FCBC 10-Q Quarterly Report Sept. 30, 2023

FIRST COMMUNITY BANKSHARES INC /VA/

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fcbc20230930_10q.htm

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

☐ 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 October 30, 2023, there were 18,535,770 shares outstanding of the registrant’s Common Stock, $1.00 par value.

Table of Contents

FIRST COMMUNITY BAN K SHARES, INC.
FORM 10-Q
INDEX

PART I.	FINANCIAL INFORMATION		P age

Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	4
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	9
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		52
Item 4.	Controls and Procedures		52

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		52
Item 1A.	Risk Factors		52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 3.	Defaults Upon Senior Securities		53
Item 4.	Mine Safety Disclosures		53
Item 5.	Other Information		53
Item 6.	Exhibits		54

Signatures			56

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.

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statemen ts

CONDENSED CONSOLIDATED BALANCE SHEETS

	*September 30,*			*December 31,*
	*2023*			2022 ⁽¹⁾
(Amounts in thousands, except share and per share data)	(Unaudited)
Assets
Cash and due from banks	$	71,666		$	63,044
Federal funds sold		40,204			105,636
Interest-bearing deposits in banks		1,527			2,166
Total cash and cash equivalents		113,397			170,846
Debt securities available for sale		275,332			300,349
Loans held for investment, net of unearned income		2,593,472			2,400,197
Allowance for credit losses		( 36,031	)		( 30,556	)
Loans held for investment, net		2,557,441			2,369,641
Premises and equipment, net		51,205			47,340
Other real estate owned		243			703
Interest receivable		10,428			9,279
Goodwill		143,946			129,565
Other intangible assets		15,681			4,176
Other assets		116,552			103,673
Total assets	$	3,284,225		$	3,135,572

Liabilities
Deposits
Noninterest-bearing	$	944,301		$	872,168
Interest-bearing		1,801,835			1,806,647
Total deposits		2,746,136			2,678,815
Securities sold under agreements to repurchase		1,029			1,874
Interest, taxes, and other liabilities		41,393			32,898
Total liabilities		2,788,558			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; 27,502,121 shares issued and 18,671,470 outstanding at September 30, 2023; 24,477,471 shares issued and 16,225,399 outstanding at December 31, 2022		18,671			16,225
Additional paid-in capital		180,951			128,508
Retained earnings		313,489			292,971
Accumulated other comprehensive loss		( 17,444	)		( 15,719	)
Total stockholders' equity		495,667			421,985
Total liabilities and stockholders' equity	$	3,284,225		$	3,135,572

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
(Amounts in thousands, except share and per share data)	*2023*		*2022*		*2023*			*2022*
Interest income
Interest and fees on loans	$	33,496	$	26,405	$	93,051		$	76,697
Interest on securities -- taxable		1,765		1,610		5,597			3,539
Interest on securities -- tax-exempt		147		175		471			547
Interest on deposits in banks		697		1,532		2,044			2,548
Total interest income		36,105		29,722		101,163			83,331
Interest expense
Interest on deposits		2,758		380		5,406			1,288
Interest on short-term borrowings		-		-		136			1
Total interest expense		2,758		380		5,542			1,289
Net interest income		33,347		29,342		95,621			82,042
Provision for credit losses		1,109		685		6,956			3,156
Net interest income after provision for loan losses		32,238		28,657		88,665			78,886
Noninterest income
Wealth management		1,145		932		3,127			2,897
Service charges on deposits		3,729		3,689		10,359			10,859
Other service charges and fees		3,564		2,988		10,106			9,302
Loss on sale of securities		-		-		( 21	)		-
Divestiture gain		-		1,658		-			1,658
Other operating income		1,184		683		3,419			3,282
Total noninterest income		9,622		9,950		26,990			27,998
Noninterest expense
Salaries and employee benefits		12,673		12,081		36,954			35,270
Occupancy expense		1,271		1,188		3,715			3,622
Furniture and equipment expense		1,480		1,478		4,389			4,588
Service fees		2,350		1,635		6,653			5,701
Advertising and public relations		968		718		2,457			1,835
Professional fees		172		208		780			1,205
Amortization of intangibles		536		365		1,195			1,082
FDIC premiums and assessments		392		321		1,135			796
Merger expenses		-		-		2,393			-
Divestiture expenses		-		153		-			153
Other operating expense		3,071		2,998		8,726			8,134
Total noninterest expense		22,913		21,145		68,397			62,386
Income before income taxes		18,947		17,462		47,258			44,498
Income tax expense		4,307		4,111		11,022			10,419
Net income	$	14,640	$	13,351	$	36,236		$	34,079


