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FIRST COMMUNITY BANKSHARES, INC.
FORM 10-Q
INDEX
PART I.	FINANCIAL INFORMATION		Page
Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	9
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		52
Item 4.	Controls and Procedures		52
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		52
Item 1A.	Risk Factors		52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 3.	Defaults Upon Senior Securities		53
Item 4.	Mine Safety Disclosures		53
Item 5.	Other Information		53
Item 6.	Exhibits		54
Signatures			56

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

●

inflation, interest rate, market and monetary fluctuations;

	●	the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;
	●	the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;

●

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

●

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

●

the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;

●

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

●

technological changes;

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

●

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

●

the sustainability of noninterest, or fee, income being less than expected;

●

unanticipated regulatory or judicial proceedings;

●

changes in consumer spending and saving habits; and

●

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

 

This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

 

PART I.

FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

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(1)   Derived from audited financial statements

  

See Notes to Condensed Consolidated Financial Statements.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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

THREE MONTHS ENDED

September 30, 2023 and 2022

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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

NINE MONTHS ENDED

September 30, 2023 and 2022

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Basis of Presentation

 

General

 

First Community Bankshares, Inc. (the “Company”), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874.  The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

 

Principles of Consolidation

 

The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2023. The condensed consolidated balance sheet as of December 31, 2022, has been derived from the audited consolidated financial statements.

 

Reclassifications

 

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

 

Use of Estimates

 

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

 

Significant Accounting Policies

 

The Company’s significant accounting policies are included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2022 Form 10-K.

 

Allowance for Credit Losses (“ACL”)

 

On January 1,  2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments.  

 

ACL – Investment Securities

 

Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value.  The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors.  Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.

 

The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities and does not record an allowance for credit losses on accrued interest receivable.  As of September 30, 2023, the accrued interest receivable for investment securities available for sale was $1.07 million.

 

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ACL – Loans

 

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

 

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

 

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

 

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

 

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

 

For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses. During 2022, the Company changed third party model providers which necessitated a change from remaining life to open pool for the portfolios noted above. The change in method was not quantitatively significant. In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. The Company reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver using a statistical regression modeling methodology.

 

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

 

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

 

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

 

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

 

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

 

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of  September 30, 2023, the accrued interest receivable for loans was $9.35 million.

 

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

 

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

 

The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of  September 30, 2023, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $758 thousand.

 

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Recent Accounting Standards

 

Standards Adopted in 2023

 

In March 2022, the Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provided accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. We adopted this standard, effective January 1, 2023.  The updated guidance had no material impact on our Consolidated Financial Statements. 

 

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

 

     

Note 2. Divestitures and Acquisitions

 

On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank (the "Emporia Branch Sale"). The sale included the branch real estate, certain personal property, and all deposits associated with the branch.  There were no loans included in the transaction.  Benchmark paid a deposit premium of two percent for certain deposits.  In addition, Benchmark paid $1.50 million for branch real estate and certain personal property.   Total deposits acquired by Benchmark totaled $61.05 million.  The deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits.  The Company recognized a gain of $1.66 million from the Emporia Branch Sale.

 

On November 18, 2022, the Company and NC-based Surrey Bancorp ("Surrey"), parent company of Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. Under the terms of the agreement and plan of merger, each share of Surrey common stock immediately converted into the right to receive 0.7159 shares of the Company's common stock.  The transaction was consummated on April 21, 2023.  The total purchase price for the transaction was $71.37 million.

 

The strategic combination of the Company and Surrey united two high-performing community banks that historically produced returns on average assets well-above one percent and efficiency ratios below sixty percent while maintaining low-risk profiles.  In addition, the combination will create a leading community banking institution in northwestern North Carolina and southwestern Virginia.  Significant synergies and efficiencies are anticipated to be gained from the acquisition. The Company's commercial loan customers are anticipated to benefit from Surrey's government guarantee lending expertise, while Surrey's customers will benefit from additional scale, increased lending limits, and enhanced product and technology offerings.

 

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

 

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the fair value of the liabilities assumed.  The Surrey acquisition resulted in the Company recognizing $14.38 million in goodwill.

 

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

 

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

 

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

 

 

Explanation of fair value adjustments:

 

(a)

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

(b)

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

(c)

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

(d)

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

(e)

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

(f)

Adjustment to record the core deposit intangible on the acquired deposit accounts.

(g)

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

(h)

Adjustment to reclass deferred tax asset $(99) thousand, goodwill $(282) thousand, federal income tax payable $(389) thousand, and state income tax payable $8 thousand.

 

Comparative and Pro Forma Financial Information for Acquisitions

 

The following table discloses the financial impact of the merger.  The table presents certain pro forma information as if Surrey had been acquired on January 1, 2022.  These results combine the historical results of Surrey in the Company's consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2022. 

 

No adjustments have been made to the pro formas to eliminate the recovery of provision for credit losses for the quarter and year-to-date periods ended September 30, 2022 of Surrey in the amounts of $37 thousand and $1.12 million, respectively .  The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:

 

		ProForma
		Three months ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)		2023				2022				2023				2022
Total revenues (net interest income plus noninterest income)		$	42,969			$	44,669			$	122,611			$	123,566
Net adjusted income available to the common shareholder		$	14,640			$	15,554			$	38,493			$	39,535

 

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Note 3. Debt Securities

 

There was no allowance for credit losses for debt securities as of  September 30, 2023; therefore, it is not presented in the table below.  The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:

 

		September 30, 2023
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	5,750			$	-			$	(9	)		$	5,741
U.S. Treasury securities			146,929				-				(2,009	)			144,920
Municipal securities			19,951				-				(550	)			19,401
Corporate notes			28,559				-				(2,310	)			26,249
Agency mortgage-backed securities			96,102				-				(17,081	)			79,021
Total		$	297,291			$	-			$	(21,959	)		$	275,332

 

		December 31, 2022
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
(Amounts in thousands)
U.S. Agency securities		$	1,500			$	—			$	(15	)		$	1,485
U.S. Treasury securities			161,617				-				(4,353	)			157,264
Municipal securities			23,480				21				(192	)			23,309
Corporate notes			37,046				—				(2,189	)			34,857
Agency mortgage-backed securities			96,480				3				(13,049	)			83,434
Total		$	320,123			$	24			$	(19,798	)		$	300,349

 

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

 

		September 30, 2023
		Amortized
(Amounts in thousands)		Cost				Fair Value
Available-for-sale debt securities
Due within one year		$	157,238			$	155,191
Due after one year but within five years			43,357				40,550
Due after five years but within ten years			594				570
			201,189				196,311
Agency mortgage-backed securities			96,102				79,021
Total debt securities available for sale		$	297,291			$	275,332

 

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

 

		September 30, 2023
		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
(Amounts in thousands)
U.S. Agency securities		$	5,741			$	(9	)		$	-			$	-			$	5,741			$	(9	)
U.S. Treasury securities			11,301				(39	)			132,373				(1,970	)			143,674				(2,009	)
Municipal securities			13,165				(261	)			5,391				(289	)			18,556				(550	)
Corporate notes			-				-				26,249				(2,310	)			26,249				(2,310	)
Agency mortgage-backed securities			4,545				(167	)			74,476				(16,914	)			79,021				(17,081	)
Total		$	34,752			$	(476	)		$	238,489			$	(21,483	)		$	273,241			$	(21,959	)

 

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

 

There were 145 individual debt securities in an unrealized loss position as of September 30, 2023, and the combined depreciation in value represented 7.98% of the debt securities portfolio. There were113 individual debt securities in an unrealized loss position as of December 31, 2022, and their combined depreciation in value represented 6.59% of  the debt securities portfolio.  

 

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments.  All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of September 30, 2023, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.

 

Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.

 

Approximately $38.98 million in securities available for sale have been sold in the first nine months of 2023.  Included in the sale of securities was the entire portfolio of Surrey with an acquired fair value of $20.93 million comprised primarily of U. S. Treasury Notes.  A loss of $28 thousand was recognized in the sale of the portfolio. The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2023				2022				2023				2022
(Amounts in thousands)
Gross realized gains		$	-			$	-			$	7			$	-
Gross realized losses			-				-				(28	)			-
Net gain (loss) on sale of securities		$	-			$	-			$	(21	)		$	-

 

 

The carrying amount of securities pledged for various purposes totaled $145.38 million as of September 30, 2023, and $22.43million as of December 31, 2022.

 

Note 4. Loans

 

The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.74 million as of September 30, 2023, and $1.80 million  as of December 31, 2022. Deferred loan fees, net of loan costs, totaled $7.76 million as of September 30, 2023, and $8.81 million  as of December 31, 2022. 

 

In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $7.76 million and $8.81 million and unamortized discount related to loans acquired of $16.08 million and $3.80 million for September 30, 2023, and December 31, 2022, respectively.  Accrued interest receivable of $9.35 million as of  September 30, 2023, and $7.94 million  as of  December 31, 2022, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.

