Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the ~~Company~~’sCompany’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:

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

~~FIRST COMMUNITY BANCSHARES, INC.~~
~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

(Amounts in thousands)

Net income
$ 7,652 $ 6,383 $ 20,272 $ 18,722
Other comprehensive income, before tax

Available-for-sale securities:

Change in net unrealized (losses) gains on securities without other-than-temporary impairment
(169 ) 744 2,127 4,141
Reclassification adjustment for net losses recognized in net income
- (25 ) 657 53
Reclassification adjustment for other-than-temporary impairment losses recognized in net income
- 4,635 - 4,646
Net unrealized (losses) gains on available-for-sale securities
(169 ) 5,354 2,784 8,840
Employee benefit plans:

Net actuarial (loss) gain
(1 ) (2 ) 133 (56 )
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income
65 69 194 205
Net unrealized gains on employee benefit plans
64 67 327 149
Other comprehensive (loss) income, before tax
(105 ) 5,421 3,111 8,989
Income tax (benefit) expense
(39 ) 2,034 1,167 3,372
Other comprehensive (loss) income, net of tax
(66 ) 3,387 1,944 5,617
Total comprehensive income
$ 7,586 $ 9,770 $ 22,216 $ 24,339

~~See Notes to Consolidated Financial Statements.~~

~~Table of Contents~~

~~FIRST COMMUNITY BANCSHARES, INC.~~

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

THREE MONTHS ENDED

September 30, 2020 and 2019

Accumulated

Additional

Other

Preferred

Common

Paid-in

Retained

Treasury

Comprehensive

(Amounts in thousands,

Stock

Stock

Capital

Earnings

Stock

Income (Loss)

Total

except share and per share data)

Balance January 1, 2016
$ - $ 21,382 $ 227,692 $ 155,647 $ (56,457 ) $ (5,247 ) $ 343,017
Net income
- - - 18,722 - - 18,722
Other comprehensive income
- - - - - 5,617 5,617
Common dividends declared -- $0.44 per share
- - - (7,680 ) - - (7,680 )
Equity-based compensation expense
- - 144 - - - 144
Common stock options exercised -- 11,730 shares
- - (23 ) - 205 - 182
Restricted stock awards -- 15,587 shares
- - 26 - 270 - 296
Issuance of treasury stock to 401(k) plan -- 16,290 shares
- - 45 - 287 - 332
Purchase of treasury shares -- 1,152,776 shares at $20.00 per share
- - - - (23,094 ) - (23,094 )
Balance September 30, 2016
$ - $ 21,382 $ 227,884 $ 166,689 $ (78,789 ) $ 370 $ 337,536
��
Balance January 1, 2017
$ - $ 21,382 $ 228,142 $ 170,377 $ (78,833 ) $ (2,011 ) $ 339,057
Net income
- - - 20,272 - - 20,272
Other comprehensive income
- - - - - 1,944 1,944
Common dividends declared -- $0.50 per share
- - - (8,504 ) - - (8,504 )
Equity-based compensation expense
- - 290 - - - 290
Common stock options exercised -- 8,036 shares
- - 6 - 145 - 151
Restricted stock awards -- 21,542 shares
- - (40 ) - 387 - 347
Issuance of treasury stock to 401(k) plan -- 12,834 shares
- - 112 - 231 - 343
Purchase of treasury shares -- 50,118 shares at $25.16 per share
- - - - (1,263 ) - (1,263 )
Balance September 30, 2017
$ - $ 21,382 $ 228,510 $ 182,145 $ (79,333 ) $ (67 ) $ 352,637

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

Balance July 1, 2019	$	-	$	15,633		$	109,816		$	208,618		$	(381	)	$	333,686
Net income		-		-			-			9,156			-			9,156
Other comprehensive income		-		-			-			-			76			76
Common dividends declared -- $0.25 per share		-		-			-			(3,908	)		-			(3,908	)
Equity-based compensation expense		-		0			216			-			-			216
Common stock options exercised -- 3,407 shares		-		4			37			-			-			41
Issuance of common stock to 401(k) plan -- 3,010 shares		-		4			95			-			-			99
Repurchase of common shares -- 60,500 shares at $33.11 per share		-		(61	)		(1,942	)		-			-			(2,003	)
Balance September 30, 2019	$	-	$	15,580		$	108,222		$	213,866		$	(305	)	$	337,363

Balance July 1, 2020	$	-	$	17,710		$	172,601		$	226,627		$	(1,108	)	$	415,830
Net income		-		-			-			8,266			-			8,266
Other comprehensive income		-		-			-			-			(136	)		(136	)
Common dividends declared -- $0.25 per share		-		-			-			(4,429	)		-			(4,429	)
Equity-based compensation expense		-		1			262			-			-			263
Issuance of common stock to 401(k) plan -- 6,237 shares		-		6			117			-			-			123
Balance September 30, 2020	$	0	$	17,717		$	172,980		$	230,464		$	(1,244	)	$	419,917

See Notes to Condensed Consolidated Financial Statements.

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~~FIRST COMMUNITY BANCSHARES, INC.~~
CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
nine MONTHS ENDED
September 30, 2020 and 2019

Nine Months Ended

September 30,

(Amounts in thousands)

2017

2016

Operating activities

Net income
$ 20,272 $ 18,722
Adjustments to reconcile net income to net cash provided by operating activities

Provision for loan losses
2,156 755
Depreciation and amortization of property, plant, and equipment
2,688 2,707
Amortization of premiums on investments, net
63 2,758
Amortization of FDIC indemnification asset, net
3,186 3,856
Amortization of intangible assets
790 871
Accretion on acquired loans
(4,257 ) (3,893 )
Gain on divestiture, net
- (3,065 )
Equity-based compensation expense
290 144
Restricted stock awards
347 296
Issuance of treasury stock to 401(k) plan
343 332
Loss on sale of property, plant, and equipment, net
13 271
Loss on sale of other real estate
940 1,487
Loss on sale of securities
657 53
Net impairment losses recognized in earnings
- 4,646
Decrease in accrued interest receivable
397 509
(Increase) decrease in other operating activities
(2,008 ) 4,341
Net cash provided by operating activities
25,877 34,790
Investing activities

Proceeds from sale of securities available for sale
12,273 70,530
Proceeds from maturities, prepayments, and calls of securities available for sale
18,022 77,395
Proceeds from maturities and calls of securities held to maturity
21,840 190
Payments to acquire securities available for sale
(36,966 ) (1,174 )
Proceeds from (originations of) loans, net
17,304 (138,984 )
Proceeds from (payments for) FHLB stock, net
694 (933 )
Cash proceeds from mergers, acquisitions, and divestitures, net
- 24,816
Proceeds from the FDIC
1,701 3,639
Payments to acquire property, plant, and equipment, net
(1,999 ) (448 )
Proceeds from sale of other real estate
2,130 4,541
Net cash provided by investing activities
34,999 39,572
Financing activities

Increase in noninterest-bearing deposits, net
25,235 28,322
Decrease in interest-bearing deposits, net
(2,753 ) (62,819 )
Repayments of securities sold under agreements to repurchase, net
(14,222 ) (20,082 )
(Repayments of) proceeds from FHLB and other borrowings, net
(30,708 ) 24,951
Proceeds from stock options exercised
151 182
Payments for repurchase of treasury stock
(1,263 ) (23,094 )
Payments of common dividends
(8,504 ) (7,680 )
Net cash used in financing activities
(32,064 ) (60,220 )
Net increase in cash and cash equivalents
28,812 14,142
Cash and cash equivalents at beginning of period
76,307 51,787
Cash and cash equivalents at end of period
$ 105,119 $ 65,929

Supplemental disclosure -- cash flow information

Cash paid for interest
$ 6,257 $ 7,394
Cash paid for income taxes
12,942 6,488

Supplemental transactions -- noncash items

Transfer of loans to other real estate
1,282 3,652
Loans originated to finance other real estate
- 42

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

Balance January 1, 2019	$	0	$	16,007		$	122,486		$	195,793		$	(1,429	)	$	332,857
Net income		-		-			-			29,238			-			29,238
Other comprehensive income		-		-			-			-			1,124			1,124
Common dividends declared -- $0.71 per share		-		-			-			(11,165	)		-			(11,165	)
Equity-based compensation expense		-		42			1,180			-			-			1,222
Common stock options exercised -- 7,752 shares		-		8			116			-			-			124
Issuance of common stock to 401(k) plan -- 9,663 shares		-		10			315			-			-			325
Repurchase of common shares -- 487,400 shares at $33.57 per share		-		(487	)		(15,875	)		-			-			(16,362	)
Balance September 30, 2019	$	-	$	15,580		$	108,222		$	213,866		$	(305	)	$	337,363

Balance January 1, 2020	$	-	$	18,377		$	192,413		$	219,535		$	(1,506	)	$	428,819
Net income		-		-			-			24,376			-			24,376
Other comprehensive income		-		-			-			-			262			262
Common dividends declared -- $0.75 per share		-		-			-			(13,447	)		-			(13,447	)
Equity-based compensation expense		-		57			1,311			-			-			1,368
Issuance of common stock to 401(k) plan -- 18,148 shares		-		18			393			-			-			411
Repurchase of common shares -- 734,653 shares at $29.77 per share		0		(735	)		(21,137	)		0			0			(21,872	)
Balance September 30, 2020	$	0	$	17,717		$	172,980		$	230,464		$	(1,244	)	$	419,917

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	*Nine Months Ended*
	*September 30,*
(Amounts in thousands)	*2020*			*2019*
Operating activities
Net income	$	24,376		$	29,238
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		12,034			3,480
Depreciation and amortization of premises and equipment		3,328			2,491
Amortization of premiums on investments, net		1,387			171
Amortization of FDIC indemnification asset, net		1,352			1,787
Amortization of intangible assets		1,086			746
Accretion on acquired loans		(5,221	)		(2,720	)
Equity-based compensation expense		1,368			1,222
Issuance of common stock to 401(k) plan		411			325
Loss (gain) on sale of premises and equipment, net		9			(104	)
Loss on sale of other real estate owned		299			791
(Gain) Loss on sale of securities		(385	)		43
(Increase) decrease in accrued interest receivable		(2,474	)		639
(Increase) decrease in other operating activities		(5,542	)		1,527
Net cash provided by operating activities		32,028			39,636
Investing activities
Proceeds from sale of securities available for sale		51,027			13,897
Proceeds from maturities, prepayments, and calls of securities available for sale		29,614			29,555
Proceeds from maturities and calls of securities held to maturity		0			25,000
Payments to acquire securities available for sale		(2,553	)		(4,453	)
(Originations of) proceeds from repayment of loans, net		(78,663	)		78,036
(Purchase of) proceeds from FHLB stock, net		(12	)		129
Payments to the FDIC		(67	)		(137	)
Proceeds from sale of premises and equipment		1,435			1,038
Payments to acquire premises and equipment		(2,474	)		(6,225	)
Proceeds from sale of other real estate owned		1,997			2,917
Net cash provided by investing activities		304			139,757
Financing activities
Increase in noninterest-bearing deposits, net		122,409			12,928
Increase (decrease) in interest-bearing deposits, net		39,918			(31,826	)
Repayments of securities sold under agreements to repurchase, net		(645	)		(27,507	)
Repayments of FHLB and other borrowings, net		(40	)		0
Proceeds from stock options exercised		0			124
Payments for repurchase of common stock		(21,872	)		(16,362	)
Payments of common dividends		(13,447	)		(11,165	)
Net cash provided by (used in) financing activities		126,323			(73,808	)
Net increase in cash and cash equivalents		158,655			105,585
Cash and cash equivalents at beginning of period		217,009			76,873
Cash and cash equivalents at end of period	$	375,664		$	182,458

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

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

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO ~~CONDENSED~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

General

First Community ~~Bancshares,~~Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of ~~Nevada~~the Commonwealth of Virginia in ~~1997.~~2018. The Company’s is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank ~~provides insurance services through its wholly owned subsidiary First Community Insurance Services (“FCIS”) and~~ offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community ~~Bancshares,~~Bankshares, Inc. and its subsidiaries as a consolidated entity.

Principles of Consolidation

The ~~Company~~’sCompany’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, and insurance services.~~management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

~~The condensed consolidated balance sheet as of~~ ~~December 31, 2016, has been derived from the audited consolidated financial statements.~~ These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form ~~10-K~~10-K for the year ended December 31, ~~2016~~2019 (the ~~“2016~~“2019 Form ~~10-K”~~10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March ~~3, 2017.~~13, 2020. The condensed consolidated balance sheet as of December 31, 2019, has been derived from the audited consolidated financial statements.

Reclassifications

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

Use of Estimates

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

Significant Accounting Policies

~~A complete and detailed description of the Company~~’sThe Company’s significant accounting policies isare included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s ~~2016~~2019 Form ~~10-K.~~10-K.

Risks and Uncertainties

Recent COVID-19 Virus Developments –

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

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Company Response to COVID-19 –

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

•

Implemented its board-approved pandemic business continuity plan

•

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

•

Modified branch operations:

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

Most transactions conducted via drive-throughs

Increased emphasis on digital banking platforms

•

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

•

Expanded paid time off and health benefits for employees

•

Implemented work from home strategy 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

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 September 30, 2020, the Company has modified or deferred payments on a total of 3,362 loans totaling $426.45 million in principal. As of September 30, 2020, commercial and consumer loans currently in deferral decreased to $102.54 million and $13.09 million, respectively. Included in the September 30, 2020 deferral amounts are re-deferrals for approximately $69.32 million commercial loans and approximately $5.09 million in consumer mortgage and installment loans. Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.

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

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

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

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

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

Recent Accounting Standards

Standards Adopted in 2020

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

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

Standards Not Yet Adopted

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” This ASU removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The update should be applied prospectively. The Company early adopted ASU 2017-04 in the first quarter of 2017. The adoption of the standard did not have an effect on the Company’s financial statements.

~~Table of Contents~~

~~In January 2017,~~ June 2016, the FASB issued ASU ~~2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments~~ ~~– Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22,~~ 2016 and November 17, 2016 EITF Meetings.” This ASU requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. The Company adopted ASU 2017-03 in the first quarter of 2017. The adoption of the standard resulted in enhanced disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on the Company’s financial statements and disclosures. See “Standards Not Yet Adopted” below.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance eliminates additional paid-in capital pools for equity-based awards and requires that the related income tax effects of awards be recognized in the income statement. The guidance also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The Company adopted ASU 2016-09 in the first quarter of 2017 on a prospective basis and elected to account for forfeitures of share-based awards as they occur. Excess tax benefits on share-based awards in the statements of cash flows in prior periods have not been adjusted. The adoption of the standard did not have a material effect on the Company’s financial statements.

~~Standards Not Yet Adopted~~

~~In August 2017, the FASB~~ issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU intends to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of hedge accounting guidance. ASU 2017-12 will be effective for the Company for fiscal years beginning after December 15, 2018.The Company expects to adopt ASU 2017-12 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2017-09 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Securities.” This ASU amends the amortization period for certain purchased callable debt securities held at a premium. ASU 2017-08 will be effective for the Company for fiscal years beginning after December 15, 2018. The Company expects to adopt ASU 2017-08 in the first quarter of 2019. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. ASU 2017-07 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2017-07 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

~~In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This ASU requires that a statement of cash flows explain~~s the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for the Company for fiscal years beginning after December 15, 2017. The Company expects to adopt ASU 2016-18 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

~~Table of Contents~~

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted. The update should be applied on a retrospective basis, if practicable. The Company expects to adopt ASU 2016-15 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect the guidance to have a material effect on its financial statements.

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

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for ~~the Company for~~fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019, with early~~2020. Early adoption is permitted, including adoption in any interim period for ~~fiscal years beginning after December 15, 2018.~~which financial statements have not yet been issued. The ~~Company expects to adopt ASU 2016-13 in the first quarter of 2020 and recognize a cumulative adjustment to retained earnings as of the beginning of the year of adoption. The Company~~update is ~~evaluating the impact of the standard.~~

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. ASU 2016-02 will be effective for the Company for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt ASU 2016-02 in the first quarter of 2019. The Company leases certain banking offices under lease agreements it classifies as operating leases. The Company is evaluating the impact of the standard and expects an increase in assets and liabilities; however, the Company does not ~~expect the guidance~~ expected to have aany material effect on ~~its~~the Company’s financial statements.

~~In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10):~~ ~~Recognition and Measurement~~

Table of Financial Assets and Financial Liabilities.” This ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The new guidance also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 will be effective for the Company for fiscal years beginning after December 15, 2017, with early adoption permitted for the instrument-specific credit risk provision. The Company expects to adopt ASU 2016-01 in the first quarter of 2018. The Company is evaluating the impact of the standard and does not expect to recognize a significant cumulative effect adjustment to retained earnings at the beginning of the year of adoption or expect the guidance to have a material effect on its financial statements. The cumulative-effect adjustment will be dependent on the composition and fair value of the Company’s equity securities portfolio at the adoption date.

~~In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU~~’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” deferring the effective date of ASU 2014-09 for the Company until fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. Additional revenue related standards to be adopted concurrently with ASU 2014-09 include ASU 2017-10, ASU 2017-05, ASU 2016-20, ASU 2016-12, ASU 2016-10, and ASU 2016-08. The Company expects to adopt ASU 2014-09, and related updates, in the first quarter of 2018 and recognize a cumulative adjustment to retained earnings as of the beginning of the year of adoption, if necessary. The Company’s primary source of revenue is interest income, which is excluded from the scope of this guidance; however, the Company is evaluating the impact of the standard on other income, which includes fees for services, commissions on sales, and various deposit service charges. The Company does not expect the guidance to have a material effect on its financial statements.

Contents

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

Note 2. Acquisitions

Highlands Bankshares, Inc.

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

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

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

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

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

Explanation of fair value adjustments:

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

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

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

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

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

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

Comparative and Pro Forma Financial Information for Acquisitions

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

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

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

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

Note 23. ~~Investment~~ 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:

	September 30, 2017									*September 30, 2020*
	Amortized		Unrealized		Unrealized			Fair		*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	Cost		Gains		Losses			Value		*Cost*		*Gains*		*Losses*			*Value*
(Amounts in thousands)
U.S. Treasury securities	$	36,973	$	-	$	(9	)	$	36,964
U.S. Agency securities		1,254		21		-			1,275	$	576	$	0	$	(4	)	$	572
Municipal securities		102,347		2,648		(88	)		104,907		55,036		631		0			55,667
Single issue trust preferred securities		9,363		-		(401	)		8,962
Mortgage-backed Agency securities		22,518		72		(347	)		22,243		33,776		999		(42	)		34,733
Equity securities		55		18		-			73
Total securities available for sale	$	172,510	$	2,759	$	(845	)	$	174,424
Total										$	89,388	$	1,630	$	(46	)	$	90,972

	December 31, 2016									December 31, 2019
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
(Amounts in thousands)
U.S. Agency securities	$	1,342	$	3	$	-		$	1,345	$	5,038	$	0	$	(4	)	$	5,034
Municipal securities		111,659		2,258		(586	)		113,331		85,992		886		0			86,878
Single issue trust preferred securities		22,104		-		(2,165	)		19,939
Mortgage-backed Agency securities		31,290		66		(465	)		30,891		77,448		380		(166	)		77,662
Equity securities		55		18		-			73
Total securities available for sale	$	166,450	$	2,345	$	(3,216	)	$	165,579
Total										$	168,478	$	1,266	$	(170	)	$	169,574

The ~~following tables present the amortized cost and fair value of held-to-maturity securities, including gross unrealized gains and losses, as of the dates indicated:~~

September 30, 2017

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(Amounts in thousands)

U.S. Agency securities
$ 17,949 $ 31 $ - $ 17,980
Corporate securities
7,233 13 - 7,246
Total securities held to maturity
$ 25,182 $ 44 $ - $ 25,226

December 31, 2016

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(Amounts in thousands)

U.S. Agency securities
$ 36,741 $ 124 $ - $ 36,865
Corporate securities
10,392 11 (2 ) 10,401
Total securities held to maturity
$ 47,133 $ 135 $ (2 ) $ 47,266

~~Table of Contents~~

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

	September 30, 2017				*September 30, 2020*
	Amortized				*Amortized*
(Amounts in thousands)	Cost		Fair Value		*Cost*		*Fair Value*
Available-for-sale securities
Available-for-sale debt securities
Due within one year	$	37,288	$	37,279	$	0	$	0
Due after one year but within five years		5,617		5,734		28,495		28,749
Due after five years but within ten years		96,693		98,602		27,117		27,490
Due after ten years		10,339		10,493		0		0
		149,937		152,108		55,612		56,239
Mortgage-backed securities		22,518		22,243		33,776		34,733
Equity securities		55		73
Total securities available for sale	$	172,510	$	174,424

Held-to-maturity securities
Due within one year	$	-	$	-
Due after one year but within five years		25,182		25,226
Due after five years but within ten years		-		-
Due after ten years		-		-
Total securities held to maturity	$	25,182	$	25,226
Total debt securities available for sale					$	89,388	$	90,972

Table of Contents

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

	September 30, 2017															*September 30, 2020*
	Less than 12 Months					12 Months or Longer					Total					*Less than 12 Months*					*12 Months or Longer*					*Total*
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*
	Value		Losses			Value		Losses			Value		Losses			*Value*		*Losses*			*Value*		*Losses*			*Value*		*Losses*
(Amounts in thousands)
U.S. Treasury securities	$	36,963	$	(9	)	$	-	$	-		$	36,963	$	(9	)
Municipal securities		9,421		(52	)		1,427		(36	)		10,848		(88	)
Single issue trust preferred securities		-		-			8,962		(401	)		8,962		(401	)
U.S. Agency securities																$	0	$	0		$	565	$	(4	)	$	565	$	(4	)
Mortgage-backed Agency securities		7,898		(59	)		8,281		(288	)		16,179		(347	)		3,405		(42	)		0		0			3,405		(42	)
Total	$	54,282	$	(120	)	$	18,670	$	(725	)	$	72,952	$	(845	)	$	3,405	$	(42	)	$	565	$	(4	)	$	3,970	$	(46	)

December 31, 2016

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

(Amounts in thousands)

Municipal securities
$ 24,252 $ (527 ) $ 715 $ (59 ) $ 24,967 $ (586 )
Single issue trust preferred securities
- - 19,939 (2,165 ) 19,939 (2,165 )
Mortgage-backed Agency securities
12,834 (166 ) 11,851 (299 ) 24,685 (465 )
Total
$ 37,086 $ (693 ) $ 32,505 $ (2,523 ) $ 69,591 $ (3,216 )

~~Table of Contents~~

	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	)
Mortgage-backed Agency securities		8,020		(48	)		8,319		(118	)		16,339		(166	)
Total	$	8,995	$	(52	)	$	8,319	$	(118	)	$	17,314	$	(170	)

There were ~~no unrealized losses for held-to-maturity securities as of~~ September 30, 2017. The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the date indicated:

T~~here were 45~~3 individual debt securities in an unrealized loss position as of September 30, ~~2017,~~2020, and ~~their~~the combined depreciation in value represented ~~0.42%~~0.05% of the ~~investment~~debt securities portfolio. There were 8217 individual debt securities in an unrealized loss position as of December 31, ~~2016,~~2019, and their combined depreciation in value represented ~~1.51%~~0.10% of the ~~investment~~debt securities portfolio.