Earnings per common share
Basic	$	0.78	$	0.82	$	2.03		$	2.05
Diluted		0.79		0.81		2.06			2.05
Weighted average shares outstanding
Basic		18,786,032		16,378,022		17,816,505			16,617,766
Diluted		18,831,836		16,413,202		17,857,494			16,654,697

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2023*			*2022*			*2023*			*2022*
(Amounts in thousands)
Net income	$	14,640		$	13,351		$	36,236		$	34,079
Other comprehensive income (loss), before tax
Available-for-sale debt securities:
Change in net unrealized losses on debt securities		( 3,776	)		( 9,355	)		( 2,206	)		( 21,802	)
Reclassification adjustment for losses recognized in net income		-			-			21			-
Net unrealized losses on available-for-sale debt securities		( 3,776	)		( 9,355	)		( 2,185	)		( 21,802	)
Employee benefit plans:
Net actuarial loss		( 32	)		( 1	)		( 95	)		( 424	)
Reclassification adjustment for amortization of prior service cost and net actuarial loss recognized in net income		32			34			95			101
Net unrealized gains (losses) on employee benefit plans		-			33			-			( 323	)
Other comprehensive loss, before tax		( 3,776	)		( 9,322	)		( 2,185	)		( 22,125	)
Income tax benefit		( 793	)		( 1,957	)		( 460	)		( 4,646	)
Other comprehensive loss, net of tax		( 2,983	)		( 7,365	)		( 1,725	)		( 17,479	)
Total comprehensive income	$	11,657		$	5,986		$	34,511		$	16,600

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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

THREE MONTHS ENDED

September 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 July, 1 2022		-	$	-		16,502,144		$	16,502		$	136,705		$	276,499		$	( 11,660	)	$	418,046
Net income		-		-		-			-			-			13,351			-			13,351
Other comprehensive loss		-		-		-			-			-			-			( 7,365	)		( 7,365	)
Common dividends declared -- $0.29 per share		-		-		-			-			-			( 4,754	)		-			( 4,754	)
Equity-based compensation expense		-		-		-			-			52			-			-			52
Common stock options exercised		-		-		2,443			2			182			-			-			184
Issuance of common stock to 401(k) plan		-		-		3,990			4			123			-			-			127
Repurchase of common shares at $31.36 per share		-		-		( 235,400	)		( 235	)		( 7,148	)		-			-			( 7,383	)
Balance September 30, 2022		-	$	-		16,273,177		$	16,273		$	129,914		$	285,096		$	( 19,025	)	$	412,258

Balance July, 1 2023		-	$	-		18,969,281		$	18,969		$	189,917		$	304,295		$	( 14,461	)	$	498,720
Net income		-		-		-			-			-			14,640			-			14,640
Other comprehensive loss		-		-		-			-			-			-			( 2,983	)		( 2,983	)
Common dividends declared -- $0.29 per share		-		-		-			-			-			( 5,446	)		-			( 5,446	)
Equity-based compensation expense		-		-		-			-			82			-			-			82
Common stock options exercised		-		-		1,201			1			22			-			-			23
Repurchase of common shares at $31.33 per share		-		-		( 299,012	)		( 299	)		( 9,070	)		-			-			( 9,369	)
Balance September 30, 2023		-	$	-		18,671,470		$	18,671		$	180,951		$	313,489		$	( 17,444	)	$	495,667

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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

Nine MONTHS ENDED

September 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		-		-		-			-			-			34,079			-			34,079
Other comprehensive loss		-		-		-			-			-			-			( 17,479	)		( 17,479	)
Common dividends declared -- $0.83 per share		-		-		-			-			-			( 13,807	)		0			( 13,807	)
Equity-based compensation expense		-		-		25,137			25			511			-			-			536
Common stock options exercised		-		-		6,979			7			150			-			-			157
Issuance of common stock to 401(k) plan		-		-		13,748			14			401			-			-			415
Repurchase of common shares at $29.83 per share		-		-		( 650,907	)		( 651	)		( 18,767	)		-			-			( 19,418	)
Balance September 30, 2022		-	$	-		16,273,177		$	16,273		$	129,914		$	285,096		$	( 19,025	)	$	412,258

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		-		-		-			-			-			36,236			-			36,236
Other comprehensive loss		-		-		-			-			-			-			( 1,725	)		( 1,725	)
Common dividends declared -- $0.87 per share		-		-		-			-			-			( 15,718	)		-			( 15,718	)
Equity-based compensation expense		-		-		24,243			25			491			-			-			516
Common stock options exercised		-		-		3,359			3			67			-			-			70
Issuance of common stock to 401(k) plan		-		-		262			-			8			-			-			8
Repurchase of common shares at $29.48 per share		-		-		( 578,579	)		( 579	)		( 16,480	)		-			-			( 17,059	)
Balance September 30, 2023		-	$	-		18,671,470		$	18,671		$	180,951		$	313,489		$	( 17,444	)	$	495,667

