FIRST COMMUNITY BANKSHARES INC /VA/ 10-Q

fcbc20230630_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 June 30, 2023 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)             Not Applicable   (Former name, former address and former fiscal year, if changed since last report)   Securities registered pursuant to Section 12 (b) of the Act:   Title of each class Trading Symbol(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  July 31, 2023, there were 18,788,881  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 June 30, 2023 (Unaudited) and December 31, 2022 4     Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited)  5     Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited) 6     Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited) 7     Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited) 9     Notes to Condensed Consolidated Financial Statements (Unaudited) 10 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37 Item 3. Quantitative and Qualitative Disclosures About Market Risk 52 Item 4. Controls and Procedures 52       PART II. OTHER INFORMATION         Item 1. Legal Proceedings 52 Item 1A. Risk Factors 52 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53 Item 3. Defaults Upon Senior Securities 53 Item 4. Mine Safety Disclosures 53 Item 5. Other Information 53 Item 6. Exhibits 54       Signatures 56     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:     ● inflation, interest rate, market and monetary fluctuations;   ● the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;   ● the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve System;   ● timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;   ● the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa;   ● the impact of changes in financial services laws and regulations, including laws about taxes, banking, securities, and insurance;   ● the impact of the U.S. Department of the Treasury and federal banking regulators’ continued implementation of programs to address capital and liquidity in the banking system;   ● technological changes;   ● the cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of third-party providers;   ● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;    ● the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;   ● the sustainability of noninterest, or fee, income being less than expected;   ● unanticipated regulatory or judicial proceedings;   ● changes in consumer spending and saving habits; and   ● the Company’s success at managing the risks mentioned above.   This list of important factors is not exclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we file with the Securities and Exchange Commission. Therefore, the Company cautions you not to place undue reliance on forward-looking information and statements. The Company does not intend to update any forward-looking statements, whether written or oral, to reflect changes. These cautionary statements expressly qualify all forward-looking statements that apply to the Company including the risk factors presented in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.   3 Table of Contents   PART I. FINANCIAL INFORMATION   Item 1.     Financial Statemen ts     CONDENSED CONSOLIDATED BALANCE SHEETS       June 30,     December 31,       2023     2022 (1)   (Amounts in thousands, except share and per share data)   (Unaudited)           Assets                 Cash and due from banks   $ 100,438     $ 63,044   Federal funds sold     50,682       105,636   Interest-bearing deposits in banks     1,540       2,166   Total cash and cash equivalents     152,660       170,846   Debt securities available for sale     314,373       300,349   Loans held for investment, net of unearned income     2,621,073       2,400,197   Allowance for credit losses     ( 36,177 )     ( 30,556 ) Loans held for investment, net     2,584,896       2,369,641   Premises and equipment, net     53,546       47,340   Other real estate owned     339       703   Interest receivable     10,185       9,279   Goodwill     143,946       129,565   Other intangible assets     16,217       4,176   Other assets     115,275       103,673   Total assets   $ 3,391,437     $ 3,135,572                     Liabilities                 Deposits                 Noninterest-bearing   $ 974,995     $ 872,168   Interest-bearing     1,877,683       1,806,647   Total deposits     2,852,678       2,678,815   Securities sold under agreements to repurchase     1,348       1,874   Interest, taxes, and other liabilities     38,691       32,898   Total liabilities     2,892,717       2,713,587                     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; 27,500,920 shares issued and 18,969,281 outstanding at June 30, 2023; 24,477,471 shares issued and 16,225,399 outstanding at December 31, 2022     18,969       16,225   Additional paid-in capital     189,917       128,508   Retained earnings     304,295       292,971   Accumulated other comprehensive loss     ( 14,461 )     ( 15,719 ) Total stockholders' equity     498,720       421,985   Total liabilities and stockholders' equity   $ 3,391,437     $ 3,135,572     (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     Six Months Ended       June 30,     June 30,   (Amounts in thousands, except share and per share data)   2023     2022     2023     2022   Interest income                                 Interest and fees on loans   $ 31,927     $ 25,651     $ 59,555     $ 50,292   Interest on securities -- taxable     1,898       1,373       3,832       1,929   Interest on securities -- tax-exempt     159       178       324       372   Interest on deposits in banks     885       768       1,347       1,016   Total interest income     34,869       27,970       65,058       53,609   Interest expense                                 Interest on deposits     1,930       422       2,648       908   Interest on short-term borrowings     77       1       136       1   Total interest expense     2,007       423       2,784       909   Net interest income     32,862       27,547       62,274       52,700   Provision for credit losses     4,105       510       5,847       2,471   Net interest income after provision for loan losses     28,757       27,037       56,427       50,229   Noninterest income                                 Wealth management     965       993       1,982       1,965   Service charges on deposits     3,471       3,672       6,630       7,170   Other service charges and fees     3,460       3,297       6,542       6,314   Loss on sale of securities     ( 28 )     -       ( 21 )     -   Other operating income     917       892       2,235       2,599   Total noninterest income     8,785       8,854       17,368       18,048   Noninterest expense                                 Salaries and employee benefits     12,686       11,518       24,281       23,189   Occupancy expense     1,276       1,165       2,444       2,434   Furniture and equipment expense     1,508       1,496       2,909       3,110   Service fees     2,284       2,563       4,303       4,066   Advertising and public relations     846       577       1,489       1,117   Professional fees     281       544       608       997   Amortization of intangibles     425       360       659       717   FDIC premiums and assessments     423       257       743       475   Merger expenses     2,014       -       2,393       -   Other operating expense     2,928       2,775       5,655       5,136   Total noninterest expense     24,671       21,255       45,484       41,241   Income before income taxes     12,871       14,636       28,311       27,036   Income tax expense     3,057       3,423       6,715       6,308   Net income   $ 9,814     $ 11,213     $ 21,596     $ 20,728                                     Earnings per common share                                 Basic   $ 0.53     $ 0.67     $ 1.25     $ 1.24   Diluted     0.55       0.67       1.26       1.24   Weighted average shares outstanding                                 Basic     18,407,078       16,662,817       17,323,706       16,739,624   Diluted     18,431,598       16,682,615       17,363,478       16,772,847     See Notes to Condensed Consolidated Financial Statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)       Three Months Ended     Six Months Ended       June 30,     June 30,       2023     2022     2023     2022   (Amounts in thousands)                                 Net income   $ 9,814     $ 11,213     $ 21,596     $ 20,728   Other comprehensive income (loss), before tax                                 Available-for-sale debt securities:                                 Change in net unrealized (losses) gains on debt securities     ( 1,593 )     ( 6,550 )     1,570       ( 12,447 ) Reclassification adjustment for losses recognized in net income     28       -       21       -   Net unrealized (losses) gains on available-for-sale debt securities     ( 1,565 )     ( 6,550 )     1,591       ( 12,447 ) Employee benefit plans:                                 Net actuarial loss     ( 31 )     ( 1 )     ( 63 )     ( 423 ) Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income     31       33       63       67   Net unrealized gains (losses) on employee benefit plans     -       32       -       ( 356 ) Other comprehensive (loss) income, before tax     ( 1,565 )     ( 6,518 )     1,591       ( 12,803 ) Income tax (benefit) expense     ( 329 )     ( 1,370 )     333       ( 2,689 ) Other comprehensive (loss) income, net of tax     ( 1,236 )     ( 5,148 )     1,258       ( 10,114 ) Total comprehensive income   $ 8,578     $ 6,065     $ 22,854     $ 10,614     See Notes to Condensed Consolidated Financial Statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) THREE MONTHS ENDED June 30, 2023 and 2022                                                                                                                         Accumulated               Preferred             Common             Additional             Other           (Amounts in thousands, except share and per share data)   Stock Outstanding     Preferred Stock     Stock Outstanding     Common Stock     Paid-in Capital     Retained Earnings     Comprehensive Loss     Total                                                                     Balance April, 1 2022     -     $ -       16,781,975     $ 16,782     $ 144,088     $ 269,798     $ ( 6,512 )   $ 424,156   Net income     -       -       -       -       -       11,213       -       11,213   Other comprehensive loss     -       -       -       -       -       -       ( 5,148 )     ( 5,148 ) Common dividends declared -- $0.27 per share     -       -       -       -       -       ( 4,512 )     -       ( 4,512 ) Equity-based compensation expense     -       -       -       -       -       -       -       -   Common stock options exercised     -       -       -       -       181       -       -       181   Issuance of common stock to 401(k) plan     -       -       3,676       4       100       -       -       104   Repurchase of common shares at $28.03 per share     -       -       ( 283,507 )     ( 284 )     ( 7,664 )     -       -       ( 7,948 ) Balance June 30, 2022     -     $ -       16,502,144     $ 16,502     $ 136,705     $ 276,499     $ ( 11,660 )   $ 418,046                                                                     Balance April, 1 2023     -     $ -       16,243,551     $ 16,243     $ 128,666     $ 300,047     $ ( 13,225 )   $ 431,731   Surrey acquisition     -       -       2,996,786       2,997       68,357       -       -       71,354   Net income     -       -       -       -       -       9,814       -       9,814   Other comprehensive loss     -       -       -       -       -       -       ( 1,236 )     ( 1,236 ) Common dividends declared -- $0.29 per share     -       -       -       -       -       ( 5,566 )     -       ( 5,566 ) Equity-based compensation expense     -       -       8,511       9       304       -       -       313   Repurchase of common shares at $27.51 per share     -       -       ( 279,567 )     ( 280 )     ( 7,410 )     -       -       ( 7,690 ) Balance June 30, 2023     -     $ -       18,969,281     $ 18,969     $ 189,917     $ 304,295     $ ( 14,461 )   $ 498,720     See Notes to Condensed Consolidated Financial Statements.   7 Table of Contents   CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) Six MONTHS ENDED June 30, 2023 and 2022                                                                                                                         Accumulated               Preferred             Common             Additional             Other           (Amounts in thousands, except share and per share data)   Stock Outstanding     Preferred Stock     Stock Outstanding     Common Stock     Paid-in Capital     Retained Earnings     Comprehensive Loss     Total   Balance January 1, 2022     -     $ -       16,878,220     $ 16,878     $ 147,619     $ 264,824     $ ( 1,546 )   $ 427,775   Net income     -       -       -       -       -       20,728       -       20,728   Other comprehensive loss     -       -       -       -       -       0       ( 10,114 )     ( 10,114 ) Common dividends declared -- $0.54 per share     -       -       -       -       -       ( 9,053 )     0       ( 9,053 ) Equity-based compensation expense     -       -       25,137       25       328       0       -       353   Common stock options exercised     -       -       4,536       5       98       0       -       103   Issuance of common stock to 401(k) plan     -       -       9,758       10       279       -       -       289   Repurchase of common shares at $28.96 per share     -       -       ( 415,507 )     ( 416 )     ( 11,619 )     -       -       ( 12,035 ) Balance June 30, 2022     -     $ -       16,502,144     $ 16,502     $ 136,705     $ 276,499     $ ( 11,660 )   $ 418,046                                                                     Balance January 1, 2023     -     $ -       16,225,399     $ 16,225     $ 128,508     $ 292,971     $ ( 15,719 )   $ 421,985   Surrey acquisition     -       -       2,996,786       2,997       68,357       -       -       71,354   Net income     -       -       -       -       -       21,596       -       21,596   Other comprehensive income     -       -       -       -       -       -       1,258       1,258   Common dividends declared -- $0.58 per share     -       -       -       -       -       ( 10,272 )     -       ( 10,272 ) Equity-based compensation expense     -       -       24,243       24       408       -       -       432   Common stock options exercised     -       -       2,158       2       46       -       -       48   Issuance of common stock to 401(k) plan     -       -       262       -       8       -       -       8   Repurchase of common shares at $27.51 per share     -       -       ( 279,567 )     ( 279 )     ( 7,410 )     -       -       ( 7,689 ) Balance June 30, 2023     -     $ -       18,969,281     $ 18,969     $ 189,917     $ 304,295     $ ( 14,461 )   $ 498,720     See Notes to Condensed Consolidated Financial Statements.   8 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)       Six Months Ended       June 30,   (Amounts in thousands)   2023     2022   Operating activities                 Net income   $ 21,596     $ 20,728   Adjustments to reconcile net income to net cash provided by operating activities                 Provision for credit losses for loans     5,847       2,471   Depreciation and amortization of premises and equipment     1,912       2,168   (Accretion) amortization of (discounts) premiums on investments, net     ( 2,015 )     117   Amortization of intangible assets     659       717   Accretion on acquired loans     ( 1,077 )     ( 1,736 ) Equity-based compensation expense     432       353   Issuance of common stock to 401(k) plan     8       289   Loss (gain) on sale of premises and equipment, net     12       ( 381 ) Loss on sale of other real estate owned     41       420   Net loss on sale of securities     21       -   Increase in accrued interest receivable     ( 906 )     ( 533 ) (Increase) decrease in other operating activities     1,247       3,587   Net cash provided by operating activities     27,777       28,200   Investing activities                 Proceeds from sale of securities available for sale     38,979       -   Proceeds from maturities, prepayments, and calls of securities available for sale     25,788       12,812   Payments to acquire securities available for sale     ( 54,272 )     ( 236,850 ) Net decrease (increase) in loans     16,752       ( 133,395 ) Purchase of FHLB stock, net     ( 146 )     ( 240 ) Cash proceeds from merger, net     176,684       -   Proceeds from sale of premises and equipment     12       1,145   Payments to acquire premises and equipment     ( 1,931 )     ( 469 ) Proceeds from sale of other real estate owned     382       338   Net cash provided (used) by investing activities     202,248       ( 356,659 ) Financing activities                 (Decrease) increase in noninterest-bearing deposits, net     ( 55,562 )     35,179   (Decrease) increase in interest-bearing deposits, net     ( 174,210 )     33,969   (Repayments) proceeds from securities sold under agreements to repurchase, net     ( 526 )     1,099   Proceeds from stock options exercised     48       103   Payments for repurchase of common stock     ( 7,689 )     ( 12,035 ) Payments of common dividends     ( 10,272 )     ( 9,053 ) Net cash (used) provided by financing activities     ( 248,211 )     49,262   Net decrease in cash and cash equivalents     ( 18,186 )     ( 279,197 ) Cash and cash equivalents at beginning of period     170,846       677,439   Cash and cash equivalents at end of period   $ 152,660     $ 398,242                     Supplemental disclosure -- cash flow information                 Cash paid for interest   $ 2,645     $ 1,330   Cash paid for income taxes     4,641       490                     Supplemental transactions -- noncash items                 Transfer of loans to other real estate owned     79       322   Loans originated to finance other real estate owned     20       -   Increase in accumulated other comprehensive income (loss), net of taxes     1,258       ( 10,114 ) Acquisition of Surrey Bancorp     See Note 2       -     See Notes to Condensed Consolidated Financial Statements.       9 Table of Contents   NOTES TO COND ENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)     Note 1. Basis of Presentation   General   First Community Bankshares, Inc. (the “Company”), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874.   The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.   Principles of Consolidation   The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.   These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022 (the “ 2022 Form 10 -K”), as filed with the Securities and Exchange Commission (the “SEC”) on February  22, 2023. The condensed consolidated balance sheet as of December 31, 2022 , has been derived from the audited consolidated financial statements.   Reclassifications   Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.   Use of Estimates   Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, the allowance for 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 2022 Form 10 -K.   Allowance for Credit Losses ( “ ACL ” )   On January 1,  2021, the Company adopted ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments.     ACL – Investment Securities   Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value.  The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third -party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors.  Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.   The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities and does not  record an allowance for credit losses on accrued interest receivable.  