FIRST COMMUNITY BANKSHARES INC /VA/ 10-Q

fcbc20200630_10q.htm     Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549   FORM 10-Q   ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended September 30, 2020 or   ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   Commission file number: 000-19297     FIRST COMMUNITY BAN K SHARES, INC.     (Exact name of registrant as specified in its charter)     Virginia   55-0694814 (State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)   P.O. Box 989 Bluefield , Virginia   24605-0989 (Address of principal executive offices)   (Zip Code)     ( 276 ) 326-9000     (Registrant’s telephone number, including area code)     Securities registered pursuant to Section 12 (b) of the Act:   Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock ($1.00 par value) FCBC NASDAQ Global Select   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.     Large accelerated filer ☐ Accelerated filer ☑   Non-accelerated filer ☐  Smaller reporting company ☐     Emerging growth company ☐   If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No   As of October 27, 2020, there were 17,717,306 shares outstanding of the registrant’s Common Stock, $1.00 par value.     Table of Contents       FIRST COMMUNITY BAN K SHARES, INC. FORM 10-Q INDEX   PART I. FINANCIAL INFORMATION P age       Item 1. Financial Statements       Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019 4     Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)  5     Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) 6     Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) 7     Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited) 9     Notes to Condensed Consolidated Financial Statements (Unaudited) 10 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Item 3. Quantitative and Qualitative Disclosures About Market Risk 57 Item 4. Controls and Procedures 57       PART II. OTHER INFORMATION         Item 1. Legal Proceedings 58 Item 1A. Risk Factors 58 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 60 Item 3. Defaults Upon Senior Securities 60 Item 4. Mine Safety Disclosures 60 Item 5. Other Information 60 Item 6. Exhibits 60       Signatures 62     2 Table of Contents     CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS   Forward-looking statements in filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q and the accompanying Exhibits, filings incorporated by reference, reports to shareholders, and other communications that represent the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and other similar expressions identify forward-looking statements. The following factors, among others, could cause financial performance to differ materially from that expressed in such forward-looking statements:     ● the effects of the COVID-19 pandemic, including the negative impacts and disruptions to the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company’s business;   ● the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;   ● the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;   ● inflation, interest rate, market and monetary fluctuations;   ● timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;   ● the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa;   ● the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;   ● the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system;   ● further, future, and proposed rules, including those that are part of the process outlined in the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” which require banking institutions to increase levels of capital;   ● technological changes;   ● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;   ● the growth and profitability of noninterest, or fee, income being less than expected;   ● unanticipated regulatory or judicial proceedings;   ● changes in consumer spending and saving habits; and   ● the Company’s success at managing the risks mentioned above.   This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may contain forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this report and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.   3 Table of Contents   PART I. FINANCIAL INFORMATION   Item 1.     Financial Statemen ts     CONDENSED CONSOLIDATED BALANCE SHEETS       September 30,     December 31,       2020     2019 (1)   (Amounts in thousands, except share and per share data)   (Unaudited)           Assets                 Cash and due from banks   $ 49,895     $ 66,818   Federal funds sold     323,355       148,000   Interest-bearing deposits in banks     2,414       2,191   Total cash and cash equivalents     375,664       217,009   Debt securities available for sale     90,972       169,574   Loans held for sale     -       263   Loans held for investment, net of unearned income (includes covered loans of $10,744 and $12,861 , respectively)     2,194,995       2,114,460   Allowance for loan losses     ( 27,277 )     ( 18,425 ) Loans held for investment, net     2,167,718       2,096,035   FDIC indemnification asset     1,598       2,883   Premises and equipment, net     60,488       62,824   Other real estate owned     2,103       3,969   Interest receivable     9,151       6,677   Goodwill     129,565       129,565   Other intangible assets     7,433       8,519   Other assets     103,236       101,529   Total assets   $ 2,947,928     $ 2,798,847                     Liabilities                 Deposits                 Noninterest-bearing   $ 750,277     $ 627,868   Interest-bearing     1,741,962       1,702,044   Total deposits     2,492,239       2,329,912   Securities sold under agreements to repurchase     956       1,601   Interest, taxes, and other liabilities     34,816       38,515   Total liabilities     2,528,011       2,370,028                     Stockholders' equity                 Preferred stock, undesignated par value; 1,000,000 shares authorized; Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; none outstanding     -       -   Common stock, $1 par value; 50,000,000 shares authorized; 24,313,091 shares issued and 17,716,522 outstanding at September 30, 2020; 24,238,907 shares issued and 18,376,991 outstanding at December 31, 2019     17,717       18,377   Additional paid-in capital     172,980       192,413   Retained earnings     230,464       219,535   Accumulated other comprehensive loss     ( 1,244 )     ( 1,506 ) Total stockholders' equity     419,917       428,819   Total liabilities and stockholders' equity   $ 2,947,928     $ 2,798,847     (1) Derived from audited financial statements                     See Notes to Condensed Consolidated Financial Statements.           4 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)       Three Months Ended     Nine Months Ended       September 30,     September 30,   (Amounts in thousands, except share and per share data)   2020     2019     2020     2019   Interest income                                 Interest and fees on loans   $ 27,297     $ 22,068     $ 82,346     $ 66,968   Interest on securities -- taxable     190       261       808       916   Interest on securities -- tax-exempt     419       596       1,432       1,930   Interest on deposits in banks     89       680       704       1,784   Total interest income     27,995       23,605       85,290       71,598   Interest expense                                 Interest on deposits     1,161       1,383       4,431       4,080   Interest on short-term borrowings     -       1       4       122   Total interest expense     1,161       1,384       4,435       4,202   Net interest income     26,834       22,221       80,855       67,396   Provision for loan losses     4,703       675       12,034       3,480   Net interest income after provision for loan losses     22,131       21,546       68,821       63,916   Noninterest income                                 Wealth management     909       952       2,607       2,581   Service charges on deposits     3,250       3,785       9,541       10,892   Other service charges and fees     2,748       2,007       7,596       6,185   Net (loss) gain on sale of securities     -       -       385       ( 43 ) Net FDIC indemnification asset amortization     ( 383 )     ( 719 )     ( 1,352 )     ( 1,787 ) Litigation settlements     -       900       -       4,600   Other operating income     1,114       709       3,323       1,935   Total noninterest income     7,638       7,634       22,100       24,363   Noninterest expense                                 Salaries and employee benefits     10,485       9,334       32,886       27,653   Occupancy expense     1,228       1,042       3,818       3,277   Furniture and equipment expense     1,412       1,183       4,112       3,278   Service fees     1,581       1,466       4,433       3,727   Advertising and public relations     430       795       1,417       1,832   Professional fees     408       548       948       1,290   Amortization of intangibles     365       251       1,086       746   FDIC premiums and assessments     191       -       224       318   Merger expenses     -       592       1,893       592   Other operating expense     3,071       2,233       8,931       8,167   Total noninterest expense     19,171       17,444       59,748       50,880   Income before income taxes     10,598       11,736       31,173       37,399   Income tax expense     2,332       2,580       6,797       8,161   Net income   $ 8,266     $ 9,156     $ 24,376     $ 29,238                                     Earnings per common share                                 Basic   $ 0.47     $ 0.59     $ 1.37     $ 1.86   Diluted     0.47       0.58       1.37       1.85   Weighted average shares outstanding                                 Basic     17,710,283       15,603,992       17,803,369       15,717,678   Diluted     17,732,428       15,664,587       17,836,963       15,785,484     See Notes to Condensed Consolidated Financial Statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)       Three Months Ended     Nine Months Ended       September 30,     September 30,       2020     2019     2020     2019   (Amounts in thousands)                                 Net income   $ 8,266     $ 9,156     $ 24,376     $ 29,238   Other comprehensive income, before tax                                 Available-for-sale debt securities:                                 Change in net unrealized (losses) gains on debt securities without other-than-temporary impairment     ( 268 )     28       873       1,578   Reclassification adjustment for net (gains) losses recognized in net income     -       -       ( 385 )     43   Net unrealized (losses) gains on available-for-sale debt securities     ( 268 )     28       488       1,621   Employee benefit plans:                                 Net actuarial (loss) gain     ( 1 )     1       ( 446 )     ( 405 ) Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income     97       67       290       207   Net unrealized gains (losses) on employee benefit plans     96       68       ( 156 )     ( 198 ) Other comprehensive (loss) income, before tax     ( 172 )     96       332       1,423   Income tax expense     ( 36 )     20       70       299   Other comprehensive (loss) income, net of tax     ( 136 )     76       262       1,124   Total comprehensive income   $ 8,130     $ 9,232     $ 24,638     $ 30,362     See Notes to Condensed Consolidated Financial Statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) THREE MONTHS ENDED September 30, 2020 and 2019                                       Accumulated                               Additional             Other           (Amounts in thousands,   Preferred     Common     Paid-in     Retained     Comprehensive           except share and per share data)   Stock     Stock     Capital     Earnings     Income (Loss)     Total                                                     Balance July 1, 2019   $ -     $ 15,633     $ 109,816     $ 208,618     $ ( 381 )   $ 333,686   Net income     -       -       -       9,156       -       9,156   Other comprehensive income     -       -       -       -       76       76   Common dividends declared -- $0.25 per share     -       -       -       ( 3,908 )     -       ( 3,908 ) Equity-based compensation expense     -       -       216       -       -       216   Common stock options exercised -- 3,407 shares     -       4       37       -       -       41   Issuance of common stock to 401(k) plan -- 3,010 shares     -       4       95       -       -       99   Repurchase of common shares -- 60,500 shares at $33.11 per share     -       ( 61 )     ( 1,942 )     -       -       ( 2,003 ) Balance September 30, 2019   $ -     $ 15,580     $ 108,222     $ 213,866     $ ( 305 )   $ 337,363                                                     Balance July 1, 2020   $ -     $ 17,710     $ 172,601     $ 226,627     $ ( 1,108 )   $ 415,830   Net income     -       -       -       8,266       -       8,266   Other comprehensive income     -       -       -       -       ( 136 )     ( 136 ) Common dividends declared -- $0.25 per share     -       -       -       ( 4,429 )     -       ( 4,429 ) Equity-based compensation expense     -       1       262       -       -       263   Issuance of common stock to 401(k) plan -- 6,237 shares     -       6       117       -       -       123   Balance September 30, 2020   $ -     $ 17,717     $ 172,980     $ 230,464     $ ( 1,244 )   $ 419,917     See Notes to Condensed Consolidated Financial Statements.   7 Table of Contents   CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) nine MONTHS ENDED September 30, 2020 and 2019                                       Accumulated                               Additional             Other           (Amounts in thousands,   Preferred     Common     Paid-in     Retained     Comprehensive           except share and per share data)   Stock     Stock     Capital     Earnings     Income (Loss)     Total                                                     Balance January 1, 2019   $ -     $ 16,007     $ 122,486     $ 195,793     $ ( 1,429 )   $ 332,857   Net income     -       -       -       29,238       -       29,238   Other comprehensive income     -       -       -       -       1,124       1,124   Common dividends declared -- $0.71 per share     -       -       -       ( 11,165 )     -       ( 11,165 ) Equity-based compensation expense     -       42       1,180       -       -       1,222   Common stock options exercised -- 7,752 shares     -       8       116       -       -       124   Issuance of common stock to 401(k) plan -- 9,663 shares     -       10       315       -       -       325   Repurchase of common shares -- 487,400 shares at $33.57 per share     -       ( 487 )     ( 15,875 )     -       -       ( 16,362 ) Balance September 30, 2019   $ -     $ 15,580     $ 108,222     $ 213,866     $ ( 305 )   $ 337,363                                                     Balance January 1, 2020   $ -     $ 18,377     $ 192,413     $ 219,535     $ ( 1,506 )   $ 428,819   Net income     -       -       -       24,376       -       24,376   Other comprehensive income     -       -       -       -       262       262   Common dividends declared -- $0.75 per share     -       -       -       ( 13,447 )     -       ( 13,447 ) Equity-based compensation expense     -       57       1,311       -       -       1,368   Issuance of common stock to 401(k) plan -- 18,148 shares     -       18       393       -       -       411   Repurchase of common shares -- 734,653 shares at $29.77 per share     -       ( 735 )     ( 21,137 )     -       -       ( 21,872 ) Balance September 30, 2020   $ -     $ 17,717     $ 172,980     $ 230,464     $ ( 1,244 )   $ 419,917     See Notes to Condensed Consolidated Financial Statements.   8 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)       Nine Months Ended       September 30,   (Amounts in thousands)   2020     2019   Operating activities                 Net income   $ 24,376     $ 29,238   Adjustments to reconcile net income to net cash provided by operating activities                 Provision for loan losses     12,034       3,480   Depreciation and amortization of premises and equipment     3,328       2,491   Amortization of premiums on investments, net     1,387       171   Amortization of FDIC indemnification asset, net     1,352       1,787   Amortization of intangible assets     1,086       746   Accretion on acquired loans     ( 5,221 )     ( 2,720 ) Equity-based compensation expense     1,368       1,222   Issuance of common stock to 401(k) plan     411       325   Loss (gain) on sale of premises and equipment, net     9       ( 104 ) Loss on sale of other real estate owned     299       791   (Gain) Loss on sale of securities     ( 385 )     43   (Increase) decrease in accrued interest receivable     ( 2,474 )     639   (Increase) decrease in other operating activities     ( 5,542 )     1,527   Net cash provided by operating activities     32,028       39,636   Investing activities                 Proceeds from sale of securities available for sale     51,027       13,897   Proceeds from maturities, prepayments, and calls of securities available for sale     29,614       29,555   Proceeds from maturities and calls of securities held to maturity     -       25,000   Payments to acquire securities available for sale     ( 2,553 )     ( 4,453 ) (Originations of) proceeds from repayment of loans, net     ( 78,663 )     78,036   (Purchase of) proceeds from FHLB stock, net     ( 12 )     129   Payments to the FDIC     ( 67 )     ( 137 ) Proceeds from sale of premises and equipment     1,435       1,038   Payments to acquire premises and equipment     ( 2,474 )     ( 6,225 ) Proceeds from sale of other real estate owned     1,997       2,917   Net cash provided by investing activities     304       139,757   Financing activities                 Increase in noninterest-bearing deposits, net     122,409       12,928   Increase (decrease) in interest-bearing deposits, net     39,918       ( 31,826 ) Repayments of securities sold under agreements to repurchase, net     ( 645 )     ( 27,507 ) Repayments of FHLB and other borrowings, net     ( 40 )     -   Proceeds from stock options exercised     -       124   Payments for repurchase of common stock     ( 21,872 )     ( 16,362 ) Payments of common dividends     ( 13,447 )     ( 11,165 ) Net cash provided by (used in) financing activities     126,323       ( 73,808 ) Net increase in cash and cash equivalents     158,655       105,585   Cash and cash equivalents at beginning of period     217,009       76,873   Cash and cash equivalents at end of period   $ 375,664     $ 182,458                     Supplemental disclosure -- cash flow information                 Cash paid for interest   $ 4,334     $ 4,308   Cash paid for income taxes     5,607       7,083                     Supplemental transactions -- noncash items                 Transfer of loans to other real estate owned     695       2,883   Loans originated to finance other real estate owned     265       484   Decrease in accumulated other comprehensive loss     262       1,124     See Notes to Condensed Consolidated Financial Statements.       9 Table of Contents   NOTES TO COND ENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)     Note 1. Basis of Presentation   General   First Community Bankshares, Inc. (the “Company”), a financial holding company, was founded in 1989 and incorporated under the laws of the Commonwealth of Virginia in 2018. The Company is the successor to First Community Bancshares, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Reincorporation and Merger, the sole purpose of which was to change the Company’s state of incorporation from Nevada to Virginia. The Company’s principal executive office is located at One Community Place, Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank operates as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, People’s Community Bank, a Division of First Community Bank, in Tennessee. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.   Principles of Consolidation   The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.   These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2019 (the “ 2019 Form 10 -K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020. The condensed consolidated balance sheet as of December 31, 2019 , has been derived from the audited consolidated financial statements.   Reclassifications   Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.   