 

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		September 30, 2023								December 31, 2022
(Amounts in thousands)		Amount				Percent				Amount				Percent
Loans held for investment
Commercial loans
Construction, development, and other land		$	113,790				4.39	%		$	117,174				4.88	%
Commercial and industrial			213,541				8.23	%			150,428				6.27	%
Multi-family residential			169,245				6.53	%			148,026				6.17	%
Single family non-owner occupied			230,836				8.90	%			206,121				8.59	%
Non-farm, non-residential			896,555				34.57	%			787,703				32.82	%
Agricultural			22,146				0.85	%			12,032				0.50	%
Farmland			15,997				0.62	%			11,779				0.49	%
Total commercial loans			1,662,110				64.09	%			1,433,263				59.72	%
Consumer real estate loans
Home equity lines			88,224				3.40	%			75,642				3.15	%
Single family owner occupied			703,789				27.14	%			734,540				30.61	%
Owner occupied construction			10,692				0.41	%			10,366				0.43	%
Total consumer real estate loans			802,705				30.95	%			820,548				34.19	%
Consumer and other loans
Consumer loans			126,917				4.89	%			144,582				6.02	%
Other			1,740				0.07	%			1,804				0.07	%
Total consumer and other loans			128,657				4.96	%			146,386				6.09	%
Total loans held for investment, net of unearned income		$	2,593,472				100.00	%		$	2,400,197				100.00	%

  

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Note 5. Credit Quality

 

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

●

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

●

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

●

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

●

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

●

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

 

The following table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated:

 

		September 30, 2023
						Special
(Amounts in thousands)		Pass				Mention				Substandard				Doubtful				Loss				Total
Commercial loans
Construction, development, and other land		$	111,792			$	1,567			$	431			$	-			$	-			$	113,790
Commercial and industrial			209,349				1,881				2,311				-				-				213,541
Multi-family residential			165,500				3,558				187				-				-				169,245
Single family non-owner occupied			221,021				2,039				7,776				-				-				230,836
Non-farm, non-residential			864,326				19,858				12,371				-				-				896,555
Agricultural			16,497				3,954				1,695				-				-				22,146
Farmland			14,246				498				1,253				-				-				15,997
Consumer real estate loans
Home equity lines			84,681				653				2,890				-				-				88,224
Single family owner occupied			677,149				2,402				24,238				-				-				703,789
Owner occupied construction			10,692				-				-				-				-				10,692
Consumer and other loans
Consumer loans			124,372				8				2,537				-				-				126,917
Other			1,740				-				-				-				-				1,740
Total loans		$	2,501,365			$	36,418			$	55,689			$	-			$	-			$	2,593,472

 

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

 

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The following tables present the amortized cost basis and current period gross write-offs of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:  

 

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at September 30, 2023		2023				2022				2021				2020				2019				Prior				Revolving				Total
Construction, development and other land
Pass		$	9,463			$	66,682			$	21,568			$	4,214			$	2,768			$	4,409			$	2,688			$	111,792
Special mention			-				1,328				-				156				-				83				-				1,567
Substandard			-				-				-				-				181				250				-				431
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total construction, development, and other land		$	9,463			$	68,010			$	21,568			$	4,370			$	2,949			$	4,742			$	2,688			$	113,790
Current period gross write-offs		$	-			$	-			$	-			$	-			$	13			$	-			$	-			$	13
Commercial and industrial
Pass		$	34,735			$	68,271			$	21,700			$	12,935			$	6,447			$	14,313			$	50,948			$	209,349
Special mention			-				466				19				9				377				910				100				1,881
Substandard			120				395				401				110				540				745				-				2,311
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total commercial and industrial		$	34,855			$	69,132			$	22,120			$	13,054			$	7,364			$	15,968			$	51,048			$	213,541
Current period gross write-offs		$	-			$	169			$	143			$	37			$	32			$	-			$	-			$	381
Multi-family residential
Pass		$	3,854			$	48,919			$	36,874			$	30,303			$	3,308			$	38,420			$	3,822			$	165,500
Special mention			-				-				-				-				-				3,558				-				3,558
Substandard			-				-				-				-				-				187				-				187
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total multi-family residential		$	3,854			$	48,919			$	36,874			$	30,303			$	3,308			$	42,165			$	3,822			$	169,245
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Non-farm, non-residential
Pass		$	63,691			$	239,671			$	151,689			$	118,814			$	54,564			$	224,907			$	10,990			$	864,326
Special mention			65				588				4,229				1,013				-				13,920				43				19,858
Substandard			1,204				241				1,980				522				3,214				4,989				221				12,371
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total non-farm, non-residential		$	64,960			$	240,500			$	157,898			$	120,349			$	57,778			$	243,816			$	11,254			$	896,555
Current period gross write-offs		$	-			$	8			$	-			$	-			$	-			$	4			$	-			$	12
Agricultural
Pass		$	4,441			$	4,863			$	2,604			$	773			$	723			$	2,203			$	890			$	16,497
Special mention			29				281				189				10				97				3,348				-				3,954
Substandard			-				24				110				-				1,301				260				-				1,695
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total agricultural		$	4,470			$	5,168			$	2,903			$	783			$	2,121			$	5,811			$	890			$	22,146
Current period gross write-offs		$	-			$	59			$	-			$	10			$	13			$	8			$	-			$	90
Farmland
Pass		$	1,197			$	1,614			$	1,641			$	950			$	766			$	7,242			$	836			$	14,246
Special mention			-				-				106				-				-				392				-				498
Substandard			-				-				-				-				-				1,253				-				1,253
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total farmland		$	1,197			$	1,614			$	1,747			$	950			$	766			$	8,887			$	836			$	15,997
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-

 

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(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at September 30, 2023		2023				2022				2021				2020				2019				Prior				Revolving				Total
Home equity lines
Pass		$	393			$	914			$	94			$	74			$	70			$	4,098			$	79,038			$	84,681
Special mention			-				-				-				-				-				48				605				653
Substandard			-				12				-				27				35				1,827				989				2,890
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total home equity lines		$	393			$	926			$	94			$	101			$	105			$	5,973			$	80,632			$	88,224
Current period gross write-offs		$	-			$	-			$	20			$	-			$	-			$	199			$	-			$	219
Single family Mortgage
Pass		$	42,236			$	167,274			$	224,320			$	196,018			$	46,274			$	221,612			$	436			$	898,170
Special mention			-				-				469				96				109				3,767				-				4,441
Substandard			107				468				1,470				1,345				1,486				27,138				-				32,014
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total single family owner and non-owner occupied		$	42,343			$	167,742			$	226,259			$	197,459			$	47,869			$	252,517			$	436			$	934,625
Current period gross write-offs		$	-			$	-			$	47			$	-			$	-			$	185			$	-			$	232
Owner occupied construction
Pass		$	2,093			$	5,826			$	2,343			$	-			$	27			$	403			$	-			$	10,692
Special mention			-				-				-				-				-				-				-				-
Substandard			-				-				-				-				-				-				-				-
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total owner occupied construction		$	2,093			$	5,826			$	2,343			$	-			$	27			$	403			$	-			$	10,692
Current period gross write-offs		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Consumer loans
Pass		$	29,131			$	49,752			$	24,035			$	9,264			$	4,051			$	1,307			$	8,572			$	126,112
Special mention			-				-				3				-				3				-				2				8
Substandard			159				942				599				384				192				200				61				2,537
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total consumer loans		$	29,290			$	50,694			$	24,637			$	9,648			$	4,246			$	1,507			$	8,635			$	128,657
Current period gross write-offs		$	772			$	2,726			$	1,549			$	391			$	163			$	44			$	128			$	5,773

 

(Amounts in thousands)		Term Loans Amortized Cost Basis by Origination Year
Balance at September 30, 2023		2023				2022				2021				2020				2019				Prior				Revolving				Total
Total loans
Pass		$	191,234			$	653,786			$	486,868			$	373,345			$	118,998			$	518,914			$	158,220			$	2,501,365
Special mention			94				2,663				5,015				1,284				586				26,026				750				36,418
Substandard			1,590				2,082				4,560				2,388				6,949				36,849				1,271				55,689
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total loans		$	192,918			$	658,531			$	496,443			$	377,017			$	126,533			$	581,789			$	160,241			$	2,593,472
Current period gross write-offs		$	772			$	2,962			$	1,759			$	438			$	221			$	440			$	128			$	6,720

 

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

 

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

 

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

 

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The Company generally places a loan on nonaccrual status when it is 90 days or more past due.  The following table presents nonaccrual loans, by loan class, as of the dates indicated:

 

		September 30, 2023												December 31, 2022
(Amounts in thousands)		No Allowance				With an Allowance				Total				No Allowance				With an Allowance				Total
Commercial loans
Construction, development, and other land		$	178			$	-			$	178			$	31			$	-			$	31
Commercial and industrial			654				-				654				438				-				438
Multi-family residential			187				-				187				220				-				220
Single family non-owner occupied			968				-				968				984				-				984
Non-farm, non-residential			1,149				1,203				2,352				1,771				-				1,771
Agricultural			1,379				-				1,379				9				-				9
Farmland			123				-				123				133				-				133
Consumer real estate loans
Home equity lines			1,318				-				1,318				400				-				400
Single family owner occupied			9,209				-				9,209				8,228				589				8,817
Owner occupied construction			-				-				-				-				-				-
Consumer and other loans
Consumer loans			1,998				-				1,998				2,405				-				2,405
Total nonaccrual loans		$	17,163			$	1,203			$	18,366			$	14,619			$	589			$	15,208

 

There was no material nonaccrual loan interest recognized in income during the quarter or for the nine months of both 2023 and  2022.  