As of June 30, 2023 , the accrued interest receivable for investment securities available for sale was $ 1.27  million.   10 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 Government National 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.   ACL – Loans   The Company reviews our allowance for credit losses quarterly to determine if it is sufficient to absorb expected loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While the Company uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for credit losses in the near term; however, the amount of the change cannot reasonably be estimated.   The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption through retained earnings and subsequent adjustments will be made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.   A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. The Company considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgement and reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.   The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1 - 4 Family Properties, Home Equity Lines of Credit (“HELOC”), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).   Risk characteristics of residential real estate loans which include loans secured by Single family properties, HELOC, and Owner occupied construction loans are dependent upon individual borrowers who are affected by changes in general economic conditions, real estate valuations, and the demand for housing. Commercial and Industrial, Multi-family residential, Non-farm/non-residential, Agricultural, and Loans secured by Farmland are similar in that they are generally dependent upon the borrower's internal cash flow from operations to service the debt and changes in general economic conditions. Commercial construction, Development, and other land loans, Consumer, and Other consumer loans (open pool) are similar in that they are dependent on changes in general economic conditions.   For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses. During 2022, the Company changed third party model providers which necessitated a change from remaining life to open pool for the portfolios noted above. The change in method was not quantitatively significant. In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. The Company reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver using a statistical regression modeling methodology.   The Company considers forward-looking information in estimated expected credit losses. The Company subscribes to a third -party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one -year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.   Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, The Company considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1 ) changes in lending policies and procedures, 2 ) changes in economic conditions, 3 ) changes in portfolio nature and volume, 4 ) changes in management, 5 ) changes in past due loans, 6 ) changes in the quality of the Company’s credit review system, 7 ) changes in the value of underlying collateral, 8 ) the effect of concentrations of credit, and 9 ) the effect of other external factors.   11 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 are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.    When loans are acquired they are identified as either purchased credit deteriorated ("PCD") or non-PCD.  PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date.  The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.   Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.  The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans.   The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of  June 30, 2023 , the accrued interest receivable for loans was $ 8.91  million.   Effective January 1, 2023, the Company adopted Financial Accounting Standards Board issued ASU 2022 - 02, Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.  As noted, the allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification.   Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time.   The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of  June 30, 2023 , the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $ 964  thousand.   12 Table of Contents   Recent Accounting Standards   Standards Adopted in  2023   In March 2022, the Financial Accounting Standards Board issued ASU 2022 - 02, Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provided accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016 - 13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. We adopted this standard, effective January 1, 2023.  The updated guidance had no material impact on our Consolidated Financial Statements.    The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements.          Note 2 . Divestitures and Acquisitions   On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank (the "Emporia Branch Sale"). The sale included the branch real estate, certain personal property, and all deposits associated with the branch.  There were no loans included in the transaction.  Benchmark paid a deposit premium of two percent for certain deposits.  In addition, Benchmark paid $ 1.50 million for branch real estate and certain personal property.   Total deposits acquired by Benchmark totaled $ 61.05 million.  The deposits were composed of $ 18.38 million in demand, $ 28.46 million in interest-bearing demand, $ 11.52 million in savings, and $ 2.69 million in time deposits.  The Company recognized a gain of $ 1.66 million from the Emporia Branch Sale.   On November 18, 2022, the Company and NC-based Surrey Bancorp ("Surrey"), parent company of Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. Under the terms of the agreement and plan of merger, each share of Surrey common stock immediately converted into the right to receive 0.7159  shares of the Company's common stock.  The transaction was consummated on April 21, 2023.  The total purchase price for the transaction was $ 71.37 million.   The strategic combination of the Company and Surrey united two high-performing community banks that historically produced returns on average assets well-above one percent and efficiency ratios below sixty percent while maintaining low-risk profiles.  In addition, the combination will create a leading community banking institution in northwestern North Carolina and southwestern Virginia.  Significant synergies and efficiencies are anticipated to be gained from the acquisition. The Company's commercial loan customers are anticipated to benefit from Surrey's government guarantee lending expertise, while Surrey's customers will benefit from additional scale, increased lending limits, and enhanced product and technology offerings.   The Surrey transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date.  Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.  The Company incurred a total of $ 2.99 million in merger expenses related to the Surrey transaction, $ 596 thousand was recorded in the last quarter of 2022 and $ 2.39 million in the first six months of 2023. These costs were primarily related to data conversion, investment banking fees, and legal fees.    Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the fair value of the liabilities assumed.  The Surrey acquisition resulted in the Company recognizing $ 14.38 million in goodwill.   The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible.  Core deposit intangibles for the Surrey transaction totaled $12.70 million.    When loans are acquired they are identified as either purchased credit deteriorated ("PCD") or non-PCD.  PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since the origination of the loans as of the acquisition date.  The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.  Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.  The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions similar to originated performing loans.  The fair value of purchased loans with credit deterioration was $ 101.42 million on the date of acquisition with the gross contractual amount totaling $ 111.22 million.  The Company estimates that $ 2.01 million of contractual cash flows specific to the purchased loans with credit deterioration will not be collected.  Non purchased credit deteriorated loans acquired had a fair value of $ 137.55 million with a gross contractual value of $ 143.55 million.   13 Table of Contents       As recorded by     Fair Value       As recorded by   (Amounts in thousands)   Surrey     Adjustments       the Company   Assets                           Cash and cash equivalents   $ 176,700     $ -       $ 176,700   Securities available for sale     22,027       ( 1,093 ) ( a )     20,934   Loans held for investment, net of allowance and mark     251,944       ( 12,864 ) ( b )     239,080   Premises and equipment     5,501       774   ( c )     6,275   Other assets     10,787       ( 229 ) ( d ), ( e )     10,558   Intangible assets     -       12,700   ( f )     12,700   Total assets   $ 466,959     $ ( 712 )     $ 466,247                               LIABILITIES                           Deposits:                           Noninterest-bearing   $ 158,389     $ -       $ 158,389   Interest-bearing     246,460       ( 1,214 ) ( g )     245,246   Total deposits     404,849       ( 1,214 )       403,635   Long term debt     -       -         -   Other liabilities     6,004       ( 381 ) ( h )     5,623   Total liabilities     410,853       ( 1,595 )       409,258                               Net identifiable assets acquired over liabilities assumed     56,106       883         56,989                               Goodwill     -       14,381         14,381   Net assets acquired over liabilities assumed   $ 56,106     $ 15,264       $ 71,370                               Consideration:                           First Community Bankshares, Inc. common stock                       2,996,786   Purchase price per share of the Company's common stock                     $ 23.81   Fair value of Company common stock issued                       71,354   Cash paid for fractional shares                       16   Fair Value of total consideration transferred                     $ 71,370       Explanation of fair value adjustments:     (a) Adjustment reflects the fair value adjustment based on the Company's evaluation of the acquired investment portfolio.   (b) Adjustment reflects the fair value adjustments of $( 15.80 ) million based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for credit losses and deferred loans fees of $ 2.94 million as recorded by Surrey.   (c) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.   (d) Adjustment reflects the fair value adjustment based on the Company's evaluation of stocks with other banks of $ 47 thousand.   (e) Adjustment to record the deferred tax asset related to the fair value adjustments $( 177 ) thousand.   (f) Adjustment to record the core deposit intangible on the acquired deposit accounts.   (g) Adjustment reflects the fair value adjustment based on the Company's evaluation of the time deposit portfolio.   (h) Adjustment to reclass deferred tax asset $( 99 ) thousand, goodwill $( 282 ) thousand, federal income tax payable $( 389 ) thousand, and state income tax payable $ 8 thousand.   Comparative and Pro Forma Financial Information for Acquisitions   The following table discloses the financial impact of the merger.  The table presents certain pro forma information as if Surrey had been acquired on January 1, 2022.  These results combine the historical results of Surrey in the Company's consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2022.    No adjustments have been made to the pro formas to eliminate the recovery of provision for credit losses for the quarter and year-to-date periods ended June 30, 2022 of Surrey in the amounts of $ 415 thousand and $ 1.08 million, respectively .  The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:       ProForma       Three months ended June 30,     Six Months Ended June 30,   (Dollars in thousands)   2023     2022     2023     2022   Total revenues (net interest income plus noninterest income)   $ 41,647     $ 40,758     $ 79,642     $ 78,897   Net adjusted income available to the common shareholder   $ 11,701     $ 12,926     $ 23,851     $ 23,981     14 Table of Contents     Note 3 . Debt Securities   There was no allowance for credit losses for debt securities as of  June 30, 2023 ; therefore, it is not presented in the table below.  The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:       June 30, 2023       Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value   (Amounts in thousands)                                 U.S. Agency securities   $ 7,250     $ -     $ ( 21 )   $ 7,229   U.S. Treasury Notes     181,670       3       ( 3,167 )     178,506   Municipal securities     21,684       10       ( 245 )     21,449   Corporate notes     28,551       -       ( 2,088 )     26,463   Agency mortgage-backed securities     93,401       1       ( 12,676 )     80,726   Total   $ 332,556     $ 14     $ ( 18,197 )   $ 314,373         December 31, 2022       Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value   (Amounts in thousands)                                 U.S. Agency securities   $ 1,500     $ —     $ ( 15 )   $ 1,485   U.S. Treasury Notes     161,617       -       ( 4,353 )     157,264   Municipal securities     23,480       21       ( 192 )     23,309   Corporate notes     37,046       —       ( 2,189 )     34,857   Agency mortgage-backed securities     96,480       3       ( 13,049 )     83,434   Total   $ 320,123     $ 24     $ ( 19,798 )   $ 300,349     15 Table of Contents   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.       June 30, 2023       Amortized           (Amounts in thousands)   Cost     Fair Value   Available-for-sale debt securities                 Due within one year   $ 188,484     $ 185,298   Due after one year but within five years     48,727       46,419   Due after five years but within ten years     1,944       1,930         239,155       233,647   Agency mortgage-backed securities     93,401       80,726   Total debt securities available for sale   $ 332,556     $ 314,373     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:       June 30, 2023       Less than 12 Months     12 Months or Longer     Total       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses   (Amounts in thousands)                                                 U.S. Agency securities   $ 7,228     $ ( 21 )   $ -     $ -     $ 7,228     $ ( 21 ) U.S. Treasury Notes     40,602       ( 84 )     126,686       ( 3,083 )     167,288       ( 3,167 ) Municipal securities     14,017       ( 189 )     1,403       ( 56 )     15,420       ( 245 ) Corporate notes     -       -       26,462       ( 2,088 )     26,462       ( 2,088 ) Agency mortgage-backed securities     3,335       ( 204 )     77,311       ( 12,472 )     80,646       ( 12,676 ) Total   $ 65,182     $ ( 498 )   $ 231,862     $ ( 17,699 )   $ 297,044     $ ( 18,197 )   16 Table of Contents       December 31, 2022       Less than 12 Months     12 Months or Longer     Total       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses   (Amounts in thousands)                                                 U.S. Agency securities   $ 1,485     $ ( 15 )   $ —     $ —     $ 1,485     $ ( 15 ) U.S. Treasury Notes     157,264       ( 4,353 )     —       —       157,264       ( 4,353 ) Municipal securities     12,347       ( 192 )     —       —       12,347       ( 192 ) Corporate notes     32,368       ( 2,172 )     2,489       ( 17 )     34,857       ( 2,189 ) Agency mortgage-backed securities     64,993       ( 8,824 )     18,305       ( 4,225 )     83,298       ( 13,049 ) Total   $ 268,457     $ ( 15,556 )   $ 20,794     $ ( 4,242 )   $ 289,251     $ ( 19,798 )   There were 129  individual debt securities in an unrealized loss position as of June 30, 2023 , and the combined depreciation in value represented  5.79 % of the debt securities portfolio. There were 113 individual debt securities in an unrealized loss position as of December 31, 2022 , and their combined depreciation in value represented  6.59 % of  the debt securities portfolio.     Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to ( 1 ) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, ( 2 ) the outlook for receiving the contractual cash flows of the investments, ( 3 ) the length of time and the extent to which the fair value has been less than cost, ( 4 ) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than- not that we will be required to sell the debt security prior to recovering its fair value, ( 5 ) the anticipated outlook for changes in the general level of interest rates, ( 6 ) credit ratings, ( 7 ) third party guarantees, and ( 8 ) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments.  All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of June 30, 2023 , continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than- not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.   Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.   Approximately $ 38.98 million in securities available for sale have been sold in the first six months of 2023 .  Included in the sale of securities was the entire portfolio of Surrey with an acquired fair value of $ 20.93 million comprised primarily of U. S. Treasury Notes.  A loss of $ 28 thousand was recognized in the sale of the portfolio. The following table presents gross realized gains and losses from the sale of available-for-sale debt securities for the periods indicated:       Three Months Ended     Six Months Ended       June 30,     June 30,       2023     2022     2023     2022   (Amounts in thousands)                                 Gross realized gains   $ -     $ -     $ 7     $ -   Gross realized losses     ( 28 )     -       ( 28 )     -   Net Gain (Loss) on sale of securities   $ ( 28 )   $ -     $ ( 21 )   $ -       The carrying amount of securities pledged for various purposes totaled $ 37.88   million  as of June 30, 2023 , and $ 22.43 million  as of December 31, 2022 .     Note 4 . Loans   The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $ 1.59  million as of June 30, 2023 , and $ 1.80  million  as of December 31, 2022 . Deferred loan fees, net of loan costs, totaled $ 7.98  million as of June 30, 2023 , and $ 8.81  million  as of December 31, 2022 .    In accordance with the adoption of ASU 2016 - 13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $ 7.98  million and $ 8.81  million and unamortized discount related to loans acquired of $ 16.95  million and $ 3.80  million for June 30, 2023 , and December 31, 2022 , respectively.  Accrued interest receivable of $ 8.91  million as of  June 30, 2023 , and $ 7.94  million  as of  December 31, 2022 , is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.   17 Table of Contents       June 30, 2023     December 31, 2022   (Amounts in thousands)   Amount     Percent     Amount     Percent   Loans held for investment                                 Commercial loans                                 Construction, development, and other land   $ 112,213       4.28 %   $ 117,174       4.88 % Commercial and industrial     214,962       8.20 %     150,428       6.27 % Multi-family residential     164,017       6.26 %     148,026       6.17 % Single family non-owner occupied     228,363       8.71 %     206,121       8.59 % Non-farm, non-residential     904,777       34.52 %     787,703       32.82 % Agricultural     22,106       0.84 %     12,032       0.50 % Farmland     15,822       0.60 %     11,779       0.49 % Total commercial loans     1,662,260       63.41 %     1,433,263       59.72 % Consumer real estate loans                                 Home equity lines     89,701       3.42 %     75,642       3.15 % Single family owner occupied     722,769       27.58 %     734,540       30.61 % Owner occupied construction     11,198       0.43 %     10,366       0.43 % Total consumer real estate loans     823,668       31.43 %     820,548       34.19 % Consumer and other loans                                 Consumer loans     133,559       5.10 %     144,582       6.02 % Other     1,586       0.06 %     1,804       0.07 % Total consumer and other loans     135,145       5.16 %     146,386       6.09 % Total loans held for investment, net of unearned income   $ 2,621,073       100.00 %   $ 2,400,197       100.00 %    18 Table of Contents       Note 5 . Credit Quality   The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:   ● Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.   ● Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.   ● Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.   ● Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.   ● Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.   The following table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated:       June 30, 2023               Special                                   (Amounts in thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total   Commercial loans                                                 Construction, development, and other land   $ 111,532     $ 281     $ 400     $ -     $ -     $ 112,213   Commercial and industrial     209,472       2,244       2,021       1,225       -       214,962   Multi-family residential     160,317       3,502       198       -       -       164,017   Single family non-owner occupied     218,324       2,245       7,794       -       -       228,363   Non-farm, non-residential     875,138       18,850       10,789       -       -       904,777   Agricultural     17,038       3,645       1,423       -       -       22,106   Farmland     14,012       514       1,296       -       -       15,822   Consumer real estate loans                                                 Home equity lines     86,530       691       2,480       -       -       89,701   Single family owner occupied     695,594       2,435       24,716       24       -       722,769   Owner occupied construction     11,039       -       159       -       -       11,198   Consumer and other loans                                                 Consumer loans     131,003       10       2,546       -       -       133,559   Other     1,586       -       -       -       -       1,586   Total loans   $ 2,531,585     $ 34,417     $ 53,822     $ 1,249     $ -     $ 2,621,073         December 31, 2022               Special                                   (Amounts in thousands)   Pass     Mention     Substandard     Doubtful     Loss     Total                                                     Commercial loans                                                 Construction, development, and other land   $ 115,972     $ 853     $ 349     $ -     $ -     $ 117,174   Commercial and industrial     147,543       920       1,965       -       -       150,428   Multi-family residential     143,859       3,946       221       -       -       148,026   Single family non-owner occupied     195,775       2,303       8,043       -       -       206,121   Non-farm, non-residential     761,154       14,903       11,646       -       -       787,703   Agricultural     11,722       47       263       -       -       12,032   Farmland     9,868       573       1,338       -       -       11,779   Consumer real estate loans                                                 Home equity lines     72,927       288       2,427       -       -       75,642   Single family owner occupied     706,952       1,958       25,630       -       -       734,540   Owner occupied construction     10,204       -       162       -       -       10,366   Consumer and other loans                                                 Consumer loans     141,551       11       3,020       -       -       144,582   Other     1,804       -       -       -       -       1,804   Total loans   $ 2,319,331     $ 25,802     $ 55,064     $ -     $ -     $ 2,400,197     19 Table of Contents   The following tables present the amortized cost basis and current period gross write-offs of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:     (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at June 30, 2023   2023     2022     2021     2020     2019     Prior     Revolving     Total   Construction, development and other land                                                                 Pass   $ 4,314     $ 63,451     $ 28,700     $ 4,329     $ 2,942     $ 5,629     $ 2,167     $ 111,532   Special Mention     -       -       -       204       -       77       -       281   Substandard     -       -       -       -       188       212       -       400   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total construction, development, and other land   $ 4,314     $ 63,451     $ 28,700     $ 4,533     $ 3,130     $ 5,918     $ 2,167     $ 112,213   Current period gross write-offs   $ -     $ -     $ -     $ -     $ 13     $ -     $ -     $ 13   Commercial and industrial                                                                 Pass   $ 26,362     $ 72,027     $ 24,102     $ 14,600     $ 7,801     $ 16,084     $ 48,496     $ 209,472   Special Mention     -       486       239       12       418       837       252       2,244   Substandard     -       464       172       100       586       699       -       2,021   Doubtful     -       1,225       -       -       -       -       -       1,225   Loss     -       -       -       -       -       -       -       -   Total commercial and industrial   $ 26,362     $ 74,202     $ 24,513     $ 14,712     $ 8,805     $ 17,620     $ 48,748     $ 214,962   Current period gross write-offs   $ -     $ 56     $ 91     $ 37     $ 32     $ -     $ -     $ 216   Multi-family residential                                                                 Pass   $ 1,293     $ 50,442     $ 30,672     $ 30,959     $ 3,660     $ 41,016     $ 2,275     $ 160,317   Special Mention     -       -       -       -       -       3,502       -       3,502   Substandard     -       -       -       -       -       198       -       198   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total multi-family residential   $ 1,293     $ 50,442     $ 30,672     $ 30,959     $ 3,660     $ 44,716     $ 2,275     $ 164,017   Current period gross write-offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Non-farm, non-residential                                                                 Pass   $ 51,766     $ 241,912     $ 154,930     $ 121,650     $ 56,542     $ 235,998     $ 12,340     $ 875,138   Special Mention     65       592       3,506       1,066       158       13,463       -       18,850   Substandard     -       244       1,099       531       3,264       5,419       232       10,789   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total non-farm, non-residential   $ 51,831     $ 242,748     $ 159,535     $ 123,247     $ 59,964     $ 254,880     $ 12,572     $ 904,777   Current period gross write-offs   $ -     $ 8     $ -     $ -     $ -     $ 2     $ -     $ 10   Agricultural                                                                 Pass   $ 3,641     $ 5,308     $ 2,906     $ 872     $ 769     $ 2,889     $ 653     $ 17,038   Special Mention     -       295       225       11       103       3,011       -       3,645   Substandard     -       -       32       9       1,372       10       -       1,423   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total agricultural   $ 3,641     $ 5,603     $ 3,163     $ 892     $ 2,244     $ 5,910     $ 653     $ 22,106   Current period gross write-offs   $ -     $ 59     $ -     $ -     $ -     $ 8     $ -     $ 67   Farmland                                                                 Pass   $ 519     $ 1,647     $ 1,682     $ 972     $ 787     $ 7,442     $ 963     $ 14,012   Special Mention     -       -       107       11       -       396       -       514   Substandard     -       -       -       11       -       1,285       -       1,296   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total farmland   $ 519     $ 1,647     $ 1,789     $ 994     $ 787     $ 9,123     $ 963     $ 15,822   Current period gross write-offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     20 Table of Contents    (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at June 30, 2023   2023     2022     2021     2020     2019     Prior     Revolving     Total   Home equity lines                                                                 Pass   $ 81     $ 929     $ 123     $ 143     $ 70     $ 4,517     $ 80,667     $ 86,530   Special Mention     -       -       -       -       -       40       651       691   Substandard     -       12       -       27       35       1,380       1,026       2,480   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total home equity lines   $ 81     $ 941     $ 123     $ 170     $ 105     $ 5,937     $ 82,344     $ 89,701   Current period gross write-offs   $ -     $ -     $ -     $ -     $ -     $ 154     $ -     $ 154   Single family Mortgage                                                                 Pass   $ 30,711     $ 168,262     $ 231,284     $ 200,710     $ 47,925     $ 234,597     $ 429     $ 913,918   Special Mention     -       -       485       97       109       3,989       -       4,680   Substandard     107       453       1,307       1,207       1,202       28,234       -       32,510   Doubtful     -       -       -       -       -       24       -       24   Loss     -       -       -       -       -       -       -       -   Total single family owner and non-owner occupied   $ 30,818     $ 168,715     $ 233,076     $ 202,014     $ 49,236     $ 266,844     $ 429     $ 951,132   Current period gross write-offs   $ -     $ -     $ 47     $ -     $ -     $ 122     $ -     $ 169   Owner occupied construction                                                                 Pass   $ 946     $ 7,487     $ 2,161     $ -     $ 32     $ 413     $ -     $ 11,039   Special Mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       157       -       2       -       159   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total owner occupied construction   $ 946     $ 7,487     $ 2,161     $ 157     $ 32     $ 415     $ -     $ 11,198   Current period gross write-offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Consumer loans                                                                 Pass   $ 21,611     $ 56,667     $ 28,172     $ 11,166     $ 5,037     $ 1,649     $ 8,287     $ 132,589   Special Mention     -       -       4       -       4       1       1       10   Substandard     28       978       663       338       275       203       61       2,546   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total consumer loans   $ 21,639     $ 57,645     $ 28,839     $ 11,504     $ 5,316     $ 1,853     $ 8,349     $ 135,145   Current period gross write-offs   $ 423     $ 1,722     $ 1,241     $ 309     $ 130     $ 20     $ 89     $ 3,934     (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at June 30, 2023   2023     2022     2021     2020     2019     Prior     Revolving     Total   Total Loans                                                                 Pass   $ 141,244     $ 668,132     $ 504,732     $ 385,401     $ 125,565     $ 550,234     $ 156,277     $ 2,531,585   Special Mention     65       1,373       4,566       1,401       792       25,316       904       34,417   Substandard     135       2,151       3,273       2,380       6,922       37,642       1,319       53,822   Doubtful     -       1,225       -       -       -       24       -       1,249   Loss     -       -       -       -       -       -       -       -   Total loans   $ 141,444     $ 672,881     $ 512,571     $ 389,182     $ 133,279     $ 613,216     $ 158,500     $ 2,621,073   Current period gross write-offs   $ 423     $ 1,845     $ 1,379     $ 346     $ 175     $ 306     $ 89     $ 4,563     21 Table of Contents   (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at December 31, 2022   2022     2021     2020     2019     2018     Prior     Revolving     Total   Construction, development                                                                 and other land                                                                 Pass   $ 58,770     $ 39,995     $ 4,602     $ 3,050     $ 2,485     $ 5,608     $ 1,462     $ 115,972   Special Mention     -       225       -       -       94       534       -       853   Substandard     -       -       267       71       11       -       -       349   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total construction, development, and other land   $ 58,770     $ 40,220     $ 4,869     $ 3,121     $ 2,590     $ 6,142     $ 1,462     $ 117,174   Commercial and industrial                                                                 Pass   $ 69,678     $ 23,746     $ 12,047     $ 7,729     $ 9,121     $ 8,890     $ 16,332     $ 147,543   Special Mention     227       20       21       367       185       1       99       920   Substandard     130       112       114       620       192       797       -       1,965   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total commercial and industrial   $ 70,035     $ 23,878     $ 12,182     $ 8,716     $ 9,498     $ 9,688     $ 16,431     $ 150,428   Multi-family residential                                                                 Pass   $ 45,261     $ 20,881     $ 31,087     $ 3,733     $ 1,328     $ 41,063     $ 506     $ 143,859   Special Mention     -       -       -       -       -       3,946       -       3,946   Substandard     -       -       -       -       -       221       -       221   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total multi-family residential   $ 45,261     $ 20,881     $ 31,087     $ 3,733     $ 1,328     $ 45,230     $ 506     $ 148,026   Non-farm, non-residential                                                                 Pass   $ 218,595     $ 145,675     $ 114,840     $ 52,575     $ 35,564     $ 185,448     $ 8,457     $ 761,154   Special Mention     -       1,927       852       1,193       2,708       8,076       147       14,903   Substandard     -       1,267       675       2,509       1,531       5,664       -       11,646   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total non-farm, non-residential   $ 218,595     $ 148,869     $ 116,367     $ 56,277     $ 39,803     $ 199,188     $ 8,604     $ 787,703   Agricultural                                                                 Pass   $ 6,244     $ 3,225     $ 1,003     $ 376     $ 154     $ 214     $ 506     $ 11,722   Special Mention     -       33       14       -       -       -       -       47   Substandard     124       37       1       66       24       11       -       263   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total agricultural   $ 6,368     $ 3,295     $ 1,018     $ 442     $ 178     $ 225     $ 506     $ 12,032   Farmland                                                                 Pass   $ 646     $ 713     $ 796     $ 77     $ 869     $ 6,150     $ 617     $ 9,868   Special Mention     -       109       -       -       222       242       -       573   Substandard     -       -       12       -       253       1,073       -       1,338   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total farmland   $ 646     $ 822     $ 808     $ 77     $ 1,344     $ 7,465     $ 617     $ 11,779     22 Table of Contents   (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at December 31, 2022   2022     2021     2020     2019     2018     Prior     Revolving     Total   Home equity lines                                                                 Pass   $ 1,960     $ 198     $ 241     $ -     $ 24     $ 7,429     $ 63,075     $ 72,927   Special Mention     -       -       -       -       -       117       171       288   Substandard     -       -       27       35       114       1,253       998       2,427   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total home equity lines   $ 1,960     $ 198     $ 268     $ 35     $ 138     $ 8,799     $ 64,244     $ 75,642   Single family Mortgage                                                                 Pass   $ 157,890     $ 237,363     $ 207,480     $ 48,795     $ 36,678     $ 214,148     $ 373     $ 902,727   Special Mention     -       376       90       363       262       3,170       -       4,261   Substandard     461       1,196       740       1,217       1,991       28,068       -       33,673   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total single family owner and non-owner occupied   $ 158,351     $ 238,935     $ 208,310     $ 50,375     $ 38,931     $ 245,386     $ 373     $ 940,661   Owner occupied construction                                                                 Pass   $ 6,357     $ 3,344     $ -     $ 23     $ 11     $ 469     $ -     $ 10,204   Special Mention     -       -       -       -       -       -       -       -   Substandard     -       -       162       -       -       -       -       162   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total owner occupied construction   $ 6,357     $ 3,344     $ 162     $ 23     $ 11     $ 469     $ -     $ 10,366   Consumer loans                                                                 Pass   $ 69,579     $ 37,603     $ 16,033     $ 7,640     $ 2,528     $ 2,040     $ 7,932     $ 143,355   Special Mention     -       5       -       6       -       -       -       11   Substandard     881       1,002       466       416       36       159       60       3,020   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total consumer loans   $ 70,460     $ 38,610     $ 16,499     $ 8,062     $ 2,564     $ 2,199     $ 7,992     $ 146,386     (Amounts in thousands)   Term Loans Amortized Cost Basis by Origination Year                   Balance at December 31, 2022   2022     2021     2020     2019     2018     Prior     Revolving     Total   Total Loans                                                                 Pass   $ 634,980     $ 512,743     $ 388,129     $ 123,998     $ 88,762     $ 471,459     $ 99,260     $ 2,319,331   Special Mention     227       2,695       977       1,929       3,471       16,086       417       25,802   Substandard     1,596       3,614       2,464       4,934       4,152       37,246       1,058       55,064   Doubtful     -       -       -       -       -       -       -       -   Loss     -       -       -       -       -       -       -       -   Total loans   $ 636,803     $ 519,052     $ 391,570     $ 130,861     $ 96,385     $ 524,791     $ 100,735     $ 2,400,197     23 Table of Contents   The Company generally places a loan on nonaccrual status when it is 90 days or more past due.  The following table presents nonaccrual loans, by loan class, as of the dates indicated:       June 30, 2023     December 31, 2022   (Amounts in thousands)   No Allowance     With an Allowance     Total     No Allowance     With an Allowance     Total   Commercial loans                                                 Construction, development, and other land   $ 183     $ -     $ 183     $ 31     $ -     $ 31   Commercial and industrial     812       1,225       2,037       438       -       438   Multi-family residential     198       -       198       220       -       220   Single family non-owner occupied     991       -       991       984       -       984   Non-farm, non-residential     1,325       -       1,325       1,771       -       1,771   Agricultural     1,343       -       1,343       9       -       9   Farmland     123       -       123       133       -       133   Consumer real estate loans                                                 Home equity lines     859       -       859       400       -       400   Single family owner occupied     8,976       582       9,558       8,228       589       8,817   Owner occupied construction     -       -       -       -       -       -   Consumer and other loans                                                 Consumer loans     2,011       -       2,011       2,405       -       2,405   Total nonaccrual loans   $ 16,821     $ 1,807     $ 18,628     $ 14,619     $ 589     $ 15,208     There was no material nonaccrual loan interest recognized in income during the second quarter or for the six  months of both 2023  and   2022 .     