UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

	For the quarterly period ended ~~March 31,~~September 30, 2021

or

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

	For the transition period from to

Commission File Number: 001-32590

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)


Virginia	20-2652949
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9954 Mayland Drive, Suite 2100
Richmond, Virginia	23233
(Address of principal executive offices)	(Zip Code)
(804) 934-9999 (Registrant’s telephone number, including area code)

n/a (Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 par value	ESXB	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit. such files). Yes ☒ No ☐

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At ~~March 31,~~September 30, 2021, there were ~~22,219,926~~22,464,593 shares of the Company’s common stock outstanding.

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

~~March 31,~~September 30, 2021

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2729
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4146
Item 4. Controls and Procedures	4247
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	4347
Item 1A. Risk Factors	4348
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4348
Item 3. Defaults upon Senior Securities	4448
Item 4. Mine Safety Disclosures	4448
Item 5. Other Information	4448
Item 6. Exhibits	4448
SIGNATURES	4549

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF ~~MARCH 31,~~SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

(dollars in thousands, except share data)

March 31, 2021

December 31, 2020*
ASSETS

Cash and due from banks

$
20,836

$
17,845
Interest bearing bank deposits

74,337

45,118
Federal funds sold

234

222
Total cash and cash equivalents

95,407

63,185

Securities available for sale, at fair value

273,126

271,347
Securities held to maturity, at cost (fair value of $21,190 and $22,257, respectively)

20,271

21,176
Equity securities, restricted, at cost

8,049

8,436
Total securities

301,446

300,959

Loans

1,202,723

1,182,362
Purchased credit impaired (PCI) loans

22,465

24,040
Total loans

1,225,188

1,206,402
Allowance for loan losses (loans of $10,828 and $12,340, respectively; PCI loans of $156 and $156, respectively)

(10,984)

(12,496)
Net loans

1,214,204

1,193,906

Bank premises and equipment, net

27,582

27,897
Bank premises and equipment held for sale

1,507

1,507
Right-of-use lease assets

5,292

5,530
Other real estate owned

4,313

4,361
Bank owned life insurance

30,195

30,029
Other assets

18,862

17,435
Total assets

$
1,698,808

$
1,644,809

LIABILITIES

Deposits:

Noninterest bearing

$
333,910

$
298,901
Interest bearing

1,105,385

1,099,800
Total deposits

1,439,295

1,398,701

Federal Home Loan Bank borrowings

67,667

57,833
Trust preferred capital notes

4,124

4,124
Lease liabilities

5,545

5,787
Other liabilities

9,701

8,710
Total liabilities

1,526,332

1,475,155

SHAREHOLDERS’ EQUITY

Common stock (200,000,000 shares authorized $0.01 par value; 22,219,926 and 22,200,929 shares issued and outstanding, respectively)

222

222
Additional paid in capital

150,039

149,822
Retained earnings

18,729

13,419
Accumulated other comprehensive income

3,486

6,191
Total shareholders’ equity

172,476

169,654
Total liabilities and shareholders’ equity

$
1,698,808

$
1,644,809


	September 30, 2021		December 31, 2020 *
ASSETS
Cash and due from banks	$	25,485	$	17,845
Interest bearing bank deposits		23,591		45,118
Federal funds sold		—		222
Total cash and cash equivalents		49,076		63,185

Securities available for sale, at fair value		375,845		271,347
Securities held to maturity, at cost (fair value of $19,844 and $22,257, respectively)		19,052		21,176
Equity securities, restricted, at cost		8,049		8,436
Total securities		402,946		300,959

Loans		1,230,981		1,182,362
Purchased credit impaired (PCI) loans		15,679		24,040
Total loans		1,246,660		1,206,402
Allowance for loan losses (loans of $9,929 and $12,340, respectively; PCI loans of $156 and $156, respectively)		(10,085)		(12,496)
Net loans		1,236,575		1,193,906

Bank premises and equipment, net		26,967		27,897
Bank premises and equipment held for sale		1,507		1,507
Right-of-use lease assets		4,811		5,530
Other real estate owned		255		4,361
Bank owned life insurance		30,528		30,029
Other assets		18,635		17,435
Total assets	$	1,771,300	$	1,644,809

LIABILITIES
Deposits:
Noninterest bearing	$	345,721	$	298,901
Interest bearing		1,153,081		1,099,800
Total deposits		1,498,802		1,398,701

Federal funds purchased		2,698		-
Federal Home Loan Bank borrowings		67,333		57,833
Trust preferred capital notes		4,124		4,124
Lease liabilities		5,045		5,787
Other liabilities		8,961		8,710
Total liabilities		1,586,963		1,475,155

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized $0.01 par value; 22,464,593 and 22,200,929 shares issued and outstanding, respectively)		225		222
Additional paid in capital		151,905		149,822
Retained earnings		27,787		13,419
Accumulated other comprehensive income		4,420		6,191
Total shareholders’ equity		184,337		169,654
Total liabilities and shareholders’ equity	$	1,771,300	$	1,644,809

*	Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2021 AND 2020

(dollars and shares in thousands, except per share data)

Three months ended

March 31, 2021

March 31, 2020

Interest and dividend income





Interest and fees on loans

$
13,150

$
13,086

Interest and fees on PCI loans

856

1,097

Interest on deposits in other banks

60

69

Interest and dividends on securities

Taxable

1,467

1,351

Nontaxable

327

343

Total interest and dividend income

15,860

15,946

Interest expense

Interest on deposits

1,565

3,419

Interest on borrowed funds

217

289

Total interest expense

1,782

3,708

Net interest income

14,078

12,238

(Recovery of) provision for loan losses

(1,400)

3,300

Net interest income after (recovery of) provision for loan losses

15,478

8,938

Noninterest income





Service charges and fees

679

672

Gain (loss) on securities transactions, net

16

(39)

Gain on sale of other loans

—

11

Income on bank owned life insurance

166

174

Mortgage loan income

320

221

Other

447

296

Total noninterest income

1,628

1,335

Noninterest expense





Salaries and employee benefits

5,208

5,152

Occupancy expenses

836

827

Equipment expenses

288

372

FDIC assessment

212

125

Data processing fees

608

592

Other real estate expense, net

11

6

Other operating expenses

1,592

1,520

Total noninterest expense

8,755

8,594

Income before income taxes

8,351

1,679

Income tax expense

1,708

264

Net income

$
6,643

$
1,415

Net income per share — basic

$
0.30

$
0.06

Net income per share — diluted

$
0.30

$
0.06

Weighted average number of shares outstanding





Basic

22,201

22,400

Diluted

22,416

22,591


	Three months ended				Nine months ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Interest and dividend income
Interest and fees on loans	$	13,441	$	12,760	$	39,787	$	38,858
Interest and fees on PCI loans		708		962		2,348		3,121
Interest on deposits in other banks		59		121		173		231
Interest and dividends on securities
Taxable		1,723		1,362		4,885		4,000
Nontaxable		350		344		1,012		1,036
Total interest and dividend income		16,281		15,549		48,205		47,246
Interest expense
Interest on deposits		1,262		2,614		4,174		9,215
Interest on borrowed funds		224		222		661		720
Total interest expense		1,486		2,836		4,835		9,935
Net interest income		14,795		12,713		43,370		37,311
(Recovery of) provision for loan losses		(1,250)		—		(2,650)		4,200
Net interest income after (recovery of) provision for loan losses		16,045		12,713		46,020		33,111
Noninterest income
Service charges and fees		671		613		2,001		1,817
Gain (loss) on securities transactions, net		(7)		78		(19)		281
Gain on sale of other loans		—		—		—		11
Income on bank owned life insurance		165		171		499		518
Mortgage loan income		255		228		810		822
Other		297		382		1,179		974
Total noninterest income		1,381		1,472		4,470		4,423
Noninterest expense
Salaries and employee benefits		5,408		5,041		15,968		14,806
Occupancy expenses		790		815		2,387		2,420
Equipment expenses		275		330		880		1,047
FDIC assessment		161		174		481		455
Data processing fees		673		656		2,022		1,821
Other real estate expense, net		5		87		(415)		89
Other operating expenses		1,798		1,423		5,734		4,355
Total noninterest expense		9,110		8,526		27,057		24,993
Income before income taxes		8,316		5,659		23,433		12,541
Income tax expense		1,768		1,143		4,816		2,450
Net income	$	6,548	$	4,516	$	18,617	$	10,091
Net income per share — basic	$	0.29	$	0.20	$	0.83	$	0.45
Net income per share — diluted	$	0.28	$	0.20	$	0.82	$	0.45
Weighted average number of shares outstanding
Basic		22,455		22,312		22,333		22,339
Diluted		23,002		22,503		22,717		22,534

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2021 AND 2020

(dollars in thousands)

Three months ended

March 31, 2021

March 31, 2020

Net income

$
6,643

$
1,415

Other comprehensive (loss) income :

Unrealized (loss) gain on investment securities:

Change in unrealized (loss) gain on investment securities

(3,635)

782

Tax related to unrealized loss (gain) on investment securities

799

(172)

Reclassification adjustment for (gain) loss on securities sold

(16)

39

Tax related to realized gain (loss) on securities sold

4

(9)

Cash flow hedge:

Change in unrealized gain (loss) on cash flow hedge

182

(557)

Tax related to cash flow hedge

(39)

122

Total other comprehensive (loss) income

(2,705)

205

Total comprehensive income

$
3,938

$
1,620


	Three months ended				Nine months ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Net income	$	6,548	$	4,516	$	18,617	$	10,091

Other comprehensive (loss) income :
Unrealized (loss) gain on investment securities:
Change in unrealized gain (loss) on investment securities		(1,024)		1,735		(2,546)		5,527
Tax related to unrealized (gain) loss on investment securities		226		(382)		560		(1,215)
Reclassification adjustment for loss (gain) on securities sold		7		(78)		19		(281)
Tax related to realized (loss) gain on securities sold		(2)		17		(5)		62
Cash flow hedge:
Change in unrealized gain (loss) on cash flow hedge		50		47		257		(639)
Tax related to cash flow hedge		(10)		(10)		(56)		140
Total other comprehensive (loss) income		(753)		1,329		(1,771)		3,594
Total comprehensive income	$	5,795	$	5,845	$	16,846	$	13,685

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2021 AND 2020

(dollars and shares in thousands, except per share amounts)

Accumulated

Additional

Other

Common Stock

Paid in

Retained

Comprehensive


Shares

Amount

Earnings

Earnings

Income

Total
Balance December 31, 2019

22,423

$
224

$
150,728

$
2,562

$
1,965

$
155,479
Issuance of common stock

6

—

54

—

—

54
Exercise and issuance of employee stock options

4

—

242

—

—

242
Stock purchased under stock repurchase program

(116)

(1)

(805)

—

—

(806)
Net income

—

—

—

1,415

—

1,415
Dividends paid on common stock ($0.05 per share)

—

—

—

(1,121)

—

(1,121)
Other comprehensive income

—

—

—

—

205

205
Balance March 31, 2020

22,317

$
223

$
150,219

$
2,856

$
2,170

$
155,468

Balance December 31, 2020

22,201

$
222

$
149,822

$
13,419

$
6,191

$
169,654
Issuance of common stock

7

—

54

—

—

54
Exercise and issuance of employee stock options

33

—

309

—

—

309
Stock purchased under stock repurchase program

(21)

—

(146)

—

(146)
Net income

—

—

—

6,643

—

6,643
Dividends paid on common stock ($0.06 per share)

—

—

—

(1,333)

—

(1,333)
Other comprehensive loss

—

—

—

—

(2,705)

(2,705)
Balance March 31, 2021

22,220

$
222

$
150,039

$
18,729

$
3,486

$
172,476


								Accumulated
				Additional				Other
	Common Stock			Paid in		Retained		Comprehensive
	Shares	Amount		Capital		Earnings		Income		Total
Balance June 30, 2020	22,311	$	223	$	150,428	$	5,900	$	4,230	$	160,781
Issuance of common stock	10		—		49		—		—		49
Exercise and issuance of employee stock options	—		—		231		—		—		231
Net income	—		—		—		4,516		—		4,516
Dividends of $0.05 per share paid on common stock	—		—		—		(1,116)		—		(1,116)
Other comprehensive income	—		—		—		—		1,329		1,329
Balance September 30, 2020	22,321	$	223	$	150,708	$	9,300	$	5,559	$	165,790

Balance December 31, 2019	22,423	$	224	$	150,728	$	2,562	$	1,965	$	155,479
Issuance of common stock	25		—		152		—		—		152
Exercise and issuance of employee stock options	4		—		705		—		—		705
Stock purchased under stock repurchase program	(131)		(1)		(877)		—				(878)
Net income	—		—		—		10,091		—		10,091
Dividends of $0.10 per share paid on common stock	—		—		—		(3,353)		—		(3,353)
Other comprehensive income	—		—		—		—		3,594		3,594
Balance September 30, 2020	22,321	$	223	$	150,708	$	9,300	$	5,559	$	165,790

Balance June 30, 2021	22,452	$	225	$	151,522	$	22,811	$	5,173	$	179,731
Issuance of common stock	4		—		49		—		—		49
Exercise and issuance of employee stock options	9		—		334		—		—		334
Net income	—		—		—		6,548		—		6,548
Dividends of $0.07 per share paid on common stock	—		—		—		(1,572)		—		(1,572)
Other comprehensive loss	—		—		—		—		(753)		(753)
Balance September 30, 2021	22,465		225		151,905		27,787		4,420	$	184,337

Balance December 31, 2020	22,201	$	222	$	149,822	$	13,419	$	6,191	$	169,654
Issuance of common stock	17		1		152		—		—		153
Exercise and issuance of employee stock options	268		2		2,077		—		—		2,079
Stock purchased under stock repurchase program	(21)				(146)		—				(146)
Net income	—		—		—		18,617		—		18,617
Dividends paid of $0.19 per share on common stock	—		—		—		(4,249)		—		(4,249)
Other comprehensive loss	—		—		—		—		(1,771)		(1,771)
Balance September 30, 2021	22,465		225		151,905		27,787		4,420	$	184,337

~~See accompanying notes to unaudited consolidated financial statements~~

Table of Contents

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~THREE~~NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2021 AND 2020

(dollars in thousands)

March 31, 2021

March 31, 2020

Operating activities:

Net income

$
6,643

$
1,415

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

432

483

Right-of-use lease asset amortization

238

238

Stock-based compensation expense

311

285

Tax benefit of exercised stock options

(43)

(6)

Amortization of purchased loan premium

28

160

(Recovery of) provision for loan losses

(1,400)

3,300

Amortization of security premiums and accretion of discounts, net

159

233

Net (gain) loss on sale of securities

(16)

39

Net gain on sale and valuation of other real estate owned

(1)

(6)

Net loss on disposal of premises and equipment

1

—

Net gain on sale of loans

—

(11)

Originations of mortgages held for sale

—

(8,668)

Proceeds from sales of mortgages held for sale

—

6,699

Increase in bank owned life insurance investment

(166)

(174)

Changes in assets and liabilities:

(Increase) decrease in other assets

(713)

174

Increase (decrease) in accrued expenses and other liabilities

1,024

(846)

Net cash provided by operating activities

6,497

3,315

Investing activities:





Proceeds from sales/calls/maturities/paydowns of available for sale securities

31,524

9,893

Proceeds from calls/maturities/paydowns of held to maturity securities

895

11,065

Proceeds from sales of restricted equity securities

805

1,700

Purchase of available for sale securities

(37,087)

(25,069)

Purchase of restricted equity securities

(418)

(1,302)

Proceeds from sale of other real estate owned

49

27

Net increase in loans

(19,060)

(19,527)

Principal recoveries of loans previously charged off

134

184

Purchase of premises and equipment, net

(118)

(76)

Purchase small business investment company fund investment

—

(250)

Proceeds from sale of loans

—

632

Net cash used in investing activities

(23,276)