 

The following tables presents the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category: 

 

		September 30, 2023
																										Amortized Cost of
		30 - 59 Days				60 - 89 Days				90+ Days				Total				Current				Total				> 90 Days Accruing
(Amounts in thousands)		Past Due				Past Due				Past Due				Past Due				Loans				Loans				No Allowance
Commercial loans
Construction, development, and other land		$	198			$	7			$	23			$	228			$	113,562			$	113,790			$	-
Commercial and industrial			729				1,109				279				2,117				211,424				213,541				-
Multi-family residential			185				-				-				185				169,060				169,245				-
Single family non-owner occupied			1,067				165				106				1,338				229,498				230,836				-
Non-farm, non-residential			975				120				205				1,300				895,255				896,555				-
Agricultural			423				-				1,379				1,802				20,344				22,146				-
Farmland			-				-				-				-				15,997				15,997				-
Consumer real estate loans
Home equity lines			376				345				877				1,598				86,626				88,224				-
Single family owner occupied			4,366				1,825				4,211				10,402				693,387				703,789				-
Owner occupied construction			196				-				-				196				10,496				10,692				-
Consumer and other loans
Consumer loans			3,930				1,330				953				6,213				120,704				126,917				-
Other			-				-				-				-				1,740				1,740				-
Total loans		$	12,445			$	4,901			$	8,033			$	25,379			$	2,568,093			$	2,593,472			$	-

 

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

 

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

 

		September 30, 2023												December 31, 2022
(Amounts in thousands)		Balance				Collateral Coverage				%				Balance				Collateral Coverage				%
Commercial Real Estate
Hotel		$	-			$	-				-			$	-			$	-				-
Office			-				-				-				-				-				-
Other			1,203				825				68.58	%			-				-				-
Retail			-				-				-				-				-				-
Multi-Family
Industrial			-				-				-				-				-				-
Office			-				-				-				-				-				-
Other			-				-				-				-				-				-
Commercial and industrial
Industrial			-				-				-				-				-				-
Other			-				-				-				-				-				-
Home equity loans			-				-				-				-				-				-
Consumer owner occupied			-				-				-				589				574				97.45	%
Consumer			-				-				-				-				-				-
Total collateral dependent loans		$	1,203			$	825				68.58	%		$	589			$	574				97.45	%

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty.  Effective, January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs.  Presented below are the amortized cost basis and percentage of loan class for loan modifications made to borrowers experiencing financial difficulty by loan class, concession type, and financial effect as of the date indicated:

 

		Payment Delays
		Amortized Cost Basis				% of Total Class of
		September 30, 2023				Financing Receivable			Financial Effect
(Amounts in thousands)
Non farm, non residential property		$	661				0.07	%	Deferred six months of interest to loan maturity.
Single family owner occupied			562				0.08	%	Deferred $66 thousand in principal to loan maturity
Total		$	1,223
		Term Extensions
		Amortized Cost Basis				% of Total Class of
		September 30, 2023				Financing Receivable			Financial Effect
(Amounts in thousands)
Consumer		$	7				0.01	%	Extended term from 60 to 84 months
Total		$	7
		Principal Forgiveness
		Amortized Cost Basis				% of Total Class of
		September 30, 2023				Financing Receivable			Financial Effect
(Amounts in thousands)
Single family owner occupied		$	7				0.00	%	Reduced amortized cost basis by $13 thousand
Total		$	7
		Term Extension and Rate Reduction
		Amortized Cost Basis				% of Total Class of
		September 30, 2023				Financing Receivable			Financial Effect
(Amounts in thousands)
Single family owner occupied		$	437				0.06	%	Reduced interest income and extended time to recover principal.
Total		$	437

 

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.  As of  September 30, 2023, there were no modified loans (or portions of a loan) deemed uncollectible.

 

---

 

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

 

		September 30, 2023
		Payment Status (Amortized Cost Basis)
		Current				30-89 Days Past Due				90+ Days Past Due
(Amounts in thousands)
Non farm, non residential property		$	661			$	-			$	-
Single family owner occupied			744				262				-
Consumer			7				-				-
Total		$	1,412			$	262			$	-

 

 

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

 

		December 31, 2022
(Amounts in thousands)		Nonaccrual(1)				Accruing				Total
Commercial loans
Commercial and industrial		$	-			$	374			$	374
Single family non-owner occupied			142				838				980
Non-farm, non-residential			-				747				747
Consumer real estate loans
Home equity lines			-				55				55
Single family owner occupied			1,182				5,073				6,255
Owner occupied construction			-				-				-
Consumer and other loans
Consumer loans			-				25				25
Total TDRs		$	1,324			$	7,112			$	8,436
Allowance for credit losses related to TDRs										$	-

 

---

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

 

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

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2022				2022
(Amounts in thousands)
Interest income recognized		$	97			$	299

 

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:

 

		Three Months Ended September 30,
		2022
(Amounts in thousands)		Total Contracts				Pre-modification Recorded Investment				Post-modification Recorded Investment(1)
Payment deferral
Single family owner occupied			1			$	94			$	72
Total			1			$	94			$	72

 

		Nine Months Ended September 30,
		2022
(Amounts in thousands)		Total Contracts				Pre-modification Recorded Investment				Post-modification Recorded Investment(1)
Below market interest rate
Single family owner occupied			1			$	31			$	32
Total below market interest rate			1				31				32
Below market interest rate and extended payment term
Single family owner occupied			3			$	331			$	317
Total below market interest rate and extended payment term			3			$	331			$	317
Total			4			$	362			$	349

 

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(1)	Represents the loan balance immediately following modification

 

---

 

As of   September 30, 2022, there were no payments in default for loans modified as TDRs restructured within the previous 12 months.

 

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

 

		September 30, 2023				December 31, 2022
(Amounts in thousands)
OREO		$	243			$	703
OREO secured by residential real estate		$	243			$	407
Residential real estate loans in the foreclosure process(1)		$	1,966			$	1,474

 

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

 

Note 6. Allowance for Credit Losses

 

The following tables present the changes in the allowance for credit losses, by loan segment, during the periods indicated:

 

		Three Months Ended September 30, 2023
						Consumer Real				Consumer and				Total
(Amounts in thousands)		Commercial				Estate				Other				Allowance
Total allowance
Balance at beginning of quarter:
Allowance for credit losses - loans		$	21,515			$	9,956			$	4,706			$	36,177
Allowance for credit losses - loan commitments			786				150				28				964
Total allowance for credit losses beginning of year			22,301				10,106				4,734				37,141
Provision for credit losses:
Provision (recovery) for credit losses - loans			39				(207	)			1,483				1,315
Recovery of credit losses - loan commitments			(194	)			(9	)			(3	)			(206	)
Total (recovery) provision for credit losses - loans and loan commitments			(155	)			(216	)			1,480				1,109
Charge-offs			(245	)			(73	)			(1,839	)			(2,157	)
Recoveries			227				82				387				696
Net (charge-offs) recoveries			(18	)			9				(1,452	)			(1,461	)
Allowance for credit losses - loans			21,536				9,758				4,737				36,031
Allowance for credit losses - loan commitments			592				141				25				758
Ending balance		$	22,128			$	9,899			$	4,762			$	36,789

 

		Three Months Ended September 30, 2022
						Consumer Real				Consumer and				Total
(Amounts in thousands)		Commercial				Estate				Other				Allowance
Total allowance
Balance at beginning of quarter:
Allowance for credit losses - loans		$	16,119			$	10,049			$	3,581			$	29,749
Allowance for credit losses - loan commitments			854				88				14				956
Total allowance for credit losses beginning of year			16,973				10,137				3,595				30,705
Provision for credit losses:
(Recovery) provision for credit losses - loans			(444	)			(1,391	)			2,520				685
Provision for credit losses - loan commitments			391				63				5				459
Total (recovery) provision for credit losses - loans and loan commitments			(53	)			(1,328	)			2,525				1,144
Charge-offs			(89	)			(182	)			(1,887	)			(2,158	)
Recoveries			872				77				163				1,112
Net recoveries (charge-offs)			783				(105	)			(1,724	)			(1,046	)
Allowance for credit losses - loans			16,458				8,553				4,377				29,388
Allowance for credit losses - loan commitments			1,245				151				19				1,415
Ending balance		$	17,703			$	8,704			$	4,396			$	30,803

 

---

 

		Nine Months Ended September 30, 2023
						Consumer Real				Consumer and				Total
(Amounts in thousands)		Commercial				Estate				Other				Allowance
Total allowance
Balance at beginning of year:
Allowance for credit losses - loans		$	17,213			$	8,931			$	4,412			$	30,556
Allowance for credit losses - loan commitments			1,018				156				22				1,196
Total allowance for credit losses beginning of year			18,231				9,087				4,434				31,752
Purchased credit deteriorated -Surrey acquisition			1,452				529				30				2,011
Provision for credit losses:
Provision for credit losses - loans			2,425				276				4,693				7,394
(Recovery of) provision for credit losses - loan commitments			(426	)			(15	)			3				(438	)
Total provision for credit losses - loans and loan commitments			1,999				261				4,696				6,956
Charge-offs			(551	)			(396	)			(5,773	)			(6,720	)
Recoveries			997				418				1,375				2,790
Net recoveries (charge-offs)			446				22				(4,398	)			(3,930	)
Allowance for credit losses - loans			21,536				9,758				4,737				36,031
Allowance for credit losses - loan commitments			592				141				25				758
Ending balance		$	22,128			$	9,899			$	4,762			$	36,789

 

		Nine Months Ended September 30, 2022
						Consumer Real				Consumer and				Total
(Amounts in thousands)		Commercial				Estate				Other				Allowance
Total allowance
Balance at beginning of year:
Allowance for credit losses - loans		$	14,775			$	9,972			$	3,111			$	27,858
Allowance for credit losses - loan commitments			576				88				14				678
Total allowance for credit losses beginning of year			15,351				10,060				3,125				28,536
Provision for credit losses:
(Recovery) provision for credit losses - loans			(144	)			(1,584	)			4,884				3,156
Provision for credit losses - loan commitments			669				63				5				737
Total provision for credit losses - loans and loan commitments			525				(1,521	)			4,889				3,893
Charge-offs			(497	)			(276	)			(4,156	)			(4,929	)
Recoveries			2,324				441				538				3,303
Net recoveries (charge-offs)			1,827				165				(3,618	)			(1,626	)
Allowance for credit losses - loans			16,458				8,553				4,377				29,388
Allowance for credit losses - loan commitments			1,245				151				19				1,415
Ending balance		$	17,703			$	8,704			$	4,396			$	30,803

 

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Note 7. Deposits

 

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

 

		September 30, 2023				December 31, 2022
(Amounts in thousands)
Noninterest-bearing demand deposits		$	944,301			$	872,168
Interest-bearing deposits:
Interest-bearing demand deposits			702,015				679,609
Money market accounts			297,189				264,734
Savings deposits			545,064				578,974
Certificates of deposit			166,445				180,008
Individual retirement accounts			91,122				103,322
Total interest-bearing deposits			1,801,835				1,806,647
Total deposits		$	2,746,136			$	2,678,815

 

 

 

 

Note 8. Borrowings

 

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

 

		September 30, 2023								December 31, 2022
						Weighted								Weighted
(Amounts in thousands)		Balance				Average Rate				Balance				Average Rate
Retail repurchase agreements		$	1,029				0.06	%		$	1,874				0.07	%

 

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

 

As of September 30, 2023, the Company had no long-term borrowings.

