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 March 31, 2021 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 May 04, 2021, there were 17,538,048 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 March 31, 2021 (Unaudited) and December 31, 2020 4     Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited)  5     Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited) 6     Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (Unaudited) 7     Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited) 8     Notes to Condensed Consolidated Financial Statements (Unaudited) 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 3. Quantitative and Qualitative Disclosures About Market Risk 48 Item 4. Controls and Procedures 48       PART II. OTHER INFORMATION         Item 1. Legal Proceedings 48 Item 1A. Risk Factors 48 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49 Item 3. Defaults Upon Senior Securities 49 Item 4. Mine Safety Disclosures 49 Item 5. Other Information 49 Item 6. Exhibits 49       Signatures 51     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;   ● the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system;   ● technological changes;   ● the cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;   ● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;    ● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;   ● the 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, 2020.   3 Table of Contents   PART I. FINANCIAL INFORMATION   Item 1.     Financial Statemen ts     CONDENSED CONSOLIDATED BALANCE SHEETS       March 31,     December 31,       2021     2020 (1)   (Amounts in thousands, except share and per share data)   (Unaudited)           Assets                 Cash and due from banks   $ 54,863     $ 58,404   Federal funds sold     570,486       395,756   Interest-bearing deposits in banks     3,396       2,401   Total cash and cash equivalents     628,745       456,561   Debt securities available for sale     87,643       83,358   Loans held for investment, net of unearned income (includes covered loans of $ 9,041 and $ 9,680 , respectively)     2,146,640       2,186,632   Allowance for credit losses     ( 34,563 )     ( 26,182 ) Loans held for investment, net     2,112,077       2,160,450   FDIC indemnification asset     946       1,223   Premises and equipment, net     57,371       57,700   Other real estate owned     1,740       2,083   Interest receivable     8,724       9,052   Goodwill     129,565       129,565   Other intangible assets     6,712       7,069   Other assets     106,543       104,075   Total assets   $ 3,140,066     $ 3,011,136                     Liabilities                 Deposits                 Noninterest-bearing   $ 824,576     $ 772,795   Interest-bearing     1,848,524       1,773,452   Total deposits     2,673,100       2,546,247   Securities sold under agreements to repurchase     1,519       964   Interest, taxes, and other liabilities     39,448       37,195   Total liabilities     2,714,067       2,584,406                     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; 24,376,278 shares issued and 17,592,009 outstanding at March 31, 2021; 24,319,076 shares issued and 17,722,507 outstanding at December 31, 2020     17,592       17,723   Additional paid-in capital     169,173       173,345   Retained earnings     241,889       237,585   Accumulated other comprehensive loss     ( 2,655 )     ( 1,923 ) Total stockholders' equity     425,999       426,730   Total liabilities and stockholders' equity   $ 3,140,066     $ 3,011,136     (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       March 31,   (Amounts in thousands, except share and per share data)   2021     2020   Interest income                 Interest and fees on loans   $ 26,540     $ 28,058   Interest on securities -- taxable     198       380   Interest on securities -- tax-exempt     297       538   Interest on deposits in banks     116       533   Total interest income     27,151       29,509   Interest expense                 Interest on deposits     869       1,825   Interest on short-term borrowings     -       2   Total interest expense     869       1,827   Net interest income     26,282       27,682   (Recovery of) provision for credit losses     ( 4,001 )     3,500   Net interest income after provision for loan losses     30,283       24,182   Noninterest income                 Wealth management     881       844   Service charges on deposits     3,031       3,731   Other service charges and fees     3,022       2,231   Net gain on sale of securities     -       385   Net FDIC indemnification asset amortization     ( 280 )     ( 486 ) Other operating income     915       844   Total noninterest income     7,569       7,549   Noninterest expense                 Salaries and employee benefits     10,884       11,386   Occupancy expense     1,275       1,315   Furniture and equipment expense     1,367       1,384   Service fees     1,335       1,523   Advertising and public relations     335       512   Professional fees     466       233   Amortization of intangibles     357       361   FDIC premiums and assessments     199       -   Merger expenses     -       1,893   Other operating expense     2,602       3,057   Total noninterest expense     18,820       21,664   Income before income taxes     19,032       10,067   Income tax expense     4,430       2,195   Net income   $ 14,602     $ 7,872                     Earnings per common share                 Basic   $ 0.83     $ 0.44   Diluted     0.82       0.44   Weighted average shares outstanding                 Basic     17,669,937       17,998,994   Diluted     17,729,185       18,050,071     See Notes to Condensed Consolidated Financial Statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)       Three Months Ended       March 31,       2021     2020   (Amounts in thousands)                 Net income   $ 14,602     $ 7,872   Other comprehensive income, before tax                 Available-for-sale debt securities:                 Change in net unrealized (losses) gains on debt securities without other-than-temporary impairment     ( 817 )     1,199   Reclassification adjustment for net (gains) recognized in net income     -       ( 385 ) Net unrealized (losses) gains on available-for-sale debt securities     ( 817 )     814   Employee benefit plans:                 Net actuarial (loss)     ( 206 )     ( 446 ) Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income     97       97   Net unrealized (losses) on employee benefit plans     ( 109 )     ( 349 ) Other comprehensive (loss) income, before tax     ( 926 )     465   Income tax (benefit) expense     ( 194 )     98   Other comprehensive (loss) income, net of tax     ( 732 )     367   Total comprehensive income   $ 13,870     $ 8,239     See Notes to Condensed Consolidated Financial Statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) THREE MONTHS ENDED March 31, 2021 and 2020                                       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, 2020   $ -     $ 18,377     $ 192,413     $ 219,535     $ ( 1,506 )   $ 428,819   Net income     -       -       -       7,872       -       7,872   Other comprehensive income     -       -       -       -       367       367   Common dividends declared -- $ 0.25 per share     -       -       -       ( 4,593 )     -       ( 4,593 ) Equity-based compensation expense     -       51       788       -       -       839   Issuance of common stock to 401(k) plan -- 6,617 shares     -       7       167       -       -       174   Repurchase of common shares -- 734,653 shares at $ 29.77 per share     -       ( 735 )     ( 21,137 )     -       -       ( 21,872 ) Balance March 31, 2020   $ -     $ 17,700     $ 172,231     $ 222,814     $ ( 1,139 )   $ 411,606                                                     Balance January 1, 2021   $ -     $ 17,723     $ 173,345     $ 237,585     $ ( 1,923 )   $ 426,730   Cumulative effect of adoption of ASU 2016-13     -       -       -       ( 5,870 )     -       ( 5,870 ) Net income     -       -       -       14,602       -       14,602   Other comprehensive income     -       -       -       -       ( 732 )     ( 732 ) Common dividends declared -- $ 0.25 per share     -       -       -       ( 4,428 )     -       ( 4,428 ) Equity-based compensation expense     -       51       483       -       -       534   Issuance of common stock to 401(k) plan -- 5,652 shares     -       6       142       -       -       148   Repurchase of common shares -- 187,700 shares at $ 26.56 per share     -       ( 188 )     ( 4,797 )     -       -       ( 4,985 ) Balance March 31, 2021   $ -     $ 17,592     $ 169,173     $ 241,889     $ ( 2,655 )   $ 425,999     See Notes to Condensed Consolidated Financial Statements.   7 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)       Three Months Ended       March 31,   (Amounts in thousands)   2021     2020   Operating activities                 Net income   $ 14,602     $ 7,872   Adjustments to reconcile net income to net cash provided by operating activities                 (Recovery of) provision for credit losses     ( 4,001 )     3,500   Depreciation and amortization of premises and equipment     1,125       1,090   Amortization of premiums on investments, net     85       1,243   Amortization of FDIC indemnification asset, net     280       486   Amortization of intangible assets     357       361   Accretion on acquired loans     ( 1,187 )     ( 1,954 ) Equity-based compensation expense     402       839   Issuance of common stock to 401(k) plan     148       174   Gain on sale of premises and equipment, net     ( 64 )     ( 1 ) Loss on sale of other real estate owned     316       300   Gain on sale of securities     -       ( 385 ) Decrease in accrued interest receivable     328       560   Decrease/Increase in other operating activities     224       ( 2,712 ) Net cash provided by operating activities     12,615       11,373   Investing activities                 Proceeds from sale of securities available for sale     -       51,027   Proceeds from maturities, prepayments, and calls of securities available for sale     6,489       10,751   Payments to acquire securities available for sale     ( 11,675 )     -   Proceeds from repayment of loans, net     45,985       19,052   Proceeds from (Purchase of) FHLB stock, net     1,012       ( 12 ) Payments to the FDIC     ( 3 )     ( 35 ) Proceeds from sale of premises and equipment     128       5   Payments to acquire premises and equipment     ( 922 )     ( 1,580 ) Proceeds from sale of other real estate owned     428       1,279   Net cash provided by investing activities     41,442       80,487   Financing activities                 Increase (decrease) in noninterest-bearing deposits, net     51,781       ( 7,576 ) Increase (decrease) in interest-bearing deposits, net     75,072       ( 33,922 ) Proceeds from (repayments) of securities sold under agreements to repurchase, net     555       ( 253 ) Repayments of FHLB and other borrowings, net     -       960   Proceeds from stock options exercised     132       -   Payments for repurchase of common stock     ( 4,985 )     ( 21,872 ) Payments of common dividends     ( 4,428 )     ( 4,593 ) Net cash provided by (used in) financing activities     118,127       ( 67,256 ) Net increase in cash and cash equivalents     172,184       24,604   Cash and cash equivalents at beginning of period     456,561       217,009   Cash and cash equivalents at end of period   $ 628,745     $ 241,613                     Supplemental disclosure -- cash flow information                 Cash paid for interest   $ 1,072     $ 1,514   Cash paid for income taxes     4,744       1,454                     Supplemental transactions -- noncash items                 Transfer of loans to other real estate owned     460       377   Loans originated to finance other real estate owned     59       265   (Increase) decrease in accumulated other comprehensive loss     ( 732 )     367     See Notes to Condensed Consolidated Financial Statements.       8 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 reincorporation was completed on October 2, 2018.  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 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, 2020 (the “ 2020 Form 10 -K”), as filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2021. The condensed consolidated balance sheet as of December 31, 2020 , 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 2020 Form 10 -K.   Allowance for Credit Losses ( “ ACL ” )   On January 1,  2021, the Company adopted ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments.  The Company applied the ASU’s provisions using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021.  The cumulative-effect adjustment was a decrease to retained earnings net of tax of $ 5.87 million. The Company is not required to restate comparative prior periods presented in the financial statements utilizing this method; but will present comparative prior periods disclosures using the previous accounting guidance for the allowance for loan losses.  This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.   ACL – Investment Securities   The Company uses a systematic methodology to determine its ACL for investment securities held-to-maturity.  The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held-to-maturity portfolio.  The Company considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio.  The Company’s estimate of its ACL involves a high degree of judgement; therefore the the process for determining expected credit losses may result in a range of expected credit losses.  The Company  monitors the held-to-maturity portfolio to determine if a valuation account is necessary.  The Company currently has no held-to-maturity investment securities.   The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities.  Nor does the Company record an allowance for credit losses on accrued interest receivable.  As of March  31, 2021, the accrued interest receivable for investment securities available for sale was $ 406  thousand.   9 Table of Contents   The Company’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote.  The Company does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero.  Nonpayment of the amortized cost basis is not expected to be zero solely on the basis of the current value of collateral securing the security but, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third -party guarantees, credit ratings, interest rate change since purchase, volatility of the security’s fair value and historical loss information for financial assets securitized with similar collateral. The Company performed an analysis that determined that the following securities have a zero expected credit loss:  U.S. Treasury Securities, Agency-Backed Securities including Ginnie Mae Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Bank (“FHLB”), Federal Farm Credit Banks (“FFCB”) and Small Business Administration (“SBA”).  All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies.  These securities are included in Government-Sponsored Entities Debt and Mortgage-Backed Securities line items in the Investment Securities footnote.  Municipal securities and all other securities that do not have a zero expected credit loss will be evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.   