(22,723)

Financing activities:





Net increase in deposits

40,594

57,610

Net decrease in federal funds purchased

—

(24,437)

Net increase in short-term Federal Home Loan Bank borrowings

10,000

(10,000)

Proceeds from long-term Federal Home Loan Bank borrowings

—

40,000

Payments on long-term Federal Home Loan Bank borrowings

(166)

(40,167)

Proceeds from issuance of common stock

52

11

Cash dividends paid

(1,333)

(1,121)

Repurchase of common stock

(146)

(806)

Net cash provided by financing activities

49,001

21,090

Net increase in cash and cash equivalents

32,222

1,682

Cash and cash equivalents:





Beginning of the period

63,185

28,684

End of the period

$
95,407

$
30,366

Supplemental disclosures of cash flow information:





Interest paid

$
2,072

$
3,689

~~See accompanying notes to unaudited consolidated financial statements~~


	September 30, 2021		September 30, 2020
Operating activities:
Net income	$	18,617	$	10,091
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization		1,231		1,379
Right-of-use lease asset amortization		719		706
Stock-based compensation expense		957		846
Tax benefit of exercised stock options		(235)		(6)
Amortization of purchased loan premium		84		229
(Recovery of) provision for loan losses		(2,650)		4,200
Amortization of security premiums and accretion of discounts, net		607		574
Net loss (gain) on sale of securities		19		(281)
Net gain on sale of loans		—		(11)
Originations of mortgages held for sale		—		(26,112)
Proceeds from sales of mortgages held for sale		—		25,462
Net gain on sale and valuation of OREO		(439)		(23)
Net (gain) loss on disposal of premises and equipment		(3)		82
Increase in bank owned life insurance investment		(499)		(518)
Changes in assets and liabilities:
Increase in other assets		(753)		(2,086)
Increase (decrease) in accrued expenses and other liabilities		52		(1,446)
Net cash provided by operating activities		17,707		13,086

Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities		47,913		66,171
Proceeds from calls/maturities/paydowns of held to maturity securities		2,105		12,640
Proceeds from sales of restricted equity securities		805		1,700
Purchase of available for sale securities		(155,545)		(107,834)
Purchase of restricted equity securities		(418)		(1,720)
Proceeds from sale of other real estate owned		4,545		134
Net increase in loans		(40,694)		(115,608)
Principal recoveries of loans previously charged off		591		453
Purchase of premises and equipment, net		(361)		(186)
Purchase small business investment company fund investment		—		(345)
Proceeds from sale of premises and equipment		64		—
Proceeds from sale of loans		—		632
Net cash used in investing activities		(140,995)		(143,963)

Financing activities:
Net increase in deposits		100,101		205,894
Net increase (decrease) in federal funds purchased		2,698		(23,497)
Net increase in short-term Federal Home Loan Bank borrowings		10,000		—
Proceeds from long-term Federal Home Loan Bank borrowings		—		40,000
Payments on long-term Federal Home Loan Bank borrowings		(500)		(40,500)
Proceeds from issuance of common stock		1,275		11
Cash dividends paid		(4,249)		(3,353)
Repurchase of common stock		(146)		(878)
Net cash provided by financing activities		109,179		177,677

Net (decrease) increase in cash and cash equivalents		(14,109)		46,800

Cash and cash equivalents:
Beginning of the period		63,185		28,684
End of the period	$	49,076	$	75,484

Supplemental disclosures of cash flow information:
Interest paid	$	5,211	$	10,312
Income taxes paid		4,440		3,306

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See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices, 18 of which are in Virginia and 6 of which are in Maryland. The Bank also operates 2 loan production offices. The Bank will cose its Edgewater and Rockville branches in Maryland on December 3, 2021.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and cash management services.

Financial Statements

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of ~~March 31,~~September 30, 2021, the statements of income, comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, 2021, and the statements of cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2021. Results for the three and nine month ~~period~~periods ended ~~March 31,~~September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure through the date the financial statements were issued.

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Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at ~~March 31,~~September 30, 2021 and December 31, 2020 were as follows (dollars in thousands):


	March 31, 2021								September 30, 2021
			Gross Unrealized								Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	7,805	$	—	$	(1)	$	7,804	$	19,896	$	66	$	(82)	$	19,880
U.S. Government agencies		36,178		120		(175)		36,123		52,948		282		(422)		52,808
State, county and municipal		120,720		5,018		(1,127)		124,611		187,999		6,026		(734)		193,291
Mortgage backed securities		31,144		1,303		(173)		32,274		37,885		1,163		(140)		38,908
Asset backed securities		45,842		934		(64)		46,712		45,951		869		(91)		46,729
Corporate bonds		25,144		548		(90)		25,602		23,749		532		(52)		24,229
Total securities available for sale	$	266,833	$	7,923	$	(1,630)	$	273,126
Total Securities Available for Sale									$	368,428	$	8,938	$	(1,521)	$	375,845

Securities Held to Maturity
State, county and municipal	$	20,271		919		—		21,190	$	19,052		792		—		19,844
Total securities held to maturity	$	20,271	$	919	$	—	$	21,190
Total Securities Held to Maturity									$	19,052	$	792	$	—	$	19,844


	December 31, 2020								December 31, 2020
			Gross Unrealized								Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	23,500	$	—	$	(1)	$	23,499	$	23,500	$	—	$	(1)	$	23,499
U.S. Government agencies		25,880		114		(141)		25,853		25,880		114		(141)		25,853
State, county and municipal		118,612		7,172		(64)		125,720		118,612		7,172		(64)		125,720
Mortgage backed securities		30,434		1,756		(1)		32,189		30,434		1,756		(1)		32,189
Asset backed securities		36,841		704		(57)		37,488		36,841		704		(57)		37,488
Corporate bonds		26,136		480		(18)		26,598		26,136		480		(18)		26,598
Total securities available for sale	$	261,403	$	10,226	$	(282)	$	271,347
Total Securities Available for Sale									$	261,403	$	10,226	$	(282)	$	271,347

Securities Held to Maturity
State, county and municipal	$	21,176	$	1,081	$	—	$	22,257	$	21,176	$	1,081	$	—	$	22,257
Total securities held to maturity	$	21,176	$	1,081	$	—	$	22,257
Total Securities Held to Maturity									$	21,176	$	1,081	$	—	$	22,257

The amortized cost and fair value of securities at ~~March 31,~~September 30, 2021 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.


	Held to Maturity				Available for Sale				Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,431	$	3,474	$	17,276	$	17,478	$	5,073	$	5,134	$	18,359	$	18,561
Due after one year through five years		12,034		12,682		108,786		111,808		9,860		10,395		130,547		133,305
Due after five years through ten years		4,554		4,750		111,287		114,147		3,867		4,031		186,997		190,805
Due after ten years		252		284		29,484		29,693		252		284		32,525		33,174
Total securities	$	20,271	$	21,190	$	266,833	$	273,126	$	19,052	$	19,844	$	368,428	$	375,845

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Proceeds from sales and calls of securities were ~~$3.8~~$2.5 million and ~~$6.2~~$4.6 million during the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $9.9 million and $25.2 million for the nine months ended September 30, 2021 and 2020, respectively. Gains and losses on securities transactions are determined using the specific identification method. Gross realized gains and losses on securities transactions during the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 were as follows (dollars in thousands):


					Three months ended				Nine months ended
	March 31, 2021		March 31, 2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Gross realized gains	$	16	$	29	$	—	$	79	$	18	$	375
Gross realized losses		—		(68)		(7)		(1)		(37)		(94)
Net securities gain	$	16	$	(39)	$	(7)	$	78	$	(19)	$	281

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were 0 investments held that had OTTI losses for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020.

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at ~~March 31,~~September 30, 2021 and December 31, 2020 were as follows (dollars in thousands):


	March 31, 2021												September 30, 2021
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities	$	7,804		(1)	$	—	$	—	$	7,804		(1)	$	11,993		(82)	$	—	$	—	$	11,993	$	(82)
U.S. Government agencies		14,300		(69)		5,069		(106)		19,369		(175)		27,037		(294)		4,681		(128)		31,718		(422)
State, county and municipal		28,045		(1,094)		417		(33)		28,462		(1,127)		63,267		(668)		1,680		(66)		64,947		(734)
Mortgage backed securities		9,175		(173)		—		—		9,175		(173)		16,786		(140)		—		—		16,786		(140)
Asset backed securities		19,093		(61)		532		(3)		19,625		(64)		21,696		(90)		374		(1)		22,070		(91)
Corporate bonds		5,251		(90)	—	—		—		5,251		(90)		3,517		(52)		—		—		3,517		(52)
Total	$	83,668	$	(1,488)	$	6,018	$	(142)	$	89,686	$	(1,630)	$	144,296	$	(1,326)	$	6,735	$	(195)	$	151,031	$	(1,521)


	December 31, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities	$	23,499	$	(1)	$	—	$	—	$	23,499	$	(1)
U.S. Government agencies		6,726		(25)		8,266		(116)		14,992		(141)
State, county and municipal		6,203		(49)		301		(15)		6,504		(64)
Mortgage backed securities		118		(1)		—		—		118		(1)
Asset backed securities		12,427		(8)		4,410		(49)		16,837		(57)
Corporate bonds		7,216		(18)		—		—		7,216		(18)
Total	$	56,189	$	(102)	$	12,977	$	(180)	$	69,166	$	(282)

The unrealized losses (impairments) in the investment portfolio at ~~March 31,~~September 30, 2021 and December 31, 2020 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from 87123 securities at ~~March 31,~~September 30, 2021. Of those, 73111 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. NaN investment grade asset-backed securities comprised of student loan pools, which are 97% U.S. government guaranteed, included in corporate obligations and 74 corporate bonds make up the remaining securities with unrealized losses at ~~March 31,~~September 30, 2021. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in

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determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be

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temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

Market prices are affected by conditions beyond the control of the Company. Investment decisions are made by the management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

Securities with amortized costs of ~~$52.5~~$63.9 million and $52.2 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of ~~$4.7~~$4.5 million and $5.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of ~~March 31,~~September 30, 2021 and December 31, 2020, there were 0 securities purchased from a single issuer, other than U.S. Treasury securities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at ~~March 31,~~September 30, 2021 and December 31, 2020 were comprised of the following (dollars in thousands):


	March 31, 2021				December 31, 2020				September 30, 2021				December 31, 2020
	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	184,286	15.32	%	$	197,228	16.68	%	$	178,099	14.47	%	$	197,228	16.68	%
Commercial		504,846	41.98			474,856	40.16			542,418	44.06			474,856	40.16
Construction and land development		161,825	13.45			182,277	15.42			200,878	16.32			182,277	15.42
Second mortgages		6,526	0.54			6,360	0.54			7,078	0.57			6,360	0.54
Multifamily		87,624	7.29			78,158	6.61			80,245	6.52			78,158	6.61
Agriculture		7,947	0.66			6,662	0.56			7,748	0.63			6,662	0.56
Total real estate loans		953,054	79.24			945,541	79.97			1,016,466	82.57			945,541	79.97
Commercial loans		239,782	19.94			225,386	19.06			206,801	16.80			225,386	19.06
Consumer installment loans		8,595	0.71			9,996	0.85			6,841	0.56			9,996	0.85
All other loans		1,292	0.11			1,439	0.12			873	0.07			1,439	0.12
Total loans	$	1,202,723	100.00	%	$	1,182,362	100.00	%	$	1,230,981	100.00	%	$	1,182,362	100.00	%

The Company held ~~$10.6~~$10.4 million and $10.7 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. As these loans are 100% guaranteed by the USDA, 0 loan loss allowance is required. These loan balances included a purchase premium of ~~$776,000~~$722,000 and $804,000 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.

The Company ~~originated~~originates loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). These PPP loans totaled ~~$67.7~~$32.8 million and $49.3 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, and are included in commercial loans. As these loans are 100% guaranteed by the SBA, 0 loan loss allowance is required. The majority of the PPP loans have a five year term; however, most are expected to be forgiven by the SBA as borrowers use the funds for qualified expenses. These loan balances included net fees of ~~$2.3~~$1.1 million and $920,000 at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, which are being amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized net fee remaining on loans forgiven or prepaid by the borrower is recorded as income.

At ~~March 31,~~September 30, 2021 and December 31, 2020, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with ~~the~~ Financial Accounting Standards Board ~~(FASB) Accounting Standards Codification (ASC) 310,~~ ~~Receivables,~~ ~~(ii) a general valuation component calculated in accordance~~

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(FASB) Accounting Standards Codification (ASC) 310, Receivables, (ii) a general valuation component calculated in accordance with FASB ASC 450, Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover imprecision in the model and uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with FASB ASC 310.

The following table summarizes information related to impaired loans at and for the three and nine months ended ~~March 31,~~September 30, 2021 (dollars in thousands):

Three months ended

March 31, 2021

March 31, 2021




Unpaid




Recorded

Principal

Related

Average

Interest

Investment ⁽¹⁾

Balance ⁽²⁾

Allowance

Investment

Recognized

With no related allowance recorded:

Mortgage loans on real estate:

Residential 1‑4 family

$
308

$
412

$
—

$
466

$
3

Commercial

3,421

4,174

—

3,002

33

Total real estate loans

3,729

4,586

—

3,468

36

Subtotal impaired loans with no valuation allowance

3,729

4,586

—

3,468

36

With an allowance recorded:








��



Mortgage loans on real estate:











Residential 1‑4 family

2,253

2,645

660

2,226

11

Commercial

191

582

55

196

—

Construction and land development

5

113

2

25

—

Agriculture

45

47

13

45

—

Total real estate loans

2,494

3,387

730

2,492

11

Commercial loans

1,462

1,474

385

2,005

1

Consumer installment loans

12

12

3

15

—

Subtotal impaired loans with a valuation allowance

3,968

4,873

1,118

4,512

12

Total:











Mortgage loans on real estate:











Residential 1‑4 family

2,561

3,057

660

2,692

14

Commercial

3,612

4,756

55

3,198

33

Construction and land development

5

113

2

25

—

Agriculture

45

47

13

45

—

Total real estate loans

6,223

7,973

730

5,960

47

Commercial loans

1,462

1,474

385

2,005

1

Consumer installment loans

12

12

3

15

—

Total impaired loans

$
7,697

$
9,459

$
1,118

$
7,980

$
48


							Three months ended				Nine months ended
	September 30, 2021						September 30, 2021				September 30, 2021
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	302	$	412	$	—	$	303	$	3	$	385	$	10
Commercial		2,984		3,770		—		3,392		28		3,415		83
Total real estate loans		3,286		4,182		—		3,695		31		3,800		93
Subtotal impaired loans with no valuation allowance		3,286		4,182		—		3,695		31		3,800		93
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,982		2,367		581		2,061		11		2,144		32
Commercial		351		720		101		190		3		193		10
Construction and land development		2		4		1		2		—		13		—
Agriculture		—		—		—		—		—		23		—
Total real estate loans		2,335		3,091		683		2,253		14		2,373		42
Commercial loans		2,150		2,187		317		1,795		1		1,900		2
Consumer installment loans		—		—		—		—		—		8		—
Subtotal impaired loans with a valuation allowance		4,485		5,278		1,000		4,048		15		4,281		44
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,284		2,779		581		2,364		14		2,529		42
Commercial		3,335		4,490		101		3,582		31		3,608		93
Construction and land development		2		4		1		2		—		13		—
Agriculture		—		—		—		—		—		23		—
Total real estate loans		5,621		7,273		683		5,948		45		6,173		135
Commercial loans		2,150		2,187		317		1,795		1		1,900		2
Consumer installment loans		—		—		—		—		—		8		—
Total impaired loans	$	7,771	$	9,460	$	1,000	$	7,743	$	46	$	8,081	$	137

(1)	The amount of the investment in a loan is not net of a valuation allowance, but does reflect any direct write-down of the investment.