 

Unused borrowing capacity with the FHLB totaled $382.39 million, net of FHLB letters of credit of $126.08 million, as of September 30, 2023. As of September 30, 2023, the Company maintains $508.47 million in qualifying loans to secure the FHLB borrowing capacity.

 

Note 9. Derivative Instruments and Hedging Activities

 

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

 

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

 

Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of September 30, 2023.

 

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

 

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

 

		September 30, 2023												December 31, 2022
		Notional or				Fair Value								Notional or				Fair Value
		Contractual				Derivative				Derivative				Contractual				Derivative				Derivative
(Amounts in thousands)		Amount				Assets				Liabilities				Amount				Assets				Liabilities
Derivatives designated as hedges
Interest rate swaps		$	3,644			$	229			$	-			$	3,983			$	199			$	-
Total derivatives		$	3,644			$	229			$	-			$	3,983			$	199			$	-

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(Amounts in thousands)		2023				2022				2023				2022			Income Statement Location
Derivatives designated as hedges
Interest rate swaps		$	(26	)		$	3			$	(72	)		$	47		Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps		$	-			$	6			$	-			$	90		Interest and fees on loans
Total derivative (income) expense		$	(26	)		$	9			$	(72	)		$	137

  

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Note 10. Employee Benefit Plans

 

The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan ("SERP") and the Directors’ Supplemental Retirement Plan ("Director Plan"). The SERP was frozen near the end of 2021; the Director Plan was fundamentally frozen at that time as well. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022			Income Statement Location
(Amounts in thousands)
Service cost		$	-			$	-			$	-			$	-		Salaries and employee benefits
Interest cost			90				83				267				249		Other expense
Amortization of prior service cost			-				-				-				-		Other expense
Amortization of losses			32				34				95				101		Other expense
Net periodic cost		$	122			$	117			$	362			$	350

    

Note 11. Earnings per Share

 

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

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2023				2022				2023				2022
(Amounts in thousands, except share and per share data)
Net income		$	14,640			$	13,351			$	36,236			$	34,079
Adjust net income for fair value of restricted stock units (tax effected)			237				-				592				-
Net income for fully dilutive earnings per common share		$	14,877			$	13,351			$	36,828			$	34,079
Weighted average common shares outstanding, basic			18,786,032				16,378,022				17,816,505				16,617,766
Dilutive effect of potential common shares
Stock options			17,223				18,975				14,323				16,615
Unvested stock awards			-				10,570				4,067				14,681
Restricted stock units			28,581				5,635				22,599				5,635
Total dilutive effect of potential common shares			45,804				35,180				40,989				36,931
Weighted average common shares outstanding, diluted			18,831,836				16,413,202				17,857,494				16,654,697
Basic earnings per common share		$	0.78			$	0.82			$	2.03			$	2.05
Diluted earnings per common share			0.79				0.81				2.06				2.05
Antidilutive potential common shares
Stock options			129,355				131,198				130,577				131,198
Stock units			93				-				82				-
Total potential antidilutive shares			129,448				131,198				130,659				131,198

 

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Note 12. Accumulated Other Comprehensive Income (Loss)

 

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

 

		Three Months Ended September 30, 2023
		Unrealized
		Losses on Available-
		for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Beginning balance		$	(14,363	)		$	(98	)		$	(14,461	)
Other comprehensive loss before reclassifications			(2,983	)			(28	)			(3,011	)
Reclassified from AOCI			-				28				28
Other comprehensive loss, net			(2,983	)			-				(2,983	)
Ending balance		$	(17,346	)		$	(98	)		$	(17,444	)

 

		Three Months Ended September 30, 2022
		Unrealized
		Losses on Available-
		for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Beginning balance		$	(9,817	)		$	(1,843	)		$	(11,660	)
Other comprehensive loss before reclassifications			(7,392	)			-				(7,392	)
Reclassified from AOCI			-				27				27
Other comprehensive loss, net			(7,392	)			27				(7,365	)
Ending balance		$	(17,209	)		$	(1,816	)		$	(19,025	)

 

		Nine Months Ended September 30, 2023
		Unrealized Gains
		(Losses) on Available-
		for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Beginning balance		$	(15,621	)		$	(98	)		$	(15,719	)
Other comprehensive loss before reclassifications			(1,743	)			(76	)			(1,819	)
Reclassified from AOCI			18				76				94
Other comprehensive loss, net			(1,725	)			-				(1,725	)
Ending balance		$	(17,346	)		$	(98	)		$	(17,444	)

 

		Nine Months Ended September 30, 2022
		Unrealized Gains
		(Losses) on Available-
		for-Sale Securities				Employee Benefit Plans				Total
(Amounts in thousands)
Beginning balance		$	15			$	(1,561	)		$	(1,546	)
Other comprehensive loss before reclassifications			(17,224	)			(335	)			(17,559	)
Reclassified from AOCI			-				80				80
Other comprehensive loss, net			(17,224	)			(255	)			(17,479	)
Ending balance		$	(17,209	)		$	(1,816	)		$	(19,025	)

 

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

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,							Income Statement
(Amounts in thousands)		2023				2022				2023				2022			Line Item Affected
Available-for-sale securities
Loss recognized		$	-			$	-			$	21			$	-		Net loss on sale of securities
Reclassified out of AOCI, before tax			-				-				21				-		Income before income taxes
Income tax expense			-				-				4				-		Income tax expense
Reclassified out of AOCI, net of tax			-				-				17				-		Net income
Employee benefit plans
Amortization of prior service cost			-				-				-				-		Salaries and employee benefits
Amortization of net actuarial benefit cost			32				34				95				101		Salaries and employee benefits
Reclassified out of AOCI, before tax			32				34				95				101		Income before income taxes
Income tax expense			7				7				19				21		Income tax expense
Reclassified out of AOCI, net of tax			25				27				76				80		Net income
Total reclassified out of AOCI, net of tax		$	25			$	27			$	93			$	80		Net income

 

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(1)	Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."

 

Note 13. Fair Value

 

Financial Instruments Measured at Fair Value

 

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

 

●

Level 1 – Observable, unadjusted quoted prices in active markets

●

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

●

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

 

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

 

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Assets and Liabilities Reported at Fair Value on a Recurring Basis

 

Available-for-Sale Debt Securities

 

 

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

 

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

 

Loans Held for Investment. Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.

 

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

 

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

 

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

 

		September 30, 2023
		Total				Fair Value Measurements Using
(Amounts in thousands)		Fair Value				Level 1				Level 2				Level 3
Available-for-sale debt securities
U.S. Agency securities		$	5,741			$	-			$	5,741			$	-
U.S. Treasury securities			144,920				-				144,920				-
Municipal securities			19,401				-				19,401				-
Corporate Notes			26,249								26,249
Agency mortgage-backed securities			79,021				-				79,021				-
Total available-for-sale debt securities			275,332				-				275,332				-
Equity securities			55				-				55				-
Fair value loans			3,415				-				-				3,415
Derivative assets			229				-				229				-
Deferred compensation assets			6,003				6,003				-				-
Deferred compensation liabilities			7,527				7,527				-				-

 

		December 31, 2022
		Total				Fair Value Measurements Using
(Amounts in thousands)		Fair Value				Level 1				Level 2				Level 3
Available-for-sale debt securities
U.S. Agency securities		$	1,485			$	-			$	1,485			$	-
U.S. Treasury securities			157,264				-				157,264				-
Municipal securities			23,309				-				23,309				-
Corporate notes			34,857				-				34,857				-
Agency mortgage-backed securities			83,434				-				83,434				-
Total available-for-sale debt securities			300,349				-				300,349				-
Equity securities			55				-				55				-
Fair value loans			3,784				-				-				3,784
Derivative assets			199				-				199				-
Deferred compensation assets			5,142				5,142				-				-
Deferred compensation liabilities			5,142				5,142				-				-

 

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Assets Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

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

 

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

 

		September 30, 2023
		Total				Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
(Amounts in thousands)
Collateral dependent assets with specific reserves		$	825			$	-			$	-			$	825
OREO			243				-				-				243

 

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

 

Quantitative Information about Level 3 Fair Value Measurements

 

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

 

				Discount Range
	Valuation	Unobservable		(Weighted Average)
	Technique	Input		September 30, 2023
Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)			46% (46%)
OREO	Discounted appraisals(1)	Appraisal adjustments(2)			20% to 100% (86%)

 

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

 

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

 

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

 

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Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

 

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

 

		September 30, 2023
		Carrying								Fair Value Measurements Using
(Amounts in thousands)		Amount				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	113,397			$	113,397			$	113,397			$	-			$	-
Debt securities available for sale			275,332				275,332				-				275,332				-
Equity securities			55				55				-				55				-
Loans held for investment, net of allowance			2,557,441				2,320,750				-				-				2,320,750
Derivative financial assets			229				229				-				229				-
Interest receivable			10,428				10,428				-				10,428				-
Deferred compensation assets			6,003				6,003				6,003				-				-
Liabilities
Time deposits			257,567				242,721				-				242,721				-
Securities sold under agreements to repurchase			1,029				1,029				-				1,029				-
Interest payable			404				404				-				404				-
Deferred compensation liabilities			7,527				7,527				7,527				-				-

 

		December 31, 2022
		Carrying								Fair Value Measurements Using
(Amounts in thousands)		Amount				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	170,846			$	170,846			$	170,846			$	-			$	-
Debt securities available for sale			300,349				300,349				-				300,349				-
Equity securities			55				55				-				55				-
Loans held for investment, net of allowance			2,369,641				2,215,243				-				-				2,215,243
Interest receivable			9,279				9,279				-				9,279				-
Deferred compensation assets			5,142				5,142				5,142				-				-
Derivative assets			199				199				-				199				-
Liabilities
Time deposits			283,330				281,744				-				281,744				-
Securities sold under agreements to repurchase			1,874				1,874				-				1,874				-
Interest payable			159				159				-				159				-
Deferred compensation liabilities			5,142				5,142				5,142				-				-

