		$	4,772			$	0			$	465			$	5,136			$	0			$	217			$	3,557			$	136			$	—			$	3,983			$	199			$	—
Derivatives not designated as hedges
Interest rate swaps			11,928				0				666				12,296				0				293				-				-				-				-				-				-
Total derivatives		$	16,700			$	0			$	1,131			$	17,432			$	0			$	510			$	3,557			$	136			$	—			$	3,983			$	199			$	—

 

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

 

		Year Ended December 31,
(Amounts in thousands)		2020				2019				2018			Income Statement Location
Derivatives designated as hedges
Interest rate swaps		$	85			$	12			$	40		Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps			235				0				0		Interest and fees on loans
Total derivative expense		$	320			$	12			$	40

		Year Ended December 31,
(Amounts in thousands)		2023				2022				2021			Income Statement Location
Derivatives designated as hedges
Interest rate swaps		$	(102	)		$	35			$	111		Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps			-				90				217		Interest and fees on loans
Total derivative expense		$	(102	)		$	125			$	328

 

 

Note 1312. Employee Benefit Plans

 

Defined Benefit Plans

 

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan (“SERP”) and the Directors’ Supplemental Retirement Plan (“Directors’ Plan”). The SERP provides for a defined benefit, at normal retirement age, targeted at 35% of the participant’s projected final average compensation, subject to a defined maximum annual benefit. Benefits under the SERP generally become payable at age 62. The Directors’ Plan provides for a defined benefit, at normal retirement age, up to 100% of the participant’s highest consecutive three-year average compensation. Benefits under the Directors’ Plan generally become payable at age 70. The SERP was frozen near the end of 2021; the Directors' Plan was fundamentally frozen at that time as well.   The following table presents the changes in the aggregate actuarial benefit obligation for the two plans combined during the periods indicated:

 

		December 31,
		2020				2019
(Amounts in thousands)
Beginning balance		$	11,312			$	9,265
Plan change			0				262
Service cost			310				320
Interest cost			355				404
Actuarial loss			1,217				1,570
Benefits paid			(615	)			(509	)
Ending balance		$	12,579			$	11,312

		December 31,
		2023				2022
(Amounts in thousands)
Beginning balance		$	9,488			$	11,458
Effect of curtailment			—				—
Service cost			—				—
Interest cost			451				332
Actuarial gain			(306	)			(1,718	)
Benefits paid			(583	)			(584	)
Ending balance		$	9,050			$	9,488

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the components of net periodic pension cost, the effect on the consolidated statements of income, and the assumed discount rate for the periods indicated:

 

		Year Ended December 31,													Year Ended December 31,
		2020				2019				2018			Income Statement Location		2023				2022				2021			Income Statement Location
(Amounts in thousands)
Service cost		$	310			$	320			$	245		Salaries and employee benefits		$	—			$	—			$	352		Salaries and employee benefits
Interest cost			355				404				358		Other expense			451				332				315		Other expense
Effect of curtailment																—				—				289		Salaries and employee benefits
Amortization of prior service cost			201				257				228		Other expense			—				—				124		Other expense
Amortization of losses			186				20				57		Other expense			38				135				264		Other expense
Net periodic cost		$	1,052			$	1,001			$	888				$	489			$	467			$	1,344
Assumed discount rate			2.53	%			3.10	%			4.28	%				4.79	%			4.96	%			2.88	%

 

The following schedule presents the projected benefit payments to be paid under the Benefit Plans, by year, as of December 31, 20202023:

 

(Amounts in thousands)
2021		$	664
2022			675
2023			675
2024			717
2025			707
2026 through 2030			3,694

(Amounts in thousands)
2024		$	745
2025			743
2026			822
2027			789
2028			751
2029 through 2033			3,479

 

Deferred Compensation Plan

 

The Company maintains deferred compensation agreements with certain current and former officers that provide benefit payments, over various periods, commencing at retirement or death. There were 0no accrued benefits, which are based on the present values of expected payments and estimated life expectancies, as of December 31, 20202023 or 20192022. There was 0no deferred compensation plan expense in 20202023,  20192022, or 20182021.

 

The Company maintains a deferred compensation plan, referred to as the WRAP, and is a voluntary, non-tax qualified deferred compensation plan available to certain employees, including executive officers. Under the plan, participants may defer a portion of their base and/or annual incentive compensation. The plan is intended to mirror the Corporation's qualified KSOP, and may include discretionary match that coincides with a match made to the KSOP to the extent participants cannot otherwise receive the full match in the KSOP. The balance as of December 31, 2023 and 2022 was $8.28 million and $5.14 million, respectively.

Employee Welfare Plan

 

The Company provides various medical, dental, vision, life, accidental death and dismemberment, and long-term disability insurance benefits to all full-time employees who elect coverage under this program. A third-party administrator manages the health plan. Monthly employer and employee contributions are made to a tax-exempt employee benefits trust where the third-party administrator processes and pays claims. As of December 31, 20202023, stop-loss insurance coverage generally limits the Company’s risk of loss to $200 thousand for individual claims and $6.00$5.88 million for aggregate claims. Health plan expenses were $4.17$4.16 million in  20202023, $3.97$4.04 million in 20192022, and $3.72$3.98 million in 20182021.

 

Employee Stock Ownership and Savings Plan

 

The Company maintains the Employee Stock Ownership and Savings Plan (“KSOP”) that consists of a 401(k) savings feature that covers all employees that meet minimum eligibility requirements. The Company matches employee contributions at levels determined by the Board of Directors annually. These contributions are made in the first quarter following each plan year and employees must be employed on the last day of the plan year to be eligible. Matching contributions to qualified deferrals under the 401(k) savings component of the KSOP totaled $1.51$1.76 million in 20202023, $1.10$1.82 million in 20192022, and $1.06$1.71 million in 20182021. The KSOP held 351,222 282,072  shares of the Company’s common stock as of December 31, 20202023, 346,833309,019 shares as of December 31, 20192022, and 366,969320,164 shares as of December 31, 20182021.

 

Equity-Based Compensation Plans

 

The Company maintains equity-based compensation plans to promote the long-term success of the Company by encouraging officers, employees, directors, and other individuals performing services for the Company to focus on critical long-range objectives. The Company’s most current equity-based compensation plans include the 20122022 Omnibus Equity Compensation Plan ((the “20122022 Plan”), 2004 Omnibus Stock Option Plan, 2001 Director’s Option Plan, 1999 Stock Option Plan, and various other plans obtained through acquisitions. As of December 31, 2020, the 2012 Plan was the only plan available for the issuance of future grants. All plans issued or obtained before the 2012 Plan are frozen and no new grants may be issued; however, any options or awards unexercised and outstanding under those plans remain in effect per their respective terms. The 2012 Planwhich authorized 600,0001,000,000 shares available for potential grants of incentive stock options, nonqualified stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, bonus stock,Non-Qualified Stock Options, Incentive Stock Options, Performance Shares, Performance Stock Units, Restricted Stock, Restricted Stock Units, and stock awards. Grants issued under the 2012 Plan state the period of time the grant may be exercised, not to exceed more than ten years from the date granted.Performance Awards. The Company’s Compensation and Retirement Committee determines the vesting period for each grant; however, ifawards shall have a minimum vesting/exercise schedule of at least noone vesting period is specifiedyear, except that a shorter vesting/exercise schedule may apply to not more than 5% of the vesting occurs in 25% increments onshares authorized for issuance under the first2022 four anniversaries of the grant date.Plan.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the pre-tax compensation expense and excess tax benefit recognized in earnings for all equity-based compensation plans for the periods indicated:

 

		Year Ended December 31,												Year Ended December 31,
		2020				2019				2018				2023				2022				2021
(Amounts in thousands)
Pre-tax compensation expense		$	1,643			$	1,481			$	1,158			$	597			$	718			$	1,282
Excess tax benefit			0				0				95
Excess tax (benefit) expense															—				—				(633	)

 

Stock Options

 

The following table presents stock option activity and related information for the year ended December 31, 20202023:

 

(Amounts in thousands, except share and per share data)		Option Shares				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value				Option Shares				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding, January 1, 2020			147,200			$	21.10
Outstanding, January 1, 2023																			197,303			$	29.61
Granted			0				0												—				—
Exercised			0				0												(4,288	)			21.25
Canceled/Expired			(32,921	)			26.44												(6,751	)			31.73
Outstanding, December 31, 2020			114,279			$	19.56				4.52			$	432
Exercisable, December 31, 2020			114,279			$	19.56				4.52			$	432
Outstanding, December 31, 2023																			186,264			$	29.72				6.37			$	1,375
Exercisable, December 31, 2023																			144,441			$	28.77				6.13			$	1,203

 

There were 0no options granted in 2020 or 20192023.