(2)	The contractual amount due reflects paydowns applied in accordance with loan documents, but does not reflect any direct write-downs or valuation allowances.

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The following table summarizes information related to impaired loans ~~as of~~at December 31, 2020 and for the three and nine months ended ~~March 31, 2021~~September 30, 2020 (dollars in thousands):

Three months ended

December 31, 2020

March 31, 2020




Unpaid




Recorded

Principal

Related

Average

Interest

Investment ⁽¹⁾

Balance ⁽²⁾

Allowance

Investment

Recognized
With no related allowance recorded:

Mortgage loans on real estate:

Residential 1‑4 family

$
624

$
787

$
—

$
1,322

$
10
Commercial

3,458

4,198

—

3,179

34
Construction and land development

—

—

—

328

—
Multifamily

—

1,231

—
Total real estate loans

4,082

4,985

—

6,060

44
Subtotal impaired loans with no valuation allowance

4,082

4,985

—

6,060

44
With an allowance recorded:










Mortgage loans on real estate:










Residential 1‑4 family

2,200

2,573

640

1,690

11
Commercial

200

715

57

238

2
Construction and land development

44

149

12

749

—
Agriculture

45

46

13

—

—
Total real estate loans

2,489

3,483

722

2,677

13
Commercial loans

2,549

2,549

437

1,042

4
Consumer installment loans

19

19

6

9

—
Subtotal impaired loans with a valuation allowance

5,057

6,051

1,165

3,728

17
Total:










Mortgage loans on real estate:










Residential 1‑4 family

2,824

3,360

640

3,012

21
Commercial

3,658

4,913

57

3,417

36
Construction and land development

44

149

12

1,077

—
Multifamily

—

—

—

1,231

—
Agriculture

45

46

13

—

—
Total real estate loans

6,571

8,468

722

8,737

57
Commercial loans

2,549

2,549

437

1,042

4
Consumer installment loans

19

19

6

9

—
Total impaired loans

$
9,139

$
11,036

$
1,165

$
9,788

$
61


							Three months ended				Nine months ended
	December 31, 2020						September 30, 2020				September 30, 2020
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	624	$	787	$	—	$	888	$	7	$	1,105	$	22
Commercial		3,458		4,198		—		3,080		34		3,129		101
Construction and land development		—		—		—		—		—		164		—
Multifamily						—		—		—		616		—
Total real estate loans		4,082		4,985		—		3,968		41		5,014		123
Commercial loans		—		—		—		175		—		88		—
Subtotal impaired loans with no valuation allowance		4,082		4,985		—		4,143		41		5,102		123
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		2,200		2,573		640		2,156		13		1,923		37
Commercial		200		715		57		152		2		195		6
Construction and land development		44		149		12		847		—		798		—
Agriculture		45		46		13		51		—		26		—
Total real estate loans		2,489		3,483		722		3,206		15		2,942		43
Commercial loans		2,549		2,549		437		1,243		3		1,142		9
Consumer installment loans		19		19		6		15		—		12		—
Subtotal impaired loans with a valuation allowance		5,057		6,051		1,165		4,464		18		4,096		52
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,824		3,360		640		3,044		20		3,028		59
Commercial		3,658		4,913		57		3,232		36		3,324		107
Construction and land development		44		149		12		847		—		962		—
Multifamily		—		—		—		—		—		616		—
Agriculture		45		46		13		51		—		26		—
Total real estate loans		6,571		8,468		722		7,174		56		7,956		166
Commercial loans		2,549		2,549		437		1,418		3		1,230		9
Consumer installment loans		19		19		6		15		—		12		—
Total impaired loans	$	9,139	$	11,036	$	1,165	$	8,607	$	59	$	9,198	$	175

(1)	The amount of the investment in a loan is not net of a valuation allowance, but does reflect any direct write-down of the investment.

(2)	The contractual amount due reflects paydowns applied in accordance with loan documents, but does not reflect any direct write-downs or valuation allowances.

Troubled debt restructures still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at ~~March 31,~~September 30, 2021 and December 31, 2020, is set forth in the table below (dollars in thousands):


	March 31, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Nonaccruals	$	3,496	$	4,460	$	3,770	$	4,460
Trouble debt restructure and still accruing		4,201		4,679
Troubled debt restructure and still accruing						4,001		4,679
Total impaired	$	7,697	$	9,139	$	7,771	$	9,139

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was ~~$103,000 in cash basis income~~$17,000 and $185,000 recognized during the three and nine months ended ~~March 31, 2021.~~September 30, 2021, respectively. There was an insignificant amount of cash basis income recognized during the three and nine months ended ~~March 31,~~September 30, 2020. For the three months ended ~~March 31,~~September 30, 2021 and 2020, estimated interest income of $50,000 and ~~$97,000,~~$61,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the

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nine months ended September 30, 2021 and 2020, estimated interest income of $151,000 and $152,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

The following tables present an age analysis of past due status of loans by category as of September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	816	$	—	$	1,168	$	1,984	$	176,115	$	178,099
Commercial		250		—		602		852		541,566		542,418
Construction and land development		—		—		2		2		200,876		200,878
Second mortgages		226		—		—		226		6,852		7,078
Multifamily		—		—		—		—		80,245		80,245
Agriculture		—		—		—		—		7,748		7,748
Total real estate loans		1,292		—		1,772		3,064		1,013,402		1,016,466
Commercial loans		91		—		1,998		2,089		204,712		206,801
Consumer installment loans		—		—		—		—		6,841		6,841
All other loans		—		—		—		—		873		873
Total loans	$	1,383	$	—	$	3,770	$	5,153	$	1,225,828	$	1,230,981


	December 31, 2020
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,324	$	33	$	1,357	$	2,714	$	194,514	$	197,228
Commercial		438		—		730		1,168		473,688		474,856
Construction and land development		157		—		44		201		182,076		182,277
Second mortgages		227		—		—		227		6,133		6,360
Multifamily		—		—		—		—		78,158		78,158
Agriculture		—		—		45		45		6,617		6,662
Total real estate loans		2,146		33		2,176		4,355		941,186		945,541
Commercial loans		60		—		2,264		2,324		223,062		225,386
Consumer installment loans		—		12		20		32		9,964		9,996
All other loans		—		—		—		—		1,439		1,439
Total loans	$	2,206	$	45	$	4,460	$	6,711	$	1,175,651	$	1,182,362

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~~The following tables present an age analysis of past due status of loans by category as of March 31, 2021 and December 31, 2020 (dollars in thousands):~~

March 31, 2021


30‑89 Days

90+ Days Past


Total Past



Total Loans

Past Due

Due and Accruing

Nonaccrual

Due

Current

Receivable
Mortgage loans on real estate:












Residential 1‑4 family

$
704

$
33

$
1,422

$
2,159

$
182,127

$
184,286
Commercial

—

—

711

711

504,135

504,846
Construction and land development

83

—

5

88

161,737

161,825
Second mortgages

229

—

—

229

6,297

6,526
Multifamily

—

—

—

—

87,624

87,624
Agriculture

—

—

45

45

7,902

7,947
Total real estate loans

1,016

33

2,183

3,232

949,822

953,054
Commercial loans

216

—

1,301

1,517

238,265

239,782
Consumer installment loans

39

—

12

51

8,544

8,595
All other loans

—

—

—

—

1,292

1,292
Total loans

$
1,271

$
33

$
3,496

$
4,800

$
1,197,923

$
1,202,723

December 31, 2020


30‑89 Days

90+ Days Past


Total Past



Total Loans

Past Due

Due and Accruing

Nonaccrual

Due

Current

Receivable
Mortgage loans on real estate:












Residential 1‑4 family

$
1,324

$
33

$
1,357

$
2,714

$
194,514

$
197,228
Commercial

438

—

730

1,168

473,688

474,856
Construction and land development

157

—

44

201

182,076

182,277
Second mortgages

227

—

—

227

6,133

6,360
Multifamily

—

—

—

—

78,158

78,158
Agriculture

—

—

45

45

6,617

6,662
Total real estate loans

2,146

33

2,176

4,355

941,186

945,541
Commercial loans

60

—

2,264

2,324

223,062

225,386
Consumer installment loans

—

12

20

32

9,964

9,996
All other loans

—

—

—

—

1,439

1,439
Total loans

$
2,206

$
45

$
4,460

$
6,711

$
1,175,651

$
1,182,362

Activity in the allowance for loan losses on loans by segment for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 is presented in the following tables (dollars in thousands):


	Three Months Ended March 31, 2021										Three Months Ended September 30, 2021
			Provision										Provision
	December 31, 2020		Allocation		Charge-offs		Recoveries		March 31, 2021		June 30, 2021		Allocation		Charge-offs		Recoveries		September 30, 2021
Mortgage loans on real estate:
Residential 1‑4 family	$	2,638	$	(772)	$	—	$	38	$	1,904	$	2,004	$	(263)	$	—	$	24	$	1,765
Commercial		4,568		(1,059)		—		3		3,512		3,782		514		—		5		4,301
Construction and land development		2,545		(758)		—		20		1,807		2,040		(763)		—		152		1,429
Second mortgages		18		(7)		—		8		19		20		(10)		—		10		20
Multifamily		508		(201)		—		—		307		366		(74)		—		—		292
Agriculture		40		19		—		—		59		43		(10)		—		—		33
Total real estate loans		10,317		(2,778)		—		69		7,608		8,255		(606)		—		191		7,840
Commercial loans		1,897		379		(167)		24		2,133		1,482		(242)		—		—		1,241
Consumer installment loans		119		86		(79)		41		167		110		(2)		(49)		31		90
All other loans		7		—		—		—		7		8		(3)		—		—		4
Unallocated		—		913		—		—		913		1,151		(397)		—		—		754
Total loans	$	12,340	$	(1,400)	$	(246)	$	134	$	10,828	$	11,006	$	(1,250)	$	(49)	$	222	$	9,929


	Three Months Ended September 30, 2020
			Provision
	June 30, 2020		Allocation		Charge-offs		Recoveries		September 30, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	3,495	$	(954)	$	—	$	14	$	2,555
Commercial		4,612		(1,606)		—		5		3,011
Construction and land development		1,342		(254)		—		75		1,163
Second mortgages		45		(9)		—		2		38
Multifamily		499		28		—		—		527
Agriculture		44		7		—		—		51
Total real estate loans		10,037		(2,788)		—		96		7,345
Commercial loans		2,058		(288)		—		19		1,789
Consumer installment loans		110		31		(42)		17		116
All other loans		8		2		—		—		10
Unallocated		25		3,043		—		—		3,068
Total loans	$	12,238	$	—	$	(42)	$	132	$	12,328


	Nine Months Ended September 30, 2021
			Provision
	December 31, 2020		Allocation			Charge-offs		Recoveries		September 30, 2021
Mortgage loans on real estate:
Residential 1‑4 family	$	2,638	$	(975)		$	(11)	$	113	$	1,765
Commercial		4,568		(279)			—		12		4,301
Construction and land development		2,545		(1,403)			—		287		1,429
Second mortgages		18		(18)			—		20		20
Multifamily		508		(216)			—		—		292
Agriculture		40		(7)			—		—		33
Total real estate loans		10,317		(2,898)			(11)		432		7,840
Commercial loans		1,897		(538)			(167)		49		1,241
Consumer installment loans		119		35			(174)		110		90
All other loans		7		(3)			—				4
Unallocated		—		754	��		—		—		754
Total loans	$	12,340	$	(2,650)		$	(352)	$	591	$	9,929

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Three Months Ended March 31, 2020

Provision


December 31, 2019

Allocation

Charge-offs

Recoveries

March 31, 2020
Mortgage loans on real estate:











Residential 1‑4 family

$
2,685

$
234

$
—

$
16

$
2,935
Commercial

2,196

2,000

—

44

4,240
Construction and land development

1,044

227

—

83

1,354
Second mortgages

79

(10)

—

1

70
Multifamily

248

19

—

—

267
Agriculture

38

7

—

—

45
Total real estate loans

6,290

2,477

—

144

8,911
Commercial loans

1,980

582

(19)

3

2,546
Consumer installment loans

114

35

(75)

37

111
All other loans

7

1

—

—

8
Unallocated

38

205

—

—

243
Total loans

$
8,429

$
3,300

$
(94)

$
184

$
11,819


	Nine Months Ended September 30, 2020
			Provision
	December 31, 2019		Allocation		Charge-offs		Recoveries		September 30, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	2,685	$	(173)	$	—	$	43	$	2,555
Commercial		2,196		731		—		84		3,011
Construction and land development		1,044		(40)		—		159		1,163
Second mortgages		79		(45)		—		4		38
Multifamily		248		279		—		—		527
Agriculture		38		13		—		—		51
Total real estate loans		6,290		765		—		290		7,345
Commercial loans		1,980		331		(608)		86		1,789
Consumer installment loans		114		71		(146)		77		116
All other loans		7		3		—		—		10
Unallocated		38		3,030		—		—		3,068
Total loans	$	8,429	$	4,200	$	(754)	$	453	$	12,328

The increase in provision expense for the three and nine months ended ~~March 31,~~September 30, 2020 reflected the significant increase in commercial real estate and commercial loans classified as special mention due to the inherent economic impact COVID-19 was expected to have on these borrowers. The subsequent recovery of loan loss provision for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 reflected a more stable economic climate in the first ~~quarter~~nine months of 2021 compared with each quarter in 2020. This is evidenced by the level of charge-offs and delinquencies, which have remained relatively ~~low.~~low, as well as decreases in special mention loans. Also, the majority of loans that were granted COVID-19 related payment relief have resumed normal payments. The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable.

Due to the lingering, although diminishing, potential effects of COVID-19, the Company changed the look back period related to the qualitative factor measuring credit quality deterioration trends for the September 30, 2021 loan loss allowance calculation. The factor was calculated based on an 8 quarter look back period versus a 4 quarter look back period used in prior periods. This change accounted for the credit quality changes pre- and post-COVID-19, which span over the 8 quarter period. The revised methodology resulted in a decrease of $560,000 to the unallocated component with corresponding increases of $483,000 and $221,000 to the commercial real estate and construction and land development, respectively, offset by a $116,000 decrease in residential 1-4 family, as compared to the previous methodology.

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):

March 31, 2021

Allowance for Loan Losses

Recorded Investment in Loans


Individually

Collectively



Individually

Collectively


Evaluated for

Evaluated for

Evaluated for

Evaluated for

Impairment

Impairment

Total

Impairment

Impairment

Total
Mortgage loans on real estate:












Residential 1‑4 family

$
660

$
1,244

$
1,904

$
2,561

$
181,725

$
184,286
Commercial

55

3,457

3,512

3,612

501,234

504,846
Construction and land development

2

1,805

1,807

5

161,820

161,825
Second mortgages

—

19

19

—

6,526

6,526
Multifamily

—

307

307

—

87,624

87,624
Agriculture

13

70

83

45

7,902

7,947
Total real estate loans

730

6,902

7,632

6,223

946,831

953,054
Commercial loans

385

1,724

2,109

1,462

238,320

239,782
Consumer installment loans

3

164

167

12

8,583

8,595
All other loans

—

7

7

—

1,292

1,292
Unallocated

—

913

913

—

—

—
Total loans

$
1,118

$
9,710

$
10,828

$
7,697

$
1,195,026

$
1,202,723


	September 30, 2021
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	581	$	1,184	$	1,765	$	2,284	$	175,815	$	178,099
Commercial		101		4,200		4,301		2,150		540,268		542,418
Construction and land development		1		1,428		1,429		2		200,876		200,878
Second mortgages		—		20		20		—		7,078		7,078
Multifamily		—		292		292		—		80,245		80,245
Agriculture		—		33		33		—		7,748		7,748
Total real estate loans		683		7,157		7,840		4,436		1,012,030		1,016,466
Commercial loans		317		924		1,241		3,335		203,466		206,801
Consumer installment loans		—		90		90		—		6,841		6,841
All other loans		—		4		4		—		873		873
Unallocated		—		754		754		—		—		—
Total loans	$	1,000	$	8,929	$	9,929	$	7,771	$	1,223,210	$	1,230,981

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	December 31, 2020
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	640	$	1,998	$	2,638	$	2,824	$	194,404	$	197,228
Commercial		57		4,511		4,568		3,658		471,198		474,856
Construction and land development		12		2,533		2,545		44		182,233		182,277
Second mortgages		—		18		18		—		6,360		6,360
Multifamily		—		508		508		—		78,158		78,158
Agriculture		13		27		40		45		6,617		6,662
Total real estate loans		722		9,595		10,317		6,571		938,970		945,541
Commercial loans		437		1,460		1,897		2,549		222,837		225,386
Consumer installment loans		6		113		119		19		9,977		9,996
All other loans		—		7		7		—		1,439		1,439
Unallocated		—		—		—		—		—		—
Total loans	$	1,165	$	11,175	$	12,340	$	9,139	$	1,173,223	$	1,182,362

Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of ~~$10.6~~$10.4 million and $10.7 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, and PPP loans 100% guaranteed by the SBA of ~~$67.7~~$32.8 million and $49.3 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high.