The following tables presents the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category:        June 30, 2023                                                       Amortized Cost of       30 - 59 Days     60 - 89 Days     90+ Days     Total     Current     Total     > 90 Days Accruing   (Amounts in thousands)   Past Due     Past Due     Past Due     Past Due     Loans     Loans     No Allowance                                                             Commercial loans                                                         Construction, development, and other land   $ -     $ 7     $ 23     $ 30     $ 112,183     $ 112,213     $ -   Commercial and industrial     1,203       150       576       1,929       213,033       214,962       -   Multi-family residential     190       -       -       190       163,827       164,017       -   Single family non-owner occupied     391       391       109       891       227,472       228,363       -   Non-farm, non-residential     784       73       403       1,260       903,517       904,777       -   Agricultural     132       -       1,343       1,475       20,631       22,106       -   Farmland     107       -       -       107       15,715       15,822       -   Consumer real estate loans                                                         Home equity lines     753       471       678       1,902       87,799       89,701       -   Single family owner occupied     3,725       2,811       3,821       10,357       712,412       722,769       -   Owner occupied construction     196       -       -       196       11,002       11,198       -   Consumer and other loans                                                         Consumer loans     3,971       1,195       801       5,967       127,592       133,559       -   Other     -       -       -       -       1,586       1,586       -   Total loans   $ 11,452     $ 5,098     $ 7,754     $ 24,304     $ 2,596,769     $ 2,621,073     $ -         December 31, 2022                                                       Amortized Cost of       30 - 59 Days     60 - 89 Days     90+ Days     Total     Current     Total     > 90 Days Accruing   (Amounts in thousands)   Past Due     Past Due     Past Due     Past Due     Loans     Loans     No Allowance                                                             Commercial loans                                                         Construction, development, and other land   $ 393     $ 8     $ 23     $ 424     $ 116,750     $ 117,174     $ -   Commercial and industrial     756       129       217       1,102       149,326       150,428       -   Multi-family residential     -       -       83       83       147,943       148,026       -   Single family non-owner occupied     990       122       299       1,411       204,710       206,121       -   Non-farm, non-residential     646       52       548       1,246       786,457       787,703       -   Agricultural     36       135       9       180       11,852       12,032       -   Farmland     -       -       133       133       11,646       11,779       -   Consumer real estate loans                                                         Home equity lines     519       115       262       896       74,746       75,642       -   Single family owner occupied     5,951       2,322       3,166       11,439       723,101       734,540       -   Owner occupied construction     -       -       -       -       10,366       10,366       -   Consumer and other loans                                                         Consumer loans     4,282       1,960       1,459       7,701       136,881       144,582       -   Other     -       -       -       -       1,804       1,804       -   Total loans   $ 13,573     $ 4,843     $ 6,199     $ 24,615     $ 2,375,582     $ 2,400,197     $ -     24 Table of Contents   ASC 326 prescribes that when an entity determines foreclosure is probable, the expected credit loss can be measured based on the fair value of the collateral. As a practical expedient, an entity may use the fair value as of the reporting date when recording the net carrying amount of the asset. For the collateral dependent asset ("CDA") a credit loss expense is recorded for loan amounts in excess of fair value of the collateral.  The table below summarizes collateral dependent loans, where foreclosure is probable, by type of collateral, and the extent to which they are collateralized during the period.         June 30, 2023     December 31, 2022   (Amounts in thousands)   Balance     Collateral Coverage     %     Balance     Collateral Coverage     %   Commercial Real Estate                                                 Hotel   $ -     $ -       -     $ -     $ -       -   Office     -       -       -       -       -       -   Other     -       -       -       -       -       -   Retail     -       -       -       -       -       -   Multi-Family                                                 Industrial     -       -       -       -       -       -   Office     -       -       -       -       -       -   Other     -       -       -       -       -       -   Commercial and industrial                                                 Industrial     -       -       -       -       -       -   Other     1,225       375       30.61 %     -       -       -   Home equity loans     -       -       -       -       -       -   Consumer owner occupied     582       582       100.00 %     589       574       97.45 % Consumer     -       -       -       -       -       -   Total collateral dependent loans   $ 1,807     $ 957       52.96 %   $ 589     $ 574       97.45 %   The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty.  Effective, January 1, 2023, the Company adopted ASU 2022 - 02, Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016 - 13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs.  Presented below are the amortized cost basis and percentage of loan class for loan modifications made to borrowers experiencing financial difficulty by loan class, concession type, and financial effect as of the date indicated:       Payment Delays     Amortized Cost Basis     % of Total Class of         June 30, 2023     Financing Receivable   Financial Effect                     (Amounts in thousands)                   Single family owner occupied   $ 404       0.056 % Deferred $6 thousand in principal to maturity Total   $ 404                                     Term Extensions     Amortized Cost Basis     % of Total Class of         June 30, 2023     Financing Receivable   Financial Effect                     (Amounts in thousands)                   Consumer   $ 8       0.006 % Extended term from 60 to 84 months Total   $ 8                                                         Principal Forgiveness     Amortized Cost Basis     % of Total Class of         June 30, 2023     Financing Receivable   Financial Effect                     (Amounts in thousands)                   Single family owner occupied   $ 8       0.001 % Reduced amortized cost basis by $13 thousand Total   $ 8               Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.  As of  June 30, 2023 , there were no modified loans (or portions of a loan) deemed uncollectible.   25 Table of Contents   The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.  The following table depicts the performance of loans that have been modified in the last three months:       June 30, 2023       Payment Status (Amortized Cost Basis)       Current     30-89 Days Past Due     90+ Days Past Due                             (Amounts in thousands)                         Single family owner occupied   $ 634     $ -     $ -   Consumer     8       -       -   Total   $ 642     $ -     $ -       The Company did not retroactively adopt ASU 2022 - 02 January 1, 2023; as such the periods are not comparable.  Prior to the adoption of ASU 2022 - 02, Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures below is the presentation of loans modified as TDRs, by loan class and accrual status, as of the dates indicated:       December 31, 2022   (Amounts in thousands)   Nonaccrual(1)     Accruing     Total   Commercial loans                         Commercial and industrial   $ -     $ 374     $ 374   Single family non-owner occupied     142       838       980   Non-farm, non-residential     -       747       747   Consumer real estate loans                         Home equity lines     -       55       55   Single family owner occupied     1,182       5,073       6,255   Owner occupied construction     -       -       -   Consumer and other loans                         Consumer loans     -       25       25   Total TDRs   $ 1,324     $ 7,112     $ 8,436                             Allowance for credit losses related to TDRs                   $ -     ( 1 ) Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.   The following table presents interest income recognized on TDRs for the periods indicated:       Three Months Ended June 30,     Six Months Ended June 30,       2022     2022   (Amounts in thousands)                 Interest income recognized   $ 105     $ 105     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 June 30,       2022   (Amounts in thousands)   Total Contracts     Pre-modification Recorded Investment     Post-modification Recorded Investment(1)   Below market interest rate                         Single family owner occupied     2     $ 238     $ 245   Total below market interest rate     2     $ 238     $ 245   Total     2     $ 238     $ 245         Six Months Ended June 30,       2022   (Amounts in thousands)   Total Contracts     Pre-modification Recorded Investment     Post-modification Recorded Investment(1)   Below market interest rate                         Single family owner occupied     1     $ 31     $ 31   Total below market interest rate     1       31       31   Below market interest rate and extended payment term                         Single family owner occupied     2     $ 238     $ 245   Total below market interest rate and extended payment term     2     $ 238     $ 245   Payment deferral                         Single family owner occupied     -       -       -   Non-farm, non-residential     -       -       -   Total payment deferral     -     $ -     $ -   Total     3     $ 269     $ 276     ( 1 ) Represents the loan balance immediately following modification   26 Table of Contents   As of   June 30, 2022 , there was one payment in default in the amount of $ 39  thousand for loans modified as TDRs restructured within the previous 12 months.   The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:       June 30, 2023     December 31, 2022   (Amounts in thousands)                 OREO   $ 339     $ 703                     OREO secured by residential real estate   $ 139     $ 407   Residential real estate loans in the foreclosure process (1)   $ 2,800     $ 1,474     ( 1 ) The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction     Note 6 . Allowance for Credit Losses   The following tables present the changes in the allowance for credit losses, by loan segment, during the periods indicated:       Three Months Ended June 30, 2023               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Balance at beginning of quarter:                                 Allowance for credit losses - loans   $ 17,269     $ 8,995     $ 4,525     $ 30,789   Allowance for credit losses - loan commitments     786       150       28       964   Total allowance for credit losses beginning of year     18,055       9,145       4,553       31,753   Purchased credit deteriorated -Surrey acquisition     1,452       529       30       2,011   Provision for credit losses:                                 Provision for credit losses - loans     2,349       380       1,376       4,105   Provision for credit losses - loan commitments     -       -       -       -   Total provision for credit losses - loans and loan commitments     2,349       380       1,376       4,105   Charge-offs     ( 133 )     ( 225 )     ( 1,635 )     ( 1,993 ) Recoveries     578       277       410       1,265   Net recoveries (charge-offs)     445       52       ( 1,225 )     ( 728 ) Allowance for credit losses - loans     21,515       9,956       4,706       36,177   Allowance for credit losses - loan commitments     786       150       28       964   Ending balance   $ 22,301     $ 10,106     $ 4,734     $ 37,141         Three Months Ended June 30, 2022               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Balance at beginning of quarter:                                 Allowance for credit losses - loans   $ 15,896     $ 9,764     $ 3,321     $ 28,981   Allowance for credit losses - loan commitments     663       94       19       776   Total allowance for credit losses beginning of year     16,559       9,858       3,340       29,757   Provision for credit losses:                                 Provision for credit losses - loans     ( 808 )     48       1,270       510   Provision (recovery of) for credit losses - loan commitments     191       ( 6 )     ( 5 )     180   Total provision for credit losses - loans and loan commitments     ( 617 )     42       1,265       690   Charge-offs     ( 151 )     ( 88 )     ( 1,230 )     ( 1,469 ) Recoveries     1,182       325       220       1,727   Net recoveries (charge-offs)     1,031       237       ( 1,010 )     258   Allowance for credit losses - loans     16,119       10,049       3,581       29,749   Allowance for credit losses - loan commitments     854       88       14       956   Ending balance   $ 16,973     $ 10,137     $ 3,595     $ 30,705     27 Table of Contents       Six Months Ended June 30, 2023               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Balance at beginning of year:                                 Allowance for credit losses - loans   $ 17,213     $ 8,931     $ 4,412     $ 30,556   Allowance for credit losses - loan commitments     1,018       156       22       1,196   Total allowance for credit losses beginning of year     18,231       9,087       4,434       31,752   Purchased credit deteriorated -Surrey acquisition     1,452       529       30       2,011   Provision for credit losses:                                 Provision for credit losses - loans     2,386       483       3,210       6,079   (Recovery of) provision for credit losses - loan commitments     ( 232 )     ( 6 )     6       ( 232 ) Total provision for credit losses - loans and loan commitments     2,154       477       3,216       5,847   Charge-offs     ( 306 )     ( 323 )     ( 3,934 )     ( 4,563 ) Recoveries     770       336       988       2,094   Net recoveries (charge-offs)     464       13       ( 2,946 )     ( 2,469 ) Allowance for credit losses - loans     21,515       9,956       4,706       36,177   Allowance for credit losses - loan commitments     786       150       28       964   Ending balance   $ 22,301     $ 10,106     $ 4,734     $ 37,141         Six Months Ended June 30, 2022               Consumer Real     Consumer and     Total   (Amounts in thousands)   Commercial     Estate     Other     Allowance   Total allowance                                 Balance at beginning of year:                                 Allowance for credit losses - loans   $ 14,775     $ 9,972     $ 3,111     $ 27,858   Allowance for credit losses - loan commitments     576       88       14       678   Total allowance for credit losses beginning of year     15,351       10,060       3,125       28,536   Provision for credit losses:                                 Provision for credit losses - loans     300       ( 193 )     2,364       2,471   (Recovery of) provision for credit losses - loan commitments     278       -       -       278   Total provision for credit losses - loans and loan commitments     578       ( 193 )     2,364       2,749   Charge-offs     ( 408 )     ( 94 )     ( 2,269 )     ( 2,771 ) Recoveries     1,452       364       375       2,191   Net recoveries (charge-offs)     1,044       270       ( 1,894 )     ( 580 ) Allowance for credit losses - loans     16,119       10,049       3,581       29,749   Allowance for credit losses - loan commitments     854       88       14       956   Ending balance   $ 16,973     $ 10,137     $ 3,595     $ 30,705     28 Table of Contents     Note 7 . Deposits   The following table presents the components of deposits as of the dates indicated:       June 30, 2023     December 31, 2022   (Amounts in thousands)                 Noninterest-bearing demand deposits   $ 974,995     $ 872,168   Interest-bearing deposits:                 Interest-bearing demand deposits     737,193       679,609   Money market accounts     289,431       264,734   Savings deposits     578,292       578,974   Certificates of deposit     178,279       180,008   Individual retirement accounts     94,488       103,322   Total interest-bearing deposits     1,877,683       1,806,647   Total deposits   $ 2,852,678     $ 2,678,815         29 Table of Contents     Note 8 . Borrowings   The following table presents the components of borrowings as of the dates indicated:       June 30, 2023     December 31, 2022               Weighted             Weighted   (Amounts in thousands)   Balance     Average Rate     Balance     Average Rate   Retail repurchase agreements   $ 1,348       0.06 %   $ 1,874       0.07 %   Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements.   As of June 30, 2023 , the Company had no long-term borrowings.   Unused borrowing capacity with the FHLB totaled $ 405.85  million, net of FHLB letters of credit of $ 113.99  million, as of June 30, 2023 . As of June 30, 2023 , the Company maintains $ 519.83  million in qualifying loans to secure the FHLB borrowing capacity.     Note 9 . Derivative Instruments and Hedging Activities   Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.   The Company has used interest rate swap contracts to modify its exposure to interest rate risk caused by changes in benchmark interest rates in relation to certain designated fixed rate loans.  These instruments are used to convert these fixed rate loans to an effective floating rate. If the Secured Overnight Financing Rate ("SOFR") plus a spread falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between the floating rate and the stated fixed rate. If SOFR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between the floating rate and the stated fixed rate.    Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of June 30, 2023 .   Through July 2022, the Company had certain interest rate swaps that did  not qualify as fair value hedges and the fair value changes in the derivative were recognized in earnings each period.  On July 26, 2022, these swaps were terminated at a cost of $ 72 thousand.   