 

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Note 14. Litigation, Commitments, and Contingencies

 

Litigation

 

On June 24, 2022, the Bank was sued in a putative class action lawsuit filed by two customers of the Bank in the United States District Court for the Northern District of West Virginia. (The lawsuit was subsequently transferred to the District Court for the Southern District of West Virginia.) The plaintiffs, individually and as putative class representatives, allege that the Bank breached its deposit account agreements and was unjustly enriched by collecting overdraft fees with respect to certain debit card transactions and the assessment of multiple nonsufficient funds fees as to items presented for payment against nonsufficient funds more than one time. No class has been certified and discovery is ongoing. The Bank disputes the allegations and has actively defended itself, but it is exploring settlement opportunities. We cannot provide assurance whether a settlement will be reached, the final terms or timing of any such settlement, or the negotiated amount of any settlement with respect to this matter. Because settlement negotiations have not yet started, the Bank cannot reasonably estimate the amount of any possible settlement. If the Bank cannot reach a settlement or if the court rejects any settlement proposed by the Bank and plaintiffs’ counsel, the Bank may need to litigate the matter in court. If the Bank must litigate, it will defend itself vigorously. Management, after consultation with legal counsel, believes it is currently not possible to predict the ultimate resolution or potential financial liability with respect to this litigation.

 

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

 

Commitments and Contingencies

 

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

 

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

 

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

 

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

 

		September 30, 2023				December 31, 2022
(Amounts in thousands)
Commitments to extend credit		$	289,934			$	278,926
Standby letters of credit and financial guarantees(1)			128,286				119,681
Total off-balance sheet risk		$	418,220			$	398,607

 

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(1)	Includes FHLB letters of credit

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.

 

Executive Overview

 

First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of September 30, 2023, the Bank operated 53 branches in Virginia, West Virginia, North Carolina and Tennessee. As of September 30, 2023, full-time equivalent employees, calculated using the number of hours worked, totaled 628. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol FCBC.

 

 

The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of September 30, 2023, the Trust Division and FCWM managed and administered $1.40 billion in combined assets under various fee-based arrangements as fiduciary or agent. The Bank also offers a full range of commercial and personal insurance products through its strategic partnership with Bankers Insurance, LLC.

 

On March 12, 2023, the Department of the Treasury, the Federal Reserve and the FDIC issued a joint statement relating to the resolution of Silicon Valley Bank and Signature Bank that stated that losses to support uninsured deposits of those banks would be recovered via a special assessment on banks. On May 11, 2023 the FDIC approved a notice of proposed rulemaking, which would impose the special assessment to recover the losses to the deposit insurance fund (“DIF”) resulting from protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The FDIC stated that it currently estimates those assessed losses to total $15.8 billion and that the amount of the special assessments would be adjusted as the loss estimate changes. Under the proposed rule, the assessment base would be an insured depository institution’s (“IDI”) estimated uninsured deposits, as reported in the IDI’s December 31, 2022 Call Report, excluding the first $5 billion in estimated uninsured deposits. The special assessments would be collected at an annual rate of approximately 12.5 basis points per year (3.13 basis points per quarter) over eight quarters in 2024 and 2025, with the first assessment period beginning January 1, 2024 (with the first assessment payment due by June 28, 2024). Under the proposed rule, the estimated loss pursuant to the systemic risk determination would be periodically adjusted, and the FDIC would retain the ability to cease collection early, extend the special assessment collection period and impose a final shortfall special assessment on a one-time basis. Under the current provisions of this notice of proposed rulemaking, we believe that we would not be impacted by the special assessment associated with the most recent banking organization closures.

 

Critical Accounting Estimates

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

 

Allowance for Credit Losses or "ACL"

 ​

The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 – "Basis of Presentation - Significant Accounting Policies" in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5 — "Allowance for Credit Losses" in this Quarterly Report on Form 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A. Periods prior to the January 1, 2021 adoption of ASU 2016-13 follow prior accounting guidance for estimated loan losses and may not be comparable.

 

Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2022 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2022 Form 10-K.

 

 

Performance Overview

 

Highlights of our results of operations for the three and nine months ended September 30, 2023, and financial condition as of September 30, 2023, include the following:

 

●

Net income of $14.64 million for the quarter was approximately 9.66%, or $1.29 million, higher compared to net income of $13.35 million in the same quarter of 2022. Adjusted for non-recurring items, third quarter net income increased $2.52 million to $14.72 million compared to third quarter 2022.  The increase is primarily attributable to a significant increase in net interest income.

	●	Net interest income increased $4.01 million compared to the same quarter in 2022, as increases in benchmark interest rates have improved net interest margin.
	●	Net interest margin of 4.51% is an increase of 50 basis points over the same quarter of 2022. The yield on earning assets increased 82 basis points primarily driven by increased earnings on loans and securities.
	●	Interest and fees on loans increased $7.09 million from the same quarter of 2022 and is attributable to both an increase in yield and an increase in average balance compared to the yield and average balance of the prior year. Interest income from securities of $1.91 million was an increase of $127 thousand over the same quarter of 2022 and is attributable to an increase in yield from the same period of the prior year. Interest income on deposits in banks decreased $835 thousand to $697 thousand for the third quarter, primarily due to a significant decrease in the average balance compared to the third quarter of 2022.

●

Annualized return on average assets was 1.74% for the third quarter and 1.49% for the first nine months of 2023 compared to 1.63% and 1.41% for the same periods, respectively of 2022. Annualized return on average common equity was 11.63% for the third quarter and 10.25% for the first nine months of 2023 compared to 12.60% and 10.73% for the same periods, respectively, of 2022.

	●	The Company’s loan portfolio increased by $193.28 million, or 8.05% from December 31, 2022.  Excluding the Surrey transaction, the loan portfolio decreased approximately $45.81 million, or 1.91%.
	●	Deposits increased $67.32 million, or 2.51% from year-end 2022.  Excluding the Surrey transaction, deposits decreased approximately $336.31 million, or 12.55% from December 31, 2022.
	●	The Company repurchased 299,012 common shares during the third quarter of 2023 for a total cost of $9.37 million. The Company repurchased 578,579 common shares year-to-date for a total cost of $17.06 million.  The Company recently announced a new $2.7 million share repurchase program that replaces the small remainder of the prior program and expires December 31, 2026.
	●	Non-performing loans to total loans remained at 0.71% when compared with the prior quarter of June 30, 2023.  The Company experienced net charge-offs for the third quarter of 2023 of $1.46 million or 0.22% of annualized average loans, compared to net charge-offs of $1.05 million, or 0.18% of annualized average loans for the same period in 2022.
	●	The allowance for credit losses to total loans was 1.39% at September 30, 2023 compared to 1.38% for the second quarter of 2023.
	●	Accumulated other comprehensive loss of $17.44 million at September 30, 2023, is primarily attributable to a relatively small decline in the market value of investment securities compared to book value after the significant increases in benchmark interest rates of the last seven quarters.
	●	Book value per share at September 30, 2023, was $26.55, an increase of $0.54 from year-end 2022.

 

Results of Operations

 

Net Income

 

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

 

		Three Months Ended																Nine Months Ended
(Amounts in thousands, except per		September 30,								Increase								September 30,								Increase
share data)		2023				2022				(Decrease)				% Change				2023				2022				(Decrease)				% Change
Net income		$	14,640			$	13,351			$	1,289				9.65	%		$	36,236			$	34,079			$	2,157				6.33	%
Basic earnings per common share			0.78				0.82				(0.04	)			-4.88	%			2.03				2.05				(0.02	)			-0.98	%
Diluted earnings per common share			0.79				0.81				(0.02	)			-2.47	%			2.06				2.05				0.01				0.49	%
Return on average assets			1.74	%			1.63	%			0.11	%			6.75	%			1.49	%			1.41	%			0.08	%			5.67	%
Return on average common equity			11.63	%			12.60	%			-0.97	%			-7.70	%			10.25	%			10.73	%			-0.48	%			-4.47	%

 

Three-Month Comparison.

 

Net income increased $1.29 million in the third quarter of 2023 compared to the same period in 2022.  The increase is primarily attributable to an increase in net interest income of $4.01 million. Excluding the gain recorded in the third quarter of 2022 for the divestiture of the Emporia, Virginia branch of $1.66 million, non interest income increased $1.33 million. The increase was primarily driven by interchange fee income as well as a gain recorded from the sale of bank property in the third quarter of 2023. These increases were offset by a $1.77 million increase in noninterest expense. The increase in noninterest expense was primarily the result of increased salaries and benefits costs and increased service fees and are primarily attributable to the acquisition of Surrey Bancorp.

 

 

 

 

Net Interest Income

 

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

  

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

 

		Three Months Ended September 30,
		2023												2022
		Average								Average Yield/				Average								Average Yield/
(Amounts in thousands)		Balance				Interest(1)				Rate(1)				Balance				Interest(1)				Rate(1)
Assets
Earning assets
Loans(2)(3)		$	2,604,885			$	33,566				5.11	%		$	2,334,596			$	26,474				4.50	%
Securities available for sale			284,659				1,952				2.72	%			301,360				1,833				2.41	%
Interest-bearing deposits			50,855				697				5.44	%			275,290				1,531				2.21	%
Total earning assets			2,940,399				36,215				4.89	%			2,911,246				29,838				4.07	%
Other assets			393,001												328,534
Total assets		$	3,333,400											$	3,239,780
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits		$	699,066			$	165				0.09	%		$	689,376			$	28				0.02	%
Savings deposits			862,121				1,941				0.89	%			887,454				67				0.03	%
Time deposits			263,940				652				0.98	%			317,294				285				0.36	%
Total interest-bearing deposits			1,825,127				2,758				0.60	%			1,894,124				380				0.08	%
Borrowings
Retail repurchase agreements			1,254				-				N/M				2,378				-				N/M
Total borrowings			1,254				-				N/M				2,378				-				N/M
Total interest-bearing liabilities			1,826,381				2,758				0.60	%			1,896,502				380				0.08	%
Noninterest-bearing demand deposits			964,093												881,429
Other liabilities			43,574												41,373
Total liabilities			2,834,048												2,819,304
Stockholders' equity			499,352												420,476
Total liabilities and stockholders' equity		$	3,333,400											$	3,239,780
Net interest income, FTE(1)						$	33,457											$	29,458
Net interest rate spread											4.29	%											3.99	%
Net interest margin, FTE(1)											4.51	%											4.01	%

 

---

(1)	Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%.
(2)	Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash and accelerated purchase accounting accretion of $874 thousand and $487 thousand for the three months ended September 30, 2023 and 2022, respectively.