There was 0were 4,288 options exercised in 20202023; the  and 7,575 were exercised in 2022.  The intrinsic value of options was exercised was $150$58 thousand in 20192023, and $423$83 thousand in 20182022. As of December 31, 20202023, there were 0unrecognized compensation cost related to nonvested stock options or unrecognized expense.totaled $80 thousand with an expected weighted average recognition period of  0.25 years.  The actual compensation cost recognized might differ from this estimate due to various items, including new grants and changes in estimated forfeitures.

 

Restricted Stock and Stock Unit Awards

 

The following table presents restricted stock activity and related information for the year ended December 31, 20202023:

 

		Shares				Weighted Average Grant-Date Fair Value				Shares/Units				Weighted Average Grant-Date Fair Value
Nonvested, January 1, 2020			57,653			$	31.93
Nonvested, January 1, 2023											73,605			$	30.87
Granted			89,097				21.20				69,964				26.33
Vested			(57,962	)			25.28				(31,782	)			24.04
Canceled			(3,873	)			29.92				(2,794	)			29.41
Nonvested, December 31, 2020			84,915			$	25.31
Nonvested, December 31, 2023											108,993			$	29.98

 

As of December 31, 20202023, unrecognized compensation cost related to nonvested restricted stockstock/unit awards totaled $1.38$2.47 million with an expected weighted average recognition period of  1.831.91 years. The actual compensation cost recognized might differ from this estimate due to various items, including new awards granted and changes in estimated forfeitures.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1413. Other Operating Income and Expense

 

The following table presents the components of other operating income and expense for the periods indicated:

 

		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands)		2020				2019				2018				2023				2022				2021
Other operating income
Bank owned life insurance		$	814			$	916			$	687			$	829			$	961			$	1,183
Net FDIC indemnification asset amortization															-				-				(1,226	)
Other(1)			3,555				1,888				1,861				4,822				4,187				4,623
Total other operating income		$	4,369			$	2,804			$	2,548			$	5,651			$	5,148			$	4,580
Other operating expense
OREO expense and net loss			414				1,494				1,549				129				557				330
Telephone and data communications			2,188				1,404				1,333				1,326				1,658				1,720
Office supplies			660				647				1,045				586				494				553
Other(1)			9,148				8,384				8,800				9,994				7,766				9,134
Total other operating expense		$	12,410			$	11,929			$	12,727			$	12,035			$	10,475			$	11,737

 

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(1)		Components of other operating income or expense that do not exceed 1% of total income

 

 

Note 1514. Income Taxes 

 

Income tax expense is comprised of current and deferred, federal and state income taxes on the Company’s pre-tax earnings. The following table presents the components of the income tax provision for the periods indicated:

 

		Year Ended December 31,
(Amounts in thousands)		2020				2019				2018
Current tax expense:
Federal		$	10,048			$	9,603			$	7,201
State			1,643				1,554				1,233
Total current tax expense			11,691				11,157				8,434
Deferred tax expense (benefit):
Federal			(1,266	)			(152	)			296
State			(239	)			(11	)			52
Total deferred tax expense (benefit)			(1,505	)			(163	)			348
Total income tax expense		$	10,186			$	10,994			$	8,782

		Year Ended December 31,
(Amounts in thousands)		2023				2022				2021
Current tax expense:
Federal		$	11,055			$	9,883			$	8,546
State			1,553				1,648				1,563
Total current tax expense			12,608				11,531				10,109
Deferred tax expense:
Federal			1,166				1,800				4,677
State			180				164				574
Total deferred tax expense			1,346				1,964				5,251
Total income tax expense		$	13,954			$	13,495			$	15,360

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		Year Ended December 31,																								Year Ended December 31,
		2020								2019								2018								2023								2022								2021
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
(Amounts in thousands)
Federal income tax at the statutory rate		$	9,683				21.00	%		$	10,457				21.00	%		$	9,475				21.00	%		$	13,014				21.00	%		$	12,633				21.00	%		$	13,971				21.00	%
State income tax, net of federal benefit			1,109				3.12	%			1,220				3.12	%			1,016				2.25	%			1,368				2.21	%			1,432				2.38	%			2,076				3.12	%
			10,792				24.12	%			11,677				24.12	%			10,491				23.25	%			14,382				23.21	%			14,065				23.38	%			16,047				24.12	%
Increase (decrease) resulting from:
Tax-exempt interest income			(500	)			(1.51	)%			(637	)			(1.28	)%			(702	)			(1.56	)%			(348	)			(0.56	)%			(347	)			(0.58	)%			(340	)			(0.51	)%
Nondeductible goodwill impairment and disposition			0				0.00	%			0				0.00	%			569				1.26	%
Excess tax benefits																											(25	)			(0.04	)%			(24	)			(0.04	)%			(133	)			(0.20	)%
Bank owned life insurance			(139	)			(0.42	)%			(249	)			(0.50	)%			(144	)			(0.32	)%			(167	)			(0.27	)%			(68	)			(0.11	)%			(225	)			(0.34	)%
Deferred tax revaluation			0				0.00	%			(98	)			(0.20	)%			(1,669	)			(3.70	)%
Other items, net			33				(0.10	)%			301				0.10	%			237				0.53	%			112				0.17	%			(131	)			(0.22	)%			11				0.02	%
Income tax at the effective tax rate		$	10,186				22.09	%		$	10,994				22.24	%		$	8,782				19.46	%		$	13,954				22.51	%		$	13,495				22.43	%		$	15,360				23.09	%

 

Deferred taxes derived from continuing operations reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. The following table presents the significant components of the net deferred tax asset as of the dates indicated:

 

		December 31,								December 31,
(Amounts in thousands)		2020				2019				2023				2022
Deferred tax assets
Allowance for loan losses		$	6,128			$	4,312
Allowance for credit losses										$	8,523			$	7,283
Unrealized losses on available-for-sale securities											2,958				4,153
Unrealized asset losses			545				540				420				503
Purchase accounting			2,559				3,689				—				148
FDIC assisted transactions			1,685				1,597				346				588
Intangible assets			217				745
Deferred loan fees											4,674				2,074
Deferred compensation assets			4,048				4,079				6,316				5,035
Federal net operating loss carryforward			4,093				4,279				266				1,223
Deferred loan fees			2,401				1,247
Lease liability											146				160
Accrued litigation											824				—
Other			1,816				1,746				831				707
Total deferred tax assets			23,492				22,234				25,304				21,874
Deferred tax liabilities
FDIC indemnification asset			286				675
Fixed assets			2,450				1,080				(939	)			(755	)
Intangible assets											(4,303	)			(857	)
Odd days interest deferral			1,482				1,912				(4,134	)			(4,010	)
Unrealized gains on available for sale securities			257				230
Purchase accounting											(81	)			—
Right of use asset											(140	)			(155	)
Other			287				399				(869	)			(197	)
Total deferred tax liabilities			4,762				4,296				(10,466	)			(5,974	)
Net deferred tax asset		$	18,730			$	17,938			$	14,838			$	15,900

 

The Company had 0no unrecognized tax benefits or accrued interest or penalties as of December 31, 20202023 or 20192022. The Company had 0no deferred tax valuation allowance recorded as of December 31, 20202023 or 20192022, as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income. The Company and its subsidiaries are subject to U.S. federal income tax of the various states.  The Company is currently openno longer subject to audit under the statute of limitationsexamination by the Internal Revenue Service and variousfederal or state tax departmentstaxing authorities for the years endedbefore 2020.

At December 31, 20172023, through 2019.the Company had Federal net operating loss carryforwards of approximately $1.27 million of which $796 thousand can be carried forward 20 years with expiration occurring no earlier than 2036, and $470 thousand that can be carried forward indefinitely.  During 2023, the Company acquired $1.46 million of Federal net operating loss carryforwards and these will be utilized during the current year. 