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	*Nine Months Ended*
	*September 30,*
(Amounts in thousands)	*2023*			*2022*
Operating activities
Net income	$	36,236		$	34,079
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses for loans		6,956			3,156
Depreciation and amortization of premises and equipment		2,934			3,205
Accretion of discounts on investments		( 2,263	)		( 26	)
Amortization of intangible assets		1,195			1,082
Accretion on acquired loans		( 1,951	)		( 2,224	)
Gain on divestiture		-			( 1,658	)
Equity-based compensation expense		516			536
Issuance of common stock to 401(k) plan		8			415
Gain on sale of premises and equipment, net		( 190	)		( 772	)
Loss on sale of other real estate owned		94			423
Net loss on sale of securities		21			-
Increase in accrued interest receivable		( 1,149	)		( 445	)
Decrease in other operating activities		4,426			3,757
Net cash provided by operating activities		46,833			41,528
Investing activities
Proceeds from sale of securities available for sale		38,979			-
Proceeds from maturities, prepayments, and calls of securities available for sale		75,898			19,855
Payments to acquire securities available for sale		( 68,868	)		( 264,960	)
Net decrease (increase) in loans		43,575			( 197,035	)
Purchase of FHLB stock, net		( 876	)		( 240	)
Proceeds from bank owned life insurance		-			1,046
Cash provided by (used in) divestitures and acquisitions, net		176,684			( 59,039	)
Proceeds from sale of premises and equipment		1,828			1,542
Payments to acquire premises and equipment		( 2,252	)		( 750	)
Proceeds from sale of other real estate owned		616			471
Net cash provided by (used in) investing activities		265,584			( 499,110	)
Financing activities
(Decrease) increase in noninterest-bearing deposits, net		( 86,256	)		54,024
Decrease in interest-bearing deposits, net		( 250,058	)		( 12,140	)
(Repayments) proceeds from securities sold under agreements to repurchase, net		( 845	)		422
Proceeds from stock options exercised		70			157
Payments for repurchase of common stock		( 17,059	)		( 19,418	)
Payments of common dividends		( 15,718	)		( 13,807	)
Net cash (used in) provided by financing activities		( 369,866	)		9,238
Net decrease in cash and cash equivalents		( 57,449	)		( 448,344	)
Cash and cash equivalents at beginning of period		170,846			677,439
Cash and cash equivalents at end of period	$	113,397		$	229,095

Supplemental disclosure -- cash flow information
Cash paid for interest	$	5,297		$	1,728
Cash paid for income taxes		5,585			4,090

Supplemental transactions -- noncash items
Transfer of loans to other real estate owned		270			438
Loans originated to finance other real estate owned		20			-
Increase in accumulated other comprehensive income (loss), net of taxes		( 1,725	)		( 17,479	)
Acquisition of Surrey Bancorp		See Note 2			-

See Notes to Condensed Consolidated Financial Statements.

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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 credit losses, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

Significant Accounting Policies

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

Allowance for Credit Losses ( “ ACL ” )

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

ACL – Investment Securities

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

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

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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.

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

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

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

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

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

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

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

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Recent Accounting Standards

Standards Adopted in 2023

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

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

Note 2 . Divestitures and Acquisitions

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

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

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

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

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

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

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

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	*As recorded by*		*Fair Value*				*As recorded by*
(Amounts in thousands)	*Surrey*		*Adjustments*				*the Company*
Assets
Cash and cash equivalents	$	176,700	$	-			$	176,700
Securities available for sale		22,027		( 1,093	)	( a )		20,934
Loans held for investment, net of allowance and mark		251,944		( 12,864	)	( b )		239,080
Premises and equipment		5,501		774		( c )		6,275
Other assets		10,787		( 229	)	( d ), ( e )		10,558
Intangible assets		-		12,700		( f )		12,700
Total assets	$	466,959	$	( 712	)		$	466,247

LIABILITIES
Deposits:
Noninterest-bearing	$	158,389	$	-			$	158,389
Interest-bearing		246,460		( 1,214	)	( g )		245,246
Total deposits		404,849		( 1,214	)			403,635
Long term debt		-		-				-
Other liabilities		6,004		( 381	)	( h )		5,623
Total liabilities		410,853		( 1,595	)			409,258

Net identifiable assets acquired over liabilities assumed		56,106		883				56,989

Goodwill		-		14,381				14,381
Net assets acquired over liabilities assumed	$	56,106	$	15,264			$	71,370

Consideration:
First Community Bankshares, Inc. common stock issued								2,996,786
Purchase price per share of the Company's common stock							$	23.81
Fair value of Company common stock issued								71,354
Cash paid for fractional shares								16
Fair Value of total consideration transferred							$	71,370

Explanation of fair value adjustments:

(a)

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

(b)

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

(c)

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

(d)

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

(e)

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

(f)

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

(g)

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

(h)

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

Comparative and Pro Forma Financial Information for Acquisitions

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

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

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

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Note 3 . Debt Securities

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

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

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

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

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

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

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

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

There were 145 individual debt securities in an unrealized loss position as of September 30, 2023 , and the combined depreciation in value represented 7.98 % of the debt securities portfolio. There 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 September 30, 2023 , continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than- not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.