The Company no longer evaluates securities for other-than-temporary impairment (“OTTI”), as ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” changes the accounting for recognizing impairment on available-for-sale debt securities.  Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value.  The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third -party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors.  Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.   ACL – Loans   The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments.  The Company established the incremental increase in the ACL at the adoption through retained earnings and subsequent adjustments will be made through a provision for credit losses charged to earnings.  Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.   A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures.  The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio.  Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio.  The Company’s estimate of its ACL involves a high degree of judgement and reflects management’s best estimate within the range of expected credit losses.  The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses.  The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.   The Company collectively evaluates loans that share similar risk characteristics.  In general, loans are segmented by loan purpose.  The Company collectively evaluates loans within the following consumer and commercial segments:  Loans secured by 1 - 4 Family Properties, Home Equity Lines of Credit (“HELOC”), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).   For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses.   In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL.  The Company utilized call report data to measure its and its peer s' historical credit losses experience with similar risk characteristics within the segments over an economic cycle.  Management reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics.  Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated.  For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology.   Management considers forward-looking information in estimated expected credit losses.  The Company subscribes to a third -party service which provides summary detail of dozens of economic forecasts.  Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one -year reasonable and supportable forecast period.  Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management.  Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses.  For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach.  Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.    Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process.  These qualitative adjustments either increase or decrease the quantitative model estimation.  Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following:  1 ) changes in lending polices and procedures, 2 ) changes in economic conditions, 3 ) changes in portfolio nature and volume, 4 ) changes in management, 5 ) changes in past due loans, 6 ) changes in the quality of the Company’s credit review system, 7 ) changes in the value of underlying collateral, 8 ) the effect of concentrations of credit, and 9 ) the effect of other external factors.   10 Table of Contents   When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $ 500,000 for individually-evaluated loans . Generally, individually-evaluated loans other than Troubled Debt Restructurings, otherwise referred to herein as “TDRs,” are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.   Management measures expected credit losses over the contractual term of the loans. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. The effects of a TDR are recorded when an individual asset is specifically identified as a reasonably-expected TDR. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower’s application for a modification (i.e. the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology to calculate the effect of the concession provided to the borrower in TDR within the ACL.    Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition date, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the fair value and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s acquired purchased credit impaired loans were treated as PCD loans.   The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March  31, 2021, the accrued interest receivable for loans was $ 8.31  million.    The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of March  31, 2021, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $ 465  thousand. The current adjustment to the ACL for unfunded commitments would be recognized through the provision for credit losses in the Statement of Income.   Risks and Uncertainties   Recent COVID- 19 Virus Developments –   During the year of 2020 and continuing into 2021, 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.  As COVID- 19 events unfolded during 2020 and 2021, 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.   11 Table of Contents   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.   As of March  31, 2021, total COVID- 19 loan deferrals stood at  $ 17.48 million,  down significantly from our peak of $ 436.11 million at June 30, 2020.  Deferred interest and fees for these loans will continue to accrue to income under normal GAAP accounting.  However, should eventual credit losses on deferred payment s 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 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 March 31, 2021  the Company processed 1,165  loans with original principal balances totaling $ 85.21 million through both the first and second rounds of the PPP. As of March 31, 2021, $ 32.73 million or 39.21 %, of the Company's Paycheck Protection Program loan balances have been forgiven by the SBA. As of March 31, 2021, 53.58 % of the Company's first round Paycheck Protection Program loan balances had been forgiven.   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.   12 Table of Contents   Recent Accounting Standards   Standards Adopted in 2021   In June 2016, the FASB issued ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” This ASU purportedly requires earlier recording of credit losses on loans and other financial assets 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 in investments in debt securities and purchased financial assets with credit deterioration.  The Company adopted the new standard as of January 1, 2021.  The standard was applied using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2021.  Under this method, comparative periods will not be required to be restated for financial statements related to Topic 326.   Comparative prior period disclosures will be presented using the guidance for the allowance for loan losses.  This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and the reasons for the change, which is solely a result of the adoption of the required standard.  This standard did not have a material impact on our investment securities portfolio at implementation.  Related to the implementation of the standard, the Company recorded an additional ACL for loans of $ 13.11  million, deferred tax assets of $ 1.81  million, and additional reserve for unfunded commitments of $ 509  thousand and an adjustment to retained earnings of $ 5.87  million.  See the table below for the impact of ASU 2016 - 13 on the Company’s consolidated balance sheet.                                   January 1, 2021         As Reported     Pre-     Impact of         Under     ASU 2016-13     ASU 2016-13         ASU 2016-13     Adoption     Adoption                                                             Assets:                           Non-covered loans held for investment                           Allowance for credit losses on debt securities                           Investment securities - available for sale   $ 83,358     $ 83,358     $ -   A Loans                           Non-acquired loans and acquired performing loans     2,146,972       2,146,972       -     Acquired purchased deteriorated loans     45,535       39,660       5,875   B Allowance for credit losses on loans     ( 39,289 )     ( 26,182 )     ( 13,107 ) C Deferred tax asset     19,306       17,493       1,813   D Accrued interest receivable - loans     9,109       9,052       57   B                             Liabilities                           Allowance for credit losses on off-balance sheet                           credit exposures     575       66       509   E                             Equity:                           Retained earnings     231,714       237,585       ( 5,871 ) F                               A. Per our analysis no ACL was necessary for investment securities available-for-sale. B. Accrued interest receivable from acquired credit impaired loans of $ 57 thousand was reclassed to other assets and was offset by the reclass of the grossed up credit discount on acquired credit impaired loans of $ 57 thousand that was moved to the ACL for the purchased credit deteriorated loans. C. Calculated adjustment to the ACL related to the adoption of ASU 2016 - 13.   Additional reserve related to purchased deteriorated loans of $ 5.88 million. D. Effect of deferred tax assets related to the adjustment to the ACL form the adoption of ASU 2016 - 13 using a 23.37 % tax rate. E. Adjustment to the reserve for unfunded commitments related to the adoption of ASU 2016 - 13. F. Net adjustment to retained earnings related to the adoption of ASU 2016 - 13.   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. The Company adopted this ASU as of January 1, 2021, and it did not have a material effect on the Company's financial statements.   The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements.   13 Table of Contents     Note 2 . Debt Securities   There was no allowance for credit losses for investments as of March 31, 2021; therefore, it is not presented in the table below.  The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:       March 31, 2021       Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value   (Amounts in thousands)                                 U.S. Agency securities   $ 534     $ -     $ ( 4 )   $ 530   Municipal securities     40,125       370       -       40,495   Mortgage-backed Agency securities     46,402       957       ( 741 )     46,618   Total   $ 87,061     $ 1,327     $ ( 745 )   $ 87,643         December 31, 2020       Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value   (Amounts in thousands)                                 U.S. Agency securities   $ 555     $ —     $ ( 4 )   $ 551   Municipal securities     43,950       509       —       44,459   Mortgage-backed Agency securities     37,453       992       ( 97 )     38,348   Total   $ 81,958     $ 1,501     $ ( 101 )   $ 83,358     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.       March 31, 2021       Amortized           (Amounts in thousands)   Cost     Fair Value   Available-for-sale debt securities                 Due within one year   $ 980     $ 982   Due after one year but within five years     28,688       28,902   Due after five years but within ten years     10,991       11,141         40,659       41,025   Mortgage-backed securities     46,402       46,618   Total debt securities available for sale   $ 87,061     $ 87,643     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:       March 31, 2021       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   $ -     $ -     $ 523     $ ( 4 )   $ 523     $ ( 4 ) Mortgage-backed Agency securities     21,453       ( 741 )     -       -       21,453       ( 741 ) Total   $ 21,453     $ ( 741 )   $ 523     $ ( 4 )   $ 21,976     $ ( 745 )       December 31, 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     $ —       $ —       $ 544       $ (4)       $ 544       $ (4)   Municipal securities     —       —       —       —       —       —   Mortgage-backed Agency securities     11,018       (97)       —       —       11,018       (97)   Total     $ 11,018       $ (97)       $ 544       $ (4)       $ 11,562       $ (101)     14 Table of Contents   There were 12  individual debt securities in an unrealized loss position as of March 31, 2021 , and the combined depreciation in value represented  0.85 % of the debt securities portfolio. There were 6  individual debt securities in an unrealized loss position as of December 31, 2020 , and their combined depreciation in value represented 0.12 % of the debt securities portfolio.   Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to ( 1 ) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, ( 2 ) the outlook for receiving the contractual cash flows of the investments, ( 3 ) the length of time and the extent to which the fair value has been less than cost, ( 4 ) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than- not that we will be required to sell the debt security prior to recovering its fair value, ( 5 ) the anticipated outlook for changes in the general level of interest rates, ( 6 ) credit ratings, ( 7 ) third party guarantees, and ( 8 ) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments.  All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of March 31, 2021 continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than- not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.   Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.   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       March 31,       2021     2020   (Amounts in thousands)                 Gross realized gains   $ -     $ 419   Gross realized losses     -       ( 34 ) Net Gain (Loss) on sale of securities   $ -     $ 385     The carrying amount of securities pledged for various purposes totaled $ 37.13  million as of March 31, 2021 , and $ 36.56  million as of December 31, 2020 .     Note 3 . Loans   The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $ 1.18 million as of March 31, 2021 , and $ 1.13 million as of December 31, 2020 . Deferred loan fees, net of loan costs, totaled $ 6.52 million as of March 31, 2021 , and $ 5.58 million as of December 31, 2020 . For information about off-balance sheet financing, see Note 14, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.   In accordance with the adoption of ASU 2016 - 13, the table below reflects the loan portfolio at the amortized cost basis for the current period March 31, 2021 , to include net deferred loan fees of $ 6.52 million and unamortized discount total related to loans acquired of $ 7.78  million. Accrued interest receivable (AIR) of $ 8.31 million is accounted for separately and reported in Interest Receivable on the Statement of Condition.   The comparative periods in the table below reflect the loan portfolio prior to the adoption of ASU 2016 - 13. Prior periods were reported as shown in the below tables, with the acquired loans being net of earned income and of related discounts, which includes the credit discount on the acquired credit impaired loans.   