The Company has analyzed the tax positions taken, or expected to be taken in its tax returns, and concluded it has no liability related to uncertain tax positions.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   

 

Note 1615. Accumulated Other Comprehensive Income

 

The following table presents the changes in AOCI, net of tax and by component, during the periods indicated:

 

		Unrealized Gains (Losses) on Available for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Balance January 1, 2018		$	975			$	(1,815	)		$	(840	)
Other comprehensive (loss) income before reclassifications			(1,748	)			446				(1,302	)
Reclassified from AOCI			488				225				713
Other comprehensive (loss) income, net			(1,260	)			671				(589	)
Balance December 31, 2018		$	(285	)		$	(1,144	)		$	(1,429	)
Balance January 1, 2019		$	(285	)		$	(1,144	)		$	(1,429	)
Other comprehensive income (loss) before reclassifications			1,117				(1,448	)			(331	)
Reclassified from AOCI			34				220				254
Other comprehensive income (loss), net			1,151				(1,228	)			(77	)
Balance December 31, 2019		$	866			$	(2,372	)		$	(1,506	)
Balance January 1, 2020		$	866			$	(2,372	)		$	(1,506	)
Other comprehensive income (loss) before reclassifications			544				(961	)			(417	)
Reclassified from AOCI			(304	)			304				0
Other comprehensive income (loss), net			240				(657	)			(417	)
Balance December 31, 2020		$	1,106			$	(3,029	)		$	(1,923	)

		Unrealized Gains (Losses) on Available for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Balance January 1, 2021		$	1,106			$	(3,029	)		$	(1,923	)
Other comprehensive (loss) income before reclassifications			(1,091	)			1,160				69
Reclassified from AOCI			—				308				308
Other comprehensive (loss) income, net			(1,091	)			1,468				377
Balance December 31, 2021		$	15			$	(1,561	)		$	(1,546	)
Balance January 1, 2022		$	15			$	(1,561	)		$	(1,546	)
Other comprehensive (loss) income before reclassifications			(15,636	)			1,357				(14,279	)
Reclassified from AOCI			—				106				106
Other comprehensive (loss) income, net			(15,636	)			1,463				(14,173	)
Balance December 31, 2022		$	(15,621	)		$	(98	)		$	(15,719	)
Balance January 1, 2023		$	(15,621	)		$	(98	)		$	(15,719	)
Other comprehensive income before reclassifications			4,479				242				4,721
Reclassified from AOCI			16				31				47
Other comprehensive income, net			4,495				273				4,768
Balance December 31, 2023		$	(11,126	)		$	175			$	(10,951	)

 

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

 

		Year Ended December 31,											Income Statement
(Amounts in thousands)		2020				2019				2018			Line Item Affected
Available-for-sale securities
(Losses) gains recognized		$	(385	)		$	43			$	618		Net loss on sale of securities
Reclassified out of AOCI, before tax			(385	)			43				618		Income before income taxes
Income tax benefit			81				(9	)			(130	)	Income tax expense
Reclassified out of AOCI, net of tax			(304	)			34				488		Net income
Employee benefit plans
Amortization of prior service cost			201				257				228		Other operating expense
Amortization of net actuarial loss			185				21				57		Other operating expense
Reclassified out of AOCI, before tax			386				278				285		Income before income taxes
Income tax expense			(82	)			(58	)			(60	)	Income tax expense
Reclassified out of AOCI, net of tax			304				220				225		Net income
Total reclassified out of AOCI, net of tax		$	0			$	254			$	713		Net income

		Year Ended December 31,											Income Statement
(Amounts in thousands)		2023				2022				2021			Line Item Affected
Available-for-sale securities
Loss recognized		$	21			$	—			$	—		Net loss on sale of securities
Reclassified out of AOCI, before tax			21				—				—		Income before income taxes
Income tax benefit			(5	)			—				—		Income tax expense
Reclassified out of AOCI, net of tax			16				—				—		Net income
Employee benefit plans
Amortization of prior service cost			—				—				124		Other operating expense
Amortization of net actuarial loss			38				135				264		Other operating expense
Reclassified out of AOCI, before tax			38				135				388		Income before income taxes
Income tax expense			(7	)			(29	)			(80	)	Income tax expense
Reclassified out of AOCI, net of tax			31				106				308		Net income
Total reclassified out of AOCI, net of tax		$	47			$	106			$	308		Net income

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1716. Fair Value 

 

Financial Instruments Measured at Fair Value

 

The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

 

Assets and Liabilities Reported at Fair Value on a Recurring Basis

 

Available-for-Sale Debt Securities. Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

 

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

 

Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

 

Loans Held for Investment. Loans held for investment are reported at fair value using the exit price notion, which is derived from third-party models. Loans related to fair value hedges are recorded at fair value on a recurring basis.

 

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

 

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

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

		December 31, 2020																December 31, 2023
		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		$	551			$	0			$	551			$	0			$	5,749			$	—			$	5,749			$	—
U.S. Treasury securities																			145,826				—				145,826				—
Municipal securities			44,459				0				44,459				0				19,377				—				19,377				—
Corporate Notes																			27,081				—				27,081				—
Mortgage-backed Agency securities			38,348				0				38,348				0				82,928				—				82,928				—
Total available-for-sale debt securities			83,358				0				83,358				0				280,961				—				280,961				—
Equity securities			55				0				55				0				55				—				55				—
Fair value loans			17,831				0				0				17,831				3,421				—				—				3,421
Derivative assets																			136				—				136				—
Deferred compensation assets			4,181				4,181				0				0				6,729				6,729				—				—
Deferred compensation liabilities			4,181				4,181				0				0				8,282				8,282				—				—
Derivative liabilities			1,131				0				1,131				0

 

 

		December 31, 2019																December 31, 2022
		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			$	1,485			$	—			$	1,485			$	—
U.S. Treasury securities																			157,264			$	—				157,264			$	—
Municipal securities			86,878				0				86,878				0				23,309				—				23,309				—
Corporate Notes																			34,857				—				34,857				—
Mortgage-backed Agency securities			77,662				0				77,662				0				83,434				—				83,434				—
Total available-for-sale debt securities			169,574				0				169,574				0				300,349				—				300,349				—
Equity securities			55				0				55				0				55				—				55				—
Fair value loans			17,942				0				0				17,942				3,784				—				—				3,784
Derivative assets																			199				—				199				—
Deferred compensation assets			3,990				3,990				0				0				5,142				5,142				—				—
Deferred compensation liabilities			3,990				3,990				0				0				5,142				5,142				—				—
Derivative liabilities			510				0				510				0

 

Changes in Level 3 Fair Value Measurements

 

The following table presents the changes in Level 3 assets recorded at fair value on a recurring basis during the period indicated:

 

		Assets				Assets
(Amounts in thousands)
Balance January 1, 2019		$	5,412
Transfer of certain loans into Level 3 (Highlands acquisition)			12,295
Balance January 1, 2022						$	13,106
Change due to termination of interest rate swaps not qualifying as fair value hedges							(8,489	)
Changes in fair value			522				(428	)
Changes due to principal reduction			(287	)			(405	)
Balance December 31, 2019		$	17,942
Balance December 31, 2022						$	3,784
Balance January 1, 2020		$	17,942
Balance January 1, 2023						$	3,784
Changes in fair value			621				63
Changes due to principal reduction			(732	)			(426	)
Balance December 31, 2020		$	17,831
Balance December 31, 2023						$	3,421

 

 No transfers into or out of Level 3 of the fair value hierarchy occurred during the year ended December 31, 2020.2023 or 2022.

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Impaired LoansLoans.  . ImpairedPrior to the adoption of ASU 2016-13, impaired loans arewere recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’sloan'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:

 

		December 31, 2020
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Impaired loans, non-covered		$	979			$	0			$	0			$	979
OREO, non-covered			2,083				0				0				2,083

		December 31, 2023
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Collateral dependent assets with specific reserves		$	825			$	—			$	—			$	825
OREO			192				—				—				192

 

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

		December 31, 2022
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Collateral dependent assets with specific reserves		$	574			$	—			$	—			$	574
OREO			703				—				—				703

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Quantitative Information about Level 3 Fair Value Measurements

 

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

 

Valuation

Unobservable

Discount Range (Weighted Average)

Technique

Input

December 31, 2020

December 31, 2019

Impaired loans, non-covered

Discounted appraisals(1)

Appraisal adjustments(2)

22% to 38%

(30)%

22% to 36%

(26)%

OREO, non-covered

Discounted appraisals(1)

Appraisal adjustments(2)

8% to 77%

(25)%

15% to 100%

(8)%

			Discount Range
	Valuation	Unobservable	(Weighted Average)
	Technique	Input	December 31, 2023
Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		42%	42	%
OREO	Discounted appraisals(1)	Appraisal adjustments(2)		20% to 100%	10	%

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

			Discount Range
	Valuation	Unobservable	(Weighted Average)
	Technique	Input	December 31, 2022
Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		3% to 3%	3	%
OREO	Discounted appraisals(1)	Appraisal adjustments(2)		20% to 100%	69	%

 

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

 

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

 