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

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

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

The carrying amount of securities pledged for various purposes totaled $ 145.38 million as of September 30, 2023 , and $ 22.43 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 $ 1.74 million as of September 30, 2023 , and $ 1.80 million as of December 31, 2022 . Deferred loan fees, net of loan costs, totaled $ 7.76 million as of September 30, 2023 , and $ 8.81 million as of December 31, 2022 .

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

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

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Note 5 . Credit Quality

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

●

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

●

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

●

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

●

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

●

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

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

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

	*December 31, 2022*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*

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

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

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

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

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

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

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

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

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

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

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

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

	*September 30, 2023*
													*Amortized Cost of*
	*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*		*> 90 Days Accruing*
(Amounts in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*		*No Allowance*

Commercial loans
Construction, development, and other land	$	198	$	7	$	23	$	228	$	113,562	$	113,790	$	-
Commercial and industrial		729		1,109		279		2,117		211,424		213,541		-
Multi-family residential		185		-		-		185		169,060		169,245		-
Single family non-owner occupied		1,067		165		106		1,338		229,498		230,836		-
Non-farm, non-residential		975		120		205		1,300		895,255		896,555		-
Agricultural		423		-		1,379		1,802		20,344		22,146		-
Farmland		-		-		-		-		15,997		15,997		-
Consumer real estate loans
Home equity lines		376		345		877		1,598		86,626		88,224		-
Single family owner occupied		4,366		1,825		4,211		10,402		693,387		703,789		-
Owner occupied construction		196		-		-		196		10,496		10,692		-
Consumer and other loans
Consumer loans		3,930		1,330		953		6,213		120,704		126,917		-
Other		-		-		-		-		1,740		1,740		-
Total loans	$	12,445	$	4,901	$	8,033	$	25,379	$	2,568,093	$	2,593,472	$	-

	*December 31, 2022*
													*Amortized Cost of*
	*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*		*> 90 Days Accruing*
(Amounts in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*		*No Allowance*

Commercial loans
Construction, development, and other land	$	393	$	8	$	23	$	424	$	116,750	$	117,174	$	-
Commercial and industrial		756		129		217		1,102		149,326		150,428		-
Multi-family residential		-		-		83		83		147,943		148,026		-
Single family non-owner occupied		990		122		299		1,411		204,710		206,121		-
Non-farm, non-residential		646		52		548		1,246		786,457		787,703		-
Agricultural		36		135		9		180		11,852		12,032		-
Farmland		-		-		133		133		11,646		11,779		-
Consumer real estate loans
Home equity lines		519		115		262		896		74,746		75,642		-
Single family owner occupied		5,951		2,322		3,166		11,439		723,101		734,540		-
Owner occupied construction		-		-		-		-		10,366		10,366		-
Consumer and other loans
Consumer loans		4,282		1,960		1,459		7,701		136,881		144,582		-
Other		-		-		-		-		1,804		1,804		-
Total loans	$	13,573	$	4,843	$	6,199	$	24,615	$	2,375,582	$	2,400,197	$	-

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

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

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

	Payment Delays
	Amortized Cost Basis		% of Total Class of
	September 30, 2023		Financing Receivable			Financial Effect

(Amounts in thousands)
Non farm, non residential property	$	661		0.07	%	Deferred six months of interest to loan maturity.
Single family owner occupied		562		0.08	%	Deferred $66 thousand in principal to loan maturity
Total	$	1,223

	*Term Extensions*
	*Amortized Cost Basis*		*% of Total Class of*
	*September 30, 2023*		*Financing Receivable*			*Financial Effect*

(Amounts in thousands)
Consumer	$	7		0.01	%	Extended term from 60 to 84 months
Total	$	7


	*Principal Forgiveness*
	*Amortized Cost Basis*		*% of Total Class of*
	*September 30, 2023*		*Financing Receivable*			*Financial Effect*

(Amounts in thousands)
Single family owner occupied	$	7		0.00	%	Reduced amortized cost basis by $13 thousand
Total	$	7