15 Table of Contents   Included in total loans are covered loans that are generally reimbursable by the FDIC at the applicable loss share percentage of 80%. As of March 31, 2021, covered loan balances totaled $ 9.04 million; covered loan balances were $ 9.68 million year-end 2020. The following table presents loans, net of unearned income, within the portfolio by loan class, as of the dates indicated:       March 31, 2021     December 31, 2020   (Amounts in thousands)   Amount     Percent     Amount     Percent   Loans held for investment                                 Commercial loans                                 Construction, development, and other land   $ 45,328       2.11 %   $ 44,674       2.04 % Commercial and industrial     162,227       7.56 %     173,024       7.91 % Multi-family residential     105,592       4.92 %     115,161       5.27 % Single family non-owner occupied     187,896       8.75 %     187,783       8.59 % Non-farm, non-residential     718,830       33.49 %     734,793       33.60 % Agricultural     9,723       0.45 %     9,749       0.45 % Farmland     19,014       0.89 %     19,761       0.90 % Total commercial loans     1,248,610       58.17 %     1,284,945       58.76 % Consumer real estate loans                                 Home equity lines     92,095       4.29 %     96,526       4.41 % Single family owner occupied     665,128       30.98 %     661,054       30.24 % Owner occupied construction     18,376       0.86 %     17,720       0.81 % Total consumer real estate loans     775,599       36.13 %     775,300       35.46 % Consumer and other loans                                 Consumer loans     117,904       5.49 %     120,373       5.50 % Other     4,527       0.21 %     6,014       0.28 % Total consumer and other loans     122,431       5.70 %     126,387       5.78 % Total loans held for investment, net of unearned income   $ 2,146,640       100.00 %   $ 2,186,632       100.00 %                                     The Company began participating as a Small Business Administration Paycheck Protection Program lender during the  second quarter of 2020. At March 31, 2021 , the PPP loans had a current balance of $ 50.75  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 $ 3.27 million at March 31, 2021 , were also recorded. During the first quarter of 2021 , the Company recorded amortization of net deferred loan origination fees of $ 922 thousand on PPP loans. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.   Prior to the adoption of ASU 2016 - 13, the Company identified certain purchased loans as impaired when fair values were established at acquisition and grouped those purchased credit impaired (“PCI”) loans into loan pools with common risk characteristics. The Company estimated cash flows to be collected on PCI loans and discounted 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 were those loans acquired in the Highlands acquisition on December 31, 2019.   The following table presents the recorded investment and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:       December 31, 2020       Recorded     Unpaid Principal   (Amounts in thousands)   Investment     Balance   PCI Loans, by acquisition                 Peoples   $ -     $ -   Waccamaw     -       -   Highlands     39,662       47,514   Other acquired     -       -   Total PCI Loans   $ 39,662     $ 47,514     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, 2020   $ 1,890     $ 12,574     $ 8,152     $ 22,616   Accretion     -       -       ( 686 )     ( 686 ) Reclassifications (to) from nonaccretable difference (1)     -       -       -       -   Other changes, net     ( 1,890 )     ( 12,574 )     -       ( 14,464 ) Balance March 31, 2020   $ -     $ -     $ 7,466     $ 7,466                                     ( 1 ) Represents changes attributable to expected loss assumptions   16 Table of Contents     Note 4 . Credit Quality   The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:   ● Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.   ● Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.   ● Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.   ● Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.   ● Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.   The following table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%. Covered loan balances totaled $ 9.04 million and $ 9.68 million for March 31, 2021 and December 31, 2020, respectively.       March 31, 2021               Special                                   (Amounts in thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total   Commercial loans                                                 Construction, development, and other land   $ 40,347     $ 2,440     $ 2,541     $ -     $ -     $ 45,328   Commercial and industrial     153,725       3,556       4,946       -       -       162,227   Multi-family residential     96,018       6,215       3,359       -       -       105,592   Single family non-owner occupied     166,474       8,802       12,608       12       -       187,896   Non-farm, non-residential     577,928       106,228       34,674       -       -       718,830   Agricultural     7,430       1,611       682       -       -       9,723   Farmland     13,893       1,333       3,788       -       -       19,014   Consumer real estate loans                                                 Home equity lines     87,260       1,294       3,541       -       -       92,095   Single family owner occupied     629,303       3,488       32,336       -       -       665,127   Owner occupied construction     18,090       -       286       -       -       18,376   Consumer and other loans                                                 Consumer loans     115,895       23       1,987       -       -       117,905   Other     4,527       -       -       -       -       4,527   Total loans   $ 1,910,890     $ 134,990     $ 100,748     $ 12     $ -     $ 2,146,640         December 31, 2020               Special                                   (Amounts in thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total                                                     Commercial loans                                                 Construction, development, and other land   $ 36,934     $ 4,975     $ 2,765     $ -     $ -     $ 44,674   Commercial and industrial     160,625       7,065       5,519       -       -       173,209   Multi-family residential     103,291       8,586       3,284       -       -       115,161   Single family non-owner occupied     165,146       9,602       12,838       12       -       187,598   Non-farm, non-residential     568,438       125,907       40,448       -       -       734,793   Agricultural     7,724       1,686       339       -       -       9,749   Farmland     13,527       2,597       3,637       -       -       19,761   Consumer real estate loans                                             -   Home equity lines     91,712       1,488       3,326       -       -       96,526   Single family owner occupied     623,860       3,859       33,335       -       -       661,054   Owner occupied construction     17,232       201       287       -       -       17,720   Consumer and other loans                                             -   Consumer loans     118,134       28       2,211       -       -       120,373   Other     6,014       -       -       -       -       6,014   Total loans   $ 1,912,637     $ 165,994     $ 107,989     $ 12     $ -     $ 2,186,632     17 Table of Contents   The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated.   (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at March 31, 2021   2021     2020     2019     2018     2017     Prior     Revolving     Total   Construction, development                                                                 and other land                                                                 Pass   $ 3,119     $ 13,696     $ 6,642     $ 5,879     $ 2,205     $ 8,364     $ 442     $ 40,347   Special Mention     -       282       -       1,179       682       251       46       2,440   Substandard     -       -       84       13       282       2,162       -       2,541   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total construction, development, and other land   $ 3,119     $ 13,978     $ 6,726     $ 7,071     $ 3,169     $ 10,777     $ 488     $ 45,328   Commercial and industrial                                                                 Pass   $ 6,729     $ 28,778     $ 21,645     $ 17,695     $ 6,271     $ 7,165     $ 14,694     $ 102,977   Special Mention     -       392       1,246       1,306       297       59       256       3,556   Substandard     -       422       1,081       343       1,728       1,343       29       4,946   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total commercial and industrial   $ 6,729     $ 29,592     $ 23,972     $ 19,344     $ 8,296     $ 8,567     $ 14,979     $ 111,479   Paycheck Protection Loans                                                                 Pass   $ 22,436     $ 28,312     $ -     $ -     $ -     $ -     $ -     $ 50,748   Special Mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total Paycheck Protection Loans   $ 22,436     $ 28,312     $ -     $ -     $ -     $ -     $ -     $ 50,748   Multi-family residential                                                                 Pass   $ 3,110     $ 28,363     $ 6,296     $ 2,147     $ 5,557     $ 49,593     $ 952     $ 96,018   Special Mention     -       -       -       -       2,573       3,642       -       6,215   Substandard     -       -       -       434       673       2,252       -       3,359   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total multi-family residential   $ 3,110     $ 28,363     $ 6,296     $ 2,581     $ 8,803     $ 55,487     $ 952     $ 105,592   Non-farm, non-residential                                                                 Pass   $ 27,998     $ 145,910     $ 57,936     $ 67,978     $ 51,626     $ 214,496     $ 11,984     $ 577,928   Special Mention     -       16,810       10,453       3,338       26,743       48,797       87       106,228   Substandard     1,340       741       5,738       9,583       9,951       7,186       135       34,674   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total non-farm, non-residential   $ 29,338     $ 163,461     $ 74,127     $ 80,899     $ 88,320     $ 270,479     $ 12,206     $ 718,830   Agricultural                                                                 Pass   $ 1,041     $ 2,506     $ 1,426     $ 590     $ 936     $ 430     $ 501     $ 7,430   Special Mention     49       128       366       650       328       30       60       1,611   Substandard     -       15       214       208       33       212       -       682   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total agricultural   $ 1,090     $ 2,649     $ 2,006     $ 1,448     $ 1,297     $ 672     $ 561     $ 9,723   Farmland                                                                 Pass   $ 649     $ 1,237     $ 216     $ 1,132     $ 472     $ 8,756     $ 1,431     $ 13,893   Special Mention     -       -       -       372       662       299       -       1,333   Substandard     -       15       943       252       255       2,323       -       3,788   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total farmland   $ 649     $ 1,252     $ 1,159     $ 1,756     $ 1,389     $ 11,378     $ 1,431     $ 19,014     18 Table of Contents   (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at March 31, 2021   2021     2020     2019     2018     2017     Prior     Revolving     Total   Home equity lines                                                                 Pass   $ 162     $ 683     $ 696     $ 303     $ 110     $ 10,643     $ 74,663     $ 87,260   Special Mention     -       -       -       122       -       519       653       1,294   Substandard     -       -       23       125       188       1,808       1,397       3,541   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total home equity lines   $ 162     $ 683     $ 719     $ 550     $ 298     $ 12,970     $ 76,713     $ 92,095   Single family Mortgage                                                                 Pass   $ 55,294     $ 241,770     $ 76,583     $ 61,791     $ 55,113     $ 304,325     $ 901     $ 795,777   Special Mention     -       916       1,133       275       2,655       7,311       -       12,290   Substandard     754       748       1,935       3,634       2,548       35,325       -       44,944   Doubtful     -       -       -       -       -       12       -       12   Loss     -       -       -       -       -       -       -       -   Total single family owner occupied   $ 56,048     $ 243,434     $ 79,651     $ 65,700     $ 60,316     $ 346,973     $ 901     $ 853,023   Owner occupied construction                                                                 Pass   $ 900     $ 9,816     $ 2,747     $ 1,932     $ 456     $ 2,239     $ -     $ 18,090   Special Mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       286       -       286   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total owner occupied construction   $ 900     $ 9,816     $ 2,747     $ 1,932     $ 456     $ 2,525     $ -     $ 18,376   Consumer loans                                                                 Pass   $ 15,522     $ 50,551     $ 28,501     $ 8,754     $ 3,742     $ 10,841     $ 2,511     $ 120,422   Special Mention     -       -       10       12       -       -       1       23   Substandard     -       378       978       215       162       175       79       1,987   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total consumer loans   $ 15,522     $ 50,929     $ 29,489     $ 8,981     $ 3,904     $ 11,016     $ 2,591     $ 122,432     Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at March 31, 2021   2021     2020     2019     2018     2017     Prior     Revolving     Total   Total Loans                                                                 Pass   $ 136,960     $ 551,622     $ 202,688     $ 168,201     $ 126,488     $ 616,852     $ 108,079     $ 1,910,890   Special Mention     49       18,528       13,208       7,254       33,940       60,908       1,103       134,990   Substandard     2,094       2,319       10,996       14,807       15,820       53,072       1,640       100,748   Doubtful     -       -       -       -       -       12       -       12   Loss     -       -       -       -       -       -       -       -   Total loans   $ 139,103     $ 572,469     $ 226,892     $ 190,262     $ 176,248     $ 730,844     $ 110,822     $ 2,146,640     19 Table of Contents   Prior to the adoption of ASU 2016 - 13, the Company identified 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. When the Company determined that it was probable all principal and interest amounts due would not be collected in accordance with the contractual terms of the loan agreement, the loan was generally deemed impaired.   