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The following tables present the composition of loans by credit quality indicator at ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021										September 30, 2021
			Special										Special
	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	177,591	$	5,280	$	1,415	$	—	$	184,286	$	173,361	$	3,509	$	1,229	$	—	$	178,099
Commercial		459,805		44,330		711		—		504,846		499,588		42,325		505		—		542,418
Construction and land development		149,809		12,011		5		—		161,825		197,497		3,379		2		—		200,878
Second mortgages		5,903		623		—		—		6,526		6,465		613		—		—		7,078
Multifamily		86,539		1,085		—		—		87,624		80,245		—		—		—		80,245
Agriculture		6,491		34		1,422		—		7,947		6,319		1,429		—		—		7,748
Total real estate loans		886,138		63,363		3,553		—		953,054		963,475		51,255		1,736		—		1,016,466
Commercial loans		217,059		14,739		7,984		—		239,782		189,623		13,597		3,581		—		206,801
Consumer installment loans		8,569		14		12		—		8,595		6,830		11		—		—		6,841
All other loans		1,277		15		—		—		1,292		859		14		—		—		873
Total loans	$	1,113,043	$	78,131	$	11,549	$	—	$	1,202,723	$	1,160,787	$	64,877	$	5,317	$	—	$	1,230,981


	December 31, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	189,617	$	6,253	$	1,358	$	—	$	197,228
Commercial		433,748		39,001		2,107		—		474,856
Construction and land development		173,668		8,565		44		—		182,277
Second mortgages		5,495		865		—		—		6,360
Multifamily		71,923		6,235		—		—		78,158
Agriculture		6,208		409		45		—		6,662
Total real estate loans		880,659		61,328		3,554		—		945,541
Commercial loans		199,762		17,843		7,781		—		225,386
Consumer installment loans		9,959		18		19		—		9,996
All other loans		1,424		15		—		—		1,439
Total loans	$	1,091,804	$	79,204	$	11,354	$	—	$	1,182,362

In accordance with FASB Accounting Standards Update (ASU) 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 1815 and 19 loans that met the definition of a TDR at each of ~~March 31,~~September 30, 2021 and ~~2020.~~2020, respectively.

The Company had 0no loan modifications considered to be TDRs during the three months ended ~~March 31,~~September 30, 2021. During the nine months ended September 30, 2021, the Company restructured the terms of one 1-4 family residential loan that was considered to be a TDR with a pre- and ~~2020.~~post-modification balance of $61,000.

The Company had no loan modifications considered to be TDRs during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company modified one commercial real estate loan that was considered to be a TDR. The Company granted the borrower six months interest only payment relief and no other changes were made to the loan structure. The loan is 100% guaranteed by the USDA and had a pre- and post-modification balance of $438,000.

A loan is considered to be in default if it is 90 days or more past due. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three and nine months ended ~~March 31,~~September 30, 2021 and 2020.

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In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35, Receivables, Subsequent Measurement.

At ~~March 31,~~September 30, 2021, the Company had 1-4 family mortgages in the amount of ~~$78.0~~$77.0 million and cash in the amount of $6.5 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of ~~$65.7~~$63.3 million.

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Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

As of ~~March 31,~~September 30, 2021 and December 31, 2020, the outstanding contractual balance of the PCI loans was ~~$41.1~~$33.6 million and $43.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in

thousands):


	March 31, 2021				December 31, 2020				September 30, 2021				December 31, 2020
			% of PCI				% of PCI				% of PCI				% of PCI
	Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	20,251	90.14	%	$	21,720	90.35	%	$	13,984	89.19	%	$	21,720	90.35	%
Commercial		423	1.88			429	1.78			386	2.46			429	1.78
Construction and land development		729	3.25			780	3.25			453	2.89			780	3.25
Second mortgages		860	3.83			904	3.76			680	4.34			904	3.76
Multifamily		202	0.90			207	0.86			176	1.12			207	0.86
Total real estate loans		22,465	100.00			24,040	100.00			15,679	100.00			24,040	100.00
Total PCI loans	$	22,465	100.00	%	$	24,040	100.00	%	$	15,679	100.00	%	$	24,040	100.00	%

There was 0 activity in the allowance for loan losses on PCI loans for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021				December 31, 2020				September 30, 2021				December 31, 2020
	Allowance		Recorded				Recorded		Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in		for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans		losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	20,251	$	156	$	21,720	$	156	$	13,984	$	156	$	21,720
Commercial		—		423		—		429		—		386		—		429
Construction and land development		—		729		—		780		—		453		—		780
Second mortgages		—		860		—		904		—		680		—		904
Multifamily		—		202		—		207		—		176		—		207
Total real estate loans		156		22,465		156		24,040		156		15,679		156		24,040
Total PCI loans	$	156	$	22,465	$	156	$	24,040	$	156	$	15,679	$	156	$	24,040

1819

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The change in the accretable yield balance for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and the year ended December 31, 2020, is as follows (dollars in thousands):



Balance, January 1, 2020	$	33,466	$	33,466
Accretion		(4,024)		(4,024)
Reclassification to nonaccretable difference		(253)		(253)
Balance, December 31, 2020	$	29,189	$	29,189
Accretion		(847)		(2,310)
Reclassification to nonaccretable difference		(1,019)		(2,183)
Balance, March 31, 2021	$	27,323
Balance, September 30, 2021			$	24,696

The PCI loans were not classified as nonperforming assets as of ~~March 31,~~September 30, 2021, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. Other Real Estate Owned

The following table presents the balances of other real estate owned (OREO) at ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Residential 1‑4 family	$	21	$	21	$	21	$	21
Construction and land development		4,292		4,340		234		4,340
Total other real estate owned	$	4,313	$	4,361	$	255	$	4,361

At ~~March 31,~~September 30, 2021, the Company had ~~$274,000 in~~$239,000 of residential 1-4 family loans and PCI loans that were in the process of foreclosure.

On April 7, 2021, the Company sold OREO property with a carrying value of $3.8 million for a gain of $435,000. In accordance with FASB ASC 610, Other Income, the Company recognizes a sale when it deems that it is probable it will collect substantially all of the consideration to which it will be entitled in exchange for the OREO property and has transferred control to the buyer.

Note 6. Deposits

The following table provides interest bearing deposit information, by type, at ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):

March 31, 2021

December 31, 2020
Interest bearing checking

$
261,536

$
239,628
MMDA

171,932

154,503
Savings

137,507

124,384
Time deposits less than or equal to $250,000

422,372

452,885
Time deposits over $250,000

112,038

128,400
Total interest bearing deposits

$
1,105,385

$
1,099,800


	September 30, 2021		December 31, 2020
Interest bearing checking	$	276,222	$	239,628
MMDA		184,750		154,503
Savings		151,090		124,384
Time deposits less than or equal to $250,000		425,072		452,885
Time deposits over $250,000		115,947		128,400
Total interest bearing deposits	$	1,153,081	$	1,099,800

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Note 7. Accumulated Other Comprehensive Income

The following tables present activity net of tax in accumulated other comprehensive income (AOCI) for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 (dollars in thousands):


	Three months ended March 31, 2021								Three months ended September 30, 2021
	Unrealized		Defined		Gain (Loss) on		Total Other		Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive		Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income		Securities		Pension Plan		Hedge		Income

Beginning balance	$	7,758	$	(1,073)	$	(494)	$	6,191	$	6,579	$	(1,073)	$	(333)	$	5,173
Other comprehensive (loss) income before reclassifications		(2,836)		—		143		(2,693)		(798)		—		40		(758)
Amounts reclassified from AOCI		(12)		—		—		(12)		5		—		—		5
Net current period other comprehensive (loss) income		(2,848)		—		143		(2,705)		(793)		—		40		(753)
Ending balance	$	4,910	$	(1,073)	$	(351)	$	3,486	$	5,786	$	(1,073)	$	(293)	$	4,420


	Three months ended March 31, 2020								Three months ended September 30, 2020
	Unrealized		Defined		Gain (Loss) on		Total Other		Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive		Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income		Securities		Pension Plan		Hedge		Income

Beginning balance	$	2,887	$	(886)	$	(36)	$	1,965	$	5,688	$	(886)	$	(572)	$	4,230
Other comprehensive income (loss) before reclassifications		610		—		(435)		175		1,353		—		37		1,390
Amounts reclassified from AOCI		30		—		—		30		(61)		—		—		(61)
Net current period other comprehensive income (loss)		640		—		(435)		205
Net current period other comprehensive income										1,292		—		37		1,329
Ending balance	$	3,527	$	(886)	$	(471)	$	2,170	$	6,980	$	(886)	$	(535)	$	5,559


	Nine months ended September 30, 2021
	Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income

Beginning balance	$	7,758	$	(1,073)	$	(494)	$	6,191
Other comprehensive (loss) income before reclassifications		(1,986)		—		201		(1,785)
Amounts reclassified from AOCI		14		—		—		14
Net current period other comprehensive (loss) income		(1,972)		—		201		(1,771)
Ending balance	$	5,786	$	(1,073)	$	(293)	$	4,420


	Nine months ended September 30, 2020
	Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income

Beginning balance	$	2,887	$	(886)	$	(36)	$	1,965
Other comprehensive income (loss) before reclassifications		4,312		—		(499)		3,813
Amounts reclassified from AOCI		(219)		—		—		(219)
Net current period other comprehensive income (loss)		4,093		—		(499)		3,594
Ending balance	$	6,980	$	(886)	$	(535)	$	5,559

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The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 (dollars in thousands):

Affected Line Item in the Unaudited Consolidated
Details about AOCI Components

Amount Reclassified from AOCI

Statement of Income

Three months ended


March 31, 2021

March 31, 2020


Securities available for sale:






Unrealized (gain) loss on securities available for sale

$
(16)

$
39

Gain (loss) on securities transactions, net
Related tax expense (benefit)

4

(9)

Income tax expense

$
(12)

$
30

Net of tax


					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Three months ended
	September 30, 2021		September 30, 2020
Securities available for sale:
Unrealized loss (gains) on securities available for sale	$	7	$	(78)	Gain (loss) on securities transactions, net
Related tax (benefit) expense		(2)		17	Income tax expense
	$	5	$	(61)	Net of tax


					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Nine months ended
	September 30, 2021		September 30, 2020
Securities available for sale:
Unrealized loss (gains) on securities available for sale	$	19	$	(281)	Gain (loss) on securities transactions, net
Related tax (benefit) expense		(5)		62	Income tax expense
	$	14	$	(219)	Net of tax

Note 8. Fair Values of Assets and Liabilities

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

●

Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

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●

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

FASB ASC 825, Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of ~~March 31,~~September 30, 2021.

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and the cash flow hedge are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021								September 30, 2021
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	7,804	$	7,804	$	—	$	—	$	19,880	$	—	$	19,880	$	—
U.S. Government agencies		36,123		9,326		26,797		—		52,808		—		52,808		—
State, county and municipal		124,611		4,574		120,037		—		193,291		10,321		182,970		—
Mortgage backed securities		32,274		—		32,274		—		38,908		—		38,908		—
Asset backed securities		46,712		4,596		42,116		—		46,729		—		46,729		—
Corporate bonds		25,602		—		25,602		—		24,229		—		24,229		—
Total investment securities available for sale		273,126		26,300		246,826		—		375,845		10,321		365,524		—
Total assets at fair value	$	273,126	$	26,300	$	246,826	$	—	$	375,845	$	10,321	$	365,524	$	—
Cash flow hedge liability	$	449		—	$	449		—	$	374	$	—	$	374	$	—
Total liabilities at fair value	$	449	$	—	$	449	$	—	$	374	$	—	$	374	$	—


	December 31, 2020								December 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	23,499	$	23,499	$	—	$	—	$	23,499	$	23,499	$	—	$	—
U.S. Government agencies		25,853		4,034		21,819		—		25,853		4,034		21,819		—
State, county and municipal		125,720		5,945		119,775		—		125,720		5,945		119,775		—
Mortgage backed securities		32,189		5,534		26,655		—		32,189		5,534		26,655		—
Asset backed securities		37,488		9,784		27,704		—		37,488		9,784		27,704		—
Corporate bonds		26,598		500		26,098		—		26,598		500		26,098		—
Total investment securities available for sale		271,347		49,296		222,051		—		271,347		49,296		222,051		—
Total assets at fair value	$	271,347	$	49,296	$	222,051	$	—	$	271,347	$	49,296	$	222,051	$	—
Cash flow hedge liability		631		—	$	631		—	$	631	$	—	$	631	$	—
Total liabilities at fair value	$	631	$	—	$	631	$	—	$	631	$	—	$	631	$	—

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available (Level 1). If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows,

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adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses reputable pricing companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 18 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021								September 30, 2021
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Impaired loans	$	2,409	$	—	$	—	$	2,409	$	3,968	$	—	$	—	$	3,968
Bank premises and equipment held for sale		1,507		—		—		1,507		1,507		—		—		1,507
Other real estate owned		4,313		—		—		4,313		255		—		—		255
Total assets at fair value	$	8,229	$	—	$	—	$	8,229	$	5,730	$	—	$	—	$	5,730
Total liabilities at fair value	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	December 31, 2020								December 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Impaired loans	$	3,449	$	—	$	—	$	3,449	$	3,449	$	—	$	—	$	3,449
Bank premises and equipment held for sale		1,507		—		—		1,507		1,507		—		—		1,507
Other real estate owned		4,361		—		—		4,361		4,361		—		—		4,361
Total assets at fair value	$	9,317	$	—	$	—	$	9,317	$	9,317	$	—	$	—	$	9,317
Total liabilities at fair value	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At ~~March 31,~~September 30, 2021 and December 31, 2020, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. The Company makes adjustments for selling costs estimated at 10% and any known liens against the collateral. Therefore, the Company records impaired loans as nonrecurring Level 3. For each of the periods ended ~~March 31,~~September 30, 2021 and December 31, 2020, weighted average adjustments, calculated based on relative fair value, related to impaired loans ~~were~~was 12.3%.

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Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

Bank premises and equipment held for sale

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the ~~other real estate owned (OREO)~~OREO asset section below.

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, establishing a new cost basis. Initial fair value is based on appraised values of the collateral less estimated disposal costs. Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. The assets are carried at the lower of carrying value

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or fair value less estimated disposal costs ranging from 2% to 10%. The Company may incur additional write-downs of OREO assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 3.