	*Term Extension and Rate Reduction*
	*Amortized Cost Basis*		*% of Total Class of*
	*September 30, 2023*		*Financing Receivable*			*Financial Effect*

(Amounts in thousands)
Single family owner occupied	$	437		0.06	%	Reduced interest income and extended time to recover principal.
Total	$	437

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

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

	*September 30, 2023*
	*Payment Status (Amortized Cost Basis)*
	*Current*		*30-89 Days Past Due*		*90+ Days Past Due*

(Amounts in thousands)
Non farm, non residential property	$	661	$	-	$	-
Single family owner occupied		744		262		-
Consumer		7		-		-
Total	$	1,412	$	262	$	-

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

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

Allowance for credit losses related to TDRs					$	-

( 1 )

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

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

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

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

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

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

( 1 )

Represents the loan balance immediately following modification

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

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

	*September 30, 2023*		*December 31, 2022*
(Amounts in thousands)
OREO	$	243	$	703

OREO secured by residential real estate	$	243	$	407
Residential real estate loans in the foreclosure process ⁽¹⁾	$	1,966	$	1,474

( 1 )

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

Note 6 . Allowance for Credit Losses

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

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

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

Table of Contents

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

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

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Note 7 . Deposits

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

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

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Note 8 . Borrowings

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

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

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

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

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

Note 9 . Derivative Instruments and Hedging Activities

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

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

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

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

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

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

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

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

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Note 10 . Employee Benefit Plans

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

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

Note 11 . Earnings per Share

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2023*		*2022*		*2023*		*2022*
(Amounts in thousands, except share and per share data)
Net income	$	14,640	$	13,351	$	36,236	$	34,079
Adjust net income for fair value of restricted stock units (tax effected)		237		-		592		-
Net income for fully dilutive earnings per common share	$	14,877	$	13,351	$	36,828	$	34,079

Weighted average common shares outstanding, basic		18,786,032		16,378,022		17,816,505		16,617,766
Dilutive effect of potential common shares
Stock options		17,223		18,975		14,323		16,615
Unvested stock awards		-		10,570		4,067		14,681
Restricted stock units		28,581		5,635		22,599		5,635
Total dilutive effect of potential common shares		45,804		35,180		40,989		36,931
Weighted average common shares outstanding, diluted		18,831,836		16,413,202		17,857,494		16,654,697

Basic earnings per common share	$	0.78	$	0.82	$	2.03	$	2.05
Diluted earnings per common share		0.79		0.81		2.06		2.05

Antidilutive potential common shares
Stock options		129,355		131,198		130,577		131,198
Stock units		93		-		82		-
Total potential antidilutive shares		129,448		131,198		130,659		131,198

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Note 12 . Accumulated Other Comprehensive Income (Loss)

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

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

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

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

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

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

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

( 1 )

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

Note 13 . Fair Value

Financial Instruments Measured at Fair Value

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

●

Level 1 – Observable, unadjusted quoted prices in active markets

●

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

●

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

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

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Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-Sale Debt Securities

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:

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

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

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Assets Measured at Fair Value on a Nonrecurring Basis

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

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

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

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

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

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

Quantitative Information about Level 3 Fair Value Measurements

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

			*Discount Range*
	*Valuation*	*Unobservable*	*(Weighted Average)*
	*Technique*	*Input*	*September 30, 2023*

Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		46% (46%)
OREO	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾		20% to 100% (86%)

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

			*Discount Range*
	*Valuation*	*Unobservable*	*(Weighted Average)*
	*Technique*	*Input*	*December 31, 2022*

Collateral dependent assets with specific reserves	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾		3% (3%)
OREO	Discounted appraisals ⁽¹⁾	Appraisal adjustments ⁽²⁾		20% to 100% (69%)

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

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Fair Value of Financial Instruments

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

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

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

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

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

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

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

	*September 30, 2023*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	113,397	$	113,397	$	113,397	$	-	$	-
Debt securities available for sale		275,332		275,332		-		275,332		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,557,441		2,320,750		-		-		2,320,750
Derivative financial assets		229		229		-		229		-
Interest receivable		10,428		10,428		-		10,428		-
Deferred compensation assets		6,003		6,003		6,003		-		-

Liabilities
Time deposits		257,567		242,721		-		242,721		-
Securities sold under agreements to repurchase		1,029		1,029		-		1,029		-
Interest payable		404		404		-		404		-
Deferred compensation liabilities		7,527		7,527		7,527		-		-

	*December 31, 2022*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	170,846	$	170,846	$	170,846	$	-	$	-
Debt securities available for sale		300,349		300,349		-		300,349		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,369,641		2,215,243		-		-		2,215,243
Interest receivable		9,279		9,279		-		9,279		-
Deferred compensation assets		5,142		5,142		5,142		-		-
Derivative assets		199		199		-		199		-