Use of Estimates   Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.   Significant Accounting Policies   The Company’s significant accounting policies are included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2019 Form 10 -K.   Risks and Uncertainties   Recent COVID- 19 Virus Developments –   During the first nine months of 2020 , government reaction to the novel coronavirus (“COVID- 19” ) pandemic significantly disrupted local, national, and global economies and adversely impacted a broad range of industries, including banking and other financial services.   10 Table of Contents   Company Response to COVID- 19 –   As COVID- 19 events unfolded during the  first nine months of 2020 , the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of its operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In particular, the Company took the following actions, among others:     • Implemented its board-approved pandemic business continuity plan   • Appointed an internal pandemic preparedness task force comprised of the Company’s management to address both operational and financial risks posed by COVID- 19   • Modified branch operations:   o Branch lobbies remain available, but on a limited appointment-only basis   o Most transactions conducted via drive-throughs   o Increased emphasis on digital banking platforms   • Implemented physical separation of critical operational workforce for Bank and non-Bank financial services subsidiaries   • Expanded paid time off and health benefits for employees   • Implemented work from home strategy for appropriate staff:   ○ Many of the Company's non-branch, operational essential employees remain working remotely   o Geographically separated work locations of Bank and Company CEO’s and most other executive management team members   o Suspended non-essential work-related travel   • Implemented a pay differential for employees continuing to work at branch or back office locations which ended May 31, 2020   • Adopted self-monitoring and quarantining procedures   • Implemented enhanced facility cleaning protocols   • Redeployed staff to critical customer service operations to expedite loan payment deferral requests, Paycheck Protection Program lending efforts, and other operations   Potential Effects of COVID- 19 –    The adverse impact of COVID- 19 to the economy has impaired some of the Company’s customers’ ability to fulfill their financial obligations to the Company, reducing interest income on loans or increasing loan losses. In keeping with Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the Company continues to work with COVID- 19 affected borrowers to defer loan payments, interest, and fees. Through September 30, 2020 , the Company has modified or deferred payments on a total of 3,362 loans totaling $ 426.45 million in principal.   As of September 30, 2020, commercial and consumer loans currently in deferral decreased to $ 102.54 million and $ 13.09 million, respectively.  Included in the September 30, 2020  deferral amounts are re-deferrals for approximately $ 69.32 million commercial loans and approximately $ 5.09 million in consumer mortgage and installment  loans.   Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. At this time, the Company is unable to project the materiality of any such impact.   The general economic slowdown caused by COVID- 19 in local economies in communities served by the Company has affected loan demand and consumption of financial services, generally, reducing interest income, service fees, and the demand for other profitable financial services provided by the Company.   In addition to the general impact of COVID- 19, certain provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as other legislative and regulatory actions may materially impact the Company. The Company is participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist its customers. Per the terms of the program, PPP loans have a two -year term, earn interest at 1%, are fully guaranteed by the SBA, and are partially or totally forgivable if administered by the borrower according to guidance provided by the SBA. The Company believes the majority of these loans have the potential to be forgiven by the SBA if administered in accordance with the terms of the program. Through September 30, 2020  the Company processed  803 loans with original principal balances totaling $ 62.74 million through the PPP.   COVID- 19 could cause a sustained decline in the Company’s stock price or the occurrence of an event that could, under certain circumstances, create the impairment of goodwill. In the event the Company deems all or a portion of its goodwill to be impaired, the Company could record a non-cash charge to earnings for the amount of such impairment. Such a charge would have no impact on tangible or regulatory capital.   11 Table of Contents   To date, the Company has identified no material, unmitigated operational or internal control challenges or risks and anticipates no significant challenges to its ability to maintain systems and controls as a result of the actions taken to prevent the spread of COVID- 19. In addition, the Company currently faces no material resource constraints arising due to implementation of the business continuity plan.   It is impossible to predict the full extent to which COVID- 19 and the resulting measures to prevent its spread will affect the Company’s operations. Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of COVID- 19, the Company’s management believes its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.   Recent Accounting Standards   Standards Adopted in 2020   In August 2018, the FASB issued ASU 2018 - 13, “Fair Value Measurement (Topic 820 ): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements . This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.   In March 2020, the FASB issued ASU 2020 - 04, “Reference Rate Reform (Topic 848 ) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary”. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR (London Inter-bank Offered Rate) and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. With global capital markets expected to move away from LIBOR and other inter-bank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective March 12, 2020 through December 31, 2022. The Company adopted this ASU on March 12, 2020. The update is not expected to have any material effect on the Company’s financial statements when and as changes are made to various assets and liabilities for reference rates.   Standards Not Yet Adopted   In June 2016, the FASB issued ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” This ASU purportedly requires earlier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU also requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It further requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The CARES Act was passed by the United States Congress and signed into law by the President of the United States at the end of March 2020. The CARES Act states that “Notwithstanding any other provision of law, no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016 - 13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses, during the period beginning on March 27, 2020 and ending on the earlier of: ( 1 ) the date on which the national emergency concerning the novel coronavirus disease (COVID- 19 ) outbreak declared by the President on March 13, 2020 under the National Emergencies Act ( 50 U.S.C. 1601 et seq.) terminates; or ( 2 ) December 31, 2020.  The Company has elected to “not comply with” ASU 2016 - 13 for the period specified in the CARES Act and any subsequent controlling legislation or regulation. In preparation for expiration of the period specified in the CARES Act, the Company has selected loss estimation methodologies for its allowance for credit losses, performed testing on the chosen methodologies, and determined a qualitative adjustment methodology that aligns with the requirements of the new standard. The Company has also subjected the model to third party validation. Based upon the aforesaid preparatory measures, upon expiration of the period specified in the CARES Act and any subsequent controlling legislation or regulation, the Company anticipates recording a cumulative-effect adjustment to retained earnings of approximately $ 5.61 million in connection with adoption of the new standard, consisting of tax-effected increases in the allowance for credit losses associated with the Company’s legacy loan portfolio prior to the addition of Highlands Bankshares, Inc. and the portfolio of purchased performing loans associated with Highlands of approximately $ 2.89 million and $ 4.44 million, respectively. The Company also anticipates making an approximate $ 7.04 million adjustment as of January 1, 2020, to the opening balance of the allowance for credit losses associated with the required gross-up of purchased credit deteriorated loans from the Highlands transaction.   In December 2019, the FASB issued ASU 2019 - 12, “Income Taxes (Topic 740 ), Simplifying the Accounting for Income Taxes”. This ASU simplifies the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The update is not expected to have any material effect on the Company’s financial statements.   12 Table of Contents   The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements.     Note 2. Acquisitions   Highlands Bankshares, Inc.   On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands”) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock. The transaction was consummated the close of business December 31, 2019 . The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $ 86.65 million.   The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.       As recorded by     Fair Value       As recorded by   (Amounts in thousands)   Highlands     Adjustments       the Company   Assets                           Cash and cash equivalents   $ 25,879     $ -       $ 25,879   Securities available for sale     53,732       -         53,732   Loans held for sale     263       -         263   Loans held for investment, net of allowance and mark     438,896       ( 11,429 ) ( a )     427,467   Premises and equipment     16,722       ( 2,317 ) ( b )     14,405   Other real estate     1,963       -         1,963   Other assets     25,556       2,250   ( c )     27,806   Intangible assets     -       4,490   ( d )     4,490   Total assets   $ 563,011     $ ( 7,006 )     $ 556,005                               LIABILITIES                           Deposits:                           Noninterest-bearing   $ 155,714     $ -       $ 155,714   Interest-bearing     346,028       1,261   ( e )     347,289   Total deposits     501,742       1,261         503,003   Long term debt     40       -         40   Other liabilities     2,938       198   ( f )     3,136   Total liabilities     504,720       1,459         506,179   Net identifiable assets acquired over (under) liabilities assumed     58,291       ( 8,465 )       49,826   Goodwill     -       36,821         36,821   Net assets acquired over liabilities assumed   $ 58,291     $ 28,356       $ 86,647                               Consideration:                           First Community Bankshares, Inc. common                       2,792,729   Purchase price per share of the Company's common stock                     $ 31.02   Fair value of Company common stock issued                       86,631   Cash paid for fractional shares                       16   Fair Value of total consideration transferred                     $ 86,647     Explanation of fair value adjustments: ( a ) - Adjustment reflects the fair value adjustments of $( 14.70 ) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses ("ALLL") and deferred loan fees of $ 3.27 million recorded by Highlands. ( b ) - Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment. ( c ) - Adjustment to record the deferred tax asset related to the fair value adjustments. ( d ) - Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts. ( e ) - Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio. ( f ) - Adjustment reflects the fair value adjustment for death benefits payable of $ 320 thousand, the fair value adjustment for lease liability of $( 37 ) thousand and the fair value adjustment to the reserve for unfunded commitments of $( 85 ) thousand.     Comparative and Pro Forma Financial Information for Acquisitions   As the merger date was the close of business, December 31, 2019 , Highlands had no earnings contribution to the September 30, 2019 consolidated statement of income for the Company.   13 Table of Contents   The following table discloses the impact of the merger. The table also presents certain pro forma information as if Highlands had been acquired on January 1, 2019.   These results combine the historical results of Highlands in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2019.   Residual merger-related costs of $ 1.89 million incurred by the Company during the nine months ended September 30, 2020 , have been excluded from the proforma information below. There were no residual merger expenses incurred for the third quarter of 2020 . No adjustments have been made to the pro formas to eliminate the provision for loan losses for the quarter and year ended September 30, 2019 of Highlands in the amounts of $ 548 thousand and $ 1.49 million, respectively.  The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisitions which are not reflected in the pro forma amounts below:       ProForma       Three months ended September 30,     Nine Months Ended September 30,   (Dollars in thousands)   2020     2019     2020     2019   Total revenues (net interest income plus noninterest income)   $ 34,472     $ 36,627     $ 102,955     $ 111,615   Net adjusted income available to the common shareholder   $ 8,266     $ 10,225     $ 25,864     $ 33,063       Note 3 . Debt Securities   The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:       September 30, 2020       Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value   (Amounts in thousands)                                 U.S. Agency securities   $ 576     $ -     $ ( 4 )   $ 572   Municipal securities     55,036       631       -       55,667   Mortgage-backed Agency securities     33,776       999       ( 42 )     34,733   Total   $ 89,388     $ 1,630     $ ( 46 )   $ 90,972         December 31, 2019       Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value   (Amounts in thousands)                                 U.S. Agency securities   $ 5,038     $ -     $ ( 4 )   $ 5,034   Municipal securities     85,992       886       -       86,878   Mortgage-backed Agency securities     77,448       380       ( 166 )     77,662   Total   $ 168,478     $ 1,266     $ ( 170 )   $ 169,574     The following table presents the amortized cost and aggregate fair value of available-for-sale debt securities by contractual maturity, as of the date indicated. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.       September 30, 2020       Amortized           (Amounts in thousands)   Cost     Fair Value   Available-for-sale debt securities                 Due within one year   $ -     $ -   Due after one year but within five years     28,495       28,749   Due after five years but within ten years     27,117       27,490   Due after ten years     -       -         55,612       56,239   Mortgage-backed securities     33,776       34,733   Total debt securities available for sale   $ 89,388     $ 90,972     14 Table of Contents   The following tables present the fair values and unrealized losses for available-for-sale debt securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated:       September 30, 2020       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   $ -     $ -     $ 565     $ ( 4 )   $ 565     $ ( 4 ) Mortgage-backed Agency securities     3,405       ( 42 )     -       -       3,405       ( 42 ) Total   $ 3,405     $ ( 42 )   $ 565     $ ( 4 )   $ 3,970     $ ( 46 )       December 31, 2019       Less than 12 Months     12 Months or Longer     Total       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses   (Amounts in thousands)                                                 U.S. Agency securities   $ 975     $ ( 4 )   $ -     $ -     $ 975     $ ( 4 ) Mortgage-backed Agency securities     8,020       ( 48 )     8,319       ( 118 )     16,339       ( 166 ) Total   $ 8,995     $ ( 52 )   $ 8,319     $ ( 118 )   $ 17,314     $ ( 170 )   There were  3 individual debt securities in an unrealized loss position as of September 30, 2020 , and the combined depreciation in value represented  0.05 % of the debt securities portfolio. There were 17 individual debt securities in an unrealized loss position as of December 31, 2019 , and their combined depreciation in value represented 0.10 % of the debt securities portfolio.   The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”). The initial indicator of OTTI for debt securities is a decline in fair value below book value and the severity and duration of the decline. The credit-related OTTI is recognized as a charge to noninterest income and the noncredit-related OTTI is recognized in other comprehensive income (“OCI”). During the nine months ended September 30, 2020 and 2019 , the Company incurred no OTTI charges on debt securities. Temporary impairment on debt securities is primarily related to changes in benchmark interest rates, changes in pricing in the credit markets, and other current economic factors.   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,       2020     2019     2020     2019   (Amounts in thousands)                                 Gross realized gains   $ -       -     $ 419     $ 67   Gross realized losses     -       -       ( 34 )     ( 110 ) Net Gain (Loss) on sale of securities   $ -     $ -     $ 385     $ ( 43 )   The carrying amount of securities pledged for various purposes totaled $ 36.17 million as of September 30, 2020 , and $ 27.87 million as of December 31, 2019 .     Note 4 . Loans   The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are those loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss share agreements. Customer overdrafts reclassified as loans totaled $ 1.67 million as of September 30, 2020 , and $ 2.20 million as of December 31, 2019 . Deferred loan fees, net of loan costs, totaled $ 7.47 million as of September 30, 2020 , and $ 4.60 million as of December 31, 2019 . For information about off-balance sheet financing, see Note 15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.   15 Table of Contents   The following table presents loans, net of unearned income, within the non-covered portfolio by loan class, as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)   Amount     Percent     Amount     Percent   Non-covered loans held for investment                                 Commercial loans                                 Construction, development, and other land   $ 46,785       2.13 %   $ 48,659       2.30 % Commercial and industrial     179,714       8.19 %     142,962       6.76 % Multi-family residential     105,647       4.81 %     121,840       5.76 % Single family non-owner occupied     189,265       8.62 %     163,181       7.72 % Non-farm, non-residential     748,815       34.11 %     727,261       34.39 % Agricultural     10,362       0.47 %     11,756       0.56 % Farmland     22,973       1.05 %     23,155       1.10 % Total commercial loans     1,303,561       59.38 %     1,238,814       58.59 % Consumer real estate loans                                 Home equity lines     94,056       4.29 %     110,078       5.21 % Single family owner occupied     644,598       29.37 %     620,697       29.35 % Owner occupied construction     17,460       0.79 %     17,241       0.82 % Total consumer real estate loans     756,114       34.45 %     748,016       35.38 % Consumer and other loans                                 Consumer loans     118,738       5.41 %     110,027       5.20 % Other     5,838       0.27 %     4,742       0.22 % Total consumer and other loans     124,576       5.68 %     114,769       5.42 % Total non-covered loans     2,184,251       99.51 %     2,101,599       99.39 % Total covered loans     10,744       0.49 %     12,861       0.61 % Total loans held for investment, net of unearned income   $ 2,194,995       100.00 %   $ 2,114,460       100.00 %                                   Loans held for sale   $ -             $ 263             Commercial and industrial loan balances grew significantly compared to December 31, 2019 . The Company began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender during the  second quarter of 2020 . At September 30, 2020 , the PPP loans had a current balance of $ 61.00 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $ 2.30 million at September 30, 2020 , were also recorded. During the third quarter of 2020 , the Company recorded amortization of net deferred loan origination fees of $ 287 thousand on PPP loans and $ 479 thousand in amortization for the nine month period. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.   The following table presents the covered loan portfolio, by loan class, as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)                 Covered loans                 Commercial loans                 Construction, development, and other land   $ 27     $ 28   Single family non-owner occupied     188       199   Non-farm, non-residential     -       3   Total commercial loans     215       230   Consumer real estate loans                 Home equity lines     8,079       9,853   Single family owner occupied     2,450       2,778   Total consumer real estate loans     10,529       12,631   Total covered loans   $ 10,744     $ 12,861     16 Table of Contents   The Company identifies certain purchased loans as impaired when fair values are established at acquisition and groups those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. Effective January 1, 2020 , the Company consolidated the insignificant PCI loans and discounts for Peoples, Waccamaw, and other acquired loans into the core loan portfolio. The only remaining PCI pools are those loans acquired in the Highlands acquisition on December 31, 2019 .   The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:       September 30, 2020     December 31, 2019               Unpaid Principal             Unpaid Principal   (Amounts in thousands)   Recorded Investment     Balance     Recorded Investment     Balance   PCI Loans, by acquisition                                 Peoples   $ -     $ -     $ 5,071     $ 6,431   Waccamaw     -       -       2,708       14,277   Highlands     43,527       53,295       53,116       64,096   Other acquired     -       -       352       378   Total PCI Loans   $ 43,527     $ 53,295     $ 61,247     $ 85,182     The following table presents the changes in the accretable yield on PCI loans, by acquisition, during the periods indicated:       Peoples     Waccamaw     Highlands     Total   (Amounts in thousands)                                 Balance January 1, 2019   $ 2,590     $ 14,639     $ -     $ 17,229   Accretion     ( 734 )     ( 2,761 )     -       ( 3,495 ) Reclassifications (to) from nonaccretable difference (1)     14       1,200       -       1,214   Other changes, net     167       141       -       308   Balance September 30, 2019   $ 2,037     $ 13,219     $ -     $ 15,256                                     Balance January 1, 2020   $ 1,890     $ 12,574     $ 8,152     $ 22,616   Accretion     -       -       ( 1,952 )     ( 1,952 ) Reclassifications from nonaccretable difference (1)     -       -       -       -   Other changes, net     ( 1,890 )     ( 12,574 )     -       ( 14,464 ) Balance September 30, 2020   $ -     $ -     $ 6,200     $ 6,200     ( 1 ) Represents changes attributable to expected loss assumptions     Note 5 . Credit Quality   The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:   ● Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.   ● Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.   ● Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.   ● Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.   ● Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.   17 Table of Contents   The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately.       September 30, 2020               Special                                   (Amounts in thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total   Non-covered loans                                                 Commercial loans                                                 Construction, development, and other land   $ 35,889     $ 8,419     $ 2,477     $ -     $ -     $ 46,785   Commercial and industrial     153,153       19,369       7,192       -       -       179,714   Multi-family residential     81,528       20,937       3,182       -       -       105,647   Single family non-owner occupied     143,235       32,649       13,368       13       -       189,265   Non-farm, non-residential     507,094       201,975       39,746       -       -       748,815   Agricultural     6,804       3,216       342       -       -       10,362   Farmland     13,281       5,139       4,553       -       -       22,973   Consumer real estate loans                                             -   Home equity lines     89,729       1,317       3,010       -       -       94,056   Single family owner occupied     607,616       3,815       33,167       -       -       644,598   Owner occupied construction     16,684       202       574       -       -       17,460   Consumer and other loans                                             -   Consumer loans     116,786       197       1,755       -       -       118,738   Other     5,838       -       -       -       -       5,838   Total non-covered loans     1,777,637       297,235       109,366       13       -       2,184,251   Covered loans                                                 Commercial loans                                                 Construction, development, and other land     -       27       -       -       -       27   Single family non-owner occupied     155       33       -       -       -       188   Consumer real estate loans                                             -   Home equity lines     7,365       386       328       -       -       8,079   Single family owner occupied     1,832       269       349       -       -       2,450   Total covered loans     9,352       715       677       -       -       10,744   Total loans   $ 1,786,989     $ 297,950     $ 110,043     $ 13     $ -     $ 2,194,995     18 Table of Contents       December 31, 2019               Special                                   (Amounts in thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total   Non-covered loans                                                 Commercial loans                                                 Construction, development, and other land   $ 45,781     $ 2,079     $ 799     $ -     $ -     $ 48,659   Commercial and industrial     135,651       4,327       2,984       -       -       142,962   Multi-family residential     118,045       2,468       1,327       -       -       121,840   Single family non-owner occupied     149,916       7,489       5,776       -       -       163,181   Non-farm, non-residential     683,481       27,160       16,620       -       -       727,261   Agricultural     11,299       122       335       -       -       11,756   Farmland     17,609       4,107       1,439       -       -       23,155   Consumer real estate loans                                                 Home equity lines     106,246       2,014       1,818       -       -       110,078   Single family owner occupied     580,580       17,001       23,116       -       -       620,697   Owner occupied construction     16,341       179       721       -       -       17,241   Consumer and other loans                                                 Consumer loans     108,065       1,341       621       -       -       110,027   Other     4,742       -       -       -       -       4,742   Total non-covered loans     1,977,756       68,287       55,556       -       -       2,101,599   Covered loans                                                 Commercial loans                                                 Construction, development, and other land     -       28       -       -       -       28   Single family non-owner occupied     199       -       -       -       -       199   Non-farm, non-residential     -       -       3       -       -       3   Consumer real estate loans                                                 Home equity lines     7,177       2,327       349       -       -       9,853   Single family owner occupied     2,111       275       392       -       -       2,778   Total covered loans     9,487       2,630       744       -       -       12,861   Total loans   $ 1,987,243     $ 70,917     $ 56,300     $ -     $ -     $ 2,114,460     The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed impaired.   19 Table of Contents   The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the dates indicated:       September 30, 2020     December 31, 2019               Unpaid                     Unpaid               Recorded     Principal     Related     Recorded     Principal     Related   (Amounts in thousands)   Investment     Balance     Allowance     Investment     Balance     Allowance   Impaired loans with no related allowance                                                 Commercial loans                                                 Construction, development, and other land   $ 869     $ 1,097     $ -     $ 552     $ 768     $ -   Commercial and industrial     3,242       3,302       -       576       599       -   Multi-family residential     923       1,009       -       1,254       1,661       -   Single family non-owner occupied     5,011       5,663       -       2,652       3,176       -   Non-farm, non-residential     7,712       8,362       -       4,158       4,762       -   Agricultural     267       275       -       158       164       -   Farmland     1,517       1,591       -       1,437       1,500       -   Consumer real estate loans                                                 Home equity lines     1,540       1,697       -       1,372       1,477       -   Single family owner occupied     16,100       18,467       -       15,588       17,835       -   Owner occupied construction     503       511       -       648       648       -   Consumer and other loans                                                 Consumer loans     413       424       -       290       294       -   Total impaired loans with no allowance     38,097       42,398       -       28,685       32,884       -                                                     Impaired loans with a related allowance                                                 Commercial loans                                                 Commercial and industrial     -       -       -       -       -       -   Multi-family residential     944       1,278       222       -       -       -   Single family non-owner occupied     -       -       -       -       -       -   Non-farm, non-residential     1,779       1,970       565       1,241       1,227       292   Farmland     -       -       -       -       -       -   Consumer real estate loans                                                 Home equity lines     -       -       -       -       -       -   Single family owner occupied     1,418       1,522       239       1,246       1,246       353   Consumer and other loans                                                 Consumer loans     -       -       -       -       -       -   Total impaired loans with an allowance     4,141       4,770       1,026       2,487       2,473       645   Total impaired loans (1)   $ 42,238     $ 47,168     $ 1,026     $ 31,172     $ 35,357     $ 645     ( 1 ) Total recorded investment of impaired loans include loans totaling $ 33.48 million as of September 30, 2020 , and $ 24.64 million as of December 31, 2019 , that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment.   20 Table of Contents   The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:       Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019               Average             Average             Average             Average       Interest Income     Recorded     Interest Income     Recorded     Interest Income     Recorded     Interest Income     Recorded   (Amounts in thousands)   Recognized     Investment     Recognized     Investment     Recognized     Investment     Recognized     Investment   Impaired loans with no related allowance:                                                                 Commercial loans                                                                 Construction, development, and other land   $ 6     $ 882     $ 5     $ 570     $ 21     $ 1,021     $ 17     $ 720   Commercial and industrial     46       3,315       2       66       135       2,845       7       277   Multi-family residential     9       967       5       1,269       38       685       21       1,385   Single family non-owner occupied     54       5,090       41       2,958       126       4,798       97       3,063   Non-farm, non-residential     79       7,786       20       4,590       206       7,115       84       4,832   Agricultural     4       272       9       223       7       247       11       108   Farmland     12       1,526       19       1,536       48       1,640       45       1,474   Consumer real estate loans                                                                 Home equity lines     13       1,588       17       1,463       29       1,569       31       1,452   Single family owner occupied     120       16,328       176       16,593       410       17,044       454       16,123   Owner occupied construction     2       542       3       224       12       470       7       223   Consumer and other loans                                                                 Consumer loans     8       420       6       319       19       445       10       187   Total impaired loans with no related allowance     353       38,716       303       29,811       1,051       37,879       784       29,844                                                                     Impaired loans with a related allowance:                                                                 Commercial loans                                                                 Construction, development, and other land     -       -       -       -       -       -       -       -   Commercial and industrial     -       -       -       -       -       -       -       -   Multi-family residential     -       944       -       -       -       943       -       -   Single family non-owner occupied     -       -       -       -       -       -       -       -   Non-farm, non-residential     8       1,789       20       1,254       22       1,670       28       602   Farmland     -       -       -       -       -       -       -       -   Consumer real estate loans                                                                 Home equity lines     -       -       -       -       -       -       -       -   Single family owner occupied     3       1,423       ( 30 )     1,253       27       1,480       35       2,177   Owner occupied construction     -       -       -       -       -       -       -       -   Total impaired loans with a related allowance     11       4,156       ( 10 )     2,507       49       4,093       63       2,779   Total impaired loans   $ 364     $ 42,872     $ 293     $ 32,318     $ 1,100     $ 41,972     $ 847     $ 32,623     21 Table of Contents     The Company generally places a loan on nonaccrual status when it is 90 days or more past due. PCI loans are generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. The following table presents nonaccrual loans, by loan class, as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)   Non-covered     Covered     Total     Non-covered     Covered     Total   Commercial loans                                                 Construction, development, and other land   $ 285     $ -     $ 285     $ 211     $ -     $ 211   Commercial and industrial     1,765       -       1,765       530       -       530   Multi-family residential     1,536       -       1,536       1,144       -       1,144   Single family non-owner occupied     3,289       -       3,289       1,286       -       1,286   Non-farm, non-residential     6,612       -       6,612       3,400       -       3,400   Agricultural     267       -       267       158       -       158   Farmland     814       -       814       713       -       713   Consumer real estate loans                                                 Home equity lines     951       313       1,264       753       220       973   Single family owner occupied     8,012       20       8,032       7,259       24       7,283   Owner occupied construction     536       -       536       428       -       428   Consumer and other loans                                                 Consumer loans     357       -       357       231       -       231   Total nonaccrual loans   $ 24,424     $ 333     $ 24,757     $ 16,113     $ 244     $ 16,357     22 Table of Contents   The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $ 43 thousand as of September 30, 2020 , compared to $ 144 thousand as of December 31, 2019 .       September 30, 2020       30 - 59 Days     60 - 89 Days     90+ Days     Total     Current     Total   (Amounts in thousands)   Past Due     Past Due     Past Due     Past Due     Loans     Loans   Non-covered loans                                                 Commercial loans                                                 Construction, development, and other land     $ -       $ -       $ 285       $ 285       $ 46,500       $ 46,785   Commercial and industrial     1,280       163       1,061       2,504       177,210       179,714   Multi-family residential     810       334       1,202       2,346       103,301       105,647   Single family non-owner occupied     842       636       2,255       3,733       185,532       189,265   Non-farm, non-residential     608       1,856       3,619       6,083       742,732       748,815   Agricultural     1       16       84       101       10,261       10,362   Farmland     125       -       737       862       22,111       22,973   Consumer real estate loans                                                 Home equity lines     509       248       443       1,200       92,856       94,056   Single family owner occupied     2,894       1,286       3,533       7,713       636,885       644,598   Owner occupied construction     71       91       394       556       16,904       17,460   Consumer and other loans                                                 Consumer loans     1,679       436       187       2,302       116,436       118,738   Other     -       -       -       -       5,838       5,838   Total non-covered loans     8,819       5,066       13,800       27,685       2,156,566       2,184,251   Covered loans                                                 Commercial loans                                                 Construction, development, and other land     -       -       -       -       27       27   Single family non-owner occupied     -       -       -       -       188       188   Non-farm, non-residential     -       -       -       -       -       -   Consumer real estate loans                                                 Home equity lines     123       -       263       386       7,693       8,079   Single family owner occupied     20       -       -       20       2,430       2,450   Total covered loans     143       -       263       406       10,338       10,744   Total loans     $ 8,962       $ 5,066       $ 14,063       $ 28,091       $ 2,166,904       $ 2,194,995     23 Table of Contents       December 31, 2019       30 - 59 Days     60 - 89 Days     90+ Days     Total     Current     Total   (Amounts in thousands)   Past Due     Past Due     Past Due     Past Due     Loans     Loans   Non-covered loans                                                 Commercial loans                                                 Construction, development, and other land   $ 63     $ 65     $ 211     $ 339     $ 48,320     $ 48,659   Commercial and industrial     1,913       238       507       2,658       140,304       142,962   Multi-family residential     375       -       1,144       1,519       120,321       121,840   Single family non-owner occupied     754       267       661       1,682       161,499       163,181   Non-farm, non-residential     917       1,949       3,027       5,893       721,368       727,261   Agricultural     86       164       -       250       11,506       11,756   Farmland     856       349       664       1,869       21,286       23,155   Consumer real estate loans                                                 Home equity lines     1,436       165       503       2,104       107,974       110,078   Single family owner occupied     7,728       2,390       3,766       13,884       606,813       620,697   Owner occupied construction     207       -       428       635       16,606       17,241   Consumer and other loans                                                 Consumer loans     1,735       439       202       2,376       107,651       110,027   Other     22       -       -       22       4,720       4,742   Total non-covered loans     16,092       6,026       11,113       33,231       2,068,368       2,101,599   Covered loans                                                 Commercial loans                                                 Construction, development, and other land     -       -       -       -       28       28   Single family non-owner occupied     -       -       -       -       199       199   Non-farm, non-residential     -       -       -       -       3       3   Consumer real estate loans                                                 Home equity lines     144       28       -       172       9,681       9,853   Single family owner occupied     -       50       -       50       2,728       2,778   Total covered loans     144       78       -       222       12,639       12,861   Total loans   $ 16,236     $ 6,104     $ 11,113     $ 33,453     $ 2,081,007     $ 2,114,460     The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Restructured loans in excess of $ 500 thousand are evaluated for a specific reserve based on either the collateral or cash flow method, whichever is most applicable. Restructured loans under $500 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain trouble debt restructurings ("TDRs") are classified as nonperforming at the time of restructuring and are returned to performing status after  six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. PCI loans are generally not considered TDRs as long as the loans remain in the assigned loan pool. No covered loans were recorded as TDRs as of September 30, 2020 , or December 31, 2019 .   