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet, at fair value measures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):


	March 31, 2021										September 30, 2021
			Estimated Fair										Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3		Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	20,271	$	21,190	$	—	$	21,190	$	—	$	19,052	$	19,844	$	—	$	19,844	$	—
Loans, net of allowance		1,191,895		1,205,856		—		—		1,205,856		1,221,052		1,235,252		—		—		1,235,252
PCI loans, net of allowance		22,309		22,465		—		—		22,465		15,523		23,624		—		—		23,624

Financial liabilities:
Interest bearing deposits		1,105,385		1,108,536		—		1,108,536		—		1,153,081		1,155,447		—		1,155,447		—
Borrowings		71,791		72,434		—		72,434		—		71,457		71,963		—		71,963		—


	December 31, 2020
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	21,176	$	22,257	$	—	$	22,257	$	—
Loans, net of allowance		1,170,022		1,178,764		—		—		1,178,764
PCI loans, net of allowance		23,884		32,657		—		—		32,657

Financial liabilities:
Interest bearing deposits		1,099,800		1,103,112		—		1,103,112		—
Borrowings		61,957		62,852		—		62,852		—

2325

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December 31, 2020




Estimated Fair






Carrying Value

Value

Level 1

Level 2

Level 3
Financial assets:

Securities held to maturity

$
21,176

$
22,257

$
—

$
22,257

$
—
Loans, net of allowance

1,170,022

1,178,764

—

—

1,178,764
PCI loans, net of allowance

23,884

32,657

—

—

32,657

Financial liabilities:






Interest bearing deposits

1,099,800

1,103,112

—

1,103,112

—
Borrowings

61,957

62,852

—

62,852

—

Note 9. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to restricted stock units and stock option awards. The following table presents basic and diluted EPS for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 (dollars and shares in thousands, except per share data):


			Weighted Average					Weighted Average
	Net Income		Shares	Per		Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Amount		(Numerator)		(Denominator)	Share Amount
For the three months ended March 31, 2021
For the three months September 30, 2021
Basic EPS	$	6,643	22,201	$	0.30	$	6,548	22,455	$	0.29
Effect of dilutive stock awards		—	215		—		—	547		(0.01)
Diluted EPS	$	6,643	22,416	$	0.30	$	6,548	23,002	$	0.28

For the three months ended March 31, 2020
For the three months ended September 30, 2020
Basic EPS	$	1,415	22,400	$	0.06	$	4,516	22,312	$	0.20
Effect of dilutive stock awards		—	191		—		—	191		—
Diluted EPS	$	1,415	22,591	$	0.06	$	4,516	22,503	$	0.20

For the nine months ended September 30, 2021
Basic EPS						$	18,617	22,333	$	0.83
Effect of dilutive stock awards							—	384		(0.01)
Diluted EPS						$	18,617	22,717	$	0.82

For the nine months ended September 30, 2020
Basic EPS						$	10,091	22,339	$	0.45
Effect of dilutive stock awards							—	195		—
Diluted EPS						$	10,091	22,534	$	0.45

There were 0 issuable antidilutive shares excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2021. Antidilutive shares issuable under awards or options of ~~567,000 and 568,000~~1.4 million were excluded from the computation of diluted earnings per share for the three and nine months ended ~~March 31, 2021 and 2020, respectively.~~September 30, 2020.

Note 10. Employee Benefit Plan

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company froze the plan benefits for all the defined benefit plan participants effective December 31, 2010.

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The following table provides the components of net periodic benefit (income) cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 (dollars in thousands):


	Three months ended				Three months ended				Nine months ended
	March 31, 2021		March 31, 2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Interest cost	$	116	$	33	$	116	$	33	$	348	$	99
Expected return on plan assets		(265)		(54)		(265)		(54)		(795)		(161)
Amortization of prior service cost		4		1		4		1		12		3
Recognized net loss due to settlement		—		—
Recognized net actuarial loss		65		12		65		12		195		36
Net periodic income	$	(80)	$	(8)
Net periodic (income) cost					$	(80)	$	(8)	$	(240)	$	(23)

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Note 11. Cash Flow Hedge

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had interest rate swaps designated as cash flow hedges with a total notional amount of $20 million at each of ~~March 31,~~September 30, 2021 and December 31, 2020. The swaps were entered into with a counterparty that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contracts is not significant. The Company had $770,000 of cash pledged as collateral at each of ~~March 31,~~September 30, 2021 and December 31, 2020.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815, Derivatives and Hedging, the Company has designated the swaps as cash flow hedges, with the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be highly effective for the three and nine month periods ended ~~March 31,~~September 30, 2021 and 2020. The Company recorded a fair value liability of ~~$449,000~~$374,000 and $631,000 in other liabilities at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The net ~~losses~~gains were recorded as a component of other comprehensive income net of associated tax effects.

Note 12. Revenue Recognition

The Company recognizes income in accordance with FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service charges and fees on deposit accounts

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

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Interchange and ATM fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Because the Company acts as an agent and does not control the services rendered to the customers, related costs are netted against the fee income. These costs were included in other operating expenses prior to the adoption of Topic 606.

Brokerage fees and commissions

Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of mutual funds and other investments to customers by a third-party service provider and investment advisor fees. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period.

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The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020 (dollars in thousands):


	Three months ended				Three months ended				Nine months ended
	March 31, 2021		March 31, 2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Noninterest income
In-scope of Topic 606:
Service charges and fees on deposit accounts	$	318	$	454
Service charges on deposit accounts					$	341	$	315	$	964	$	1,042
Interchange and ATM fees		361		218		330		298		1,037		775
Brokerage fees and commissions		98		72		57		53		238		256
Noninterest income (in-scope of Topic 606)		777		744		728		666		2,239		2,073
Noninterest income (out-of-scope of Topic 606)		851		591		653		806		2,231		2,350
Total noninterest income	$	1,628	$	1,335	$	1,381	$	1,472	$	4,470	$	4,423

Note 13. Leases

The Company accounts for leases in accordance with FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises. The Company's leases have lease terms between five years and 20 years, with the longest lease term having an expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability. The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in a lease is not disclosed. None of the Company’s current leases contain variable lease payment terms. The Company accounts for associated non-lease components separately.

The following table presents operating lease liabilities as of ~~March 31,~~September 30, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Gross lease liability	$	7,739	$	8,047	$	7,115	$	8,047
Less: imputed interest		(2,194)		(2,260)		(2,070)		(2,260)
Present value of lease liability	$	5,545	$	5,787	$	5,045	$	5,787

The Company had 0 finance or sales type leases as of ~~March 31,~~September 30, 2021 and December 30, 2020.

The weighted average remaining lease term and weighted average discount rate for operating leases at ~~March 31,~~September 30, 2021

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was ~~12.5~~12.9 years and ~~4.83%~~4.93%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2020 was 12.3 years and 4.78%, respectively.

Maturities of the gross operating lease liability at ~~March 31,~~September 30, 2021 are as follows (dollars in thousands):


2021	$	882	$	258
2022		600		600
2023		630		630
2024		573		573
2025		552		552
Thereafter		4,502		4,502
Total of future payments	$	7,739	$	7,115

Operating lease costs and sublease rental income for the three months ended ~~March 31,~~September 30, 2021 were ~~$317,000~~$318,000 and ~~$77,000,~~$47,000, respectively. Operating lease costs and sublease rental income for the three months ended ~~March 31,~~September 30, 2020

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were $317,000 and $27,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2021 were $949,000 and $176,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2020 were ~~$314,000~~$952,000 and ~~$27,000,~~$82,000, respectively.

Note 14. ~~Subsequent event~~Other Operating Expenses

Other operating expenses totals for the three and nine month periods of September 30, 2021 and 2020 are presented in the following table. Components of these expenses exceeding 1.0%of the aggregate of total net interest income and total noninterest income for any of the periods presented are stated separately (dollars in thousands).


	Three months ended				Nine months ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Bank franchise tax	$	258	$	237	$	772	$	711
Stationery, printing and supplies		170		167		490		521
Outside vendor fees		220		177		512		604
Legal fees		136		27		596		62
Professional fees		166		95		742		248
Other expenses		848		720		2,622		2,209
Total other operating expenses	$	1,798	$	1,423	$	5,734	$	4,355

On ~~April 7,~~June 2, 2021, the Company ~~sold OREO property~~entered into a merger agreement with ~~a carrying value of $3.8 million for a gain of $435,000. In accordance with FASB ASC 610,~~ ~~Other Income~~United Bankshares, Inc. (“United”), the ~~Company recognizes a sale when it deems that it is probable it~~parent company of United Bank. Under the merger agreement, United will ~~collect substantially all~~acquire 100% of the ~~consideration to which it will be entitled~~outstanding shares of the Company’s common stock in exchange for shares of United’s common stock. The exchange ratio will be fixed at 0.3173 of United’s shares for each share of the ~~OREO property~~Company. The merger is expected to close in the fourth quarter of 2021, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and ~~has transferred control to~~approval by the ~~buyer.~~

Company’s shareholders. Upon closing, the Company will merge into United, and Essex Bank will merge into United Bank, with United and United Bank being the surviving entities. There were $147,000 and $717,000 of merger related expenses included in legal and professional fees for the three and nine month periods ended September 30, 2021, respectively.

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

The following discussion and analysis of the financial condition at ~~March 31,~~September 30, 2021 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended ~~March 31,~~September 30, 2021 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

OVERVIEW

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates two loan production offices. The Bank will cose its Edgewater and Rockville branches in Maryland on December 3, 2021.

On June 2, 2021, the Company entered into a merger agreement with United Bankshares, Inc. (“United”), the parent company of United Bank. Under the merger agreement, United will acquire 100% of the outstanding shares of the Company’s common stock in exchange for shares of United’s common stock. The exchange ratio will be fixed at 0.3173

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of United’s shares for each share of the Company. The merger is expected to close in the fourth quarter of 2021, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval by the Company’s shareholders. Upon closing, the Company will merge into United, and Essex Bank will merge into United Bank, with United and United Bank being the surviving entities.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through customer growth and targeted product types, with lenders and other employees directly involved with customer

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relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses.

The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other sources of noninterest income can include gains or losses on securities transactions and income from bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, data processing expenses, professional fees, transactions involving bank-owned property, and other operational expenses. The provision for loan losses and income taxes may also materially affect net income.

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

The Company makes certain forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, future strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:

●

the quality or composition of the Company’s loan or investment portfolios, including collateral values and the repayment abilities of borrowers and issuers;

●

assumptions that underlie the Company’s allowance for loan losses;

●

general economic and market conditions, either nationally or in the Company’s market areas;

●

unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses to them

●

the pending merger with United Bankshares, including its closing on the expected terms and schedule, the costs associated with completing it and integrating the businesses, and business operations until and through its closing

●

the interest rate environment;

●

competitive pressures among banks and financial institutions or from companies outside the banking industry;

●

real estate values;

●

the demand for deposit, loan, and investment products and other financial services;

●

the demand, development and acceptance of new products and services;

●

the performance of vendors or other parties with which the Company does business;

●

time and costs associated with de novo branching, acquisitions, dispositions and similar transactions;

●

the realization of gains and expense savings from acquisitions, dispositions and similar transactions;

●

assumptions and estimates that underlie the accounting for purchased credit impaired loans;

●

consumer profiles and spending and savings habits;

●

levels of fraud in the banking industry;

●

the level of attempted cyber attacks in the banking industry;

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●

the securities and credit markets;

●

costs associated with the integration of banking and other internal operations;

●

the soundness of other financial institutions with which the Company does business;

●

inflation;

●

technology; and

●

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

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CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan Losses on Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

●

Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

●

Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to

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any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

●

Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

●

Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

●

Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures,

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the Company manages risk by avoiding concentrations in geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

●

Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

●

Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

●

Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

●

All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors relate to loan growth and concentrations, internal environment, loan quality deterioration and delinquencies. The unallocated component covers uncertainties that could affect management’s estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance

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of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are evaluated for impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.

Accounting for Certain Loans Acquired in a Transfer

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be

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accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805, Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

RESULTS OF OPERATIONS

Overview

The coronavirus (COVID-19) pandemic that set off an economic crisis in 2020 continues to impact the Company’s financial results for the ~~first~~ three and nine months ofending September 30 2021, and ~~will~~may impact future financial results. While the government mandated business closures enacted in 2020 have eased, the Company’s customers and markets are ~~not back~~trying to reach pre-COVID business ~~levels, and unemployment continues to be a major issue.~~levels. Continued uncertainties in the economy and the time that it could take to fully recover underlie the financial impacts that the Company may experience. The Company continues to focus on assessing

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the risks in its loan portfolio and to work with its customers to minimize future losses. See below for additional discussion regarding trends and the potential effects of COVID-19.

~~Despite the continuing effects of the COVID-19 pandemic, the Company has just completed the best quarter financially in its history.~~ Net income in the ~~first~~third quarter of 2021 increased ~~$5.2~~$2.0 million when compared to the same period in 2020. Net income was ~~$6.6~~$6.5 million in the ~~first~~third quarter of 2021, with earnings per share of ~~$0.30~~$0.29 basic and $0.28 fully diluted. Net income for the ~~first~~third quarter of 2020 was ~~$1.4~~$4.5 million, with earnings per share of ~~$0.06~~$0.20 basic and fully diluted. The increase in net income was driven by a change of $4.7 million in the provision for loan losses, which reflected a recovery of $1.4 million in the first quarter of 2021 compared with a provision of $3.3 million in the first quarter of 2020 at the outset of the COVID-19 pandemic. The credit in the current quarter reflected improvement in loan quality as well as loan risk ratings since the first quarter of 2020. Additionally, thereThere was an increase of ~~$1.8~~$2.1 million in net interest income, primarily from both a decline in interest expense of ~~$1.9~~$1.4 million in the ~~first~~third quarter of 2021 compared with the same period one year ~~earlier. Noninterest~~earlier and an increase in interest income ~~increased $293,000~~of $732,000 over the same comparison period. Provision for loan losses decreased $1.250 million year over year ~~driven by an increase~~as the Company recaptured in the third quarter of ~~$151,000 in other noninterest income and an increase of $99,000 in mortgage loan income.~~2021 previously recorded provision. Offsetting these increases to net income ~~was~~were an increase of

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~~$161,000~~ $584,000 in noninterest ~~expense~~expenses and a decrease of $91,000 in noninterest income. There was also an increase of ~~$1.4 million~~$625,000 in income tax ~~expense.~~expense year-over-year. Details of the year-over-year financial performance of the Company are presented below.

Net income of $18.6 million for the first nine months of 2021 reflects an increase of $8.5 million, or 84.5%, over net income of $10.1 million for the same period in 2020. Provision for loan losses reflects a reserve recovery of $2.650 million for the first nine months of 2021 compared with a provision of $4.2 million during the early stage of the COVID-19 pandemic for the first nine months of 2020. Interest expense declined $5.1 million and was $4.8 million for the first nine months of 2021 compared with $9.9 million for the first nine months of 2020. Smaller increases were in interest and dividend income, which increased $959,000, and in noninterest income, which increased $47,000 in the first nine months of 2021 compared with the same period in 2020. Offsetting these increases to net income were an increase of $2.1 million in noninterest expenses, which were $27.1 million for the first nine months of 2021, and $2.4 million greater expense in income taxes, which were $4.8 million for the first nine months of 2021.

Net Interest Income

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

Net interest income increased ~~$1.8~~$2.1 million, or ~~15.0%~~16.4%, from the ~~first~~third quarter of 2020 to the ~~first~~third quarter of 2021. Net interest income was ~~$14.1~~$14.8 million in the ~~first~~third quarter of 2021 compared with ~~$12.2~~$12.7 million for the same period in 2020. Interest and dividend income ~~decreased $86,000,~~increased $732,000, or ~~0.5%~~4.7%, over this time period. In the ~~first~~third quarter of 2021, ~~$609,000~~$785,000 in PPP net origination fees were recognized as income versus ~~none~~$331,000 in the same period of 2020. Interest and fees on loans were ~~$13.2~~$13.4 million in the ~~first~~third quarter of 2021, an increase of ~~$64,000,~~$681,000, or ~~0.5%~~5.3%, over the same period in 2020. Interest and fees on PCI loans decreased by ~~$241,000~~$254,000 and were ~~$856,000~~$708,000 in the ~~first~~third quarter of 2021. Securities income was ~~$1.8~~$2.1 million in the ~~first~~third quarter of 2021, an increase of ~~$100,000~~$367,000 over the same period in 2020. ~~Interest~~Income on interest on deposits in other banks decreased by ~~$9,000~~$62,000 year over year.