		December 31, 2020																				December 31, 2023
		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		$	456,561			$	456,561			$	456,561			$	0			$	0			$	116,420			$	116,420			$	116,420			$	—			$	—
Debt securities available for sale			83,358				83,358				0				83,358				0				280,961				280,961				—				280,961				—
Equity securities			55				55				0				55				0				55				55				—				55				—
Loans held for investment, net of allowance			2,160,450				2,126,221				0				0				2,126,221				2,536,109				2,350,071				—				—				2,350,071
FDIC indemnification asset			1,223				509				0				0				509
Interest receivable			9,052				9,052				0				9,052				0				10,881				10,881				—				1,246				9,635
Deferred compensation assets			4,181				4,181				4,181				0				0				6,729				6,729				6,729				—				—
Derivative assets																							136				136				—				136				—
Liabilities
Time deposits			420,619				423,120				0				423,120				0				253,373				247,141				—				247,141				—
Securities sold under agreements to repurchase			964				964				0				964				0				1,119				1,119				—				1,119				—
Interest payable			582				582				0				582				0				556				556				—				556				—
Deferred compensation liabilities			4,181				4,181				4,181				0				0				8,282				8,282				8,282				—				—
Derivative liabilities			1,131				1,131				0				1,131				0

 

		December 31, 2019																				December 31, 2022
		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			$	170,846			$	170,846			$	170,846			$	—			$	—
Debt securities available for sale			169,574				169,574				0				169,574				0				300,349				300,349				—				300,349				—
Equity securities			55				55				0				55				0				55				55				—				55				—
Loans held for sale			263				263				0				0				263
Loans held for investment, net of allowance			2,096,035				2,068,257				0				0				2,068,257				2,369,641				2,215,243				—				—				2,215,243
FDIC indemnification asset			2,883				1,201				0				0				1,201
Interest receivable			6,677				6,677				0				6,677				0				9,279				9,279				—				1,343				7,936
Deferred compensation assets			3,990				3,990				3,990				0				0				5,142				5,142				5,142				—				—
Derivative assets																							199				199								199
Liabilities
Time deposits			515,622				512,134				0				512,134				0				283,330				281,744				—				281,744				—
Securities sold under agreements to repurchase			1,601				1,601				0				1,601				0				1,874				1,874				—				1,874				—
Interest payable			472				472				0				472				0				159				159				—				159				—
Deferred compensation liabilities			3,990				3,990				3,990				0				0				5,142				5,142				5,142				—				—
Derivative liabilities			510				510				0				510				0

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1817. Earnings per Share

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2020				2019				2018				2023				2022				2021
(Amounts in thousands, except share and per share data)
Net income		$	35,926			$	38,802			$	36,340			$	48,020			$	46,662			$	51,168
Adjustment to Net Income for Fair Value Changes to Restricted Stock Units (tax-effected)															1,100				-				-
Adjusted Net Income for diluted earnings per share														$	49,120			$	46,662			$	51,168
Weighted average common shares outstanding, basic			17,781,748				15,690,812				16,587,504				17,996,373				16,519,848				17,335,615
Dilutive effect of potential common shares
Stock options			22,495				53,907				62,417				15,856				18,784				30,854
Restricted stock			11,137				11,374				16,464
Restricted stock and units															14,922				23,625				36,467
Total dilutive effect of potential common shares			33,632				65,281				78,881				30,778				42,409				67,321
Weighted average common shares outstanding, diluted			17,815,380				15,756,093				16,666,385				18,027,151				16,562,257				17,402,936
Basic earnings per common share		$	2.02			$	2.47			$	2.19			$	2.67			$	2.82			$	2.95
Diluted earnings per common share			2.02				2.46				2.18				2.72				2.82				2.94
Antidilutive potential common shares
Potential antidilutive common shares
Stock options			58,166				25				19				129,324				131,198				103,520
Restricted stock			26,900				25,853				2,736
Restricted stock and units															32,706				—				630
Total potential antidilutive shares			85,066				25,878				2,755				162,030				131,198				104,150

 

 

Note 1918. Related Party Transactions

 

The Company engages in transactions with related parties in the normal course of business. Related parties includeLoans to principal officers, directors, executive officers, and principal shareholders and their immediate family members, business interests, and affiliates. All related party transactions are made on terms that are substantially the sameaffiliates were as those prevailing at the time for similar transactions with unrelated parties, including interest rates and collateral. The following table presents the changes in loans with related parties during the periods indicated:follows:

 

		Year Ended December 31,								Year Ended December 31,
		2020				2019				2023				2022
(Amounts in thousands)
Beginning balance		$	20,345			$	22,033			$	30,981			$	33,740
New loans and advances			4,821				3,958				5,215				7,768
Loan repayments			(5,023	)			(5,634	)			(6,217	)			(15,979	)
Reclassifications(1)			23				(12	)			(15	)			5,452
Ending balance		$	20,166			$	20,345			$	29,964			$	30,981

 

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(1)		Changes related to the composition of the Company's directors, executive officers, and related insiders

 

Deposits from related parties totaled $8.04  $15.19 million as of December 31, 20202023, and $7.29$14.59 million as of December 31, 20192022. Legal fees paid to related parties totaled $70$47 thousand in 20202023, $150$41 thousand in 20192022, and $67$80 thousand in 20182021. There were 0no lease payments paid to related parties in 20202023, 20192022, or 20182021. Other expense paid to related parties totaled $68 thousand in 2020, $7$23 thousand in 20192023, $53 thousand in 2022, and $4$104 thousand in 20182021.

 

 

Note 2019. Litigation, Commitments, and Contingencies

 

Litigation

 

InThe Company and its subsidiaries are currently involved in various legal proceedings in the normal course of business,business. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with all pending or threatened claims and litigation, utilizing the most recent information available. On a matter-by-matter  basis, an accrual for loss is established for those matters which the Company believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments. Accordingly, management’s estimate will change from time to time, and actual losses may be more or less than the current estimate. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established.

On June 24, 2022, the Bank was sued in a putative class action lawsuit filed by two customers of the Bank in the United States District Court for the Northern District of West Virginia. (The lawsuit was subsequently transferred to the District Court for the Southern District of West Virginia.) The plaintiffs, individually and as putative class representatives, allege that the Bank breached its deposit account agreements and was unjustly enriched by collecting overdraft fees with respect to certain debit card transactions and the assessment of multiple nonsufficient funds fees as to items presented for payment against nonsufficient funds more than one time. No class has been certified and discovery is ongoing. The Bank disputes the allegations and has actively defended itself, but it is exploring settlement opportunities. We cannot provide assurance whether a settlement will be reached, the final terms or timing of any such settlement, or the negotiated amount of any settlement with respect to this matter. 

Management currently estimates the range of reasonably possible loss with respect to this litigation matter is $1.50 to $3.50 million. As of December 31, 2023, First Community accrued a $3.00 million estimated liability related to this litigation matter. This accrual was based upon currently available information and is subject to adjustment to reflect any subsequent developments. Management is vigorously pursuing all applicable legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on the Company’s  financial statements.

We are  currently a defendant in variousother legal actions and asserted claims. Whileclaims in the Company and its legal counselnormal course of business. Although we are unable to assess the ultimate outcome of each of these mattersmatter with certainty, the Company believeswe believe that the resolution of these actions singly or in the aggregate, should not have a material adverse effect on itsour financial condition,position, results of operations, or cash flows.

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Commitments and Contingencies

 

The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

 

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

 

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

 

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

 

		December 31,								December 31,
		2020				2019				2023				2022
(Amounts in thousands)
Commitments to extend credit		$	229,408			$	228,716			$	277,462			$	278,926
Standby letters of credit and financial guarantees(1)			179,022				167,612				129,220				119,681
Total off-balance sheet risk			408,430				396,328				406,682				398,607
Reserve for unfunded commitments		$	66			$	66

 

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(1)	Includes FHLB letters of credit

 

 

Note 2120. Regulatory Requirements and Restrictions 

 

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank, the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s balance sheet assets and off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Company and the Bank are subject to various regulatory restrictions related to the payment of dividends, including requirements to maintain capital at or above regulatory minimums.

 

The current risk-based capital requirements, based on the international capital standards known as Basel III, requires the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to risk-weighted assets, and of Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”), as defined in the regulations.  On January 1, 2016, Basel III’s capital conservation buffer (“CCB”), which is intended to absorb losses during periods of economic stress, became effective at 0.625%, and was phased in over a four-year period (increased an additional 0.625% each year until it reachedincreased those minimum ratios by 2.5% on January 1, 2019).