  

 

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

 

		Nine Months Ended September 30,
		2023												2022
		Average								Average Yield/				Average								Average Yield/
(Amounts in thousands)		Balance				Interest(1)				Rate(1)				Balance				Interest(1)				Rate(1)
Assets
Earning assets
Loans(2)(3)		$	2,523,814			$	93,261				4.94	%		$	2,269,974			$	76,886				4.53	%
Securities available for sale			306,435				6,191				2.70	%			241,640				4,230				2.34	%
Interest-bearing deposits			51,759				2,047				5.29	%			398,326				2,549				0.86	%
Total earning assets			2,882,008				101,499				4.71	%			2,909,940				83,665				3.84	%
Other assets			366,243												329,508
Total assets		$	3,248,251											$	3,239,448
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits		$	682,820			$	225				0.04	%		$	689,226			$	85				0.02	%
Savings deposits			850,411				3,731				0.59	%			888,062				200				0.03	%
Time deposits			272,435				1,450				0.71	%			331,808				1,003				0.40	%
Total interest-bearing deposits			1,805,666				5,406				0.40	%			1,909,096				1,288				0.09	%
Borrowings
Retail repurchase agreements			1,674				1				0.06	%			2,161				1				0.07	%
Federal funds purchased			3,532				135				5.11	%			-				-				-
Total borrowings			5,206				136				3.49	%			2,161				1				0.07	%
Total interest-bearing liabilities			1,810,872				5,542				0.41	%			1,911,257				1,289				0.09	%
Noninterest-bearing demand deposits			924,591												864,119
Other liabilities			40,014												39,487
Total liabilities			2,775,477												2,814,863
Stockholders' equity			472,774												424,585
Total liabilities and stockholders' equity		$	3,248,251											$	3,239,448
Net interest income, FTE(1)						$	95,957											$	82,376
Net interest rate spread											4.30	%											3.75	%
Net interest margin, FTE(1)											4.45	%											3.78	%

 

---

(1)	Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%.
(2)	Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual.
(3)	Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.95 million and $2.22 million the first nine months ended September 30, 2023 and 2022, respectively.

  

 

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

 

		Three Months Ended																Nine Months Ended
		September 30, 2023 Compared to 2022																September 30, 2023 Compared to 2022
		Dollar Increase (Decrease) due to																Dollar Increase (Decrease) due to
										Rate/																Rate/
(Amounts in thousands)		Volume				Rate				Volume				Total				Volume				Rate				Volume				Total
Interest earned on(1)
Loans		$	9,095			$	10,710			$	(12,713	)		$	7,092			$	8,598			$	6,995			$	782			$	16,375
Securities available-for-sale			(301	)			693				(273	)			119				1,134				652				175				1,961
Interest-bearing deposits with other banks			(3,704	)			6,653				(3,783	)			(834	)			(2,218	)			13,204				(11,488	)			(502	)
Total interest earning assets			5,090				18,056				(16,769	)			6,377				7,514				20,851				(10,531	)			17,834
Interest paid on
Demand deposits			1				400				(264	)			137				(1	)			142				(1	)			140
Savings deposits			(6	)			5,730				(3,850	)			1,874				(8	)			3,696				(157	)			3,531
Time deposits			(142	)			1,480				(971	)			367				(179	)			763				(137	)			447
Federal funds purchased			-				-				-				-				-				-				135				135
Retail repurchase agreements			1				3				(4	)			-				-				-				-				-
Wholesale repurchase agreements			-				-				-				-				-				-				-				-
FHLB advances and other borrowings			-				-				-				-				-				-				-				-
Total interest-bearing liabilities			(146	)			7,613				(5,089	)			2,378				(188	)			4,601				(160	)			4,253
Change in net interest income(1)		$	5,236			$	10,443			$	(11,680	)		$	3,999			$	7,702			$	16,250			$	(10,371	)		$	13,581

 

---

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

 

Three-Month Comparison. Net interest income comprised 77.61% of total net interest and noninterest income in the third quarter of 2023 compared to 74.68% in the same quarter of 2022. Net interest income on a GAAP basis increased $4.01 million, or 13.65%, compared to an increase of $4.00 million, or 13.58%, on a FTE basis. The net interest margin on a FTE basis increased 50 basis points and the net interest spread on a FTE basis increased 30 basis points. The increase was primarily driven by increase in the average balance for loans as well as an increase in the yield on loans.  The average balance for loans increased $270.29 million, while the yield increased 61 basis points resulting in a tax effected increase in interest on loans of $7.09 million compared to 2022.  The tax effected interest on securities available for sale increased $119 thousand and is primarily attributable to the increase in yield of 31 basis points.   These increases were offset by a decrease in the tax effected interest on interest-bearing deposits of $834 thousand.  The decrease in interest was primarily driven by a decrease in the average balance for interest-bearing deposits of $224.44 million compared to the same quarter of 2022.

 

Average earning assets increased $29.15 million, or 1.00%, primarily due to an increase in average loans as noted above.  The increase in average loans was offset by a decrease in average interest-bearing deposits with banks of $224.44 million and securities available for sale of $16.70 million. The yield on earning assets increased 82 basis points, or 20.15% primarily due an increase in benchmark rates as compared to the same period of 2022. The average loan to deposit ratio increased to 93.39% from 84.11% reported in the same quarter of 2022. Non-cash accretion income increased to $874 thousand from $487 thousand reported in the same quarter of 2022 and is primarily due to the Surrey Bancorp acquisition.

 

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $70.12 million, or 3.70%, primarily due to a decrease in deposits. Time deposits decreased $53.35 million, or 16.82% and savings deposits decreased $25.33 million or 2.85%.  The decreases were offset by an increase in interest-bearing demand deposits of $9.69 million, or 1.41%.  The yield on interest-bearing liabilities increased 52 basis points and is primarily due to increases in benchmark rates throughout 2022 and 2023. 

 

 

Nine-Month Comparison.  

 

 

 

 

Provision for Credit Losses

 

Three-Month Comparison. The provision charged to operations increased $424 thousand, in the third quarter of 2023 compared to the same quarter of 2022. Provision for credit losses for loans of $1.32 million was recorded in the third quarter of 2023 compared to the provision of $685 thousand recorded in the same period of 2022.   The increase in provision is commensurate with changes in economic forecasts and changes in the loan portfolio.  There was a recovery of provision recorded for loan commitments during the third quarter of $206 thousand.  The provision for loan commitments of $459 thousand in 2022 was included in other operating expenses.

 

Nine-Month Comparison. The provision charged to operations increased $3.80 million, in the nine months ended of September 30, 2023 compared to the nine months ended of September 30, 2022. The provision expense of $6.96 million was comprised of $7.39 million related to loans and a recovery of provision of $438 thousand for loan commitments.  Provision for credit losses for loans of $7.39 million was recorded in the nine months ended of September 30, 2023 compared to the provision of $3.16 million recorded in the nine months ended of September 30, 2022.   The increase in provision is commensurate with changes in economic forecasts and growth in the loan portfolio associated with the acquisition of Surrey Bancorp on April 21, 2023.  $1.61 million of the provision is attributable to day two provision for the Surrey portfolio.  A provision of $737 thousand was recorded for loan commitments in 2022 and was included in other operating expense.

 

Noninterest Income

 

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

 

		Three Months Ended																Nine Months Ended
		September 30,								Increase				%				September 30,								Increase				%
		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
(Amounts in thousands)
Wealth management		$	1,145			$	932			$	213				22.85	%		$	3,127			$	2,897			$	230				7.94	%
Service charges on deposits			3,729				3,689				40				1.08	%			10,359				10,859				(500	)			-4.60	%
Other service charges and fees			3,564				2,988				576				19.28	%			10,106				9,302				804				8.64	%
Gain on sale of securities			-				-				-				N/M				(21	)			-				(21	)			N/M
Divestiture Gain			-				1,658				(1,658	)			-				-				1,658				(1,658	)			-
Other operating income			1,184				683				501				73.35	%			3,419				3,282				137				4.17	%
Total noninterest income		$	9,622			$	9,950			$	(328	)			-3.30	%		$	26,990			$	27,998			$	(1,008	)			-3.60	%

 

Three-Month Comparison. Noninterest income comprised 22.39% of total net interest and noninterest income in the third quarter of 2023 compared to 25.32% in the same quarter of 2022. Noninterest income decreased $328 thousand or 3.30%.  The decrease is primarily driven by the gain recorded in the third quarter of 2022 for the divestiture of the Emporia, Virginia branch of $1.66 million.  Other service charges and fees  increased $576 thousand and was primarily driven by an increase in interchange income.  Other operating income increased $501 thousand partially driven by a gain recorded in the third quarter for the sale of bank-owned property.  In addition, Wealth Management increased $213 thousand over the same period of 2022. 