The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID- 19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID- 19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019 . The Company elected to adopt this provision of the CARES Act.   Through September 30, 2020 , the Company had modified a total of 3,362 loans with principal balances totaling $ 426.45 million related to COVID- 19 relief.  Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act.  The Company’s policy is to downgrade commercial loans modified for COVID- 19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.  As of September, 30, 2020, current commercial and consumer loan deferrals were $ 102.54 million and $ 13.09 million, respectively.   24 Table of Contents   The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)   Nonaccrual(1)     Accruing     Total     Nonaccrual(1)     Accruing     Total   Commercial loans                                                 Construction, development, and other land   $ -     $ -     $ -     $ -     $ -     $ -   Commercial and industrial     -       1,342       1,342       -       -       -   Single family non-owner occupied     538       1,274       1,812       552       595       1,147   Non-farm, non-residential     -       2,419       2,419       -       307       307   Consumer real estate loans                                                 Home equity lines     -       81       81       -       115       115   Single family owner occupied     1,535       5,573       7,108       1,790       5,305       7,095   Owner occupied construction     -       217       217       -       221       221   Consumer and other loans                                                 Consumer loans     -       30       30       -       32       32   Total TDRs   $ 2,073     $ 10,936     $ 13,009     $ 2,342     $ 6,575     $ 8,917                                                     Allowance for loan losses related to TDRs                   $ 347                     $ 353     ( 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,       2020     2019     2020     2019   (Amounts in thousands)                                 Interest income recognized   $ 122     $ 56     $ 372     $ 203       The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:       Three Months Ended September 30,       2020     2019                       Post-modification                     Post-modification       Total     Pre-modification     Recorded     Total     Pre-modification     Recorded   (Amounts in thousands)   Contracts     Recorded Investment     Investment(1)     Contracts     Recorded Investment     Investment(1)   Below market interest rate and extended payment term                                                 Single family non-owner occupied     -       -       -       -       -       -   Single family owner occupied                             -       -       -   Total below market interest rate and extended payment term     -       -       -       -       -       -   Payment deferral                                                 Commercial and industrial     -       -       -       -       -       -   Non-farm, non-residential     -       -       -       -       -       -   Single family owner occupied     -       -       -       1       33       29   Total principal deferral     -       -       -       1       33       29   Total     -     $ -     $ -       1     $ 33     $ 29     ( 1 ) Represents the loan balance immediately following modification   25 Table of Contents       Nine Months Ended September 30,       2020     2019                       Post-modification                     Post-modification       Total     Pre-modification     Recorded     Total     Pre-modification     Recorded   (Amounts in thousands)   Contracts     Recorded Investment     Investment(1)     Contracts     Recorded Investment     Investment(1)   Below market interest rate Single family non-owner occupied     1       50       50       -     $ -     $ -   Total below market interest rate     1       50       50       -       -       -   Below market interest rate and extended payment term                                                 Single family non-owner occupied     -       -       -       2       221       218   Single family owner occupied     -       -       -       2       488       480   Total below market interest rate and extended payment term     -       -       -       4       709       698   Payment deferral                                                 Construction, development, and other land     1       63       63       -       -       -   Commercial and industrial     3       1,708       1,708       -       -       -   Single family non-owner occupied     1       529       529       -       -       -   Non-farm, non-residential     3       2,115       2,115       -       -       -   Single family owner occupied     3       742       726       1       33       29   Home equity lines     -       -       -       -       -       -   Total principal deferral     11       5,157       5,141       1       33       29   Total     12     $ 5,207     $ 5,191       5     $ 742     $ 727     ( 1 ) Represents the loan balance immediately following modification     Payment defaults on loans modified as TDRs restructured within the previous 12 months as of September 30, 2020 , were for one loan in the amount of $ 100 thousand; there were none in 2019 .   The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)                 OREO   $ 2,103     $ 3,969                     OREO secured by residential real estate   $ 767     $ 2,232   Residential real estate loans in the foreclosure process (1)     2,938       1,539     ( 1 ) 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 Loan Losses   The following tables present the changes in the allowance for loan losses, by loan segment, during the periods indicated. There was no allowance related to PCI loans as of September 30, 2020 .       Three Months Ended September 30, 2020               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Beginning balance   $ 13,909     $ 7,294     $ 2,555     $ 23,758   Provision for (recovery of) loan losses charged to operations     1,972       1,975       756       4,703   Charge-offs     ( 501 )     ( 188 )     ( 874 )     ( 1,563 ) Recoveries     169       38       172       379   Net charge-offs     ( 332 )     ( 150 )     ( 702 )     ( 1,184 ) Ending balance   $ 15,549     $ 9,119     $ 2,609     $ 27,277     26 Table of Contents       Three Months Ended September 30, 2019               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Beginning balance   $ 10,215     $ 6,881     $ 1,444     $ 18,540   Provision for (Recovery of) loan losses charged to operations     203       ( 338 )     810       675   Charge-offs     ( 159 )     ( 253 )     ( 552 )     ( 964 ) Recoveries     40       96       106       242   Net (charge-offs) recoveries     ( 119 )     ( 157 )     ( 446 )     ( 722 ) Ending balance   $ 10,299     $ 6,386     $ 1,808     $ 18,493         Nine Months Ended September 30, 2020               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Beginning balance   $ 10,235     $ 6,325     $ 1,865     $ 18,425   Provision for loan losses charged to operations     6,577       2,899       2,558       12,034   Charge-offs     ( 1,647 )     ( 430 )     ( 2,352 )     ( 4,429 ) Recoveries     384       325       538       1,247   Net (charge-offs) recoveries     ( 1,263 )     ( 105 )     ( 1,814 )     ( 3,182 ) Ending balance   $ 15,549     $ 9,119     $ 2,609     $ 27,277         Nine Months Ended September 30, 2019               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Beginning balance   $ 10,499     $ 6,732     $ 1,036     $ 18,267   Provision for loan losses charged to operations     1,359       411       1,710       3,480   Charge-offs     ( 2,165 )     ( 1,203 )     ( 1,332 )     ( 4,700 ) Recoveries     606       446       394       1,446   Net (charge-offs) recoveries     ( 1,559 )     ( 757 )     ( 938 )     ( 3,254 ) Ending balance   $ 10,299     $ 6,386     $ 1,808     $ 18,493     27 Table of Contents   The following tables present the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the dates indicated:       September 30, 2020       Loans Individually     Allowance for Loans     Loans Collectively     Allowance for Loans       Evaluated for     Individually     Evaluated for     Collectively   (Amounts in thousands)   Impairment     Evaluated     Impairment     Evaluated   Commercial loans                                 Construction, development, and other land   $ -     $ -     $ 45,517     $ 630   Commercial and industrial     767       -       177,396       1,102   Multi-family residential     944       222       103,087       1,299   Single family non-owner occupied     1,054       -       183,088       1,974   Non-farm, non-residential     3,774       565       726,741       9,360   Agricultural     -       -       10,341       174   Farmland     -       -       19,940       225   Total commercial loans     6,539       787       1,266,110       14,764   Consumer real estate loans                                 Home equity lines     -       -       101,276       871   Single family owner occupied     2,259       239       634,021       7,815   Owner occupied construction     -       -       17,460       194   Total consumer real estate loans     2,259       239       752,757       8,880   Consumer and other loans                                 Consumer loans     -       -       117,965       2,607   Other     -       -       5,838       -   Total consumer and other loans     -       -       123,803       2,607   Total loans, excluding PCI loans   $ 8,798     $ 1,026     $ 2,142,670     $ 26,251         December 31, 2019       Loans Individually     Allowance for Loans     Loans Collectively     Allowance for Loans       Evaluated for     Individually     Evaluated for     Collectively   (Amounts in thousands)   Impairment     Evaluated     Impairment     Evaluated   Commercial loans                                 Construction, development, and other land   $ -     $ -     $ 30,334     $ 245   Commercial and industrial     -       -       95,659       699   Multi-family residential     944       -       98,201       969   Single family non-owner occupied     -       -       128,520       1,323   Non-farm, non-residential     2,575       292       591,520       6,361   Agricultural     -       -       9,458       145   Farmland     -       -       16,146       201   Total commercial loans     3,519       292       969,838       9,943   Consumer real estate loans                                 Home equity lines     -       -       91,999       673   Single family owner occupied     3,016       353       490,712       5,175   Owner occupied construction     -       -       16,144       124   Total consumer real estate loans     3,016       353       598,855       5,972   Consumer and other loans                                 Consumer loans     -       -       99,199       1,865   Other     -       -       4,742       -   Total consumer and other loans     -       -       103,941       1,865   Total loans, excluding PCI loans   $ 6,535     $ 645     $ 1,672,634     $ 17,780     28 Table of Contents   The following table presents the recorded investment in PCI loans and the allowance for loan losses on PCI loans, by loan pool, as of the dates indicated:       September 30, 2020     December 31, 2019               Allowance for Loan             Allowance for Loan       Recorded     Pools With     Recorded     Pools With   (Amounts in thousands)   Investment     Impairment     Investment     Impairment   Commercial loans                                 Waccamaw commercial   $ -     $ -     $ -     $ -   Peoples commercial     -       -       4,371       -   Highlands:                                 1-4 family, senior-commercial     5,311       -       4,564       -   Construction & land development     1,295       -       1,956       -   Farmland and other agricultural     3,054       -       3,722       -   Multifamily     1,616       -       1,663       -   Commercial real estate     18,300       -       21,710       -   Commercial and industrial     1,551       -       2,829       -   Other     -       -       352       -   Total commercial loans     31,127       -       41,167       -   Consumer real estate loans                                 Waccamaw serviced home equity lines     -       -       2,121       -   Waccamaw residential     -       -       587       -   Highlands:     -       -       -       -   1-4 family, junior and HELOCS     859       -       2,157       -   1-4 family, senior-consumer     10,768       -       13,174       -   Consumer     773       -       1,341       -   Peoples residential     -       -       700       -   Total consumer real estate loans     12,400       -       20,080       -   Total PCI loans   $ 43,527     $ -     $ 61,247     $ -     Management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio as of September 30, 2020 .     Note 7 . FDIC Indemnification Asset   In connection with the FDIC-assisted acquisition of Waccamaw Bank in 2012, the Company entered into loss share agreements with the FDIC in which the FDIC agrees to cover 80 % of most loan and foreclosed real estate losses and reimburse certain expenses incurred in relation to those covered assets. Loss share coverage for commercial loans expired June 30, 2017, with recoveries ending  June 30, 2020. Loss share coverage on single family loans will expire June 30, 2022. The Company’s condensed statements of income include the expense on covered assets net of estimated reimbursements. The following table presents the changes in the FDIC indemnification asset and total covered loans and OREO for the periods indicated:       Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019   (Amounts in thousands)                                 Beginning balance   $ 1,943     $ 4,020     $ 2,883     $ 5,108   Reimbursable expenses to the FDIC     -       -       -       -   Net amortization     ( 383 )     ( 719 )     ( 1,352 )     ( 1,787 ) Payments to the FDIC     38       157       67       137   Ending balance   $ 1,598     $ 3,458     $ 1,598     $ 3,458     29 Table of Contents     Note 8 . Deposits   The following table presents the components of deposits as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)                 Noninterest-bearing demand deposits   $ 750,277     $ 627,868   Interest-bearing deposits:                 Interest-bearing demand deposits     576,731       497,470   Money market accounts     241,843       235,712   Savings deposits     486,506       453,240   Certificates of deposit     307,267       372,821   Individual retirement accounts     129,615       142,801   Total interest-bearing deposits     1,741,962       1,702,044   Total deposits   $ 2,492,239     $ 2,329,912       Note 9 . Leases   Operating leases are recorded as a right of use (“ROU”) asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016 - 02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016 - 02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.   The Company’s current operating leases relate primarily to bank branches. The Company’s ROU asset was $ 852 thousand as of September 30, 2020 compared to $ 917 thousand as of December 31, 2019 . The operating lease liability as of September 30, 2020 was $ 920 compared to $ 1.01 million as of December 31, 2019 . The Company’s total operating leases have remaining terms of   2 - 9 years; compared with 2 - 10 years as of December 31, 2019 . The September 30, 2020 weighted average discount rate of 3.22 % did not change from December 31, 2019 .   Future minimum lease payments as of the dates indicated are as follows:   Year   September 30, 2020   (Amounts in thousands)         2021   $ 154   2022     140   2023     119   2024     119   2025 and thereafter     490   Total lease payments     1,022   Less: Interest     ( 102 ) Present value of lease liabilities   $ 920     Year   December 31, 2019   (Amounts in thousands)         2020   $ 154   2021     154   2022     131   2023     119   2024 and thereafter     580   Total lease payments     1,138   Less: Interest     ( 129 ) Present value of lease liabilities   $ 1,009     30 Table of Contents     Note 10 . Borrowings   The following table presents the components of borrowings as of the dates indicated:       September 30, 2020     December 31, 2019               Weighted             Weighted   (Amounts in thousands)   Balance     Average Rate     Balance     Average Rate   Retail repurchase agreements   $ 956       0.14 %   $ 1,601       0.14 %   Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements.   As of September 30, 2020 , the Company had no long-term borrowings.   Unused borrowing capacity with the FHLB totaled $ 322.82 million, net of FHLB letters of credit of $ 169.64 million, as of September 30, 2020 . As of September 30, 2020 , the Company pledged $ 891.45 million in qualifying loans to secure the FHLB borrowing capacity.   The Company maintains a $ 15.00 million unsecured, committed line of credit with an unrelated financial institution with an interest rate of one -month LIBOR plus 2.00 % that matures in April 2021. There was no outstanding balance on the line as of September 30, 2020 or December 31, 2019 .     Note 1 1 . Derivative Instruments and Hedging Activities   Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.   The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify and are designated as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of September 30, 2020 . The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:       September 30, 2020     December 31, 2019       Notional or     Fair Value     Notional or     Fair Value       Contractual     Derivative     Derivative     Contractual     Derivative     Derivativ   (Amounts in thousands)   Amount     Assets     Liabilities     Amount     Assets     Liabilities   Derivatives designated as hedges                                                 Interest rate swaps   $ 16,889     $ -     $ 1,261     $ 17,432     $ -     $ 510   Total derivatives   $ 16,889     $ -     $ 1,261     $ 17,432     $ -     $ 510       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)   2020     2019     2020     2019   Income Statement Location Derivatives designated as hedges                                   Interest rate swaps   $ 80     $ 1     $ 172     $ 1   Interest and fees on loans Total derivative expense   $ 80     $ 1     $ 172     $ 1       31 Table of Contents       Note 1 2 . Employee Benefit Plans   The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan and the Directors’ Supplemental Retirement Plan. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:       Three Months Ended September 30,     Nine Months Ended September 30,         2020     2019     2020     2019   Income Statement Location (Amounts in thousands)                                   Service cost   $ 77     $ 80     $ 232     $ 240   Salaries and employee benefits Interest cost     88       101       266       303   Other expense Amortization of prior service cost     51       65       151       193   Other expense Amortization of losses     46       5       139       16   Other expense Net periodic cost   $ 262     $ 251     $ 788     $ 752         Note 1 3 . Earnings per Share   The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:        Three Months Ended     Nine Months Ended       September 30,     September 30,       2020     2019     2020     2019   (Amounts in thousands, except share and per share data)                                 Net income   $ 8,266     $ 9,156     $ 24,376     $ 29,238                                     Weighted average common shares outstanding, basic     17,710,283       15,603,992       17,803,369       15,717,678   Dilutive effect of potential common shares                                 Stock options     16,163       52,360       23,711       55,898   Restricted stock     5,982       8,235       9,883       11,908   Total dilutive effect of potential common shares     22,145       60,595       33,594       67,806   Weighted average common shares outstanding, diluted     17,732,428       15,664,587       17,836,963       15,785,484                                     Basic earnings per common share   $ 0.47     $ 0.59     $ 1.37     $ 1.86   Diluted earnings per common share     0.47       0.58       1.37       1.85                                     Antidilutive potential common shares                                 Stock options     78,016       -       61,241       -   Restricted stock     26,012       -       27,874       -   Total potential antidilutive shares     104,028       -       89,115       -     32 Table of Contents     Note 1 4 . Accumulated Other Comprehensive Income (Loss)   The following tables present the changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax and by component, during the periods indicated:       Three Months Ended September 30, 2020       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ 1,464     $ ( 2,572 )   $ ( 1,108 ) Other comprehensive income (loss) before reclassifications     ( 213 )     1       ( 212 ) Reclassified from AOCI     -       76       76   Other comprehensive (loss) income, net     ( 213 )     77       ( 136 ) Ending balance   $ 1,251     $ ( 2,495 )   $ ( 1,244 )       Three Months Ended September 30, 2019       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ 973     $ ( 1,354 )   $ ( 381 ) Other comprehensive income (loss) before reclassifications     23       ( 2 )     21   Reclassified from AOCI     -       55       55   Other comprehensive income, net     23       53       76   Ending balance   $ 996     $ ( 1,301 )   $ ( 305 )       Nine Months Ended September 30, 2020       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ 866     $ ( 2,372 )   $ ( 1,506 ) Other comprehensive income (loss) before reclassifications     689       ( 352 )     337   Reclassified from AOCI     ( 304 )     229       ( 75 ) Other comprehensive income (loss), net     385       ( 123 )     262   Ending balance   $ 1,251     $ ( 2,495 )   $ ( 1,244 )       Nine Months Ended September 30, 2019       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ ( 285 )   $ ( 1,144 )   $ ( 1,429 ) Other comprehensive income (loss)                         before reclassifications     1,247       ( 322 )     925   Reclassified from AOCI     34       165       199   Other comprehensive income (loss), net     1,281       ( 157 )     1,124   Ending balance   $ 996     $ ( 1,301 )   $ ( 305 )   33 Table of Contents   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)   2020     2019     2020     2019   Line Item Affected Available-for-sale securities                                   Gain recognized   $ -     $ -     $ ( 385 )   $ 43   Net loss on sale of securities Reclassified out of AOCI, before tax     -       -       ( 385 )     43   Income before income taxes Income tax expense     -       -       ( 81 )     9   Income tax expense Reclassified out of AOCI, net of tax     -       -       ( 304 )     34   Net income Employee benefit plans                                   Amortization of prior service cost   $ 51     $ 65     $ 150     $ 193   (1) Amortization of net actuarial benefit cost     46       5       140       16   (1) Reclassified out of AOCI, before tax     97       70       290       209   Income before income taxes Income tax expense     21       15       61       44   Income tax expense Reclassified out of AOCI, net of tax     76       55       229       165   Net income Total reclassified out of AOCI, net of tax   $ 76     $ 55     $ ( 75 )   $ 199   Net income   ( 1 ) Amortization is included in net periodic pension cost. See Note 11, "Employee Benefit Plans."     Note 1 5 . 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.   Assets and Liabilities Reported at Fair Value on a Recurring Basis   Available-for-Sale Debt Securities . Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.   34 Table of Contents   Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third -party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.   Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.   Loans Held for Investment . Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third -party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.   Deferred Compensation Assets and Liabilities . Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.   Derivative Assets and Liabilities . Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.   The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:       September 30, 2020       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   $ 572     $ -     $ 572     $ -   Municipal securities     55,667       -       55,667       -   Mortgage-backed Agency securities     34,733       -       34,733       -   Total available-for-sale debt securities     90,972       -       90,972       -   Equity securities     55       55       -       -   Fair value loans     15,628       -       -       15,628   Deferred compensation assets     3,752       3,752       -       -   Deferred compensation liabilities     3,752       3,752       -       -   Derivative liabilities     1,261       -       1,261       -         December 31, 2019       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   $ 5,034     $ -     $ 5,034     $ -   Municipal securities     86,878       -       86,878       -   Mortgage-backed Agency securities     77,662       -       77,662       -   Total available-for-sale debt securities     169,574       -       169,574       -   Equity securities     55       55       -       -   Fair value loans     16,922       -       -       16,922   Deferred compensation assets     3,990       3,990       -       -   Deferred compensation liabilities     3,990       3,990       -       -   Derivative liabilities     510             510           35 Table of Contents   Assets Measured at Fair Value on a Nonrecurring Basis   Impaired Loans . Impaired loans are recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.   The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third -party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third -party valuation within thirty to forty-five days of completing the internal valuation. When a third -party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.   Specific reserves are generally recorded for impaired loans while third -party valuations are in process and for impaired loans that continue to make some form of payment. While waiting to receive the third -party appraisal, the Company regularly reviews the relationship to identify any potential adverse developments and begins the tasks necessary to gain control of the collateral and prepare it for liquidation, including, but not limited to, engagement of counsel, inspection of collateral, and continued communication with the borrower. Generally, the only difference between the current appraised value, less liquidation costs, and the carrying amount of the loan, less the specific reserve, is any downward adjustment to the appraised value that the Company deems appropriate, such as the costs to sell the property. Impaired loans that do not meet certain criteria and do not have a specific reserve have typically been written down through partial charge-offs to net realizable value. Based on prior experience, the Company rarely returns loans to performing status after they have been partially charged off. Credits identified as impaired move quickly through the process towards ultimate resolution, except in cases involving bankruptcy and various state judicial processes that may extend the time for ultimate resolution.   OREO . OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.   The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:       September 30, 2020       Total     Fair Value Measurements Using       Fair Value     Level 1     Level 2     Level 3   (Amounts in thousands)                                 Impaired loans, non-covered   $ 3,114     $ -     $ -     $ 3,114   OREO     2,103       -       -       2,103         December 31, 2019       Total     Fair Value Measurements Using       Fair Value     Level 1     Level 2     Level 3   (Amounts in thousands)                                 Impaired loans, non-covered   $ 1,828     $ -     $ -     $ 1,828   OREO     3,969       -       -       3,969     36 Table of Contents   Quantitative Information about Level 3 Fair Value Measurements   The following table provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:     Valuation   Unobservable   Discount Range (Weighted Average)     Technique   Input   September 30, 2020     December 31, 2019                           Impaired loans, non-covered Discounted appraisals(1)   Appraisal adjustments(2)     3% to 42% (25%)       22% to 36% (26%)   OREO Discounted appraisals(1)   Appraisal adjustments(2)     0% to 77% (24%)       15% to 100% (8%)     ( 1 ) Fair value is generally based on appraisals of the underlying collateral. ( 2 ) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.     Fair Value of Financial Instruments   The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of valuation methodologies used for instruments not previously discussed is as follows:   Cash and Cash Equivalents . Cash and cash equivalents fair value is estimated at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.   FDIC Indemnification Asset . The FDIC indemnification asset fair value is estimated using discounted future cash flows that apply current discount rates.   Accrued Interest Receivable/Payable . Accrued interest receivable/payable fair value is estimated at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.   Deposits and Securities Sold Under Agreements to Repurchase . Deposits and repurchase agreements with fixed maturities and rates are estimated at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.   FHLB and Other Borrowings . FHLB and other borrowings are estimated at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities.   Off-Balance Sheet Instruments . The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 16, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.   37 Table of Contents   The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:       September 30, 2020       Carrying             Fair Value Measurements Using   (Amounts in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets                                         Cash and cash equivalents   $ 375,664     $ 375,664     $ 375,664     $ -     $ -   Debt securities available for sale     90,972       90,972       -       90,972       -   Equity securities     55       55       55       -       -   Loans held for investment, net of allowance     2,167,718       2,123,823       -       -       2,123,823   FDIC indemnification asset     1,598       666       -       -       666   Interest receivable     9,151       9,151       -       9,151       -   Deferred compensation assets     3,752       3,752       3,752       -       -                                             Liabilities                                         Time deposits     436,882       440,283       -       440,283       -   Securities sold under agreements to repurchase     956       956       -       956       -   Interest payable     719       719       -       719       -   Derivative financial liabilities     1,261       1,261       -       1,261       -   Deferred compensation liabilities     3,752       3,752       3,752       -       -         December 31, 2019       Carrying             Fair Value Measurements Using   (Amounts in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets                                         Cash and cash equivalents   $ 217,009     $ 217,009     $ 217,009     $ -     $ -   Debt securities available for sale     169,574       169,574       -       169,574       -   Equity securities     55       55       55       -       -   Loans held for sale     263       263       -       -       263   Loans held for investment, net of allowance     2,096,035       2,068,257       -       -       2,068,257   FDIC indemnification asset     2,883       1,201       -       -       1,201   Interest receivable     6,677       6,677       -       6,677       -   Deferred compensation assets     3,990       3,990       3,990       -       -                                             Liabilities                                         Time deposits     515,622       512,134       -       512,134       -   Securities sold under agreements to repurchase     1,601       1,601       -       1,601       -   Interest payable     472       472       -       472       -   Derivative liabilities     510       510       -       510       -   Deferred compensation liabilities     3,990       3,990       3,990       -       -       Note 1 6 . Litigation, Commitments , and Contingencies   Litigation   In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.   Commitments and Contingencies   The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.   38 Table of Contents   Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.   Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.   The following table presents the off-balance sheet financial instruments as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)                 Commitments to extend credit   $ 219,297     $ 228,716   Standby letters of credit and financial guarantees (1)     173,925       167,612   Total off-balance sheet risk   $ 393,222     $ 396,328                     Reserve for unfunded commitments   $ 66     $ 66     ( 1 ) Includes FHLB letters of credit   39 Table of Contents     ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations   Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.   Executive Overview   First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of September 30, 2020, the Bank operated 52 branches as First Community Bank in Virginia, West Virginia, and North Carolina and, through November 1, 2020, as People’s Community Bank, a Division of First Community Bank, in Tennessee. As of September 30, 2020, full-time equivalent employees, calculated using the number of hours worked, totaled 630. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network and, to a lesser extent, retail and wholesale repurchase agreements and Federal Home Loan Bank (“FHLB”) borrowings. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.   The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of September 30, 2020, the Trust Division and FCWM managed and administered $1.13 billion in combined assets under various fee-based arrangements as fiduciary or agent.   Recent Events   In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China, and quickly spread across most of the earth, including the United States. In March 2020, President Trump declared a National Public Health Emergency. Government responses to the COVID-19 pandemic severely restricted the level of economic activity in the Company’s markets during the Spring and early Summer of 2020. While the financial services industry has been designated an essential business in each of the states in which the Company operates, many of the Company’s customers are non-essential businesses, or are employed by non-essential businesses, and have been adversely affected by government shutdowns.   The Company’s business, financial condition, and results of operations generally rely upon the ability of borrowers to repay their loans, the value of collateral underlying secured loans, and demand for loans and other financial products and services. Each of these conditions depends highly on the business environment in the primary markets where the Company operates and in the United States as a whole. The COVID-19 pandemic has, and will continue to have, a significant impact on the Company’s business and operations.   To date, the COVID-19 pandemic has impacted trade, travel, employee productivity, unemployment, consumer spending, and other economic activities which has resulted in less economic activity, lower equity market valuations, significant volatility and disruption in financial markets, which have all adversely affected the Company’s business volume, financial condition and results of operations. However, the impact of the COVID-19 pandemic is fluid and continues to evolve. The ultimate extent to which the COVID-19 pandemic will impact the Company’s business, financial condition, and results of operations is currently uncertain and will depend on various developments, including the duration and scope of the pandemic, governmental, regulatory and private sector responses to the pandemic, the pandemic’s depth of impact on national and local economies, financial market reactions, responses of the Company’s customers, employees and vendors, and other factors.   In order to implement and exercise social distancing, on March 20, 2020, the Company began limiting access to branch lobbies and conducting most business through drive-through tellers and through electronic and online means.  To support the health and well-being of employees, a significant amount of the Company's non-customer facing, operational workforce is currently working remotely, and the Company temporarily implemented pay differential for employees not working remotely, which ended when states and localities began their phased re-opening plans.  To support and assist loan customers and/or comply with guidance from regulatory authorities, the Company has deferred loan payments for many consumer and commercial customers, suspended residential property foreclosures, evictions, and involuntary  automobile repossessions, and is offering fee waivers, payment deferrals, and other extraordinary assistance for automobile, mortgage, small business and personal lending customers.  Future regulatory or governmental actions may require these and other types of customer-assistance measures.     40 Table of Contents   In order to help our customers in these unprecedented times, the Company modified or deferred payments on a total of 3,362 loans totaling $426.45 million in principal through September 30, 2020.  At September 30, 2020, loans currently in deferral amounted to $115.63 million.  Included in the September 30, 2020, amounts are re-deferrals for approximately $69.32 million commercial loans and approximately $5.09 million in consumer mortgage and installment loans.  Deferred interest and fees for these loans will continue to accrue. However, should eventual credit losses on deferred payments occur, accrued interest income and fees would be reversed, which would negatively impact interest income in future periods. The accrued interest for these loans total $1.10 million  as of September 30, 2020.  