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present actual and required capital ratios, under Basel III capital rules, as of the dates indicated:

 

		December 31, 2020																																December 31, 2023
		Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - with CCB								Well Capitalized Requirement(1)								Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - with CCB								Well Capitalized Requirement(1)
(Amounts in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio
The Company
Common equity Tier 1 ratio		$	292,019				14.28	%		$	92,043				4.50	%		$	143,178				7.00	%			N/A				N/A			$	355,157				14.69	%		$	108,761				4.50	%		$	169,184				7.00	%			N/A				N/A
Tier 1 risk-based capital ratio			292,019				14.28	%			122,724				6.00	%			214,767				8.50	%			N/A				N/A				355,157				14.69	%			145,015				6.00	%			205,438				8.50	%			N/A				N/A
Total risk-based capital ratio			317,595				15.53	%			163,632				8.00	%			173,859				10.50	%			N/A				N/A				385,369				15.94	%			193,353				8.00	%			253,776				10.50	%			N/A				N/A
Tier 1 Leverage ratio			292,019				10.24	%			114,081				4.00	%			N/A				N/A				N/A				N/A				355,157				11.52	%			123,278				4.00	%			N/A				N/A				N/A				N/A
The Bank
Common equity Tier 1 ratio		$	277,449				13.57	%		$	92,017				4.50	%		$	143,137				7.00	%		$	132,913				6.50	%		$	312,593				12.97	%		$	108,461				4.50	%		$	168,718				7.00	%		$	156,667				6.50	%
Tier 1 risk-based capital ratio			277,449				13.57	%			122,689				6.00	%			173,809				8.50	%			163,585				8.00	%			312,593				12.97	%			144,615				6.00	%			204,872				8.50	%			192,820				8.00	%
Total risk-based capital ratio			303,018				14.82	%			163,585				8.00	%			214,706				10.50	%			204,482				10.00	%			342,805				14.22	%			192,820				8.00	%			253,077				10.50	%			241,026				10.00	%
Tier 1 Leverage ratio			277,449				9.73	%			114,058				4.00	%			N/A				N/A				142,572				5.00	%			312,593				10.07	%			124,181				4.00	%			N/A				N/A				155,226				5.00	%

 

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(1)	Based on prompt corrective action provisions

 

		December 31, 2019																																December 31, 2022
		Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - with CCB								Well Capitalized Requirement(1)								Actual								Minimum Basel III Requirement								Minimum Basel III Requirement - with CCB								Well Capitalized Requirement(1)
(Amounts in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio
The Company
Common equity Tier 1 ratio		$	292,241				14.31	%		$	91,926				4.50	%		$	142,996				7.00	%			N/A				N/A			$	303,963				13.37	%		$	102,332				4.50	%		$	159,183				7.00	%			N/A				N/A
Tier 1 risk-based capital ratio			292,241				14.31	%			122,568				6.00	%			173,637				8.50	%			N/A				N/A				303,963				13.37	%			136,443				6.00	%			193,294				8.50	%			N/A				N/A
Total risk-based capital ratio			310,732				15.21	%			163,423				8.00	%			214,493				10.50	%			N/A				N/A				332,430				14.62	%			181,924				8.00	%			238,775				10.50	%			N/A				N/A
Tier 1 Leverage ratio			292,241				14.01	%			83,408				4.00	%			N/A				N/A				N/A				N/A				303,963				10.17	%			119,499				4.00	%			N/A				N/A				N/A				N/A
The Bank
Common equity Tier 1 ratio		$	262,716				12.87	%		$	91,860				4.50	%		$	142,893				7.00	%		$	132,686				6.50	%		$	264,185				11.69	%		$	101,712				4.50	%		$	158,218				7.00	%		$	146,917				6.50	%
Tier 1 risk-based capital ratio			262,716				12.87	%			122,480				6.00	%			173,513				8.50	%			163,306				8.00	%			264,185				11.69	%			135,616				6.00	%			192,122				8.50	%			180,821				8.00	%
Total risk-based capital ratio			281,207				13.78	%			163,306				8.00	%			214,339				10.50	%			204,133				10.00	%			292,481				12.94	%			180,821				8.00	%			237,327				10.50	%			226,026				10.00	%
Tier 1 Leverage ratio			262,716				12.61	%			83,313				4.00	%			N/A				N/A				104,141				5.00	%			264,185				8.79	%			120,248				4.00	%			N/A				N/A				150,310				5.00	%

 

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(1)	Based on prompt corrective action provisions

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2221. Parent Company Financial Information 

 

The following tables present condensed financial information for the parent company, First Community Bankshares, Inc., as of and for the dates indicated:

 

		CONDENSED BALANCE SHEETS								CONDENSED BALANCE SHEETS
		December 31,								December 31,
(Amounts in thousands)		2020				2019				2023				2022
Assets
Cash and due from banks		$	10,089			$	23,998			$	14,681			$	16,988
Loans to affiliates			0				184
Securities available for sale											22,468				17,313
Investment in subsidiaries			412,161				399,294				460,731				382,286
Other assets			5,089				5,888				6,227				5,910
Total assets		$	427,339			$	429,364			$	504,107			$	422,497
Liabilities
Other liabilities		$	609			$	545			$	813			$	512
Total liabilities			609				545				813				512
Stockholders' equity
Common stock			17,723				18,377				18,502				16,225
Additional paid-in capital			173,345				192,413				175,841				128,508
Retained earnings			237,585				219,535				319,902				292,971
Accumulated other comprehensive loss			(1,923	)			(1,506	)			(10,951	)			(15,719	)
Total stockholders' equity			426,730				428,819				503,294				421,985
Total liabilities and stockholders' equity		$	427,339			$	429,364			$	504,107			$	422,497

 

		CONDENSED STATEMENTS OF INCOME												CONDENSED STATEMENTS OF INCOME
		Year Ended December 31,												Year Ended December 31,
		2020				2019				2018				2023				2022				2021
(Amounts in thousands)
Cash dividends received from subsidiary bank		$	23,710			$	38,500			$	48,000			$	45,700			$	56,250			$	53,200
Other income			3				444				306				1,397				222				8
Other operating expense			1,446				1,420				2,293				1,524				1,052				1,086
Income before income taxes and equity in undistributed net income of subsidiaries			22,267				37,524				46,013				45,573				55,420				52,122
Income tax benefit			(375	)			(276	)			(595	)			(41	)			(224	)			(351	)
Income before equity in undistributed net income of subsidiaries			22,642				37,800				46,608				45,614				55,644				52,473
Equity in (dividends in excess) of undistributed net income of subsidiaries			13,284				1,002				(10,268	)			2,406				(8,982	)			(1,305	)
Net income		$	35,926			$	38,802			$	36,340			$	48,020			$	46,662			$	51,168

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		CONDENSED STATEMENTS OF CASH FLOWS												CONDENSED STATEMENTS OF CASH FLOWS
		Year Ended December 31,												Year Ended December 31,
(Amounts in thousands)		2020				2019				2018				2023				2022				2021
Operating activities
Net income		$	35,926			$	38,802			$	36,340			$	48,020			$	46,662			$	51,168
Adjustments to reconcile net income to net cash provided by operating activities
Net change in other operating activities			1,047				1,865				1,509				(3,275	)			8,442				253
Net cash provided by operating activities			36,973				40,667				37,849				44,745				55,104				51,421
Investing activities
Purchase of investment securities															(69,469	)			(19,372	)			—
Proceeds from maturities, calls, sales of investment securities															65,250				11,807				(9,919	)
Dividends in excess of undistributed net income of subsidiaries			(13,284	)			(1,002	)			10,268				—				—				1,305
Net cash provided by investing activities			(13,284	)			(1,002	)			10,268
Net cash (used) provided by investing activities															(4,219	)			(7,565	)			(8,614	)
Financing activities
Proceeds from issuance of common stock			0				136				832				91				172				—
Payments for repurchase of common stock			(21,872	)			(16,362	)			(34,412	)			(23,038	)			(21,311	)			(28,882	)
Payments of common dividends			(17,876	)			(15,060	)			(21,090	)			(21,089	)			(18,515	)			(18,059	)
Net change in other financing activities			2,150				1,893				1,063				1,203				1,375				1,773
Net cash used in financing activities			(37,598	)			(29,393	)			(53,607	)
Net increase (decrease) in cash and cash equivalents			(13,909	)			10,272				(5,490	)
Cash and cash equivalents at beginning of period			23,998				13,726				19,216
Cash and cash equivalents at end of period		$	10,089			$	23,998			$	13,726
Net cash (used) provided by financing activities															(42,833	)			(38,279	)			(45,168	)
Cash and cash equivalents increase (decrease)															(2,307	)			9,260				(2,361	)
Cash and cash equivalents at carrying value at beginning of period															16,988				7,728				10,089
Cash and cash equivalents at carrying value at end of period														$	14,681			$	16,988			$	7,728