The average balance of the loan portfolio, excluding PCI loans, increased by ~~$126.1~~$34.3 million year over year and averaged ~~$1.191~~$1.204 billion for the ~~first~~third quarter of 2021. The average balance of the PCI portfolio declined ~~$8.1~~$11.7 million during the year-over-year comparison period. The average balance of securities increased by $136.9 million in the third quarter of 2021 compared with the same period one year earlier. The average balance of total earning assets increased ~~$224.2~~$162.2 million, or ~~16.7%~~10.7%, from the ~~first~~third quarter of 2020 to the ~~first~~third quarter of 2021. The yield on earning assets decreased from ~~4.78%~~4.09% in the ~~first~~third quarter of 2020 to ~~4.12%~~3.87% in the ~~first~~third quarter of 2021. The change in yield on earning assets was the culmination of ~~decreases~~the decrease in the yield on ~~all loans,~~securities, from ~~5.19%~~2.89% in the ~~first~~third quarter of 2020 to ~~4.68%~~2.25% in the ~~first quarter of 2021, in the tax-equivalent yield on securities, from 3.08% in the first quarter of 2020 to 2.65% in the first~~third quarter of 2021 and in the yield on interest bearing bank balances, from ~~1.68%~~0.68% to ~~0.34%~~0.32% year over year.

The yield on total loans increased year over year, from 4.55% in the third quarter of 2020, to 4.60% for the same period in 2021.

Interest expense decreased ~~$1.9~~$1.4 million, or ~~51.9%~~47.6%, when comparing the ~~first~~third quarter of 2021 and the ~~first~~third quarter of 2020. Interest expense on deposits decreased ~~$1.9~~$1.4 million, or ~~54.2%~~51.7%, as the cost declined from ~~1.34%~~0.96% in the ~~first~~third quarter of 2020 to ~~0.58%~~0.43% for the same period in 2021. The average balance of interest bearing deposits increased ~~$70.4~~$74.5 million,

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or 6.9%. This growth was from non-maturity deposit sources. First, there was an increase of ~~$80.6~~$82.8 million, or ~~47.3%~~41.2%, in the average balance of interest bearing checking accounts, which averaged ~~$250.9~~$283.8 million in the ~~first~~third quarter of 2021. Additionally, there was an increase of ~~$72.1~~$63.6 million in the average balance of savings and money market accounts from the ~~first~~third quarter of 2020 to the same period in 2021. Offsetting these increases was a decrease of $71.9 million in the average balance of time deposits, ~~of $82.4 million,~~ to ~~$550.3~~$540.9 million for the ~~first~~third quarter of 2021. FHLB and other borrowings ~~benefited from a decrease in cost from 1.58%~~costs were stable over the time frame and were 1.22% in the ~~first~~third quarter of ~~2020 to 1.26%~~2021 compared with 1.19% for the same period in ~~the first quarter of 2021.~~2020. All of the above contributed to the reduction of interest expense for interest bearing liabilities by ~~$1.9~~$1.4 million despite an increase of ~~$69.0~~$72.4 million in the average amount outstanding. Also noteworthy is that, although not an interest bearing category, a sizeable amount of funding was generated in the ~~first~~third quarter of 2021 by a year-over-year average balance increase of ~~$139.1~~$63.3 million in noninterest bearing deposits. The amount of liquidity in the banking system, along with lower interest rates and a shift in deposit balances, decreased the cost of interest bearing liabilities from ~~1.36%~~0.97% in the ~~first~~third quarter of 2020 to ~~0.62%~~0.48% in the ~~first~~third quarter of 2021.

The tax-equivalent net interest margin ~~decreased two~~increased 17 basis points, from ~~3.68%~~3.35% in the ~~first~~third quarter of 2020 to ~~3.66%~~3.52% in the ~~first~~third quarter of 2021. ~~Conversely,~~Likewise, the interest spread increased from ~~3.42%~~3.12% to ~~3.50%~~3.39% over the same time period. The ~~decrease~~increase in the margin was precipitated by a decrease of 6622 basis points in the yield on earning assets compared with a greater decline of 7449 basis points in the cost of interest bearing liabilities applied against growth of ~~$224.2~~$162.2 million, or ~~16.7%~~10.7%, in earning assets. The Company also examined the net interest margin without the effects of PPP net fees, interest income and average balances. Excluding the effects of these PPP related items, the net interest margin would have been 3.39% in each of the third quarter of 2021 and 2020.

Net interest income was $43.4 million for the nine months of 2021. This is an increase of $6.1 million, or 16.2%, from net interest income of $37.3 million for the first nine months of 2020. Interest and dividend income increased by $959,000 over this time frame. Interest and dividend income was impacted by volume increases offset by a decline in yield. First, there was an increase of $929,000, or 2.4%, in interest and fees on loans, which increased as a result of growth of $73.0 million, or 6.5%, in the average balance of loans in 2021 over 2020. The yield on loans declined from 4.59% for the first nine months of 2020 to 4.43% for the same period in 2021. Interest and fees on PCI loans declined by $773,000, or 24.8%. The yield on the PCI portfolio was 15.54% for the first nine months of 2021 compared with 13.71% for the first nine months of 2020. Interest and dividends on securities increased by $861,000 in the first nine months of 2021 compared with the same period in 2020. The average balance of the securities portfolio increased $91.0 million, or 37.9%, and the yield declined from 2.95% for the first nine months of 2020 to 2.48% for the same period in 2021. The yield on earning assets was 3.98% for the first nine months of 2021, a decline of 40 basis points from 4.38% in the first nine months of 2020. The yield on total loans, which includes PCI loans and PPP loans, declined from 4.83% for the first nine months of 2020 compared with 4.62% for the same period in 2021.

Interest expense of $4.8 million for the first nine months of 2021 was a decrease of $5.1 million, or 51.3%, from interest expense of $9.9 million for the first nine months of 2020. The cost of interest bearing liabilities decreased over this time frame from 1.17% for the first nine months of 2020 to 0.54% for the same period in 2021. Interest on deposits decreased $5.0 million due to a decline in the rate paid from 1.16% for the first nine months of 2020 to 0.50% for the first nine months of 2021. The average balance of interest bearing liabilities increased over this time frame by $67.3 million, or 6.0%. Short term borrowing expense decreased by $24,000, and the cost of FHLB and other borrowings decreased by $35,000, or 5.0%, as the rate paid decreased from 1.30% for the first nine months of 2020 to 1.23% for the first nine months of 2021.

The changes noted to interest income and interest expense led to an increase in the net interest margin from 3.48% for the first nine months of 2020 to 3.58% for the same period in 2021. The interest spread also increased over this time frame from 3.21% in 2020 to 3.44% in 2021. Excluding PPP related items from the net interest margin calculation would have resulted in a margin of 3.50% for the first nine months of 2021 compared with the actual margin of 3.58%. Excluding PPP related items from the net interest margin calculation for the first nine months of 2020 would have resulted in a margin of 3.49% for the first nine months of 2020 compared with the actual margin of 3.48%. The yield on the loan portfolio for the first nine months of 2021 would have been 4.36% excluding PPP related items versus the actual yield of 4.43%. The yield on the loan portfolio for the first nine months of 2020 would have been 4.68% excluding PPP related items versus the actual yield of 4.59%. The yield on earning assets for the first nine months of 2021 would have been 3.91% without PPP related items as opposed to the actual yield of 3.98%. The yield on earning assets for the first nine months of 2020 would have been 4.44% without PPP related items as opposed to the actual yield of 4.38%.

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The following tables set forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020. The tables also set forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the tables, as loans carrying a zero yield.


	Three months ended March 31, 2021						Three months ended March 31, 2020						Three months ended September 30, 2021						Three months ended September 30, 2020
					Average						Average						Average						Average
	Average		Interest		Rates		Average		Interest		Rates		Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/		Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid		Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,191,395	$	13,150	4.48	%	$	1,065,268	$	13,086	4.93	%	$	1,203,674	$	13,441	4.43	%	$	1,169,330	$	12,760	4.33	%
PCI loans		23,226		856	14.75			31,311		1,097	13.87			16,789		708	16.51			28,480		962	13.21
Total loans		1,214,621		14,006	4.68			1,096,579		14,183	5.19			1,220,463		14,149	4.60			1,197,810		13,722	4.55
Interest bearing bank balances		70,192		60	0.34			16,455		69	1.68			73,098		59	0.32			70,590		121	0.68
Federal funds sold		198		-	0.07			141		-	1.06			225		—	0.12			127		—	0.07
Securities (taxable)		234,938		1,467	2.50			182,340		1,351	2.96			332,322		1,723	2.07			198,296		1,362	2.75
Securities (tax exempt) ⁽¹⁾		49,158		414	3.37			49,391		435	3.52			53,456		443	3.32			50,551		435	3.44
Total earning assets		1,569,107		15,947	4.12			1,344,906		16,038	4.78			1,679,564		16,374	3.87			1,517,374		15,640	4.09
Allowance for loan losses		(12,459)						(8,621)						(11,312)						(12,424)
Non-earning assets		105,946						105,540						101,745						108,772
Total assets	$	1,662,594					$	1,441,825					$	1,769,997					$	1,613,722

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	250,888	$	138	0.22		$	170,279	$	94	0.22		$	283,809	$	125	0.18		$	200,995	$	112	0.22
Savings and money market		291,779		183	0.25			219,661		280	0.51			331,981		201	0.24			268,350		241	0.36
Time deposits		550,297		1,244	0.92			632,664		3,045	1.93			540,934		936	0.69			612,848		2,261	1.46
Total interest bearing deposits		1,092,964		1,565	0.58			1,022,604		3,419	1.34			1,156,724		1,262	0.43			1,082,193		2,614	0.96
Short-term borrowings		439		-	0.20			4,185		23	2.20			139		—	0.19			1,611		1	0.21
FHLB and other borrowings		69,174		217	1.26			66,796		266	1.58			71,619		224	1.22			72,285		221	1.19
Total interest bearing liabilities		1,162,577		1,782	0.62			1,093,585		3,708	1.36			1,228,482		1,486	0.48			1,156,089		2,836	0.97
Noninterest bearing deposits		314,979						175,871						344,320						281,026
Other liabilities		13,208						14,184						13,776						12,980
Total liabilities		1,490,764						1,283,640						1,586,578						1,450,095
Shareholders’ equity		171,830						158,185						183,419						163,627

Total liabilities and shareholders’ equity	$	1,662,594					$	1,441,825					$	1,769,997					$	1,613,722
Net interest earnings			$	14,165					$	12,330					$	14,888					$	12,804
Interest spread					3.50	%					3.42	%					3.39	%					3.12	%
Net interest margin					3.66	%					3.68	%					3.52	%					3.35	%

Tax equivalent adjustment:
Securities			$	87					$	92					$	93					$	91

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%.

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	Nine months ended September 30, 2021						Nine months ended September 30, 2020
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,199,965	$	39,787	4.43	%	$	1,127,002	$	38,858	4.59	%
PCI loans		19,924		2,348	15.54			29,917		3,121	13.71
Total loans		1,219,889		42,135	4.62			1,156,919		41,979	4.83
Interest bearing bank balances		76,484		173	0.30			46,620		231	0.66
Federal funds sold		210		—	0.09			159		—	0.36
Securities (taxable)		280,295		4,885	2.32			190,035		4,000	2.81
Securities (tax exempt) ⁽¹⁾		50,974		1,281	3.35			50,192		1,311	3.48
Total earning assets		1,627,852		48,474	3.98			1,443,925		47,521	4.38
Allowance for loan losses		(11,594)						(11,023)
Non-earning assets		104,124						108,056
Total assets	$	1,720,382					$	1,540,958

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	267,862	$	382	0.19		$	184,415		304	0.22
Savings and money market		315,779		589	0.25			243,311		749	0.41
Time deposits		542,195		3,203	0.79			629,598		8,162	1.73
Total interest bearing deposits		1,125,836		4,174	0.50			1,057,324		9,215	1.16
Short-term borrowings		236		—	0.21			2,038		24	1.57
FHLB and other borrowings		70,868		661	1.23			70,263		696	1.30
Total interest bearing liabilities		1,196,940		4,835	0.54			1,129,625		9,935	1.17
Noninterest bearing deposits		332,509						237,198
Other liabilities		13,644						13,849
Total liabilities		1,543,093						1,380,672
Shareholders’ equity		177,289						160,286

Total liabilities and shareholders’ equity	$	1,720,382					$	1,540,958
Net interest earnings			$	43,639					$	37,586
Interest spread					3.44	%					3.21	%
Net interest margin					3.58	%					3.48	%

Tax equivalent adjustment:
Securities			$	269					$	275

(1)

Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%.

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Provision for Loan Losses

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

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Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.

Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for these loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio. There was a recovery of ~~$1.4~~$1.250 million of previously recorded provision for loan losses in the third quarter of 2021 compared with no provision the third quarter of 2020. The recovery of $2.650 million of provision for loan losses ~~on the loan portfolio, excluding PCI loans, in~~for the first ~~quarter~~nine months of ~~2021. This~~2021 compares towith a provision of ~~$3.3~~$4.2 million infor the first ~~quarter~~nine months of 2020.

The recovery of provision recorded in the first ~~quarter~~and third quarters of 2021 was due to continued improvement in the quality of the loan portfolio and an overall improvement in the risks associated with the potential economic impact of the COVID-19 ~~pandemic. These improvements reflect a more stable economic climate in~~pandemic, which continued through the ~~first~~third quarter of 2021 compared with each quarter in 2020. This is evidenced by the level of charge-offs and delinquencies, which have remained relatively low. Also, the majority of loans that were granted COVID-19 related payment relief have resumed normal payments.2021. Beginning in the first quarter of 2020, management ~~adjusted~~performs a review of each loan within the ~~loan review process~~portfolio to identify, and monitor on a going forward basis, those borrowers that management believed to be possibly impacted by the COVID affected economy. Loans identified with increased risk are aggregated by loan type. During the first and second quarter of 2020, this analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans’ risk grade migration was applied to the allowance for loan loss calculation, which led to ~~the~~a provision for loan losses of ~~$3.3~~$4.2 million for the first ~~quarter~~half of 2020. ~~Despite~~The Company determined that no adjustment to the ~~stay-at-home orders, shut downs, higher than historical unemployment levels~~allowance was necessary for the third or fourth quarters of 2020 after a similar analysis and ~~slow growth, the~~review process. The loan portfolio has exhibited a trend over the last year of lower nonaccrual loans, lower other real estate loans, ~~and~~ very low ~~charge-offs.~~charge-offs and a gradual improvement in risk grades as previously COVID deferred loan relationships return to their original payment terms.

Due to the COVID-19 pandemic, the Company is closely monitoring loan concentrations in various “at risk areas” that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in our geographic territory. As of ~~March 31,~~September 30, 2021, the Company identified the following categories of borrowers as being potentially at risk:


Category	% of Total Loans
~~Consumer~~	~~19.7~~	%
Lessors of commercial properties	~~12.4~~22.3	%
Lessors of residential properties	~~12.2~~13.2
Consumer	10.4
Hotels and other lodging	~~5.6~~5.4
Medical and care services	~~4.4~~3.9
Food service & drinking	~~2.5~~2.7
Retail stores	~~1.5~~1.7
Personal services	~~1.3~~1.2

The Company ~~is working~~continues to work with borrowers who have currently expressed a need for relief due to the effects of COVID-19. The Company had provided aggregate COVID-19 related payment relief on loans totaling $192.6 million through March 31, 2021. As of March 31, 2021, regular payments have resumed on $148.1 million of these loans, of which PCI

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~~comprised $11.8 million. As a result, at March 31,~~At September 30, 2021, there were ~~$44.5~~13 loans with an aggregate outstanding balance of $15.8 million ~~in loans~~ under COVID-19 related payment relief. Two PCI loans comprised ~~$13.2~~$1.3 million of this total at March 31, 2021. Through March 31, 2021, the Company had re-extended this payment relief on $57.6 million of these loans, $2.0 million of which were within the PCI portfolio. At March 31, 2021, $16.1 million in loans were in first time payment relief status.total.