The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for ~~both~~ debt ~~and equity~~ securities is a decline in fair value below book value and the severity and duration of the decline. ~~For debt securities, the~~The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the ~~three and~~ nine months ended September 30, ~~2017,~~2020 and 2019, the Company incurred no0 OTTI charges on debt securities. During the three and nine months ended September 30, 2016, the Company incurred OTTI charges on debt securities owned of $4.64 million related to the Company’s change in intent to hold certain securities to recovery. The intent was changed to sell specific trust preferred securities in the Company’s investment portfolio primarily to reduce credit concentrations with two issuers. 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. For equity securities, the OTTI is recognized as a charge to noninterest income. During the three and nine months ended September 30, 2017, the Company incurred no OTTI charges related to equity securities. During the three months ended September 30, 2016, the Company incurred no OTTI charges related to equity holdings. During the nine months ended September 30, 2016, the Company incurred OTTI charges related to certain equity holdings of $11 thousand.

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

	Three Months Ended					Nine Months Ended						*Three Months Ended*				*Nine Months Ended*
	September 30,					September 30,						*September 30,*				*September 30,*
	2017		2016			2017			2016			*2020*		*2019*		*2020*			*2019*
(Amounts in thousands)
Gross realized gains	$	-	$	203		$	-		$	344		$	0		0	$	419		$	67
Gross realized losses		-		(178	)		(657	)		(397	)		0		0		(34	)		(110	)
Net gain (loss) on sale of securities	$	-	$	25		$	(657	)	$	(53	)
Net Gain (Loss) on sale of securities												$	0	$	0	$	385		$	(43	)

The carrying amount of securities pledged for various purposes totaled ~~$99.69~~$36.17 million as of September 30, ~~2017,~~2020, and ~~$139.75~~$27.87 million as of December 31, ~~2016.~~2019.

Note 34. Loans

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are those loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled ~~$1.45~~$1.67 million as of September 30, ~~2017,~~2020, and ~~$1.41~~$2.20 million as of December 31, ~~2016.~~2019. Deferred loan fees, net of loan costs, totaled ~~$4.48~~$7.47 million as of September 30, ~~2017,~~2020, and ~~$5.34~~$4.60 million as of December 31, ~~2016.~~2019. For information about off-balance sheet financing, see Note ~~14,~~15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

Table of Contents

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

	September 30, 2017					December 31, 2016					*September 30, 2020*					*December 31, 2019*
(Amounts in thousands)	Amount		Percent			Amount		Percent			*Amount*		*Percent*			*Amount*		*Percent*
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	72,952		3.97	%	$	56,948		3.07	%	$	46,785		2.13	%	$	48,659		2.30	%
Commercial and industrial		90,184		4.91	%		92,204		4.98	%		179,714		8.19	%		142,962		6.76	%
Multi-family residential		125,997		6.86	%		134,228		7.24	%		105,647		4.81	%		121,840		5.76	%
Single family non-owner occupied		143,213		7.79	%		142,965		7.72	%		189,265		8.62	%		163,181		7.72	%
Non-farm, non-residential		613,380		33.38	%		598,674		32.31	%		748,815		34.11	%		727,261		34.39	%
Agricultural		6,096		0.33	%		6,003		0.32	%		10,362		0.47	%		11,756		0.56	%
Farmland		27,897		1.52	%		31,729		1.71	%		22,973		1.05	%		23,155		1.10	%
Total commercial loans		1,079,719		58.76	%		1,062,751		57.35	%		1,303,561		59.38	%		1,238,814		58.59	%
Consumer real estate loans
Home equity lines		102,888		5.60	%		106,361		5.74	%		94,056		4.29	%		110,078		5.21	%
Single family owner occupied		501,242		27.27	%		500,891		27.03	%		644,598		29.37	%		620,697		29.35	%
Owner occupied construction		47,034		2.56	%		44,535		2.41	%		17,460		0.79	%		17,241		0.82	%
Total consumer real estate loans		651,164		35.43	%		651,787		35.18	%		756,114		34.45	%		748,016		35.38	%
Consumer and other loans
Consumer loans		70,695		3.85	%		77,445		4.18	%		118,738		5.41	%		110,027		5.20	%
Other		4,856		0.26	%		3,971		0.21	%		5,838		0.27	%		4,742		0.22	%
Total consumer and other loans		75,551		4.11	%		81,416		4.39	%		124,576		5.68	%		114,769		5.42	%
Total non-covered loans		1,806,434		98.30	%		1,795,954		96.92	%		2,184,251		99.51	%		2,101,599		99.39	%
Total covered loans		31,287		1.70	%		56,994		3.08	%		10,744		0.49	%		12,861		0.61	%
Total loans held for investment, net of unearned income	$	1,837,721		100.00	%	$	1,852,948		100.00	%	$	2,194,995		100.00	%	$	2,114,460		100.00	%

Loans held for sale											$	0				$	263

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

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

	September 30, 2017		December 31, 2016		*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)
Covered loans
Commercial loans
Construction, development, and other land	$	40	$	4,570	$	27	$	28
Commercial and industrial		-		895
Multi-family residential		-		8
Single family non-owner occupied		292		962		188		199
Non-farm, non-residential		10		7,512		0		3
Agricultural		-		25
Farmland		-		397
Total commercial loans		342		14,369		215		230
Consumer real estate loans
Home equity lines		26,850		35,817		8,079		9,853
Single family owner occupied		4,095		6,729		2,450		2,778
Total consumer real estate loans		30,945		42,546		10,529		12,631
Consumer and other loans
Consumer loans		-		79
Total covered loans	$	31,287	$	56,994	$	10,744	$	12,861

Table of Contents

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

~~Table of Contents~~

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

									*September 30, 2020*				*December 31, 2019*
	September 30, 2017				December 31, 2016						*Unpaid Principal*				*Unpaid Principal*
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		*Recorded Investment*		*Balance*		*Recorded Investment*		*Balance*
PCI Loans, by acquisition
Peoples	$	5,179	$	8,328	$	5,576	$	9,397	$	0	$	0	$	5,071	$	6,431
Waccamaw		14,903		34,420		21,758		45,030		0		0		2,708		14,277
Highlands										43,527		53,295		53,116		64,096
Other acquired		1,011		1,037		1,095		1,121		0		0		352		378
Total PCI Loans	$	21,093	$	43,785	$	28,429	$	55,548	$	43,527	$	53,295	$	61,247	$	85,182

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

	Peoples			Waccamaw			Total			*Peoples*			*Waccamaw*			*Highlands*			*Total*
(Amounts in thousands)
Balance January 1, 2016	$	3,589		$	26,109		$	29,698
Balance January 1, 2019										$	2,590		$	14,639		$	0		$	17,229
Accretion											(734	)		(2,761	)		0			(3,495	)
Reclassifications (to) from nonaccretable difference⁽¹⁾											14			1,200			0			1,214
Other changes, net											167			141			0			308
Balance September 30, 2019										$	2,037		$	13,219		$	0		$	15,256

Balance January 1, 2020										$	1,890		$	12,574		$	8,152		$	22,616
Accretion		(982	)		(4,408	)		(5,390	)		0			0			(1,952	)		(1,952	)
Reclassifications from nonaccretable difference⁽¹⁾		231			848			1,079			0			0			0			0
Other changes, net		1,774			4			1,778			(1,890	)		(12,574	)		0			(14,464	)
Balance September 30, 2016	$	4,612		$	22,553		$	27,165

Balance January 1, 2017	$	4,392		$	21,834		$	26,226
Accretion		(969	)		(4,690	)		(5,659	)
Reclassifications from nonaccretable difference⁽¹⁾		782			2,525			3,307
Other changes, net		(375	)		(311	)		(686	)
Balance September 30, 2017	$	3,830		$	19,358		$	23,188

(1) Represents changes attributable to expected loss assumptions
Balance September 30, 2020										$	0		$	0		$	6,200		$	6,200

(1) Represents changes attributable to expected loss assumptions

Note 45. 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.

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~~’smanagement’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 ~~principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary~~events outside the normal course of business to meet 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 ~~inherent~~are so severe that collection or liquidation in ~~substandard loans; however,~~full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the ~~weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the~~ amount of loss cannot yet be determined.

●

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

Table of Contents

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

	September 30, 2017												*September 30, 2020*
			Special												*Special*
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total		*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Non-covered loans
Commercial loans
Construction, development, and other land	$	69,257	$	2,791	$	904	$	-	$	-	$	72,952	$	35,889	$	8,419	$	2,477	$	0	$	0	$	46,785
Commercial and industrial		85,368		1,844		2,972		-		-		90,184		153,153		19,369		7,192		0		0		179,714
Multi-family residential		119,399		5,882		716		-		-		125,997		81,528		20,937		3,182		0		0		105,647
Single family non-owner occupied		132,000		6,839		4,374		-		-		143,213		143,235		32,649		13,368		13		0		189,265
Non-farm, non-residential		593,809		11,126		8,243		202		-		613,380		507,094		201,975		39,746		0		0		748,815
Agricultural		5,743		235		118		-		-		6,096		6,804		3,216		342		0		0		10,362
Farmland		25,097		153		2,647		-		-		27,897		13,281		5,139		4,553		0		0		22,973
Consumer real estate loans																								-
Home equity lines		100,375		850		1,663		-		-		102,888		89,729		1,317		3,010		0		0		94,056
Single family owner occupied		471,378		5,705		24,159		-		-		501,242		607,616		3,815		33,167		0		0		644,598
Owner occupied construction		46,802		-		232		-		-		47,034		16,684		202		574		0		0		17,460
Consumer and other loans																								-
Consumer loans		70,459		27		209		-		-		70,695		116,786		197		1,755		0		0		118,738
Other		4,856		-		-		-		-		4,856		5,838		0		0		0		0		5,838
Total non-covered loans		1,724,543		35,452		46,237		202		-		1,806,434		1,777,637		297,235		109,366		13		0		2,184,251
Covered loans
Commercial loans
Construction, development, and other land		-		39		1		-		-		40		0		27		0		0		0		27
Single family non-owner occupied		271		-		21		-		-		292		155		33		0		0		0		188
Non-farm, non-residential		-		-		10		-		-		10
Consumer real estate loans																								-
Home equity lines		12,242		13,840		768		-		-		26,850		7,365		386		328		0		0		8,079
Single family owner occupied		3,136		425		534		-		-		4,095		1,832		269		349		0		0		2,450
Total covered loans		15,649		14,304		1,334		-		-		31,287		9,352		715		677		0		0		10,744
Total loans	$	1,740,192	$	49,756	$	47,571	$	202	$	-	$	1,837,721	$	1,786,989	$	297,950	$	110,043	$	13	$	0	$	2,194,995

Table of Contents

December 31, 2016

Special

(Amounts in thousands)

Pass

Mention

Substandard

Doubtful

Loss

Total

Non-covered loans

Commercial loans

Construction, development, and other land
$ 55,188 $ 980 $ 780 $ - $ - $ 56,948
Commercial and industrial
87,581 3,483 1,137 - 3 92,204
Multi-family residential
126,468 6,992 768 - - 134,228
Single family non-owner occupied
131,934 5,466 5,565 - - 142,965
Non-farm, non-residential
579,134 10,236 9,102 202 - 598,674
Agricultural
5,839 164 - - - 6,003
Farmland
28,887 1,223 1,619 - - 31,729
Consumer real estate loans

Home equity lines
104,033 871 1,457 - - 106,361
Single family owner occupied
475,402 4,636 20,381 472 - 500,891
Owner occupied construction
43,833 - 702 - - 44,535
Consumer and other loans

Consumer loans
77,218 11 216 - - 77,445
Other
3,971 - - - - 3,971
Total non-covered loans
1,719,488 34,062 41,727 674 3 1,795,954
Covered loans

Commercial loans

Construction, development, and other land
2,768 803 999 - - 4,570
Commercial and industrial
882 - 13 - - 895
Multi-family residential
- - 8 - - 8
Single family non-owner occupied
796 63 103 - - 962
Non-farm, non-residential
6,423 537 552 - - 7,512
Agricultural
25 - - - - 25
Farmland
132 - 265 - - 397
Consumer real estate loans

Home equity lines
14,283 20,763 771 - - 35,817
Single family owner occupied
4,601 928 1,200 - - 6,729
Consumer and other loans

Consumer loans
79 - - - - 79
Total covered loans
29,989 23,094 3,911 - - 56,994
Total loans
$ 1,749,477 $ 57,156 $ 45,638 $ 674 $ 3 $ 1,852,948

	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

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

Table of Contents

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

	September 30, 2017						December 31, 2016						*September 30, 2020*						*December 31, 2019*
			Unpaid						Unpaid						*Unpaid*						*Unpaid*
	Recorded		Principal		Related		Recorded		Principal		Related		*Recorded*		*Principal*		*Related*		*Recorded*		*Principal*		*Related*
(Amounts in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance		*Investment*		*Balance*		*Allowance*		*Investment*		*Balance*		*Allowance*
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land	$	662	$	999	$	-	$	33	$	35	$	-	$	869	$	1,097	$	-	$	552	$	768	$	-
Commercial and industrial		146		1,093		-		346		383		-		3,242		3,302		-		576		599		-
Multi-family residential		381		836		-		294		369		-		923		1,009		-		1,254		1,661		-
Single family non-owner occupied		2,485		3,891		-		3,084		3,334		-		5,011		5,663		-		2,652		3,176		-
Non-farm, non-residential		3,905		6,239		-		3,829		4,534		-		7,712		8,362		-		4,158		4,762		-
Agricultural		118		122		-		-		-		-		267		275		-		158		164		-
Farmland		990		1,037		-		1,161		1,188		-		1,517		1,591		-		1,437		1,500		-
Consumer real estate loans
Home equity lines		1,624		1,766		-		913		968		-		1,540		1,697		-		1,372		1,477		-
Single family owner occupied		16,768		18,932		-		11,779		12,630		-		16,100		18,467		-		15,588		17,835		-
Owner occupied construction		233		233		-		573		589		-		503		511		-		648		648		-
Consumer and other loans
Consumer loans		61		63		-		62		103		-		413		424		-		290		294		-
Total impaired loans with no allowance		27,373		35,211		-		22,074		24,133		-		38,097		42,398		-		28,685		32,884		-

Impaired loans with a related allowance
Commercial loans
Construction, development, and other land		-		-		-		-		-		-
Commercial and industrial		2,400		2,400		262		-		-		-		0		0		0		0		0		0
Multi-family residential														944		1,278		222		0		0		0
Single family non-owner occupied		771		772		69		351		351		31		0		0		0		0		0		0
Non-farm, non-residential		865		874		325		-		-		-		1,779		1,970		565		1,241		1,227		292
Farmland		410		418		50		430		430		18		0		0		0		0		0		0
Consumer real estate loans
Home equity lines		-		-		-		-		-		-		0		0		0		0		0		0
Single family owner occupied		3,771		3,779		754		4,118		4,174		770		1,418		1,522		239		1,246		1,246		353
Consumer and other loans
Consumer loans														0		0		0		0		0		0
Total impaired loans with an allowance		8,217		8,243		1,460		4,899		4,955		819		4,141		4,770		1,026		2,487		2,473		645
Total impaired loans⁽¹⁾	$	35,590	$	43,454	$	1,460	$	26,973	$	29,088	$	819	$	42,238	$	47,168	$	1,026	$	31,172	$	35,357	$	645

(1)

~~(1)~~

~~Includes~~Total recorded investment of impaired loans include loans totaling ~~$20.07~~$33.48 million as of September 30, ~~2017,~~2020, and ~~$16.89~~$24.64 million as of December 31, ~~2016,~~2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for ~~impairment~~impairment.

Table of Contents

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

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(Amounts in thousands)

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Impaired loans with no related allowance:

Commercial loans

Construction, development, and other land
$ 32 $ 907 $ 22 $ 600 $ 32 $ 309 $ 22 $ 447
Commercial and industrial
5 754 6 1,029 8 468 10 738
Multi-family residential
- 509 15 562 3 474 15 309
Single family non-owner occupied
11 3,304 91 3,498 88 3,313 107 3,035
Non-farm, non-residential
68 5,244 65 8,930 93 3,766 307 10,186
Agricultural
4 127 - - 4 127 - -
Farmland
17 1,003 5 204 17 1,004 9 186
Consumer real estate loans

Home equity lines
15 1,683 6 1,157 35 1,259 21 1,318
Single family owner occupied
137 17,478 91 13,175 317 15,209 254 12,436
Owner occupied construction
1 235 2 585 6 234 7 470
Consumer and other loans

Consumer loans
1 62 2 63 3 52 2 45
Total impaired loans with no related allowance
291 31,306 305 29,803 606 26,215 754 29,170

Impaired loans with a related allowance:

Commercial loans

Construction, development, and other land
- - - - - 143 - -
Commercial and industrial
50 2,516 - - 103 1,727 - -
Single family non-owner occupied
8 778 5 682 21 488 18 572
Non-farm, non-residential
- 872 45 4,658 15 964 215 5,108
Farmland
- 413 - - - 275 - -
Consumer real estate loans

Home equity lines
- - - - - 139 - -
Single family owner occupied
24 3,814 24 4,130 92 4,527 91 4,547
Owner occupied construction
- - - - - 1 - 115
Total impaired loans with a related allowance
82 8,393 74 9,470 231 8,264 324 10,342
Total impaired loans
$ 373 $ 39,699 $ 379 $ 39,273 $ 837 $ 34,479 $ 1,078 $ 39,512

~~The following tables provide information on impaired PCI loan pools as of and for the dates indicated:~~

September 30, 2017

December 31, 2016

(Amounts in thousands, except impaired loan pools)

Unpaid principal balance
$ - $ 1,086
Recorded investment
- 1,085
Allowance for loan losses related to PCI loan pools
- 12

Impaired PCI loan pools
- 1

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(Amounts in thousands)

Interest income recognized
$ - $ 12 $ 20 $ 130
Average recorded investment
- 1,139 705 2,195

	*Three Months Ended September 30,*									*Nine Months Ended September 30,*
	*2020*				*2019*					*2020*				*2019*
			*Average*					*Average*				*Average*				*Average*
	*Interest Income*		*Recorded*		*Interest Income*			*Recorded*		*Interest Income*		*Recorded*		*Interest Income*		*Recorded*
(Amounts in thousands)	*Recognized*		*Investment*		*Recognized*			*Investment*		*Recognized*		*Investment*		*Recognized*		*Investment*
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	6	$	882	$	5		$	570	$	21	$	1,021	$	17	$	720
Commercial and industrial		46		3,315		2			66		135		2,845		7		277
Multi-family residential		9		967		5			1,269		38		685		21		1,385
Single family non-owner occupied		54		5,090		41			2,958		126		4,798		97		3,063
Non-farm, non-residential		79		7,786		20			4,590		206		7,115		84		4,832
Agricultural		4		272		9			223		7		247		11		108
Farmland		12		1,526		19			1,536		48		1,640		45		1,474
Consumer real estate loans
Home equity lines		13		1,588		17			1,463		29		1,569		31		1,452
Single family owner occupied		120		16,328		176			16,593		410		17,044		454		16,123
Owner occupied construction		2		542		3			224		12		470		7		223
Consumer and other loans
Consumer loans		8		420		6			319		19		445		10		187
Total impaired loans with no related allowance		353		38,716		303			29,811		1,051		37,879		784		29,844

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		0		0		0			0		0		0		0		0
Commercial and industrial		0		0		0			0		0		0		0		0
Multi-family residential		0		944		0			0		0		943		0		0
Single family non-owner occupied		0		0		0			0		0		0		0		0
Non-farm, non-residential		8		1,789		20			1,254		22		1,670		28		602
Farmland		0		0		0			0		0		0		0		0
Consumer real estate loans
Home equity lines		0		0		0			0		0		0		0		0
Single family owner occupied		3		1,423		(30	)		1,253		27		1,480		35		2,177
Owner occupied construction		0		0		0			0		0		0		0		0
Total impaired loans with a related allowance		11		4,156		(10	)		2,507		49		4,093		63		2,779
Total impaired loans	$	364	$	42,872	$	293		$	32,318	$	1,100	$	41,972	$	847	$	32,623

Table of Contents

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

	September 30, 2017						December 31, 2016						*September 30, 2020*						*December 31, 2019*
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total		*Non-covered*		*Covered*		*Total*		*Non-covered*		*Covered*		*Total*
Commercial loans
Construction, development, and other land	$	126	$	-	$	126	$	72	$	32	$	104	$	285	$	0	$	285	$	211	$	0	$	211
Commercial and industrial		118		-		118		332		13		345		1,765		0		1,765		530		0		530
Multi-family residential		330		-		330		294		-		294		1,536		0		1,536		1,144		0		1,144
Single family non-owner occupied		1,626		20		1,646		1,242		24		1,266		3,289		0		3,289		1,286		0		1,286
Non-farm, non-residential		3,352		-		3,352		3,295		30		3,325		6,612		0		6,612		3,400		0		3,400
Agricultural		118		-		118		-		-		-		267		0		267		158		0		158
Farmland		870		-		870		1,591		-		1,591		814		0		814		713		0		713
Consumer real estate loans
Home equity lines		828		350		1,178		705		400		1,105		951		313		1,264		753		220		973
Single family owner occupied		11,517		50		11,567		7,924		109		8,033		8,012		20		8,032		7,259		24		7,283
Owner occupied construction		-		-		-		336		-		336		536		0		536		428		0		428
Consumer and other loans
Consumer loans		57		-		57		63		-		63		357		0		357		231		0		231
Total nonaccrual loans	$	18,942	$	420	$	19,362	$	15,854	$	608	$	16,462	$	24,424	$	333	$	24,757	$	16,113	$	244	$	16,357

Table of Contents

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. ~~There were no non-covered~~Non-covered accruing loans contractually past due 90 days or more totaled $43 thousand as of September 30, ~~2017, or~~ 2020, compared to $144 thousand as of December 31, ~~2016.~~2019.