The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:       June 30, 2023     December 31, 2022       Notional or     Fair Value     Notional or     Fair Value       Contractual     Derivative     Derivative     Contractual     Derivative     Derivative   (Amounts in thousands)   Amount     Assets     Liabilities     Amount     Assets     Liabilities   Derivatives designated as hedges                                                 Interest rate swaps   $ 3,773     $ 204     $ -     $ 3,983     $ 199     $ -   Total derivatives   $ 3,773     $ 204     $ -     $ 3,983     $ 199     $ -     The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:       Three Months Ended June 30,     Six Months Ended June 30,     (Amounts in thousands)   2023     2022     2023     2022   Income Statement Location Derivatives designated as hedges                                   Interest rate swaps   $ ( 26 )   $ 19     $ ( 46 )   $ 44   Interest and fees on loans Derivatives not designated as hedges                                   Interest rate swaps   $ -     $ 32     $ -     $ 83   Interest and fees on loans Total derivative (income) expense   $ ( 26 )   $ 51     $ ( 46 )   $ 127        30 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 ("SERP") and the Directors’ Supplemental Retirement Plan ("Director Plan"). The SERP was frozen near the end of 2021; the Director Plan was fundamentally frozen at that time as well. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:       Three Months Ended June 30,     Six Months Ended June 30,         2023     2022     2023     2022   Income Statement Location (Amounts in thousands)                                   Service cost   $ -     $ -     $ -     $ -   Salaries and employee benefits Interest cost     95       83       177       166   Other expense Amortization of prior service cost     -       -       -       -   Other expense Amortization of losses     31       33       63       67   Other expense Net periodic cost   $ 126     $ 116     $ 240     $ 233            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     Six Months Ended       June 30,     June 30,       2023     2022     2023     2022   (Amounts in thousands, except share and per share data)                                 Net income   $ 9,814     $ 11,213     $ 21,596     $ 20,728   Adjust net income for fair value of restricted stock units (tax effected)     335       -       448       -   Net income for fully dilutive earnings per common share   $ 10,149     $ 11,213     $ 22,044     $ 20,728                                     Weighted average common shares outstanding, basic     18,407,078       16,662,817       17,323,706       16,739,624   Dilutive effect of potential common shares                                 Stock options     9,656       13,068       12,938       15,266   Unvested stock awards     -       6,169       6,825       17,123   Restricted stock units     14,864       561       20,009       834   Total dilutive effect of potential common shares     24,520       19,798       39,772       33,223   Weighted average common shares outstanding, diluted     18,431,598       16,682,615       17,363,478       16,772,847                                     Basic earnings per common share   $ 0.53     $ 0.67     $ 1.25     $ 1.24   Diluted earnings per common share     0.55       0.67       1.26       1.24                                     Antidilutive potential common shares                                 Stock options     143,676       143,676       143,676       131,198   Stock units     4,038       -       2,030       -   Total potential antidilutive shares     147,714       143,676       145,706       131,198     31 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 June 30, 2023       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ ( 13,127 )   $ ( 98 )   $ ( 13,225 ) Other comprehensive income before reclassifications     ( 1,258 )     ( 24 )     ( 1,282 ) Reclassified from AOCI     22       24       46   Other comprehensive income, net     ( 1,236 )     -       ( 1,236 ) Ending balance   $ ( 14,363 )   $ ( 98 )   $ ( 14,461 )       Three Months Ended June 30, 2022       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ ( 4,643 )   $ ( 1,869 )   $ ( 6,512 ) Other comprehensive loss before reclassifications     ( 5,174 )     -       ( 5,174 ) Reclassified from AOCI     -       26       26   Other comprehensive loss, net     ( 5,174 )     26       ( 5,148 ) Ending balance   $ ( 9,817 )   $ ( 1,843 )   $ ( 11,660 )       Six Months Ended June 30, 2023       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ ( 15,621 )   $ ( 98 )   $ ( 15,719 ) Other comprehensive income before reclassifications     1,240       ( 50 )     1,190   Reclassified from AOCI     18       50       68   Other comprehensive income, net     1,258       -       1,258   Ending balance   $ ( 14,363 )   $ ( 98 )   $ ( 14,461 )       Six Months Ended June 30, 2022       Unrealized Gains                       (Losses) on Available-                       for-Sale Securities     Employee Benefit Plans     Total   (Amounts in thousands)                         Beginning balance   $ 15     $ ( 1,561 )   $ ( 1,546 ) Other comprehensive loss before reclassifications     ( 9,832 )     ( 335 )     ( 10,167 ) Reclassified from AOCI     -       53       53   Other comprehensive loss, net     ( 9,832 )     ( 282 )     ( 10,114 ) Ending balance   $ ( 9,817 )   $ ( 1,843 )   $ ( 11,660 )   32 Table of Contents   The following table presents reclassifications out of AOCI, by component, during the periods indicated:       Three Months Ended     Six Months Ended         June 30,     June 30,   Income Statement (Amounts in thousands)   2023     2022     2023     2022   Line Item Affected Available-for-sale securities                                   Loss recognized   $ 28     $ -     $ 21     $ -   Net loss on sale of securities Reclassified out of AOCI, before tax     28       -       21       -   Income before income taxes Income tax expense     6       -       4       -   Income tax expense Reclassified out of AOCI, net of tax     22       -       17       -   Net income Employee benefit plans                                   Amortization of prior service cost   $ -     $ -     $ -     $ -   Salaries and employee benefits Amortization of net actuarial benefit cost     31       33       63       67   Salaries and employee benefits Reclassified out of AOCI, before tax     31       33       63       67   Income before income taxes Income tax expense     7       7       12       14   Income tax expense Reclassified out of AOCI, net of tax     24       26       51       53   Net income Total reclassified out of AOCI, net of tax   $ 46     $ 26     $ 68     $ 53   Net income   ( 1 ) Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans."     Note 13 . Fair Value   Financial Instruments Measured at Fair Value   Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:     ● Level 1 – Observable, unadjusted quoted prices in active markets   ● Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability   ● Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions   The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.   33 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.  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:       June 30, 2023       Total     Fair Value Measurements Using   (Amounts in thousands)   Fair Value     Level 1     Level 2     Level 3   Available-for-sale debt securities                                 U.S. Agency securities   $ 7,229     $ -     $ 7,229     $ -   U.S. Treasury Notes     178,506       -       178,506       -   Municipal securities     21,449       -       21,449       -   Corporate Notes     26,463             26,463         Agency mortgage-backed securities     80,726       -       80,726       -   Total available-for-sale debt securities     314,373       -       314,373       -   Equity securities     55       -       55       -   Fair value loans     3,569       -       -       3,569   Derivative assets     204       -       204       -   Deferred compensation assets     6,269       6,269       -       -   Deferred compensation liabilities     7,733       7,733       -       -         December 31, 2022       Total     Fair Value Measurements Using   (Amounts in thousands)   Fair Value     Level 1     Level 2     Level 3   Available-for-sale debt securities                                 U.S. Agency securities   $ 1,485     $ -     $ 1,485     $ -   U.S. Treasury Notes     157,264       -       157,264       -   Municipal securities     23,309       -       23,309       -   Corporate notes     34,857       -       34,857       -   Agency mortgage-backed securities     83,434       -       83,434       -   Total available-for-sale debt securities     300,349       -       300,349       -   Equity securities     55       -       55       -   Fair value loans     3,784       -       -       3,784   Derivative assets     199       -       199       -   Deferred compensation assets     5,142       5,142       -       -   Deferred compensation liabilities     5,142       5,142       -       -     34 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:       June 30, 2023       Total     Fair Value Measurements Using       Fair Value     Level 1     Level 2     Level 3   (Amounts in thousands)                                 Collateral dependent assets with specific reserves   $ 957     $ -     $ -     $ 957   OREO   $ 339     $ -     $ -     $ 339         December 31, 2022       Total     Fair Value Measurements Using       Fair Value     Level 1     Level 2     Level 3   (Amounts in thousands)                                 Collateral dependent assets with specific reserves   $ 574     $ -     $ -     $ 574   OREO     703       -       -       703     Quantitative Information about Level 3 Fair Value Measurements   The following tables provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:           Discount Range     Valuation Unobservable   (Weighted Average)     Technique Input   June 30, 2023                 Collateral dependent assets with specific reserves Discounted appraisals(1) Appraisal adjustments(2)     10% to 82% (56%)   OREO Discounted appraisals (1) Appraisal adjustments (2)     20% to 100% (81%)     ( 1 ) Fair value is generally based on appraisals of the underlying collateral. ( 2 ) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.           Discount Range     Valuation Unobservable   (Weighted Average)     Technique Input   December 31, 2022                 Collateral dependent assets with specific reserves Discounted appraisals (1) Appraisal adjustments (2)     3% (3%)   OREO Discounted appraisals (1) Appraisal adjustments (2)     20% to 100% (69%)     ( 1 ) Fair value is generally based on appraisals of the underlying collateral. ( 2 ) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.   35 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.   Accrued Interest Receivable/Payable . Accrued interest receivable/payable fair value is estimated at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.   Deposits and Securities Sold Under Agreements to Repurchase . Deposits and repurchase agreements with fixed maturities and rates are estimated at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.   FHLB and Other Borrowings . FHLB and other borrowings are estimated at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities.   Off-Balance Sheet Instruments . The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.   The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:       June 30, 2023       Carrying             Fair Value Measurements Using   (Amounts in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets                                         Cash and cash equivalents   $ 152,660     $ 152,660     $ 152,660     $ -     $ -   Debt securities available for sale     314,373       314,373       -       314,373       -   Equity securities     55       55       -       55       -   Loans held for investment, net of allowance     2,584,896       2,411,647       -       -       2,411,647   Derivative financial assets     204       204       -       204       -   Interest receivable     10,185       10,185       -       10,185       -   Deferred compensation assets     6,269       6,269       6,269       -       -                                             Liabilities                                         Time deposits     272,767       257,012       -       257,012       -   Securities sold under agreements to repurchase     1,348       1,348       -       1,348       -   Interest payable     298       298       -       298       -   Deferred compensation liabilities     7,733       7,733       7,733       -       -         December 31, 2022       Carrying             Fair Value Measurements Using   (Amounts in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets                                         Cash and cash equivalents   $ 170,846     $ 170,846     $ 170,846     $ -     $ -   Debt securities available for sale     300,349       300,349       -       300,349       -   Equity securities     55       55       -       55       -   Loans held for investment, net of allowance     2,369,641       2,215,243       -       -       2,215,243   Interest receivable     9,279       9,279       -       9,279       -   Deferred compensation assets     5,142       5,142       5,142       -       -   Derivative assets     199       199       -       199       -                                             Liabilities                                         Time deposits     283,330       281,744       -       281,744       -   Securities sold under agreements to repurchase     1,874       1,874       -       1,874       -   Interest payable     159       159       -       159       -   Deferred compensation liabilities     5,142       5,142       5,142       -       -     36 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:       June 30, 2023     December 31, 2022   (Amounts in thousands)                 Commitments to extend credit   $ 313,233     $ 278,926   Standby letters of credit and financial guarantees (1)     116,583       119,681   Total off-balance sheet risk   $ 429,816     $ 398,607     ( 1 ) Includes FHLB letters of credit     ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations   Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our financial condition, changes in financial condition, and results of operations. MD&A contains forward-looking statements and should be read in conjunction with our consolidated financial statements, accompanying notes, and other financial information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.   Executive Overview   First Community Bankshares, Inc. (the “Company”) is a financial holding company, headquartered in Bluefield, Virginia, that provides banking products and services through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia chartered bank institution. As of June 30, 2023, the Bank operated 53 branches in Virginia, West Virginia, North Carolina and Tennessee. As of June 30, 2023, full-time equivalent employees, calculated using the number of hours worked, totaled 638. 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.   37 Table of Contents   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 June 30, 2023, the Trust Division and FCWM managed and administered $1.42 billion in combined assets under various fee-based arrangements as fiduciary or agent. The Bank also offers a full range of commercial and personal insurance products through its strategic partnership with Bankers Insurance, LLC.   On March 12, 2023, the Department of the Treasury, the Federal Reserve and the FDIC issued a joint statement relating to the resolution of Silicon Valley Bank and Signature Bank that stated that losses to support uninsured deposits of those banks would be recovered via a special assessment on banks. On May 11, 2023 the FDIC approved a notice of proposed rulemaking, which would impose the special assessment to recover the losses to the deposit insurance fund (“DIF”) resulting from protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The FDIC stated that it currently estimates those assessed losses to total $15.8 billion and that the amount of the special assessments would be adjusted as the loss estimate changes. Under the proposed rule, the assessment base would be an insured depository institution’s (“IDI”) estimated uninsured deposits, as reported in the IDI’s December 31, 2022 Call Report, excluding the first $5 billion in estimated uninsured deposits. The special assessments would be collected at an annual rate of approximately 12.5 basis points per year (3.13 basis points per quarter) over eight quarters in 2024 and 2025, with the first assessment period beginning January 1, 2024 (with the first assessment payment due by June 28, 2024). Under the proposed rule, the estimated loss pursuant to the systemic risk determination would be periodically adjusted, and the FDIC would retain the ability to cease collection early, extend the special assessment collection period and impose a final shortfall special assessment on a one-time basis. Under the current provisions of this notice of proposed rulemaking, we believe that we would not be impacted by the special assessment associated with the most recent banking organization closures.   Critical Accounting Estimates   We prepare our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and conform to general practices within the banking industry. Our financial position and results of operations may require management to make significant estimates and assumptions that have a material impact on our financial condition or operating performance. Due to the level of subjectivity and the susceptibility of such matters to change, actual results could differ significantly from management’s assumptions and estimates. Estimates, assumptions, and judgments, which are periodically evaluated, are based on historical experience and other factors, including expectations of future events believed reasonable under the circumstances. These estimates are generally necessary when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve, or when an asset or liability needs recorded based on the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices, when available, or third-party sources. When quoted prices or third-party information is not available, management estimates valuation adjustments primarily through the use of financial modeling techniques and appraisal estimates.   Allowance for Credit Losses or "ACL"  ​ The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1 – "Basis of Presentation - Significant Accounting Policies" in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5 — " Allowance for Credit Losses" in this Quarterly Report on Form 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A. Periods prior to the January 1, 2021 adoption of ASU 2016-13 follow prior accounting guidance for estimated loan losses and may not be comparable.   Our accounting policies are fundamental in understanding MD&A and the disclosures presented in Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q. Our accounting policies are described in detail in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2023, and in Note 1, “ Basis of Presentation and Significant Accounting Policies, ” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2022 Form 10-K. Our critical accounting estimates are detailed in the “Critical Accounting Estimates” section in Part II, Item 7 of our 2022 Form 10-K.   38 Table of Contents   Performance Overview   Highlights of our results of operations for the three and six months ended June 30, 2023, and financial condition as of June 30, 2023, include the following:     ● Net income of $9.81 million for the quarter was approximately 12.48%, or $1.40 million, lower compared to net income of $11.21 million in the same quarter of 2022. The decrease is primarily attributable to $2.01 million in one-time merger-related costs and $1.61 million in additional credit loss provision both associated with the acquisition of Surrey Bancorp on April 21, 2023.   ● When adjusted for merger-related costs and provisions and other non-recurring items, second quarter net income of $12.95 million, or $0.70 per diluted common share, was an increase of $1.81 million, or 16.20%, from the same quarter last year.   ● Net interest income increased $5.32 million compared to the same quarter in 2022, as increases in interest rates improved net interest margin.   ● Net interest margin of 4.48% is an increase of 70 basis points over the same quarter of 2022. The yield on earning assets increased 91 basis points primarily driven by increased earnings on loans and securities.   ● Interest and fees on loans increased $6.28 million from the same quarter of 2022 and is attributable to both an increase in yield and an increase in average balance compared to the yield and average balance of the prior year. Interest income from securities of $2.06 million was an increase of $506 thousand over the same quarter of 2022 and is attributable to an increase in the portfolio and in yield from the same period of the prior year. Interest income on deposits in banks also increased $117 thousand to $885 thousand for the second quarter, primarily due to a significant increase in overnight rates compared to the second quarter of 2022.   ● Annualized return on average assets was 1.18% for the second quarter and 1.36% for the first six months of 2023 compared to 1.38% and 1.29% for the same periods, respectively of 2022. Annualized return on average common equity was 8.04% for the second quarter and 9.48% for the first six months of 2023 compared to 10.61% and 9.80% for the same periods, respectively of 2022.   ● The Company completed the strategic acquisition of Surrey Bancorp, on April 21, 2023. Total assets of $466.25 million were acquired in the transaction increasing the Company's consolidated assets to $3.39 billion.   In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in capital of $71.37 million. The purchase transaction created $14.38 million in goodwill and $12.7 million in other intangible assets. Other major balance sheet components increased in the transaction with  $239.08 million acquired in loans and $403.64 million in deposits.   ● The Company’s loan portfolio increased by $220.88 million, or 9.20% from December 31, 2022.  Excluding the Surrey transaction, the loan portfolio decreased approximately $18.20 million, or 0.76%.   ● Deposits increased $173.86 million, or 6.49% from year-end 2022.  Excluding the Surrey transaction, deposits decreased approximately $229.77 million, or 8.58% from December 31, 2022.   ● The Company repurchased 279,567 common shares during the second quarter of 2023 for a total cost of $7.69 million. Share repurchases had been stopped in the fourth quarter of 2022 in anticipation of the now completed acquisition of Surrey Bancorp and not restarted until the second quarter of 2023.    ● Non-performing loans to total loans increased slightly to 0.71% from 0.65% that was reported at March 31, 2023.  The Company experienced net charge-offs for the second quarter of 2023 of $728 thousand, or 0.11% of annualized average loans, compared to net recoveries of $258 thousand, or 0.05% of annualized average loans for the same period in 2022.    ● The allowance for credit losses to total loans was 1.38% at June 30, 2023 compared to 1.29% for the first quarter of 2023.   ● Accumulated other comprehensive loss of $14.46 million at June 30, 2023, is primarily attributable to a relatively small decline in the market value of investment securities compared to book value after the significant increases in benchmark interest rates of the last six quarters.   ● Book value per share at June 30, 2023, was $26.29, an increase of $0.28 from year-end 2022.   Results of Operations   Net Income   The following table presents the changes in net income and related information for the periods indicated:       Three Months Ended     Six Months Ended   (Amounts in thousands, except per   June 30,     Increase             June 30,     Increase           share data)   2023     2022     (Decrease)     % Change     2023     2022     (Decrease)     % Change                                                                     Net income   $ 9,814     $ 11,213     $ (1,399 )     -12.48 %   $ 21,596     $ 20,728     $ 868       4.19 %                                                                   Basic earnings per common share     0.53       0.67       (0.14 )     -20.90 %     1.25       1.24       0.01       0.81 % Diluted earnings per common share     0.55       0.67       (0.12 )     -17.91 %     1.26       1.24       0.02       1.61 %                                                                   Return on average assets     1.18 %     1.38 %     -0.20 %     -14.49 %     1.36 %     1.29 %     0.07 %     5.43 % Return on average common equity     8.04 %     10.61 %     -2.57 %     -24.22 %     9.48 %     9.80 %     -0.32 %     -3.27 %   Three - Month Comparison .   Net income decreased $1.40 million in the second quarter of 2023 compared to the same period in 2022. The decrease is primarily attributable to $3.60 million in additional credit loss provision as well as an increase in noninterest expense of $3.42 million over the same period in 2022.  The decreases in income were offset by an increase in net interest income of $5.32 million over the same quarter in 2022.  The increase in provision for credit losses was partly due to $1.61 million for the day two provision for the Surrey portfolio and noninterest expense included $2.01 million in merger expenses related to the Surrey acquisition as well.   Six - Month Comparison .   Net income increased $868 thousand in the first six months  of 2023 compared to the same period in 2022. The increase was primarily attributable to an increase in net interest income of $9.57 million compared to the same period in 2022.  Net interest income totaled $62.27 million for the first six months of 2023 compared to $52.70 million for the same period of 2022. The increase in net interest income was offset by an increase in the provision for credit losses of $3.38 million and an increase in noninterest expense of $4.24 million over the same period in 2022.  As noted above the increase in provision for credit losses was partly due to $1.61 million for the day two provision for the Surrey portfolio and noninterest expense included $2.39 million in merger expenses related to the Surrey acquisition as well.   39 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 June 30,       2023     2022       Average             Average Yield/     Average             Average Yield/   (Amounts in thousands)   Balance     Interest(1)     Rate(1)     Balance     Interest(1)     Rate(1)   Assets                                                 Earning assets                                                 Loans (2)(3)   $ 2,570,477     $ 31,997       4.99 %   $ 2,273,844     $ 25,714       4.54 % Securities available for sale     318,263       2,099       2.65 %     280,823       1,597       2.28 % Interest-bearing deposits     63,322       885       5.61 %     377,931       769       0.82 % Total earning assets     2,952,062       34,981       4.75 %     2,932,598       28,080       3.84 % Other assets     382,162                       331,774                   Total assets   $ 3,334,224                     $ 3,264,372                                                                     Liabilities and stockholders' equity                                                 Interest-bearing deposits                                                 Demand deposits   $ 712,943     $ 34       0.02 %   $ 698,978     $ 29       0.02 % Savings deposits     861,315       1,306       0.61 %     895,370       67       0.03 % Time deposits     282,229       590       0.84 %     331,555       326       0.39 % Total interest-bearing deposits     1,856,487       1,930       0.42 %     1,925,903       422       0.09 % Borrowings                                                 Retail repurchase agreements     1,693       1       0.06 %     2,105       1       0.08 % Federal funds purchased     5,927       76       5.14 %     -       -       -   Total borrowings     7,620       77       3.94 %     2,105       1       0.08 % Total interest-bearing liabilities     1,864,107       2,007       0.43 %     1,928,008       423       0.09 % Noninterest-bearing demand deposits     939,902                       874,507                   Other liabilities     40,705                       38,106                   Total liabilities     2,844,714                       2,840,621                   Stockholders' equity     489,510                       423,751                   Total liabilities and stockholders' equity   $ 3,334,224                     $ 3,264,372                   Net interest income, FTE (1)           $ 32,974                     $ 27,657           Net interest rate spread                     4.32 %                     3.75 % Net interest margin, FTE (1)                     4.48 %                     3.78 %   (1) Interest income and average yield/rate are presented on a FTE, non-GAAP, basis using the federal statutory income tax rate of 21%. (2) Nonaccrual loans are included in the average balance; however, no related interest income is recorded during the period of nonaccrual. (3) Interest on loans includes non-cash and accelerated purchase accounting accretion of $884 thousand and $870 thousand for the three months ended June 30, 2023 and 2022, respectively.    40 Table of Contents   AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)       Six Months Ended June 30,       2023     2022       Average             Average Yield/     Average             Average Yield/   (Amounts in thousands)   Balance     Interest(1)     Rate(1)     Balance     Interest(1)     Rate(1)   Assets                                                 Earning assets                                                 Loans (2)(3)   $ 2,482,606     $ 59,695       4.85 %   $ 2,237,128     $ 50,412       4.54 % Securities available for sale     317,503       4,239       2.69 %     211,285       2,397       2.29 % Interest-bearing deposits     52,219       1,350       5.21 %     460,864       1,018       0.45 % Total earning assets     2,852,328       65,284       4.62 %     2,909,277       53,827       3.73 % Other assets     352,643                       330,003                   Total assets   $ 3,204,971                     $ 3,239,280                                                                     Liabilities and stockholders' equity                                                 Interest-bearing deposits                                                 Demand deposits   $ 689,823     $ 60       0.02 %   $ 689,149     $ 57       0.02 % Savings deposits     844,459       1,790       0.43 %     888,371       133       0.03 % Time deposits     276,752       798       0.58 %     339,186       718       0.43 % Total interest-bearing deposits     1,811,034       2,648       0.29 %     1,916,706       908       0.10 % Borrowings                                                 Retail repurchase agreements     1,889       1       0.06 %     2,050       1       0.08 % Federal funds purchased     5,326       135       5.11 %     -       -       -   Total borrowings     7,215       136       3.80 %     2,050       1       0.08 % Total interest-bearing liabilities     1,818,249       2,784       0.31 %     1,918,756       909       0.10 % Noninterest-bearing demand deposits     889,253                       855,321                   Other liabilities     38,204                       38,529                   Total liabilities     2,745,706                       2,812,606                   Stockholders' equity     459,265                       426,674                   Total liabilities and stockholders' equity   $ 3,204,971                     $ 3,239,280                   Net interest income, FTE (1)           $ 62,500                     $ 52,918           Net interest rate spread                     4.31 %                     3.64 % Net interest margin, FTE (1)                     4.42 %                     3.67 %   (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 $1.08 million and $1.74 million the first six months ended June 30, 2023 and 2022, respectively.    41 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     Six Months Ended       June 30, 2023 Compared to 2022     June 30, 2023 Compared to 2022       Dollar Increase (Decrease) due to     Dollar Increase (Decrease) due to                       Rate/                             Rate/           (Amounts in thousands)   Volume     Rate     Volume     Total     Volume     Rate     Volume     Total   Interest earned on (1)                                                                 Loans   $ 6,672     $ 5,153     $ (5,542 )   $ 6,283     $ 5,532     $ 3,380     $ 371     $ 9,283   Securities available-for-sale     423       507       (428 )     502       1,205       424       213       1,842   Interest-bearing deposits with other banks     (1,273 )     8,976       (7,587 )     116       (903 )     10,897       (9,662 )     332   Total interest earning assets     5,822       14,636       (13,557 )     6,901       5,834       14,701       (9,078 )     11,457                                                                     Interest paid on                                                                 Demand deposits     1       9       (5 )     5       -       3       -       3   Savings deposits     (5 )     2,567       (1,323 )     1,239       (7 )     1,750       (86 )     1,657   Time deposits     (96 )     730       (370 )     264       (132 )     260       (48 )     80   Federal funds purchased     -       -       76       76       -       -       135       135   Retail repurchase agreements     -       -       -       -       -       -       -       -   Wholesale repurchase agreements     -       -       -       -       -       -       -       -   FHLB advances and other borrowings     -       -       -       -       -       -       -       -   Total interest-bearing liabilities     (100 )     3,306       (1,622 )     1,584       (139 )     2,013       1       1,875                                                                     Change in net interest income (1)   $ 5,922     $ 11,330     $ (11,935 )   $ 5,317     $ 5,973     $ 12,688     $ (9,079 )   $ 9,582     (1) FTE basis based on the federal statutory rate of 21%.    Three - Month Comparison . Net interest income comprised 78.91% of total net interest and noninterest income in the second quarter of 2023 compared to 75.68% in the same quarter of 2022. Net interest income on a GAAP basis increased $5.32 million, or 19.29%, compared to an increase of $5.31 million, or 19.22%, on a FTE basis. The net interest margin on a FTE basis increased 70 basis points and the net interest spread on a FTE basis increased 57 basis points. The increase was primarily driven by increases in both average balances and rates for loans and securities available for sale.  The average balance for loans increased $296.63 million, while the yield increased 45 basis points resulting in a tax effected increase in interest on loans of $6.28 million compared to 2022.  The average balance for securities available for sale increased $37.44 million and the yield increased 37 basis points resulting in a tax effected increase to interest on securities available for sale of $502 thousand compared to 2022.   Average earning assets increased $19.46 million, or 0.66%, primarily due to an incr ease in average loans and average securities available for sale as noted above.  The increase in average loans and deposits was offset by a decrease in average interest-bearing deposits with banks of $314.61 million. The yield on earning assets increased 91 basis points, or 23.70% primarily due an increase in rates as compared to the same period of 2022. The average loan to deposit ratio increased to 91.92% from 81.20% reported in the same quarter of 2022. Non-cash accretion income increased slightly to $884 thousand from $870 thousand reported in the same quarter of 2022.   Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $63.90 million, or 3.31%, primarily due to a decrease in deposits. Time deposits decreased $49.33 million, or 14.88% and savings deposits decreased $34.06 million or 3.80%.  The decreases were offset by an increase in interest-bearing demand deposits of $13.97 million, or 2.00%.  The yield on interest-bearing liabilities increased 34 basis points and is primarily due to rate increases throughout 2022 and 2023.    42 Table of Contents   Six-Month Comparison .     Net interest income comprised 78.19% of total net interest and noninterest income for the  six months ended June 30, 2023 compared to 74.49% in the same period of 2022. Net interest income on a GAAP basis increased $9.57 million, or 18.17%, compared to an increase of $9.58 million, or 18.11%, on a FTE basis. The net interest margin on a FTE basis increased 75 basis points and the net interest spread on a FTE basis increased 67 basis points. The increase was primarily driven by increases in both average balances and rates for loans and securities available for sale.  The average balance for loans increased $245.48 million, while the yield increased 31 basis points resulting in a tax effected increase in interest on loans of $9.28 million compared to 2022.  The average balance for securities available for sale increased $106.22 million and the yield increased 40 basis points resulting in a tax effected increase to interest on securities available for sale of $1.84 million compared to 2022.   Average earning assets decreased $56.95 million, or 1.96%, primarily due to a decrease in interest-bearing deposits with banks of $408.65 million, or 88.67%.  This decrease was offset by an increase in average loans and average securities available for sale as noted above.  The yield on earning assets increased 89 basis points, or 23.86%, primarily due to significant increase in rates as compared to the same period of 2022. The average loan to deposit ratio increased to 91.94% from 80.70% in the same quarter of 2022. Non-cash accretion income decreased $659 thousand, or 37.96% to $1.08 million.   Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $100.51 million, or 5.24%, primarily due to a decrease in deposits. Time deposits decreased $62.43 million, or 18.41% and savings deposits decreased $43.91 million or 4.94%.  The yield on interest-bearing liabilities increased 21 basis points and is primarily due to rate increases throughout 2022 and the first quarter of 2023.    Provision for Credit Losses   Three - Month Comparison . The provision charged to operations increased $3.60 million, in the second quarter of 2023 compared to the same quarter of 2022. Provision for credit losses for loans of $4.11 million was recorded in the second quarter of 2023 compared to the provision of $510 thousand recorded in the same period of 2022.   The increase in provision is commensurate with changes in economic forecasts and growth in the loan portfolio associated with the acquisition of Surrey Bancorp on April 21, 2023. $1.61 million of the provision is attributable to day two provision for the Surrey portfolio.  There was no provision recorded for loan commitments during the second quarter of 2023.     Six-Month Comparison . The provision charged to operations increased $3.38 million, in the six months ended of June 30, 2023 compared to the six months ended of June 30, 2022. The Provision expense of $5.85 million was comprised of $6.08 million related to loans and a recovery of provision of $232 thousand for loan commitments.  