Liabilities
Time deposits		283,330		281,744		-		281,744		-
Securities sold under agreements to repurchase		1,874		1,874		-		1,874		-
Interest payable		159		159		-		159		-
Deferred compensation liabilities		5,142		5,142		5,142		-		-

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Note 14 . Litigation, Commitments , and Contingencies

Litigation

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

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

Commitments and Contingencies

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

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

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

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

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

( 1 )

Includes FHLB letters of credit

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

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

Executive Overview

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

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

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

Critical Accounting Estimates

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

Allowance for Credit Losses or "ACL"

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

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

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Performance Overview

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

●

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

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

●

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

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

Results of Operations

Net Income

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

	Three Months Ended												Nine Months Ended
(Amounts in thousands, except per	September 30,						Increase						September 30,						Increase
share data)	2023			2022			(Decrease)			% Change			2023			2022			(Decrease)			% Change

Net income	$	14,640		$	13,351		$	1,289			9.65	%	$	36,236		$	34,079		$	2,157			6.33	%

Basic earnings per common share		0.78			0.82			(0.04	)		-4.88	%		2.03			2.05			(0.02	)		-0.98	%
Diluted earnings per common share		0.79			0.81			(0.02	)		-2.47	%		2.06			2.05			0.01			0.49	%

Return on average assets		1.74	%		1.63	%		0.11	%		6.75	%		1.49	%		1.41	%		0.08	%		5.67	%
Return on average common equity		11.63	%		12.60	%		-0.97	%		-7.70	%		10.25	%		10.73	%		-0.48	%		-4.47	%

Three - Month Comparison .

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

Nine - Month Comparison .

Net income increased $2.16 million in the first nine months of 2023 compared to the same period in 2022. The increase was primarily attributable to an increase in net interest income of $13.58 million compared to the same period in 2022. Net interest income totaled $95.62 million for the first nine months of 2023 compared to $82.04 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 $3.80 million, an increase in noninterest expense of $6.01 million, and a decrease in noninterest income of $1.01 million over the same period in 2022. The increase in provision for credit losses was partly due to $1.61 million recorded for the day two provision for the Surrey loan portfolio. The increase in noninterest expense included $2.39 million in merger expenses and an increase in salaries and benefits costs of $1.68 million both due to the second quarter acquisition of Surrey Bancorp. The decrease in noninterest income was primarily attributable to a gain of $1.66 million recorded in 2022 for the divestiture of the Emporia, Virginia branch.

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Net Interest Income

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

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Three Months Ended September 30,
	2023							2022
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest(1)		Rate(1)			Balance		Interest(1)		Rate(1)
Assets
Earning assets
Loans ⁽²⁾⁽³⁾	$	2,604,885	$	33,566		5.11	%	$	2,334,596	$	26,474		4.50	%
Securities available for sale		284,659		1,952		2.72	%		301,360		1,833		2.41	%
Interest-bearing deposits		50,855		697		5.44	%		275,290		1,531		2.21	%
Total earning assets		2,940,399		36,215		4.89	%		2,911,246		29,838		4.07	%
Other assets		393,001							328,534
Total assets	$	3,333,400						$	3,239,780

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	699,066	$	165		0.09	%	$	689,376	$	28		0.02	%
Savings deposits		862,121		1,941		0.89	%		887,454		67		0.03	%
Time deposits		263,940		652		0.98	%		317,294		285		0.36	%
Total interest-bearing deposits		1,825,127		2,758		0.60	%		1,894,124		380		0.08	%
Borrowings
Retail repurchase agreements		1,254		-		N/M			2,378		-		N/M
Total borrowings		1,254		-		N/M			2,378		-		N/M
Total interest-bearing liabilities		1,826,381		2,758		0.60	%		1,896,502		380		0.08	%
Noninterest-bearing demand deposits		964,093							881,429
Other liabilities		43,574							41,373
Total liabilities		2,834,048							2,819,304
Stockholders' equity		499,352							420,476
Total liabilities and stockholders' equity	$	3,333,400						$	3,239,780
Net interest income, FTE ⁽¹⁾			$	33,457						$	29,458
Net interest rate spread						4.29	%						3.99	%
Net interest margin, FTE ⁽¹⁾						4.51	%						4.01	%

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

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AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Unaudited)