To date, the Company has not experienced an increase in borrowers drawing on lines of credit. Management currently believes the hotel/motel and retail loan portfolios to be at the greatest risk.   The Company is also participating in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), in an attempt to assist both existing customers and non-customers. Through September 30, 2020, the Company processed 803 loans with original principal balances totaling $62.74 million through the SBA’s PPP.   Management and the Board of Directors are closely monitoring the impact of the COVID-19 pandemic on results of operations and financial condition. The Company recorded a provision for loan losses of $12.03 million for the first nine months of 2020  which is significantly higher than in the recent previous periods. Management expects the provisions for loan losses for periods ending after September 30, 2020, to be materially impacted by the COVID-19 pandemic.   Acquisitions and Divestitures   On September 11, 2019, the Company entered into an Agreement and Plan of Merger with Highlands Bankshares, Inc. (“Highlands” ) of Abingdon, Virginia. Under the terms of the agreement and plan of merger, each share of Highlands’ common and preferred stock outstanding immediately converted into the right to receive 0.2703 shares of the Company’s stock. The transaction was consummated at the close of business December 31, 2019. The transaction combined two traditional Southwestern Virginia community banks who serve the Highlands region in Virginia, North Carolina, and Tennessee. The total purchase price for the transaction was $86.65 million.   The Highlands transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement up to a year after the closing date of the acquisition.   Critical Accounting Estimates   We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and conform to general practices within the banking industry. Our financial position and results of operations may require management to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve, or when an asset or liability needs recorded based on the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices, when available, or third-party sources. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.   Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this report. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2020, and in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2019 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2019 Form 10-K.   41 Table of Contents   Performance Overview   Highlights of our results of operations for the three and nine months ended September 30, 2020, and financial condition as of September 30, 2020, include the following:     ● Diluted earnings per share was $0.47 for the third quarter and $1.37 for the first  nine months .   ● Current quarter earnings include a loan loss provision of $4.70 million, an increase of $4.03 million over third quarter of 2019. The year to date loan loss provision was $12.03 million, an increase of $8.55 million from the prior year.  The increase further recognizes the economic uncertainty of the COVID-19 pandemic.   ● Despite the significant increase in loan loss provision, return on average assets remained strong at 1.11% for the third quarter and 1.14% for the nine month period.   ● Net interest margin decreased 46 basis points to 4.10% compared to the same quarter of 2019. Net interest margin decreased 30 basis points to 4.33% for the first  nine months compared to the same period of 2019. Both decreases are reflective of the current historically low interest rate environment.   ● Service charges on deposit accounts have increased since the second quarter of 2020 as pandemic shutdowns and stay-at-home orders were relaxed during the summer.   ● Total deposits have grown $162.33 million, or 6.97%, during 2020 with $122.41 million of the increase occurring in interest free categories.   ● Book value per common share at September 30, 2020, was $23.70, an increase of $0.37 during the year.   ● As of September 30, 2020, the Company continues to significantly exceed regulatory “well capitalized” targets, as well as all capital targets of its capital management plan. The Company completed its previous share repurchase authorization in the first quarter of 2020, prior to the onset of the current COVID-19 pandemic, which completed a strategic objective of acquiring 6.6 million shares, returning over $149 million in surplus capital to shareholders. In light of the uncertain economic forecast, the Company has temporarily delayed consideration of a new share repurchase authorization to preserve and further accumulate surplus capital.     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)   2020     2019     (Decrease)     % Change     2020     2019     (Decrease)     % Change                                                                     Net income   $ 8,266     $ 9,156     $ (890 )     -9.72 %   $ 24,376     $ 29,238     $ (4,862 )     -16.63 %                                                                   Basic earnings per common share     0.47       0.59       (0.12 )     -20.34 %     1.37       1.86       (0.49 )     -26.34 % Diluted earnings per common share     0.47       0.58       (0.11 )     -18.97 %     1.37       1.85       (0.48 )     -25.95 %                                                                   Return on average assets     1.11 %     1.65 %     -0.54 %     -32.73 %     1.14 %     1.76 %     -0.62 %     -35.23 % Return on average common equity     7.83 %     10.80 %     -2.97 %     -27.50 %     7.76 %     11.70 %     -3.94 %     -33.68 %   Three - Month Comparison . Net income decreased $890 thousand in the third quarter of 2020 largely due to a $4.03 million increase in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown. Additional decreases resulted from increases in salaries and employee benefits of $1.15 million in 2020 reflective of the addition of Highlands and a one-time litigation settlement of $900 thousand included in the third quarter results from 2019.  These decreases were offset by an increase of $4.61 million in net interest income that is reflective of the addition of Highlands in 2020 and $592 thousand in merger expenses recognized in the third quarter of 2019 .   Nine-Month Comparison. Net income decreased $4.86 million in the first nine months of 2020 due to a $8.55 million increase in the provision for loan losses as a result of increasing the reserve to recognize the impact of the coronavirus slowdown as noted above. Additional decreases resulted from an increase in salaries and employee benefits of $5.23 million which was reflective of the addition of Highlands as well as expenses arising from the implementation of a pay differential related to COVID-19 which ended May 31, 2020. Also contributing to the decrease, were litigation settlements received of $4.60 million received in 2019. These decreases were offset by an increase of $13.46 million in net interest income that is reflective of the of Highlands acquisition.   42 Table of Contents   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,       2020     2019       Average             Average Yield/     Average             Average Yield/   (Amounts in thousands)   Balance     Interest (1)     Rate (1)     Balance     Interest (1)     Rate (1)   Assets                                                 Earning assets                                                 Loans (2)(3)   $ 2,171,023     $ 27,331       5.01 %   $ 1,706,936     $ 22,106       5.14 % Securities available for sale     93,263       720       3.07 %     118,450       1,015       3.40 % Interest-bearing deposits     352,144       90       0.10 %     122,891       680       2.20 % Total earning assets     2,616,430       28,141       4.28 %     1,948,277       23,801       4.85 % Other assets     344,285                       250,142                   Total assets   $ 2,960,715                     $ 2,198,419                                                                     Liabilities and stockholders' equity                                                 Interest-bearing deposits                                                 Demand deposits   $ 580,165     $ 73       0.05 %   $ 450,650     $ 78       0.07 % Savings deposits     720,657       136       0.08 %     500,600       222       0.18 % Time deposits     448,275       951       0.84 %     413,012       1,083       1.04 % Total interest-bearing deposits     1,749,097       1,160       0.26 %     1,364,262       1,383       0.40 % Borrowings                                                 Retail repurchase agreements     969       1       0.14 %     2,107       1       0.17 % Total borrowings     969       1       0.14 %     2,107       1       0.17 % Total interest-bearing liabilities     1,750,066       1,161       0.26 %     1,366,369       1,384       0.40 % Noninterest-bearing demand deposits     754,147                       466,253                   Other liabilities     36,379                       29,449                   Total liabilities     2,540,592                       1,862,071                   Stockholders' equity     420,123                       336,348                   Total liabilities and stockholders' equity   $ 2,960,715                     $ 2,198,419                   Net interest income, FTE (1)           $ 26,980                     $ 22,417           Net interest rate spread                     4.02 %                     4.44 % Net interest margin, FTE (1)                     4.10 %                     4.56 %   (1) Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%. (2) Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual. (3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $1.77 million and $566 thousand for the three months ended September 30, 2020 and 2019, respectively.   43 Table of Contents   AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)       Nine Months Ended September 30,       2020     2019       Average             Average Yield/     Average             Average Yield/   (Amounts in thousands)   Balance     Interest (1)     Rate (1)     Balance     Interest (1)     Rate (1)   Assets                                                 Earning assets                                                 Loans (2)(3)   $ 2,127,383     $ 82,476       5.18 %   $ 1,730,940     $ 67,114       5.18 % Securities available for sale     110,852       2,619       3.16 %     130,029       3,314       3.41 % Securities held to maturity     -       -       -       4,071       45       1.48 % Interest-bearing deposits     270,106       706       0.34 %     101,364       1,784       2.34 % Total earning assets     2,508,341       85,801       4.57 %     1,966,404       72,257       4.91 % Other assets     351,589                       248,801                   Total assets   $ 2,859,930                     $ 2,215,205                                                                     Liabilities and stockholders' equity                                                 Interest-bearing deposits                                                 Demand deposits   $ 543,539     $ 261       0.06 %   $ 450,653     $ 192       0.06 % Savings deposits     702,604       790       0.15 %     502,241       589       0.16 % Time deposits     466,126       3,380       0.97 %     426,885       3,299       1.03 % Total interest-bearing deposits     1,712,269       4,431       0.35 %     1,379,779       4,080       0.40 % Borrowings                                                 Retail repurchase agreements     1,218       3       0.32 %     2,792       3       0.13 % Wholesale repurchase agreements     -       -       -       5,037       119       3.17 % FHLB advances and other borrowings     48       1       2.23 %     -       -       -   Total borrowings     1,266       4       0.42 %     7,829       122       2.08 % Total interest-bearing liabilities     1,713,535       4,435       0.35 %     1,387,608       4,202       0.40 % Noninterest-bearing demand deposits     688,891                       464,958                   Other liabilities     38,001                       28,651                   Total liabilities     2,440,427                       1,881,217                   Stockholders' equity     419,503                       333,988                   Total liabilities and stockholders' equity   $ 2,859,930                     $ 2,215,205                   Net interest income, FTE (1)           $ 81,366                     $ 68,055           Net interest rate spread                     4.22 %                     4.51 % Net interest margin, FTE (1)                     4.33 %                     4.63 %   (1) Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%. (2) Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual. (3) Interest on loans includes non-cash purchase accounting accretion of $5.22 million and $2.72 million for the nine months ended September 30, 2020 and 2019, respectively.   44 Table of Contents   The following table presents the impact to net interest income on a FTE basis due to changes in volume (change in average volume times the prior year’s average rate), rate (average rate times the prior year’s average volume), and rate/volume (average volume times the change in average rate), for the periods indicated:       Three Months Ended     Nine Months Ended       September 30, 2020 Compared to 2019     September 30, 2020 Compared to 2019       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   $ 5,994     $ (557 )   $ (212 )   $ 5,225     $ 15,371     $ (23 )   $ 14     $ 15,362   Securities available-for-sale     (215 )     (98 )     18       (295 )     (489 )     (82 )     (124 )     (695 ) Securities held-to-maturity     -       -       -       -       (45 )     -       -       (45 ) Interest-bearing deposits with other banks     1,265       (647 )     (1,208 )     (590 )     2,957       (511 )     (3,524 )     (1,078 ) Total interest earning assets     7,044       (1,302 )     (1,402 )     4,340       17,794       (616 )     (3,634 )     13,544                                                                     Interest paid on                                                                 Demand deposits     22       (21 )     (6 )     (5 )     40       8       21       69   Savings deposits     97       (127 )     (56 )     (86 )     235       (8 )     (26 )     201   Time deposits     92       (204 )     (20 )     (132 )     303       (69 )     (153 )     81   Retail repurchase agreements     -       -       -       -       (2 )     1       1       -   Wholesale repurchase agreements     -       -       -       -       (119 )     -       -       (119 ) FHLB advances and other borrowings     -       -       -       -       -       -       1       1   Total interest-bearing liabilities     211       (352 )     (82 )     (223 )     457       (68 )     (156 )     233                                                                     Change in net interest income (1)   $ 6,833     $ (950 )   $ (1,320 )   $ 4,563     $ 17,337     $ (548 )   $ (3,478 )   $ 13,311     (1) FTE basis based on the federal statutory rate of 21%.    Three - Month Comparison . Net interest income comprised 77.84% of total net interest and noninterest income in the third quarter of 2020 compared to 74.43% in the same quarter of 2019. Net interest income on a GAAP basis increased $4.61 million, or 20.76%, compared to an increase of $4.56 million, or 20.36%, on a FTE basis. The net interest margin on a FTE basis decreased 46 basis points and the net interest spread on a FTE basis decreased 42 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment.   Average earning assets increased $668.15 million, or 34.29%, primarily due to an increase in average loans as well as an increase in interest-bearing deposits. Average loans increased $464.09 million which was primarily due to the addition of Highlands. The yield on earning assets decreased 57 basis points or 11.75%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to 86.73% from 93.25% in the same quarter of 2019. Non-cash accretion income increased $1.20 million, or 211.84%, due to the addition of loans from the Highlands acquisition.   Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $383.70 million, or 28.08%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 14 basis points. Average interest-bearing deposits increased $384.84 million, or 28.21%, which was driven by the December 31, 2019 Highlands acquisition with increases in average savings deposits of $220.06 million, or 43.96%, interest-bearing demand of $129.52 million, or 28.74%, and time deposits of $35.26 million, or 8.54%   Nine-Month Comparison . Net interest income comprised 78.53% of total net interest and noninterest income for the first nine months of 2020 compared to 73.45% in the same period of 2019. Net interest income on a GAAP basis increased $13.46 million, or 19.97%, compared to an increase of $13.31 million, or 19.56%, on a FTE basis. The net interest margin on a FTE basis decreased 30 basis points and the net interest spread on a FTE basis decreased 29 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the historically low rate environment experienced over the past nine months.   Average earning assets increased $541.94 million, or 27.56%, primarily due to an increase in loans and overnight funds sold. The yield on earning assets decreased 34 basis points as the yields in interest-bearing deposits and the available-for-sale investment portfolio decreased. Average loans increased $396.44 million, 22.90%, and the average loan to deposit ratio decreased to 88.60% from 93.83% in the same period of 2019. Non-cash accretion income increased $2.50 million, or 91.98%, due to the addition of loans from the Highlands acquisition.   45 Table of Contents   Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $325.93 million, or 23.49%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 5 basis points or 12.50%. Average borrowings decreased $6.56 million, or 83.83%, largely due to a decrease in average wholesale repurchase agreements of $5.04 million. The decrease resulted from the payoff of a $25 million wholesale repurchase agreement in the first quarter of 2019. Average interest-bearing deposits increased $332.49 million, or 24.10%, which was driven by the December 2019 acquisition of Highlands, resulting in increases of $200.36 million in savings, $92.89 million in interest-bearing demand, and $39.24 million in time deposits.   Provision for Loan Losses   Three - Month Comparison . The provision charged to operations increased $4.03 million, or 596.74%, to $4.70 million in the third quarter of 2020 compared to the same quarter of 2019. The increase in the provision was primarily due to the impact of the coronavirus slowdown. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.   Nine-Month Comparison . The provision charged to operations increased $8.55 million, or 245.80%, to $12.03 million for the first nine months of 2020 compared to the same period of 2019. The provision net of year to date net charge-offs of $3.18 million had the effect of increasing loan loss reserves $8.85 million. For additional information, see “Allowance for Loan Losses” in the “Financial Condition” section below.   Noninterest Income   The following table presents the components of, and changes in, noninterest income for the periods indicated:       Three Months Ended                     Nine Months Ended                       September 30,     Increase       %   September 30,     Increase       %     2020     2019     (Decrease)     Change     2020     2019     (Decrease)     Change   (Amounts in thousands)                                                                 Wealth management   $ 909     $ 952     $ (43 )     -4.52 %   $ 2,607     $ 2,581     $ 26       1.01 % Service charges on deposits     3,250       3,785       (535 )     -14.13 %     9,541       10,892       (1,351 )     -12.40 % Other service charges and fees     2,748       2,007       741       36.92 %     7,596       6,185       1,411       22.81 % Net gain on sale of securities     -       -       -       -       385       (43 )     428       -995.35 % Net FDIC indemnification asset amortization     (383 )     (719 )     336       -46.73 %     (1,352 )     (1,787 )     435       -24.34 % Other income/litigation settlements     -       900       (900 )     -100.00 %     -       4,600       (4,600 )     -100.00 % Other operating income     1,114       709       405       57.12 %     3,323       1,935       1,388       71.73 % Total noninterest income   $ 7,638     $ 7,634     $ 4       0.05 %   $ 22,100     $ 24,363     $ (2,263 )     -9.29 %   Three - Month Comparison . Noninterest income comprised 22.16% of total net interest and noninterest income in the third quarter of 2020 compared to 25.57% in the same quarter of 2019. Noninterest income increased $4 thousand, or 0.05%. The increase was primarily due to increases in both net interchange income and other operating income for a combined total of $1.15 million. A decrease in the amortization of the FDIC indemnification asset of $336 thousand contributed to the increase in noninterest income as well.  