Provision for credit losses for loans of $6.08 million was recorded in the six months ended of June 30, 2023 compared to the provision of $2.47 million recorded in the six months ended of June 30, 2022.   The increase in provision is commensurate with changes in economic forecasts and growth in the loan portfolio associated with the acquisition of Surrey Bancorp on April 21, 2023.  As noted above, $1.61 million of the provision is attributable to day two provision for the Surrey portfolio.     Noninterest Income   The following table presents the components of, and changes in, noninterest income for the periods indicated:       Three Months Ended                     Six Months Ended                       June 30,     Increase     %     June 30,     Increase     %       2023     2022     (Decrease)     Change     2023     2022     (Decrease)     Change   (Amounts in thousands)                                                                 Wealth management   $ 965     $ 993     $ (28 )     -2.82 %   $ 1,982     $ 1,965     $ 17       0.87 % Service charges on deposits     3,471       3,672       (201 )     -5.47 %     6,630       7,170       (540 )     -7.53 % Other service charges and fees     3,460       3,297       163       4.94 %     6,542       6,314       228       3.61 % Gain on sale of securities     (28 )     -       (28 )     N/M       (21 )     -       (21 )     N/M   Other operating income     917       892       25       2.80 %     2,235       2,599       (364 )     -14.01 % Total noninterest income   $ 8,785     $ 8,854     $ (69 )     -0.78 %   $ 17,368     $ 18,048     $ (680 )     -3.77 %   Three - Month Comparison . Noninterest income comprised 21.09% of total net interest and noninterest income in the second quarter of 2023 compared to 24.32% in the same quarter of 2022. Noninterest income decreased $69 thousand or 0.78%.  The decrease is primarily driven by a $201 thousand decrease in services charges on deposits compared to the same quarter of 2022 The decrease in service charges on deposits was primarily driven by a decrease in the volume of overdraft fees.  The decrease in service charges on deposits was offset by an increase in other services charges and fees of $163 thousand from the same period of  2022.  The increase in other service charges and fees was primarily driven by an increase in interchange income.     Six-Month Comparison . Noninterest income comprised 21.81% of total net interest and noninterest income in the six months ended of June 30, 2023 compared to 25.51% in the six months ended of June 30, 2022. Noninterest income decreased $680 thousand or 3.77%.  The decrease was primarily driven by a $540 thousand decrease in service charges on deposits compared to the same period of 2022 and was primarily the result of a decrease in the volume of overdraft fees.  In addition, the decrease in noninterest income was the result of  a $394 thousand gain for the sale of bank-owned property reported in other operating income in the six months ended of June 30, 2022.  The decreases were offset by an increase in other service charges of  $228 thousand compared to the six months ended of June 30, 2022.  The increase in other service charges was primarily driven by an increase in interchange income.   43 Table of Contents   Noninterest Expense   The following table presents the components of, and changes in, noninterest expense for the periods indicated:       Three Months Ended                     Six Months Ended                       June 30,     Increase     %     June 30,     Increase     %       2023     2022     (Decrease)     Change     2023     2022     (Decrease)     Change   (Amounts in thousands)                                                                 Salaries and employee benefits   $ 12,686     $ 11,518     $ 1,168       10.14 %   $ 24,281     $ 23,189     $ 1,092       4.71 % Occupancy expense     1,276       1,165       111       9.53 %     2,444       2,434       10       0.41 % Furniture and equipment expense     1,508       1,496       12       0.80 %     2,909       3,110       (201 )     -6.46 % Service fees     2,284       2,563       (279 )     -10.89 %     4,303       4,066       237       5.83 % Advertising and public relations     846       577       269       46.62 %     1,489       1,117       372       33.30 % Professional fees     281       544       (263 )     -48.35 %     608       997       (389 )     -39.02 % Amortization of intangibles     425       360       65       18.06 %     659       717       (58 )     -8.09 % FDIC premiums and assessments     423       257       166       64.59 %     743       475       268       56.42 % Merger expense     2,014       -       2,014       -       2,393       -       2,393       -   Other operating expense     2,928       2,775       153       5.51 %     5,655       5,136       519       10.11 % Total noninterest expense   $ 24,671     $ 21,255     $ 3,416       16.07 %   $ 45,484     $ 41,241     $ 4,243       10.29 %   Three - Month Comparison . Noninterest expense increased $3.42 million, or 16.07%, in the second quarter of 2023 compared to the same quarter of 2022. The Company recorded merger expenses of $2.01 million for the quarter related to the Surrey Bancorp acquisition.  Also, contributing to the overall increase, was an increase in salaries and benefits of $1.17 million, or 10.14%.  The increase in salaries and benefits is partly attributable to the acquisition of Surrey Bankcorp.   Six-Month Comparison . Noninterest expense increased $4.24 million, or 10.29%, in the six months ended of June 30, 2023 compared to the six months ended of June 30, 2022. The Company recorded merger expenses of $2.39 million for the first six months of 2023 related to the Surrey Bancorp acquisition.  Also, contributing to the overall increase, was an increase in salaries and benefits of $1.09 million, or 4.71%.  The increase in salaries and benefits is partly attributable to the acquisition of Surrey Bankcorp.   I ncome Tax Expense   The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Permanent differences are income and expense items excluded by law in the calculation of taxable income. The Company’s most significant permanent differences generally include interest income on municipal securities and increases in the cash surrender value of life insurance policies.   Three-Month Comparison . Income tax expense decreased $366 thousand, or 10.69% and was primarily due to the decrease in pre-tax income.  The effective tax rate increased to 23.75% in the second quarter of 2023 from 23.39% in the same quarter of 2022.    Six-Month Comparison . Income tax expense increased $407 thousand, or 6.45% and was primarily due to the increase in pre-tax income.  The effective tax rate increased to 23.72% in the six months ended of June 30, 2023 from 23.33% in the six months ended of June 30, 2022.    Non-GAAP Financial Measures     In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that management believes provide investors with important information useful in understanding our operational performance and comparing our financial measures with other financial institutions. The non-GAAP financial measure presented in this report includes net interest income on a FTE basis. We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. The FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory rate of 21%. While we believe certain non-GAAP financial measures enhance understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared on a GAAP basis. Our non-GAAP financial measures may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below.   44 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 June 30,     Six Months Ended June 30,       2023     2022     2023     2022   (Amounts in thousands)                                 Net interest income, GAAP   $ 32,862     $ 27,547     $ 62,274     $ 52,700   FTE adjustment (1)     112       110       226       218   Net interest income, FTE     32,974       27,657       62,500       52,918                                     Net interest margin, GAAP     4.46 %     3.77 %     4.39 %     3.66 % FTE adjustment (1)     0.02 %     0.01 %     0.03 %     0.01 % Net interest margin, FTE     4.48 %     3.78 %     4.42 %     3.67 %   (1) FTE basis of 21%.   Financial Condition   Total assets as of June 30, 2023, increased $255.87 million, or 8.16%, from December 31, 2022.  Total liabilities increased $179.13 million, or 6.60%, and stockholders' equity increased $76.74 million or 18.18%.  The primary driver for the change in the balance sheet components was the acquisition of Surrey Bancorp on April 21, 2023.  Total assets of $466.25 million were acquired in the transaction increasing the Company's consolidated assets to $3.39 billion,  In addition, the Company issued 2.99 million common shares in the purchase resulting in an increase in capital of $71.37 million.  The purchase transaction created $14.38 million in goodwill and $12.7 million in other intangible assets.  Other major balance sheet components impacted by the transaction were an increase to loans of $239.08 million and an increase of $403.64 million in deposits.   Excluding the Surrey transaction, total assets decreased $224.76 million primarily due to a decrease in cash and cash equivalents of $194.89 million.  Total liabilities decreased $230.13 million excluding the Surrey transaction primarily due to a decrease in deposits of $229.78 million.   Investment Securities   Our investment securities are used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.   Available-for-sale debt securities as of June 30, 2023, increased $14.02 million, or 4.67%, compared to December 31, 2022.  The increase is due to the purchase of $54.27 million in securities primarily comprised of U. S. Treasury Notes.  The purchases were offset by $25.79 million in maturities, prepayments, and calls, as well as the sale of securities of $38.98 million.  Included in the sale of securities was the entire portfolio of Surrey with an acquired fair value of $20.93 million comprised primarily of U. S. Treasury Notes.  A loss of $28 thousand was recognized in the sale of the portfolio.  The market value of debt securities available for sale as a percentage of amortized cost was 94.53% as of June 30, 2023, compared to 93.82% as of December 31, 2022.     Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security.  The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. U.S. Treasury Securities, Agency-Backed Securities including GNMA, FHLMC, FNMA, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of June 30, 2023 continue to perform as scheduled and we do not believe that a provision for credit losses is necessary.   Loans Held for Investment   Loans held for investment, which generates the largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose.    45 Table of Contents   The following table presents loans, net of unearned income, with non-covered loans by loan class as of the dates indicated:       June 30, 2023     December 31, 2022     June 30, 2022   (Amounts in thousands)   Amount     Percent     Amount     Percent     Amount     Percent   Loans held for investment                                                 Commercial loans                                                 Construction, development, and other land   $ 112,213       4.28 %   $ 117,174       4.88 %   $ 92,840       4.04 % Commercial and industrial     214,962       8.20 %     150,428       6.27 %     139,792       6.08 % Multi-family residential     164,017       6.26 %     148,026       6.17 %     124,274       5.40 % Single family non-owner occupied     228,363       8.71 %     206,121       8.59 %     195,113       8.48 % Non-farm, non-residential     904,777       34.52 %     787,703       32.82 %     752,369       32.72 % Agricultural     22,106       0.84 %     12,032       0.50 %     9,987       0.43 % Farmland     15,822       0.60 %     11,779       0.49 %     12,833       0.56 % Total commercial loans     1,662,260       63.41 %     1,433,263       59.72 %     1,327,208       57.71 % Consumer real estate loans                                                 Home equity lines     89,701       3.42 %     75,642       3.15 %     78,999       3.44 % Single family owner occupied     722,769       27.58 %     734,540       30.61 %     722,370       31.41 % Owner occupied construction     11,198       0.43 %     10,366       0.43 %     17,331       0.75 % Total consumer real estate loans     823,668       31.43 %     820,548       34.19 %     818,700       35.60 % Consumer and other loans                                                 Consumer loans     133,559       5.10 %     144,582       6.02 %     148,741       6.47 % Other     1,586       0.06 %     1,804       0.07 %     5,149       0.22 % Total consumer and other loans     135,145       5.16 %     146,386       6.09 %     153,890       6.69 % Total loans held for investment, net of unearned income     2,621,073       100.00 %     2,400,197       100.00 %     2,299,798       100.00 % Less: allowance for credit losses     36,177               30,556               29,749           Total loans held for investment, net of unearned income and allowance   $ 2,584,896             $ 2,369,641             $ 2,270,049             Total loans as of June 30, 2023, increased $220.88 million, or 9.20%, compared to December 31, 2022, and was primarily due to the Surrey acquisition with loans acquired totaling $239.08 million.  The largest components of Surrey's portfolio included approximately $98.89 million in non-farm, non-residential loans, $61.47 million in commercial and industrial loans, and $23.03 million in non-owner occupied single family loans.   Risk Elements   We seek to mitigate credit risk by following specific underwriting practices and by ongoing monitoring of our loan portfolio. Our underwriting practices include the analysis of borrowers’ prior credit histories, financial statements, tax returns, and cash flow projections; valuation of collateral based on independent appraisers’ reports; and verification of liquid assets. We believe our underwriting criteria are appropriate for the various loan types we offer; however, losses may occur that exceed the reserves established in our allowance for loan losses. We track certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company's loan review function performs an independent credit analysis on a risk-based sample of commercial loan relationships annually, and performs a qualitative review of a sample of smaller commercial and retail loans.   Nonperforming assets consist of nonaccrual loans, accrual loans contractually past due 90 days or more, and modified loans past due 90 days or more, and OREO. Prior to the adoption of ASU 2022-02, unseasoned troubled debt restructurings ("TDRs") were included in nonperforming assets.  Ongoing activity in the classification and categories of nonperforming loans include collections on delinquencies, foreclosures, loan restructurings, and movements into or out of the nonperforming classification due to changing economic conditions, borrower financial capacity, or resolution efforts.    46 Table of Contents   The following table presents the components of nonperforming assets and related information as of the periods indicated:       June 30, 2023     December 31, 2022     June 30, 2022   (Amounts in thousands)                         Nonperforming                         Nonaccrual loans   $ 18,628     $ 15,208     $ 17,826   Accruing loans past due 90 days or more     -       142       131   Modified loans past due 90 days or more (1)     -       -       -   TDRs' (2)(3)     -       1,346       515   Total nonperforming loans     18,628       16,696       18,472   OREO     339       703       579   Total nonperforming assets   $ 18,967     $ 17,399     $ 19,051                                                       Additional Information                         Total modified loans (1)   $ 642     $ -     $ -   Total Accruing TDRs (3)   $ -     $ 7,112     $ 8,313                                                       Asset Quality Ratios:                         Nonperforming loans to total loans     0.71 %     0.70 %     0.80 % Nonperforming assets to total assets     0.56 %     0.55 %     0.58 % Allowance for credit losses to nonperforming loans     194.21 %     183.01 %     161.05 % Allowance for credit losses to total loans     1.38 %     1.27 %     1.29 %   (1) ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.  ASU adopted effective January 1, 2023. (2) TDRs restructured within the past six months and nonperforming TDRs exclude nonaccrual TDRs of $1.22 million and $1.17 million for the periods ended  December 31, 2022, and June 30, 2022, respectively.  They are included in nonaccrual loans as reported prior to the adoption of ASU 2022-02. (3) Total accruing TDRs exclude nonaccrual TDRs of $1.32 million and $1.43 million for the periods ended  December 31, 2022, and June 30, 2022, respectively.  They are included in nonaccrual loans as reported prior to the adoption of ASU 2022-02.   Nonperforming assets as of June 30, 2023, increased $1.57 million, or 9.01%, from December 31, 2022, with the largest increase due to an increase in nonaccrual loans of $3.42 million.  The increase was offset by a decrease of $1.35 million in nonaccrual TDRs that was reported in December 31, 2022.  The adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, on January 1, 2023, eliminated the accounting guidance for troubled debt restructurings by creditors as provided in ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors.  Therefore, the guidance applied prior to January 1, 2023, is no longer applicable.  OREO decreased $364 thousand, or 51.78% and accruing loans past due 90 days or more decreased $142 thousand from year-end.  As of June 30, 2023, nonaccrual loans were largely attributed to single family owner occupied (53.36%), consumer loans (11.96%), and agricultural (7.98%). Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for loan losses based on management’s estimate of loss at ultimate resolution.   Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled $31.09 million as of June 30, 2023, a increase of $1.41 million, or 4.75%, compared to $29.68 million as of December 31, 2022. Delinquent loans as a percent of total loans totaled 1.19% as of June 30, 2023, which includes past due loans (0.48%) and nonaccrual loans (0.71%).   47 Table of Contents   When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. As noted above, ASU 2022-02, eliminated and replaced the accounting guidance for borrowers experiencing financial difficulties previously applied under ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors.  ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, discloses loans for borrowers experiencing financial difficulty as modified loans.  Total loans modified as of June 30, 2023, were $642 thousand.  As of June 30, 2023, the payment status of these loans were all current.        OREO, which is carried at the lesser of estimated net realizable value or cost, decreased $364 thousand, or 51.78%, as of June 30, 2023, compared to December 31, 2022, and consisted of 6 properties with an average holding period of approximately 19 months. The net loss on the sale of OREO totaled $41 thousand for the six months ended June 30, 2023, compared to a net loss of $421 thousand for the same period of the prior year. The following table presents the changes in OREO during the periods indicated:         Six Months Ended June 30,       2023     2022   (Amounts in thousands)                 Beginning balance   $ 703     $ 1,015   Additions     79       322   Disposals     (411 )     (325 ) Valuation adjustments     (32 )     (433 ) Ending balance   $ 339     $ 579     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.    