 

 

Note 2322. Quarterly Financial Data (Unaudited)

 

The following tables present selected financial data for the periods indicated:

 

		Year Ended December 31, 2020																Year Ended December 31, 2023
		First				Second				Third				Fourth				First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter
(Amounts in thousands, except share and per share data)
Interest income		$	29,509			$	27,786			$	27,995			$	28,746			$	30,189			$	34,869			$	36,105			$	36,002
Interest expense			1,827				1,447				1,161				1,029				777				2,007				2,758				3,939
Net interest income			27,682				26,339				26,834				27,717				29,412				32,862				33,347				32,063
Provision for loan losses			3,500				3,831				4,703				634
Provision for credit losses																			1,742				4,105				1,109				1,029
Net interest income after provision			24,182				22,508				22,131				27,083				27,670				28,757				32,238				31,034
Noninterest income, excluding net loss on sale of securities			7,164				6,913				7,638				7,733				8,583				8,785				9,622				10,462
Net loss on sale of securities			385				0				0				0
Noninterest expense			21,664				18,913				19,171				19,877				20,813				24,671				22,913				26,780
Income before income taxes			10,067				10,508				10,598				14,939				15,440				12,871				18,947				14,716
Income tax expense			2,195				2,270				2,332				3,389				3,658				3,057				4,307				2,932
Net income		$	7,872			$	8,238			$	8,266			$	11,550			$	11,782			$	9,814			$	14,640			$	11,784
Adjustment to Net Income for Fair Value Changes to Restricted Stock Units (tax-effected)																		$	20			$	335			$	215			$	530
Adjusted Net Income for diluted earnings per share																		$	11,802			$	10,149			$	14,855			$	12,314
Basic earnings per common share		$	0.44			$	0.47			$	0.47			$	0.65			$	0.73			$	0.53			$	0.78			$	0.64
Diluted earnings per common share			0.44				0.46				0.47				0.65				0.72				0.55				0.79				0.66
Dividends per common share			0.25				0.25				0.25				0.25				0.29				0.29				0.29				0.29
Weighted average basic shares outstanding			17,998,994				17,701,853				17,710,283				17,717,356				16,228,297				18,407,078				18,786,032				18,530,114
Weighted average diluted shares outstanding			18,050,071				17,728,300				17,732,428				17,751,805				16,289,489				18,431,598				18,831,836				18,575,226

 

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FIRST COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLID

ATEDCONSOLIDATED FINANCIAL STATEMENTS

 

		Year Ended December 31, 2019
		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
(Amounts in thousands, except share and per share data)
Interest income		$	23,611			$	24,382			$	23,605			$	23,370
Interest expense			1,425				1,393				1,384				1,313
Net interest income			22,186				22,989				22,221				22,057
Provision for loan losses			1,220				1,585				675				91
Net interest income after provision			20,966				21,404				21,546				21,966
Noninterest income, excluding net loss on sale of securities			8,080				8,692				7,634				9,314
Net loss on sale of securities			0				(43	)			0				0
Noninterest expense			16,785				16,651				17,444				18,883
Income before income taxes			12,261				13,402				11,736				12,397
Income tax expense			2,630				2,951				2,580				2,833
Net income		$	9,631			$	10,451			$	9,156			$	9,564
Basic earnings per common share		$	0.61			$	0.67			$	0.59			$	0.61
Diluted earnings per common share			0.60				0.66				0.58				0.61
Dividends per common share			0.21				0.25				0.25				0.25
Weighted average basic shares outstanding			15,839,424				15,712,204				15,603,992				15,611,093
Weighted average diluted shares outstanding			15,920,950				15,775,320				15,664,587				15,670,047

		Year Ended December 31, 2022
		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
(Amounts in thousands, except share and per share data)
Interest income		$	25,639			$	27,970			$	29,722			$	30,988
Interest expense			486				423				380				367
Net interest income			25,153				27,547				29,342				30,621
Recovery of credit losses			1,961				510				685				3,416
Net interest income after provision			23,192				27,037				28,657				27,205
Noninterest income, excluding net loss on sale of securities			9,194				8,854				9,950				9,184
Noninterest expense			19,986				21,255				21,145				20,730
Income before income taxes			12,400				14,636				17,462				15,659
Income tax expense			2,885				3,423				4,111				3,076
Net income		$	9,515			$	11,213			$	13,351			$	12,583
Basic earnings per common share		$	0.57			$	0.67			$	0.82			$	0.78
Diluted earnings per common share			0.56				0.67				0.81				0.77
Dividends per common share			0.27				0.27				0.29				0.29
Weighted average basic shares outstanding			16,817,284				16,662,817				16,378,022				16,229,289
Weighted average diluted shares outstanding			16,864,515				16,682,615				16,413,202				16,281,922

 

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Crowe LLP Independent Member Crowe Global

 

- Report of Independent Registered Public Accounting Firm -

 

Stockholders and the Board of Directors and the Stockholders

of First Community Bankshares, Inc. and Subsidiary

Bluefield, Virginia

 

 

OpinionOpinions on the Consolidated Financial Statements

and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheetssheet of First Community Bankshares, Inc. and Subsidiary (the "Company") as of December 31, 2020 and 2019,2023, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows,flow for each of the three years in the periodyear ended December 31, 2020,2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.  The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance and Provision for Credit Losses on Loans – Discounted Cash Flow

As more fully described in Notes 1, 4, 5 and 6 of the financial statements, the allowance for credit losses (the “ACL”) is an accounting estimate of the expected credit losses in the loans held for investment portfolio over the life of an exposure (or pool of exposures). Expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For collectively evaluated loans, the Company uses a combination of discounted cash flow model, which includes the use of probability of default and loss given default assumptions, and open pool model to estimate expected credit losses. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver using a statistical regression. In addition, the Company considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process.

We identified auditing the ACL’s discounted cash flow model as a critical audit matter because of the extent of auditor judgment applied and significant audit effort, with the need to use our valuation specialists, to evaluate the high degree of judgments made by management related to the determination of the probability of default and loss given default (“the significant model assumptions”) within the discounted cash flow method for certain collectively evaluated loan segments.

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The primary procedures performed to address the critical audit matter included:

Testing the effectiveness of internal controls over:

	●	The Company’s evaluation of the ACL calculation, including the reasonableness of the significant model assumptions and judgments within the discounted cash flow model.
	●	The Company’s evaluation of the relevance and reliability of data used in the discounted cash flow model of the ACL calculation.

Substantively testing management’s estimate, which included:

	●	Evaluation of the appropriateness of the ACL calculation, including the reasonableness of the significant model assumptions and the application of data within the significant model assumptions used in the discounted cash flow model, with assistance of our valuation specialists.
	●	Evaluation of the relevance and reliability of data used to develop the discounted cash flow model of the ACL calculation.

/s/ Crowe LLP

We have served as the Company's auditor since 2023.

Washington, D.C.

March 8, 2024

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of First Community Bankshares, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of First Community Bankshares, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019,2022, and the results of theirits operations and theirits cash flows for each of the three years in the periodyear then ended December 31, 2020, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our auditsaudit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

The allowance for loan losses (‘ALL’) was $26.2 million at December 31, 2020. As described in Note 1 to the consolidated financial statements, the Company’s allowance for loan losses is reviewed quarterly to determine if it is sufficient to absorb probable loan losses in the portfolio. The allowance for loan losses consists of specific reserves assigned to impaired loans and credit relationships and general reserves assigned to unimpaired loans that have been segmented into loan classes with similar risk characteristics. General reserve allocations are based on management’s judgments of qualitative and quantitative factors that include, but are not limited to, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Specific reserves assigned to impaired loans and credit relationships are measured based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate or the net realizable value of the collateral if the loan is collateral dependent. /s/ Elliott Davis, PLLC

 

We identifiedserved as the Company’s estimate of the ALL as a critical audit matter. The principal considerations for our determination included the high degree of judgment and subjectivity in management’s identification and measurement of the qualitative factors within the general reserve. This required a high degree of judgment in selecting theCompany's auditor proceduresfrom 2022 to evaluate management’s estimate of the ALL, particularly as it relates to the identification and measurement of the qualitative factors.2023.

Charlotte, North Carolina

February 22, 2023

 

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The primary procedures we performed to address this critical audit matter included:

●

We tested the design and operating effectiveness of the Company’s controls over the qualitative factors within the general reserve, including controls over the completeness and accuracy of data utilized in assessing the qualitative factors, management’s determination of the assumptions used to develop and adjust the qualitative factors, and the mathematical accuracy of the allowance calculation, including the application of the qualitative factors by loan class within the model.