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 date indicated prior to the adoption of ASU 2016 - 13:       December 31, 2020               Unpaid               Recorded     Principal     Related   (Amounts in thousands)   Investment     Balance     Allowance   Impaired loans with no related allowance                         Commercial loans                         Construction, development, and other land   $ 616     $ 891     $ -   Commercial and industrial     2,341       2,392       -   Multi-family residential     946       1,593       -   Single family non-owner occupied     4,816       5,785       -   Non-farm, non-residential     8,238       9,467       -   Agricultural     218       226       -   Farmland     1,228       1,311       -   Consumer real estate loans                         Home equity lines     1,604       1,772       -   Single family owner occupied     16,778       19,361       -   Owner occupied construction     216       216       -   Consumer and other loans                         Consumer loans     818       833       -   Total impaired loans with no allowance     37,819       43,847       -                             Impaired loans with a related allowance                         Commercial loans                         Commercial and industrial     -       -       -   Multi-family residential     -       -       -   Single family non-owner occupied     -       -       -   Non-farm, non-residential     1,068       1,121       319   Farmland     -       -       -   Consumer real estate loans                         Home equity lines     -       -       -   Single family owner occupied     338       338       108   Consumer and other loans                         Consumer loans     -       -       -   Total impaired loans with an allowance     1,406       1,459       427   Total impaired loans(1)   $ 39,225     $ 45,306     $ 427     ( 1 ) Total recorded investment of impaired loans include loans totaling $ 31.18  million as of December 31, 2020 , that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment.   20 Table of Contents   Prior to the adoption of ASU 2016 - 13, the Company presented the average recorded investment and interest income recognized on impaired loans, excluding PCI loans. The table below presents the information for the period indicated:       Three Months Ended March 31,       2020               Average       Interest Income     Recorded   (Amounts in thousands)   Recognized     Investment   Impaired loans with no related allowance:                 Commercial loans                 Construction, development, and other land   $ 8     $ 1,299   Commercial and industrial     29       2,029   Multi-family residential     11       670   Single family non-owner occupied     35       4,101   Non-farm, non-residential     43       4,674   Agricultural     1       206   Farmland     21       1,560   Consumer real estate loans                 Home equity lines     9       1,467   Single family owner occupied     168       17,550   Owner occupied construction     6       334   Consumer and other loans                 Consumer loans     4       407   Total impaired loans with no related allowance     335       34,297                     Impaired loans with a related allowance:                 Commercial loans                 Construction, development, and other land     -       -   Commercial and industrial     -       -   Multi-family residential     -       941   Single family non-owner occupied     -       -   Non-farm, non-residential     -       1,338   Farmland     -       -   Consumer real estate loans                 Home equity lines     -       -   Single family owner occupied     13       1,240   Owner occupied construction     -       -   Total impaired loans with a related allowance     13       3,519   Total impaired loans   $ 348     $ 37,816     The Company generally places a loan on nonaccrual status when it is 90 days or more past due.  Covered nonaccrual loans totaled $ 359 thousand at March 31, 2021; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the dates indicated:       March 31, 2021   (Amounts in thousands)   No Allowance     With an Allowance     Total   Commercial loans                         Construction, development, and other land   $ 391     $ -     $ 391   Commercial and industrial     1,781       -       1,781   Multi-family residential     854       -       854   Single family non-owner occupied     3,631       -       3,631   Non-farm, non-residential     7,295       -       7,295   Agricultural     267       -       267   Farmland     485       -       485   Consumer real estate loans                     -   Home equity lines     1,035       -       1,035   Single family owner occupied     9,333       187       9,520   Owner occupied construction     -       -       -   Consumer and other loans                     -   Consumer loans     847       -       847   Total nonaccrual loans   $ 25,919     $ 187     $ 26,106     During the three month period, $ 9 thousand in nonaccrual loan interest was recognized.   21 Table of Contents   The following table presents nonaccrual loans prior to the adoption of ASU 2016 - 13.   PCI loans were generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. Covered nonaccrual loans totaled $ 297 thousand at December 31, 2020; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the date indicated:   (Amounts in thousands)   December 31, 2020   Commercial loans         Construction, development, and other land   $ 244   Commercial and industrial     895   Multi-family residential     946   Single family non-owner occupied     2,990   Non-farm, non-residential     6,343   Agricultural     217   Farmland     489   Consumer real estate loans         Home equity lines     1,122   Single family owner occupied     7,976   Owner occupied construction     -   Consumer and other loans         Consumer loans     781   Total nonaccrual loans   $ 22,003     The following table presents the aging of past due loans, by loan class, as of the date indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category.  Non-covered accruing loans contractually past due 90 days or more totaled $ 171  thousand as of March 31, 2021 .       March 31, 2021                                                               Amortized Cost of       30 - 59 Days     60 - 89 Days     90+ Days     Total     Current     Total     > 90 Days Accruing   (Amounts in thousands)   Past Due     Past Due     Past Due     Past Due     Loans     Loans     No Allowance                                                             Commercial loans                                                         Construction, development, and other land   $ 40     $ -     $ 384     $ 424     $ 44,904     $ 45,328     $ -   Commercial and industrial     1,116       746       550       2,412       159,815       162,227       -   Multi-family residential     156       -       854       1,010       104,582       105,592       -   Single family non-owner occupied     778       655       2,042       3,475       184,421       187,896       163   Non-farm, non-residential     76       283       3,916       4,275       714,555       718,830       -   Agricultural     221       93       46       360       9,363       9,723       -   Farmland     9       -       485       494       18,520       19,014       -   Consumer real estate loans                                                         Home equity lines     493       181       557       1,231       90,864       92,095       -   Single family owner occupied     4,455       1,291       4,477       10,223       654,905       665,128       -   Owner occupied construction     -       -       -       -       18,376       18,376       -   Consumer and other loans                                                         Consumer loans     1,394       280       417       2,091       115,813       117,904       8   Other     -       -       -       -       4,527       4,527       -   Total loans   $ 8,738     $ 3,529     $ 13,728     $ 25,995     $ 2,120,645     $ 2,146,640     $ 171     22 Table of Contents   The following table presents the aging of past due loans, by loan class, as of the date indicated prior to the adoption of ASU 2016 - 13. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category.  Loans acquired with credit deterioration, with a discount, continued to accrue interest based on expected cash flows; therefore, PCI loans were  not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $ 295  thousand as of December 31, 2020 .       December 31, 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                                                     Commercial loans                                                 Construction, development, and other land   $ 1,039     $ -     $ 235     $ 1,274     $ 43,400     $ 44,674   Commercial and industrial     669       230       700       1,599       171,425       173,024   Multi-family residential     103       -       946       1,049       114,112       115,161   Single family non-owner occupied     925       488       2,144       3,557       184,226       187,783   Non-farm, non-residential     601       296       3,368       4,265       730,528       734,793   Agricultural     70       189       88       347       9,402       9,749   Farmland     43       -       457       500       19,261       19,761   Consumer real estate loans                                                 Home equity lines     649       380       425       1,454       95,072       96,526   Single family owner occupied     5,317       2,265       3,891       11,473       649,581       661,054   Owner occupied construction     82       -       -       82       17,638       17,720   Consumer and other loans                                                 Consumer loans     2,637       746       651       4,034       116,339       120,373   Other     -       -       -       -       6,014       6,014   Total loans   $ 12,135     $ 4,594     $ 12,905     $ 29,634     $ 2,156,998     $ 2,186,632     In estimating estimated credit losses, ASC 326 prescribes that if foreclosure is probable, a collateral dependent asset (“CDA”) is required to be measured at the fair value of the collateral, but as a practical expedient, if foreclosure is not probable, fair value measurement is optional.  For those CDA loans measured at the fair value of collateral, a credit loss expense is recorded for loan amounts in excess of fair value.  The table below summarizes collateral dependent loans, by type of collateral, and the extent to which they are collateralized during the period.   (Amounts in thousands)   March 31, 2021     Collateral Coverage     %   Commercial Real Estate                         Hotel   $ -     $ -       -   Office     -       -       -   Other     2,480       3,126       126.05 % Retail     -       -       -   Multi-Family                         Industrial     -       -       -   Office     -       -       -   Other     686       723       105 % Commercial and industrial                         Industrial     -       -       -   Other     -       -       -   Home equity loans     42       -       0.00 % Consumer owner occupied     189       -       0.00 % Consumer     -       -       -   Total collateral dependent loans   $ 3,397     $ 3,849       113.31 %   The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain 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.   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, 2021 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.   From March, 2020, through March 31, 2021 , the Company had modified a total of 3,812  loans with principal balances totaling $ 466.59  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 March 31, 2021, total COVID- 19 loan deferrals stood at $ 17.48 million.   23 Table of Contents   The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:       March 31, 2021     December 31, 2020   (Amounts in thousands)   Nonaccrual(1)     Accruing     Total     Nonaccrual(1)     Accruing     Total   Commercial loans                                                 Construction, development, and other land   $ -     $ -     $ -     $ -     $ -     $ -   Commercial and industrial     353       709       1,062       -       1,326       1,326   Single family non-owner occupied     1,523       1,045       2,568       1,585       1,265       2,850   Non-farm, non-residential     1,388       2,393       3,781       -       2,407       2,407   Consumer real estate loans                                                 Home equity lines     -       75       75       -       77       77   Single family owner occupied     216       4,560       4,776       229       4,927       5,156   Owner occupied construction     -       216       216       -       216       216   Consumer and other loans                                                 Consumer loans     -       29       29       -       30       30   Total TDRs   $ 3,480     $ 9,027     $ 12,507     $ 1,814     $ 10,248     $ 12,062                                                     Allowance for credit losses related to TDRs                   $ -                     $ -     ( 1 ) Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.     The following table presents interest income recognized on TDRs for the periods indicated:       Three Months Ended March 31,       2021     2020   (Amounts in thousands)                 Interest income recognized   $ 104     $ 98       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 March 31,       2021     2020                       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     -       -       -       1       50       50   Single family owner occupied                       -       -       -   Total below market interest rate and extended payment term     -       -       -       1       50       50   Payment deferral                                                 Construction, development, and other land     -       -       -       1       63       63   Commercial and industrial     -       -       -       1       602       602   Single family non-owner occupied     -       -       -       1       529       529   Non-farm, non-residential     1       1,390       1,390       1       577       577   Single family owner occupied     -       -       -       2       672       672   Total principal deferral     1       1,390       1,390       6       2,443       2,443   Total     1     $ 1,390     $ 1,390       7     $ 2,493     $ 2,493     ( 1 ) Represents the loan balance immediately following modification   24 Table of Contents   There were no payment defaults on loans modified as TDRs restructured within the previous 12 months as of March 31, 2021 , and one loan for $ 209 thousand as of March 31, 2020.   The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:       March 31, 2021     December 31, 2020   (Amounts in thousands)                 OREO   $ 1,740     $ 2,083                     OREO secured by residential real estate   $ 645     $ 769   Residential real estate loans in the foreclosure process (1)     2,900       4,141     ( 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 5 . Allowance for Credit Losses   The following tables present the changes in the allowance for credit losses, by loan segment, during the periods indicated. .       