48 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 - "Basis of Presentation - Significant Accounting Policies".   With the adoption of ASU 2016-13 effective January 1, 2021, the Company changed its method for calculating it allowance for loans from an incurred loss method to a life of loan method.  As of June 30, 2023, the balance of the ACL for loans was $36.18 million, or 1.38% of total loans. The ACL at June 30, 2023, increased $5.62 million from the balance of $30.56 million recorded at December 31, 2022. This increase included a $6.08 million provision offset by net charge-offs for the six months of $2.47 million. Included in the $6.08 million provision was a day two provision of $1.61 million for Surrey loans.  In addition, $2.01 million was added to the reserve for Surrey's purchased credit deteriorated loans.   At June 30, 2023, the Company also had an allowance for unfunded commitments of $964 thousand which was recorded in Other Liabilities on the Balance Sheet.  During the first six months of 2023, the Company recorded a recovery for credit losses on unfunded commitments of $232 thousand compared to a provision of $278 thousand  recorded in the same period of 2022.    Deposits   Total deposits as of June 30, 2023, increased $173.86 million, or 6.49%, compared to December 31, 2022.  The increase was primarily attributable to the acquisition of Surrey Bancorp.  The Company acquired $403.64 million in deposits in the transaction; acquiring $158.39 million in demand accounts, $99.32 million in interest-bearing demand, $102.70 million in savings, and $43.23 million in time deposit accounts.  Excluding the Surrey transaction, deposits decreased $229.77 million with the largest decreases occurring in savings of $78.68 million, demand deposits of $55.56 million, and time deposits of $53.79 million.    Total borrowings in the form of retail repurchase agreements as of June 30, 2023, decreased $526 thousand, or 28.07%, compared to December 31, 2022.   Liquidity and Capital Resources   Liquidity   Liquidity is a measure of our ability to convert assets to cash or raise cash to meet financial obligations. We believe that liquidity management should encompass an overall balance sheet approach that draws together all sources and uses of liquidity. Poor or inadequate liquidity risk management may result in a funding deficit that could have a material impact on our operations. We maintain a liquidity risk management policy and contingency funding policy (“Liquidity Plan”) to detect potential liquidity issues and protect our depositors, creditors, and shareholders. The Liquidity Plan includes various internal and external indicators that are reviewed on a recurring basis by our Asset/Liability Management Committee (“ALCO”) of the Board of Directors. ALCO reviews liquidity risk exposure and policies related to liquidity management; ensures that systems and internal controls are consistent with liquidity policies; and provides accurate reports about liquidity needs, sources, and compliance. The Liquidity Plan involves ongoing monitoring and estimation of potentially credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows during a funding crisis. The liquidity model incorporates various funding crisis scenarios and a specific action plan is formulated, and activated, when a financial shock that affects our normal funding activities is identified. Generally, the plan will reflect a strategy of replacing liability outflows with alternative liabilities, rather than balance sheet asset liquidity, to the extent that significant premiums can be avoided. If alternative liabilities are not available, outflows will be met through liquidation of balance sheet assets, including unpledged securities.   49 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 June 30, 2023, the Company’s cash reserves and short-term investment securities totaled $7.14 million and $28.35 million, respectively. The Company’s cash reserves and investments provide adequate working capital to meet obligations for the next twelve months.   In addition to cash on hand and deposits with other financial institutions, we rely on customer deposits, cash flows from loans and investment securities, and lines of credit from the FHLB and the Federal Reserve Bank (“FRB”) Discount Window to meet potential liquidity demands. These sources of liquidity are immediately available to satisfy deposit withdrawals, customer credit needs, and our operations. Secondary sources of liquidity include approved lines of credit with correspondent banks and unpledged available-for-sale securities. As of June 30, 2023, our unencumbered cash totaled $152.66 million, unused borrowing capacity from the FHLB totaled $405.85 million, available credit from the FRB Discount Window totaled $6.08 million, available lines from correspondent banks totaled $90.00 million, and unpledged available-for-sale securities totaled $276.49 million.   Capital Resources   We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders’ equity as of June 30, 2023, increased $76.74 million, or 18.18%, to $498.72 million from $421.99 million as of December 31, 2022. The change in stockholders’ equity was largely due to the acquisition of Surrey Bancorp.  The Company issued 2.99 million shares of common stock in the transaction resulting in an increase to capital of $71.37 million.  In addition, capital increased due to net income of $21.60 million and by other comprehensive income of $1.26 million.  The increases were offset by dividends declared on our common stock of $10.27  million and the repurchase of our common stock totaling $7.69 million.  Book value per share at June 30, 2023, was $26.29, a increase of $0.28 from year-end 2022.     Capital Adequacy Requirements   Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known as Basel III. A description of the Basel III capital rules is included in Part I, Item 1 of the 2022 Form 10-K. Our current required capital ratios are as follows:     ● 4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00% including the capital conservation buffer)   ● 6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the capital conservation buffer)   ● 8.0% Total capital to risk-weighted assets (effectively 10.50% including the capital conservation buffer)   ● 4.0% Tier 1 capital to average consolidated assets (“Tier 1 leverage ratio”)   The following table presents our capital ratios as of the dates indicated:       June 30, 2023     December 31, 2022       Company     Bank     Company     Bank                             Common equity Tier 1 ratio   14.38%     12.50%     13.37%     11.69%   Tier 1 risk-based capital ratio   14.38%     12.50%     13.37%     11.69%   Total risk-based capital ratio   15.64%     13.76%     14.62%     12.94%   Tier 1 leverage ratio   11.15%     9.69%     10.17%     8.79%     Our risk-based capital ratios as of June 30, 2023, increased from December 31, 2022, primarily due to an increase in capital. The increase in capital was primarily due to the acquisition of Surrey and the issuance of 2.99 million shares of common stock in the transaction resulting in an increase to capital of $71.37 million.  As of June 30, 2023, we continued to meet all capital adequacy requirements and were classified as well-capitalized under the regulatory framework for prompt corrective action. Management believes there have been no conditions or events since those notifications that would change the Bank’s classification. Additionally, our capital ratios were in excess of the minimum standards under the Basel III capital rules as of June 30, 2023.   50 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:       June 30, 2023     December 31, 2022   (Amounts in thousands)                 Commitments to extend credit   $ 313,233     $ 278,926   Standby letters of credit and financial guarantees (1)     116,583       119,681   Total off-balance sheet risk   $ 429,816     $ 398,607     (1) Includes FHLB letters of credit   Market Risk and Interest Rate Sensitivity   Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. ALCO reviews our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and mitigate the effect of interest rate changes.   In order to manage our exposure to interest rate risk, we periodically review internal simulation and third-party models that project net interest income at risk, which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate shock.   As of June 30, 2023, the Federal Open Market Committee had set the benchmark federal funds rate to a range of 475 to 525 basis points.   In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated.       June 30, 2023     December 31, 2022   Increase (Decrease) in Basis Points   Change in Net Interest Income     Percent Change     Change in Net Interest Income     Percent Change   (Dollars in thousands)                                 200   $ 796       0.6 %   $ 214       0.2 % 100     365       0.3 %     79       0.6 % (100)     (4,099 )     (2.9 )%     (5,644 )     -4.5 % (200)     (9,822 )     (7.0 )%     (12,849 )     -10.4 %   Inflation and Changing Prices   Our consolidated financial statements and related notes are presented in accordance with GAAP, which requires the measurement of results of operations and financial position in historical dollars. Inflation may cause a rise in price levels and changes in the relative purchasing power of money. These inflationary effects are not reflected in historical dollar measurements. The primary effect of inflation on our operations is increased operating costs. In management’s opinion, interest rates have a greater impact on our financial performance than inflation. Interest rates do not necessarily fluctuate in the same direction, or to the same extent, as the price of goods and services; therefore, the effect of inflation on businesses with large investments in property, plant, and inventory is generally more significant than the effect on financial institutions.   Astronomic federal government spending, growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, have contributed to rising inflation. In response, the Federal Reserve Bank has begun raising interest rates and signaled that it will continue to raise rates, taper its purchase of mortgage and other bonds and reduce the size of the balance sheet over time. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.   Most LIBOR settings ceased to be published after June 30, 2023.  The Company had discontinued originating LIBOR-based variable rate loans in 2018 in favor of U. S. Treasury rates.  The Company has substituted an alternative reference rate published  by the U. S. Treasury for any remaining loans tied to LIBOR.   51 Table of Contents   Item 3. Quantitative and Qualitative Disclosures about Market Risk   The information required in this item is incorporated by reference to “Market Risk and Interest Rate Sensitivity” in Item 2 of this Quarterly Report on Form 10-Q.   Item 4. Controls and Procedures   Evaluation of Disclosure Controls and Procedures   In connection with this report, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures under the Exchange Act Rule 13a-15(b). Based upon that evaluation, the CEO and CFO concluded that, as of June 30, 2023, our disclosure controls and procedures were effective.   Disclosure controls and procedures are our Company’s controls and other procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions about required disclosure.   Management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or management’s override of the controls.   Changes in Internal Control over Financial Reporting   We assess the adequacy of our internal control over financial reporting quarterly and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.   PART II. OTHER INFORMATION   ITEM 1. Legal Proceedings   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, 2022, discuss potential events, trends, or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, access to capital resources, and, consequently, cause the market value of our common stock to decline. These risks could cause our future results to differ materially from historical results and expectations of future financial performance. If any of the risks occur and the market price of our common stock declines significantly, individuals may lose all, or part, of their investment in our Company. Individuals should carefully consider our risk factors and information included in our annual report on Form 10-K for the year ended December 31, 2022 before making an investment decision. There may be risks and uncertainties that we have not identified or that we have deemed immaterial that could adversely affect our business; therefore, such risk factors are not intended to be an exhaustive list of all risks we face. There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2022.    52 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   During the second quarter of 2023 the Company purchased 279,567 shares of its commons stock compared to 283,507 shares purchased during the same quarter of 2022.       The following table provides information about purchases of our common stock made by us or on our behalf by any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, during the periods indicated:       Total Number of Shares Purchased     Average Price Paid per Share     Total Number of Shares Purchased as Part of a Publicly Announced Plan     Maximum Number of Shares that May Yet be Purchased Under the Plan                                     April 1-30, 2023     -     $ -       -       744,497   May 1-31, 2023     124,100       25.00       124,100       620,397   June 1-30, 2023     155,467       29.51       155,467       464,930   Total     279,567     $ 27.51       279,567             ITEM 3. Defaults Upon Senio r Securities   None.   ITEM 4. Mine Safety Disclosures   None.   ITEM 5. Other Information   (a) None.  (b) No changes were made to the procedures by which security holders may recommend nominees to the Company's board of directors. (c) During the quarter ended June 30, 2023, none of the Company’s directors or executive officers has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Securities Exchange Act of 1934, as amended).     53 Table of Contents   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, 20 19. 2.3 Agreement and Plan of Merger between First Community Bankshares, Inc. and Surrey Bancorp, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated and filed November 18, 20 22. 3.1 Articles of Incorporation of First Community Bankshares, Inc., incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2018, filed on March 13, 2018 3.2 Bylaws of First Community Bankshares, Inc., incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated and filed October 2, 2018 4.1 Description of First Community Bankshares, Inc. Common Stock, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated and filed October 2, 2018 4.2 Form of First Community Bankshares, Inc. Common Stock Certificate, incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated and filed October 2, 2018 10.1.1** First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000 10.1.2** Amendment One to the First Community Bancshares, Inc. 1999 Stock Option Plan, incorporated by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed on May 7, 2004 10.2** First Community Bancshares, Inc. 1999 Stock Option Agreement, incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 13, 2002 10.3** First Community Bancshares, Inc. 2001 Nonqualified Director Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002 10.6** First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan, incorporated by reference to Appendix B of the Definitive Proxy Statement on Form DEF 14A dated April 24, 2012, filed on March 7, 2012 10.7** First Community Bancshares, Inc. 2012 Omnibus Equity Compensation Plan Restricted Stock Grant Agreement, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and filed May 28, 2013 10.8** First Community Bancshares, Inc. Life Insurance Endorsement Method Split Dollar Plan and Agreement, incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K/A for the period ended December 31, 1999, filed on April 13, 2000 10.9.1** First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, filed on January 5, 2009; 10.9.2** Amendment #1 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010 10.9.3** Amendment #2 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 21, 2013, filed on February 25, 2013   54 Table of Contents   10.9.4** Amendment #3 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016 10.9.5** Amendment #4 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on February 28, 2017 10.9.6* Amendment #5 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan . 10.9.7* Amendment #6 to the First Community Bancshares, Inc. and Affiliates Executive Retention Plan . 10.10** Amended and Restated Deferred Compensation Plan for Directors of First Community Bancshares, Inc. and Affiliates, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2019, filed on December 19,2019 10.11.1** First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated August 22, 2006, filed on August 23, 2006, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017 10.11.2** Amendment #2 to the First Community Bancshares, Inc. Amended and Restated Nonqualified Supplemental Cash or Deferred Retirement Plan, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on February 28, 2017 10.12.1** First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated December 16, 2010, filed on December 17, 2010, and Amendment #2, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016 10.12.2** Amendment #2 to the First Community Bancshares, Inc. Supplemental Directors Retirement Plan, as amended and restated, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated May 24, 2016, filed on May 31, 2016 10.13** Employment Agreement between First Community Bancshares, Inc. and David D. Brown, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated and filed on April 16, 2015 10.15** Employment Agreement between First Community Bancshares, Inc. and Gary R. Mills, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated and filed on April 16, 2015 10.16** Employment Agreement between First Community Bancshares, Inc. and William P. Stafford, II, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated and filed on April 16, 2015 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   101*** Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2023, (Unaudited) and December 31, 2022; (ii) Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 30, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2023 and 2022; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). 104* The cover page of First Community Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL (included within the Exhibit 101 attachments).   * Filed herewith ** Indicates a management contract or compensation plan or agreement. These contracts, plans, or agreements were assumed by First Community Bankshares, Inc. in October 2018 in connection with First Community Bancshares, Inc., a Nevada corporation, merging with and into its wholly-owned subsidiary, First Community Bankshares, Inc., a Virginia corporation, pursuant to an Agreement and Plan of Reincorporation and Merger with First Community Bankshares, Inc. continuing as the surviving corporation. *** Submitted electronically herewith   55 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  August 4, 2023.       First Community Bankshares, Inc. (Registrant)                             /s/ William P. Stafford, II     William P. Stafford, II     Chief Executive Officer     (Principal Executive Officer)                             /s/ David D. Brown     David D. Brown     Chief Financial Officer     (Principal Accounting Officer)       56