With respect to the PCI portfolio, due to the stable nature of its performance and its declining balances over time as the portfolio amortizes, no provision was taken during either of the three and nine months ended ~~March 31,~~September 30, 2021 and 2020. Additional discussion of loan quality is presented below.

The loan portfolio, excluding PCI loans, had net ~~charge-offs~~recoveries of ~~$112,000~~$173,000 in the ~~first~~third quarter of 2021, compared with net recoveries of $90,000 in the ~~first~~third quarter of 2020. Total charge-offs were ~~$246,000~~$49,000 for the ~~first~~third quarter of 2021 compared with ~~$94,000~~$42,000 in the ~~first~~third quarter of 2020. Recoveries of previously charged-off loans were ~~$134,000~~$222,000 for the ~~first~~third quarter of 2021 compared with ~~$184,000~~$132,000 in the ~~first~~third quarter of 2020.

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The loan portfolio, excluding PCI loans, had net recoveries of $239,000 for the nine months ended September 30, 2021, compared with net charge-offs of $301,000 in the same period of 2020. Total charge-offs were $352,000 for the nine months ended September 30, 2021, compared with $754,000 in the same period of 2020. Recoveries of previously charged-off loans were $591,000 for the nine months ended September 30, 2021, compared with $453,000 in the same period of 2020.

Noninterest Income

Noninterest income of ~~$1.6~~$1.4 million in the ~~first~~third quarter of 2021 was a decrease of $91,000, or 6.2%, compared with the third quarter of 2020. Other noninterest income declined by $85,000 year over year and was $297,000 in the third quarter of 2021. Gains (loss) on securities transactions decreased $85,000 year over year as securities losses of $7,000 were recognized in the third quarter of 2021 compared with gains of $78,000 in the third quarter of 2020. Offsetting these decreases to noninterest income was an increase of $58,000 in service charges and fees, which were $671,000 in the third quarter of 2021. Additionally, mortgage loan income of $255,000 in the third quarter of 2021 was an increase of ~~$293,000,~~$27,000 year over year.

Noninterest income was $4.5 million for the first nine months of 2021, an increase of $47,000, or ~~21.9%~~1.1%, over noninterest income of $4.4 million for the first ~~quarter~~nine months of 2020. Other noninterest income ~~of $447,000 in~~was $1.2 million for the first ~~quarter~~nine months of 2021, an increase of $205,000 over the same period in 2020. Service charges and fees of $2.0 million for the first nine months of 2021 was an increase of ~~$151,000~~$184,000 over the same period in 2020, ~~driven~~reflecting reduced transaction volumes in 2020 created by ~~an increase in insurance commissions. Mortgage loan income of $320,000 was an increase of $99,000 year over year. Gains (losses)~~the COVID-19 pandemic stay-at-home orders. Gain (loss) on securities transactions, ~~increased $55,000 year over year,~~net exhibited the greatest decline, $300,000, and ~~service charges on deposit accounts increased $7,000 and were $679,000 in~~reflected a net loss of $19,000 recognized for the first ~~quarter~~nine months of ~~2021. Offsetting these increases to noninterest income were a decrease~~2021 compared with gains of ~~$11,000~~$281,000 for the same period in ~~gain on sale of loans, of which there were none in the current quarter, and a decrease of $8,000 in income~~2020. Income on bank owned life insurance ~~which~~ was ~~$166,000 in~~$499,000 for the first ~~quarter~~nine months of 2021, ~~year~~a decrease of $19,000 from the same period in 2020. Mortgage loan income was $810,000 for the first nine months of 2021, a decrease of $12,000 over ~~year.~~the same period in 2020.

Noninterest Expense

Noninterest expenses ~~were $8.8~~of $9.1 million for the ~~first~~third quarter of ~~2021. This is~~2021 was an increase of ~~$161,000,~~$584,000, or ~~1.9%~~6.8%, from noninterest expenses of ~~$8.6~~$8.5 million for the ~~first~~third quarter of 2020. The largest component of the increase was an increase in ~~FDIC assessment reflecting an increase~~other operating expenses, which increased by $375,000, from $1.4 million in the ~~assessment base, which was $212,000~~third quarter of 2020, to $1.8 million for the same period in 2021. This increase is comprised mainly of $147,000 in merger related expenses incurred during the ~~first~~third quarter of 2021, ~~compared~~combined with ~~$125,000~~increases of $59,000 in ~~the first quarter of 2020. Other noninterest expenses were $1.6 million~~professional fees, $59,000 in ~~the first quarter of 2021, an increase of $72,000 over the same quarter one year earlier.~~marketing expense and $50,000 in telephone and data expenses. Salaries and employee benefits of ~~$5.2~~$5.4 million in the ~~first~~third quarter of 2021 increased ~~$56,000~~$367,000, or 7.3%, over the ~~first~~third quarter of 2020. Data processing fees of ~~$608,000~~$673,000 in the ~~first~~third quarter of 2021 reflected an increase of ~~$16,000~~$17,000 year over year. Offsetting these increases was a year-over-year decline of ~~$84,000~~$82,000 in other real estate expenses, net, which were $5,000 in the third quarter of 2021. Equipment expenses were $275,000 in the third quarter of 2021 compared with $330,000 for the same period in 2020, a decrease of $55,000, or 16.7%. Occupancy expenses, $790,000 in the third quarter of 2021, declined $25,000 from the same period in 2020. FDIC assessment, which was $161,000 in the third quarter of 2021, declined by $13,000 year over year.

Noninterest expenses were $27.1 million for the nine months ended September 30, 2021, an increase of $2.1 million, or 8.3%, compared with the same period in 2020. Other operating expenses were $5.7 million and increased by $1.4 million, or 31.7%, in the first nine months of 2021 compared with the same period in 2020. Part of the increase is attributed to $717,000 in merger related expenses, a $201,000 increase in legal fees, and a $114,000 increase in professional fees incurred during the second quarter of 2021. Also, there was an assessment of the fair value of a low income housing tax credit investment that resulted in a downward adjustment of $154,000 in the second quarter of 2021. Salaries and employee benefits of $16.0 million were an increase of $1.2 million, or 7.8%, for the first nine months of 2021 over the same period in 2020. Data processing fees, which were $2.0 million, increased by $201,000, or 11.0%, for the first nine months of 2021 over the same period in 2020. Other real estate expenses, net, decreased $504,000 as a result of gains recognized in the second quarter of 2021 on the disposition of other real estate owned. Also offsetting these increases were a decline of $167,000 in equipment expenses, ~~driven by lower depreciation expense,~~ which ~~were $288,000~~was $880,000 for the first ~~quarter~~nine months of 2021, and a decrease of $33,000 in occupancy expenses, which was $2.4 million for the first nine months of 2021.

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Income Taxes

Income tax expense was ~~$1.7~~$1.8 million for the ~~first~~third quarter of 2021 compared with income tax expense of ~~$264,000~~$1.1 million for ~~first~~the third quarter of 2020. The effective tax rate was 21.3% for the third quarter of 2021, and 20.2% for the third quarter of 2020.

Income tax expense was $4.8 million for the first ~~quarter of 2021 was 20.5% compared with 15.7% for the first quarter of 2020. The increase in the effective tax rate in the first quarter~~nine months of 2021 compared with $2.5 million for the same period in 2020. The effective tax rate was 20.6% for the first ~~quarter~~nine months of ~~2020 was~~2021 compared with an effective tax rate of 19.5% for the ~~result~~first nine months of ~~a higher deduction related to stock option exercises in~~ 2020.

FINANCIAL CONDITION

General

Total assets were ~~$1.699~~$1.771 billion at ~~March 31,~~September 30, 2021 and increased ~~$54.1~~$126.5 million, or ~~3.3%~~7.7%, when compared with December 31, 2020. Total loans, excluding PCI loans, were ~~$1.203~~$1.231 billion at ~~March 31,~~September 30, 2021, increasing ~~$20.4~~$48.6 million, or ~~1.7%~~4.1%, from year end 2020. ~~The March 31, 2021 loan total includes $67.7 million in PPP loans, net of fees. PPP loans, net of fees, were $49.3 million at December 31, 2020.~~ Total PCI loans were ~~$22.5~~$15.7 million at ~~March 31,~~September 30, 2021 versus $24.0 million at December 31, 2020.

~~Table~~Loans, net of ~~Contents~~

~~The~~fees, that the Bank originated under the PPP ~~loan~~were $32.8 million at September 30, 2021 and $49.3 million at December 31, 2020. All of these balances ~~noted above are~~have been included in commercial loans. As a result of the economic conditions that existed during 2020 and ~~early~~the first nine months of 2021, commercial loans balances, excluding PPP loans, have been stagnant and declined by ~~$4.0~~$2.1 million ~~from~~since December 31, 2020. Commercial real estate loans, the largest category of loans at ~~$504.8~~$542.4 million, or ~~42.0%~~44.1% of gross loans outstanding at ~~March 31,~~September 30, 2021, increased ~~$30.0~~$67.6 million, ~~during the first quarter of 2021.~~or 14.2%, since December 31, 2020. Construction and land development loans ~~totaling $161.8~~were $200.9 million ~~decreased by $20.5~~at September 30, 2021 and represent 16.3% of the loan portfolio. This category has grown $18.6 million ~~or 11.2%,~~ during the first ~~quarter~~nine months of 2021. Residential 1 – 4 family loans declined during the first ~~quarter~~nine of 2021 by ~~$12.9~~$19.1 million, or 9.7%, and ended the period at ~~$184.3~~$178.1 million, or ~~15.3%~~14.5% of the portfolio.

The Company’s securities portfolio, excluding restricted equity securities, was ~~$293.4~~$394.9 million at ~~March 31,~~September 30, 2021 and increased ~~$874,000~~$102.4 million, or 35.0%, during the first ~~quarter~~nine months of 2021. U.S. Treasury issues decreased by ~~$15.7~~$3.6 million during the first ~~quarter of 2021 as excess liquidity was invested short term in very liquid and low risk instruments during the fourth quarter of 2020 and deployed in longer term securities during the first quarter~~nine months of 2021. U.S. Government agencies increased ~~$10.3~~$27.0 million during the first ~~quarter~~nine months of 2021 and were ~~$36.1~~$52.8 million at ~~March 31,~~September 30, 2021. State, county and municipal securities, the largest investment category totaling $212.3 million at September 30, 2021, increased by $65.4 million during the first nine months of 2021. Asset backed securities, consisting of student loan pools 97% guaranteed by the U.S. Government, increased ~~$9.2~~$9.3 million during the first ~~quarter~~three quarters of 2021 and were $46.7 million at ~~March 31,~~September 30, 2021. ~~State, county and municipal~~Mortgage backed securities ~~the largest investment category totaling $144.9~~were $38.9 million at ~~March 31,~~September 30, 2021 ~~decreased~~and grew by ~~$2.0~~$6.7 million during ~~the first quarter of~~ 2021. Corporate securities were ~~$25.6~~$24.2 million at ~~March 31,~~September 30, 2021.

~~The Company is required to account for the effect of changes in the fair value of securities available for sale (AFS) under FASB ASC 320,~~ ~~Investments – Debt and Equity Securities~~. The fair value of the AFS portfolio was $273.1 million at March 31, 2021 and $271.3 million at December 31, 2020. At March 31, 2021, the Company had a net unrealized gain on the AFS portfolio of $6.3 million compared with a net unrealized gain of $9.9 million at December 31, 2020. Municipal securities comprised 45.2% of the total AFS portfolio at March 31, 2021. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of ~~$95.4~~$49.1 million at ~~March 31,~~September 30, 2021 compared with $63.2 million at year end ~~2020, an increase~~2020. This category grew to $123.6 million at June 30, 2021 but decreased during the third quarter of ~~$32.2 million. The majority of this category growth, $29.2 million, occurred in interest~~2021 as funds were invested into higher earning loans and securities. Interest bearing bank balances ~~which~~ were ~~$74.3~~$23.6 million at ~~March~~September 30, 2021 compared with $45.1 million at December 31, 2021, as large amounts of liquidity have been funneled into the banking system through the facilitation of PPP loans by the banking industry and stimulus checks issued by the U.S. Treasury under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). 2021.

Interest bearing deposits at ~~March 31,~~September 30, 2021 were ~~$1.105~~$1.153 billion, an increase of ~~$5.6~~$53.3 million, or ~~0.5%~~4.8%, from December 31, 2020. Interest bearing checking accounts of ~~$261.5~~$276.2 million grew by ~~$21.9~~$36.6 million, or ~~9.1%~~15.3%, during the first ~~quarter~~nine months of 2021. Money market deposit accounts were ~~$171.9~~$184.8 million at ~~March 31,~~September 30, 2021 and grew ~~$17.4~~$30.2 million, or ~~11.3%~~19.6%, during the first ~~quarter~~nine months of 2021. Savings accounts totaled ~~$137.5~~$151.1 million at ~~March 31,~~September 30, 2021 ~~and~~ grew ~~$13.1~~$26.7 million, or ~~10.6%~~21.5%, during the first ~~quarter~~nine months of 2021. Strong growth in these non-maturity categories for the year has allowed the ~~Company~~Bank to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category. As a result, ~~there has been a decline in~~ time deposits less than or equal to $250,000 ~~which~~ decreased by ~~$30.5~~$27.8 million, or ~~6.7%~~6.1%, in the first ~~quarter~~nine months of 2021 and were ~~$422.4~~$425.1 million at ~~March 31,~~September 30, 2021. Time deposits over $250,000 declined ~~$16.4~~$12.5 million in the first ~~quarter~~nine months of 2021 and were ~~$112.0~~$115.9 million at ~~March 31,~~September 30, 2021. Time deposit balances combined

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were ~~48.3%~~46.9% of interest bearing deposits at ~~March 31,~~September 30, 2021 and ~~37.1%~~36.1% of all deposit balances. This is a decline from 52.9% of interest bearing balances and 41.6% of all deposit balances at December 31, 2020. The growth in interest bearing checking accounts, money market accounts and savings accounts, as well as in noninterest bearing checking accounts, was ~~$87.5~~$140.4 million during the first ~~quarter~~nine months of 2021. A portion of this growth was associated with the PPP loans originated during 2020 and 2021 and stimulus checks issued under the CARES Act, as well as previously postponed business activity that resulted from the COVID-19 stay-at-home orders.

FHLB borrowings were ~~$67.7~~$67.3 million at ~~March 31,~~September 30, 2021 compared with $57.8 million at December 31, 2020. The stable level of FHLB borrowings during 2020 and into 2021 has been due to the FHLB swiftly responding to the March 16, 2020 rate cut of 1.50% to the discount rate by repricing advances downward to ensure low cost liquidity for the banking system. As a result, the Bank has found this level of borrowing to be a stable source of low cost funding. The average rate paid on FHLB borrowings was ~~1.26%~~1.23% during the first ~~quarter~~nine months of 2021. There were Federal funds purchased of $2.7 million at September 30, 2021 compared with no Federal funds purchased at ~~March 31, 2021 or~~ December 31, 2020.