 

Nine-Month Comparison. Noninterest income comprised 22.01% of total net interest and noninterest income in the nine months ended of September 30, 2023 compared to 25.44% in the nine months ended of September 30, 2022. Noninterest income decreased $1.01 million or 3.60%.  As noted above, the decrease is primarily driven by the gain recorded in the third quarter of 2022 for the divestiture of the Emporia, Virginia branch of $1.66 million.  Additionally, there was decrease in service charges on deposits of $500 thousand compared to the same period of 2022.  The decrease was primarily the result of a decrease in the volume of overdraft fees.  The decreases were offset by an increase in other service charges of $804 thousand and an increase in wealth management income of $230 thousand compared to the nine months ended of September 30, 2022.  The increase in other service charges was primarily driven by an increase in interchange income.

 

 

Noninterest Expense

 

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

 

		Three Months Ended																Nine Months Ended
		September 30,								Increase				%				September 30,								Increase				%
		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
(Amounts in thousands)
Salaries and employee benefits		$	12,673			$	12,081			$	592				4.90	%		$	36,954			$	35,270			$	1,684				4.77	%
Occupancy expense			1,271				1,188				83				6.99	%			3,715				3,622				93				2.57	%
Furniture and equipment expense			1,480				1,478				2				0.14	%			4,389				4,588				(199	)			-4.34	%
Service fees			2,350				1,635				715				43.73	%			6,653				5,701				952				16.70	%
Advertising and public relations			968				718				250				34.82	%			2,457				1,835				622				33.90	%
Professional fees			172				208				(36	)			-17.31	%			780				1,205				(425	)			-35.27	%
Amortization of intangibles			536				365				171				46.85	%			1,195				1,082				113				10.44	%
FDIC premiums and assessments			392				321				71				22.12	%			1,135				796				339				42.59	%
Divestiture expense			-				153				(153	)			-100.00	%			-				153				(153	)			-100.00	%
Merger expense			-				-				-				-				2,393				-				2,393				-
Other operating expense			3,071				2,998				73				2.43	%			8,726				8,134				592				7.28	%
Total noninterest expense		$	22,913			$	21,145			$	1,768				8.36	%		$	68,397			$	62,386			$	6,011				9.64	%

 

Three-Month Comparison. Noninterest expense increased $1.77 million, or 8.36%, in the third quarter of 2023 compared to the same quarter of 2022. The increase is primarily attributable to an increase in service fees of $715 thousand as well as an increase of $592 thousand in salaries and employee benefits.  The increase in both costs can be attributable to the addition of Surrey branches and staff.

 

Nine-Month Comparison. Noninterest expense increased $6.01 million, or 9.64%, in the nine months ended of September 30, 2023 compared to the nine months ended of September 30, 2022. The Company recorded merger expenses of $2.39 million in 2023 related to the Surrey Bancorp acquisition.  Also, contributing to the overall increase, was an increase in salaries and benefits of $1.68 million, or 4.77%.  In addition, increases occurred in services fees of $952 thousand, advertising and public relations of $622 thousand, and other operating expense of $592 thousand.  The increases are partially driven by the addition of Surrey branches and staff.

 

Income Tax Expense

 

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

 

Three-Month Comparison. Income tax expense increased $196 thousand, or 4.77% and was primarily due to the increase in pre-tax income.  The effective tax rate decreased to 22.73% in the third quarter of 2023 from 23.54% in the same quarter of 2022. 

 

Nine-Month Comparison. Income tax expense increased $603 thousand, or 5.79% and was primarily due to the increase in pre-tax income.  The effective tax rate decreased to 23.32% in the nine months ended of September 30, 2023 from 23.41% in the nine months ended of September 30, 2022. 

 

Non-GAAP Financial Measures 

 

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

 

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
(Amounts in thousands)
Net interest income, GAAP		$	33,347			$	29,342			$	95,621			$	82,042
FTE adjustment(1)			110				116				336				334
Net interest income, FTE			33,457				29,458				95,957				82,376
Net interest margin, GAAP			4.49	%			3.99	%			4.40	%			3.77	%
FTE adjustment(1)			0.02	%			0.02	%			0.05	%			0.01	%
Net interest margin, FTE			4.51	%			4.01	%			4.45	%			3.78	%

 

(1) FTE basis of 21%.

 

Financial Condition

 

Total assets as of September 30, 2023, increased $148.65 million, or 4.74%, from December 31, 2022.  Total liabilities increased $74.97 million, or 2.76%, and stockholders' equity increased $73.68 million or 17.46%.  The primary driver for the change in the balance sheet components was the acquisition of Surrey Bancorp on April 21, 2023.  Total assets of $466.25 million were acquired in the transaction.  In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in capital of $71.35 million.  The purchase transaction created $14.38 million in goodwill and $12.7 million in other intangible assets.  

 

Excluding the Surrey transaction, total assets decreased $317.59 million primarily due to a decrease in cash and cash equivalents of $234.15 million excluding the Surrey transaction.  Total liabilities decreased $334.29 million excluding the Surrey transaction primarily due to a decrease in deposits of $336.31 million.

 

Investment Securities

 

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

 

Available-for-sale debt securities as of September 30, 2023, decreased $25.02 million, or 8.33%, compared to December 31, 2022.  The decrease is due to $75.90 million in maturities, prepayments, and calls, as well as sales of $38.98 million in securities available for sale.  Included in the sale of securities was the entire portfolio of Surrey with an acquired fair value of $20.93 million comprised primarily of U. S. Treasury securities.  A loss of $28 thousand was recognized in the sale of the portfolio.  The decreases were offset by purchases of $68.87 million and $20.93 million in investments acquired in the Surrey acquisition.  The market value of debt securities available for sale as a percentage of amortized cost was 92.61% as of September 30, 2023, compared to 93.82% as of December 31, 2022.  

 

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of September 30, 2023 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.

 

Loans Held for Investment

 

Loans held for investment, which generates the largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. 

 

 

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

 

		September 30, 2023								December 31, 2022								September 30, 2022
(Amounts in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Loans held for investment
Commercial loans
Construction, development, and other land		$	113,790				4.39	%		$	117,174				4.88	%		$	109,104				4.62	%
Commercial and industrial			213,541				8.23	%			150,428				6.27	%			148,024				6.26	%
Multi-family residential			169,245				6.53	%			148,026				6.17	%			135,489				5.73	%
Single family non-owner occupied			230,836				8.90	%			206,121				8.59	%			196,133				8.30	%
Non-farm, non-residential			896,555				34.57	%			787,703				32.82	%			777,350				32.90	%
Agricultural			22,146				0.85	%			12,032				0.50	%			10,537				0.45	%
Farmland			15,997				0.62	%			11,779				0.49	%			12,127				0.51	%
Total commercial loans			1,662,110				64.09	%			1,433,263				59.72	%			1,388,764				58.77	%
Consumer real estate loans
Home equity lines			88,224				3.40	%			75,642				3.15	%			77,424				3.28	%
Single family owner occupied			703,789				27.14	%			734,540				30.61	%			726,780				30.76	%
Owner occupied construction			10,692				0.41	%			10,366				0.43	%			14,602				0.62	%
Total consumer real estate loans			802,705				30.95	%			820,548				34.19	%			818,806				34.66	%
Consumer and other loans
Consumer loans			126,917				4.89	%			144,582				6.02	%			151,022				6.39	%
Other			1,740				0.07	%			1,804				0.07	%			4,141				0.18	%
Total consumer and other loans			128,657				4.96	%			146,386				6.09	%			155,163				6.57	%
Total loans held for investment, net of unearned income			2,593,472				100.00	%			2,400,197				100.00	%			2,362,733				100.00	%
Less: allowance for credit losses			36,031								30,556								29,388
Total loans held for investment, net of unearned income and allowance		$	2,557,441							$	2,369,641							$	2,333,345

 

Total loans as of September 30, 2023, increased $193.28 million, or 8.05%, compared to December 31, 2022, and was primarily due to the Surrey acquisition with loans acquired totaling $239.08 million.  The largest components of Surrey's portfolio included approximately $98.89 million in non-farm, non-residential loans, $61.47 million in commercial and industrial loans, and $23.03 million in non-owner occupied single family loans.

 

Risk Elements

 

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

 

Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, and modified loans past due 90 days or more, and OREO. Prior to the adoption of ASU 2022-02, unseasoned troubled debt restructurings ("TDRs") were included in nonperforming assets.  Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. 

 

 

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

 

		September 30, 2023				December 31, 2022				September 30, 2022
(Amounts in thousands)
Nonperforming
Nonaccrual loans		$	18,366			$	15,208			$	15,303
Accruing loans past due 90 days or more			59				142				131
Modified loans past due 90 days or more (1)			-				-				-
TDRs'(2)(3)			-				1,346				1,331
Total nonperforming loans			18,425				16,696				16,765
OREO			243				703				559
Total nonperforming assets		$	18,668			$	17,399			$	17,324
Additional Information
Total modified loans (1)		$	1,674			$	-			$	-
Total Accruing TDRs (3)		$	-			$	7,112			$	7,028
Asset Quality Ratios:
Nonperforming loans to total loans			0.71	%			0.70	%			0.71	%
Nonperforming assets to total assets			0.57	%			0.55	%			0.55	%
Allowance for credit losses to nonperforming loans			195.55	%			183.01	%			175.29	%
Allowance for credit losses to total loans			1.39	%			1.27	%			1.24	%

 

---

(1)	ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.  ASU adopted effective January 1, 2023.
(2)	TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.22 million and $2.09 million for the periods ended  December 31, 2022, and September 30, 2022, respectively.  They are included in nonaccrual loans as reported prior to the adoption of ASU 2022-02.
(3)	Total accruing TDRs exclude nonaccrual TDRs of $1.32 million and $1.48 million for the periods ended  December 31, 2022, and September 30, 2022, respectively.  They are included in nonaccrual loans as reported prior to the adoption of ASU 2022-02.