	Nine Months Ended September 30,
	2023							2022
	Average				Average Yield/			Average				Average Yield/
(Amounts in thousands)	Balance		Interest(1)		Rate(1)			Balance		Interest(1)		Rate(1)
Assets
Earning assets
Loans ⁽²⁾⁽³⁾	$	2,523,814	$	93,261		4.94	%	$	2,269,974	$	76,886		4.53	%
Securities available for sale		306,435		6,191		2.70	%		241,640		4,230		2.34	%
Interest-bearing deposits		51,759		2,047		5.29	%		398,326		2,549		0.86	%
Total earning assets		2,882,008		101,499		4.71	%		2,909,940		83,665		3.84	%
Other assets		366,243							329,508
Total assets	$	3,248,251						$	3,239,448

Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	682,820	$	225		0.04	%	$	689,226	$	85		0.02	%
Savings deposits		850,411		3,731		0.59	%		888,062		200		0.03	%
Time deposits		272,435		1,450		0.71	%		331,808		1,003		0.40	%
Total interest-bearing deposits		1,805,666		5,406		0.40	%		1,909,096		1,288		0.09	%
Borrowings
Retail repurchase agreements		1,674		1		0.06	%		2,161		1		0.07	%
Federal funds purchased		3,532		135		5.11	%		-		-		-
Total borrowings		5,206		136		3.49	%		2,161		1		0.07	%
Total interest-bearing liabilities		1,810,872		5,542		0.41	%		1,911,257		1,289		0.09	%
Noninterest-bearing demand deposits		924,591							864,119
Other liabilities		40,014							39,487
Total liabilities		2,775,477							2,814,863
Stockholders' equity		472,774							424,585
Total liabilities and stockholders' equity	$	3,248,251						$	3,239,448
Net interest income, FTE ⁽¹⁾			$	95,957						$	82,376
Net interest rate spread						4.30	%						3.75	%
Net interest margin, FTE ⁽¹⁾						4.45	%						3.78	%

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

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

	Three Months Ended											Nine Months Ended
	September 30, 2023 Compared to 2022											September 30, 2023 Compared to 2022
	Dollar Increase (Decrease) due to											Dollar Increase (Decrease) due to
						Rate/											Rate/
(Amounts in thousands)	Volume			Rate		Volume			Total			Volume			Rate		Volume			Total
Interest earned on ⁽¹⁾
Loans	$	9,095		$	10,710	$	(12,713	)	$	7,092		$	8,598		$	6,995	$	782		$	16,375
Securities available-for-sale		(301	)		693		(273	)		119			1,134			652		175			1,961
Interest-bearing deposits with other banks		(3,704	)		6,653		(3,783	)		(834	)		(2,218	)		13,204		(11,488	)		(502	)
Total interest earning assets		5,090			18,056		(16,769	)		6,377			7,514			20,851		(10,531	)		17,834

Interest paid on
Demand deposits		1			400		(264	)		137			(1	)		142		(1	)		140
Savings deposits		(6	)		5,730		(3,850	)		1,874			(8	)		3,696		(157	)		3,531
Time deposits		(142	)		1,480		(971	)		367			(179	)		763		(137	)		447
Federal funds purchased		-			-		-			-			-			-		135			135
Retail repurchase agreements		1			3		(4	)		-			-			-		-			-
Wholesale repurchase agreements		-			-		-			-			-			-		-			-
FHLB advances and other borrowings		-			-		-			-			-			-		-			-
Total interest-bearing liabilities		(146	)		7,613		(5,089	)		2,378			(188	)		4,601		(160	)		4,253

Change in net interest income ⁽¹⁾	$	5,236		$	10,443	$	(11,680	)	$	3,999		$	7,702		$	16,250	$	(10,371	)	$	13,581

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

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

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

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

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Nine-Month Comparison .

Net interest income comprised 77.99% of total net interest and noninterest income for the nine months ended September 30, 2023 compared to 74.56% in the same period of 2022. Net interest income on a GAAP basis increased $13.58 million, or 16.55%, compared to an increase of $13.58 million, or 16.49%, on a FTE basis. The net interest margin on a FTE basis increased 67 basis points and the net interest spread on a FTE basis increased 55 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 $253.84 million, while the yield increased 41 basis points resulting in a tax effected increase in interest on loans of $16.38 million compared to 2022. The average balance for securities available for sale increased $64.80 million and the yield increased 36 basis points resulting in a tax effected increase to interest on securities available for sale of $1.96 million compared to 2022.

Average earning assets decreased $27.93 million, or 0.96%, primarily due to a decrease in interest-bearing deposits with banks of $346.57 million, or 87.01%. 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 87 basis points, or 22.66%, primarily due to significant increase in benchmark rates as compared to the same period of 2022. The average loan to deposit ratio increased to 92.44% from 81.85% in the same period of 2022. Non-cash accretion income decreased $272 thousand, or 12.24% to $1.95 million.

Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, decreased $100.39 million, or 5.25%, primarily due to a decrease in deposits. Time deposits decreased $59.37 million, or 17.89%, savings deposits decreased $37.65 million or 4.24%, and demand deposits decreased $6.41 million or 0.93%. The yield on interest-bearing liabilities increased 32 basis points and is primarily due to increases in benchmark rates throughout 2022 and 2023.

Provision for Credit Losses

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

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

Noninterest Income

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

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

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

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

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Noninterest Expense

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

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

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

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

I ncome Tax Expense

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

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

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

Non-GAAP Financial Measures

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
(Amounts in thousands)
Net interest income, GAAP	$	33,347		$	29,342		$	95,621		$	82,042
FTE adjustment ⁽¹⁾		110			116			336			334
Net interest income, FTE		33,457			29,458			95,957			82,376

Net interest margin, GAAP		4.49	%		3.99	%		4.40	%		3.77	%
FTE adjustment(1)		0.02	%		0.02	%		0.05	%		0.01	%
Net interest margin, FTE		4.51	%		4.01	%		4.45	%		3.78	%

(1) FTE basis of 21%.

Financial Condition

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

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

Investment Securities

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

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

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

Loans Held for Investment

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

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

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

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

Risk Elements

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

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

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

	September 30, 2023			December 31, 2022			September 30, 2022
(Amounts in thousands)
Nonperforming
Nonaccrual loans	$	18,366		$	15,208		$	15,303
Accruing loans past due 90 days or more		59			142			131
Modified loans past due 90 days or more ⁽¹⁾		-			-			-
TDRs' ⁽²⁾⁽³⁾		-			1,346			1,331
Total nonperforming loans		18,425			16,696			16,765
OREO		243			703			559
Total nonperforming assets	$	18,668		$	17,399		$	17,324


Additional Information
Total modified loans ⁽¹⁾	$	1,674		$	-		$	-
Total Accruing TDRs ⁽³⁾	$	-		$	7,112		$	7,028


Asset Quality Ratios:
Nonperforming loans to total loans		0.71	%		0.70	%		0.71	%
Nonperforming assets to total assets		0.57	%		0.55	%		0.55	%
Allowance for credit losses to nonperforming loans		195.55	%		183.01	%		175.29	%
Allowance for credit losses to total loans		1.39	%		1.27	%		1.24	%

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

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

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

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

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

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

Allowance for Credit Losses

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

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

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

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

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

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

Deposits

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

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

Liquidity and Capital Resources

Liquidity

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

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

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

Capital Resources

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

Capital Adequacy Requirements

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

●

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

●

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

●

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

●

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

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

	September 30, 2023		December 31, 2022
	Company	Bank	Company	Bank

Common equity Tier 1 ratio	14.64%	12.90%	13.37%	11.69%
Tier 1 risk-based capital ratio	14.64%	12.90%	13.37%	11.69%
Total risk-based capital ratio	15.89%	14.15%	14.62%	12.94%
Tier 1 leverage ratio	11.08%	9.89%	10.17%	8.79%

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

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Off-Balance Sheet Arrangements

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

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

(1)	Includes FHLB letters of credit

Market Risk and Interest Rate Sensitivity

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

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

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

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

Inflation and Changing Prices

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

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

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

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

Changes in Internal Control over Financial Reporting

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

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

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

ITEM 1A.

Risk Factors

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

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ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not Applicable

(b)	Not Applicable

(c)	Issuer Purchases of Equity Securities

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

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

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs

July 1-31, 2023		180,400	$	31.42		180,400		284,530
August 1-31, 2023		29,600		32.53		29,600		254,930
September 1-30, 2023		89,012		30.76		89,012		2,692,000
Total		299,012	$	31.33		299,012

ITEM 3.

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

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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

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

101***

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

104*

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

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

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SIGNATURES

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

		First Community Bankshares, Inc. (Registrant)




		/s/ William P. Stafford, II
		William P. Stafford, II
		Chief Executive Officer
		(Principal Executive Officer)




		/s/ David D. Brown
		David D. Brown
		Chief Financial Officer
		(Principal Accounting Officer)

TABLE OF CONTENTS

Item 1. Financial Statements Item 1. Financial Note 1. Basis Of Presentation Note 2. Divestitures and Acquisitions Note 3. Debt Securities Note 4. Loans Note 5. Credit Quality Note 6. Allowance For Credit Losses Note 7. Deposits Note 8. Borrowings Note 9. Derivative Instruments and Hedging Activities Note 10. Employee Benefit Plans Note 11. Earnings Per Share Note 12. Accumulated Other Comprehensive Income (loss)Note 13. Fair Value Note 14. Litigation, Commitments, and Contingencies Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations

Exhibits

FCBC 10-Q Quarter ended Sept. 30, 2023

Exhibits