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Shareholders’ equity was ~~$172.5~~$184.3 million at ~~March 31,~~September 30, 2021, or ~~10.2%~~10.4% of total assets, compared with $169.7 million, or 10.3% of total assets, at December 31, 2020. ~~The Company repurchased 309,700 shares of common stock at a total cost of $2.2 million during 2020 and 21,100 shares for a total cost of $147,000 during the first quarter of 2021.~~

Asset Quality – excluding PCI loans

The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.

Loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming loans were ~~$3.5~~$3.8 million at ~~March 31,~~September 30, 2021, a decrease of ~~$976,000~~$735,000 from December 31, 2020. Total non-performing assets totaled ~~$7.8~~$4.0 million at ~~March 31,~~September 30, 2021 compared with $8.9 million at December 31, 2020. On April 7, 2021, the Company sold an item included in other real estate owned (OREO) at March 31, 2021 in the amount of $3.8 million, and this sale was the primary reason for the decline in non-performing assets. There were net ~~charge-offs~~recoveries of ~~$112,000~~$239,000 in the first ~~quarter~~nine months of 2021.

The allowance for loan losses equaled 263.4% of nonaccrual loans at September 30, 2021 compared with 276.7% at December 31, 2020. The ratio of nonperforming assets to loans and OREO was 0.33% at September 30, 2021 compared with 0.75% at December 31, 2020.

The allowance for loan losses to total loans was ~~0.90%~~0.81% at ~~March 31,~~September 30, 2021 compared with 1.04% at December 31, 2020. The volume of PPP loans originated since the second quarter of 2020 impacted the ratio. PPP loans, net of fees, were ~~$67.7~~$32.8 million at ~~March 31,~~September 30, 2021 and $49.3 million at December 31, 2020. When excluding PPP loans, the allowance for loan losses to total loans would have been 0.83% and 1.09% at September 30, 2021 and December 31, 2020, respectively. These loans are fully guaranteed by the SBA in accordance with the CARES Act; therefore, no allowance is required. The Company monitors and adjusts the allowance for loan losses based on loans requiring a reserve. ~~The allowance for loan losses to total loans excluding the PPP loans would have reflected a level of coverage of 0.95% at March 31, 2021 and 1.09% at December 31, 2020.~~

The allowance for loan losses includes an amount that cannot be related to individual types of loans, and this is referred to as the unallocated component of the allowance. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the partial recovery

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of $2.65 million from the provision of $4.2 million taken during the year ended December 31, 2020 drove the ~~March 31,~~September 30, 2021 unallocated amount of ~~$913,000,~~$754,000, which is reflective of the on-going COVID-related risk grade stresses inherent in the loan portfolio. Several factors justify the maintenance of this unallocated amount, as follows:

●

The uncertainty of the economic impact of COVID-19 continues to be a factor for the remainder of ~~2021 as the pandemic enters its hopeful twilight.~~2021. The Company does not believe that any of its COVID-related modifications currently rise to the level of a TDR under the current regulatory guidance, and it continues to monitor impacted loans closely with regularity as modification periods expire and the economy recovers from the pandemic.

●

While the Company believes that it has appropriately assigned risk grade factors to address COVID-related risk in the most vulnerable pools, there is still a degree of uncertainty. For example, ~~the Company expected about 200 applications from current customers during the latest round~~monthly and yearly gains of the ~~PPP. As of March 31, 2021, the Company has made over 400 PPP loans, indicating that the extent to~~Consumer Price Index have increased at a level not seen since 2008, which its customers are struggling has been greater than expected. Also, new variants of COVID are emerging and causing concern for increased cases that could result in the return of increased restrictions and more economic strain. affects all borrowers.

●

Coverage ratios at ~~March 31,~~September 30, 2021 relating to the allowance, as noted in the table below, were consistent with prior periods when the ratios were proven to be adequate and produced provisions and allowances for loan losses that are directionally consistent with the credit quality of the loan portfolio. This is an indication

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that the allowance, in the aggregate, is reasonably stated when considering both total loans and loans with some doubt regarding ultimate collectability.

●

The Company believes that, if the portfolio continues to show improvement and the calculation continues to yield a significant unallocated component, it will make adjustments as considered appropriate after observing a longer, more substantiated time horizon.

In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructures and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At ~~March 31,~~September 30, 2021 and December 31, 2020, total impaired loans, excluding PCI loans, equaled ~~$7.7~~$7.8 million and $9.1 million, respectively.

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The following table sets forth selected asset quality data, excluding PCI loans, and ratios for the dates indicated (dollars in thousands):


	March 31, 2021			December 31, 2020		September 30, 2021			December 31, 2020
Nonaccrual loans	$	3,496		$	4,460	$	3,770		$	4,460
Loans past due 90 days and accruing interest		33			45		—			45
Total nonperforming loans		3,529			4,505		3,770			4,505
OREO		4,313			4,361		255			4,361
Total nonperforming assets	$	7,842		$	8,866	$	4,025		$	8,866

Accruing troubled debt restructure loans	$	4,201		$	4,679	$	4,001		$	4,679

Balances
Specific reserve on impaired loans		1,118			1,165		1,000			1,165
General reserve related to unimpaired loans		9,710			11,175		8,929			11,175
Total allowance for loan losses		10,828			12,340		9,929			12,340

Average loans during the year, net of unearned income		1,191,395			1,138,603		1,199,965			1,138,603

Impaired loans		7,697			9,139		7,771			9,139
Non-impaired loans		1,195,026			1,173,223		1,223,210			1,173,223
Total loans, net of unearned income		1,202,723			1,182,362		1,230,981			1,182,362

Ratios
Allowance for loan losses to loans		0.90	%		1.04		0.81	%		1.04
Allowance for loan losses to nonaccrual loans		309.73			276.68		263.37			276.68
General reserve to non-impaired loans		0.81			0.95		0.73			0.95
Nonaccrual loans to loans		0.29			0.38		0.31			0.38
Nonperforming assets to loans and OREO		0.65			0.75		0.33			0.75
Net charge-offs to average loans		0.04			0.03
Net (recoveries) charge-offs to average loans							(0.02)			0.03

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A further breakout of nonaccrual loans, excluding PCI loans, at ~~March 31,~~September 30, 2021 and December 31, 2020 is below (dollars in thousands):


	March 31, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	1,422	$	1,357	$	1,168	$	1,357
Commercial		711		730		602		730
Construction and land development		5		44		2		44
Agriculture		45		45		—		45
Total real estate loans		2,183		2,176		1,772		2,176
Commercial loans		1,301		2,264		1,998		2,264
Consumer installment loans		12		20		—		20
Total loans	$	3,496	$	4,460	$	3,770	$	4,460

Asset Quality – PCI loans

Loans accounted for under FASB ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash

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flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

Capital Requirements

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base exceeding regulatory minimums for well capitalized institutions to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

Activity under the stock repurchase program that the Company adopted in January 2020 was suspended effective April 2, 2020. The sole reason for this suspension was due to the uncertainties surrounding COVID-19. On October 29, 2020, the Company announced the recommencement of this program for the repurchase of up to 200,000 shares of its common stock through January 2021. On February 19, 2021, the Company’s Board of Directors authorized a new share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock through February 2022. Shares of common stock may be purchased under the program periodically in privately negotiated transactions or in open market transactions at prevailing market prices, and pursuant to a trading plan in accordance with applicable securities laws.

The actual means and timing of any purchases, target number of shares and prices or range of prices under the repurchase program, which the Company determines in its discretion, depend on a number of factors, including the market price of the Company’s common stock, share issuances under the Company’s equity plans, general market and economic conditions, and applicable legal and regulatory requirements. The Company’s Board of Directors may modify, amend or terminate the program at any time. There is no assurance as to the amount of shares that the Company will purchase under the program. The Company continues to place a heightened emphasis on capital and liquidity to safeguard shareholders, its balance sheet and the needs of its customers.

Management believes that the Company possesses strong capital and liquidity. The actions taken with regard to capital and liquidity as a result of the pandemic were put into effect to safeguard these areas of strength.

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Effective September 2018, the Federal Reserve raised the total consolidated asset limit in the Small Bank Holding Company Policy Statement from $1 billion to $3 billion, thereby eliminating the Company’s consolidated capital reporting requirements. Therefore, the Company only reports capital information at the Bank level.

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on four definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. The “leverage ratio” is tier 1 capital divided by total average assets.

The Bank’s ratio of total risk-based capital was ~~13.8%~~13.7% at ~~March 31,~~September 30, 2021 compared with 13.6% at December 31, 2020. The tier 1 risk-based capital ratio was 13.0% at ~~March 31,~~September 30, 2021 and 12.7% at December 31, 2020. The Bank’s tier 1 leverage ratio was ~~10.4%~~10.3% at ~~March 31,~~September 30, 2021 and 10.1% at December 31, 2020. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was ~~13.0%~~13.3% at ~~March 31,~~September 30, 2021 and 12.7% at December 31, 2020.

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Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Bank does not maintain the full amount of the buffer. At ~~March 31,~~September 30, 2021, the Bank had a capital conservation buffer of ~~5.8%~~5.7%.

Liquidity

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at ~~March 31,~~September 30, 2021 and December 31, 2020 was as follows (dollars in thousands):


	March 31, 2021			December 31, 2020			September 30, 2021			December 31, 2020
Cash and due from banks	$	20,836		$	17,845		$	25,485		$	17,845
Interest bearing bank deposits		74,337			45,118			23,591			45,118
Federal funds sold		234			222			-			222
Available for sale securities, at fair value, unpledged		237,367			235,784			331,405			235,784
Total liquid assets	$	332,774		$	298,969		$	380,481		$	298,969

Deposits and other liabilities	$	1,526,332		$	1,475,155		$	1,586,963		$	1,475,155
Ratio of liquid assets to deposits and other liabilities		21.80	%		20.27	%		23.98	%		20.27	%

The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. The Company has a total of $55 million in this type of facility in the aggregate at ~~March 31,~~September 30, 2021.

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Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of ~~March 31,~~September 30, 2021 and December 31, 2020, is as follows (dollars in thousands):


	March 31, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Commitments with off-balance sheet risk:
Commitments to extend credit	$	276,433	$	245,858	$	292,282	$	245,858
Standby letters of credit		14,480		15,193		14,511		15,193
Total commitments with off-balance sheet risks	$	290,913	$	261,051	$	306,793	$	261,051

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 of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may be drawn upon only to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements,

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including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had cash flow hedges with total notional amounts of $20 million at each of ~~March 31,~~September 30, 2021 and December 31, 2020. The Company recorded a fair value liability of ~~$449,000~~$374,000 and $631,000 in other liabilities, at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The Company’s cash flow hedges are deemed to be highly effective. Therefore, the net losses were recorded as a component of other comprehensive income in the Company’s consolidated statements of comprehensive income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.

~~Table of Contents~~

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in the current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a 12-month period is assumed.

The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at ~~March 31,~~September 30, 2021 (dollars in thousands):


	March 31, 2021		September 30, 2021
	%	$	%	$
Change in Yield curve
+400 bp	14.9	7,979	8.0	4,543
+300 bp	11.0	5,893	5.9	3,319
+200 bp	7.0	3,725	3.7	2,069
+100 bp	3.1	1,666	1.6	887
most likely	—	—	—	—
‑100 bp	(1.0)	(539)	(0.8)	(458)
‑200 bp	(1.3)	(695)	(1.1)	(639)
‑300 bp	(1.3)	(702)	(1.1)	(641)
‑400 bp	(1.3)	(702)	(1.1)	(641)

At ~~March 31,~~September 30, 2021, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by ~~14.9%.~~8.0% For the same time period, the interest rate

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risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by ~~1.3%.~~1.1% While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer (the “Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the

~~Table of Contents~~

reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated under it.

Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. Furthermore, the Company has seen no effect on internal control over financial reporting related to its change to a mostly remote workforce due to COVID-19.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

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Item 1A. Risk Factors

There are no material changes to any of the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 ~~(Part I, Item 1A).~~and Quarterly Report on Form 10-Q for the quarter ended June 30, 2021

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2021.

Effective January 22, 2020, the Company’s Board of Directors authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The Company purchased 130,800 shares under the program during the first two quarters of 2020 before suspending activity under it effective April 2, 2020. On October 26, 2020, the Company authorized the recommencement of the program for the repurchase of up to 200,000 shares of its common stock through January 2021. The Company repurchased 178,900 shares under the program during the fourth quarter of ~~2020.~~2020 and 21,100 shares during the first quarter of 2021.

On February 19, 2021, the Company’s Board of Directors authorized a new share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock through February 2022. The Company has not repurchased any shares under this authorization.

~~The following table provides information with respect to purchases under the share repurchase program during the first quarter of 2021.~~

Period

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet Be Purchased Under the Program
January 1 - January 31, 2021

21,100

$
6.92

21,100

—
February 1 - February 29, 2021

—

—

—

—
March 1 - March 31, 2021

—

—

—

—
Total

21,100

$
6.92

21,100

—

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Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
2.1		Agreement and Plan of Reorganization, dated as of June 2, 2021, by and between United Bankshares, Inc. and Community Bankers Trust Corporation, incorporated by reference to the Company’s Current Report on Form 8-K filed on June 3, 2021 (File No. 001-32590)
31.1		Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
31.2		Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
32.1		Section 1350 Certifications*
101		Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10-Q for the period ended ~~March 31,~~September 30, 2021 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*	Filed herewith.

4448

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMUNITY BANKERS TRUST CORPORATION
	(Registrant)

	/s/ Rex L. Smith, III
	Rex L. Smith, III
	President and Chief Executive Officer
	(principal executive officer)

Date: ~~May 14,~~November 12, 2021

	/s/ Bruce E. Thomas
	Bruce E. Thomas
	Executive Vice President and Chief Financial Officer
	(principal financial officer)

Date: ~~May 14,~~November 12, 2021

4549


	March 31, 2021		December 31, 2020*
ASSETS
Cash and due from banks	$	20,836	$	17,845
Interest bearing bank deposits		74,337		45,118
Federal funds sold		234		222
Total cash and cash equivalents		95,407		63,185

Securities available for sale, at fair value		273,126		271,347
Securities held to maturity, at cost (fair value of $21,190 and $22,257, respectively)		20,271		21,176
Equity securities, restricted, at cost		8,049		8,436
Total securities		301,446		300,959

Loans		1,202,723		1,182,362
Purchased credit impaired (PCI) loans		22,465		24,040
Total loans		1,225,188		1,206,402
Allowance for loan losses (loans of $10,828 and $12,340, respectively; PCI loans of $156 and $156, respectively)		(10,984)		(12,496)
Net loans		1,214,204		1,193,906

Bank premises and equipment, net		27,582		27,897
Bank premises and equipment held for sale		1,507		1,507
Right-of-use lease assets		5,292		5,530
Other real estate owned		4,313		4,361
Bank owned life insurance		30,195		30,029
Other assets		18,862		17,435
Total assets	$	1,698,808	$	1,644,809

LIABILITIES
Deposits:
Noninterest bearing	$	333,910	$	298,901
Interest bearing		1,105,385		1,099,800
Total deposits		1,439,295		1,398,701

Federal Home Loan Bank borrowings		67,667		57,833
Trust preferred capital notes		4,124		4,124
Lease liabilities		5,545		5,787
Other liabilities		9,701		8,710
Total liabilities		1,526,332		1,475,155

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized $0.01 par value; 22,219,926 and 22,200,929 shares issued and outstanding, respectively)		222		222
Additional paid in capital		150,039		149,822
Retained earnings		18,729		13,419
Accumulated other comprehensive income		3,486		6,191
Total shareholders’ equity		172,476		169,654
Total liabilities and shareholders’ equity	$	1,698,808	$	1,644,809


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Program
January 1 - January 31, 2021	21,100	$	6.92	21,100	—
February 1 - February 29, 2021	—		—	—	—
March 1 - March 31, 2021	—		—	—	—
Total	21,100	$	6.92	21,100	—