 

Nonperforming assets as of September 30, 2023, increased $1.27 million, or 7.29%, from December 31, 2022, with the largest increase due to an increase in nonaccrual loans of $3.16 million.  The increase was offset by a decrease of $1.35 million in nonaccrual TDRs that was reported in December 31, 2022.  The adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, on January 1, 2023, eliminated the accounting guidance for troubled debt restructurings by creditors as provided in ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors.  Therefore, the guidance applied prior to January 1, 2023, is no longer applicable.  OREO decreased $460 thousand, or 65.43% and accruing loans past due 90 days or more decreased $83 thousand from year-end.  As of September 30, 2023, nonaccrual loans were largely attributed to single family owner occupied (53.66%), consumer loans (11.64%), and agricultural (8.03%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.

 

Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $31.46 million as of September 30, 2023, a increase of $1.78 million, or 5.98%, compared to $29.68 million as of December 31, 2022. Delinquent loans as a percent of total loans totaled 1.21% as of September 30, 2023, which includes past due loans (0.50%) and nonaccrual loans (0.71%).

 

 

When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. As noted above, ASU 2022-02, eliminated and replaced the accounting guidance for borrowers experiencing financial difficulties previously applied under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors.  ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, discloses loans for borrowers experiencing financial difficulty as modified loans.  Total loans modified as of September 30, 2023, were $642 thousand.  As of September 30, 2023, the payment status of these loans were all current.     

 

OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $460 thousand, or 65.43%, as of September 30, 2023, compared to December 31, 2022, and consisted of 7 properties with an average holding period of approximately 15 months. The net loss on the sale of OREO totaled $94 thousand for the nine months ended September 30, 2023, compared to a net loss of $423 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:  

 

		Nine Months Ended September 30,
		2023				2022
(Amounts in thousands)
Beginning balance January 1		$	703			$	1,015
Additions			270				438
Disposals			(698	)			(442	)
Valuation adjustments			(32	)			(452	)
Ending balance		$	243			$	559

 

Allowance for Credit Losses

 

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

 

​For collectively evaluated loans, the Company in general uses two modeling approaches to estimate expected credit losses. The Company projects the contractual run-off of its portfolio at the segment level and incorporates a prepayment assumption in order to estimate exposure at default. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.

 

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

 

 

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

 

With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method.  As of September 30, 2023, the balance of the ACL for loans was $36.03 million, or 1.39% of total loans. The ACL at September 30, 2023, increased $5.48 million from the balance of $30.56 million recorded at December 31, 2022. This increase included a $7.39 million provision offset by net charge-offs for the nine months of $3.93 million. Included in the $7.39 million provision was a day two provision of $1.61 million for Surrey loans.  In addition, $2.01 million was added to the reserve for Surrey's purchased credit deteriorated loans.

 

At September 30, 2023, the Company also had an allowance for unfunded commitments of $758 thousand which was recorded in Other Liabilities on the Balance Sheet.  During the first nine months of 2023, the Company recorded a recovery for credit losses on unfunded commitments of $438 thousand compared to a provision of $737 thousand  recorded in the same period of 2022. 

 

Deposits

 

Total deposits as of September 30, 2023, increased $67.32 million, or 2.51%, compared to December 31, 2022.  The increase was primarily attributable to the acquisition of Surrey Bancorp.  The Company acquired $403.64 million in deposits in the transaction; acquiring $158.39 million in demand accounts, $99.32 million in interest-bearing demand, $102.70 million in savings, and $43.23 million in time deposit accounts.  Excluding the Surrey acquisition, deposits decreased $336.31 million with the largest decreases occurring in savings of $104.15 million, demand deposits of $86.26 million, and interest-bearing demand of $76.92 million.  Deposit attrition related to Surrey post-merger totaled $59.80 million, with attrition of $37.99 million in interest-bearing demand, $13.92 million in savings, and $12.21 million in time deposits. 

 

Total borrowings in the form of retail repurchase agreements as of September 30, 2023, decreased $845 thousand, or 45.09%, compared to December 31, 2022.

 

Liquidity and Capital Resources

 

Liquidity

 

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

 

 

As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of September 30, 2023, the Company’s cash reserves and short-term investment securities totaled $12.92 million and $22.76 million, respectively. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.

 

In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of September 30, 2023, our unencumbered cash totaled $113.40 million, unused borrowing capacity from the FHLB totaled $382.39 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $100.00 million, and unpledged available-for-sale securities totaled $129.95 million.

 

Capital Resources

 

We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of September 30, 2023, increased $73.68 million, or 17.46%, to $495.67 million from $421.99 million as of December 31, 2022. The change in stockholders’ equity was largely due to the acquisition of Surrey Bancorp.  The Company issued 2.99 million shares of common stock in the transaction resulting in an increase to capital of $71.35 million.  In addition, capital increased due to net income of $36.24 million.  The increases were offset by the repurchase of our common stock totaling $17.06 million and dividends declared on our common stock of $15.72 million.  Book value per share at September 30, 2023, was $26.55, an increase of $0.54 from year-end 2022.

 

 

Capital Adequacy Requirements

 

Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III. A description of the Basel III capital rules is included in Part I, Item 1 of the 2022 Form 10-K. Our current required capital ratios are as follows:

 

●

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

●

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

●

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

●

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

 

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

 

		September 30, 2023						December 31, 2022
		Company			Bank			Company			Bank
Common equity Tier 1 ratio		14.64%			12.90%			13.37%			11.69%
Tier 1 risk-based capital ratio		14.64%			12.90%			13.37%			11.69%
Total risk-based capital ratio		15.89%			14.15%			14.62%			12.94%
Tier 1 leverage ratio		11.08%			9.89%			10.17%			8.79%

 

Our risk-based capital ratios as of September 30, 2023, increased from December 31, 2022, primarily due to an increase in capital. The increase in capital was primarily due to the acquisition of Surrey and the issuance of 2.99 million shares of common stock in the transaction resulting in an increase to capital of $71.35 million.  As of September 30, 2023, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of September 30, 2023.

 

 

Off-Balance Sheet Arrangements

 

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

 

		September 30, 2023				December 31, 2022
(Amounts in thousands)
Commitments to extend credit		$	289,934			$	278,926
Standby letters of credit and financial guarantees (1)			128,286				119,681
Total off-balance sheet risk		$	418,220			$	398,607

 

(1)	Includes FHLB letters of credit

 

Market Risk and Interest Rate Sensitivity

 

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

 

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

 

As of September 30, 2023, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 525 to 550 basis points.   In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.

 

		September 30, 2023								December 31, 2022
Increase (Decrease) in Basis Points		Change in Net Interest Income				Percent Change				Change in Net Interest Income				Percent Change
(Dollars in thousands)
200		$	679				0.5	%		$	214				0.2	%
100			291				0.2	%			79				0.6	%
(100)			(3,714	)			(2.9	)%			(5,644	)			-4.5	%
(200)			(9,053	)			(7.0	)%			(12,849	)			-10.4	%

 

Inflation and Changing Prices

 

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

 

Astronomic federal government spending, growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, have contributed to rising inflation. In response, the Federal Reserve Bank has begun raising interest rates and signaled that it will continue to raise rates, taper its purchase of mortgage and other bonds and reduce the size of the balance sheet over time. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.

 

Most LIBOR settings ceased to be published after June 30, 2023.  The Company had discontinued originating LIBOR-based variable rate loans in 2018 in favor of U. S. Treasury rates.  The Company has substituted an alternative reference rate published  by the U. S. Treasury for any remaining loans tied to LIBOR.

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 2 of this Quarterly Report on Form 10-Q.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of September 30, 2023, our disclosure controls and procedures were effective.

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

 

For details on legal proceedings, see “Note 14, Litigation, Commitments, and Contingencies” included in Part I, Financial Information, Item 1, Financial Statements, which information is incorporated by referenced into this Item.

 

ITEM 1A.

Risk Factors

 

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2022, discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included in our annual report on Form 10-K for the year ended December 31, 2022 before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2022.

  

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)	Not Applicable

 

(b)	Not Applicable

 

(c)	Issuer Purchases of Equity Securities

 

During the third quarter of 2023 the Company purchased 299,012 shares of its commons stock compared to 235,400 shares purchased during the same quarter of 2022.    

 

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

 

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of a Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1-31, 2023			180,400			$	31.42				180,400				284,530
August 1-31, 2023			29,600				32.53				29,600				254,930
September 1-30, 2023			89,012				30.76				89,012				2,692,000
Total			299,012			$	31.33				299,012

 

ITEM 3.

Defaults Upon Senior Securities

 

None.

 

ITEM 4.

Mine Safety Disclosures

 

None.

 

ITEM 5.

Other Information

 

(a) None. 

(b) No changes were made to the procedures by which security holders may recommend nominees to the Company's board of directors.

(c) During the three months ended September 30, 2023, none of  our directors or executive officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as such terms defined in Item 408 of Regulation S-K under the Securities Exchange Act of 1934, as amended).

 

 

---

 

ITEM 6.

Exhibits

 

2.1	Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
2.2	Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019.
2.3	Agreement and Plan of Merger between First Community Bankshares, Inc. and Surrey Bancorp, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed November 18, 2022.
3.1	Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018
3.2	Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018
4.1	Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018
4.2	Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018
10.1.1**	First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.1.2**	Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004
10.2**	First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002
10.3**	First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002

10.6**	First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012
10.7**	First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013
10.8**	First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000
10.9.1**	First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009;
10.9.2**	Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010
10.9.3**	Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013

 

 

10.9.4**	Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.9.5**	Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.9.6*	Amendment #5 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan.
10.9.7*	Amendment #6 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan.
10.10**	Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19,2019
10.11.1**	First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.11.2**	Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017
10.12.1**	First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.12.2**	Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016
10.13**	Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.15**	Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015
10.16**	Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101***

Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2023, (Unaudited) and December 31, 2022; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and 2022; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

104*

The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included within the Exhibit 101 attachments).

 

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

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on  November 6, 2023.

 

		First Community Bankshares, Inc. (Registrant)
		/s/ William P. Stafford, II
		William P. Stafford, II
		Chief Executive Officer
		(Principal Executive Officer)
		/s/ David D. Brown
		David D. Brown
		Chief Financial Officer
		(Principal Accounting Officer)