	September 30, 2017												*September 30, 2020*
	30 - 59 Days		60 - 89 Days		90+ Days		Total		Current		Total		*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*
(Amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans		Loans		*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*
Non-covered loans
Commercial loans
Construction, development, and other land	$	25	$	-	$	-	$	25	$	72,927	$	72,952		$ -		$ -		$ 285		$ 285		$ 46,500		$ 46,785
Commercial and industrial		226		36		47		309		89,875		90,184		1,280		163		1,061		2,504		177,210		179,714
Multi-family residential		341		185		-		526		125,471		125,997		810		334		1,202		2,346		103,301		105,647
Single family non-owner occupied		405		186		861		1,452		141,761		143,213		842		636		2,255		3,733		185,532		189,265
Non-farm, non-residential		523		17		2,623		3,163		610,217		613,380		608		1,856		3,619		6,083		742,732		748,815
Agricultural		6		-		-		6		6,090		6,096		1		16		84		101		10,261		10,362
Farmland		849		410		343		1,602		26,295		27,897		125		0		737		862		22,111		22,973
Consumer real estate loans
Home equity lines		242		105		298		645		102,243		102,888		509		248		443		1,200		92,856		94,056
Single family owner occupied		3,133		1,414		6,199		10,746		490,496		501,242		2,894		1,286		3,533		7,713		636,885		644,598
Owner occupied construction		330		-		-		330		46,704		47,034		71		91		394		556		16,904		17,460
Consumer and other loans
Consumer loans		360		62		38		460		70,235		70,695		1,679		436		187		2,302		116,436		118,738
Other		-		-		-		-		4,856		4,856		-		-		-		-		5,838		5,838
Total non-covered loans		6,440		2,415		10,409		19,264		1,787,170		1,806,434		8,819		5,066		13,800		27,685		2,156,566		2,184,251
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		40		40		0		0		0		0		27		27
Single family non-owner occupied		72		-		-		72		220		292		0		0		0		0		188		188
Non-farm, non-residential		-		-		-		-		10		10		0		0		0		0		0		0
Consumer real estate loans
Home equity lines		291		-		118		409		26,441		26,850		123		0		263		386		7,693		8,079
Single family owner occupied		-		-		28		28		4,067		4,095		20		0		0		20		2,430		2,450
Total covered loans		363		-		146		509		30,778		31,287		143		0		263		406		10,338		10,744
Total loans	$	6,803	$	2,415	$	10,555	$	19,773	$	1,817,948	$	1,837,721		$ 8,962		$ 5,066		$ 14,063		$ 28,091		$ 2,166,904		$ 2,194,995

Table of Contents

December 31, 2016

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
$ 33 $ 5 $ 17 $ 55 $ 56,893 $ 56,948
Commercial and industrial
174 30 149 353 91,851 92,204
Multi-family residential
163 - 281 444 133,784 134,228
Single family non-owner occupied
1,302 159 835 2,296 140,669 142,965
Non-farm, non-residential
1,235 332 2,169 3,736 594,938 598,674
Agricultural
- 5 - 5 5,998 6,003
Farmland
224 343 565 1,132 30,597 31,729
Consumer real estate loans

Home equity lines
78 136 658 872 105,489 106,361
Single family owner occupied
4,777 2,408 3,311 10,496 490,395 500,891
Owner occupied construction
342 336 - 678 43,857 44,535
Consumer and other loans

Consumer loans
371 90 15 476 76,969 77,445
Other
- - - - 3,971 3,971
Total non-covered loans
8,699 3,844 8,000 20,543 1,775,411 1,795,954
Covered loans

Commercial loans

Construction, development, and other land
434 - 32 466 4,104 4,570
Commercial and industrial
- - - - 895 895
Multi-family residential
- - - - 8 8
Single family non-owner occupied
24 - - 24 938 962
Non-farm, non-residential
32 - - 32 7,480 7,512
Agricultural
- - - - 25 25
Farmland
- - - - 397 397
Consumer real estate loans

Home equity lines
108 146 62 316 35,501 35,817
Single family owner occupied
58 - 39 97 6,632 6,729
Owner occupied construction
- - - - - -
Consumer and other loans

Consumer loans
- - - - 79 79
Total covered loans
656 146 133 935 56,059 56,994
Total loans
$ 9,355 $ 3,990 $ 8,133 $ 21,478 $ 1,831,470 $ 1,852,948

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

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of ~~$250~~$500 thousand are evaluated for a specific reserve based on either the collateral or ~~net present value~~cash flow method, whichever is most applicable. Restructured loans under ~~$250~~$500 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain ~~troubled~~trouble debt restructurings ~~(“TDRs”~~("TDRs") are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally not considered TDRs as long as the loans remain in the assigned loan pool. No covered loans were recorded as TDRs as of September 30, ~~2017,~~2020, or December 31, ~~2016.~~2019.

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

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

Table of Contents

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

		September 30, 2017						December 31, 2016						*September 30, 2020*						*December 31, 2019*
(Amounts in thousands)	(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total		*Nonaccrual(1)*		*Accruing*		*Total*		*Nonaccrual(1)*		*Accruing*		*Total*
Commercial loans	Commercial loans
Construction, development, and other land														$	0	$	0	$	0	$	0	$	0	$	0
Commercial and industrial															0		1,342		1,342		0		0		0
Single family non-owner occupied	Single family non-owner occupied	$	33	$	875	$	908	$	38	$	892	$	930		538		1,274		1,812		552		595		1,147
Non-farm, non-residential	Non-farm, non-residential		-		295		295		-		4,160		4,160		0		2,419		2,419		0		307		307
Consumer real estate loans	Consumer real estate loans
Home equity lines	Home equity lines		-		148		148		-		158		158		0		81		81		0		115		115
Single family owner occupied	Single family owner occupied		1,484		6,690		8,174		905		7,503		8,408		1,535		5,573		7,108		1,790		5,305		7,095
Owner occupied construction	Owner occupied construction		-		234		234		341		239		580		0		217		217		0		221		221
Consumer and other loans
Consumer loans															0		30		30		0		32		32
Total TDRs	Total TDRs	$	1,517	$	8,242	$	9,759	$	1,284	$	12,952	$	14,236	$	2,073	$	10,936	$	13,009	$	2,342	$	6,575	$	8,917

Allowance for loan losses related to TDRs	Allowance for loan losses related to TDRs					$	707					$	670					$	347					$	353

~~(1)~~(1)

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

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

		Three Months Ended September 30,				Nine Months Ended September 30,				*Three Months Ended September 30,*				*Nine Months Ended September 30,*
		2017		2016		2017		2016		*2020*		*2019*		*2020*		*2019*
(Amounts in thousands)	(Amounts in thousands)
Interest income recognized	Interest income recognized	$	74	$	143	$	159	$	296	$	122	$	56	$	372	$	203

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods ~~indicated. The post-modification recorded investment represents the loan balance immediately following modification.~~indicated:

													*Three Months Ended September 30,*
													*2020*						*2019*
	Three Months Ended September 30,																*Post-modification*						*Post-modification*
	2017						2016						*Total*		*Pre-modification*		*Recorded*		*Total*		*Pre-modification*		*Recorded*
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment		*Contracts*		*Recorded Investment*		*Investment(1)*		*Contracts*		*Recorded Investment*		*Investment(1)*
Below market interest rate and extended payment term
Single family non-owner occupied														-		-		-		0		0		0
Single family owner occupied		1	$	42	$	42		-	$	-	$	-								0		0		0
Total below market interest rate and extended payment term														-		-		-		0		0		0
Payment deferral
Commercial and industrial														0		0		0		-		-		-
Non-farm, non-residential														0		0		0		-		-		-
Single family owner occupied														0		0		0		1		33		29
Total principal deferral														0		0		0		1		33		29
Total		1	$	42	$	42		-	$	-	$	-		0	$	0	$	0		1	$	33	$	29

Nine Months Ended September 30,

2017

2016

(Amounts in thousands)

Total Contracts

Pre-modification
Recorded Investment

Post-modification
Recorded Investment

Total Contracts

Pre-modification
Recorded Investment

Post-modification
Recorded Investment

Below market interest rate and extended payment term

Single family owner occupied
3 $ 141 $ 141 1 $ 115 $ 115
Total
3 $ 141 $ 141 1 $ 115 $ 115

(1)	Represents the loan balance immediately following modification

Table of Contents

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

(1)	Represents the loan balance immediately following modification

~~There~~ ~~were no payment~~

Payment defaults on loans modified as TDRs ~~that were~~ restructured within the previous 12 months as of September 30, ~~2017 or 2016.~~

~~Table~~2020, were for one loan in the amount of ~~Contents~~

$100 thousand; there were none in 2019.

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

September 30, 2017

December 31, 2016

(Amounts in thousands)

Non-covered OREO
$ 3,543 $ 5,109
Covered OREO
54 276
Total OREO
$ 3,597 $ 5,385

Non-covered OREO secured by residential real estate
$ 971 $ 1,746
Residential real estate loans in the foreclosure process⁽¹⁾
10,025 2,539

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

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

(1)
~~(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 56. Allowance for Loan Losses

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

Three Months Ended September 30, 2017

(Amounts in thousands)

Commercial

Consumer Real
Estate

Consumer and
Other

Total
Allowance

Allowance, excluding PCI

Beginning balance
$ 12,283 $ 5,802 $ 793 $ 18,878
Provision for loan losses charged to operations
358 75 305 738
Charge-offs
(207 ) (137 ) (373 ) (717 )
Recoveries
170 67 70 307
Net charge-offs
(37 ) (70 ) (303 ) (410 )
Ending balance
$ 12,604 $ 5,807 $ 795 $ 19,206

PCI allowance

Beginning balance
$ - $ 8 $ - $ 8
Recovery of loan losses
- (8 ) - (8 )
Benefit attributable to the FDIC indemnification asset
- - - -
Recovery of loan losses charged to operations
- (8 ) - (8 )
Recovery of loan losses recorded through the FDIC indemnification asset
- - - -
Ending balance
$ - $ - $ - $ -

Total allowance

Beginning balance
$ 12,283 $ 5,810 $ 793 $ 18,886
Provision for loan losses
358 67 305 730
Benefit attributable to the FDIC indemnification asset
- - - -
Provision for loan losses charged to operations
358 67 305 730
Recovery of loan losses recorded through the FDIC indemnification asset
- - - -
Charge-offs
(207 ) (137 ) (373 ) (717 )
Recoveries
170 67 70 307
Net charge-offs
(37 ) (70 ) (303 ) (410 )
Ending balance
$ 12,604 $ 5,807 $ 795 $ 19,206

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

Table of Contents

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

Three Months Ended September 30, 2016

(Amounts in thousands)

Commercial

Consumer Real Estate

Consumer and Other

Total Allowance

Allowance, excluding PCI

Beginning balance
$ 13,689 $ 6,625 $ 773 $ 21,087
(Recovery of) provision for loan losses charged to operations
(726 ) (575 ) 147 (1,154 )
Charge-offs
(272 ) (207 ) (293 ) (772 )
Recoveries
295 89 76 460
Net recoveries (charge-offs)
23 (118 ) (217 ) (312 )
Ending balance
$ 12,986 $ 5,932 $ 703 $ 19,621

PCI allowance

Beginning balance
$ - $ 12 $ - $ 12
Recovery of loan losses
- - - -
Benefit attributable to the FDIC indemnification asset
- - - -
Recovery of loan losses charged to operations
- - - -
Recovery of loan losses recorded through the FDIC indemnification asset
- - - -
Ending balance
$ - $ 12 $ - $ 12

Total allowance

Beginning balance
$ 13,689 $ 6,637 $ 773 $ 21,099
(Recovery of) provision for loan losses
(726 ) (575 ) 147 (1,154 )
Benefit attributable to the FDIC indemnification asset
- - - -
(Recovery of) provision for loan losses charged to operations
(726 ) (575 ) 147 (1,154 )
Recovery of loan losses recorded through the FDIC indemnification asset
- - - -
Charge-offs
(272 ) (207 ) (293 ) (772 )
Recoveries
295 89 76 460
Net recoveries (charge-offs)
23 (118 ) (217 ) (312 )
Ending balance
$ 12,986 $ 5,944 $ 703 $ 19,633

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

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

Table of Contents

Nine Months Ended September 30, 2017

(Amounts in thousands)

Commercial

Consumer Real Estate

Consumer and Other

Total Allowance

Allowance, excluding PCI

Beginning balance
$ 11,690 $ 5,487 $ 759 $ 17,936
Provision for loan losses charged to operations
822 561 785 2,168
Charge-offs
(493 ) (535 ) (948 ) (1,976 )
Recoveries
585 294 199 1,078
Net recoveries (charge-offs)
92 (241 ) (749 ) (898 )
Ending balance
$ 12,604 $ 5,807 $ 795 $ 19,206

PCI allowance

Beginning balance
$ - $ 12 $ - $ 12
Recovery of loan losses
- (12 ) - (12 )
Benefit attributable to the FDIC indemnification asset
- - - -
Recovery of loan losses charged to operations
- (12 ) - (12 )
Recovery of loan losses recorded through the FDIC indemnification asset
- - - -
Ending balance
$ - $ - $ - $ -

Total allowance

Beginning balance
$ 11,690 $ 5,499 $ 759 $ 17,948
Provision for loan losses
822 549 785 2,156
Benefit attributable to the FDIC indemnification asset
- - - -
Provision for loan losses charged to operations
822 549 785 2,156
Recovery of loan losses recorded through the FDIC indemnification asset
- - - -
Charge-offs
(493 ) (535 ) (948 ) (1,976 )
Recoveries
585 294 199 1,078
Net recoveries (charge-offs)
92 (241 ) (749 ) (898 )
Ending balance
$ 12,604 $ 5,807 $ 795 $ 19,206

~~Table of Contents~~

Nine Months Ended September 30, 2016

(Amounts in thousands)

Commercial

Consumer Real Estate

Consumer and Other

Total Allowance

Allowance, excluding PCI

Beginning balance
$ 13,133 $ 6,356 $ 690 $ 20,179
(Recovery of) provision for loan losses charged to operations
(200 ) 436 560 796
Charge-offs
(747 ) (1,135 ) (809 ) (2,691 )
Recoveries
800 275 262 1,337
Net recoveries (charge-offs)
53 (860 ) (547 ) (1,354 )
Ending balance
$ 12,986 $ 5,932 $ 703 $ 19,621

PCI allowance

Beginning balance
$ - $ 54 $ - $ 54
Recovery of loan losses
- (42 ) - (42 )
Benefit attributable to the FDIC indemnification asset
- 1 - 1
Recovery of loan losses charged to operations
- (41 ) - (41 )
Recovery of loan losses recorded through the FDIC indemnification asset
- (1 ) - (1 )
Ending balance
$ - $ 12 $ - $ 12

Total allowance

Beginning balance
$ 13,133 $ 6,410 $ 690 $ 20,233
(Recovery of) provision for loan losses
(200 ) 394 560 754
Benefit attributable to the FDIC indemnification asset
- 1 - 1
(Recovery of) provision for loan losses charged to operations
(200 ) 395 560 755
Recovery of loan losses recorded through the FDIC indemnification asset
- (1 ) - (1 )
Charge-offs
(747 ) (1,135 ) (809 ) (2,691 )
Recoveries
800 275 262 1,337
Net recoveries (charge-offs)
53 (860 ) (547 ) (1,354 )
Ending balance
$ 12,986 $ 5,944 $ 703 $ 19,633

~~Table of Contents~~

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

									*September 30, 2020*
									*Loans Individually*		*Allowance for Loans*		*Loans Collectively*		*Allowance for Loans*
	September 30, 2017								*Evaluated for*		*Individually*		*Evaluated for*		*Collectively*
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		*Impairment*		*Evaluated*		*Impairment*		*Evaluated*
Commercial loans
Construction, development, and other land	$	-	$	-	$	72,293	$	1,099	$	0	$	0	$	45,517	$	630
Commercial and industrial		2,400		262		87,782		478		767		0		177,396		1,102
Multi-family residential		254		-		125,743		1,133		944		222		103,087		1,299
Single family non-owner occupied		1,103		69		140,150		2,308		1,054		0		183,088		1,974
Non-farm, non-residential		2,561		325		606,773		6,706		3,774		565		726,741		9,360
Agricultural		-		-		6,096		44		0		0		10,341		174
Farmland		940		50		26,957		130		0		0		19,940		225
Total commercial loans		7,258		706		1,065,794		11,898		6,539		787		1,266,110		14,764
Consumer real estate loans
Home equity lines		-		-		116,468		825		0		0		101,276		871
Single family owner occupied		8,259		754		496,264		3,852		2,259		239		634,021		7,815
Owner occupied construction		-		-		47,034		376		0		0		17,460		194
Total consumer real estate loans		8,259		754		659,766		5,053		2,259		239		752,757		8,880
Consumer and other loans
Consumer loans		-		-		70,695		795		0		0		117,965		2,607
Other		-		-		4,856		-		0		0		5,838		0
Total consumer and other loans		-		-		75,551		795		0		0		123,803		2,607
Total loans, excluding PCI loans	$	15,517	$	1,460	$	1,801,111	$	17,746	$	8,798	$	1,026	$	2,142,670	$	26,251

									December 31, 2019
									Loans Individually		Allowance for Loans		Loans Collectively		Allowance for Loans
	December 31, 2016								Evaluated for		Individually		Evaluated for		Collectively
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		*Impairment*		*Evaluated*		*Impairment*		*Evaluated*
Commercial loans
Construction, development, and other land	$	-	$	-	$	60,281	$	889	$	0	$	0	$	30,334	$	245
Commercial and industrial		-		-		93,099		495		0		0		95,659		699
Multi-family residential		281		-		133,947		1,157		944		0		98,201		969
Single family non-owner occupied		1,910		31		139,711		2,721		0		0		128,520		1,323
Non-farm, non-residential		1,454		-		600,915		6,185		2,575		292		591,520		6,361
Agricultural		-		-		6,028		43		0		0		9,458		145
Farmland		981		18		31,145		151		0		0		16,146		201
Total commercial loans		4,626		49		1,065,126		11,641		3,519		292		969,838		9,943
Consumer real estate loans
Home equity lines		-		-		122,000		895		0		0		91,999		673
Single family owner occupied		5,120		770		501,617		3,594		3,016		353		490,712		5,175
Owner occupied construction		336		-		44,199		228		0		0		16,144		124
Total consumer real estate loans		5,456		770		667,816		4,717		3,016		353		598,855		5,972
Consumer and other loans
Consumer loans		-		-		77,524		759		0		0		99,199		1,865
Other		-		-		3,971		-		0		0		4,742		0
Total consumer and other loans		-		-		81,495		759		0		0		103,941		1,865
Total loans, excluding PCI loans	$	10,082	$	819	$	1,814,437	$	17,117	$	6,535	$	645	$	1,672,634	$	17,780

Table of Contents

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

										*September 30, 2020*				*December 31, 2019*
												*Allowance for Loan*				*Allowance for Loan*
		September 30, 2017				December 31, 2016				*Recorded*		*Pools With*		*Recorded*		*Pools With*
(Amounts in thousands)	(Amounts in thousands)	Recorded Investment		Allowance for Loan Pools With Impairment		Recorded Investment		Allowance for Loan Pools With Impairment		*Investment*		*Impairment*		*Investment*		*Impairment*
Commercial loans	Commercial loans
Waccamaw commercial	Waccamaw commercial	$	452	$	-	$	260	$	-	$	0	$	0	$	0	$	0
Peoples commercial	Peoples commercial		4,159		-		4,491		-		0		0		4,371		0
Highlands:
1-4 family, senior-commercial											5,311		0		4,564		0
Construction & land development											1,295		0		1,956		0
Farmland and other agricultural											3,054		0		3,722		0
Multifamily											1,616		0		1,663		0
Commercial real estate											18,300		0		21,710		0
Commercial and industrial											1,551		0		2,829		0
Other	Other		1,011		-		1,095		-		0		0		352		0
Total commercial loans	Total commercial loans		5,622		-		5,846		-		31,127		0		41,167		0
Consumer real estate loans	Consumer real estate loans
Waccamaw serviced home equity lines	Waccamaw serviced home equity lines		13,270		-		20,178		-		0		0		2,121		0
Waccamaw residential	Waccamaw residential		1,181		-		1,320		-		0		0		587		0
Highlands:											-		-		-		-
1-4 family, junior and HELOCS											859		0		2,157		0
1-4 family, senior-consumer											10,768		0		13,174		0
Consumer											773		0		1,341		0
Peoples residential	Peoples residential		1,020		-		1,085		12		0		0		700		0
Total consumer real estate loans	Total consumer real estate loans		15,471		-		22,583		12		12,400		0		20,080		0
Total PCI loans	Total PCI loans	$	21,093	$	-	$	28,429	$	12	$	43,527	$	0	$	61,247	$	0

Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of September 30, ~~2017.~~2020.

Note 67. FDIC Indemnification Asset

In connection with the ~~FDIC-assisted~~FDIC-assisted acquisition of Waccamaw Bank in 2012, the Company entered into loss share agreements with the FDIC that covered $31.29 million of loans and $54 thousand of OREO as of September 30, 2017, compared to $56.99 million of loans and $276 thousand of OREO as of December 31, 2016. Under the loss share agreements,in which the FDIC agrees to cover 80% of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to ~~these~~those covered assets. Loss share coverage for commercial loans expired June 30, 2017, ~~for commercial loans,~~ with recoveries ~~continuing until~~ ending June 30, ~~2019.~~ 2020. Loss share coverage on single family loans will expire June 30, ~~2022, for single family loans.~~ 2022. The Company’s condensed ~~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 ~~during~~and total covered loans and OREO for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(Amounts in thousands)

Beginning balance
$ 8,159 $ 16,431 $ 12,173 $ 20,844
Decrease in estimated losses on covered loans
- - - (1 )
Increase in estimated losses on covered OREO
4 277 71 851
Reimbursable expenses from the FDIC
47 60 108 134
Net amortization
(268 ) (1,369 ) (3,186 ) (3,856 )
Reimbursements from the FDIC
(477 ) (1,067 ) (1,701 ) (3,640 )
Ending balance
$ 7,465 $ 14,332 $ 7,465 $ 14,332

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2020*			*2019*			*2020*			*2019*
(Amounts in thousands)
Beginning balance	$	1,943		$	4,020		$	2,883		$	5,108
Reimbursable expenses to the FDIC		0			0			0			0
Net amortization		(383	)		(719	)		(1,352	)		(1,787	)
Payments to the FDIC		38			157			67			137
Ending balance	$	1,598		$	3,458		$	1,598		$	3,458

Table of Contents

Note 78. Deposits

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

	September 30, 2017		December 31, 2016		*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)
Noninterest-bearing demand deposits	$	452,940	$	427,705	$	750,277	$	627,868
Interest-bearing deposits:
Interest-bearing demand deposits		393,244		378,339		576,731		497,470
Money market accounts		172,266		196,997		241,843		235,712
Savings deposits		337,934		326,263		486,506		453,240
Certificates of deposit		381,625		382,503		307,267		372,821
Individual retirement accounts		125,811		129,531		129,615		142,801
Total interest-bearing deposits		1,410,880		1,413,633		1,741,962		1,702,044
Total deposits	$	1,863,820	$	1,841,338	$	2,492,239	$	2,329,912

Note 89. Leases

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

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

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

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

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

Table of Contents

Note 10. Borrowings

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

September 30, 2017

December 31, 2016

(Amounts in thousands)

Balance

Weighted
Average Rate

Balance

Weighted
Average Rate

Short-term borrowings

Retail repurchase agreements
$ 58,783 0.07 % $ 73,005 0.07 %
Long-term borrowings

Wholesale repurchase agreements
25,000 3.18 % 25,000 3.18 %
Long-term FHLB advances
50,000 4.00 % 65,000 4.04 %
Other borrowings

Subordinated debt
- - 15,464 3.65 %
Other debt
- 244
Total borrowings
$ 133,783 $ 178,713

	*September 30, 2020*					*December 31, 2019*
			*Weighted*					*Weighted*
(Amounts in thousands)	*Balance*		*Average Rate*			*Balance*		*Average Rate*
Retail repurchase agreements	$	956		0.14	%	$	1,601		0.14	%

~~The following schedule presents~~Repurchase agreements are secured by certain securities that remain under the ~~contractual and weighted average maturities~~Company’s control during the terms of ~~long-term borrowings, by year, as~~the agreements.