These increases were offset by litigation settlements received in the third quarter of 2019  of $900 thousand as well as a decrease in service charges on deposits of $535 thousand as a result of pandemic shutdowns.   Nine-Month Comparison . Noninterest income comprised 21.47% of total net interest and noninterest income for the first nine months of 2020 compared to 26.55% in the same period of 2019. Noninterest income decreased $2.26 million, or 9.29%, primarily due to $4.60 million received from litigation settlements in 2019. In addition, service charges on deposits decreased $1.35 million primarily as a result of the second and third quarter effects of the pandemic shutdowns. These decreases were primarily offset by increases in other service charges and fees and other operating income. Other service charges and fees increased $1.41 million, or 22.81%, primarily due to an increase in net interchange income. Other Operating income increased $1.39 million or 71.73% and was primarily driven by third party incentives associated with debit cards and demand deposit accounts.    46 Table of Contents   Noninterest Expense   The following table presents the components of, and changes in, noninterest expense for the periods indicated:       Three Months Ended                     Nine Months Ended                       September 30,     Increase       %   September 30,     Increase       %     2020     2019     (Decrease)     Change     2020     2019     (Decrease)     Change   (Amounts in thousands)                                                                 Salaries and employee benefits   $ 10,485     $ 9,334     $ 1,151       12.33 %   $ 32,886     $ 27,653     $ 5,233       18.92 % Occupancy expense     1,228       1,042       186       17.85 %     3,818       3,277       541       16.51 % Furniture and equipment expense     1,412       1,183       229       19.36 %     4,112       3,278       834       25.44 % Service fees     1,581       1,466       115       7.84 %     4,433       3,727       706       18.94 % Advertising and public relations     430       795       (365 )     -45.91 %     1,417       1,832       (415 )     -22.65 % Professional fees     408       548       (140 )     -25.55 %     948       1,290       (342 )     -26.51 % Amortization of intangibles     365       251       114       45.42 %     1,086       746       340       45.58 % FDIC premiums and assessments     191       -       191       -       224       318       (94 )     -29.56 % Merger expense     -       592       (592 )     -100.00 %     1,893       592       1,301       219.76 % Other operating expense     3,071       2,233       838       37.53 %     8,931       8,167       764       9.35 % Total noninterest expense   $ 19,171     $ 17,444     $ 1,727       9.90 %   $ 59,748     $ 50,880     $ 8,868       17.43 %     Three - Month Comparison . Noninterest expense increased $1.73 million, or 9.90%, in the third quarter of 2020 compared to the same quarter of 2019. The increase was largely due to an increase in salaries and benefits of $1.15 million primarily attributable to the addition of Highlands employees. Other increases also occurred in occupancy and furniture and equipment expense, and other operating expense for a combined total of $1.25 million.  The increases in these categories were primarily due to the addition of branch locations acquired in the Highlands transaction.  Increases in the third quarter of 2020 were offset primarily by merger expenses of $592 thousand that were incurred in the third quarter of 2019.   Nine-Month Comparison . Noninterest expense increased $8.87 million, or 17.43%, in the first nine months of 2020 compared to the same period of 2019. The increase was primarily due to an increase in salaries and benefits of $5.23 million, or 18.92% which was largely due to the addition of Highlands employees. In addition, the Company incurred $1.89 million in residual merger expenses during the first quarter of 2020 related to the Highlands acquisition. Occupancy and furniture and equipment expense increased a combined total of $1.38 million and was primarily driven by the addition of branch locations acquired in the Highlands transaction.   I ncome Tax Expense   The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies.   Three-Month Comparison . Income tax expense decreased $248 thousand, or 9.61%, primarily due to the decrease in pre-tax earnings. The effective tax rate increased to 22.00% in the third quarter of 2020 from 21.98% in the same quarter of 2019.   Nine-Month Comparison . Income tax expense decreased $1.36 million, or 16.71%, and the effective tax rate decreased to 21.80% in the third quarter of 2020 from 21.82% in the same quarter of 2019.   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.   47 Table of Contents   The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated:       Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019   (Amounts in thousands)                                 Net interest income, GAAP   $ 26,834     $ 22,221     $ 80,855     $ 67,396   FTE adjustment(1)     146       196       511       659   Net interest income, FTE     26,980       22,417       81,366       68,055                                     Net interest margin, GAAP     4.08 %     4.53 %     4.30 %     4.58 % FTE adjustment(1)     0.02 %     0.03 %     0.03 %     0.05 % Net interest margin, FTE     4.10 %     4.56 %     4.33 %     4.63 % (1) FTE basis of 21%.   Financial Condition   Total assets as of September 30, 2020, increased $149.08 million, or 5.33% from December 31, 2019. The increase in assets was primarily driven by a increase in overnight funds of $175.36 million, or 118.48%. In addition, total liabilities as of September 30, 2020, increased $157.98 million, or 6.67% from December 31, 2019. The increase in liabilities was primarily the result of an increase in total deposits of $162.33 million, or 6.97%.   Investment Securities   Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.   Available-for-sale debt securities as of September 30, 2020, decreased $78.60 million, or 46.35%, compared to December 31, 2019. The decrease was primarily due to the sale of $51.03 million in securities in the first quarter. The market value of debt securities available for sale as a percentage of amortized cost was 101.77.% as of September 30, 2020, compared to 100.65% as of December 31, 2019.   Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”) charges. We recognized no OTTI charges in earnings associated with debt securities for the three and nine months ended September 30, 2020 or 2019. For additional information, see Note 2, “Debt Securities,” to the Condensed Consolidated Financial Statements in Item 1 of this report.   Loans Held for Investment   Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. Certain loans acquired in FDIC-assisted transactions are covered under loss share agreements (“covered loans”). Total loans held for investment, net of unearned income, as of September 30, 2020, increased $80.54 million, or 3.81%, compared to December 31, 2019. Covered loans decreased $2.12 million, or 16.46%, as the covered Waccamaw portfolio continues to pay down. For additional information, see Note 4, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.   48 Table of Contents   The following table presents loans, net of unearned income, with non-covered loans by loan class as of the dates indicated:       September 30, 2020     December 31, 2019     September 30, 2019   (Amounts in thousands)   Amount     Percent     Amount     Percent     Amount     Percent   Non-covered loans held for investment                                                 Commercial loans                                                 Construction, development, and other land   $ 46,785       2.13 %   $ 48,659       2.30 %   $ 61,350       3.62 % Commercial and industrial     179,714       8.19 %     142,962       6.76 %     93,627       5.53 % Multi-family residential     105,647       4.81 %     121,840       5.76 %     96,274       5.68 % Single family non-owner occupied     189,265       8.62 %     163,181       7.72 %     135,298       7.99 % Non-farm, non-residential     748,815       34.11 %     727,261       34.39 %     584,897       34.52 % Agricultural     10,362       0.47 %     11,756       0.56 %     9,429       0.56 % Farmland     22,973       1.05 %     23,155       1.10 %     16,728       0.99 % Total commercial loans     1,303,561       59.38 %     1,238,814       58.59 %     997,603       58.89 % Consumer real estate loans                                                 Home equity lines     94,056       4.29 %     110,078       5.21 %     86,349       5.10 % Single family owner occupied     644,598       29.37 %     620,697       29.35 %     484,567       28.60 % Owner occupied construction     17,460       0.79 %     17,241       0.82 %     14,872       0.87 % Total consumer real estate loans     756,114       34.45 %     748,016       35.38 %     585,788       34.57 % Consumer and other loans                                                 Consumer loans     118,738       5.41 %     110,027       5.20 %     92,027       5.43 % Other     5,838       0.27 %     4,742       0.22 %     4,540       0.27 % Total consumer and other loans     124,576       5.68 %     114,769       5.42 %     96,567       5.70 % Total non-covered loans     2,184,251       99.51 %     2,101,599       99.39 %     1,679,958       99.15 % Total covered loans     10,744       0.49 %     12,861       0.61 %     14,158       0.84 % Total loans held for investment, net of unearned income     2,194,995       100.00 %     2,114,460       100.00 %     1,694,116       99.99 % Less: allowance for loan losses     27,277               18,425               18,493           Total loans held for investment, net of unearned income and allowance   $ 2,167,718             $ 2,096,035             $ 1,675,623                                                             Loans held for sale   $ -             $ 263             $ -             Commercial and industrial loan balances grew significantly compared to December 31, 2019. During the second quarter, we began participating as a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) lender. At September 30, 2020, the PPP loans had a current balance of $61.00 million, and were included in commercial and industrial loan balances. Deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $2.30 million at September 30, 2020, were also recorded. During the third quarter of 2020, we recorded amortization of net deferred loan origination fees of $286 thousand on PPP loans, while year to date we recorded amortization of $479 thousand. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.    49 Table of Contents   The following table presents covered loans, by loan class, as of the dates indicated:       September 30, 2020     December 31, 2019     September 30, 2019   (Amounts in thousands)   Amount     Percent     Amount     Percent     Amount     Percent   Commercial loans                                                 Construction, development, and other land   $ 27       0.25 %   $ 28       0.22 %   $ 30       0.21 % Single family non-owner occupied     188       1.75 %     199       1.55 %     216       1.53 % Non-farm, non-residential     -       0.00 %     3       0.02 %     4       0.03 % Total commercial loans     215       2.00 %     230       1.79 %     250       1.77 % Consumer real estate loans                                                 Home equity lines     8,079       75.20 %     9,853       76.61 %     11,031       77.91 % Single family owner occupied     2,450       22.80 %     2,778       21.60 %     2,877       20.32 % Total consumer real estate loans     10,529       98.00 %     12,631       98.21 %     13,908       98.23 % Total covered loans   $ 10,744       100.00 %   $ 12,861       100.00 %   $ 14,158       100.00 %     Commercial Loans Modified Under CARES Act   The following table details the balance of commercial loans modified for short-term payment deferral under provisions of the CARES Act as of the dates indicated.       September 30, 2020     June 30, 2020             Percent           Percent   (unaudited, in thousands)   Balance     Modified     Balance     Modified                                 Construction, development, and other land   $ 3,753     8.88 %   $ 14,377     27.33 % Commercial and industrial     6,700     3.61 %     25,584     13.88 % Multi-family residential     5,919     5.61 %     22,021     20.82 % Single family non-owner occupied     7,049     3.65 %     39,135     20.75 % Commercial Real Estate - Hotel/Motel     48,225     46.69 %     92,940     89.75 % Commercial Real Estate - Retail Strip Centers     4,432     6.45 %     19,740     38.17 % Commercial Real Estate - Other     22,912     3.92 %     116,871     20.58 % Agricultural     1,322     12.93 %     3,464     33.29 % Farmland     2,223     9.56 %     5,865     24.79 % Total commercial modifications   $ 102,535     7.78 %   $ 339,997     26.39 %   50 Table of Contents   Risk Elements   We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $4.00 million annually and at various times during the year. Smaller commercial and retail loans are sampled for review during the year.   Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, unseasoned troubled debt restructurings (“TDRs”), and OREO. Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 5, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.   51 Table of Contents   The following table presents the components of nonperforming assets and related information as of the periods indicated:       September 30, 2020     December 31, 2019     September 30, 2019   (Amounts in thousands)                         Non-covered nonperforming                         Nonaccrual loans   $ 24,423     $ 16,113     $ 16,701   Accruing loans past due 90 days or more     43       144       107   TDRs(1)     456       720       668   Total nonperforming loans     24,922       16,977       17,476   Non-covered OREO     2,103       3,969       2,528   Total non-covered nonperforming assets   $ 27,025     $ 20,946     $ 20,004                             Covered nonperforming                         Nonaccrual loans   $ 333     $ 244     $ 243   Total nonperforming loans     333       244       243   Covered OREO     -       -       -   Total covered nonperforming assets   $ 333     $ 244     $ 243                             Total nonperforming                         Nonaccrual loans   $ 24,756     $ 16,357     $ 16,944   Accruing loans past due 90 days or more     43       144       107   TDRs(1)     456       720       668   Total nonperforming loans     25,255       17,221       17,719   OREO     2,103       3,969       2,528   Total nonperforming assets   $ 27,358     $ 21,190     $ 20,247                             Additional Information                         Performing TDRs(2)   $ 10,480     $ 5,855     $ 5,635   Total Accruing TDRs(3)     10,936       6,575       6,303                             Non-covered ratios                         Nonperforming loans to total loans     1.14 %     0.81 %     1.04 % Nonperforming assets to total assets     0.92 %     0.75 %     0.91 % Non-PCI allowance to nonperforming loans     109.45 %     108.53 %     105.82 % Non-PCI allowance to total loans     1.25 %     0.88 %     1.10 %                           Total ratios                         Nonperforming loans to total loans     1.15 %     0.81 %     1.05 % Nonperforming assets to total assets     0.93 %     0.76 %     0.92 % Allowance for loan losses to nonperforming loans     108.01 %     106.99 %     104.37 % Allowance for loan losses to total loans     1.24 %     0.87 %     1.09 %   (1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.57 million, $95 thousand, and $329 thousand for the periods ended September 30, 2020, December 31, 2019, and September 30, 2019, respectively. (2) TDRs with six months or more of satisfactory payment performance exclude nonaccrual TDRs of $474 thousand, $2.25 million, and $2.19 million for the periods ended September 30, 2020, December 31, 2019, and September 30, 2019, respectively. (3) Total accruing TDRs exclude nonaccrual TDRs of $2.04 million, $2.34 million, and $2.52 million for the periods ended September 30, 2020, December 31, 2019, and September 30, 2019, respectively.   Non-covered nonperforming assets as of September 30, 2020, increased $6.08 million, or 29.02%, from December 31, 2019, primarily due to an increase in non-covered nonaccrual loans acquired from Highlands Union Bank offset by a decrease in OREO of $1.87 million. Non-covered nonaccrual loans as of September 30, 2020, increased $8.31 million, or 51.57%, from December 31, 2019. As of September 30, 2020, non-covered nonaccrual loans were largely attributed to single family owner occupied (32.80%), non-farm, non-residential (27.07%), and single family non-owner occupied loans (13.47%). As of September 30, 2020, approximately $6.86 million or 28.09%, of non-covered nonaccrual loans were attributed to performing loans acquired through the Highlands acquisition. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.   Non-covered delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $33.90 million as of September 30, 2020, a  decrease of $1.72 million, or 4.84%, compared to $35.62 million as of December 31, 2019. Non-covered delinquent loans as a percent of total non-covered loans totaled 1.55% as of September 30, 2020, which includes past due loans (0.43%) and nonaccrual loans (1.12%).   52 Table of Contents When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. Accruing TDRs as of September 30, 2020, increased $4.36 million, or 66.33%, to $10.94 million from December 31, 2019. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of September 30, 2020, increased $1.87 million to $2.77 million compared to December 31, 2019. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 25.29% as of September 30, 2020, compared to 13.69% as of December 31, 2019. Specific reserves on TDRs totaled $347 thousand as of September 30, 2020, compared to $353 thousand as of December 31, 2019.   The Coronavirus Aid, Relief and Economic Security (“CARES”) Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.   Through September 30, 2020, we had modified 3,362 loans for $426.45 million related to COVID-19 relief.  Those modifications were generally short-term payment deferrals and are not considered TDR’s based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.   The balance of non-accrual loans was higher at September 30, 2020, due mainly to the migration of three commercial real estate loans with a total balance of $2.58 million coupled with approximately $6.00 million in HUB loans since year-end.  The loans were past due prior to the COVID-19 emergency declaration and payments continued to slow during the quarter.  Additionally, the Bank suspended foreclosure and repossession activity at the end of March due to the COVID-19 pandemic and loans that would have normally been resolved through these processes remain in the portfolio at September 30, 2020.   