Three Months Ended March 31, 2021               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Beginning balance   $ 14,661     $ 8,951     $ 2,570     $ 26,182   Cumulative effect of adoption of ASU 2016-13     8,360       4,145       602       13,107   Provision for (recovery of) loan losses charged to operations     ( 3,070 )     ( 1,542 )     611       ( 4,001 ) Charge-offs     ( 757 )     ( 10 )     ( 963 )     ( 1,730 ) Recoveries     392       343       270       1,005   Net charge-offs     ( 365 )     333       ( 693 )     ( 725 ) Ending balance   $ 19,586     $ 11,887     $ 3,090     $ 34,563         Three Months Ended March 31, 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     1,987       1,145       368       3,500   Charge-offs     ( 268 )     ( 63 )     ( 863 )     ( 1,194 ) Recoveries     121       112       173       406   Net charge-offs     ( 147 )     49       ( 690 )     ( 788 ) Ending balance   $ 12,075     $ 7,519     $ 1,543     $ 21,137     25 Table of Contents   The following table presents the allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the date indicated prior to the adoption of ASU 2016 - 13:       December 31, 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   $ -     $ -     $ 43,716     $ 528   Commercial and industrial     724       -       171,486       1,024   Multi-family residential     695       -       112,852       1,417   Single family non-owner occupied     1,041       -       183,283       1,861   Non-farm, non-residential     3,916       319       714,160       9,097   Agricultural     -       -       9,728       218   Farmland     -       -       17,540       196   Total commercial loans     6,376       319       1,252,765       14,341   Consumer real estate loans                                 Home equity lines     -       -       95,765       799   Single family owner occupied     1,673       108       647,040       7,849   Owner occupied construction     -       -       17,567       195   Total consumer real estate loans     1,673       108       760,372       8,843   Consumer and other loans                                 Consumer loans     -       -       119,770       2,570   Other     -       -       6,014       -   Total consumer and other loans     -       -       125,784       2,570   Total loans, excluding PCI loans   $ 8,049     $ 427     $ 2,138,921     $ 25,754     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 date indicated prior to the adoption of ASU 2016 - 13:       December 31, 2020               Allowance for Loan       Recorded     Pools With   (Amounts in thousands)   Investment     Impairment   Commercial loans                 Highlands:                 Construction & land development   $ 958     $ -   Farmland and other agricultural     2,242       -   Multifamily     1,614       -   Commercial real estate     20,176       -   Commercial and industrial     814       -   Total commercial loans     25,804       -   Consumer real estate loans                 Highlands:                 1-4 family, junior and HELOCS     761       -   1-4 family, senior-consumer     12,494       -   Consumer     603       -   Total consumer real estate loans     13,858       -   Total PCI loans   $ 39,662     $ -         26 Table of Contents     Note 6 . Deposits   The following table presents the components of deposits as of the dates indicated:       March 31, 2021     December 31, 2020   (Amounts in thousands)                 Noninterest-bearing demand deposits   $ 824,576     $ 772,795   Interest-bearing deposits:                 Interest-bearing demand deposits     634,947       598,148   Money market accounts     285,157       258,864   Savings deposits     524,021       495,821   Certificates of deposit     279,832       293,848   Individual retirement accounts     124,567       126,771   Total interest-bearing deposits     1,848,524       1,773,452   Total deposits   $ 2,673,100     $ 2,546,247       Note 7 . 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 $ 808  thousand as of March 31, 2021 compared to $ 830  thousand as of December 31, 2020 . The operating lease liability as of March 31, 2021 was $ 861  compared to $ 891 thousand as of December 31, 2020 . The Company’s total operating leases have remaining terms of  1 - 8  years; compared with 1 - 9  years as of December 31, 2020 . The March 31, 2021 weighted average discount rate of 3.22 % did not change from December 31, 2020 .   Future minimum lease payments as of the dates indicated are as follows:   Year   March 31, 2021   (Amounts in thousands)         2022   $ 154   2023     122   2024     119   2025     113   2026 and thereafter     437   Total lease payments     945   Less: Interest     ( 84 ) Present value of lease liabilities   $ 861     Year   December 31, 2020   (Amounts in thousands)         2021   $ 154   2022     131   2023     119   2024     117   2025 and thereafter     463   Total lease payments     984   Less: Interest     ( 93 ) Present value of lease liabilities   $ 891     27 Table of Contents     Note 8 . Borrowings   The following table presents the components of borrowings as of the dates indicated:       March 31, 2021     December 31, 2020               Weighted             Weighted   (Amounts in thousands)   Balance     Average Rate     Balance     Average Rate   Retail repurchase agreements   $ 1,519       0.07 %   $ 964       0.32 %   Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements.   As of March 31, 2021 , the Company had no long-term borrowings.   Unused borrowing capacity with the FHLB totaled $ 267.02  million, net of FHLB letters of credit of $ 179.17  million, as of March 31, 2021 . As of March 31, 2021 , the Company pledged $ 784.76  million in qualifying loans to secure the FHLB borrowing capacity.   The Company maintained 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 matured in April 2021. There was no outstanding balance on the line as of March 31, 2021 , or December 31, 2020 .     Note 9 . Derivative Instruments and Hedging Activities   Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.   The Company 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. Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of March 31, 2021. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.   The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:       March 31, 2021     December 31, 2020       Notional or     Fair Value     Notional or     Fair Value       Contractual     Derivative     Derivative     Contractual     Derivative     Derivative   (Amounts in thousands)   Amount     Assets     Liabilities     Amount     Assets     Liabilities   Derivatives designated as hedges                                                 Interest rate swaps   $ 5,045     $ -     $ 310     $ 4,772     $ -     $ 465   Derivatives not designated as hedges                                                 Interest rate swaps   $ 8,310           $ 725     $ 11,928           $ 666   Total derivatives   $ 13,355     $ -     $ 1,035     $ 16,700     $ -     $ 1,131       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 March 31,     (Amounts in thousands)   2021     2020   Income Statement Location Derivatives designated as hedges                   Interest rate swaps   $ 28     $ 12   Interest and fees on loans Derivatives not designated as hedges                   Interest rate swaps     68       -   Interest and fees on loans Total derivative expense   $ 96     $ 12       28 Table of Contents       Note 10 . Employee Benefit Plans   The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan 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 March 31,         2021     2020   Income Statement Location (Amounts in thousands)                   Service cost   $ 88     $ 77   Salaries and employee benefits Interest cost     79       89   Other expense Amortization of prior service cost     31       50   Other expense Amortization of losses     66       46   Other expense Net periodic cost   $ 264     $ 262         Note 11 . Earnings per Share   The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:        Three Months Ended       March 31,       2021     2020   (Amounts in thousands, except share and per share data)                 Net income   $ 14,602     $ 7,872                     Weighted average common shares outstanding, basic     17,669,937       17,998,994   Dilutive effect of potential common shares                 Stock options     24,956       36,199   Restricted stock     34,292       14,878   Total dilutive effect of potential common shares     59,248       51,077   Weighted average common shares outstanding, diluted     17,729,185       18,050,071                     Basic earnings per common share   $ 0.83     $ 0.44   Diluted earnings per common share     0.82       0.44                     Antidilutive potential common shares                 Stock options     13,990       -   Restricted stock     7,809       32,137   Total potential antidilutive shares     21,799       32,137     29 Table of Contents     Note 12 . Accumulated Other Comprehensive Income (Loss)   The following tables present the changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax and by component, during the periods indicated:       Three Months Ended March 31, 2021       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ 1,106     $ ( 3,029 )   $ ( 1,923 ) Other comprehensive loss before reclassifications     ( 646 )     ( 163 )     ( 809 ) Reclassified from AOCI     -       77       77   Other comprehensive loss income, net     ( 646 )     ( 86 )     ( 732 ) Ending balance   $ 460     $ ( 3,115 )   $ ( 2,655 )       Three Months Ended March 31, 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     947       ( 352 )     595   Reclassified from AOCI     ( 304 )     76       ( 228 ) Other comprehensive income, net     643       ( 276 )     367   Ending balance   $ 1,509     $ ( 2,648 )   $ ( 1,139 )   The following table presents reclassifications out of AOCI, by component, during the periods indicated:       Three Months Ended             March 31,     Income Statement   (Amounts in thousands)   2021     2020     Line Item Affected   Available-for-sale securities                       Gain recognized   $ -     $ ( 385 )   Net loss on sale of securities   Reclassified out of AOCI, before tax     -       ( 385 )   Income before income taxes   Income tax expense     -       ( 81 )   Income tax expense   Reclassified out of AOCI, net of tax     -       ( 304 )   Net income   Employee benefit plans                       Amortization of prior service cost   $ 31     $ 50         Amortization of net actuarial benefit cost     66       46         Reclassified out of AOCI, before tax     97       96     Income before income taxes   Income tax expense     20       20     Income tax expense   Reclassified out of AOCI, net of tax     77       76     Net income   Total reclassified out of AOCI, net of tax   $ 77     $ ( 228 )   Net income     ( 1 ) Amortization is included in net periodic pension cost. See Note 11, "Employee Benefit Plans."     Note 13 . Fair Value   Financial Instruments Measured at Fair Value   Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:     ● Level 1 – Observable, unadjusted quoted prices in active markets   ● Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability   ● Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions   The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.         30 Table of Contents   Assets and Liabilities Reported at Fair Value on a Recurring Basis   Available-for-Sale Debt Securities   Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.   Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third -party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.   Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.   Loans Held for Investment . Loans held for investment 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:       March 31, 2021       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   $ 530     $ -     $ 530     $ -   Municipal securities     40,495       -       40,495       -   Mortgage-backed Agency securities     46,618       -       46,618       -   Total available-for-sale debt securities     87,643       -       87,643       -   Equity securities     55       -       55       -   Fair value loans     14,265       -       -       14,265   Deferred compensation assets     4,634       4,634       -       -   Deferred compensation liabilities     4,634       4,634       -       -   Derivative liabilities     1,035       -       1,035       -         December 31, 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   $ 551     $ -     $ 551     $ -   Municipal securities     44,459       -       44,459       -   Mortgage-backed Agency securities     38,348       -       38,348       -   Total available-for-sale debt securities     83,358       -       83,358       -   Equity securities     55       -       55       -   Fair value loans     17,831       -       -       17,831   Deferred compensation assets     4,181       4,181       -       -   Deferred compensation liabilities     4,181       4,181       -       -   Derivative liabilities     1,131       -       1,131       -     31 Table of Contents   Assets Measured at Fair Value on a Nonrecurring Basis   Impaired Loans . Prior to the adoption of ASU 2016 - 13, impaired loans were recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.   The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third -party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third -party valuation within thirty to forty-five days of completing the internal valuation. When a third -party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.     OREO . OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.   The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:       March 31, 2021       Total     Fair Value Measurements Using       Fair Value     Level 1     Level 2     Level 3   (Amounts in thousands)                                 Collateral dependent assets with specific reserves   $ 3,296     $ -     $ -     $ 3,296   OREO   $ 1,740     $ -     $ -     $ 1,740         December 31, 2020       Total     Fair Value Measurements Using       Fair Value     Level 1     Level 2     Level 3   (Amounts in thousands)                                 Impaired loans, Pre-ASU 2016-13   $ 979     $ -     $ -     $ 979   OREO     2,083       -       -       2,083     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   (Weighted Average)     Technique   Input   March 31, 2021                   Collateral dependent assets with specific reserves Discounted appraisals(1)   Appraisal adjustments(2)     0% to 53%(3%)   OREO Discounted appraisals(1)   Appraisal adjustments(2)     0% to 77%(29%)     ( 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.   32 Table of Contents   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.   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:       March 31, 2021       Carrying             Fair Value Measurements Using   (Amounts in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets                                         Cash and cash equivalents   $ 628,745     $ 628,745     $ 628,745     $ -     $ -   Debt securities available for sale     87,643       87,643       -       87,643       -   Equity securities     55       55       -       55       -   Loans held for investment, net of allowance     2,146,640       2,095,680       -       -       2,095,680   FDIC indemnification asset     946       394       -       -       394   Interest receivable     8,724       8,724       -       8,724       -   Deferred compensation assets     4,634       4,634       4,634       -       -                                             Liabilities                                         Time deposits     404,399       404,939       -       404,939       -   Securities sold under agreements to repurchase     1,519       1,519       -       1,519       -   Interest payable     414       414       -       414       -   Derivative financial liabilities     1,035       1,035       -       1,035       -   Deferred compensation liabilities     4,634       4,634       4,634       -       -         December 31, 2020       Carrying             Fair Value Measurements Using   (Amounts in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets                                         Cash and cash equivalents   $ 456,561     $ 456,561     $ 456,561     $ -     $ -   Debt securities available for sale     83,358       83,358       -       83,358       -   Equity securities     55       55       -       55       -   Loans held for sale     -       -       -       -       -   Loans held for investment, net of allowance     2,160,450       2,126,221       -       -       2,126,221   FDIC indemnification asset     1,223       509       -       -       509   Interest receivable     9,052       9,052       -       9,052       -   Deferred compensation assets     4,181       4,181       4,181       -       -                                             Liabilities                                         Time deposits     420,619       423,120       -       423,120       -   Securities sold under agreements to repurchase     964       964       -       964       -   Interest payable     582       582       -       582       -   Derivative liabilities     4,181       4,181       4,181       -       -   Deferred compensation liabilities     1,131       1,131       -       1,131       -     33 Table of Contents     Note 14 . 