●

We reconciled the loan portfolio data in the model to the Company’s core system by loan class.

●

We tested the appropriateness of management’s qualitative factors by evaluating the underlying data used to derive the qualitative factors.

●

We tested the mathematical accuracy of management’s calculation, including the mathematical application of the qualitative factors by loan class to adjust the historical loss factors.

●

We evaluated the reasonableness of the qualitative factor adjustments based on the underlying data, including the Company’s loan portfolio and economic trends.

●

We assessed relevant trends in credit quality and evaluated the relationship of the trends to the identification of relevant qualitative factors and directional consistency of the qualitative factors.

Goodwill Impairment Assessment

The Company's goodwill balance was $129.6 million at December 31, 2020.  As described in Note 1 to the consolidated financial statements, goodwill is allocated to the Company’s one reporting unit. Goodwill is tested for impairment annually, or more frequently if events or circumstances indicate there may be impairment. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or the Company elects to forego the qualitative assessment, a quantitative test is performed.  The quantitative analysis provides management with an estimated fair value of the reporting unit.  The determination of the fair value of the reporting unit requires management to make significant judgements and assumptions, including cash flows for the forecasted period, guideline public companies, the discount rate, implied control premiums, and other applicable assumptions.  

We identified the Company’s goodwill impairment assessment as a critical audit matter. Management makes estimates and assumptions at the reporting unit level regarding cash flows for the forecasted period, guideline public companies, the discount rate, and implied control premiums, which includes a high degree of judgment and subjectivity. Given these factors, auditing management’s estimates and assumptions required a higher degree of judgment and subjectivity. In addition, the extent of audit effort included the use of the firm’s internal valuation specialists to assist in evaluating the appropriateness of management’s judgments.

The primary procedures we performed to address this critical audit matter included:

●

We tested the design and operating effectiveness of controls relating to management’s goodwill impairment assessment process, including controls over management’s review of the significant inputs and assumptions utilized in determining the reporting unit fair value.

●

We evaluated the historical cash flows of the reporting unit as compared to the forecasted cash flows and assessed the reasonableness of the forecasted cash flow assumptions. We also considered evidence gathered in other areas of the audit and the potential impact that could have on the assumptions used within the calculation.

●

With the assistance of our internal valuation specialists, we evaluated the reasonableness of management’s valuation methods and primary assumptions utilized, including the discount rate and implied control premiums, in determining the reporting unit’s estimated fair value.

●

We evaluated subsequent events and transactions and considered whether they corroborated or contradicted the Company’s conclusion.

/s/ DIXON HUGHES GOODMAN LLP

We have served as the Company’s auditor since 2006.

Asheville, North Carolina

March 12, 2021

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- Management’s Assessment of Internal Control over Financial Reporting-

First Community Bankshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2020.

Dixon Hughes Goodman LLP, independent registered public accounting firm, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of  December 31, 2020. The Report of Independent Registered Public Accounting Firm which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, appears hereafter in Item 8 of this Annual Report on  Form 10-K.

 

 

Dated this 12th day of March  2021.

/s/ William P. Stafford, II		/s/ David D. Brown
William P. Stafford, II		David D. Brown
Chief Executive Officer		Chief Financial Officer

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- Report of Independent Registered Public Accounting Firm -

Board of Directors and Stockholders

First Community Bankshares, Inc. and Subsidiary

Bluefield, Virginia

 

Opinion on Internal Control Overthe Consolidated Financial Reporting

We have audited First Community Bankshares, Inc. and Subsidiary (the “Company”)'s internal control overStatementsfinancial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, First Community Bankshares, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited the accompanying consolidated statements of income, comprehensive income, changes in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statementsstockholders’ equity, and cash flows of First Community Bankshares, Inc. and Subsidiary as of December 31, 2020 and 2019 and(the “Company”) for each of the three years in the periodyear ended December 31, 2020,2021, and the related notes (collectively referred to as the “consolidated financial statements”).  In our report dated March 12, 2021, expressed an unqualified opinion, on thosethe consolidated financial statements.statements referred to above present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over

These consolidated financial reporting and for its assessmentstatements are the responsibility of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting.Company’s management.  Our responsibility is to express an opinion on the Company's internal control overCompany’s consolidated financial reportingstatements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control overthe financial reporting was maintained in allstatements are free of material respects. misstatement, whether due to error or fraud.

Our audit included obtaining an understandingperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting, assessingstatements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures include examining, on a test basis, evidence regarding the risk that a material weakness exists, testingamounts and disclosures in the financial statements.  Our audit also included evaluating the designaccounting principles used and operating effectivenesssignificant estimates made by management, as well as evaluating the overall presentation of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.financial statements.  We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations/s/ FORVIS, LLP

We served as the Company’s auditor from 2006 to 2021.

Charlotte, North Carolina

March 3, 2022

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- Management’s Assessment of Internal Control Overover Financial Reporting-

A company's

First Community Bankshares, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation ofproduce reliable financial statements for external purposes in accordanceconformity with U.S. generally accepted accounting principles. A company'sThe system of internal control over financial reporting includes those policies and procedures that (1) pertainas it relates to the maintenancefinancial statements is evaluated for effectiveness by management and tested for reliability. Any system of recordsinternal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable detail, accurately and fairly reflect the transactions and dispositionsassurance with respect to financial statement preparation.

Management conducted an assessment of the assetseffectiveness of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations,Company’s internal control over financial reporting may not prevent or detect misstatements. Also, projectionsbased on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of any evaluationSponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal control over financial reporting was effective as of December 31, 2023.

Crowe, LLP, independent registered public accounting firm, has issued a report on the effectiveness to future periods are subject toof the risk that controls may become inadequate becauseCompany’s internal control over financial reporting as of  changesDecember 31, 2023. The Report of Independent Registered Public Accounting Firm, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of   December 31, 2023, appears hereafter in conditions, or that the degreeItem 8 of compliance with the policies or procedures may deteriorate.this Annual Report on  Form 10-K.

 

/s/ DIXON HUGHES GOODMAN LLPDated this 8th day March of  2024.

 

Asheville, North Carolina 

/s/ William P. Stafford, II		/s/ David D. Brown
William P. Stafford, II		David D. Brown
Chief Executive Officer		Chief Financial Officer

March 12, 2021

 

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Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2020,2023, our disclosure controls and procedures were effective.

 

Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions about required disclosure.

 

Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.

 

Changes in Internal Control over Financial Reporting

 

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2020,2023, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Management's Report on Internal Controls over Financial Reporting

 

For additional information aboutManagement's report on the Company’sCompany's internal controls, seecontrol over financial reporting and the attestation report of Crowe, LLP,  the Company's independent registered public accounting firm, on internal control over financial reportings are under the headings “Management's Assessment of Internal Control over Financial Reporting,” and “Report of Independent Registered Public Accounting Firm,” in Item 8 of this report.report and are incorporated in this Item 9A by reference.

 

Item 9B.

Other Information.

 

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

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

 

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PART III

  

Item 10.	Directors, Executive Officers and Corporate Governance.

 Board of Directors, First Community Bankshares, Inc.

C. William Davis Attorney at Law, Richardson & Davis, PLLC Samuel L. Elmore Retired Chief Credit Officer and Senior Vice President, First Community Bank; Past Executive Vice President, Citizens Southern Bank, Inc.; Past President and Chief Executive Officer, Bank One; Past Vice President, Key Centurion Bancshares; Past President and Chief Operations Officer, Beckley National Bank; Director, Raleigh County Commission on Aging Richard S. Johnson Chairman, President, and Chief Executive Officer, The Wilton Companies; Director and Past Chairman, City of Richmond Economic Development Authority; Trustee Emeritus, University of Richmond		Gary R. Mills President, First Community Bankshares, Inc.; Chief Executive Officer and President, First Community Bank M. Adam Sarver Member/Co-Manager, Main Street Builders, LLC, Eastern Door & Glass, LLC, Longview Properties LLC, and Clover Leaf Properties, LLC William P. Stafford, II Chief Executive Officer, First Community Bankshares, Inc.; Attorney at Law, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC Harriet B. Price Chief Financial Officer, Price-Williams Realty, Inc.
Executive Officers, First Community Bankshares, Inc
William P. Stafford, II Chief Executive Officer Gary R. Mills President Sarah W. Harmon General Counsel and Secretary		David D. Brown Chief Financial Officer Jason R. Belcher Chief Operating Officer
Board of Directors, First Community Bank
James H. Atkinson, Jr. Retired Chief Executive Officer, Peoples Bank of Virginia Robert L. Buzzo Retired Vice President and Secretary, First Community Bankshares, Inc.; Retired President Emeritus, First Community Bank Samuel D. Campbell Attorney at Law C. William Davis (See above) Samuel L. Elmore (See above) S. Michael Feola Retired Senior Vice President – Regional President, First Community Bank T. Vernon Foster President of J. La’Verne Print Communications; Past Director, TriStone Community Bank; Executive Director: MBA Programs, Career Management & Public Relations, University of Louisville, College of Business		Richard H. Jarrell Chick-fil-A Franchise Owner; Director, Raleigh General Hospital Board of Trustees; Director, Beckley-Raleigh County Chamber of Commerce; Director, United Way of Southwest Virginia; Director, Raleigh County Board of Education Richard S. Johnson (See above) Gary R. Mills (See above) M. Adam Sarver (See above) William P. Stafford, II (See above) Frank C. Tinder President, Tinder Enterprises, Inc. and Tinco Leasing Corporation; Realtor, Premier Realty