As of September 30, ~~2017:~~2020, the Company had no long-term borrowings.

Wholesale Repurchase
Agreements

FHLB Borrowings

Total

(Amounts in thousands)

2017
$ - $ - $ -
2018
- - -
2019
25,000 - 25,000
2020
- - -
2021
- 50,000 50,000
2022 and thereafter
- - -
Total long-term borrowings
$ 25,000 $ 50,000 $ 75,000

Weighted average maturity (in years)
1.41 3.27 2.65

~~The FHLB may redeem callable advances at quarterly intervals, which could substantially shorten the advances~~’ lives. If called, the advance may be paid in full or converted into another FHLB credit product. Prepayment of an advance may result in substantial penalties based on the differential between the contractual note and current advance rate for similar maturities. The Company pledged certain loans to secure FHLB advances and letters of credit totaling $934.90 million as of September 30, 2017. Unused borrowing capacity with the FHLB totaled ~~$446.30~~$322.82 million, net of FHLB letters of credit of ~~$113.71~~$169.64 million, as of September 30, ~~2017. The FHLB letters~~2020. As of ~~credit provide an attractive alternative to pledging securities for public unit deposits.~~

~~Table of Contents~~

~~Investment securities~~September 30, 2020, the Company pledged $891.45 million in qualifying loans to secure ~~repurchase agreements remain under~~ the ~~Company~~’s control during the agreements’ terms. 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 September 30, 2017:

U.S. Treasury
Securities

U.S. Agency
Securities

Municipal Securities

Mortgage-backed
Agency Securities

Total

(Amounts in thousands)

Overnight and continuous
$ 5,240 $ 12,874 $ 37,953 $ 2,639 $ 58,706
Up to 30 days
- - - - -
30 - 90 days
- - - - -
Greater than 90 days
9,000 3,400 - 12,677 25,077
$ 14,240 $ 16,274 $ 37,953 $ 15,316 $ 83,783

The Company issued $15.46 million of junior subordinated debentures (“Debentures”) to FCBI Capital Trust (the “Trust”), an unconsolidated subsidiary, in October 2003 with an interest rate of three-month London InterBank Offered Rate (“LIBOR”) plus 2.95% and a 30-year term ending in October 2033. The Trust purchased the Debentures through the issuance of trust preferred securities, which had substantially identical terms as the Debentures. Net proceeds from the offering were contributed as capital to the Bank to support further growth. During the first quarter of 2017, the Company redeemed all $15.46 million of its trust preferred securities issued through the Trust.FHLB borrowing capacity.

~~In addition, the~~The Company maintains a $15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of ~~one-month~~one-month LIBOR plus 2.00% that matures in April ~~2018.~~ 2021. There was no0 outstanding balance on the line as of September 30, ~~2017,~~2020 or December 31, ~~2016.~~2019.

Note 911. Derivative Instruments and Hedging Activities

~~As of~~ ~~September 30, 2017, the Company’s derivative instruments consisted of interest rate swaps.~~ Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the ~~loan~~’sloan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify and are designated as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period.

~~The Company~~’s interest rate swap agreements include a ten-year, $1.28 million notional swap entered into in August 2017; a fourteen-year, $1.20 million notional swap entered into in March 2015; and a fifteen-year, $4.37 million notional swap entered into in February 2014. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of September 30, ~~2017.~~2020. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

													*September 30, 2020*						*December 31, 2019*
	September 30, 2017						December 31, 2016						*Notional or*		*Fair Value*				*Notional or*		*Fair Value*
	Notional or		Fair Value				Notional or		Fair Value				*Contractual*		*Derivative*		*Derivative*		*Contractual*		*Derivative*		*Derivativ*
(Amounts in thousands)	Contractual Amount		Derivative Assets		Derivative Liabilities		Contractual Amount		Derivative Assets		Derivative Liabilities		*Amount*		*Assets*		*Liabilities*		*Amount*		*Assets*		*Liabilities*
Derivatives designated as hedges
Interest rate swaps	$	5,892	$	-	$	151	$	4,835	$	-	$	167	$	16,889	$	0	$	1,261	$	17,432	$	0	$	510
Total derivatives	$	5,892	$	-	$	151	$	4,835	$	-	$	167	$	16,889	$	0	$	1,261	$	17,432	$	0	$	510

~~Table of Contents~~

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

	Three Months Ended September 30,				Nine Months Ended September 30,					*Three Months Ended September 30,*				*Nine Months Ended September 30,*
(Amounts in thousands)	2017		2016		2017		2016		Income Statement Location	*2020*		*2019*		*2020*		*2019*		*Income Statement Location*
Derivatives designated as hedges
Interest rate swaps	$	23	$	31	$	64	$	86	Interest and fees on loans	$	80	$	1	$	172	$	1	Interest and fees on loans
Total derivative expense	$	23	$	31	$	64	$	86		$	80	$	1	$	172	$	1

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Note 102. Employee Benefit Plans

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

	Three Months Ended September 30,				Nine Months Ended September 30,				*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	2017		2016		2017		2016		*2020*		*2019*		*2020*		*2019*		*Income Statement Location*
(Amounts in thousands)
Service cost	$	57	$	46	$	173	$	138	$	77	$	80	$	232	$	240	Salaries and employee benefits
Interest cost		93		95		279		286		88		101		266		303	Other expense
Amortization of prior service cost		57		57		171		170		51		65		151		193	Other expense
Amortization of losses		8		12		23		35		46		5		139		16	Other expense
Net periodic cost	$	215	$	210	$	646	$	629	$	262	$	251	$	788	$	752

Note 13. Earnings per Share

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2020*		*2019*		*2020*		*2019*
(Amounts in thousands, except share and per share data)
Net income	$	8,266	$	9,156	$	24,376	$	29,238

Weighted average common shares outstanding, basic		17,710,283		15,603,992		17,803,369		15,717,678
Dilutive effect of potential common shares
Stock options		16,163		52,360		23,711		55,898
Restricted stock		5,982		8,235		9,883		11,908
Total dilutive effect of potential common shares		22,145		60,595		33,594		67,806
Weighted average common shares outstanding, diluted		17,732,428		15,664,587		17,836,963		15,785,484

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

Antidilutive potential common shares
Stock options		78,016		0		61,241		0
Restricted stock		26,012		0		27,874		0
Total potential antidilutive shares		104,028		0		89,115		0

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Note 114. Accumulated Other Comprehensive Income (Loss)

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

										*Three Months Ended September 30, 2020*
										*Unrealized Gains*
	Three Months Ended September 30, 2017									*(Losses) on Available-*
	Unrealized Gains (Losses) on Available-for-Sale Securities			Employee Benefit Plans			Total			*for-Sale Securities*			*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	1,302		$	(1,303	)	$	(1	)	$	1,464		$	(2,572	)	$	(1,108	)
Other comprehensive loss before reclassifications		(106	)		(1	)		(107	)
Other comprehensive income (loss) before reclassifications											(213	)		1			(212	)
Reclassified from AOCI		-			41			41			0			76			76
Other comprehensive (loss) income, net		(106	)		40			(66	)		(213	)		77			(136	)
Ending balance	$	1,196		$	(1,263	)	$	(67	)	$	1,251		$	(2,495	)	$	(1,244	)

										*Three Months Ended September 30, 2019*
										*Unrealized Gains*
	Three Months Ended September 30, 2016									*(Losses) on Available-*
	Unrealized Gains (Losses) on Available-for-Sale Securities			Employee Benefit Plans			Total			*for-Sale Securities*		*Employee Benefit Plans*			*Total*
(Amounts in thousands)
Beginning balance	$	(1,706	)	$	(1,311	)	$	(3,017	)	$	973	$	(1,354	)	$	(381	)
Other comprehensive income (loss) before reclassifications		465			(2	)		463			23		(2	)		21
Reclassified from AOCI		2,881			43			2,924			0		55			55
Other comprehensive income, net		3,346			41			3,387			23		53			76
Ending balance	$	1,640		$	(1,270	)	$	370		$	996	$	(1,301	)	$	(305	)

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

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

Table of Contents

Nine Months Ended September 30, 2017

Unrealized Gains (Losses) on Available-for-Sale Securities

Employee Benefit Plans

Total

(Amounts in thousands)

Beginning balance
$ (544 ) $ (1,467 ) $ (2,011 )
Other comprehensive income before reclassifications
1,329 83 1,412
Reclassified from AOCI
411 121 532
Other comprehensive income, net
1,740 204 1,944
Ending balance
$ 1,196 $ (1,263 ) $ (67 )

Nine Months Ended September 30, 2016

Unrealized Gains (Losses) on Available-for-Sale Securities

Employee Benefit
Plans

Total

(Amounts in thousands)

Beginning balance
$ (3,885 ) $ (1,362 ) $ (5,247 )
Other comprehensive income (loss) before reclassifications
2,588 (36 ) 2,552
Reclassified from AOCI
2,937 128 3,065
Other comprehensive income, net
5,525 92 5,617
Ending balance
$ 1,640 $ (1,270 ) $ 370

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

	Three Months Ended					Nine Months Ended					*Three Months Ended*				*Nine Months Ended*
	September 30,					September 30,				Income Statement	*September 30,*				*September 30,*					*Income Statement*
(Amounts in thousands)	2017		2016			2017		2016		Line Item Affected	*2020*		*2019*		*2020*			*2019*		*Line Item Affected*
Available-for-sale securities
Loss (gain) recognized	$	-	$	(25	)	$	657	$	53	Net gain (loss) on sale of securities
Credit-related OTTI recognized		-		4,635			-		4,646	Net impairment losses recognized in earnings
Gain recognized											$	0	$	0	$	(385	)	$	43	Net loss on sale of securities
Reclassified out of AOCI, before tax		-		4,610			657		4,699	Income before income taxes		0		0		(385	)		43	Income before income taxes
Income tax expense		-		1,729			246		1,762	Income tax expense		0		0		(81	)		9	Income tax expense
Reclassified out of AOCI, net of tax		-		2,881			411		2,937	Net income		0		0		(304	)		34	Net income
Employee benefit plans
Amortization of prior service cost		57		57			171		170	(1)	$	51	$	65	$	150		$	193	(1)
Amortization of net actuarial benefit cost		8		12			23		35	(1)		46		5		140			16	(1)
Reclassified out of AOCI, before tax		65		69			194		205	Income before income taxes		97		70		290			209	Income before income taxes
Income tax expense		24		26			73		77	Income tax expense		21		15		61			44	Income tax expense
Reclassified out of AOCI, net of tax		41		43			121		128	Net income		76		55		229			165	Net income
Total reclassified out of AOCI, net of tax	$	41	$	2,924		$	532	$	3,065	Net income	$	76	$	55	$	(75	)	$	199	Net income

~~(1)~~(1)

Amortization is included in net periodic pension cost. See Note ~~10,~~11, "Employee Benefit Plans."

Note 125. Fair Value

Financial Instruments Measured at Fair Value

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

●

Level 1– Observable, unadjusted quoted prices in active markets

●

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

●

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

~~Table of Contents~~

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

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-Sale Debt Securities. ~~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. ~~The Company also uses Level 1 inputs to value equity securities that are traded in active markets.~~ 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, ~~single issue trust preferred securities, corporate securities, mortgage-backed~~municipal securities, and ~~certain equity securities that are not actively traded.~~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.

Table of Contents

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~~third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

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

Loans Held for Investment. Loans held for investment that are subject to a fair value hedge are reported at fair value ~~using discounted future cash flows that apply current interest rates for loans with similar terms and borrower credit quality.~~derived from third-party models. Loans ~~related to~~designated in fair value hedges are recorded at fair value on a recurring basis.

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

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

~~Table of Contents~~

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

	September 30, 2017								*September 30, 2020*
	Total		Fair Value Measurements Using						*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale securities
U.S. Treasury securities	$	36,964	$	-	$	36,964	$	-
Available-for-sale debt securities
U.S. Agency securities		1,275		-		1,275		-	$	572	$	0	$	572	$	0
Municipal securities		104,907		-		104,907		-		55,667		0		55,667		0
Single issue trust preferred securities		8,962		-		8,962		-
Mortgage-backed Agency securities		22,243		-		22,243		-		34,733		0		34,733		0
Total available-for-sale debt securities										90,972		0		90,972		0
Equity securities		73		55		18		-		55		55		0		0
Total available-for-sale securities		174,424		55		174,369		-
Fair value loans		5,758		-		5,758		-		15,628		0		0		15,628
Deferred compensation assets		3,330		3,330		-		-		3,752		3,752		0		0
Deferred compensation liabilities		3,330		3,330		-		-		3,752		3,752		0		0
IRLCs		-		-		-		-
Derivative liabilities		151		-		151		-		1,261		0		1,261		0

	December 31, 2016								*December 31, 2019*
	Total		Fair Value Measurements Using						*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	Fair Value		Level 1		Level 2		Level 3		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale securities
Available-for-sale debt securities
U.S. Agency securities	$	1,345	$	-	$	1,345	$	-	$	5,034	$	0	$	5,034	$	0
Municipal securities		113,331		-		113,331		-		86,878		0		86,878		0
Single issue trust preferred securities		19,939		-		19,939		-
Mortgage-backed Agency securities		30,891		-		30,891		-		77,662		0		77,662		0
Total available-for-sale debt securities										169,574		0		169,574		0
Equity securities		73		55		18		-		55		55		0		0
Total available-for-sale securities		165,579		55		165,524		-
Fair value loans		4,701		-		4,701		-		16,922		0		0		16,922
Deferred compensation assets		3,224		3,224		-		-		3,990		3,990		0		0
Deferred compensation liabilities		3,224		3,224		-		-		3,990		3,990		0		0
Derivative liabilities		167		-		167		-		510				510

~~No changes in valuation techniques or transfers into or out~~

Table of ~~Level 3 of the fair value hierarchy occurred during the~~ ~~three and nine months ended September 30, 2017 or 2016.~~

Contents

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining ~~third-party~~third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The ~~Company~~’sCompany’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~~third-party valuation within thirty to forty-five days of completing the internal valuation. When a ~~third-party~~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.

~~Table of Contents~~

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

OREO. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	September 30, 2017								*September 30, 2020*
	Total		Fair Value Measurements Using						*Total*		*Fair Value Measurements Using*
	Fair Value		Level 1		Level 2		Level 3		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Impaired loans, non-covered	$	6,757	$	-	$	-	$	6,757	$	3,114	$	0	$	0	$	3,114
OREO, non-covered		2,293		-		-		2,293
OREO, covered		54		-		-		54
OREO										2,103		0		0		2,103

	December 31, 2016								December 31, 2019
	Total		Fair Value Measurements Using						Total		Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
(Amounts in thousands)
Impaired loans, non-covered	$	4,078	$	-	$	-	$	4,078	$	1,828	$	0	$	0	$	1,828
OREO, non-covered		5,109		-		-		5,109
OREO, covered		265		-		-		265
OREO										3,969		0		0		3,969

Table of Contents

Quantitative Information about Level 3 Fair Value Measurements

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

Valuation

Unobservable

Discount Range (Weighted Average)

Technique

Input

September 30, 2017

December 31, 2016

Impaired loans, non-covered
Discounted appraisals⁽¹⁾

Appraisal adjustments⁽²⁾
2% to 63% (18%) 3% to 39% (17%)
OREO, non-covered
Discounted appraisals⁽¹⁾

Appraisal adjustments⁽²⁾
10% to 62% (28%) 0% to 88% (30%)
OREO, covered
Discounted appraisals⁽¹⁾

Appraisal adjustments⁽²⁾
0% to 65% (56%) 0% to 44% (40%)

Valuation

Unobservable

Discount Range (Weighted Average)

Technique

Input

September 30, 2020

December 31, 2019

~~(1)~~Impaired loans, non-covered

Discounted appraisals(1)

Appraisal adjustments(2)

3% to 42% (25%)

22% to 36% (26%)

OREO

Discounted appraisals(1)

Appraisal adjustments(2)

0% to 77% (24%)

15% to 100% (8%)

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

Fair Value of Financial Instruments

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

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

~~Held-to-Maturity Securities~~~~. Securities held to maturity are reported at fair value using quoted market prices or dealer quotes.~~

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

~~Table of Contents~~

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

Deposits and Securities Sold Under Agreements to Repurchase. Deposits without a stated maturity, such as demand, interest-bearing demand, and savings, are reported at their carrying amount, the amount payable on demand as of the reporting date, which is considered a reasonable estimate of fair value. Deposits and repurchase agreements with fixed maturities and rates are ~~reported~~estimated at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.

FHLB and Other Borrowings. FHLB and other borrowings are ~~reported~~estimated at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities. ~~Trust preferred obligations are reported at fair value using current credit spreads in the market for similar issues.~~

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note ~~14,~~16, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

Table of Contents

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

	September 30, 2017										*September 30, 2020*
	Carrying				Fair Value Measurements Using						*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3		*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	105,119	$	105,119	$	105,119	$	-	$	-	$	375,664	$	375,664	$	375,664	$	0	$	0
Securities available for sale		174,424		174,424		55		174,369		-
Securities held to maturity		25,182		25,226		-		25,226		-
Debt securities available for sale												90,972		90,972		0		90,972		0
Equity securities												55		55		55		0		0
Loans held for investment, net of allowance		1,818,515		1,792,719		-		5,758		1,786,961		2,167,718		2,123,823		0		0		2,123,823
FDIC indemnification asset		7,465		4,548		-		-		4,548		1,598		666		0		0		666
Interest receivable		5,156		5,156		-		5,156		-		9,151		9,151		0		9,151		0
Deferred compensation assets		3,330		3,330		3,330		-		-		3,752		3,752		3,752		0		0

Liabilities
Demand deposits		452,940		452,940		-		452,940		-
Interest-bearing demand deposits		393,244		393,244		-		393,244		-
Savings deposits		510,200		510,200		-		510,200		-
Time deposits		507,436		503,332		-		503,332		-		436,882		440,283		0		440,283		0
Securities sold under agreements to repurchase		83,783		84,315		-		84,315		-		956		956		0		956		0
Interest payable		1,085		1,085		-		1,085		-		719		719		0		719		0
FHLB and other borrowings		50,000		53,402		-		53,402		-
Derivative financial liabilities		151		151		-		151		-		1,261		1,261		0		1,261		0
Deferred compensation liabilities		3,330		3,330		3,330		-		-		3,752		3,752		3,752		0		0

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

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

~~Table of Contents~~

December 31, 2016

Carrying

Fair Value Measurements Using

(Amounts in thousands)

Amount

Fair Value

Level 1

Level 2

Level 3

Assets

Cash and cash equivalents
$ 76,307 $ 76,307 $ 76,307 $ - $ -
Securities available for sale
165,579 165,579 55 165,524 -
Securities held to maturity
47,133 47,266 - 47,266 -
Loans held for investment, net of allowance
1,835,000 1,805,999 - 4,701 1,801,298
FDIC indemnification asset
12,173 8,112 - - 8,112
Interest receivable
5,553 5,553 - 5,553 -
Deferred compensation assets
3,224 3,224 3,224 - -

Liabilities

Demand deposits
427,705 427,705 - 427,705 -
Interest-bearing demand deposits
378,339 378,339 - 378,339 -
Savings deposits
523,260 523,260 - 523,260 -
Time deposits
512,034 507,917 - 507,917 -
Securities sold under agreements to repurchase
98,005 98,879 - 98,879 -
Interest payable
1,280 1,280 - 1,280 -
FHLB and other borrowings
80,708 83,551 - 83,551 -
Derivative financial liabilities
167 167 - 167 -
Deferred compensation liabilities
3,224 3,224 3,224 - -

~~Note 13. Earnings per Share~~

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

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

Net income
$ 7,652 $ 6,383 $ 20,272 $ 18,722
Dividends on preferred stock
- - - -
Net income available to common shareholders
$ 7,652 $ 6,383 $ 20,272 $ 18,722

Weighted average common shares outstanding, basic
17,005,654 17,031,074 17,005,350 17,433,406
Dilutive effect of potential common shares

Stock options
49,739 38,746 50,140 31,856
Restricted stock
27,336 13,706 21,468 9,949
Total dilutive effect of potential common shares
77,075 52,452 71,608 41,805
Weighted average common shares outstanding, diluted
17,082,729 17,083,526 17,076,958 17,475,211

Basic earnings per common share
$ 0.45 $ 0.37 $ 1.19 $ 1.07
Diluted earnings per common share
0.45 0.37 1.19 1.07

Antidilutive potential common shares

Stock options
71,592 127,789 75,868 127,789
Total potential antidilutive shares
71,592 127,789 75,868 127,789

Note 146. Litigation, Commitments, and Contingencies

Litigation

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

~~Table of Contents~~

Commitments and Contingencies

The Company is a party to financial instruments with off~~-balance~~ 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~~on balance sheet instruments.

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

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

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

		September 30, 2017		December 31, 2016		*September 30, 2020*		*December 31, 2019*
(Amounts in thousands)	(Amounts in thousands)
Commitments to extend credit	Commitments to extend credit	$	245,978	$	261,801	$	219,297	$	228,716
Standby letters of credit and financial guarantees⁽¹⁾	Standby letters of credit and financial guarantees⁽¹⁾		118,318		83,900		173,925		167,612
Total off-balance sheet risk	Total off-balance sheet risk		364,296		345,701	$	393,222	$	396,328

Reserve for unfunded commitments	Reserve for unfunded commitments	$	66	$	326	$	66	$	66

(1)
~~(1)~~ Includes FHLB letters of credit

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 (the ~~“2016~~“2019 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

Executive Overview

First Community ~~Bancshares,~~Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of September 30, ~~2017,~~2020, the Bank operated 4452 branches as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, as People’s Community Bank, a Division of First Community Bank, in Tennessee. As of September 30, 2020, full-time equivalent employees, calculated using the number of hours worked, totaled 630. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.

~~The Bank offers commercial and personal insurance services through its~~ wholly owned subsidiary First Community Insurance Services (“FCIS”). Revenues are primarily derived from commissions paid by issuing companies on the sale of policies. As of September 30, 2017, FCIS operated 6 in-branch locations in Virginia and West Virginia. The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and ~~investment advisory fees.~~administration. As of September 30, ~~2017,~~2020, the Trust Division and FCWM managed ~~$936 million~~and administered $1.13 billion in combined assets under various fee-based arrangements as fiduciary or agent.