Non-covered OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $1.87 million, or 47.01%, as of September 30, 2020, compared to December 31, 2019, and consisted of 22 properties with an average holding period of approximately 13 months. The net gain on the sale of OREO totaled $32 thousand for the three months ended September 30, 2020, compared to a net loss of $234 thousand for the same period of the prior year; the net loss on the sale of OREO for the nine months ended September 30, 2020 totaled $296 thousand compared to $790 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:       Nine Months Ended September 30,       2020     2019       Non-covered     Covered     Total     Non-covered     Covered     Total   (Amounts in thousands)                                                 Beginning balance   $ 3,969     $ -     $ 3,969     $ 3,806     $ 32     $ 3,838   Additions     695       -       695       2,752       131       2,883   Disposals     (2,139 )     -       (2,139 )     (3,388 )     (152 )     (3,540 ) Valuation adjustments     (422 )     -       (422 )     (642 )     (11 )     (653 ) Ending balance   $ 2,103     $ -     $ 2,103     $ 2,528     $ -     $ 2,528     Allowance for Loan Losses   The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and recoveries of prior loan charge-offs and decreased by loans charged off. The provision for loan losses is calculated and charged to expense to bring the allowance to an appropriate level using a systematic process of measurement that requires significant judgments and estimates. As of September 30, 2020, our allowance reflects a higher risk of loan losses due to uncertainty around the impact that the COVID-19 pandemic will have on business and economic conditions in our primary market areas. The loan portfolio is continually monitored for deterioration in credit, which may result in the need to increase the allowance for loan losses in future periods. Management considered the allowance adequate as of September 30, 2020; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see Note 6, “Allowance for Loan Losses,” to the Condensed Consolidated Financial Statements in Item 1 of this report.   The allowance for loan losses as of September 30, 2020, increased $8.85 million, or 48.04%, from December 31, 2019 due primarily to the increased potential for loan defaults and losses related to the COVID-19 pandemic. The non-PCI allowance as a percent of non-covered loans totaled 1.25% as of September 30, 2020, compared to 0.88% as of December 31, 2019. Effective January 1, 2020, the Company collapsed the PCI loans and discounts for Peoples and Waccamaw acquired loans into the core loan portfolio. The Highlands transaction added the following pools: 1-4 Family, Senior-Consumer, 1-4 Family Senior-Commercial, 1-4 Family, Junior and Home Equity Lines, Commercial Land and Development, Farmland and Agricultural, Multi-family, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-owner Occupied, Commercial and Industrial, and Consumer. Net charge-offs increased $462 thousand for the three months ended September 30, 2020, compared to the same period of the prior year. For the nine months ended September 30, 2020, net charge-offs decreased $72 thousand, compared with the same period of the prior year. The decrease in net charge-offs was driven by reduced losses in the single-family owner occupied loan pool.   53 Table of Contents   The following table presents the changes in the allowance for loan losses during the periods indicated:       Three Months Ended September 30,       2020     2019       Non-PCI                     Non-PCI                       Portfolio     PCI Portfolio     Total     Portfolio     PCI Portfolio     Total   (Amounts in thousands)                                                 Beginning balance   $ 23,758     $ -     $ 23,758     $ 18,540     $ -     $ 18,540   Provision for (recovery of) loan losses charged to operations     4,703       -       4,703       675       -       675   Charge-offs     (1,563 )     -       (1,563 )     (964 )     -       (964 ) Recoveries     379       -       379       242       -       242   Net charge-offs     (1,184 )     -       (1,184 )     (722 )     -       (722 ) Ending balance   $ 27,277     $ -     $ 27,277     $ 18,493     $ -     $ 18,493         Nine Months Ended September 30,       2020     2019       Non-PCI                     Non-PCI                       Portfolio     PCI Portfolio     Total     Portfolio     PCI Portfolio     Total   (Amounts in thousands)                                                 Beginning balance   $ 18,425     $ -     $ 18,425     $ 18,267     $ -     $ 18,267   Provision for loan losses                                                 charged to operations     12,034       -       12,034       3,480       -       3,480   Charge-offs     (4,429 )     -       (4,429 )     (4,700 )     -       (4,700 ) Recoveries     1,247       -       1,247       1,446       -       1,446   Net charge-offs     (3,182 )     -       (3,182 )     (3,254 )     -       (3,254 ) Ending balance   $ 27,277     $ -     $ 27,277     $ 18,493     $ -     $ 18,493     Deposits   Total deposits as of September 30, 2020, increased $162.33 million, or 6.97%, compared to December 31, 2019. The increase was largely attributable to noninterest-bearing demand deposits which increased $122.41 million, or 19.50%. Interest-bearing demand and savings deposits also reflected growth with increases of $79.26 million, or 15.93% and $39.40 million, or 5.72%, respectively. These increases were offset by a decrease in time deposits of $78.74 million, or 15.27%. We attribute a significant amount of the increase in deposits to the unprecedented level of federal government stimulus during the second quarter of 2020.   B orrowings   Total borrowings as of September 30, 2020, decreased $645 thousand, compared to December 31, 2019.   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.   54 Table of Contents   As a financial holding company, the Company’s primary source of liquidity is dividends received from the Bank, which are subject to certain regulatory limitations. Other sources of liquidity include cash, investment securities, and borrowings. As of September 30, 2020, the Company’s cash reserves totaled $9.46 million and availability on an unsecured, committed line of credit with an unrelated financial institution totaled $15.00 million. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.   In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of September 30, 2020, our unencumbered cash totaled $375.66 million, unused borrowing capacity from the FHLB totaled $322.82 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $85.00 million, and unpledged available-for-sale securities totaled $54.80 million.   Cash Flows   The following table summarizes the components of cash flow for the periods indicated:       Nine Months Ended September 30,       2020     2019   (Amounts in thousands)                 Net cash provided by operating activities   $ 32,028     $ 39,636   Net cash provided by investing activities     304       139,757   Net cash provided by (used in) financing activities     126,323       (73,808 ) Net increase in cash and cash equivalents     158,655       105,585   Cash and cash equivalents, beginning balance     217,009       76,873   Cash and cash equivalents, ending balance   $ 375,664     $ 182,458     Cash and cash equivalents increased $158.66 million for the nine months ended September 30, 2020, compared to an increase of $105.59 million for the same period of the prior year. The increase in cash and cash equivalents during 2020 was due largely to the significant inflow of non-maturity deposits from unprecedented government stimulus.   Capital Resources   We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of September 30, 2020, decreased $8.90 million, or 2.08%, to $419.92 million from $428.82 million as of December 31, 2019. The change in stockholders’ equity was largely due to net income of $24.38 million offset by the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared on our common stock of $13.45 million. Accumulated other comprehensive loss decreased $262 thousand to $1.24 million as of September 30, 2020, compared to December 31, 2019, primarily due to net unrealized gains on securities. In accordance with current regulatory guidelines, accumulated other comprehensive income/(loss) is largely excluded from stockholders’ equity in the calculation of our capital ratios. Our book value per common share increased $0.37 or 1.57% to $23.70 as of September 30, 2020, from $23.33 as of December 31, 2019.   55 Table of Contents   Capital Adequacy Requirements   Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III. A description of the Basel III capital rules is included in Part I, Item 1 of the 2019 Form 10-K. Our current required capital ratios are as follows:     ● 4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)   ● 6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)   ● 8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)   ● 4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)   The following table presents our capital ratios as of the dates indicated:       September 30, 2020     December 31, 2019       Company     Bank     Company     Bank                             Common equity Tier 1 ratio   13.89%     13.21%     14.31%     12.87%   Tier 1 risk-based capital ratio   13.89%     13.21%     14.31%     12.87%   Total risk-based capital ratio   15.14%     14.46%     15.21%     13.78%   Tier 1 leverage ratio   10.06%     9.57%     14.01%     12.61%     Our risk-based capital ratios as of September 30, 2020, decreased from December 31, 2019, due to a decrease in total capital. The decrease in total capital was primarily attributable to the repurchase of 734,653 shares of our common stock totaling $21.87 million and dividends declared of $13.45 million, offset by net income of $24.38 million. As of September 30, 2020, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of September 30, 2020.   Off-Balance Sheet Arrangements   We extend contractual commitments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. Our exposure to credit loss in the event of nonperformance by other parties to financial instruments is the same as the contractual amount of the instrument. The following table presents our off-balance sheet arrangements as of the dates indicated:       September 30, 2020     December 31, 2019   (Amounts in thousands)                 Commitments to extend credit   $ 219,297     $ 228,716   Standby letters of credit and financial guarantees (1)     173,925       167,612   Total off-balance sheet risk   $ 393,222     $ 396,328                     Reserve for unfunded commitments   $ 66     $ 66     (1) Includes FHLB letters of credit   Market Risk and Interest Rate Sensitivity   Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. ALCO reviews our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and mitigate the effect of interest rate changes.   56 Table of Contents   In order to manage our exposure to interest rate risk, we periodically review internal simulation and third-party models that project net interest income at risk, which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate shock.   As of September 30, 2020, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 0 to 25 basis points. Given the current level of benchmark interest rates, a complete downward shock of 100 basis points is rendered meaningless; accordingly, a downward rate scenario is only presented for the prior year end. In the downward rate shocks presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.       September 30, 2020     December 31, 2019       Change in     Percent     Change in     Percent   Increase (Decrease) in Basis Points   Net Interest Income     Change     Net Interest Income     Change   (Dollars in thousands)                                 300   $ 7,633       6.97 %   $ 171       0.20 % 200     5,354       4.89 %     428       0.40 % 100     2,846       2.60 %     426       0.40 % (100)     N/A       -       (4,631 )     -4.30 %   Inflation and Changing Prices   Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of operations and financial position in historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations is increased operating costs. In management’s opinion, interest rates have a greater impact on our financial performance than inflation. Interest rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation on businesses with large investments in property, plant, and inventory is generally more significant than the effect on financial institutions. The U.S. inflation rate continues to be relatively stable, and management believes that any changes in inflation will not be material to our financial performance.   In anticipation of the potential discontinuance of the London Interbank Offered Rate (LIBOR) at the end of 2021, the Company has broken the transition efforts into two phases. The first phase is adding additional language to new loans that allows the Company to replace LIBOR with an equivalent rate index and adjust the margin to ensure the resulting interest rate is the same as it previously was using LIBOR. Also included in the first phase, the Company will be transitioning from the LIBOR swap curve to alternative reference rates when repricing certain loans. The second phase is transitioning current variable loans tied to LIBOR or on a LIBOR swap curve. The Company is currently quantifying the dollar amount and number of loans that extend beyond 2021.   Item 3. Quantitative and Qualitative Disclosures about Market Risk   The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 2 of this report.   Item 4. Controls and Procedures   Evaluation of Disclosure Controls and Procedures   In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of September 30, 2020, our disclosure controls and procedures were effective.   57 Table of Contents   Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions about required disclosure.   Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.   Changes in Internal Control over Financial Reporting   We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.   PART II. OTHER INFORMATION   ITEM 1. Legal Proceedings   We are currently a defendant in various legal actions and asserted claims in the normal course of business. Although we are unable to assess the ultimate outcome of each matter with certainty, we believe that the resolution of these actions should not have a material adverse effect on our financial position, results of operations, or cash flows.   ITEM 1A. Risk Factors   The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2019 discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included in our annual report on Form 10-K for the year ended December 31, 2019 before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2019.   The Company is providing these additional risk factors to supplement the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.   The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.   The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have branches and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.   58 Table of Contents   The ultimate effects of the COVID-19 pandemic on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. This may include, or exacerbate, among other consequences, the following:     ● employees contracting COVID-19;   ● reductions in our operating effectiveness as our employees work from home;   ● increased cybersecurity risk due to the continuation of the work-from-home measures;   ● a work stoppage, forced quarantine, or other interruption of our business;   ● unavailability of key personnel necessary to conduct our business activities;   ● effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;   ● sustained closures of our branch lobbies or the offices of our customers;   ● declines in demand for loans and other banking services and products;   ● reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic;   ● unprecedented volatility in United States financial markets;   ● volatile performance of our investment securities portfolio;   ● decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for loan losses;   ● declines in value of collateral for loans, including real estate collateral;   ● declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and   ● declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets.   These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.   The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.   We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.   As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.   On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020 and on or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on April 24, 2020. As of September 30, 2020, we have funded approximately 803 loans with original principal balances totaling $62.74 million through the PPP program.   Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both customers and non-customers who approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.   59 Table of Contents   The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.   Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, the Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that the Bank would have otherwise extended credit.  Rules providing for forgiveness have been constantly evolving, including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.   ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds   (a) Not Applicable   (b) Not Applicable   (c) Issuer Purchases of Equity Securities   We repurchased no shares of our common stock during the third quarter of 2020 compared to 194,000 shares during the same quarter of 2019. We do not currently have a publicly announced plan to repurchase shares.   ITEM 3. Defaults Upon Senio r Securities   None.   ITEM 4. Mine Safety Disclosures   None.   ITEM 5. Other Information None.   ITEM 6. Exhibits   2.1 Agreement and Plan of Reincorporation and Merger between First Community Bancshares, Inc. and First Community Bankshares, Inc., incorporated by reference to Appendix A of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018 2.2 Agreement and Plan of Merger between First Community Bankshares, Inc. and Highlands Bankshares, Inc., incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed September 11, 2019 3.1 Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018 3.2 Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018 4.1 Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018 4.2 Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018 10.1.1** First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000 10.1.2** Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004 10.2** First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002 10.3** First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002 10.4** First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan, incorporated by reference to Annex B of the Definitive Proxy Statement on Form DEF 14A dated April 27, 2004, filed on March 15, 2004   60 Table of Contents   10.5** First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan Stock Award Agreement, incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on August 6, 2004 10.6** First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012 10.7** First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013 10.8** First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000 10.9.1** First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009; 10.9.2** Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010 10.9.3** Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013 10.9.4** Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016 10.9.5** Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017 10.10** Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19,2019 10.11.1** First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017 10.11.2** Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017 10.12.1** First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016 10.12.2** Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016 10.13** Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015 10.15** Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015 10.16** Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101*** Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2020, (Unaudited) and December 31, 2019; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). 104* The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).   * Filed herewith ** Indicates a management contract or compensation plan or agreement. 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   61 Table of Contents   SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 9th day of November, 2020.       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)   62