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.   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:       March 31, 2021     December 31, 2020   (Amounts in thousands)                 Commitments to extend credit   $ 234,828     $ 229,408   Standby letters of credit and financial guarantees (1)     182,259       179,022   Total off-balance sheet risk   $ 417,087     $ 408,430                     Reserve for unfunded commitments   $ 465     $ 66     ( 1 ) Includes FHLB letters of credit   34 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, 2020 (the “2020 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 March 31, 2021, the Bank operated 50 branches as First Community Bank in Virginia, West Virginia, North Carolina and Tennessee. As of March 31, 2021, full-time equivalent employees, calculated using the number of hours worked, totaled 621. Our primary source of earnings is net interest income, the difference between interest earned on assets and interest paid on liabilities, which is supplemented by fees for services, commissions on sales, and various deposit service charges. We fund our lending and investing activities primarily through the retail deposit operations of our branch banking network. We invest our funds primarily in loans to retail and commercial customers and various investment securities. Our common stock is traded on the NASDAQ Global Select Market under the symbol, FCBC.   The Bank offers trust management, estate administration, and investment advisory services through its Trust Division and wholly owned subsidiary First Community Wealth Management Inc. (“FCWM”). The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee benefit and individual retirement plans, and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to the size, nature, and complexity of the account. Revenues consist primarily of investment advisory fees and commissions on assets under management and administration. As of March 31, 2021, the Trust Division and FCWM managed and administered $1.23 billion in combined assets under various fee-based arrangements as fiduciary or agent.   Recent Events: COVID-19   The outbreak of COVID-19 has significantly disrupted local, national, and global economies and has adversely impacted a broad range of industries in which the Company's customers operate and could impair their ability to fulfill their financial obligations to the Company.  The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.     Congress, the Executive Branch, and the Federal Reserve have taken several actions designed to cushion the economic fallout.  The goal of these actions has been to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (PPP).  In addition to the general impact of COVID-19, certain provisions of legislative and regulatory relief efforts have had a material impact on the Company's operations and could continue to impact operations going forward.   The PPP loan program was extended and amended through additional legislation during 2020. The Consolidated Appropriations Act of 2021 was adopted in December, 2020, to provide additional COVID-19 relief and among other measures, extended weekly unemployment benefits,  provided another round of economic stimulus payments to individuals and families, lengthened temporary suspensions and modifications of several bank-related provisions and provided more aid to small businesses. The 2021 Consolidated Appropriations Act reauthorized and appropriated up to $284.5 billion for the PPP for both first-time and second-time borrowers to receive loan disbursements for a period ending March 31, 2021, expanded the list of eligible PPP expenses and created a simplified loan forgiveness application for loans under $150 thousand.    During the first quarter of 2021, President Biden signed a number of executive orders relating to stimulus and relief measures. These orders include, among other things, (i) an extension, through March 31, 2021, of the moratorium on evictions and foreclosures on federally-backed mortgages, (ii) an extension, through September 30, 2021, of the deferral of federal student loan payments and interest and (iii) an extension, through June 30, 2021, of certain mortgage forbearance programs and guidelines.   On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals. Among other things, the ARP Act provides (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the Small Business Administration (“SBA”) to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and makes $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026, non-taxable income, and (vii) funding to support state and local governments; K-12 schools and higher education; the Centers for Disease Control; public transit; rental assistance; child care; and airline industry workers.   On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was enacted, extending the bankruptcy relief provisions enacted in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act of 2020 bill until March 27, 2022. These provisions provide financially distressed small businesses and individuals greater access to bankruptcy relief.   On March 30, 2021, the PPP Extension Act of 2021 was enacted, extending the Paycheck Protection Program from its previous expiration date of March 31, 2021 to June 30, 2021. Beginning June 1, 2021, the SBA may only process applications submitted prior to that date, and it may not accept any new loan applications. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.   Financial position and results of operations   In 2020, COVID-19 had a material impact on our allowance for credit losses.  While we did not experience any significant charge-offs related to COVID-19, our allowance calculation and resulting provision for credit losses were significantly impacted by governmental reactions and forced shutdowns.  On January 1, 2021, we adopted ASU 2016-13, ("CECL"), which had the effect of increasing our allowance for credit losses by $13.11 million. In the first quarter of 2021, the economic forecasts improved significantly, resulting in a reversal of provision for credit losses of $4.00 million.  However, should economic conditions or forecasts worsen, we could experience further increase in our required allowance for credit losses and record additional credit loss expense.  It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.   35 Table of Contents     The Company's fee income has been reduced due to COVID-19.  Consumer spending behavior has proven to be very conservative during the pandemic resulting in a decrease in overdraft behavior that generates NSF and other fee income.  Should the pandemic and the global response escalate further, it is possible that the Company could see further decreases in fees in future periods; however, at this time, the Company is unable to project the materiality of such an impact on the results of operations in future periods.   The Company's interest income could be reduced due to COVID-19.  In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees.  While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  As of March 31, 2021, the Company carried $3.40 million of accrued income and fees on outstanding deferrals made to COVID-19 affected borrowers.  At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but recognized the breadth of the economic impact may affect its borrowers' ability to repay in future periods.   Capital and liquidity   As of  March 31, 2021, the Company and Bank 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 that would change the Bank's classification.  Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules on a fully phased-in basis, if such requirements were in effect, as of March 31, 2021.  While we believe that we have sufficient capital, our reported and regulatory capital ratios could be adversely impacted by loan losses and other negative trends initiated by the pandemic.  We rely on cash on hand as well as dividends from the Bank to pay dividends to our shareholders.  If our capital deteriorates such that the Bank is unable to pay dividends for an extended period of time, we may not be able to pay dividends to our shareholders.     We maintain access to multiple sources of liquidity.  Wholesale funding markets remain open to us, however, short-term funding rates have been volatile throughout the pandemic.  If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.  In addition, if an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.   Asset Valuation   Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods.  While certain valuation assumptions and judgements will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.   Our processes, controls and business continuity plan   The Company maintains an Enterprise Risk Management team to respond to, prepare, and execute responses to unforeseen circumstances, such as, natural disasters and pandemics.  Upon the pandemic declaration, the Company's Enterprise Risk Management team implemented its Board approved Business Continuity Plan.  The Company appointed an internal pandemic preparedness task force comprised of the Company's management to address both operational and financial risks posed by COVID-19.  Shortly after invoking the Plan, the Company deployed a successful remote working strategy, provided timely communication to team members and customers, implemented protocols for team member safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts.  The Company's preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations.  At March 31, 2021, a significant portion of our backroom operations employees continue to work remotely with no disruption to our operations.  We have not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods.   As of March 31, 2021, we do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19.  The Company does not currently face any material resource constraint through the implementation of our business continuity plans.   Lending operations and accommodations to borrowers   The CARES Act as amended 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, 2021, 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 March 31, 2021, we have modified a total of 3,812 commercial and consumer loans totaling $466.59 million. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of March 31, 2021, current COVID-19 loan deferrals stood at $17.48 million. It is possible that these deferrals could be extended further under the CARES Act; as amended by the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, that extended the ability to provide necessary loan modifications to our customers and not consider these troubled debt restructurings. However, the volume of these future potential extensions is unknown. It is also possible that in spite of our best efforts to assist our borrowers and achieve full collection of our investment, these deferred loans could result in future charge-offs with additional credit loss expense charged to earnings; however, the amount of any future charge-offs on deferred loans is unknown.   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.   36 Table of Contents   Allowance for Credit Losses or "ACL"  ​ The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 – Basis of Presentation - Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5 — Allowance for Credit Losses in this Quarterly Report on Form 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A. Periods prior to the January 1, 2021, adoption of ASU 2-16-13 follow prior accounting guidance for estimated loan losses and may not be comparable.   Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this 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 March 31, 2021, 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 2020 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2020 Form 10-K.   Performance Overview   Highlights of our results of operations for the three months ended March 31, 2021, and financial condition as of March 31, 2021, include the following:     ● Net income for the quarter increased $6.73 million to $14.60 million compared to the same quarter of 2020.  The large increase is primarily attributable to the reversal of $4.00 million in allowance for credit losses due to improved economic forecasts from those seen at year-end 2020.   ● On January 26, 2021, the Board of Directors approved a new plan to repurchase, on the open market at prevailing prices, up to 2.4 million shares of the Company's common stock through January 26, 2024.  During the quarter, the Company repurchased 187,700 common shares for $4.99 million.   ● Diluted earnings per share increased $0.38 to $0.82 compared to the same quarter of 2020.   ●     ● Return on average assets increased to 1.94% compared to 1.16% from the same quarter of 2020; return on average equity increased to 13.94% compared to 7.49% from the same quarter of 2020 as well.   ● Net charge-offs for the first quarter of 2021 were $725 thousand and the allowance for credit losses remains very strong at 1.61% of total loans.   ● Book value per common share at March 31, 2021, was $24.22, an increase of $0.14 from year-end.   Results of Operations   Net Income   The following table presents the changes in net income and related information for the periods indicated:       Three Months Ended   (Amounts in thousands, except per   March 31,     Increase           share data)   2021     2020     (Decrease)     % Change                                     Net income   $ 14,602     $ 7,872     $ 6,730       85.49 %                                   Basic earnings per common share     0.83       0.44       0.39       88.64 % Diluted earnings per common share     0.82       0.44       0.38       86.36 %                                   Return on average assets     1.94 %     1.16 %     0.78 %     67.24 % Return on average common equity     13.94 %     7.49 %     6.45 %     86.11 %   Three - Month Comparison . Net income increased $6.73 million in the first quarter of 2021 largely due to a $7.50 million decrease in the provision for credit losses as a result of recovering $4.00 million of credit loss provision to recognize the impact of significantly improving economic forecasts. Additional increases resulted from $1.89 million in residual merger expenses that were recognized in the first quarter of 2020.  