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Additional Information

 

Additional information required in this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 202123, 2024, (“20212024 Annual Meeting”) under the headings “Proposal 1: Election of Directors, 2021,” “Nominees“Director Nominees for the Class of 2023,2026,” “Incumbent Directors,” “Non-Director Named Executive Officers,” “Corporate Governance,and "Other Key Officers," and under the captions “Board Committees,” and “Delinquent Section 16(a) Reports.” 

 

Our Standards of Conduct apply to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Standards of Conduct is available on the Investor Relations section of our website at www.firstcommunitybank.com. There have been no waivers of the Standards of Conduct for any officer.

 

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since the disclosure in our Proxy Statement filed with the SEC on April 28, 2020.13, 2023.

 

Item 11.

Executive Compensation.

 

The information required in this item is incorporated by reference to our Proxy Statement for the 20212024 Annual Meeting under the headingscaption, “Board Committees,” and under the headings, “Compensation Discussion and Analysis,” “Director Compensation,” and “Director Compensation.”"Pay Ratio Disclosure."

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table provides information about compensation plans under which our equity securities are authorized for issuance as of December 31, 2020:2023: 

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3)				Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3)
		(a)				(b)				(c)				(a)				(b)				(c)
Equity compensation plans approved by security holders(1)			57,438			$	19.59				218,266				262,522			$	33.55				876,901
Equity compensation plans not approved by security holders(2)			56,841				19.54				—				32,735			$	23.58				—
Total			114,279								218,266				295,257								876,901

 

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(1) Includes the 20122022 Omnibus Equity Compensation Plan and 20042012 Omnibus Stock OptionEquity Compensation Plan

(2) Includes the 2001 Directors' Option Plan and 1999 Stock Option Plan

(3) Shares are available for future issuance under the 20122022 Omnibus Equity Compensation Plan.

 

Additional information required in this item is incorporated by reference to our Proxy Statement for the 20212024 Annual Meeting under the headingcaption “Information on Stock Ownership.”

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

The information required in this item is incorporated by reference to our Proxy Statement for the 20212024 Annual Meeting under the headings “Corporate Governance”caption “Independence of Directors” and “Related Person/Party Transactions.”

 

Item 14.

Principal Accounting Fees and Services.

 

The Independent Registered Public Accounting Firm is Crowe LLP (PCAOB Firm ID No.173 ) located in Washington, District of Columbia.  The information required inby this item is incorporated by reference to our Proxy Statement for the 20212023 Annual Meeting under the heading, “Independent"Independent Registered Public Accounting Firm.”Firm".

 

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PART IV

 

Item 15.

Exhibits, Financial Statement Schedules.

 

(a)	Documents Filed as Part of this Report

 

(1)

Financial Statements

 

The financial statements required in this item are incorporated by reference to Item 8, “Financial Statements and Supplementary Data,” in Part II of this report.

 

(2)

Financial Statement Schedules

 

The schedules required in this item are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes.

 

(3)

Exhibits

 

Exhibit No.

Exhibit

2.1	Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018

2.2	Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc.,Surrey Bancorp, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019November 18, 2022

3.1	Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018

3.2	Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018

4.1	Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018
4.2	Form of First Community Bankshares, Inc. Common Stock Certificate

10.1.1**

First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000

10.1.2**	Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004
10.1.7**	First Community Bankshares Executive Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 of the current Report on Form 8-K filed May 31, 2022

10.2**

First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002

10.3**

First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002

10.4**

First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan, incorporated by reference to Annex B of the Definitive Proxy Statement on Form DEF 14A dated April 27, 2004, filed on March 15, 2004

10.5**

First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004

10.6**

First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012

10.7**

First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013

10.8**

First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000

10.9.1**

First Community Bancshares,Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009.

10.9.2**

Amendment #1 to the First Community Bancshares,Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010

10.9.3**

Amendment #2 to the First Community Bancshares,Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013

10.9.4**

Amendment #3 to the First Community Bancshares,Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016

10.9.5**	Amendment #4 to the First Community Bancshares,Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.9.6**	Amendment #5 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.9.6 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.9.7**	Amendment #6 to the First Community Bankshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.9.7 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.

 

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10.10**

Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006

10.11.1**

First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017

10.11.2**

Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017

10.12.1**

First Community Bancshares,Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016

10.12.2**

Amendment #2 to the First Community Bancshares,Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016

10.12.3**	Amendment #3 to the First Community Bankshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.12.3 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.12.4**	Amendment #4 to the First Community Bankshares, Inc Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.12.4 of the Annual Report on Form 10-K for the period ended December 31, 2021, filed on March 3, 2022.
10.13**	Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015

10.15**

Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015

10.16**

Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015

10.17**	First Community Bankshares, Inc. 2022 Omnibus Equity Compensation Plan incorporated by reference to Exhibit 99.a of the Definitive Proxy Statement on Form DEF 14A dated April 26, 2022, filed on March 16, 2022.
21*	Subsidiaries of the Registrant

23*23.1*

Consent of Crowe, LLP Independent Registered Public Accounting Firm for First Community Bankshares, Inc.

23.2*	Consent of Elliott Davis, LLC former Independent Registered Public Accounting Firm for First Community Bankshares, Inc.
23.3*	Consent of FORVIS, LLP former Independent Registered Public Accounting Firm for First Community Bankshares, Inc.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

97.1	First Community Bankshares, Inc. Compensation Recoupment Policy
101***	Inline interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 20202023 and 2019;2022; (ii) Consolidated Statements of Income for the years ended December 31, 2020, 2019,2023, 2022, and 2018;2021; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019,2023, 2022, and 2018;2021; (iv) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, 2019,2023, 2022, and 2018;2021; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019,2023, 2022, and 2018;2021; and (vi) Notes to Consolidated Financial Statements
104	The cover page of First Community Bankshares, Inc. Annual Report on Form 10-K/A10-K for the year ended December 31, 2020,2023, formatted in Inline XBRL (included within the Exhibit 101 attachments).

 

*	Filed herewith

**

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

***	Submitted electronically herewith

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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 12th8th day of March, 2021.March,2024.

 

First Community Bankshares, Inc.

(Registrant)

 

By:	/s/ William P. Stafford, II		By:	/s/ David D. Brown
	William P. Stafford, II			David D. Brown
	Chief Executive Officer (Principal Executive Officer)			Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ William P. Stafford, II		Chairman and Chief Executive Officer and Director		March 12, 20218, 2024
William P. Stafford, II
/s/ David D. Brown		Chief Financial Officer		March 12, 20218, 2024
David D. Brown
/s/ C. William Davis		Director		March 12, 2021
C. William Davis
/s/ Richard S. Johnson		Director		March 12, 2021
Richard S. Johnson
/s/ Gary R. Mills		President and Director		March 12, 20218, 2024
Gary R. Mills
/s/ M. Adam SarverC. William Davis		Director		March 12, 20218, 2024
M. Adam Sarver
/s/ Samuel L. Elmore		Director		March 12, 2021
Samuel L. Elmor C. William Davis
/s/ Harriet B. PriceSamuel L. Elmore		Director		March 12, 20218, 2024
Samuel L. Elmore
/s/ Richard S. Johnson		Director		March 8, 2024
Richard S. Johnson
/s/ Harriet B. Price		Director		March 8, 2024
Harriet B. Price
/s/ M. Adam Sarver		Director		March 8, 2024
M. Adam Sarver
/s/ Beth A. Taylor		Director		March 8, 2024
Beth A. Taylor

 

 

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