~~Our acquisition~~Recent Events

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

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

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

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

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In order to help our customers in these unprecedented times, the Company modified or deferred payments on a total of 3,362 loans totaling $426.45 million in principal through September 30, ~~2017,~~2020. At September 30, 2020, loans currently in deferral amounted to $115.63 million. Included in the September 30, 2020, amounts are re-deferrals for approximately $69.32 million commercial loans and ~~year ended~~approximately $5.09 million in consumer mortgage and installment loans. Deferred interest and fees for these loans will continue to accrue. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. The accrued interest for these loans total $1.10 million as of September 30, 2020. To date, the Company has not experienced an increase in borrowers drawing on lines of credit. Management currently believes the hotel/motel and retail loan portfolios to be at the greatest risk.

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

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

Acquisitions and Divestitures

On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands” ) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock. The transaction was consummated at the close of business December 31, ~~2016, included~~2019. The transaction combined two traditional Southwestern Virginia community banks who serve the ~~sale~~Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.

The Highlands transaction was accounted for using the acquisition method of ~~Greenpoint Insurance Agency Inc.~~accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on ~~October 1, 2016,~~the acquisition date. Fair values are preliminary and subject to refinement up to a year after the ~~simultaneous sale~~closing date of ~~six branches to and purchase of seven branches from First Bank on July 15, 2016.~~the acquisition.

Critical Accounting Estimates

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

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2020, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to ~~the~~ Consolidated Financial Statements in Part II, Item 8 of our ~~2016~~2019 Form ~~10-K and our~~10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our ~~2016~~2019 Form 10-K.

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Performance Overview

Highlights of our results of operations for the three and nine months ended September 30, ~~2017,~~2020, and financial condition as of September 30, ~~2017,~~2020, include the following:

●

~~Net income available to common shareholders~~ ~~increased $1.27 million, or 19.88%, to $7.65 million and diluted~~Diluted earnings per share ~~increased $0.08, or 21.62%, to $0.45~~was $0.47 for the third quarter and $1.37 for the first nine months .

●

Current quarter earnings include a loan loss provision of ~~2017 compared to the same~~$4.70 million, an increase of $4.03 million over third quarter of ~~2016.~~2019. The year to date loan loss provision was $12.03 million, an increase of $8.55 million from the prior year. The increase further recognizes the economic uncertainty of the COVID-19 pandemic.

●

Despite the significant increase in loan loss provision, return on average assets remained strong at 1.11% for the third quarter and 1.14% for the nine month period.

~~Table of Contents~~

●

Net interest margin ~~increased~~ 30decreased 46 basis points to ~~4.25%, and normalized net interest margin increased 23 basis points to 4.00% for the third quarter of 2017~~4.10% compared to the same quarter of ~~2016.~~2019. Net interest margin decreased 30 basis points to 4.33% for the first nine months compared to the same period of 2019. Both decreases are reflective of the current historically low interest rate environment.

	●	Service charges on deposit accounts have increased since the second quarter of 2020 as pandemic shutdowns and stay-at-home orders were relaxed during the summer.
	●	Total deposits have grown $162.33 million, or 6.97%, during 2020 with $122.41 million of the increase occurring in interest free categories.

	●	Book value per common share at September 30, 2020, was $23.70, an increase of $0.37 during the year.
	●	~~The~~As of September 30, 2020, the Company~~’s book value per common share increased $0.81~~ continues to ~~$20.76 compared to December 31, 2016.~~

●

~~The Company~~ significantly ~~exceeds~~exceed regulatory “well capitalized” targets, as well as all capital targets of ~~September 30, 2017.~~its capital management plan. The Company completed its previous share repurchase authorization in the first quarter of 2020, prior to the onset of the current COVID-19 pandemic, which completed a strategic objective of acquiring 6.6 million shares, returning over $149 million in surplus capital to shareholders. In light of the uncertain economic forecast, the Company has temporarily delayed consideration of a new share repurchase authorization to preserve and further accumulate surplus capital.

Results of Operations

Net Income

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

	Three Months Ended						Three Months Ended						Nine Months Ended						Nine Months Ended						Three Months Ended												Nine Months Ended
(Amounts in thousands, except per																									September 30,						Increase						September 30,						Increase
share data)																									2020			2019			(Decrease)			% Change			2020			2019			(Decrease)			% Change
	September 30,						Increase						September 30,						Increase
(Amounts in thousands, except	2017			2016			(Decrease)			% Change			2017			2016			(Decrease)			% Change
per share data)
Net income	$	7,652		$	6,383		$	1,269			19.88	%	$	20,272		$	18,722		$	1,550			8.28	%	$	8,266		$	9,156		$	(890	)		-9.72	%	$	24,376		$	29,238		$	(4,862	)		-16.63	%
Net income available to common shareholders		7,652			6,383			1,269			19.88	%		20,272			18,722			1,550			8.28	%

Basic earnings per common share		0.45			0.37			0.08			21.62	%		1.19			1.07			0.12			11.21	%		0.47			0.59			(0.12	)		-20.34	%		1.37			1.86			(0.49	)		-26.34	%
Diluted earnings per common share		0.45			0.37			0.08			21.62	%		1.19			1.07			0.12			11.21	%		0.47			0.58			(0.11	)		-18.97	%		1.37			1.85			(0.48	)		-25.95	%

Return on average assets		1.29	%		1.03	%		0.26	%		25.24	%		1.14	%		1.01	%		0.13	%		12.87	%		1.11	%		1.65	%		-0.54	%		-32.73	%		1.14	%		1.76	%		-0.62	%		-35.23	%
Return on average common equity		8.61	%		7.58	%		1.03	%		13.59	%		7.80	%		7.40	%		0.40	%		5.41	%		7.83	%		10.80	%		-2.97	%		-27.50	%		7.76	%		11.70	%		-3.94	%		-33.68	%

Three-Month Comparison. Net income ~~increased~~decreased $890 thousand in the third quarter of ~~2017~~2020 largely due to a ~~decrease in noninterest expense and increases in noninterest and net interest income. These changes were offset by increases~~$4.03 million increase in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown. Additional decreases resulted from increases in salaries and employee benefits of $1.15 million in 2020 reflective of the addition of Highlands and a one-time litigation settlement of $900 thousand included in the third quarter results from 2019. These decreases were offset by an increase of $4.61 million in net interest income ~~tax.~~that is reflective of the addition of Highlands in 2020 and $592 thousand in merger expenses recognized in the third quarter of 2019 .

Nine-Month Comparison. Net income ~~increased~~decreased $4.86 million in the first nine months of ~~2017~~2020 due to a ~~decrease in noninterest expense and an~~$8.55 million increase ~~in net interest income. These changes were offset by a decrease in noninterest income and increases~~ in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown as noted above. Additional decreases resulted from an increase in salaries and employee benefits of $5.23 million which was reflective of the addition of Highlands as well as expenses arising from the implementation of a pay differential related to COVID-19 which ended May 31, 2020. Also contributing to the decrease, were litigation settlements received of $4.60 million received in 2019. These decreases were offset by an increase of $13.46 million in net interest income ~~tax.~~that is reflective of the of Highlands acquisition.

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Net Interest Income

Net interest income, our largest contributor to earnings, is analyzed on a fully taxable equivalent (“FTE”) basis, a non-GAAP financial measure. For additional information, see “Non-GAAP Financial Measures” below.

~~Table of Contents~~

The following ~~table~~stables present the consolidated average balance sheets and net interest analysis on a FTE basis for the dates indicated:

Three Months Ended September 30,

2017

2016

Average

Average Yield/

Average

Average Yield/

(Amounts in thousands)

Balance

Interest⁽¹⁾

Rate⁽¹⁾

Balance

Interest⁽¹⁾

Rate⁽¹⁾

Assets

Earning assets

Loans⁽²⁾
$ 1,843,612 $ 22,765 4.90 % $ 1,820,899 $ 21,974 4.80 %
Securities available for sale
157,038 1,373 3.47 % 266,162 1,941 2.90 %
Securities held to maturity
25,199 106 1.67 % 72,210 189 1.04 %
Interest-bearing deposits
73,802 275 1.48 % 19,025 26 0.54 %
Total earning assets
2,099,651 24,519 4.63 % 2,178,296 24,130 4.41 %
Other assets
258,763 282,310
Total assets
$ 2,358,414 $ 2,460,606

Liabilities and stockholders' equity

Interest-bearing deposits

Demand deposits
$ 384,594 $ 89 0.09 % $ 337,893 $ 60 0.07 %
Savings deposits
518,355 43 0.03 % 523,503 62 0.05 %
Time deposits
509,251 1,143 0.89 % 529,344 1,011 0.76 %
Total interest-bearing deposits
1,412,200 1,275 0.36 % 1,390,740 1,133 0.32 %
Borrowings

Federal funds purchased
- - - 3,696 6 0.65 %
Retail repurchase agreements
58,194 10 0.07 % 64,385 12 0.07 %
Wholesale repurchase agreements
25,000 203 3.22 % 50,000 473 3.76 %
FHLB advances and other borrowings
50,000 511 4.05 % 133,838 876 2.60 %
Total borrowings
133,194 724 2.16 % 251,919 1,367 2.16 %
Total interest-bearing liabilities
1,545,394 1,999 0.51 % 1,642,659 2,500 0.61 %
Noninterest-bearing demand deposits
440,227 462,588
Other liabilities
20,101 20,462
Total liabilities
2,005,722 2,125,709
Stockholders' equity
352,692 334,897
Total liabilities and stockholders' equity
$ 2,358,414 $ 2,460,606
Net interest income, FTE
$ 22,520 $ 21,630
Net interest rate spread
4.12 % 3.80 %
Net interest margin
4.25 % 3.95 %

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Three Months Ended September 30,
	2020							2019
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾⁽³⁾	$	2,171,023	$	27,331		5.01	%	$	1,706,936	$	22,106		5.14	%
Securities available for sale		93,263		720		3.07	%		118,450		1,015		3.40	%
Interest-bearing deposits		352,144		90		0.10	%		122,891		680		2.20	%
Total earning assets		2,616,430		28,141		4.28	%		1,948,277		23,801		4.85	%
Other assets		344,285							250,142
Total assets	$	2,960,715						$	2,198,419

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	580,165	$	73		0.05	%	$	450,650	$	78		0.07	%
Savings deposits		720,657		136		0.08	%		500,600		222		0.18	%
Time deposits		448,275		951		0.84	%		413,012		1,083		1.04	%
Total interest-bearing deposits		1,749,097		1,160		0.26	%		1,364,262		1,383		0.40	%
Borrowings
Retail repurchase agreements		969		1		0.14	%		2,107		1		0.17	%
Total borrowings		969		1		0.14	%		2,107		1		0.17	%
Total interest-bearing liabilities		1,750,066		1,161		0.26	%		1,366,369		1,384		0.40	%
Noninterest-bearing demand deposits		754,147							466,253
Other liabilities		36,379							29,449
Total liabilities		2,540,592							1,862,071
Stockholders' equity		420,123							336,348
Total liabilities and stockholders' equity	$	2,960,715						$	2,198,419
Net interest income, FTE⁽¹⁾			$	26,980						$	22,417
Net interest rate spread						4.02	%						4.44	%
Net interest margin, FTE⁽¹⁾						4.10	%						4.56	%

(1)	~~Fully taxable equivalent ("FTE")~~Interest income and average yield/rate are presented on a FTE, non-GAAP, basis ~~based on~~using the federal statutory income tax rate of ~~35%~~21%.
(2)	Nonaccrual loans are included in the average ~~balances;~~balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.77 million and $566 thousand for the three months ended September 30, 2020 and 2019, respectively.

Table of Contents

Nine Months Ended September 30,

2017

2016

Average

Average Yield/

Average

Average Yield/

(Amounts in thousands)

Balance

Interest⁽¹⁾

Rate⁽¹⁾

Balance

Interest⁽¹⁾

Rate⁽¹⁾

Assets

Earning assets

Loans⁽²⁾
$ 1,841,981 $ 67,645 4.91 % $ 1,775,744 $ 65,836 4.95 %
Securities available for sale
162,198 4,312 3.55 % 318,891 6,403 2.68 %
Securities held to maturity
35,578 382 1.44 % 72,350 575 1.06 %
Interest-bearing deposits
66,069 655 1.33 % 13,288 55 0.55 %
Total earning assets
2,105,826 72,994 4.63 % 2,180,273 72,869 4.47 %
Other assets
264,333 287,784
Total assets
$ 2,370,159 $ 2,468,057

Liabilities and stockholders' equity

Interest-bearing deposits

Demand deposits
$ 384,265 $ 301 0.10 % $ 339,920 $ 177 0.07 %
Savings deposits
523,219 114 0.03 % 533,799 191 0.05 %
Time deposits
513,072 3,259 0.85 % 527,056 2,966 0.75 %
Total interest-bearing deposits
1,420,556 3,674 0.35 % 1,400,775 3,334 0.32 %
Borrowings

Federal funds purchased
2 - 0.00 % 5,393 26 0.64 %
Retail repurchase agreements
61,951 31 0.07 % 69,347 37 0.07 %
Wholesale repurchase agreements
25,000 602 3.22 % 50,000 1,410 3.77 %
FHLB advances and other borrowings
57,357 1,754 4.09 % 124,803 2,578 2.76 %
Total borrowings
144,310 2,387 2.21 % 249,543 4,051 2.17 %
Total interest-bearing liabilities
1,564,866 6,061 0.52 % 1,650,318 7,385 0.60 %
Noninterest-bearing demand deposits
435,825 457,250
Other liabilities
21,905 22,581
Total liabilities
2,022,596 2,130,149
Stockholders' equity
347,563 337,908
Total liabilities and stockholders' equity
$ 2,370,159 $ 2,468,057
Net interest income, FTE
$ 66,933 $ 65,484
Net interest rate spread
4.11 % 3.87 %
Net interest margin
4.25 % 4.01 %

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Nine Months Ended September 30,
	2020							2019
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest⁽¹⁾		Rate⁽¹⁾			Balance		Interest⁽¹⁾		Rate⁽¹⁾
Assets
Earning assets
Loans⁽²⁾⁽³⁾	$	2,127,383	$	82,476		5.18	%	$	1,730,940	$	67,114		5.18	%
Securities available for sale		110,852		2,619		3.16	%		130,029		3,314		3.41	%
Securities held to maturity		-		-		-			4,071		45		1.48	%
Interest-bearing deposits		270,106		706		0.34	%		101,364		1,784		2.34	%
Total earning assets		2,508,341		85,801		4.57	%		1,966,404		72,257		4.91	%
Other assets		351,589							248,801
Total assets	$	2,859,930						$	2,215,205

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	543,539	$	261		0.06	%	$	450,653	$	192		0.06	%
Savings deposits		702,604		790		0.15	%		502,241		589		0.16	%
Time deposits		466,126		3,380		0.97	%		426,885		3,299		1.03	%
Total interest-bearing deposits		1,712,269		4,431		0.35	%		1,379,779		4,080		0.40	%
Borrowings
Retail repurchase agreements		1,218		3		0.32	%		2,792		3		0.13	%
Wholesale repurchase agreements		-		-		-			5,037		119		3.17	%
FHLB advances and other borrowings		48		1		2.23	%		-		-		-
Total borrowings		1,266		4		0.42	%		7,829		122		2.08	%
Total interest-bearing liabilities		1,713,535		4,435		0.35	%		1,387,608		4,202		0.40	%
Noninterest-bearing demand deposits		688,891							464,958
Other liabilities		38,001							28,651
Total liabilities		2,440,427							1,881,217
Stockholders' equity		419,503							333,988
Total liabilities and stockholders' equity	$	2,859,930						$	2,215,205
Net interest income, FTE⁽¹⁾			$	81,366						$	68,055
Net interest rate spread						4.22	%						4.51	%
Net interest margin, FTE⁽¹⁾						4.33	%						4.63	%

(1)	~~Fully taxable equivalent ("FTE")~~Interest income and average yield/rate are presented on a FTE, non-GAAP, basis ~~based on~~using the federal statutory income tax rate of ~~35%~~21%.
(2)	Nonaccrual loans are included in the average ~~balances;~~balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash purchase accounting accretion of $5.22 million and $2.72 million for the nine months ended September 30, 2020 and 2019, respectively.

Table of Contents

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

	Three Months Ended												Nine Months Ended												Three Months Ended												Nine Months Ended
	September 30, 2017 Compared to 2016												September 30, 2017 Compared to 2016												September 30, 2020 Compared to 2019												September 30, 2020 Compared to 2019
	Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to												Dollar Increase (Decrease) due to
							Rate/												Rate/												Rate/												Rate/
(Amounts in thousands)	Volume			Rate			Volume			Total			Volume			Rate			Volume			Total			Volume			Rate			Volume			Total			Volume			Rate			Volume			Total
Interest earned on⁽¹⁾
Loans⁽²⁾	$	816		$	1,336		$	(1,361	)	$	791		$	2,456		$	(563	)	$	(84	)	$	1,809		$	5,994		$	(557	)	$	(212	)	$	5,225		$	15,371		$	(23	)	$	14		$	15,362
Securities available-for-sale		(2,368	)		1,130			670			(568	)		(3,146	)		2,081			(1,026	)		(2,091	)		(215	)		(98	)		18			(295	)		(489	)		(82	)		(124	)		(695	)
Securities held-to-maturity		(366	)		339			(56	)		(83	)		(292	)		202			(103	)		(193	)		-			-			-			-			(45	)		-			-			(45	)
Interest-bearing deposits with other banks		223			133			(107	)		249			218			77			305			600			1,265			(647	)		(1,208	)		(590	)		2,957			(511	)		(3,524	)		(1,078	)
Total interest earning assets		(1,695	)		2,938			(854	)		389			(764	)		1,797			(908	)		125			7,044			(1,302	)		(1,402	)		4,340			17,794			(616	)		(3,634	)		13,544

Interest paid on⁽¹⁾
Demand deposits		25			53			(49	)		29			23			89			12			124			22			(21	)		(6	)		(5	)		40			8			21			69
Savings deposits		(2	)		(56	)		39			(19	)		(4	)		(75	)		2			(77	)		97			(127	)		(56	)		(86	)		235			(8	)		(26	)		201
Time deposits		(114	)		517			(271	)		132			(79	)		385			(13	)		293			92			(204	)		(20	)		(132	)		303			(69	)		(153	)		81
Federal funds purchased		(18	)		(18	)		30			(6	)		(26	)		-			-			(26	)
Retail repurchase agreements		(3	)		(3	)		4			(2	)		(4	)		(2	)		-			(6	)		-			-			-			-			(2	)		1			1			-
Wholesale repurchase agreements		(704	)		(203	)		637			(270	)		(705	)		(205	)		102			(808	)		-			-			-			-			(119	)		-			-			(119	)
FHLB advances and other borrowings		(1,633	)		1,452			(184	)		(365	)		(1,393	)		1,241			(672	)		(824	)		-			-			-			-			-			-			1			1
Total interest-bearing liabilities		(2,449	)		1,742			206			(501	)		(2,188	)		1,433			(569	)		(1,324	)		211			(352	)		(82	)		(223	)		457			(68	)		(156	)		233

Change in net interest income⁽¹⁾	$	754		$	1,196		$	(1,060	)	$	890		$	1,424		$	364		$	(339	)	$	1,449		$	6,833		$	(950	)	$	(1,320	)	$	4,563		$	17,337		$	(548	)	$	(3,478	)	$	13,311

(1)

FTE basis based on the federal statutory rate of ~~35%~~

~~(2)~~

~~Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.~~

~~Table of Contents~~

~~The following tables present the net interest analysis on a FTE basis excluding the impact of non-cash purchase accounting accretion from acquired loan portfolios for the periods indicated:~~

Three Months Ended September 30,

2017

2016

(Amounts in thousands)

Interest⁽¹⁾

Average Yield/
Rate⁽¹⁾

Interest⁽¹⁾

Average Yield/
Rate⁽¹⁾

Earning assets

Loans⁽²⁾
$ 22,765 4.90 % $ 21,974 4.80 %
Accretion income
1,925 1,683
Less: cash accretion income
548 699
Non-cash accretion income
1,377 984
Loans, normalized⁽³⁾
21,388 4.60 % 20,990 4.59 %
Other earning assets
1,754 2.72 % 2,156 2.40 %
Total earning assets
23,142 4.37 % 23,146 4.23 %
Total interest-bearing liabilities
1,999 0.51 % 2,500 0.61 %
Net interest income, FTE⁽³⁾
$ 21,143 $ 20,646
Net interest rate spread, normalized⁽³⁾
3.86 % 3.62 %
Net interest margin, normalized⁽³⁾
4.00 % 3.77 %

~~(1)~~

~~FTE basis based on the federal statutory rate of 35%~~

~~(2)~~

~~Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.~~21%.

~~(3)~~

~~Normalized totals are non-GAAP financial measures that exclude non-cash loan interest accretion related to PCI loans.~~

Nine Months Ended September 30,

2017

2016

(Amounts in thousands)

Interest⁽¹⁾

Average Yield/
Rate⁽¹⁾

Interest⁽¹⁾

Average Yield/
Rate⁽¹⁾

Earning assets

Loans⁽²⁾
$ 67,645 4.91 % $ 65,836 4.95 %
Accretion income
6,243 6,183
Less: cash accretion income
1,986 2,290
Non-cash accretion income
4,257 3,893
Loans, normalized⁽³⁾
63,388 4.60 % 61,943 4.66 %
Other earning assets
5,349 2.71 % 7,033 2.32 %
Total earning assets
68,737 4.36 % 68,976 4.23 %
Total interest-bearing liabilities
6,061 0.52 % 7,385 0.60 %
Net interest income, FTE⁽³⁾
$ 62,676 $ 61,591
Net interest rate spread, normalized⁽³⁾
3.84 % 3.63 %
Net interest margin, normalized⁽³⁾
3.98 % 3.77 %

~~(1)~~

~~FTE basis based on the federal statutory rate of 35%~~

~~(2)~~

~~Nonaccrual loans are included in average balances; however, no related interest income is recorded during the period of nonaccrual.~~

~~(3)~~

~~Normalized totals are non-GAAP financial measures that exclude non-cash loan interest accretion related to PCI loans.~~

Three-Month Comparison. Net interest income comprised ~~75.55%~~77.84% of total net interest and noninterest income in the third quarter of ~~2017~~2020 compared to ~~78.18%~~74.43% in the same quarter of ~~2016.~~2019. Net interest income on a GAAP basis increased ~~$929 thousand,~~$4.61 million, or ~~4.40%~~20.76%, and net interest income on a FTE basis increased $890 thousand, or 4.11%. Normalized net interest income on a FTE basis is a non-GAAP measure that excludes non-cash loan accretion income related to PCI loans. For additional information, see “Non-GAAP Financial Measures” below. Normalized net interest margin increased 23 basis points compared to an increase of ~~30 basis points~~$4.56 million, or 20.36%, on a FTE basis. ~~Normalized~~The net interest margin on a FTE basis decreased 46 basis points and the net interest spread ~~increased 24 basis points compared to an increase of 32 basis points~~ on a FTE ~~basis.~~basis decreased 42 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment.