These increases were offset by a decreases of $1.40 million in net interest income, reflective of the current historic low rate environment; and $700 thousand in service charges on deposits reflective of conservative spending behavior of customers during the pandemic.   37 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 March 31,       2021     2020       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)   $ 2,165,054     $ 26,582       4.98 %   $ 2,081,132     $ 28,105       5.43 % Securities available for sale     83,634       573       2.78 %     136,109       1,060       3.13 % Interest-bearing deposits     468,067       118       0.10 %     163,483       535       1.31 % Total earning assets     2,716,755       27,273       4.07 %     2,380,724       29,700       5.02 % Other assets     331,483                       353,647                   Total assets   $ 3,048,238                     $ 2,734,371                                                                     Liabilities and stockholders' equity                                                 Interest-bearing deposits                                                 Demand deposits   $ 613,003     $ 39       0.03 %   $ 502,603     $ 90       0.07 % Savings deposits     778,430       91       0.05 %     679,656       414       0.24 % Time deposits     412,986       739       0.73 %     485,085       1,322       1.10 % Total interest-bearing deposits     1,804,419       869       0.19 %     1,667,344       1,826       0.44 % Borrowings                                                 Retail repurchase agreements     1,234       -       N/M       1,459       2       0.59 % FHLB advances and other borrowings     -       -               134       1       N/M   Total borrowings     1,234       -       N/M       1,593       3       1.70 % Total interest-bearing liabilities     1,805,653       869       0.19 %     1,668,937       1,829       0.44 % Noninterest-bearing demand deposits     777,876                       600,636                   Other liabilities     39,926                       42,174                   Total liabilities     2,623,455                       2,311,747                   Stockholders' equity     424,783                       422,624                   Total liabilities and stockholders' equity   $ 3,048,238                     $ 2,734,371                   Net interest income, FTE (1)           $ 26,404                     $ 27,871           Net interest rate spread                     3.88 %                     4.58 % Net interest margin, FTE (1)                     3.94 %                     4.71 %   (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 $1.19 million and $1.95 million for the three months ended March 31, 2021 and 2020, respectively.   38 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       March 31, 2021 Compared to 2020       Dollar Increase (Decrease) due to                       Rate/           (Amounts in thousands)   Volume     Rate     Volume     Total   Interest earned on (1)                                 Loans   $ 1,124     $ (2,321 )   $ (326 )   $ (1,523 ) Securities available-for-sale     (405 )     (119 )     37       (487 ) Interest-bearing deposits with other banks     989       (489 )     (917 )     (417 ) Total interest earning assets     1,708       (2,929 )     (1,206 )     (2,427 )                                   Interest paid on                                 Demand deposits     20       (57 )     (14 )     (51 ) Savings deposits     60       (331 )     (52 )     (323 ) Time deposits     (195 )     (443 )     55       (583 ) Retail repurchase agreements     -       (2 )     -       (2 ) FHLB advances and other borrowings     -       -       (1 )     (1 ) Total interest-bearing liabilities     (115 )     (833 )     (12 )     (960 )                                   Change in net interest income (1)   $ 1,823     $ (2,096 )   $ (1,194 )   $ (1,467 )   (1) FTE basis based on the federal statutory rate of 21%.    Three - Month Comparison . Net interest income comprised 77.64% of total net interest and noninterest income in the first quarter of 2021 compared to 78.57% in the same quarter of 2020. Net interest income on a GAAP basis decreased $1.40 million, or 5.06%, compared to a decrease of $1.47 million, or 5.26%, on a FTE basis. The net interest margin on a FTE basis decreased 77 basis points and the net interest spread on a FTE basis decreased 70 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 $336.03 million, or 14.11%, primarily due to an increase in interest-bearing deposits and an increase in average loans. Average interest-bearing deposits increased $304.58 million or $186.31%.  This increase is primarily due to unprecedented levels of federal government stimulus during the pandemic.  Average loans increased $83.92 million, or 4.03%.  These increases were offset by a decrease in securities available-for-sale of $52.48 million, or 38.55%.  The decrease was primarily attributable to the sale of the Highlands portfolio in the first quarter of 2020.  The yield on earning assets decreased 95 basis points or 18.92%, primarily due to the historically low rate environment. The average loan to deposit ratio decreased to 83.84% from 91.76% in the same quarter of 2020. Non-cash accretion income decreased $767 thousand, or 39.25%.   Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased $136.72 million, or 8.19%, primarily due to an increase in interest-bearing deposits. The yield on interest-bearing liabilities decreased 25 basis points. Average interest-bearing deposits increased $137.08 million, or 8.22%, which was driven by unprecedented levels of federal government stimulus during the pandemic.  Interest-bearing demand deposits increased $110.40 million, or 21.97%,  and savings deposits increased $98.77 million, or 14.53%.  These increases were offset by a decrease in time deposits of $72.10 million, or 14.86%.   Provision for Credit Losses   Three - Month Comparison . The provision charged to operations decreased $7.50 million, or 214.31%, in the first quarter of 2021 compared to the same quarter of 2020. The decrease in the provision was primarily due to significantly improved economic forecasts. 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                       March 31,     Increase     %       2021     2020     (Decrease)     Change   (Amounts in thousands)                                 Wealth management   $ 881     $ 844     $ 37       4.38 % Service charges on deposits     3,031       3,731       (700 )     -18.76 % Other service charges and fees     3,022       2,231       791       35.45 % Net gain on sale of securities     -       385       (385 )     -100.00 % Net FDIC indemnification asset amortization     (280 )     (486 )     206       -42.39 % Other operating income     915       844       71       8.41 % Total noninterest income   $ 7,569     $ 7,549     $ 20       0.26 %   Three - Month Comparison . Noninterest income comprised 22.36% of total net interest and noninterest income in the first quarter of 2021 compared to 21.43% in the same quarter of 2020. Noninterest income increased $20 thousand, or 0.26%. The increase was primarily due to an increase in net interchange income of $822 thousand included in other service charges and fees and a reduction in net FDIC indemnification asset amortization of $206 thousand.  These increases were offset by a decrease in service charges on deposits of $700 thousand resulting from pandemic shutdowns throughout 2020 and the first quarter of 2021 and a gain on the sale of securities of $385 thousand in the first quarter of 2020.   39 Table of Contents   Noninterest Expense   The following table presents the components of, and changes in, noninterest expense for the periods indicated:                                         Three Months Ended                       March 31,     Increase     %       2021     2020     (Decrease)     Change   (Amounts in thousands)                                 Salaries and employee benefits   $ 10,884     $ 11,386     $ (502 )     -4.41 % Occupancy expense     1,275       1,315       (40 )     -3.04 % Furniture and equipment expense     1,367       1,384       (17 )     -1.23 % Service fees     1,335       1,523       (188 )     -12.34 % Advertising and public relations     335       512       (177 )     -34.57 % Professional fees     466       233       233       100.00 % Amortization of intangibles     357       361       (4 )     -1.11 % FDIC premiums and assessments     199       -       199       N/M   Merger expense     -       1,893       (1,893 )     -100.00 % Other operating expense     2,602       3,057       (455 )     -14.88 % Total noninterest expense   $ 18,820     $ 21,664     $ (2,844 )     -13.13 %   Three - Month Comparison . Noninterest expense decreased $2.84 million, or 13.13%, in the first quarter of 2021 compared to the same quarter of 2020. The decrease was largely due to $1.89 million in residual merger expenses recognized in the first quarter of 2020.  In addition, salaries and benefits decreased $502 thousand, or 4.41%, primarily due to branch closures.  Other operating expense decreased $455 thousand, or 14.88% and was primarily driven by decreases in expenses related to credit impaired loans.   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 increased $2.24 million, or 101.82%, primarily due to the increase in pre-tax earnings. The effective tax rate increased to 23.28% in the first quarter of 2021 from 21.80% in the same quarter of 2020.   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.   40 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 March 31,       2021     2020   (Amounts in thousands)                 Net interest income, GAAP   $ 26,282     $ 27,682   FTE adjustment (1)     122       189   Net interest income, FTE     26,404       27,871                     Net interest margin, GAAP     3.92 %     4.68 % FTE adjustment (1)     0.02 %     0.03 % Net interest margin, FTE     3.94 %     4.71 % (1) FTE basis of 21%.   Financial Condition   Total assets as of March 31, 2021, increased $128.93 million, or 4.28% from December 31, 2020. The increase in assets was primarily driven by a increase in overnight funds of $174.73 million, or 44.15%. In addition, total liabilities as of March 31, 2021, increased $129.66 million, or 5.02% from December 31, 2020. The increase in liabilities was primarily the result of an increase in total deposits of $126.85 million, or 4.98%.   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 March 31, 2021, decreased $4.29 million, or 5.14%, compared to December 31, 2020.  The market value of debt securities available for sale as a percentage of amortized cost was 100.67.% as of March 31, 2021, compared to 101.71% as of December 31, 2020.   Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of March 31, 2021 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.   Loans Held for Investment   Loans held for investment, which generates the largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. 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 March 31, 2021, decreased $39.99 million, or 1.83%, compared to December 31, 2020. Covered loans decreased $639 thousand, or 6.60%, as the covered Waccamaw portfolio continues to pay down. Covered loans were $9.04 million, $9.68 million, and $12.12 million at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. For additional information, see Note 3, “Loans,” to the Condensed Consolidated Financial Statements in Item 1 of this report.   41 Table of Contents   The following table presents loans, net of unearned income, with non-covered loans by loan class as of the dates indicated:       March 31, 2021     December 31, 2020     March 31, 2020   (Amounts in thousands)   Amount     Percent     Amount     Percent     Amount     Percent   Loans held for investment                                                 Commercial loans                                                 Construction, development, and other land   $ 45,328       9.00 %   $ 44,674       2.04 %   $ 53,348       2.54 % Commercial and industrial     162,227       7.56 %     173,024       7.91 %     129,728       6.19 % Multi-family residential     105,592       4.92 %     115,161       5.27 %     110,202       5.26 % Single family non-owner occupied     187,896       8.75 %     187,783       8.59 %     187,965       8.96 % Non-farm, non-residential     718,830       33.49 %     734,793       33.60 %     726,666       34.66 % Agricultural     9,723       0.45 %     9,749       0.45 %     11,303       0.54 % Farmland     19,014       0.89 %     19,761       0.90 %     26,045       1.24 % Total commercial loans     1,248,610       58.17 %     1,284,945       58.76 %     1,245,257       59.40 % Consumer real estate loans                                                 Home equity lines     92,095       4.29 %     96,526       4.41 %     114,690       5.46 % Single family owner occupied     665,128       30.98 %     661,054       30.24 %     606,132       28.90 % Owner occupied construction     18,376       0.86 %     17,720       0.81 %     13,946       0.65 % Total consumer real estate loans     775,599       36.13 %     775,300       35.46 %     734,768       35.02 % Consumer and other loans                                                 Consumer loans     117,904       5.49 %     120,373       5.50 %     112,127       5.35 % Other     4,527       0.21 %     6,014       0.28 %     4,573       0.22 % Total consumer and other loans     122,431       5.70 %     126,387       5.78 %     116,700       5.57 % Total loans held for investment, net of unearned income     2,146,640       100.00 %     2,186,632       100.00 %     2,096,725       100.00 % Less: allowance for credit losses     34,563               26,182               21,137           Total loans held for investment, net of unearned income and allowance   $ 2,112,077             $ 2,160,450             $ 2,075,588                                                               Total loans decreased $39.99 million compared to December 31, 2020. The decrease was primarily attributable to a decrease in the total commercial loan category of $36.33 million; comprised of decreases of $15.96 in commercial real estate, $10.80 in commercial and industrial, and $9.57 million in the multi-family.  During the second quarter of 2020, we began participating as a Small Business Administration Paycheck Protection Program lender.  The decrease in commercial loans from December 2020 to March 2021 is primarily attributable to $28.79 million received from the SBA for debt forgiveness.  At March 31, 2021, the PPP loans had a current balance of $50.75 million, and were included in commercial and industrial loan balances. Remaining deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, totaled $3.27 million at March 31, 2021, were also recorded. During the first quarter of 2021, we recorded amortization of net deferred loan origination fees of $922 thousand on PPP loans. The remaining net deferred loan origination fees will be amortized over the expected life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.    Commercial Loans Modified Under CARES Act   As of March 31, 2021, total COVID-19 loan deferrals stood at  $17.48 million; down significantly from our peak of $436.11 million at June 30, 2020. The March 31, 2021, total included $14.55 million in commercial loan deferrals. Commercial loan COVID-19 deferrals continue to decrease from our peak of $340.00 million at June 30, 2020 and year-end 2020 of $26.54 million.   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. Prior to the adoption of ASU 2016-13 ("CECL"), loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. For additional information, see Note 4, “Credit Quality,” to the Condensed Consolidated Financial Statements in Item 1 of this report.   42 Table of Contents   The following table presents the components of nonperforming assets and related information as of the periods indicated:       March 31, 2021     December 31, 2020     March 31, 2020   (Amounts in thousands)                         Nonperforming                         Nonaccrual loans   $ 26,106     $ 22,003     $ 20,408   Accruing loans past due 90 days or more     171       295       329   TDRs(1)     308       187       623   Total nonperforming loans     26,585       22,485       21,360   OREO     1,740       2,083       2,502   Total nonperforming assets   $ 28,325     $ 24,568     $ 23,862                                                       Additional Information                         Total Accruing TDRs(2)     9,027       10,248       9,052                                                       Asset Quality Ratios:                         Nonperforming loans to total loans     1.24 %     1.03 %     1.02 % Nonperforming assets to total assets     0.90 %     0.82 %     0.87 % Allowance for loan losses to nonperforming loans     130.01 %     116.44 %     98.96 % Allowance for loan losses to total loans     1.61 %     1.20 %     1.01 %   (1) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $2.09 million, $1.18 million, and $2.31 million for the periods ended March 31, 2021, December 31, 2020, and March 31, 2020, respectively.  They are included in nonaccrual loans. (2) Total accruing TDRs exclude nonaccrual TDRs of $3.48 million, $1.81 million, and $2.62 million for the periods ended March 31, 2021, December 31, 2020, and March 31, 2020, respectively.  They are included in nonaccrual loans.   Nonperforming assets as of March 31, 2021, increased $3.70 million, or 15.22%, from December 31, 2020, primarily due to an increase in nonaccrual loans of $4.04 million, or 18.62%, offset by a decrease in OREO of $343 thousand.  As of March 31, 2021, nonaccrual loans were largely attributed to single family owner occupied (36.92%), non-farm, non-residential (28.33%), and single family non-owner occupied loans (14.10%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.   Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $33.05 million as of March 31, 2021, a  decrease of $2.71 million, or 7.62%, compared to $35.62 million as of December 31, 2020. Delinquent loans as a percent of total non-covered loans totaled 1.54% as of March 31, 2021, which includes past due loans (0.34%) and nonaccrual loans (1.20%).   43 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 March 31, 2021, decreased $1.22 million, or 11.91%, to $9.03 million from December 31, 2020. Unseasoned, or loans restructured within the last six months, and nonperforming accruing TDRs as of March 31, 2021, increased $121 thousand compared to December 31, 2020. Unseasoned and nonperforming accruing TDRs as a percent of total accruing TDRs totaled 3.41% as of March 31, 2021, compared to 1.82% as of December 31, 2020. There were no specific reserves related to TDRs as of March 31, 2021, compared to $353 thousand as of December 31, 2020.   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, 2021 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 March 31, 2021, we had modified a total of 3,812 loans for $466.59 million related to COVID-19 relief.  Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act.  Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating.  Subsequent upgrade or downgrade will be on a case by case basis.  The Company is upgrading these loans back to pass once the modification period has ended and timely contractual payments resume.  Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of March 31, 2021, current COVID-19 loan deferrals stood at $17.48 million, down significantly from our peak of $436.11 at June 30, 2020.   The balance of non-accrual loans was higher at March 31, 2021, due mainly to the conversion of $5.70 million in loans from purchased credit impaired to purchased credit deteriorated status as a result of the Company's adoption of CECL coupled with the migration of a $972 thousand commercial and industrial loan relationship during the quarter.   OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $343 thousand, or 16.47%, as of March 31, 2021, compared to December 31, 2020, and consisted of 20 properties with an average holding period of approximately 18 months. The net loss on the sale of OREO totaled $316 thousand for the three months ended March 31, 2021, compared to a net loss of $300 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:         Three Months Ended March 31,                         2021     2020   (Amounts in thousands)                 Beginning balance   $ 2,083     $ 3,969   Additions     460       377   Disposals     (593 )     (1,453 ) Valuation adjustments     (210 )     (391 ) Ending balance   $ 1,740     $ 2,502     Allowance for Credit Losses   The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s measurement of credit losses policy adheres to GAAP as well as interagency guidance. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.   ​For collectively evaluated loans, the Company in general uses two modeling approaches to estimate expected credit losses. The Company projects the contractual run-off of its portfolio at the segment level and incorporates a prepayment assumption in order to estimate exposure at default. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.   In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure historical credit loss experience with similar risk characteristics within the segments. For the majority of segment models for collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology or simple loss rate modeling methodology.    44 Table of Contents       Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures.  Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e. formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework.  For further discussion of our Allowance for Credit Losses - See Note 1 - Summary of Significant Accounting Policies.   With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method. See Note 1 – Basis of Presentation - Significant Accounting Policies for further details. As of March 31, 2021, the balance of the ACL was $34.56 million, or 1.61% of total loans. The ACL at March 31, 2021, increased $8.38 million from the balance of $26.18 million recorded before the adoption of the new standard on January 1, 2021. This increase included a $13.11 million cumulative adjustment for the adoption of ASU 2016-13 offset by a reversal of provision of $4.00 million and net charge-offs for the quarter of $725 thousand. The reversal in provision was due to significantly improved economic forecasts for unemployment, GDP growth, and home prices from those used at year-end 2020.   At March 31, 2021, the Company also had an allowance for unfunded commitments of $465 thousand which was recorded in Other Liabilities on the Balance Sheet. With the adoption of ASU 2016-13 effective January 1, 2021, the Company increased its allowance for credit losses on unfunded commitments by $509 thousand. During 2020, the provision for credit losses on unfunded commitments was $66 thousand which was recorded in the provision for credit losses on the Statement of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during 2021.   The following table presents the changes in the allowance for credit losses during the periods indicated:       Three Months Ended March 31,       2021     2020                     (Amounts in thousands)                 Beginning balance   $ 26,182     $ 18,425   Cumulative effect of adoption of ASU 2016-13     13,107       -   Provision for (recovery of) loan losses charged to operations             -   Charge-offs     (4,001 )     3,500   Recoveries     (1,730 )     (1,194 ) Net charge-offs     1,005       406   Ending balance     (725 )     (788 )     $ 34,563     $ 21,137     Deposits   Total deposits as of March 31, 2021, increased $126.85 million, or 4.98%, compared to December 31, 2020. The increase was largely attributable to savings and noninterest-bearing demand deposits which increased $54.49 million, or 7.22% and $51.78 million, or 6.70%, respectively. Interest-bearing demand deposits also reflected growth with an increase of $36.80 million, or 6.15%. These increases were offset by a decrease in time deposits of $16.22 million, or 3.86%. We attribute a significant amount of the increase in deposits to the unprecedented level of federal government stimulus during the first quarter of 2021.   B orrowings   Total borrowings as of March 31, 2021, increased $555 thousand, compared to December 31, 2020.   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.   45 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 March 31, 2021, the Company’s cash reserves totaled $12.29 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 March 31, 2021, our unencumbered cash totaled $628.75 million, unused borrowing capacity from the FHLB totaled $267.02 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 $50.51 million.   Cash Flows   The following table summarizes the components of cash flow for the periods indicated:       Three Months Ended March 31,       2021     2020   (Amounts in thousands)                 Net cash provided by operating activities   $ 12,615     $ 11,373   Net cash provided by investing activities     41,442       80,487   Net cash provided by (used in) financing activities     118,127       (67,256 ) Net increase in cash and cash equivalents     172,184       24,604   Cash and cash equivalents, beginning balance     456,561       217,009   Cash and cash equivalents, ending balance   $ 628,745     $ 241,613     Cash and cash equivalents increased $172.18 million for the three months ended March 31, 2021, compared to an increase of $24.60 million for the same period of the prior year. The increase in cash and cash equivalents during the quarter 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 March 31, 2021, decreased $731 thousand, or 0.17%, to $426.00 million from $426.73 million as of December 31, 2020. The change in stockholders’ equity was largely due to the cumulative effect adjustment resulting from the adoption of ASU 2016-13, "Financial Instruments--Credit Losses (Topic 326) of $5.87 million, the repurchase of 187,700 shares of our common stock totaling $4.99 million and dividends declared on our common stock of $4.43 million offset by net income of $14.60 million.  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 $0.14 or 0.58% to $24.22 as of March 31, 2021, from $24.08 as of December 31, 2020.   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 2020 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:       March 31, 2021     December 31, 2020       Company     Bank     Company     Bank                             Common equity Tier 1 ratio   14.53%     13.69%     14.28%     13.57%   Tier 1 risk-based capital ratio   14.53%     13.69%     14.28%     13.57%   Total risk-based capital ratio   15.79%     14.95%     15.53%     14.82%   Tier 1 leverage ratio   10.04%     9.46%     10.24%     9.73%     Our risk-based capital ratios as of March 31, 2021, increased from December 31, 2020, due to a decrease in our risk-weighted assets. The decrease in risk-weighted assets was primarily due to the decrease in total loans from year-end 2020. . As of March 31, 2021, 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 March 31, 2021.   46 Table of Contents   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:       March 31, 2021     December 31, 2020   (Amounts in thousands)                 Commitments to extend credit   $ 234,828     $ 229,408   Standby letters of credit and financial guarantees (1)     182,259       179,022   Total off-balance sheet risk   $ 417,087     $ 408,430                     Reserve for unfunded commitments   $ 465     $ 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.   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 March 31, 2021, 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.       March 31, 2021     December 31, 2020       Change in     Percent     Change in     Percent   Increase (Decrease) in Basis Points   Net Interest Income     Change     Net Interest Income     Change   (Dollars in thousands)                                 300   $ 12,551       12.33 %   $ 8,429       8.50 % 200     8,628       8.48 %     5,912       6.00 % 100     4,489       4.41 %     3,130       3.20 % (100)     N/A       N/A       (4,749 )     -4.80 %   47 Table of Contents   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 developed a LIBOR transition plan.  In 2018, the Company discontinued the use of LIBOR as a reference rate in new loan originations.  Additionally, the Company has the ability to substitute an alternative referenced rate for most adjustable rate loans originated prior to 2018.   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 March 31, 2021, our disclosure controls and procedures were effective.   Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions about required disclosure.   Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.   Changes in Internal Control over Financial Reporting   We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021, 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, 2020 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, 2020 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, 2020.     48 Table of Contents     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 187,700 shares of our common stock during the first quarter of 2021 compared to 734,651 shares during the same quarter of 2020.   The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:         Total Number of Shares Purchased     Average Price Paid per Share     Total Number of Shares Purchased as Part of a Publicly Announced Plan     Maximum Number of Shares that May Yet be Purchased Under the Plan                                     January 1-31, 2021     7,700     $ 21.66       167,037.64       2,392,300   February 1-28, 2021     76,500       24.03       1,837,926.90       2,315,800   March 1-31, 2021     103,500       28.79       2,979,537.30       2,212,300   Total     187,700     $ 26.56       4,984,501.84                                               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   49 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 March 31, 2021, (Unaudited) and December 31, 2020; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2021 and 2020; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2021 and 2020; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2021 and 2020; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2021 and 2020; 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 March 31, 2021, 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   50 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 7th day of May, 2021.       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)   51