Average earning assets ~~decreased $78.65~~increased $668.15 million, or ~~3.61%~~34.29%, primarily due to ~~a decrease~~an increase in ~~investment securities offset by~~average loans as well as an increase in interest-bearing deposits. Average loans increased $464.09 million which was primarily due to the addition of Highlands. The yield on earning assets decreased 57 basis points or 11.75%, primarily due to the historically low rate environment. The average loan ~~growth~~to deposit ratio decreased to 86.73% from 93.25% in the same quarter of 2019. Non-cash accretion income increased $1.20 million, or 211.84%, due to the addition of loans from the Highlands acquisition.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $383.70 million, or 28.08%, primarily due to an increase in interest-bearing deposits. The ~~normalized~~ yield on ~~earning assets increased~~interest-bearing liabilities decreased 14 basis ~~points~~points. Average interest-bearing deposits increased $384.84 million, or 28.21%, which was driven by the December 31, 2019 Highlands acquisition with increases in average savings deposits of $220.06 million, or 43.96%, interest-bearing demand of $129.52 million, or 28.74%, and time deposits of $35.26 million, or 8.54%

Nine-Month Comparison. Net interest income comprised 78.53% of total net interest and noninterest income for the first nine months of 2020 compared to 73.45% in the same period of 2019. Net interest income on a GAAP basis increased $13.46 million, or 19.97%, compared to an increase of 22$13.31 million, or 19.56%, on a FTE basis. The net interest margin on a FTE basis decreased 30 basis points and the net interest spread on a ~~GAAP basis.~~FTE basis decreased 29 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the historically low rate environment experienced over the past nine months.

Average earning assets increased $541.94 million, or 27.56%, primarily due to an increase in loans and overnight funds sold. The yield on earning assets decreased 34 basis points as the yields in interest-bearing deposits and the available-for-sale investment portfolio decreased. Average loans increased ~~$22.71~~$396.44 million, ~~or 1.25%~~22.90%, and the average loan to deposit ratio ~~increased~~decreased to ~~99.52%~~88.60% from ~~98.25%. The normalized yield on loans increased 1 basis point compared to an increase~~93.83% in the same period of ~~10 basis points on a GAAP basis.~~2019. Non-cash accretion income increased ~~$393 thousand,~~$2.50 million, or ~~39.94%.~~91.98%, due to the addition of loans from the Highlands acquisition.

Table of Contents

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, ~~decreased $97.27~~increased $325.93 million, or ~~5.92%~~23.49%, primarily due to ~~a decline~~an increase in ~~average borrowings.~~interest-bearing deposits. The yield on interest-bearing liabilities decreased 105 basis points ~~largely driven by a decrease in the average balance of borrowings.~~or 12.50%. Average borrowings decreased ~~$118.73~~$6.56 million, or ~~47.13%~~83.83%, largely due to ~~an $83.84 million, or 62.64%, decrease in average FHLB advances and other borrowings,~~ a ~~$25.00 million, or 50.00%,~~ decrease in average wholesale repurchase agreements of $5.04 million. The decrease resulted from the payoff of a ~~$6.19~~$25 million ~~or 9.62%, decrease~~wholesale repurchase agreement in ~~average retail repurchase agreements, and a $3.70 million decrease in average federal funds purchased.~~the first quarter of 2019. Average interest-bearing deposits increased ~~$21.46~~$332.49 million, or ~~1.54%~~24.10%, which was driven by ~~a $46.70~~the December 2019 acquisition of Highlands, resulting in increases of $200.36 million ~~or 13.82%, increase~~ in ~~average~~savings, $92.89 million in interest-bearing demand, ~~deposits offset by a $20.09~~and $39.24 million ~~or 3.80%, decrease~~ in ~~average~~ time ~~deposits, and a $5.15 million, or 0.98%, decrease in average savings deposits, which include money market and savings accounts.~~deposits.

~~Nine-Month~~ ~~Comparison~~. Net interest income comprised 78.16% of total net interest and noninterest income in the first nine months of 2017 compared to 75.42% in the same period of 2016. Net interest income on a GAAP basis increased $1.56 million, or 2.44%, and net interest income on a FTE basis increased $1.45 million, or 2.21%. Normalized net interest margin increased 21 basis points compared to an increase of 24 basis points on a FTE basis. Normalized net interest spread increased 21 basis points compared to an increase of 24 basis points on a FTE basis.

~~Average earning assets~~ decreased $74.45 million, or 3.41%, primarily due to a decrease in investment offset by loan growth and an increase in interest-bearing deposits. The normalized yield on earning assets increased 13 basis points compared to an increase of 16 basis points on a GAAP basis. Average loans increased $66.24 million, or 3.73%, and the average loan to deposit ratio increased to 99.22% from 95.57%. The normalized yield on loans decreased 6 basis points compared to a decrease of 4 basis points on a GAAP basis. Non-cash accretion income increased $364 thousand, or 9.35%, as the effect of accretion income continued to decline from acquired portfolio attrition.

~~Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings,~~ decreased $85.45 million, or 5.18%, primarily due to a decline in average borrowings. The yield on interest-bearing liabilities decreased 8 basis points, largely driven by a decrease in the average balance of borrowings. Average borrowings decreased $105.23 million, or 42.17%, largely due to a $67.45 million, or 54.04%, decrease in average FHLB advances and other borrowings, a $25.00 million, or 50.00%, decrease in average wholesale repurchase agreements, a $7.40 million, or 10.67%, decrease in average retail repurchase agreements, and a $5.39 million, or 99.96%, decrease in average federal funds purchased. Average interest-bearing deposits increased $19.78 million, or 1.41%, which was driven by a $44.35 million, or 13.05%, increase in average interest-bearing demand deposits offset by a $13.98 million, or 2.65%, decrease in average time deposits, and a $10.58 million, or 1.98%, decrease in average savings deposits, which include money market and savings accounts.

Provision for Loan Losses

Three-Month Comparison. The provision charged to operations increased ~~$1.88~~$4.03 million, or 596.74%, to ~~$730 thousand~~$4.70 million in the third quarter of ~~2017~~2020 compared to ~~a recovery of $1.15 million in~~ the same quarter of ~~2016, which~~2019. The increase in the provision was ~~attributed~~primarily due to the ~~reversal~~impact of ~~$1.35 million in loan loss provisions related to loans divested in~~ the ~~First Bank transaction during the third quarter of 2016.~~coronavirus slowdown. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.

Nine-Month Comparison. The provision charged to operations increased ~~$1.40~~$8.55 million, or 245.80%, to ~~$2.16~~$12.03 million infor the first nine months of ~~2017~~2020 compared to the same period of ~~2016, which was attributed~~2019. The provision net of year to date net charge-offs of $3.18 million had the ~~reversal~~effect of ~~$1.35 million in~~increasing loan loss ~~provisions related to loans divested~~reserves $8.85 million. For additional information, see “Allowance for Loan Losses” in the ~~First Bank transaction during the third quarter of 2016.~~“Financial Condition” section below.

~~Table of Contents~~

Noninterest Income

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

	Three Months Ended						Three Months Ended						Nine Months Ended						Nine Months Ended						Three Months Ended												Nine Months Ended
	September 30,						Increase						September 30,						Increase						September 30,						Increase					%	September 30,						Increase					%
	2017			2016			(Decrease)			% Change			2017			2016			(Decrease)			% Change			2020			2019			(Decrease)			Change			2020			2019			(Decrease)			Change
(Amounts in thousands)
Wealth management	$	758		$	653		$	105			16.08	%	$	2,339		$	2,147		$	192			8.94	%	$	909		$	952		$	(43	)		-4.52	%	$	2,607		$	2,581		$	26			1.01	%
Service charges on deposits		3,605			3,494			111			3.18	%		10,078			10,146			(68	)		-0.67	%		3,250			3,785			(535	)		-14.13	%		9,541			10,892			(1,351	)		-12.40	%
Other service charges and fees		2,141			2,024			117			5.78	%		6,387			6,088		��	299			4.91	%		2,748			2,007			741			36.92	%		7,596			6,185			1,411			22.81	%
Insurance commissions		306			1,592			(1,286	)		-80.78	%		1,004			5,383			(4,379	)		-81.35	%
Net impairment losses recognized in earnings		-			(4,635	)		4,635			-100.00	%		-			(4,646	)		4,646			-100.00	%
Net loss on sale of securities		-			25			(25	)		-100.00	%		(657	)		(53	)		(604	)		1139.62	%
Net gain on sale of securities																										-			-			-			-			385			(43	)		428			-995.35	%
Net FDIC indemnification asset amortization		(268	)		(1,369	)		1,101			-80.42	%		(3,186	)		(3,856	)		670			-17.38	%		(383	)		(719	)		336			-46.73	%		(1,352	)		(1,787	)		435			-24.34	%
Net gain on divestiture		-			3,065			(3,065	)		-100.00	%		-			3,065			(3,065	)		-100.00	%
Other income/litigation settlements																										-			900			(900	)		-100.00	%		-			4,600			(4,600	)		-100.00	%
Other operating income		593			1,046			(453	)		-43.31	%		2,336			2,554			(218	)		-8.54	%		1,114			709			405			57.12	%		3,323			1,935			1,388			71.73	%
Total noninterest income	$	7,135		$	5,895		$	1,240			21.03	%	$	18,301		$	20,828		$	(2,527	)		-12.13	%	$	7,638		$	7,634		$	4			0.05	%	$	22,100		$	24,363		$	(2,263	)		-9.29	%

Three-Month Comparison. Noninterest income comprised ~~24.45%~~22.16% of total net interest and noninterest income in the third quarter of ~~2017~~2020 compared to ~~21.82%~~25.57% in the same quarter of ~~2016.~~2019. Noninterest income increased ~~$1.24 million,~~$4 thousand, or ~~21.03%,~~0.05%. The increase was primarily due to increases in both net ~~impairment losses recognized~~interchange income and other operating income for a combined total of $1.15 million. A decrease in the amortization of the FDIC indemnification asset of $336 thousand contributed to the increase in noninterest income as well. These increases were offset by litigation settlements received in the third quarter of ~~2016 and the decrease in net negative amortization related to the FDIC indemnification asset~~2019 of $900 thousand as loss share coverage expired June 30, 2017, for commercial loans. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. These changes were offset bywell as a decrease in ~~insurance commissions resulting from the Greenpoint divestiture in the fourth quarter~~service charges on deposits of ~~2016 and~~$535 thousand as a ~~net gain on the divestiture~~result of six bank branches to First Bank in the third quarter of 2016. Excluding the impact from impairment losses, sales of securities and branches, net FDIC indemnification asset amortization, and net gain on divestiture, noninterest income decreased $1.33 million, or 15.22%, to $7.40 million in the third quarter of 2017, from $8.73 million in the same quarter of 2016. The decrease was due primarily to a $1.29 million decrease in insurance commissions resulting from the Greenpoint divestiture.pandemic shutdowns.

Nine-Month Comparison. Noninterest income comprised ~~21.84%~~21.47% of total net interest and noninterest income infor the first nine months of ~~2017~~2020 compared to ~~24.58%~~26.55% in the same period of ~~2016.~~2019. Noninterest income decreased ~~$2.53~~$2.26 million, or ~~12.13%~~9.29%, primarily due to $4.60 million received from litigation settlements in 2019. In addition, service charges on deposits decreased $1.35 million primarily as a ~~decrease in insurance commissions resulting from~~result of the ~~Greenpoint divestiture in the fourth quarter of 2016~~second and ~~a net gain on the divestiture of six bank branches to First Bank in the~~ third quarter effects of ~~2016~~the pandemic shutdowns. These decreases were primarily offset by ~~net impairment losses recognized~~increases in the third quarter of 2016. See Note 2, “Investment Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report. Net negative amortization related to the FDIC indemnification asset decreasedother service charges and fees and other operating income. Other service charges and fees increased $1.41 million, or 22.81%, primarily due to ~~additional reserve provisions as loss share coverage expired June 30, 2017, for commercial loans. Excluding the impact from impairment losses, sales of securities and branches,~~an increase in net ~~FDIC indemnification asset amortization, net gain on divestiture, and bank owned life insurance proceeds, noninterest~~interchange income. Other Operating income ~~decreased $4.19~~increased $1.39 million or ~~16.20%, to $21.69 million in the first nine months of 2017, from $25.88 million in the same period of 2016. The decrease~~71.73% and was ~~due~~ primarily ~~to a $4.38 million decrease in insurance commissions resulting from the Greenpoint divestiture.~~

driven by third party incentives associated with debit cards and demand deposit accounts.

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Noninterest Expense

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

	Three Months Ended				Three Months Ended						Nine Months Ended				Nine Months Ended						Three Months Ended										Nine Months Ended
	September 30,				Increase						September 30,				Increase			%			September 30,				Increase					%	September 30,				Increase					%
	2017		2016		(Decrease)			% Change			2017		2016		(Decrease)			Change			2020		2019		(Decrease)			Change			2020		2019		(Decrease)			Change
(Amounts in thousands)
Salaries and employee benefits	$	9,137	$	9,828	$	(691	)		-7.03	%	$	27,178	$	30,501	$	(3,323	)		-10.89	%	$	10,485	$	9,334	$	1,151			12.33	%	$	32,886	$	27,653	$	5,233			18.92	%
Occupancy expense		1,082		1,249		(167	)		-13.37	%		3,671		4,139		(468	)		-11.31	%		1,228		1,042		186			17.85	%		3,818		3,277		541			16.51	%
Furniture and equipment expense		1,133		1,066		67			6.29	%		3,311		3,271		40			1.22	%		1,412		1,183		229			19.36	%		4,112		3,278		834			25.44	%
Service fees																						1,581		1,466		115			7.84	%		4,433		3,727		706			18.94	%
Advertising and public relations																						430		795		(365	)		-45.91	%		1,417		1,832		(415	)		-22.65	%
Professional fees																						408		548		(140	)		-25.55	%		948		1,290		(342	)		-26.51	%
Amortization of intangibles		266		316		(50	)		-15.82	%		790		871		(81	)		-9.30	%		365		251		114			45.42	%		1,086		746		340			45.58	%
FDIC premiums and assessments		227		363		(136	)		-37.47	%		698		1,109		(411	)		-37.06	%		191		-		191			-			224		318		(94	)		-29.56	%
Merger, acquisition, and divestiture expense		-		226		(226	)		-100.00	%		-		675		(675	)		-100.00	%
Merger expense																						-		592		(592	)		-100.00	%		1,893		592		1,301			219.76	%
Other operating expense		5,064		5,509		(445	)		-8.08	%		15,802		15,527		275			1.77	%		3,071		2,233		838			37.53	%		8,931		8,167		764			9.35	%
Total noninterest expense	$	16,909	$	18,557	$	(1,648	)		-8.88	%	$	51,450	$	56,093	$	(4,643	)		-8.28	%	$	19,171	$	17,444	$	1,727			9.90	%	$	59,748	$	50,880	$	8,868			17.43	%

Three-Month Comparison. Noninterest expense ~~decreased $1.65~~increased $1.73 million, or ~~8.88%~~9.90%, in the third quarter of ~~2017~~2020 compared to the same quarter of ~~2016, which~~2019. The increase was largely due to ~~a decrease~~an increase in salaries and ~~employee benefits. Salaries~~benefits of $1.15 million primarily attributable to the addition of Highlands employees. Other increases also occurred in occupancy and ~~employee benefits decreased as full-time equivalent employees, calculated using the number~~furniture and equipment expense, and other operating expense for a combined total of ~~hours worked, decreased to 569 as of September 30, 2017, from 624 as of September 30, 2016,~~$1.25 million. The increases in these categories were primarily due to the ~~First Bank and Greenpoint transactions that occurred during the second half~~addition of ~~2016. We incurred expenses totaling $226 thousand related to the~~ branch exchange with First Bank during the third quarter of 2016. Occupancy, furniture, and equipment expense decreased $100 thousand, or 4.32%, due to branch closures and divestitures that occurred during the prior year. Other operating expense included a $421 thousand increase in legal fees, a $146 thousand increase in property writedowns, and a $369 thousand increaselocations acquired in the ~~net loss on sales and expenses related to other real estate owned (“OREO”) to $647 thousand from $278 thousand~~Highlands transaction. Increases in the third quarter of ~~2016. These increases~~2020 were offset primarily by ~~decreases~~merger expenses of $592 thousand that were incurred in ~~office supplies expense, other service fees, nonemployee compensation, and consulting fees.~~the third quarter of 2019.

Nine-Month Comparison. Noninterest expense ~~decreased $4.64~~increased $8.87 million, or ~~8.28%~~17.43%, in the first nine months of ~~2017~~2020 compared to the same period of ~~2016,~~2019. The increase was primarily due to an increase in salaries and benefits of $5.23 million, or 18.92% which was largely due to ~~a decrease~~the addition of Highlands employees. In addition, the Company incurred $1.89 million in ~~salaries and employee benefits. Salaries and employee benefits decreased primarily due to the First Bank and Greenpoint transactions that occurred~~residual merger expenses during the ~~second half~~first quarter of ~~2016. We incurred expenses totaling $675 thousand~~2020 related to the ~~First Bank branch exchange during the first nine months of 2016.~~Highlands acquisition. Occupancy and furniture and equipment expense ~~decreased $428 thousand, or 5.78%, due to~~increased a combined total of $1.38 million and was primarily driven by the addition of branch ~~closures and divestitures that occurred during the prior year. Other operating expense included a $467 thousand increase in legal fees which were offset by a $48 thousand decrease~~locations acquired in the ~~net loss on sales and expenses related to OREO to $1.19 million from $1.24 million in the first nine months of 2016.~~Highlands transaction.

~~Income~~Income Tax Expense

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

Three-Month Comparison. 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. Income tax expense ~~increased $664~~decreased $248 thousand, or ~~20.56%~~9.61%, ~~and~~primarily due to the decrease in pre-tax earnings. The effective tax rate increased ~~13 basis points~~ to ~~33.73%~~22.00% in the third quarter of ~~2017 compared to~~2020 from 21.98% in the same quarter of ~~2016. The increase in the effective tax rate was largely due to a decrease in tax-exempt revenue.~~2019.

Nine-Month Comparison. Income tax expense ~~increased $727 thousand,~~decreased $1.36 million, or ~~7.92%~~16.71%, and the effective tax rate decreased ~~7 basis points~~ to ~~32.83%~~21.80% in the ~~first nine months~~third quarter of ~~2017 compared to~~2020 from 21.82% in the same ~~period~~quarter of ~~2016. The decrease in the effective tax rate was largely due to an increase in tax-exempt revenue.~~2019.

Non-GAAP Financial Measures

In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-GAAP financial ~~measures~~measure presented in this report ~~include net interest income on a FTE basis and normalized~~includes net interest income on a FTE basis. While we believe these non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions. The reconciliations of these measures to GAAP measures are presented below.

~~Table of Contents~~

We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 35%21%. ~~Normalized net interest income~~While we believe certain non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a ~~FTE basis is a~~GAAP basis. Our non-GAAP ~~measure that excludes non-cash loan accretion income related~~financial measures may not be comparable to ~~PCI loans.~~those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.

Table of Contents

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

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(Amounts in thousands)

Net interest income, GAAP
$ 22,050 $ 21,121 $ 65,485 $ 63,923
FTE adjustment⁽¹⁾
470 509 1,448 1,561
Net interest income, FTE
22,520 21,630 66,933 65,484
Less: non-cash accretion income⁽²⁾
1,377 984 4,257 3,893
Net interest income, normalized
$ 21,143 $ 20,646 $ 62,676 $ 61,591

Net interest margin, GAAP
4.17 % 3.85 % 4.15 % 3.91 %
FTE adjustment⁽¹⁾
0.08 % 0.08 % 0.10 % 0.09 %
Net interest margin, FTE
4.25 % 3.95 % 4.25 % 4.01 %
Less: non-cash accretion income⁽²⁾
0.25 % 0.18 % 0.27 % 0.24 %
Net interest margin, normalized
4.00 % 3.77 % 3.98 % 3.77 %

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

(Amounts in thousands)

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

Net interest margin, GAAP
4.08 % 4.53 % 4.30 % 4.58 %
FTE adjustment(1)
0.02 % 0.03 % 0.03 % 0.05 %
Net interest margin, FTE
4.10 % 4.56 % 4.33 % 4.63 %

(1) FTE basis of 21%.

~~(1)~~

~~FTE basis based on the federal statutory rate of 35%~~

~~(2)~~

~~Includes non-cash purchase accounting accretion income from acquired loan portfolios~~

Financial Condition

Total assets as of September 30, ~~2017, decreased $11.62~~2020, increased $149.08 million, or ~~0.49%, to $2.37 billion~~5.33% from ~~$2.39 billion as of~~ December 31, ~~2016. Total~~2019. The increase in assets was primarily driven by a increase in overnight funds of $175.36 million, or 118.48%. In addition, total liabilities as of September 30, ~~2017, decreased $25.20~~2020, increased $157.98 million, or ~~1.23%, to $2.02 billion~~6.67% from ~~$2.05 billion as of~~ December 31, ~~2016.~~2019. The increase in liabilities was primarily the result of an increase in total deposits of $162.33 million, or 6.97%.

Investment Securities

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

Available-for-sale debt securities as of September 30, ~~2017, increased $8.85~~2020, decreased $78.60 million, or ~~5.34%~~46.35%, compared to December 31, ~~2016,~~2019. The decrease was primarily due to the ~~purchase of U.S. Treasury securities offset by the maturity and~~ sale of ~~municipal, single-issue trust preferred, and mortgage-backed Agency securities.~~$51.03 million in securities in the first quarter. The market value of debt securities available for sale as a percentage of amortized cost was ~~101.11%~~101.77.% as of September 30, ~~2017,~~2020, compared to ~~99.48%~~100.65% as of December 31, 2016. Held-to-maturity securities as of September 30, 2017, decreased $21.95 million, or 46.57%, compared to December 31, 2016, primarily due to the maturity of U.S. Agency securities. The market value of securities held to maturity as a percentage of amortized cost was 100.17% as of September 30, 2017, compared to 100.28% as of December 31, 2016.2019.

Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities for the three and nine months ended September 30, 2017. We recognized credit-related OTTI charges in earnings associated with debt securities of $4.64 million during the three and nine months ended September 30, 2016, due to our change in intent to hold certain trust preferred securities to recovery. We recognized no OTTI charges in earnings associated with equity securities for the three and nine months ended September 30, 2017,2020 or ~~the three months ended September 30, 2016. We recognized OTTI charges in earnings associated with certain equity securities of $11 thousand for the nine months ended September 30, 2016.~~2019. For additional information, see Note 2, ~~“Investment~~“Debt Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

~~Table of Contents~~

Loans Held for Investment

L~~oans~~Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of September 30, ~~2017, decreased $15.23~~2020, increased $80.54 million, or ~~0.82%~~3.81%, compared to December 31, ~~2016, primarily due to a $25.71~~2019. Covered loans decreased $2.12 million, or ~~45.10%~~16.46%, ~~decrease in covered loans~~ as the covered Waccamaw portfolio continues to ~~run off. The decrease was offset by a $10.48 million, or 0.58%, increase in non-covered loans driven by the commercial construction and non-farm, non-real estate commercial segments.~~pay down. For additional information, see Note 3,4, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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

	September 30, 2017					December 31, 2016					September 30, 2016					September 30, 2020					December 31, 2019					September 30, 2019
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Non-covered loans held for investment
Commercial loans
Construction, development, and other land	$	72,952		3.97	%	$	56,948		3.07	%	$	49,799		2.71	%	$	46,785		2.13	%	$	48,659		2.30	%	$	61,350		3.62	%
Commercial and industrial		90,184		4.91	%		92,204		4.98	%		90,362		4.92	%		179,714		8.19	%		142,962		6.76	%		93,627		5.53	%
Multi-family residential		125,997		6.86	%		134,228		7.24	%		127,468		6.94	%		105,647		4.81	%		121,840		5.76	%		96,274		5.68	%
Single family non-owner occupied		143,213		7.79	%		142,965		7.72	%		144,023		7.84	%		189,265		8.62	%		163,181		7.72	%		135,298		7.99	%
Non-farm, non-residential		613,380		33.38	%		598,674		32.31	%		596,015		32.46	%		748,815		34.11	%		727,261		34.39	%		584,897		34.52	%
Agricultural		6,096		0.33	%		6,003		0.32	%		5,786		0.32	%		10,362		0.47	%		11,756		0.56	%		9,429		0.56	%
Farmland		27,897		1.52	%		31,729		1.71	%		31,974		1.74	%		22,973		1.05	%		23,155		1.10	%		16,728		0.99	%
Total commercial loans		1,079,719		58.76	%		1,062,751		57.35	%		1,045,427		56.93	%		1,303,561		59.38	%		1,238,814		58.59	%		997,603		58.89	%
Consumer real estate loans
Home equity lines		102,888		5.60	%		106,361		5.74	%		108,108		5.89	%		94,056		4.29	%		110,078		5.21	%		86,349		5.10	%
Single family owner occupied		501,242		27.27	%		500,891		27.03	%		497,695		27.10	%		644,598		29.37	%		620,697		29.35	%		484,567		28.60	%
Owner occupied construction		47,034		2.56	%		44,535		2.41	%		43,925		2.39	%		17,460		0.79	%		17,241		0.82	%		14,872		0.87	%
Total consumer real estate loans		651,164		35.43	%		651,787		35.18	%		649,728		35.38	%		756,114		34.45	%		748,016		35.38	%		585,788		34.57	%
Consumer and other loans
Consumer loans		70,695		3.85	%		77,445		4.18	%		76,363		4.16	%		118,738		5.41	%		110,027		5.20	%		92,027		5.43	%
Other		4,856		0.26	%		3,971		0.21	%		3,029		0.16	%		5,838		0.27	%		4,742		0.22	%		4,540		0.27	%
Total consumer and other loans		75,551		4.11	%		81,416		4.39	%		79,392		4.32	%		124,576		5.68	%		114,769		5.42	%		96,567		5.70	%
Total non-covered loans		1,806,434		98.30	%		1,795,954		96.92	%		1,774,547		96.63	%		2,184,251		99.51	%		2,101,599		99.39	%		1,679,958		99.15	%
Total covered loans		31,287		1.70	%		56,994		3.08	%		61,837		3.37	%		10,744		0.49	%		12,861		0.61	%		14,158		0.84	%
Total loans held for investment, net of unearned income		1,837,721		100.00	%		1,852,948		100.00	%		1,836,384		100.00	%		2,194,995		100.00	%		2,114,460		100.00	%		1,694,116		99.99	%
Less: allowance for loan losses		19,206					17,948					19,633					27,277					18,425					18,493
Total loans held for investment, net of unearned income and allowance	$	1,818,515				$	1,835,000				$	1,816,751				$	2,167,718				$	2,096,035				$	1,675,623

Loans held for sale																$	-				$	263				$	-

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

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

	September 30, 2017					December 31, 2016					September 30, 2016					September 30, 2020					December 31, 2019					September 30, 2019
(Amounts in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial loans
Construction, development, and other land	$	40		0.13	%	$	4,570		8.02	%	$	4,699		7.60	%	$	27		0.25	%	$	28		0.22	%	$	30		0.21	%
Commercial and industrial		-		0.00	%		895		1.57	%		941		1.52	%
Multi-family residential		-		0.00	%		8		0.01	%		43		0.07	%
Single family non-owner occupied		292		0.93	%		962		1.69	%		1,328		2.15	%		188		1.75	%		199		1.55	%		216		1.53	%
Non-farm, non-residential		10		0.03	%		7,512		13.18	%		8,312		13.44	%		-		0.00	%		3		0.02	%		4		0.03	%
Agricultural		-		0.00	%		25	��	0.04	%		26		0.04	%
Farmland		-		0.00	%		397		0.70	%		412		0.67	%
Total commercial loans		342		1.09	%		14,369		25.21	%		15,761		25.49	%		215		2.00	%		230		1.79	%		250		1.77	%
Consumer real estate loans
Home equity lines		26,850		85.82	%		35,817		62.84	%		38,737		62.64	%		8,079		75.20	%		9,853		76.61	%		11,031		77.91	%
Single family owner occupied		4,095		13.09	%		6,729		11.81	%		7,058		11.41	%		2,450		22.80	%		2,778		21.60	%		2,877		20.32	%
Owner occupied construction		-		0.00	%		-		0.00	%		201		0.33	%
Total consumer real estate loans		30,945		98.91	%		42,546		74.65	%		45,996		74.38	%		10,529		98.00	%		12,631		98.21	%		13,908		98.23	%
Consumer and other loans
Consumer loans		-		0.00	%		79		0.14	%		80		0.13	%
Total covered loans	$	31,287		100.00	%	$	56,994		100.00	%	$	61,837		100.00	%	$	10,744		100.00	%	$	12,861		100.00	%	$	14,158		100.00	%

RCommercial Loans Modified Under CARES Act

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

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

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

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~~isk~~Risk Elements

We seek to mitigate credit risk by ~~adhering to~~following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of ~~borrowers~~’borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than ~~$4.0~~$4.00 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 4,5, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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

	September 30, 2017			December 31, 2016			September 30, 2016			September 30, 2020			December 31, 2019			September 30, 2019
(Amounts in thousands)
Non-covered nonperforming
Nonaccrual loans	$	18,942		$	15,854		$	17,487		$	24,423		$	16,113		$	16,701
Accruing loans past due 90 days or more		-			-			62			43			144			107
TDRs⁽¹⁾		141			114			115
TDRs(1)											456			720			668
Total nonperforming loans		19,083			15,968			17,664			24,922			16,977			17,476
Non-covered OREO		3,543			5,109			4,052			2,103			3,969			2,528
Total non-covered nonperforming assets	$	22,626		$	21,077		$	21,716		$	27,025		$	20,946		$	20,004

Covered nonperforming
Nonaccrual loans	$	420		$	608		$	688		$	333		$	244		$	243
Total nonperforming loans		420			608			688			333			244			243
Covered OREO		54			276			2,437			-			-			-
Total covered nonperforming assets	$	474		$	884		$	3,125		$	333		$	244		$	243

Total nonperforming
Nonaccrual loans	$	19,362		$	16,462		$	18,175		$	24,756		$	16,357		$	16,944
Accruing loans past due 90 days or more		-			-			62			43			144			107
TDRs⁽¹⁾		141			114			115
TDRs(1)											456			720			668
Total nonperforming loans		19,503			16,576			18,352			25,255			17,221			17,719
OREO		3,597			5,385			6,489			2,103			3,969			2,528
Total nonperforming assets	$	23,100		$	21,961		$	24,841		$	27,358		$	21,190		$	20,247

Additional Information
Performing TDRs⁽²⁾	$	8,101		$	12,838		$	13,336
Total TDRs⁽³⁾		8,242			12,952			13,451
Performing TDRs(2)										$	10,480		$	5,855		$	5,635
Total Accruing TDRs(3)											10,936			6,575			6,303

Non-covered ratios
Nonperforming loans to total loans		1.06	%		0.89	%		1.00	%		1.14	%		0.81	%		1.04	%
Nonperforming assets to total assets		0.97	%		0.90	%		0.91	%		0.92	%		0.75	%		0.91	%
Non-PCI allowance to nonperforming loans		100.64	%		112.32	%		111.08	%		109.45	%		108.53	%		105.82	%
Non-PCI allowance to total loans		1.06	%		1.00	%		1.11	%		1.25	%		0.88	%		1.10	%

Total ratios
Nonperforming loans to total loans		1.06	%		0.89	%		1.00	%		1.15	%		0.81	%		1.05	%
Nonperforming assets to total assets		0.97	%		0.92	%		1.01	%		0.93	%		0.76	%		0.92	%
Allowance for loan losses to nonperforming loans		98.48	%		108.28	%		106.98	%		108.01	%		106.99	%		104.37	%
Allowance for loan losses to total loans		1.05	%		0.97	%		1.07	%		1.24	%		0.87	%		1.09	%


(1)	TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of ~~$15 thousand, $224~~$1.57 million, $95 thousand, and ~~$268~~$329 thousand for the periods ended September 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and September 30, ~~2016,~~2019, respectively.
(2)	TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of ~~$1.50 million, $1.06~~$474 thousand, $2.25 million, and ~~$1.04~~$2.19 million for the periods ended September 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and September 30, ~~2016,~~2019, respectively.
(3)	Total accruing TDRs exclude nonaccrual TDRs of ~~$1.52~~$2.04 million, ~~$1.28~~$2.34 million, and ~~$1.31~~$2.52 million for the periods ended September 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and September 30, ~~2016,~~2019, respectively.

~~Non-covered~~Non-covered nonperforming assets as of September 30, ~~2017,~~2020, increased ~~$1.55~~$6.08 million, or ~~7.35%~~29.02%, from December 31, ~~2016,~~2019, primarily due to an increase in non-covered nonaccrual ~~loans.~~loans acquired from Highlands Union Bank offset by a decrease in OREO of $1.87 million. Non-covered nonaccrual loans as of September 30, ~~2017,~~2020, increased ~~$3.09~~$8.31 million, or ~~19.48%~~51.57%, from December 31, ~~2016.~~2019. As of September 30, ~~2017,~~2020, non-covered nonaccrual loans were largely attributed to single family owner occupied ~~(60.80%~~(32.80%) ~~and~~, non-farm, non-residential ~~(17.70%~~(27.07%) ~~loans.~~, and single family non-owner occupied loans (13.47%). As of September 30, ~~2017,~~2020, approximately ~~$833 thousand,~~$6.86 million or ~~4.40%~~28.09%, of non-covered nonaccrual loans were attributed to performing loans acquired ~~in business combinations.~~through the Highlands acquisition. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $~~25.10~~$33.90 million as of September 30, ~~2017, an increase~~2020, a decrease of ~~$88 thousand,~~$1.72 million, or ~~0.35%~~4.84%, compared to ~~$25.02~~$35.62 million as of December 31, ~~2016.~~2019. Non-covered delinquent loans as a percent of total non-covered loans totaled ~~1.40%~~1.55% as of September 30, ~~2017,~~2020, which includes past due loans ~~(0.34%~~(0.43%) and nonaccrual loans ~~(1.06%~~(1.12%).

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When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after ~~nine~~six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of September 30, ~~2017, decreased $4.71~~2020, increased $4.36 million, or ~~36.37%~~66.33%, to ~~$8.24~~$10.94 million from December 31, ~~2016. Nonperforming~~2019. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of September 30, ~~2017,~~2020, increased ~~$27 thousand, or 23.68%,~~$1.87 million to ~~$141 thousand~~$2.77 million compared to December 31, ~~2016. Nonperforming~~2019. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled ~~1.71%~~25.29% as of September 30, ~~2017,~~2020, compared to ~~0.88%~~13.69% as of December 31, ~~2016.~~2019. Specific reserves on TDRs totaled ~~$707~~$347 thousand as of September 30, ~~2017,~~2020, compared to ~~$670~~$353 thousand as of December 31, ~~2016.~~2019.

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

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

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

Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased ~~$1.57~~$1.87 million, or ~~30.65%~~47.01%, as of September 30, ~~2017,~~2020, compared to December 31, ~~2016. Non-covered OREO~~2019, and consisted of 2622 properties with an average holding period of approximately 13 ~~months as of September 30, 2017.~~months. The net ~~loss~~gain on the sale of OREO totaled ~~$522~~$32 thousand for the three months ended September 30, ~~2017,~~2020, compared to ~~$184~~a net loss of $234 thousand for the same period of the prior ~~year, and $943 thousand~~year; the net loss on the sale of OREO for the nine months ended September 30, ~~2017,~~2020 totaled $296 thousand compared to ~~$1.00 million~~$790 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:

	Nine Months Ended September 30,																		Nine Months Ended September 30,
	2017									2016									2020								2019
	Non-covered			Covered			Total			Non-covered			Covered			Total			Non-covered			Covered		Total			Non-covered			Covered			Total
(Amounts in thousands)
Beginning balance	$	5,109		$	276		$	5,385		$	4,873		$	4,034		$	8,907		$	3,969		$	-	$	3,969		$	3,806		$	32		$	3,838
Additions		1,256			26			1,282			2,452			1,200			3,652			695			-		695			2,752			131			2,883
Disposals		(2,169	)		(218	)		(2,387	)		(2,561	)		(2,131	)		(4,692	)		(2,139	)		-		(2,139	)		(3,388	)		(152	)		(3,540	)
Valuation adjustments		(653	)		(30	)		(683	)		(712	)		(666	)		(1,378	)		(422	)		-		(422	)		(642	)		(11	)		(653	)
Ending balance	$	3,543		$	54		$	3,597		$	4,052		$	2,437		$	6,489		$	2,103		$	-	$	2,103		$	2,528		$	-		$	2,528

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates. As of ~~December 31, 2016,~~September 30, 2020, our ~~qualitative risk factors reflect~~allowance reflects a ~~stable~~higher risk of loan losses due to ~~consistent asset quality metrics and relatively stable~~uncertainty around the impact that the COVID-19 pandemic will have on business and economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of September 30, ~~2017;~~2020; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see Note 5,6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

The allowance for loan losses as of September 30, ~~2017,~~2020, increased ~~$1.26~~$8.85 million, or ~~7.01%~~48.04%, from December 31, ~~2016. The increase was largely attributed~~2019 due primarily to ~~a $1.00 million increase in unallocated reserves combined with a $641 thousand increase in specific reserves on impaired loans.~~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 ~~1.06%~~1.25% as of September 30, ~~2017,~~2020, compared to ~~1.00%~~0.88% as of December 31, ~~2016.~~2019. Effective January 1, 2020, the Company collapsed the PCI loans ~~were aggregated~~and discounts for Peoples and Waccamaw acquired loans into ~~five~~the core loan ~~pools as of September 30, 2017,~~portfolio. The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and ~~December 31, 2016: Waccamaw commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples Bank of Virginia (“Peoples”) commercial,~~Home Equity Lines, Commercial Land and Peoples residential. The cash flow analysis identified no impaired PCI loan pools as of September 30, 2017, compared to one impaired PCI loan pool with a cumulative impairment of $12 thousand as of December 31, 2016. We recorded a net charge-off of $410Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner Occupied, Commercial and Industrial, and Consumer. Net charge-offs increased $462 thousand for the three months ended September 30, ~~2017,~~2020, compared to ~~a net charge-off of $312 thousand in~~ the same period of the prior ~~year, largely due to an increase in recoveries in the commercial loan segment in 2016. We recorded a net charge-off of $898 thousand for~~year. For the nine months ended September 30, ~~2017,~~2020, net charge-offs decreased $72 thousand, compared ~~to a net charge-off of $1.35 million in~~with the same period of the prior ~~year, largely due to an overall reduction~~year. The decrease in net charge-offs ~~for commercial and consumer real estate loans offset~~was driven by ~~an increase in recoveries~~reduced losses in the ~~commercial~~single-family owner occupied loan ~~segment in 2016.~~pool.

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

																		Three Months Ended September 30,
	Three Months Ended September 30,																	2020								2019
	2017									2016								Non-PCI								Non-PCI
	Non-PCI Portfolio			PCI Portfolio			Total			Non-PCI Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total
(Amounts in thousands)
Beginning balance	$	18,878		$	8		$	18,886		$	21,087		$	12	$	21,099		$	23,758		$	-	$	23,758		$	18,540		$	-	$	18,540
Provision for (recovery of) loan losses		738			(8	)		730			(1,154	)		-		(1,154	)
Benefit attributable to the FDIC indemnification asset		-			-			-			-			-		-
Provision for (recovery of) loan losses charged to operations		738			(8	)		730			(1,154	)		-		(1,154	)		4,703			-		4,703			675			-		675
Recovery of loan losses recorded through the FDIC indemnification asset		-			-			-			-			-		-
Charge-offs		(717	)		-			(717	)		(772	)		-		(772	)		(1,563	)		-		(1,563	)		(964	)		-		(964	)
Recoveries		307			-			307			460			-		460			379			-		379			242			-		242
Net charge-offs		(410	)		-			(410	)		(312	)		-		(312	)		(1,184	)		-		(1,184	)		(722	)		-		(722	)
Ending balance	$	19,206		$	-		$	19,206		$	19,621		$	12	$	19,633		$	27,277		$	-	$	27,277		$	18,493		$	-	$	18,493

																			Nine Months Ended September 30,
	Nine Months Ended September 30,																		2020								2019
	2017									2016									Non-PCI								Non-PCI
	Non-PCI Portfolio			PCI Portfolio			Total			Non-PCI Portfolio			PCI Portfolio			Total			Portfolio			PCI Portfolio		Total			Portfolio			PCI Portfolio		Total
(Amounts in thousands)
Beginning balance	$	17,936		$	12		$	17,948		$	20,179		$	54		$	20,233		$	18,425		$	-	$	18,425		$	18,267		$	-	$	18,267
Provision for (recovery of) loan losses		2,168			(12	)		2,156			796			(42	)		754
Benefit attributable to the FDIC indemnification asset		-			-			-			-			1			1
Provision for (recovery of) loan losses charged to operations		2,168			(12	)		2,156			796			(41	)		755
Recovery of loan losses recorded through the FDIC indemnification asset		-			-			-			-			(1	)		(1	)
Provision for loan losses
charged to operations																				12,034			-		12,034			3,480			-		3,480
Charge-offs		(1,976	)		-			(1,976	)		(2,691	)		-			(2,691	)		(4,429	)		-		(4,429	)		(4,700	)		-		(4,700	)
Recoveries		1,078			-			1,078			1,337			-			1,337			1,247			-		1,247			1,446			-		1,446
Net charge-offs		(898	)		-			(898	)		(1,354	)		-			(1,354	)		(3,182	)		-		(3,182	)		(3,254	)		-		(3,254	)
Ending balance	$	19,206		$	-		$	19,206		$	19,621		$	12		$	19,633		$	27,277		$	-	$	27,277		$	18,493		$	-	$	18,493

Deposits

Total deposits as of September 30, ~~2017,~~2020, increased ~~$22.48~~$162.33 million, or ~~1.22%~~6.97%, compared to December 31, ~~2016. Noninterest-bearing~~2019. The increase was largely attributable to noninterest-bearing demand deposits which increased ~~$25.24~~$122.41 million, or 19.50%. Interest-bearing demand and ~~interest-bearing deposits increased $14.91 million while~~ savings deposits ~~which include money market accounts~~also reflected growth with increases of $79.26 million, or 15.93% and ~~savings accounts, decreased $13.06 million; and~~$39.40 million, or 5.72%, respectively. These increases were offset by a decrease in time deposits ~~which include certificates~~ of ~~deposit and individual retirement accounts, decreased $4.60 as~~$78.74 million, or 15.27%. We attribute a significant amount of ~~September 30, 2017, compared~~the increase in deposits to ~~December 31, 2016.~~the unprecedented level of federal government stimulus during the second quarter of 2020.

Borrowings

Total borrowings as of September 30, ~~2017,~~2020, decreased ~~$44.93 million, or 25.14%,~~$645 thousand, compared to December 31, 2016. Short-term borrowings consisted of retail repurchase agreements, which decreased $14.22 million, or 19.48%, while the weighted average rate remained constant at 0.07%, as of September 30, 2017, and December 31, 2016.

~~Long-term borrowings~~ consisted of wholesale repurchase agreements and FHLB borrowings, including convertible and callable advances as of September 30, 2017. Wholesale repurchase agreements totaled $25.00 million with a weighted average rate of 3.18% as of September 30, 2017, and December 31, 2016. Long-term FHLB borrowings decreased $15.00 million, or 23.08%, to $50.00 million and the weighted average rate decreased 4 basis points to 4.00% as of September 30, 2017, compared to December 31, 2016. The decrease was due to a $15.00 million convertible advance with a 4.15% rate that matured on May 4, 2017. The Company redeemed all of its trust preferred securities on January 9, 2017, resulting in a decrease of $15.46 million in subordinated debt.2019.

~~Table of Contents~~

Liquidity and Capital Resources

Liquidity

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

Table of Contents

As a financial holding company, the ~~Company~~’sCompany’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of September 30, ~~2017,~~2020, the Company’s cash reserves ~~and investment securities~~ totaled ~~$13.84~~$9.46 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 September 30, 2017.~~ The Company’s cash reserves and investments provide adequate working capital to meet obligations ~~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”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of September 30, ~~2017,~~2020, our unencumbered cash totaled ~~$105.12~~$375.66 million, unused borrowing capacity from the FHLB totaled ~~$446.30~~$322.82 million, available credit from the FRB Discount Window totaled ~~$6.15~~$6.08 million, available lines from correspondent banks totaled ~~$90.00~~$85.00 million, and unpledged available-for-sale securities totaled ~~$73.74~~$54.80 million.

Cash Flows

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

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2020		2019
(Amounts in thousands)
Net cash provided by operating activities	$	25,877		$	34,790		$	32,028	$	39,636
Net cash provided by investing activities		34,999			39,572			304		139,757
Net cash used in financing activities		(32,064	)		(60,220	)
Net cash provided by (used in) financing activities								126,323		(73,808	)
Net increase in cash and cash equivalents		28,812			14,142			158,655		105,585
Cash and cash equivalents at beginning of period		76,307			51,787
Cash and cash equivalents at end of period	$	105,119		$	65,929
Cash and cash equivalents, beginning balance								217,009		76,873
Cash and cash equivalents, ending balance							$	375,664	$	182,458

Cash and cash equivalents increased $~~28.81~~$158.66 million for the nine months ended September 30, ~~2017,~~2020, compared to an increase of ~~$14.14~~$105.59 million for the same period of the prior ~~year primarily~~year. The increase in cash and cash equivalents during 2020 was due ~~to financing activities. Net cash used in financing activities decreased $28.16 million for the nine months ended September 30, 2017, compared~~largely to the ~~same period~~significant inflow of the prior year primarily due to a decline in interest-bearing deposit runoff and treasury stock repurchases offset by the maturity and repayment of FHLB and other borrowings. Net cash provided by operating activities decreased $8.91 million for the nine months ended September 30, 2017, compared to the same period of the prior year. Net cash provided by investing activities decreased $4.57 million for the nine months ended September 30, 2017, compared to the same period of the prior year, which was largely due to a decrease in loan originations offset by a decrease in proceedsnon-maturity deposits from ~~sales and maturities of available-for-sale securities.~~unprecedented government stimulus.

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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~~’stockholders’ equity as of September 30, ~~2017, increased $13.58~~2020, decreased $8.90 million, or ~~4.01%~~2.08%, to ~~$352.64~~$419.92 million from ~~$339.06~~$428.82 million as of December 31, ~~2016.~~2019. The change in stockholders’ equity was largely due to net income of ~~$20.27 million and other comprehensive income (“OCI”) of $1.94~~$24.38 million offset by the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared on our common stock of ~~$8.50~~$13.45 million. Accumulated other comprehensive loss decreased $262 thousand to $1.24 million ~~and repurchased treasury shares~~as of ~~$1.26 million. OCI was~~September 30, 2020, compared to December 31, 2019, primarily due to net unrealized gains on securities. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from ~~stockholders'~~stockholders’ equity in the calculation of our capital ratios. ~~We repurchased 50,118 shares of our common stock for $1.26 million in the first nine months of 2017.~~ Our book value per common share increased ~~$0.81,~~$0.37 or ~~4.06%,~~1.57% to ~~$20.76~~$23.70 as of September 30, ~~2017,~~2020, from ~~$19.95~~$23.33 as of December 31, ~~2016.~~2019.

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Capital Adequacy Requirements

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel ~~III, became effective on January 1, 2015, subject to a four-year phase-in period. Basel III~~’s capital conservation buffer became effective on January 1, 2016, at 0.625%, and will be phased in over a four-year period (increasing by an additional 0.625% each year until it reaches 2.5% on January 1, 2019).III. A description of the Basel III capital rules is included in Part I, Item 1 of the ~~2016~~2019 Form 10-K. Our current required capital ratios are as follows:

●

4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 5.~~75%~~7.00% including the capital conservation buffer)

●

6.0% Tier 1 capital to risk-weighted assets (effectively ~~7.25%~~8.50% including the capital conservation buffer)

●

8.0% Total capital to risk-weighted assets (effectively ~~9.25%~~10.50% including the capital conservation buffer)

●

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

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

		September 30, 2017	December 31, 2016	September 30, 2020		December 31, 2019
The Company
				Company	Bank	Company	Bank

Common equity Tier 1 ratio	Common equity Tier 1 ratio	13.90%	13.88%	13.89%	13.21%	14.31%	12.87%
Tier 1 risk-based capital ratio	Tier 1 risk-based capital ratio	13.90%	14.74%	13.89%	13.21%	14.31%	12.87%
Total risk-based capital ratio	Total risk-based capital ratio	14.96%	15.79%	15.14%	14.46%	15.21%	13.78%
Tier 1 leverage ratio	Tier 1 leverage ratio	11.18%	11.07%	10.06%	9.57%	14.01%	12.61%

The Bank
Common equity Tier 1 ratio		12.68%	12.93%
Tier 1 risk-based capital ratio		12.68%	12.93%
Total risk-based capital ratio		13.74%	13.98%
Tier 1 leverage ratio		10.18%	9.71%

Our risk-based capital ratios as of September 30, 2020, decreased from December 31, 2019, due to a decrease in total capital. The decrease in total capital was primarily attributable to the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared of $13.45 million, offset by net income of $24.38 million. As of September 30, ~~2017,~~2020, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules ~~on a fully phased-in basis, if such requirements were in effect,~~ as of September 30, ~~2017.~~2020.

Off-Balance Sheet Arrangements

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

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The following table presents our off-balance sheet arrangements as of the dates indicated:

	September 30, 2017		December 31, 2016		September 30, 2020		December 31, 2019
(Amounts in thousands)
Commitments to extend credit	$	245,978	$	261,801	$	219,297	$	228,716
Financial letters of credit		550		4,756
Performance letters of credit⁽¹⁾		117,768		79,144
Standby letters of credit and financial guarantees (1)						173,925		167,612
Total off-balance sheet risk	$	364,296	$	345,701	$	393,222	$	396,328

Reserve for unfunded commitments	$	66	$	326	$	66	$	66

(1)
~~(1)~~ Includes FHLB letters of credit

Market Risk and Interest Rate Sensitivity

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

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

~~The~~As of September 30, 2020, the Federal Open Market Committee ~~maintained~~had set the benchmark federal funds rate atto a range of ~~100~~0 to ~~125~~25 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. ~~Due to the current target rate, we do not reflect a decrease of more than 100 basis points from current rates in our analysis.~~

September 30, 2017

December 31, 2016

Change in

Change in

Increase (Decrease) in Basis Points

Net Interest
Income

Percent
Change

Net Interest
Income

Percent
Change

(Dollars in thousands)

300
$ 1,655
1.9
% $ 526 0.6 %
200
1,294
1.5
% 438 0.5 %
100
775
0.9
% 183 0.2 %
(100)
(4,039 )
-4.8
% (2,616 ) -3.1 %

~~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 September 30, 2017, exposure to interest rate risk is within our defined policy limits.~~

~~The Company primarily uses derivative instruments to manage exposure to market risk and meet customer financing needs. As of~~ September 30, 2017, we maintained interest rate swap agreements with notional amounts totaling $5.89 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 fair value of the swap agreements, which are accounted for as fair value hedges and recorded as derivative liabilities, totaled $151 thousand as of September 30, 2017, and $167 thousand as of December 31, 2016. For additional information, see Note 9, “Derivative Instruments and Hedging Activities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.

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	September 30, 2020					December 31, 2019
	Change in		Percent			Change in			Percent
Increase (Decrease) in Basis Points	Net Interest Income		Change			Net Interest Income			Change
(Dollars in thousands)
300	$	7,633		6.97	%	$	171			0.20	%
200		5,354		4.89	%		428			0.40	%
100		2,846		2.60	%		426			0.40	%
(100)		N/A		-			(4,631	)		-4.30	%

Inflation and Changing Prices

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

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

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 12 of this report.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of September 30, ~~2017,~~2020, our disclosure controls and procedures were effective.

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Disclosure controls and procedures are our ~~Company~~’sCompany’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~~’smanagement’s override of the controls.

Changes in Internal Control over Financial Reporting

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended September 30, ~~2017,~~2020, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

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

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ITEM 1A.

Risk Factors

~~Our~~The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2019 discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our ~~company.~~Company. Individuals should carefully consider our risk factors and information included ~~or incorporated by reference,~~ in ~~this~~our annual report on Form 10-K for the year ended December 31, 2019 before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, ~~our~~such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our ~~2016~~annual report on Form ~~10-K.~~10-K for the year ended December 31, 2019.

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

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

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

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

●

employees contracting COVID-19;

●

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

●

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

●

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

●

unavailability of key personnel necessary to conduct our business activities;

●

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

●

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

●

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

●

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

●

unprecedented volatility in United States financial markets;

●

volatile performance of our investment securities portfolio;

●

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

●

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

●

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

●

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

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

The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not Applicable

(b)	Not Applicable

(c)	Issuer Purchases of Equity Securities

We repurchased ~~39,516~~no shares of our common stock during the third quarter of ~~2017~~2020 compared to ~~171,225~~194,000 shares during the same quarter of ~~the prior year.~~2019. We do not currently have a publicly announced plan to repurchase shares.

~~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⁾

July 1-31, 2017
- $ - - 635,804
August 1-31, 2017
13,177 25.16 13,177 622,627
September 1-30, 2017
26,339 25.57 26,339 604,723
Total
39,516 $ 25.43 39,516


~~(1)~~		Our stock repurchase plan, as amended, authorizes the purchase and retention of up to 5,000,000 shares. The plan has no expiration date and is currently in effect. No determination has been made to terminate the plan or to cease making purchases. We held 4,395,277 shares in treasury as of September 30, 2017.

ITEM 3.

Defaults Upon ~~Senior~~Senior Securities

~~None~~.None.

ITEM 4.

Mine Safety Disclosures

~~None~~.None.

ITEM 5.

Other Information

~~None~~.None.

ITEM 6.

Exhibits

~~Exhibit~~ ~~No.~~2.1	Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
2.2	Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019
3.1		Articles of Incorporation of First Community ~~Bancshares,~~Bankshares, Inc., ~~as amended,~~ incorporated by reference to ~~Exhibit 3(i)~~Appendix B of the ~~Quarterly Report~~Definitive Proxy Statement on Form ~~10-Q for the period ended June 30, 2010,~~DEF 14A dated April 24, 2018, filed on ~~August 16, 2010~~March 13, 2018
3.2		~~Amended and Restated~~ Bylaws of First Community ~~Bancshares,~~Bankshares, Inc., incorporated by reference to Exhibit ~~3.1~~3.2 of the Current Report on Form 8-K dated ~~February 23, 2016,~~and filed ~~on February 25, 2016~~October 2, 2018
4.1		~~Specimen stock certificate~~Description of First Community ~~Bancshares, Inc.,~~Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the ~~Annual~~Current Report on Form ~~10-K for the period ended December 31, 2002,~~8-K dated and filed ~~on March 25, 2003~~October 2, 2018
4.2		~~Indenture between~~Form of First Community ~~Bancshares,~~Bankshares, Inc. ~~and Wilmington Trust Company,~~Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the ~~Quarterly~~Current Report on Form ~~10-Q for the period ended September 30, 2003,~~8-K dated and filed ~~on November 10, 2003~~
~~4.3~~		~~Amended and Restated Declaration of Trust of FCBI Capital Trust, incorporated by reference to Exhibit 4.3 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003~~

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~~4.4~~		~~Preferred Securities Guarantee Agreement, incorporated by reference to Exhibit 4.4 of the Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed on November 10, 2003~~October 2, 2018
10.1.1**		First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.1.2**		Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004
10.2**		First Community Bancshares, ~~Inc~~.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,~~13, 2002
10.3**		First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option ~~Agreement,~~Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002
10.4**		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan, incorporated by reference to Annex B of the Definitive Proxy Statement on Form DEF 14A dated April 27, 2004, filed on March 15, 2004

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10.5**		First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the Quarterly ~~Repo~~rtReport 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 ~~Apri~~lApril 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
10.810.8*		First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.9.1**		First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009; ~~Amendment #1, incorporated by reference to Exhibit 10.~~3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010; Amendment #2, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013; Amendment #3, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 27, 2016; and Amendment #4, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.9.2**		~~Amendment~~Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010
10.9.3**		Amendment #2 to the First ~~Community~~Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013
10.9.4**		Amendment #3 to the First Community Bancshares, Inc. andand Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.9.5**		Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.10**		Amended and Restated Deferred ~~Compensati~~onCompensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit ~~99.2~~10.1 of the Current Report on Form 8-K dated ~~August 22, 2006,~~December 16, 2019, filed on ~~August 23, 2006~~December 19,2019
10.11.1**		First Community Bancshares, Inc. Amended and Re~~stated~~Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.11.2**		Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.12.1**		First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, ~~incorporated~~incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.12.2**		Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by re~~ference~~reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.13**		Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report o~~n Form 8-K dated and filed on April 16, 2015~~

~~Table of Contents~~

10.14**		~~Employment Agreement between First Community Bancshares, Inc. and E. Stephen Lilly, incorporated by reference to Exhibit 10.5 of the Current Report~~ on Form 8-K dated and filed on April 16, 2015
10.15**		Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.16**		Employment Agreement between First Community Bancshares,, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.17**		~~Employment Agreement between First Community Bank and Mark R. Evans, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated April 2, 2009, filed on April 3, 2009~~

11		~~Statement Regarding Computation of Earnings per Share, incorporated by reference to Note 13 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report~~
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~~Sarbanes-Oxley Act of 2002
101***		Interactive data files pursuant to Rule 405 of Regulation ~~S-T:~~S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, ~~2017,~~2020, (Unaudited) and December 31, ~~2016;~~2019; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, ~~2017~~2020 and ~~2016 ;~~2019; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, ~~2017~~2020 and ~~2016;~~2019; (iv) Condensed Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, ~~2017~~2020 and ~~2016;~~2019; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, ~~2017~~2020 and ~~2016;~~2019; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).
104*	The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).

*	Filed herewith

Indicates a management contract or compensation plan or ~~agreement~~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

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,, thereunto duly authorized, on the 3^rd9th day of November, ~~2017.~~2020.

		First Community ~~Bancshares,~~Bankshares, Inc. (Registrant)




		/s/ William P. Stafford, II

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




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

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

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

FIRST COMMUNITY ~~BANCSHARES,~~BANKSHARES, INC.
FORM 10-Q
INDEX

PART I.	FINANCIAL INFORMATION		~~PAGE~~Page

Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2020 (Unaudited) and December 31, ~~2016~~2019	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	6
		Condensed Consolidated Statements of Changes in ~~Stockholders~~’Stockholders’ Equity for the Three and Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	89
		Notes to Condensed Consolidated Financial Statements (Unaudited)	910
Item 2.	~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations		4140
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		5957
Item 4.	Controls and Procedures		5957

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		59 58
Item 1A.	Risk Factors		6058
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		60
Item 3.	Defaults Upon Senior Securities		60
Item 4.	Mine Safety Disclosures		60
Item 5.	Other Information		60
Item 6.	Exhibits		60

~~SIGNATURES~~Signatures			6362

~~FIRST COMMUNITY BANCSHARES, INC.~~
CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,			*September 30,*			*December 31,*
	2017				2016⁽¹⁾		*2020*			2019⁽¹⁾
(Amounts in thousands, except share and per share data)	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	37,050		$	36,645		$	49,895		$	66,818
Federal funds sold		67,124			38,717			323,355			148,000
Interest-bearing deposits in banks		945			945			2,414			2,191
Total cash and cash equivalents		105,119			76,307			375,664			217,009
Securities available for sale		174,424			165,579
Securities held to maturity		25,182			47,133
Loans held for investment, net of unearned income
Non-covered		1,806,434			1,795,954
Covered		31,287			56,994
Less: allowance for loan losses		(19,206	)		(17,948	)
Debt securities available for sale								90,972			169,574
Loans held for sale								0			263
Loans held for investment, net of unearned income (includes covered loans of $10,744 and $12,861, respectively)								2,194,995			2,114,460
Allowance for loan losses								(27,277	)		(18,425	)
Loans held for investment, net		1,818,515			1,835,000			2,167,718			2,096,035
FDIC indemnification asset		7,465			12,173			1,598			2,883
Premises and equipment, net		48,949			50,085			60,488			62,824
Other real estate owned, non-covered		3,543			5,109
Other real estate owned, covered		54			276
Other real estate owned								2,103			3,969
Interest receivable		5,156			5,553			9,151			6,677
Goodwill		95,779			95,779			129,565			129,565
Other intangible assets		6,417			7,207			7,433			8,519
Other assets		84,177			86,197			103,236			101,529
Total assets	$	2,374,780		$	2,386,398		$	2,947,928		$	2,798,847

Liabilities
Deposits												��
Noninterest-bearing	$	452,940		$	427,705		$	750,277		$	627,868
Interest-bearing		1,410,880			1,413,633			1,741,962			1,702,044
Total deposits		1,863,820			1,841,338			2,492,239			2,329,912
Securities sold under agreements to repurchase		83,783			98,005			956			1,601
FHLB borrowings		50,000			65,000
Other borrowings		-			15,708
Interest, taxes, and other liabilities		24,540			27,290			34,816			38,515
Total liabilities		2,022,143			2,047,341			2,528,011			2,370,028

Stockholders' equity
Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding		-			-			0			0
Common stock, $1 par value; 50,000,000 shares authorized; 21,381,779 shares issued at September 30, 2017, and December 31, 2016; 4,395,277 and 4,387,571 shares in treasury at September 30, 2017, and December 31, 2016, respectively		21,382			21,382
Common stock, $1 par value; 50,000,000 shares authorized; 24,313,091 shares issued and 17,716,522 outstanding at September 30, 2020; 24,238,907 shares issued and 18,376,991 outstanding at December 31, 2019								17,717			18,377
Additional paid-in capital		228,510			228,142			172,980			192,413
Retained earnings		182,145			170,377			230,464			219,535
Treasury stock, at cost		(79,333	)		(78,833	)
Accumulated other comprehensive loss		(67	)		(2,011	)		(1,244	)		(1,506	)
Total stockholders' equity		352,637			339,057			419,917			428,819
Total liabilities and stockholders' equity	$	2,374,780		$	2,386,398		$	2,947,928		$	2,798,847

(1) Derived from audited financial statements

														Accumulated
					Additional									Other
	Preferred		Common		Paid-in			Retained			Treasury			Comprehensive
(Amounts in thousands,	Stock		Stock		Capital			Earnings			Stock			Income (Loss)			Total
except share and per share data)
Balance January 1, 2016	$	-	$	21,382	$	227,692		$	155,647		$	(56,457	)	$	(5,247	)	$	343,017
Net income		-		-		-			18,722			-			-			18,722
Other comprehensive income		-		-		-			-			-			5,617			5,617
Common dividends declared -- $0.44 per share		-		-		-			(7,680	)		-			-			(7,680	)
Equity-based compensation expense		-		-		144			-			-			-			144
Common stock options exercised -- 11,730 shares		-		-		(23	)		-			205			-			182
Restricted stock awards -- 15,587 shares		-		-		26			-			270			-			296
Issuance of treasury stock to 401(k) plan -- 16,290 shares		-		-		45			-			287			-			332
Purchase of treasury shares -- 1,152,776 shares at $20.00 per share		-		-		-			-			(23,094	)		-			(23,094	)
Balance September 30, 2016	$	-	$	21,382	$	227,884		$	166,689		$	(78,789	)	$	370		$	337,536
									��
Balance January 1, 2017	$	-	$	21,382	$	228,142		$	170,377		$	(78,833	)	$	(2,011	)	$	339,057
Net income		-		-		-			20,272			-			-			20,272
Other comprehensive income		-		-		-			-			-			1,944			1,944
Common dividends declared -- $0.50 per share		-		-		-			(8,504	)		-			-			(8,504	)
Equity-based compensation expense		-		-		290			-			-			-			290
Common stock options exercised -- 8,036 shares		-		-		6			-			145			-			151
Restricted stock awards -- 21,542 shares		-		-		(40	)		-			387			-			347
Issuance of treasury stock to 401(k) plan -- 12,834 shares		-		-		112			-			231			-			343
Purchase of treasury shares -- 50,118 shares at $25.16 per share		-		-		-			-			(1,263	)		-			(1,263	)
Balance September 30, 2017	$	-	$	21,382	$	228,510		$	182,145		$	(79,333	)	$	(67	)	$	352,637

	September 30, 2017		December 31, 2016
(Amounts in thousands, except impaired loan pools)
Unpaid principal balance	$	-	$	1,086
Recorded investment		-		1,085
Allowance for loan losses related to PCI loan pools		-		12

Impaired PCI loan pools		-		1

	Three Months Ended September 30, 2017
(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total Allowance
Allowance, excluding PCI
Beginning balance	$	12,283		$	5,802		$	793		$	18,878
Provision for loan losses charged to operations		358			75			305			738
Charge-offs		(207	)		(137	)		(373	)		(717	)
Recoveries		170			67			70			307
Net charge-offs		(37	)		(70	)		(303	)		(410	)
Ending balance	$	12,604		$	5,807		$	795		$	19,206

PCI allowance
Beginning balance	$	-		$	8		$	-		$	8
Recovery of loan losses		-			(8	)		-			(8	)
Benefit attributable to the FDIC indemnification asset		-			-			-			-
Recovery of loan losses charged to operations		-			(8	)		-			(8	)
Recovery of loan losses recorded through the FDIC indemnification asset		-			-			-			-
Ending balance	$	-		$	-		$	-		$	-

Total allowance
Beginning balance	$	12,283		$	5,810		$	793		$	18,886
Provision for loan losses		358			67			305			730
Benefit attributable to the FDIC indemnification asset		-			-			-			-
Provision for loan losses charged to operations		358			67			305			730
Recovery of loan losses recorded through the FDIC indemnification asset		-			-			-			-
Charge-offs		(207	)		(137	)		(373	)		(717	)
Recoveries		170			67			70			307
Net charge-offs		(37	)		(70	)		(303	)		(410	)
Ending balance	$	12,604		$	5,807		$	795		$	19,206

	Wholesale Repurchase Agreements		FHLB Borrowings		Total
(Amounts in thousands)
2017	$	-	$	-	$	-
2018		-		-		-
2019		25,000		-		25,000
2020		-		-		-
2021		-		50,000		50,000
2022 and thereafter		-		-		-
Total long-term borrowings	$	25,000	$	50,000	$	75,000

Weighted average maturity (in years)		1.41		3.27		2.65

	U.S. Treasury Securities		U.S. Agency Securities		Municipal Securities		Mortgage-backed Agency Securities		Total
(Amounts in thousands)
Overnight and continuous	$	5,240	$	12,874	$	37,953	$	2,639	$	58,706
Up to 30 days		-		-		-		-		-
30 - 90 days		-		-		-		-		-
Greater than 90 days		9,000		3,400		-		12,677		25,077
	$	14,240	$	16,274	$	37,953	$	15,316	$	83,783

	Valuation	Unobservable	Discount Range (Weighted Average)
	Technique	Input	September 30, 2017					December 31, 2016

Impaired loans, non-covered	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾		2%	to	63%	(18%)		3%	to	39%	(17%)
OREO, non-covered	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾		10%	to	62%	(28%)		0%	to	88%	(30%)
OREO, covered	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾		0%	to	65%	(56%)		0%	to	44%	(40%)

	September 30, 2017					December 31, 2016
	Change in					Change in
Increase (Decrease) in Basis Points	Net Interest Income			Percent Change		Net Interest Income			Percent Change
(Dollars in thousands)
300	$	1,655		1.9	%	$	526			0.6	%
200		1,294		1.5	%		438			0.5	%
100		775		0.9	%		183			0.2	%
(100)		(4,039	)	-4.8	%		(2,616	)		-3.1	%

	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⁾

July 1-31, 2017		-	$	-		-		635,804
August 1-31, 2017		13,177		25.16		13,177		622,627
September 1-30, 2017		26,339		25.57		26,339		604,723
Total		39,516	$	25.43		39,516